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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934*
For the Fiscal Year Ended February 3, 2001
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to __________
Commission File Number: 33-59380
FINLAY FINE JEWELRY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3287757
- ------------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
529 Fifth Avenue New York, NY 10017
---------------------------------------- ----------
(Address of principal executive offices) (zip code)
212-808-2800
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
-----------------
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]
As of April 25, 2001, there were 1,000 shares of common stock, par value $.01
per share, of the Registrant outstanding. As of such date, all shares of common
stock were owned by the Registrant's parent, Finlay Enterprises, Inc., a
Delaware corporation.
*The Registrant is not subject to the filing requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934 and is voluntarily filing this Annual
Report on Form 10-K.
FINLAY FINE JEWELRY CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2001
INDEX
Page(s)
-------
PART I
Item 1. Business.................................................................... 3
Item 2. Properties..................................................................15
Item 3. Legal Proceedings...........................................................15
Item 4. Submission of Matters to a Vote of Security Holders.........................15
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters..................................................................16
Item 6. Selected Consolidated Financial Data........................................17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................19
Item 7a. Quantitative and Qualitative Disclosures about Market Risk..................28
Item 8. Financial Statements and Supplementary Data.................................28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................................28
PART III
Item 10. Directors and Executive Officers of the Registrant..........................29
Item 11. Executive Compensation......................................................32
Item 12. Security Ownership of Certain Beneficial Owners and Management..............39
Item 13. Certain Relationships and Related Transactions..............................42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............45
SIGNATURES .........................................................................52
2
PART I
Item 1. Business
The Company
Finlay Fine Jewelry Corporation, a Delaware corporation, and its wholly
owned subsidiaries ("Finlay Jewelry") is a wholly owned subsidiary of Finlay
Enterprises, Inc., a Delaware Corporation (the"Holding Company"). References to
"Finlay" mean, collectively, the Holding Company, Finlay Jewelry and all
predecessor businesses. All references herein to "Departments" refer to fine
jewelry departments operated pursuant to license agreements or other
arrangements with host department stores.
Finlay is one of the leading retailers of fine jewelry in the United
States. Finlay operates leased fine jewelry departments ("Departments") in major
department stores for retailers such as The May Department Stores Company
("May"), Federated Department Stores ("Federated"), Belk, the Carson Pirie Scott
and Proffitt's divisions of Saks Incorporated, Marshall Field's and Dillard's.
With the completion of the acquisition of certain assets of Jay B. Rudolph, Inc.
("J.B. Rudolph") in April 2000, Finlay now operates Departments in
Bloomingdale's, Dayton's and Hudson's. Finlay sells a broad selection of
moderately priced fine jewelry, including necklaces, earrings, bracelets, rings
and watches, and markets these items principally as fashion accessories with an
average domestic sales price of approximately $180 per item. Average sales per
Department were $981,000 in 2000 and the average size of a Department is
approximately 720 square feet.
On a domestic basis, excluding operating results of Finlay's former
international division, Finlay's sales have increased from $634.9 million in
1996 to $1.0 billion in 2000, a compound annual growth rate of 12.0%. Income
from operations has increased from $49.5 million to $77.3 million in the same
period, a compound annual growth rate of 11.8%. Finlay has increased in size
from 834 locations at the beginning of 1996 to 1,053 locations at the end of
2000.
As of February 3, 2001, Finlay operated its 1,053 locations in 25 host
store groups, in 46 states and the District of Columbia. Finlay's largest host
store relationship is with May, for which Finlay has operated Departments since
1948. Finlay operates the fine jewelry departments in all of May's 421
department stores. Finlay's second largest host store relationship is with
Federated, for which Finlay has operated Departments since 1983. Finlay operates
Departments in 179 of Federated's 428 department stores. On February 8, 2001,
Federated announced its plans to close its Stern's division. Finlay currently
operates Departments in 23 Stern's stores and expects the closings to reduce
sales in 2001 by an estimated $22.0 million. Over the past three years, store
groups owned by May and Federated accounted for an average of 47% and 22%,
respectively, of Finlay's domestic sales. Management believes that it maintains
excellent relations with its host store groups, 20 of which have had leases with
Finlay for more than five years (representing 79% of Finlay's sales in 2000) and
15 of which have had leases with Finlay for more than ten years (representing
69% of Finlay's sales in 2000).
On April 3, 2000, Finlay completed the acquisition of certain assets of
J.B. Rudolph for $20.6 million, consisting primarily of inventory and fixed
assets. By acquiring J.B. Rudolph (the "J.B. Rudolph Acquisition"), Finlay added
57 Departments and also added new host store relationships with Bloomingdale's,
Dayton's and Hudson's. Finlay financed the J.B. Rudolph Acquisition with
borrowings under Finlay's revolving credit agreement with General Electric
Capital Corporation and the other lenders thereto (the "Revolving Credit
Agreement"). The J.B. Rudolph Acquisition was accounted for as a purchase, and,
accordingly, the operating results of the former J.B. Rudolph departments have
been included in Finlay Jewelry's consolidated financial statements since the
date of acquisition.
3
On January 3, 2000, Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B.
("Sonab"), Finlay Jewelry's European leased jewelry department subsidiary, sold
the majority of its assets for $9.9 million. After the sale, the buyer operated
more than 80 locations previously included in Sonab's 130-location base in
France. The remaining departments were closed in 1999. Finlay Jewelry recorded a
pre-tax charge of $28.6 million for the write-down of assets for disposition and
related closure expenses. The cash portion of this charge was approximately $7.8
million.
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, par value $.01 per share ("Common Stock"). Under
the program, the Holding Company may, from time to time, at the discretion of
management, purchase its Common Stock on the open market through September 29,
2001. The extent and timing of repurchases will depend upon general business and
market conditions, stock prices, availability under Finlay's revolving credit
facility and its cash position and requirements going forward.
On April 24, 1998, the Holding Company completed a public offering of
1,800,000 shares of its Common Stock at a price of $27.50 per share (the "1998
Offering"), of which 567,310 shares were sold by the Holding Company.
Concurrently with the 1998 Offering, the Holding Company and Finlay Jewelry
completed the public offering of $75.0 million aggregate principal amount of 9%
Senior Debentures due May 1, 2008 (the "Senior Debentures") and $150.0 million
aggregate principal amount of 8"% Senior Notes due May 1, 2008 (the "Senior
Notes"), respectively. In addition, on April 24, 1998, Finlay's Revolving Credit
Agreement was amended to increase the line of credit thereunder to $275.0
million and to make certain other changes.
On May 26, 1998, the net proceeds to the Holding Company from the 1998
Offering, the sale of the Senior Debentures, together with other available
funds, were used to redeem the Holding Company's 12% Senior Discount Debentures
due 2005 (the "Old Debentures"), including associated premiums. Also, on May 26,
1998, Finlay Jewelry used the net proceeds from the sale of the Senior Notes to
redeem Finlay Jewelry's 10"% Senior Notes due 2003 (the "Old Notes"), including
associated premiums. The above transactions, excluding the 1998 Offering, are
referred to herein as the "Refinancing".
On October 6, 1997, Finlay completed the acquisition of certain assets of
the Diamond Park Fine Jewelers division of Zale Corporation ("Diamond Park"), a
leading operator of Departments, for approximately $63.0 million. By acquiring
Diamond Park (the "Diamond Park Acquisition"), Finlay added 139 Departments and
also added new host store relationships with Marshall Field's, Parisian and
Dillard's, formerly the Mercantile Stores.
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1996, 1997, 1998, 1999, 2000 and 2001 relate to the fiscal years ending on
February 1, 1997, January 31, 1998, January 30, 1999, January 29, 2000, February
3, 2001 and February 2, 2002, respectively. Each of the fiscal years includes 52
weeks except 2000, which includes 53 weeks.
Finlay Jewelry is a wholly owned subsidiary of the Holding Company. The
principal executive offices of Finlay Jewelry are located at 529 Fifth Avenue,
New York, New York 10017 and its telephone number at this address is (212)
808-2800.
4
General
Overview. Host stores benefit from outsourcing the operation of their fine
jewelry departments. By engaging Finlay, host stores gain specialized
managerial, merchandising, selling, marketing, inventory control and security
expertise. Additionally, by avoiding the high working capital investment
typically required of the jewelry business, host stores improve their return on
investment and can potentially increase their profitability.
As a lessee, Finlay benefits from the host stores' reputation, customer
traffic, advertising, credit services and established customer base. Finlay also
avoids the substantial capital investment in fixed assets typical of stand-alone
retail formats. These factors have generally enabled Finlay's new Departments to
achieve profitability within their first twelve months of operation. Finlay
further benefits because net sales proceeds are generally remitted to Finlay by
each host store on a monthly basis with essentially all customer credit risk
borne by the host store.
As a result of Finlay's strong relationships with its vendors, management
believes that Finlay Jewelry's working capital requirements are lower than those
of many other jewelry retailers. In recent years, on average, approximately 50%
of Finlay's domestic merchandise has been carried on consignment. The use of
consignment merchandise also reduces Finlay's inventory exposure to changing
fashion trends because, in general, unsold consigned merchandise can be returned
to the vendor.
Industry. Management believes that current trends in jewelry retailing,
particularly in the department store sector, provide a significant opportunity
for Finlay's growth. Consumers spent approximately $52.6 billion on jewelry
(including both fine and costume jewelry) in the United States in 2000, an
increase of approximately $22.3 billion over 1990, according to the United
States Department of Commerce. In the department store sector in which Finlay
operates, consumers spent $4.6 billion on fine jewelry in 1999. Management
believes that demographic factors such as the maturing of the U.S. population
and an increase in the number of working women have resulted in greater
disposable income, thus contributing to the growth of the fine jewelry retailing
industry. Management also believes that jewelry consumers today increasingly
perceive fine jewelry as a fashion accessory, resulting in purchases which
augment Finlay's gift and special occasion sales. Finlay's Departments are
typically located in "high traffic" areas of leading department stores, enabling
Finlay to capitalize on these consumer buying patterns.
Growth Strategy. Finlay intends to continue to pursue the following key
initiatives to increase sales and earnings:
o Increase Comparable Department Sales. In 1998, 1999 and 2000, Finlay
achieved domestic comparable Department sales increases of 5.4%, 8.1% and
2.1%, respectively, outpacing the majority of its host stores. These
increases were achieved primarily by emphasizing key merchandise items,
increasing focus on holiday and event-driven promotions, participating in
host store marketing programs and positioning its Departments as a
"destination location" for fine jewelry. Finlay believes that comparable
Department sales will continue to benefit from these merchandising and
marketing strategies, as well as from increasing demand for fine jewelry.
o Add Departments Within Existing Host Store Groups. Finlay's well
established relationships with many of its host store groups have enabled
Finlay to add Departments in new locations opened by existing host stores.
Finlay has operated Departments in May stores since 1948 and operates the
fine jewelry departments in all of May's 421 department stores. Finlay has
also operated Departments in Federated stores since 1983 and operates
Departments in 179 of Federated's 428 department stores (before the closing
of Stern's).
5
o Establish New Host Store Relationships. Finlay has an opportunity to grow
primarily by establishing new relationships with department stores that
presently operate their own fine jewelry departments or have an interest in
opening jewelry departments. Finlay seeks to establish these new
relationships by demonstrating to department store management the potential
for improved financial performance. Since the beginning of 1992, Finlay has
added such host store groups as Burdines, The Bon Marche and Elder Beerman.
Through acquisitions Finlay has added Marshall Field's, Parisian,
Dillard's, Bloomingdale's, Dayton's and Hudson's to its host store
relationships.
o Continue to Improve Operating Leverage. Selling, general and administrative
expenses as a percentage of sales declined from 42.2% in 1996 to 40.9% in
2000. Finlay seeks to continue to leverage expenses both by increasing
sales at a faster rate than expenses and by reducing its current level of
certain operating expenses. For example, Finlay has demonstrated that by
increasing the selling space (with host store approval) of certain high
volume Departments, incremental sales can be achieved without having to
incur proportionate increases in selling and administrative expenses. In
addition, management believes Finlay will benefit from further investments
in technology and refinements of operating procedures designed to allow
Finlay's sales associates more time for customer sales and service.
Finlay's central distribution facility, which became fully operational in
the Spring of 1998, has enabled Finlay to improve the flow of merchandise
to Departments and to reduce payroll and freight costs.
Merchandising Strategy. Finlay seeks to maximize sales and profitability
through a unique merchandising strategy known as the "Finlay Triangle", which
integrates store management (including host store management and Finlay's store
group management), vendors and Finlay's central office. By coordinating efforts
and sharing access to information, each Finlay Triangle participant plays a role
which emphasizes its area of expertise in the merchandising process, thereby
increasing productivity. Within guidelines set by the central office, Finlay's
store group management contributes to the selection of the specific merchandise
most appropriate to the demographics and customer tastes within their particular
geographical area. Finlay's advertising initiatives and promotional planning are
closely coordinated with both host store management and Finlay's store group
management to ensure the effective use of Finlay's marketing programs. Vendors
participate in the decision-making process with respect to merchandise
assortment, including the testing of new products, marketing, advertising and
stock levels. By utilizing the Finlay Triangle, opportunities are created for
the vendor to assist in identifying fashion trends thereby improving inventory
turnover and profitability, both for the vendor and Finlay. As a result,
management believes it capitalizes on economies of scale by centralizing certain
activities, such as vendor selection, advertising and planning, while allowing
store management the flexibility to implement merchandising programs tailored to
the host store environments and clientele.
6
The Finlay Triangle
[GRAPHIC]
Finlay has structured its relationships with vendors to encourage sharing
of responsibility for marketing and merchandise management. Finlay furnishes to
vendors, through on-line access to Finlay's information systems, the same sales,
stock and gross margin information that is available to Finlay's store group
management and central office for each of the vendor's styles in Finlay's
merchandise assortment. Using this information, vendors are able to participate
in decisions to replenish inventory which has been sold and to return or
exchange slower-moving merchandise. New items are tested in specially selected
"predictor" Departments where sales experience can indicate an item's future
performance in Finlay's other Departments. Management believes that the access
and input which vendors have in the merchandising process results in a better
assortment, timely replenishment, higher turnover and higher sales of inventory,
differentiating Finlay from its competitors.
Since many of the host store groups in which Finlay operates differ in
fashion image and customer demographics, Finlay's flexible approach to
merchandising is designed to complement each host store's own merchandising
philosophy. Finlay emphasizes a "fashion accessory" approach to fine jewelry and
watches, and seeks to provide items that coordinate with the host store's
fashion focus as well as to maintain stocks of traditional and gift merchandise.
Store Relationships
Host Store Relationships. As of February 3, 2001, Finlay operated 1,053
locations (including two stand-alone stores) in 25 host store groups, in 46
states and the District of Columbia. By acquiring Diamond Park in 1997, Finlay
added 139 Departments in three host store groups, in 19 states. By acquiring
J.B. Rudolph in April 2000, Finlay added 57 Departments in three host store
groups, in 14 states. Finlay's largest host store relationship is with May, for
which Finlay has operated Departments since 1948. Finlay operates the fine
jewelry departments in all of May's 421 department stores. Finlay's second
largest host store relationship is with Federated, for which Finlay has operated
Departments since 1983. Finlay operates Departments in 179 of Federated's 428
department stores (before the closing of Stern's). Over the past three years,
store groups owned by May and Federated accounted for an average of 47% and 22%,
respectively, of Finlay's domestic sales.
Finlay also operates 140 Departments in store groups owned by Saks
Incorporated. Additionally, Finlay operates in several other host store groups,
such as Belk, The Bon-Ton and Gottschalks. Management believes that it maintains
excellent relations with its host store groups, 20 of which have had leases with
Finlay for more than five years (representing 79% of Finlay's sales in 2000) and
15 of which have had leases with Finlay for more than ten years (representing
69% of Finlay's sales in 2000). As a consequence of the strong and, in many
instances, long-term relationships, host store groups have routinely renewed
Finlay's lease agreements at their renewal dates. Management believes that the
majority of its lease agreements will continue to be renewed routinely.
7
The following table identifies the host store groups in which Finlay
operated Departments at February 3, 2001, the year in which Finlay's
relationship with each host store group commenced and the number of Departments
operated by Finlay in each host store group. The table also provides similar
information regarding Finlay's stand-alone locations.
Inception of Number of
Host Store Group/Location Relationship Departments/Stores
- ------------------------- ------------ ------------------
May
Robinsons-May.............................................. 1948 55
Filene's................................................... 1977 42
Lord & Taylor.............................................. 1978 82
Famous Barr/L.S. Ayres/Jones............................... 1979 42
Kaufmann's................................................. 1979 51
Foley's.................................................... 1986 60
Hecht's/Strawbridge's...................................... 1986 74
Meier & Frank.............................................. 1988 15
------
Total May Departments.................................. 421
Federated
Rich's/Lazarus/Goldsmith's................................. 1983 68
Burdines................................................... 1992 45
The Bon March.............................................. 1993 20
Stern's (1) ............................................... 1994 23
Bloomingdale's............................................. 2000 23
------
Total Federated Departments............................ 179
Saks Incorporated
Younkers................................................... 1973 32
Carson Pirie Scott/Bergner's/Boston Store.................. 1977 51
Proffitt's................................................. 1991 16
Parisian................................................... 1997 35
Herberger's................................................ 1999 6
------
Total Saks Incorporated Departments..................... 140
Other Departments
Gottschalks................................................ 1969 39
Belk....................................................... 1975 63
Liberty House.............................................. 1983 12
The Bon-Ton................................................ 1986 45
Elder Beerman.............................................. 1992 34
Dillard's.................................................. 1997 63
Marshall Field's/Dayton's/Hudson's (2)..................... 1997/2000 55
------
Total Other Departments................................. 311
---------
Total Departments....................................... 1,051
Stand-Alone Stores
New York Jewelry Outlet.................................... 1994 2
---------
Total Departments and Stand-Alone Stores.............. 1,053
=========
- ------------------------------------------------------------------
(1) Federated has announced that it will be closing these locations in 2001.
(2) The relationship with Dayton's and Hudson's commenced in 2000 as a result of
the J.B. Rudolph Acquisition.
8
Terms of Lease Agreements. Finlay's lease agreements typically have an
initial term of one to five years. Finlay has, where possible, entered into
five-year lease agreements and expects to continue this practice. Finlay's lease
agreements generally contain renewal options or provisions for automatic renewal
absent prior notice of termination by either party. Lease renewals are for one
to five year periods. In exchange for the right to operate a Department within
the host store, Finlay pays each host store group a lease fee, calculated as a
percentage of sales (subject to a minimum annual fee in a limited number of
cases).
Finlay's lease agreements generally require host stores to remit sales
proceeds for each month (without regard to whether such sales were cash, store
credit or national credit card) to Finlay approximately three weeks after the
end of such month. During the months of November and December, however, most
host store groups remit to Finlay 75% of the estimated months' sales prior to or
shortly following the end of that month. Each host store group withholds from
the remittance of sales proceeds a lease fee and other expenditures, such as
advertising costs, which the host store group may have incurred on Finlay's
behalf.
Finlay is usually responsible for providing and maintaining any fixtures
and other equipment necessary to operate its Departments, while the host store
is typically required to provide clean space for installation of any necessary
fixtures. The host store is generally responsible for paying utility costs
(except certain telephone charges), maintenance and certain other expenses
associated with the operation of the Departments. Finlay's lease agreements
typically provide that Finlay is responsible for the hiring (subject to the
suitability of such employees to the host store) and discharge of its sales and
Department supervisory personnel, and substantially all lease agreements require
Finlay to provide its employees with salaries and certain benefits comparable to
those received by the host store's employees. Many of Finlay's lease agreements
provide that Finlay may operate the Departments in any new stores opened by the
host store group. In certain instances, Finlay is operating Departments without
written agreements, although the arrangements in respect of such Departments are
generally in accordance with the terms described herein.
In many cases, Finlay is subject to limitations under its lease agreements
which prohibit Finlay from operating Departments for competing host store groups
within a certain geographical radius of the host stores (typically five to ten
miles). Such limitations restrict Finlay from further expansion within areas
where it currently operates Departments, including expansion by possible
acquisitions. Certain lease agreements, however, make an exception for adding
Departments in stores established by groups with which Finlay has a preexisting
lease arrangement. In addition, Finlay has from time to time obtained the
consent of an existing host store group to operate in another host store group
within a prohibited area. For example, May and Federated have granted consents
of this type to Finlay with respect to one another's stores. Further, Finlay
sought and received the consent of certain of its existing host store groups in
connection with the Diamond Park Acquisition and the J.B. Rudolph Acquisition.
Credit. Substantially all consumer credit risk is borne by the host store
rather than by Finlay. Purchasers of Finlay's merchandise at a host store are
entitled to the use of the host store's credit facilities on the same basis as
all of the host store's customers. Payment of credit card or check transactions
is generally guaranteed to Finlay by the host store, provided that the proper
credit approvals have been obtained in accordance with the host store's policy.
Accordingly, payment to Finlay in respect of its sales proceeds is generally not
dependent on when, or if, payment is received by the host store.
9
Departments Opened/Closed. During 2000, Department openings offset by
closings resulted in a net increase of 66 Departments. The openings totaled 86
and included 57 Departments as a result of the J.B. Rudolph Acquisition, seven
Departments as a result of May's acquisition of ZCMI and 22 Departments within
existing store groups. The closings, which totaled 20, were all within existing
store groups, including six of Finlay's outlet stores which were sold in May
2000. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--2000 Compared with 1999".
The following table sets forth data regarding the number of domestic
Departments and stand-alone stores which Finlay has operated from the beginning
of 1996:
Fiscal Year Ended
-------------------------------------------------------
Feb. 1, Jan. 31, Jan. 30, Jan. 29, Feb. 3,
1997 1998 1999 2000 2001
-------- --------- -------- --------- ---------
Departments/Stores:
Open at beginning of period ............. 834 797 959 959 987
Opened during period .................... 47 172 68 61 86
Closed during period .................... (84) (10) (68) (33) (20)
---- ---- ---- ---- ------
Open at end of period ................... 797 959 959 987 1,053
---- ---- ---- ---- ------
Net increase (decrease) ................. (37) 162 -- 28 66
==== ==== ==== ==== ======
For the periods presented in the table above, Department closings were
primarily attributable to: ownership changes in host store groups; the
bankruptcy of certain host store groups; internal consolidation within host
store groups; the closing or sale by host store groups of individual stores;
host store group decisions to consolidate with one lessee; and Finlay's decision
to close unprofitable Departments. To management's knowledge, none of the
Department closings during the periods presented in the table above resulted
from dissatisfaction of a host store group with Finlay's performance.
Products and Pricing
Each of Finlay's Departments offers a broad selection of necklaces,
earrings, bracelets, rings and watches. Other than watches, substantially all of
the fine jewelry items sold by Finlay are made from precious metals and many
also contain diamonds or colored gemstones. Finlay also provides jewelry and
watch repair services. Finlay does not carry costume or gold-filled jewelry.
Specific brand identification is generally not important within the fine jewelry
business, except for watches and designer jewelry. With respect to watches,
Finlay emphasizes brand name vendors, including Seiko, Citizen, Movado and
Bulova. Many of Finlay's lease agreements with host store groups restrict Finlay
from selling certain types of merchandise or, in some cases, selling particular
merchandise below certain price points.
10
The following table sets forth the domestic sales and percentage of sales
by category of merchandise for 1998, 1999 and 2000:
Fiscal Year Ended
-----------------------------------------------------------------------------------
Jan. 30, 1999 Jan. 29, 2000 Feb. 3, 2001
------------------------- ------------------------ --------------------------
% of % of % of
Sales Sales Sales Sales Sales Sales
---------- ---------- ---------- ---------- ----------- --------
(Dollars in millions)
Diamonds ................... $ 192.0 23.4% $ 219.1 24.7% $ 267.7 26.7%
Gold ....................... 182.0 22.1 193.1 21.8 222.3 22.2
Gemstones .................. 184.4 22.4 194.5 22.0 209.5 21.0
Watches .................... 147.0 17.9 151.7 17.1 167.9 16.8
Other (1) .................. 116.6 14.2 127.8 14.4 132.7 13.3
------ ----- ------ ----- -------- -----
Total Sales ................ $ 822.0 100.0% $ 886.2 100.0% $ 1,000.1 100.0%
====== ===== ====== ===== ======== =====
- ----------------
(1) Includes special promotional items, remounts, estate jewelry, pearls,
beads, cubic zirconia, sterling silver and men's jewelry, as well as repair
services and accommodation sales to Finlay employees.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Finlay sells its merchandise at prices generally ranging from $50 to
$1,000. In 2000, the average price of items sold by Finlay was approximately
$180 per item. An average Department has over 4,000 items in stock. Consistent
with fine jewelry retailing in general, a substantial portion of Finlay's sales
are made at prices discounted from listed retail prices. Finlay's advertising
and promotional planning are closely coordinated with its pricing strategy.
Publicized sales events are an important part of Finlay's marketing efforts. A
substantial portion of Finlay's sales occur during such promotional events. The
amount of time during which merchandise may be offered at discount prices is
limited by applicable laws and regulations. See "Legal Proceedings".
Purchasing and Inventory
General. A key element of Finlay's strategy has been to lower the working
capital investment required for operating its existing Departments and opening
new Departments. At any one time, Finlay typically is required to pay in advance
of sale for less than half of its inventory because in recent years, on average,
approximately 50% of Finlay's domestic merchandise has been obtained on
consignment and certain additional inventory has been purchased with extended
payment terms. In 2000, Finlay's net monthly investment in inventory (i.e., the
total cost of inventory owned and paid for) averaged 31% of the total cost of
its on-hand merchandise. Finlay is generally granted exchange privileges which
permit Finlay to return or exchange unsold merchandise for new products at any
time. In addition, Finlay structures its relationships with vendors to encourage
their participation in and responsibility for merchandise management. By making
the vendor a participant in Finlay's merchandising strategy, Finlay has created
opportunities for the vendor to assist in identifying fashion trends, thereby
improving inventory turnover and profitability. As a result, Finlay's direct
capital investment in inventory has been reduced to levels which it believes are
low for the retail jewelry industry. In addition, Finlay's inventory exposure to
changing fashion trends is reduced because, in general, unsold consignment
merchandise can be returned to the vendor.
Management believes the willingness of vendors to participate in the
inventory management process is due, in part, to the large volume of merchandise
which Finlay sells in its Departments and the desire of vendors to take
advantage of Finlay's nationwide distribution network. By offering their
merchandise through Finlay's Departments, vendors are able to reach a broad
spectrum of the marketplace in
11
coordination with national or regional advertising campaigns conducted by the
vendors or their service organizations.
In 2000, merchandise obtained by Finlay from its 40 largest vendors (out of
a total of approximately 500 vendors) generated approximately 76% of sales, and
merchandise obtained from Finlay's largest vendor generated approximately 11% of
sales. Finlay does not believe the loss of any one of its vendors would have a
material adverse effect on its business.
Gold Consignment Agreement. Finlay Jewelry is party to a gold consignment
agreement (the "Gold Consignment Agreement"), which expires on December 31,
2001. The Gold Consignment Agreement enables Finlay to receive merchandise by
providing gold, or otherwise making payment, to certain vendors who currently
supply Finlay with merchandise on consignment. While the merchandise involved
remains consigned, title to the gold content of the merchandise transfers from
the vendors to the gold consignor. Finlay can obtain, pursuant to the Gold
Consignment Agreement, up to the lesser of (i) 130,000 fine troy ounces or (ii)
$37.0 million worth of gold, subject to a formula as prescribed by the Gold
Consignment Agreement. At February 3, 2001, amounts outstanding under the Gold
Consignment Agreement totaled 118,597 fine troy ounces, valued at approximately
$31.4 million. The average amount outstanding under the Gold Consignment
Agreement was $28.0 million in 2000.
Under the Gold Consignment Agreement, Finlay is required to pay a daily
consignment fee on the dollar equivalent of the fine gold value of the ounces of
gold consigned thereunder. The daily consignment fee is based on a floating rate
which, as of February 3, 2001, was 2.8% per annum. In addition, Finlay is
required to pay a fee of 0.5% if the amount of gold consigned has a value equal
to or less than $12.0 million. In conjunction with the Gold Consignment
Agreement, Finlay granted to the gold consignor a first priority perfected lien
on, and a security interest in, specified gold jewelry of participating vendors
approved under the Gold Consignment Agreement and a lien on proceeds and
products of such jewelry subject to the terms of an intercreditor agreement
between the gold consignor and the Revolving Credit Agreement lenders.
Operations
General. Most of Finlay's Departments have between 50 and 150 linear feet
of display cases (with an average of approximately 72 linear feet) generally
located in high traffic areas on the main floor of the host stores. Each
Department is supervised by a manager whose primary duties include customer
sales and service, scheduling and training of personnel, maintaining security
controls and merchandise presentation. Most of the Departments utilize up to 260
staff hours per week on a permanent basis, depending on the Department's sales
volume, and employ additional sales staff during the peak year-end holiday
season. Each Department is open for business during the same hours as its host
store. Subject to the terms of the applicable host store group lease agreement,
Finlay is generally responsible for its own operating decisions within each of
its Department operations, including the hiring and compensation of sales staff.
See "--Store Relationships--Terms of Lease Agreements".
To parallel host store operations, Finlay establishes separate group
service organizations responsible for managing Departments operated for each
host store. Staffing for each group organization varies with the number of
Departments in each group. Typically, Finlay services each host store group with
a group manager, an assistant group manager, one or more group buyers, one or
more regional supervisors who oversee the individual Department managers and a
number of clerical employees. Each group manager reports to a regional vice
president, who is responsible for supervision of up to eight host store groups.
In its continued efforts to improve comparable Department sales through improved
operating efficiency, Finlay has taken steps to minimize administrative tasks at
the Department level, thereby improving customer service and, as a result,
sales.
12
Finlay had average domestic sales per linear foot of approximately $12,200
in 1998, $12,700 in 1999 and $13,600 in 2000. Finlay determines average sales
per linear foot by dividing its sales by the aggregate estimated measurements of
the outer perimeters of the display cases of Finlay's Departments. Finlay had
average domestic sales per Department of approximately $857,000, $911,000 and
$981,000 in 1998, 1999 and 2000, respectively.
Management Information and Inventory Control Systems. Finlay and its
vendors use Finlay's management information systems to monitor sales, gross
margin and inventory performance by location, merchandise category, style number
and vendor. Using this information, Finlay is able to monitor merchandise trends
and variances in performance and improve the efficiency of its inventory
management. Finlay also measures the productivity of its sales force by
maintaining current statistics for each employee such as sales per hour,
transactions per hour and transaction size.
Personnel and Training. Finlay considers its employees an important
component of its operations and devotes substantial resources to training and
improving the quality of sales and management personnel. Finlay seeks to
motivate its employees by linking a substantial percentage of their compensation
to performance standards. In most cases, individual sales personnel are
compensated on an hourly basis and paid a commission on sales. Department
managers are generally compensated on the basis of a salary plus a percentage of
their Department's sales. Group managers and regional vice presidents are
eligible to earn bonuses of up to 50% of their base salaries upon the
achievement of specified goals.
As of the end of 2000, Finlay employed approximately 8,000 persons in the
United States, approximately 95% of whom were regional and local sales and
supervisory personnel and the balance of whom were employed in administrative or
executive capacities. Of Finlay's 8,000 employees, approximately 4,400 were
part-time employees, working less than 32 hours per week. Finlay's labor
requirements fluctuate because of the seasonal nature of Finlay's business. See
"--Seasonality". Management believes that its relations with its employees are
good. Less than 1% of Finlay's employees are unionized.
Advertising. Finlay promotes its products through four-color direct mail
catalogs, using targeted mailing lists, and newspaper advertising of the host
store groups. Finlay maintains an in-house advertising staff responsible for
preparing a majority of Finlay's advertisements and for coordinating the
finished advertisements with the promotional activities of the host stores.
Finlay's gross advertising expenditures over the past five fiscal years have
consistently been in excess of 6% of sales, a level which is consistent with the
jewelry industry's reliance on promotional efforts to generate sales. The
majority of Finlay's lease agreements with host store groups require Finlay to
expend certain specified minimum percentages of the respective Department's
annual sales on advertising and promotional activities.
Inventory Loss Prevention and Insurance. Finlay undertakes substantial
efforts to safeguard its merchandise from loss or theft, including the
installation of safes at each location and the taking of a daily diamond
inventory. During 2000, inventory shrinkage amounted to approximately 1.2% of
sales. Finlay maintains insurance covering the risk of loss of merchandise in
transit or on Finlay's premises (whether owned or on consignment) in amounts
that management believes are reasonable and adequate for the types and amounts
of merchandise carried by Finlay.
13
Gold Hedging. The cost to Finlay of gold merchandise sold on consignment in
some cases is not fixed until the sale is reported to the vendor or the gold
consignor in the case of merchandise sold pursuant to the Gold Consignment
Agreement. In such cases, the cost of merchandise varies with the price of gold
and Finlay is exposed to the risk of fluctuations in the price of gold between
the time Finlay establishes the advertised or other retail price of a particular
item of merchandise and the date on which the sale of the item is reported to
the vendor. In order to hedge against this risk and to enable Finlay to
determine the cost of such goods prior to their sale, Finlay may elect to fix
the price of gold prior to the sale of such merchandise. Accordingly, Finlay at
times enters into futures contracts, such as options or forwards or a
combination thereof. The value of gold hedged under such contracts represented
approximately 4.5% of Finlay Jewelry's cost of goods sold in 2000. Under such
contracts, Finlay obtains the right to purchase a fixed number of troy ounces of
gold at a specified price per ounce for a specified period. Such contracts
typically have durations ranging from one to nine months and are generally
priced at the spot gold price plus an amount based on prevailing interest rates
plus customary transactions costs. When sales of such merchandise are reported
to the consignment vendors and the cost of such merchandise becomes fixed,
Finlay sells its related hedge position. At February 3, 2001, Finlay Jewelry had
several open positions in futures contracts, for gold totaling 46,300 fine troy
ounces, valued at $12.6 million, which expire during 2001. The fair market value
of such contracts was $12.3 million at February 3, 2001.
The primary effect on liquidity from using futures contracts is associated
with the related margin requirements. Historically, cash flows related to
futures margin requirements have not been material to Finlay's total working
capital requirements. Finlay manages the purchase of futures contracts by
estimating and monitoring the quantity of gold that it anticipates it will
require in connection with its anticipated level of sales of the type described
above. Finlay's gold hedging transactions are entered into by Finlay in the
ordinary course of its business. Finlay's gold hedging strategies are determined
and monitored on a regular basis by Finlay's senior management and its Board of
Directors.
Competition
Finlay faces competition for retail jewelry sales from national and
regional jewelry chains, other department stores, local independently owned
jewelry stores and chains, specialty stores, mass merchandisers, catalog
showrooms, discounters, direct mail suppliers, televised home shopping and the
internet. Management believes that competition in the retail jewelry industry is
based primarily on the price, quality, fashion appeal and perceived value of the
product offered and on the reputation, integrity and service of the retailer.
See "--Store Relationships--Terms of Lease Agreements" with respect to certain
limitations on Finlay's ability to compete.
Seasonality
The retail jewelry business is highly seasonal. See "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations-- Seasonality".
14
Item 2. Properties
The only real estate owned by Finlay is the central distribution facility,
totaling 106,200 square feet at 205 Edison Avenue, Orange, Connecticut. Finlay
leases approximately 18,400 square feet at 521 Fifth Avenue, New York, New York,
and 49,100 square feet at 529 Fifth Avenue, New York, New York for its
executive, accounting, advertising, the majority of its data processing
operations and other administrative functions. The leases for such space expire
September 30, 2008. Finlay leases an additional 2,140 square feet at 521 Fifth
Avenue, New York, New York under a lease which expires September 30, 2001. For
certain operations at 500 Eighth Avenue, New York, New York, Finlay has leased
approximately 9,200 square feet under a lease which expires January 31, 2002.
Finlay also leases retail space for its New York Jewelry Outlet stores.
Generally, as part of Finlay's lease arrangements, host stores provide office
space to Finlay's host store group management personnel free of charge.
Item 3. Legal Proceedings
Finlay is involved in certain legal actions arising in the ordinary course
of business. Management believes none of these actions, either individually or
in the aggregate, will have a material adverse effect on Finlay's business,
financial position or results of operations.
Commonly in the retail jewelry industry, a substantial amount of
merchandise is sold at a discount to the "regular" or "original" price. Finlay's
experience is consistent with this practice. See "Business-- Products and
Pricing". A number of states in which Finlay operates have regulations which
require retailers who offer merchandise at discounted prices to offer the
merchandise at the "regular" or "original" prices for stated periods of time.
Management believes it is in substantial compliance with all applicable legal
requirements with respect to such practices.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
15
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Finlay Jewelry is a wholly owned subsidiary of the Holding Company.
Accordingly, there is no established public trading market for Finlay Jewelry's
common stock.
During 2000, cash dividends of $7.6 million were distributed by Finlay
Jewelry to the Holding Company. The distributions are generally utilized to pay
interest on the Senior Debentures and certain expenses of the Holding Company
such as legal, accounting and directors' fees. Certain restrictive covenants in
the indenture relating to the Senior Notes, the Revolving Credit Agreement and
the Gold Consignment Agreement 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.
There was one record holder of Finlay Jewelry's common stock at April 25,
2001.
16
Item 6. Selected Consolidated Financial Data
The selected consolidated financial information below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto. See "Index to Consolidated Financial Statements". The balance sheet
data of Finlay Jewelry at January 29, 2000 and February 3, 2001 and the
statement of operations data for each of the fiscal years ended January 30,
1999, January 29, 2000 and February 3, 2001 were derived from consolidated
financial statements of Finlay Jewelry, which statements have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report included elsewhere herein. The balance sheet data of Finlay Jewelry at
February 1, 1997, January 31, 1998 and January 30, 1999 and the statement of
operations data for the fiscal years ended February 1, 1997 and January 31, 1998
were derived from consolidated financial statements of Finlay Jewelry, which
statements have been audited by Arthur Andersen LLP, independent public
accountants, and which are not included or incorporated herein.
Fiscal Year Ended (1)
----------------------------------------------------------
Feb. 1, Jan. 31, Jan. 30, Jan. 29, Feb. 3,
1997 1998 1999 2000 2001
-------- -------- -------- -------- ----------
(Dollars in thousands)
Statement of Operations Data:
Sales ....................................................... $685,274 $769,862 $863,428 $912,978 $1,000,120
Cost of sales ............................................... 330,300 371,085 421,450 449,912 496,291
Cost of sales - Sonab inventory write-down (2) .............. -- -- -- 7,839 --
-------- -------- -------- -------- --------
Gross margin (3) ............................................ 354,974 398,777 441,978 455,227 503,829
Selling, general and administrative expenses ................ 289,145 325,752 364,002 378,112 409,019
Nonrecurring charges associated with the sale
and closure of Sonab (2) .................................. -- -- -- 20,792 --
Depreciation and amortization ............................... 10,840 12,163 15,672 16,895 17,549
-------- -------- -------- -------- --------
Income (loss) from operations ............................... 54,989 60,862 62,304 39,428 77,261
Interest expense, net ....................................... 22,526 24,413 24,612 22,565 23,117
Nonrecurring interest associated with
refinancing (4) ........................................... -- -- 417 -- --
-------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary charges ..................................... 32,463 36,449 37,275 16,863 54,144
Provision (benefit) for income taxes ........................ 14,501 15,528 15,323 7,801 22,715
-------- -------- -------- -------- --------
Income (loss) before extraordinary charges .................. 17,962 20,921 21,952 9,062 31,429
Extraordinary charges from early extinguishment
of debt, net (5) .......................................... -- -- 4,755 -- --
-------- -------- -------- -------- --------
Net income (loss) ........................................... $ 17,962 $ 20,921 $ 17,197 $ 9,062 $ 31,429
======== ======== ======== ======== ========
Operating and Financial Data:
Number of Departments (end of period) (6):
Consolidated .............................................. 939 1,117 1,109 987 1,053
Domestic .................................................. 797 959 959 987 1,053
Percentage increase in sales ................................ 4.7% 12.3% 12.2% 5.7% 9.5%
Percentage increase in comparable Department sales (6)(7):
Consolidated .............................................. 5.9% 5.5% 3.9% 6.8% 2.1%
Domestic .................................................. 6.0% 5.7% 5.4% 8.1% 2.1%
Average domestic sales per Department (8) ................... $ 779 $ 820 $ 857 $ 911 $ 981
EBITDA (9) .................................................. 65,829 73,025 77,976 56,323 94,810
Capital expenditures ........................................ 17,533 19,338 14,874 14,972 18,118
17
Fiscal Year Ended (1)
----------------------------------------------------------------------
Feb. 1, Jan. 31, Jan. 30, Jan. 29, Feb. 3,
1997 1998 1999 2000 2001
------------ ---------- ---------- ---------- ----------
(Dollars in thousands)
Cash flows provided from (used in):
Operating activities ............................. $ 14,197 $ 74,314 $ (13,018) $ 46,448 $ 34,455
Investing activities ............................. (18,372) (79,366) (23,134) (21,054) (30,403)
Financing activities ............................. (1,024) (2,349) 40,067 (7,159) (7,640)
Balance Sheet Data-End of Period:
Working capital .................................. $ 75,692 $ 65,705 $ 126,723 $ 132,696 $ 152,003
Total assets ..................................... 416,808 501,454 541,403 554,994 604,500
Short-term debt, including current portion of
long-term debt ................................. 2 -- -- -- --
Long-term debt, excluding current portion ........ 135,000 135,000 150,000 150,000 150,000
Total stockholder's equity (deficit) ............. 86,410 101,826 152,083 157,026 179,423
- ----------------
(1) Each of the fiscal years for which information is presented includes 52
weeks except 2000, which includes 53 weeks.
(2) Included in 1999 are nonrecurring charges associated with the sale and
closure of Sonab totaling $28.6 million. Included in cost of sales is $7.8
million for the write-down of inventory with the balance of $20.8 million
recorded as an operating expense. Refer to Note 12 of Notes to Consolidated
Financial Statements.
(3) Finlay utilizes the LIFO method of accounting for inventories. If Finlay
had valued inventories at actual cost, as would have resulted from the
specific identification inventory valuation method, the gross margin would
have increased (decreased) as follows: $1.9 million, $(2.3) million, $(1.0)
million, $(1.1) million and $1.8 million for 1996, 1997, 1998, 1999 and
2000, respectively.
(4) As a result of certain call requirements associated with the Old Notes,
Finlay had outstanding both the new debt and the old debt for a period of
twenty-five days in 1998. The net effect of the above, offset by reduced
interest expense on the borrowings under the Revolving Credit Agreement and
interest income on excess cash balances, was $0.4 million.
(5) The extraordinary charges of $8.0 million include $5.4 million for the
redemption premium on the Old Notes and $2.0 million to write off deferred
financing costs associated with the Old Notes. The income tax benefit on
the extraordinary charges totaled $3.2 million.
(6) Includes Departments and stand-alone locations.
(7) Comparable Department sales are calculated by comparing the sales from
Departments open for the same months in the comparable periods.
(8) 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.
(9) EBITDA represents income from operations before depreciation and
amortization expenses. For 1999, consolidated EBITDA includes the
nonrecurring charge totaling $28.6 million associated with the sale and
closure of Sonab. Finlay Jewelry believes EBITDA provides additional
information for determining its ability to meet future debt service
requirements. EBITDA should not be construed as a substitute for income
from operations, net income or cash flow from operating activities (all as
determined in accordance with generally accepted accounting principles) for
the purpose of analyzing Finlay's operating performance, financial position
and cash flows as EBITDA is not defined by generally accepted accounting
principles. Finlay has presented EBITDA, however, because it is commonly
used by certain investors and analysts to analyze and compare companies on
the basis of operating performance and to determine a company's ability to
service and/or incur debt. Finlay's computation of EBITDA may not be
comparable to similar titled measures of other companies.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with "Selected Consolidated
Financial Information" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K.
Certain statements under this caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" constitute "forward-looking
statements" under the Securities Act of 1933, as amended (the "Securities Act"),
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). See
"Special Note Regarding Forward-Looking Statements".
General
Since 1998, sales have increased by $136.7 million to $1.0 billion, a
compound annual growth rate of 7.6%, while comparable Department sales have
increased by 3.9%, 6.8% and 2.1% in 1998, 1999 and 2000, respectively.
Comparable Department sales include Departments open for the same months during
comparable periods. Domestic comparable Department sales during this same period
increased 5.4%, 8.1% and 2.1%. The increase in total sales during this period is
the result of (i) adding new Departments, including 57 Departments from the J.B.
Rudolph Acquisition, and (ii) increasing comparable Department sales. Management
attributes its comparable Department sales increases during this period to
continued focus on the following initiatives: (i) emphasizing its "Key Item" and
"Best Value" merchandising programs, which provide a targeted assortment of
items at competitive prices; (ii) increasing focus on holiday and event-driven
promotions as well as host store marketing programs; and (iii) positioning
Finlay's Departments as a "destination location" for fine jewelry.
Finlay entered the international fine jewelry retailing market in October
1994 by acquiring Sonab. In the second quarter of 1998, Sonab began to
experience lower sales trends due to the transition from a promotional pricing
strategy to an everyday low price strategy. The adverse impact of such change
continued throughout 1999. As a result of the foregoing, on January 3, 2000,
Sonab sold the majority of its assets for $9.9 million. After the sale, the
buyer operated more than 80 locations previously included in Sonab's
130-location base in France. The remaining departments were closed. Finlay
Jewelry recorded a pre-tax charge of $28.6 million for the write-down of assets
for disposition and related closure expenses in 1999, of which $7.8 million was
recorded as a component of cost of sales as it related specifically to the
write-down of inventory, with the balance of $20.8 million recorded as an
operating expense.
Gross margin as a percentage of sales has decreased from 51.2% in 1998 to
50.4% in 2000. This decrease is principally the result of Finlay's "Key Item"
and "Best Value" programs, which produce higher sales volume and a slightly
lower gross margin, on average, than other merchandise and the LIFO provision in
2000 compared to a LIFO benefit in 1998.
Selling, general and administrative expenses ("SG&A") as a percentage of
sales have decreased from 42.2% in 1998 to 40.9% in 2000. Management attributes
this improvement to (i) leveraging operating expenses through higher domestic
sales, (ii) reducing payroll expense, as a percentage of sales, which reflects
management's continued initiatives in controlling payroll hours and labor rates
and (iii) the impact of the operation of the central distribution center in
consolidating the inventory processing function, as it became fully operational
in the Spring of 1998. The components of SG&A include payroll expense, lease
fees, net advertising expenditures and other field and administrative expenses.
19
As a result of a series of recapitalization transactions in 1993 (the "1993
Recapitalization") and a 1988 reorganization transaction involving Finlay
Jewelry (the "1988 Leveraged Recapitalization"), Finlay Jewelry is highly
leveraged and, as such, interest expense had a significant impact on Finlay
Jewelry's results of operations. The Refinancing resulted in lower interest
rates on the Senior Notes than the interest rates on the Old Notes. As such, for
2000, interest expense has been favorably impacted as compared to 1998. Finlay
also records approximately $3.7 million of goodwill amortization annually
resulting primarily from the 1988 Leveraged Recapitalization and the Diamond
Park Acquisition.
On April 3, 2000, Finlay completed the acquisition of certain assets of
J.B. Rudolph, a leading operator of departments, for approximately $20.6
million. By acquiring J.B. Rudolph, Finlay added 57 Departments and also added
new host store relationships with Bloomingdale's, Dayton's and Hudson's.
Results of Operations
The following table sets forth operating results as a percentage of sales
for the periods indicated:
Fiscal Year Ended
---------------------------------------
Jan. 30, Jan. 29, Feb. 3,
1999 2000 2001
------------ ------------- ----------
Statement of Operations Data:
Sales ...................................................................... 100.0% 100.0% 100.0%
Cost of sales .............................................................. 48.8 49.3 49.6
Cost of sales - Sonab inventory write-down (1) ............................. -- 0.8 --
----- ----- -----
Gross margin ............................................................. 51.2 49.9 50.4
Selling, general and administrative expenses ............................... 42.2 41.4 40.9
Nonrecurring charges associated with the sale and closure of Sonab (1) ..... -- 2.3 --
Depreciation and amortization .............................................. 1.8 1.9 1.8
----- ----- -----
Income (loss) from operations .............................................. 7.2 4.3 7.7
Interest expense, net ...................................................... 2.8 2.5 2.3
Nonrecurring interest associated with refinancing (2) ...................... 0.1 -- --
----- ----- -----
Income (loss) before income taxes and extraordinary charges ................ 4.3 1.8 5.4
Provision for income taxes ................................................. 1.8 0.8 2.3
----- ----- -----
Income (loss) before extraordinary charges ................................. 2.5 1.0 3.1
Extraordinary charges from early extinquishment of debt, net (3) ........... 0.6 -- --
----- ----- -----
Net income (loss) .......................................................... 1.9% 1.0% 3.1%
===== ===== =====
Other Supplemental Data:
EBITDA (4)(5) .............................................................. 9.0% 6.2% 9.5%
- ----------------
(1) See Note 2 to "Selected Consolidated Financial Data".
(2) See Note 4 to "Selected Consolidated Financial Data".
(3) See Note 5 to "Selected Consolidated Financial Data".
(4) EBITDA represents income from operations before depreciation and
amortization expenses. Finlay Jewelry believes EBITDA provides additional
information for determining its ability to meet future debt service
requirements. See Note 9 to "Selected Consolidated Financial Data".
(5) For 1999, EBITDA as a percentage of sales includes the nonrecurring charges
associated with the sale and closure of Sonab. Excluding these charges,
EBITDA as a percentage of sales was 9.3%.
20
2000 Compared with 1999
Sales. Sales increased $87.1 million, or 9.5%, in 2000 compared to 1999.
Comparable Department sales increased 2.1%. Management attributes this increase
in comparable Department sales primarily to the "Key Item" and "Best Value"
merchandising programs and to the marketing initiatives discussed above. These
factors were offset by a general softening in the retail environment in the
latter part of 2000. Sales from the operation of net new Departments contributed
$68.0 million, primarily relating to the J.B. Rudolph Acquisition and the net
effect of new store openings and closings offset by the sale and closure of
Sonab at the end of 1999. Excluding Sonab's sales which totaled $26.8 million in
1999, sales on a domestic basis increased 12.9% in 2000.
During 2000, Finlay opened 86 Departments and closed 20 Departments. The
Department openings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- -------------------------------------------------
Bloomingdale's.................. 23 J.B. Rudolph Acquisition.
Hudson's........................ 21 J.B. Rudolph Acquisition.
Dayton's........................ 13 J.B. Rudolph Acquisition.
Meier & Frank................... 7 May's acquisition of ZCMI.
Other........................... 22 Department openings within existing store groups.
----
86
====
The Department closings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- -------------------------------------------------
New York Jewelry Outlet......... 6 Sold in May 2000.
Other........................... 14 Department closings within existing store groups.
----
20
====
Gross margin. Gross margin increased by $48.6 million in 2000 compared to
1999 and, as a percentage of sales, gross margin increased by 0.5%, primarily
due to a nonrecurring charge in 1999 of $7.8 million relating to the write-down
of inventory in conjunction with the sale and closure of Sonab's operations
offset by (i) management's continued efforts to increase market penetration and
market share through its pricing strategy and (ii) a charge of $1.8 million in
the LIFO provision compared to the prior year's benefit of $1.0 million.
Selling, general and administrative expenses. SG&A totaled $409.0 million,
an increase of $30.9 million, or 8.2%, in 2000 compared to 1999 due primarily to
payroll expense and lease fees associated with the increase in Finlay Jewelry's
sales. SG&A as a percentage of sales decreased to 40.9% in 2000 from 41.4% in
1999 as a result of the negative impact of Sonab's 1999 SG&A as a percentage of
sales in addition to expenses related to Finlay's year 2000 remediation project
of approximately $2.0 million in 1999. On a domestic basis, SG&A as a percentage
of sales improved 0.1%.
Nonrecurring charges associated with the sale and closure of Sonab. As a
result of the sale of the majority of Sonab's assets and the disposition of the
remaining assets, Finlay Jewelry recorded a nonrecurring charge of $20.8 million
in 1999. The components of the charge relate to the realization of foreign
exchange losses, payroll and severance costs, other close-down costs and the
write-off of undepreciated assets.
21
Depreciation and amortization. Depreciation and amortization increased by
$0.7 million in 2000 compared to 1999, reflecting $18.1 million in capital
expenditures and an increase in capitalized software costs for the most recent
twelve months. These costs were offset by the effect of certain assets becoming
fully depreciated, as well as the disposition and write-off of Sonab's fixed
assets. On a domestic basis, depreciation and amortization increased by $1.3
million. The increase in fixed assets was primarily due to the addition of new
Departments, the renovation of existing Departments and the inclusion of the
cost of fixed assets acquired in connection with the J.B. Rudolph Acquisition.
Interest expense, net. Interest expense increased by $0.6 million
reflecting a higher weighted average interest rate (8.5% for 2000 compared to
8.0% for 1999) offset slightly by a decrease in average borrowings ($246.6
million for 2000 compared to $254.2 million for 1999).
Provision for income taxes. The income tax provision for 2000 and 1999
reflects an effective tax rate of 40.5%.
Net income. Net income of $31.4 million for 2000 represents an increase of
$22.4 million as compared to net income of $9.1 million in 1999 as a result of
the factors discussed above. Excluding the nonrecurring charges in 1999 relating
to the sale and closure of Sonab, net income for 2000, on a domestic basis,
increased by $1.5 million.
1999 Compared with 1998
Sales. Sales increased $49.6 million, or 5.7%, in 1999 compared to 1998.
Comparable Department sales increased 6.8%. Domestic comparable Department sales
increased 8.1%. Management attributes this increase in comparable Department
sales primarily to the "Key Item" and "Best Value" merchandising programs and to
the marketing initiatives discussed above. Total consolidated sales were
negatively impacted by $9.2 million primarily relating to Dillard's purchase of
the Mercantile Stores in the fall of 1998 and its change to an everyday low
price strategy as well as the net effect of new store openings offset by store
closings.
During 1999, Finlay opened 61 Departments and closed 183 Departments. The
Department openings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- -------------------------------------------------
Herberger's..................... 6 New host store.
Other........................... 55 Department openings within existing store groups.
----
61
====
The Department closings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
----------------------------------- ------------- ---------------------------------------------------
All Sonab host stores........... 150 130 closings due to the sale and closure of Sonab's
operations.
Crowley's/Steinbach............. 14 Bankruptcy of the host store.
New York Jewelry Outlet......... 1 Closed upon lease expiration.
Other........................... 18 Department closings within existing store groups.
----
183
====
22
Gross margin. Gross margin increased by $13.2 million in 1999 compared to
1998, however, as a percentage of sales, gross margin decreased by 1.3%,
primarily due to (i) a nonrecurring charge of $7.8 million relating to the
write-down of inventory in conjunction with the sale and closure of Sonab's
operations and (ii) management's efforts to increase market penetration and
market share through its pricing strategy. Finlay Jewelry benefited from a
decrease in the LIFO provision of approximately $1.0 million in each 1999 and
1998.
Selling, general and administrative expenses. SG&A totaled $378.1 million,
an increase of $14.1 million, or 3.9%, in 1999 compared to 1998 due primarily to
payroll expense and lease fees associated with the increase in Finlay Jewelry's
sales. SG&A as a percentage of sales decreased to 41.4% in 1999 from 42.2% in
1998 as a result of Finlay Jewelry's strong domestic comparable Department
sales, which enabled Finlay Jewelry to leverage administrative and certain other
expenses. Also contributing to the decrease in SG&A as a percentage of sales was
the leveraging of payroll expense, reflecting management's continued initiatives
in controlling payroll hours and labor rates, and the full year impact of the
operation of the central distribution center in consolidating the inventory
processing function. SG&A as a percentage of sales was negatively impacted as a
result of the slowdown of sales in France.
Nonrecurring charges associated with the sale and closure of Sonab. As a
result of the sale of the majority of Sonab's assets and the disposition of the
remaining assets, Finlay Jewelry recorded a nonrecurring charge of $20.8
million. The components of the charge relate to the realization of foreign
exchange losses, payroll and severance costs, other close-down costs and the
write-off of undepreciated assets.
Depreciation and amortization. Depreciation and amortization increased by
$1.2 million in 1999 compared to 1998, reflecting $15.0 million in capital
expenditures for the most recent twelve months, offset by the effect of certain
assets becoming fully depreciated. The increase in fixed assets was primarily
due to the addition of new Departments and the renovation of existing
Departments.
Interest expense, net. Interest expense decreased by $2.0 million
reflecting a lower weighted average interest rate (8.0% for 1999 compared to
8.3% for 1998) relating to the lower interest rates on the Senior Notes as
compared to the Old Notes, which were outstanding for a portion of the 1998
period. In addition, there was a decrease in average borrowings ($254.2 million
for 1999 compared to $272.6 million for 1998). The 1998 average borrowings were
adjusted to exclude the timing impact of the call requirements on the Old Notes,
discussed below.
Nonrecurring interest associated with refinancing. As a result of certain
call requirements associated with the Old Notes, the debt could not be repaid
until May 26, 1998. Thus, for twenty-five days in 1998, Finlay was required to
maintain as outstanding both the new debt issued on April 24, 1998 as well as
the old debt retired on May 26, 1998. The net effect of carrying the new and old
debt, offset by reduced interest expense on the borrowings under the Revolving
Credit Agreement and interest income on excess cash balances, was an increase to
interest expense of $0.4 million.
Provision for income taxes. The income tax provision for 1999 and 1998
reflects an effective tax rate of 40.5%.
Extraordinary charges from early extinguishment of debt, net of income tax
benefit. In conjunction with the repayment of the Old Notes, Finlay Jewelry
recorded a pre-tax extraordinary charge of $8.0 million in 1998, including $5.4
million for redemption premiums on the Old Notes and $2.0 million to write off
deferred financing costs associated with the Old Notes. The income tax benefit
on the extraordinary charges totaled $3.2 million.
23
Net income. Net income of $9.1 million for 1999 represents a decrease of
$8.1 million as compared to net income of $17.2 million in 1998 as a result of
the factors discussed above. Excluding the nonrecurring and extraordinary
charges in 1999 and 1998, income before extraordinary charges increased by $4.0
million to $26.2 million.
Liquidity and Capital Resources
Finlay's primary capital requirements are for funding working capital for
new Departments and for working capital growth of existing Departments and, to a
lesser extent, capital expenditures for opening new Departments, renovating
existing Departments and information technology investments. For 1999 and 2000,
capital expenditures totaled $15.0 million and $14.1 million (exclusive of the
fixed assets acquired in the J.B. Rudolph Acquisition, which totaled $4.0
million), respectively. Total capital expenditures for 2001 are estimated to be
approximately $15.0 million. Although capital expenditures are limited by the
terms of the Revolving Credit Agreement, to date this limitation has not
precluded Finlay from satisfying its capital expenditure requirements.
Finlay's operations substantially preclude customer receivables and in
recent years, on average, approximately 50% of Finlay's domestic merchandise has
been carried on consignment. Accordingly, management believes that relatively
modest levels of working capital are required in comparison to many other
retailers. Finlay Jewelry's working capital balance was $152.0 million at
February 3, 2001, an increase of $19.3 million from January 29, 2000. The
increase resulted primarily from the impact of 2000's net income, exclusive of
depreciation and amortization, partially offset by capital expenditures and
additions to deferred charges. Based on the seasonal nature of Finlay's
business, working capital requirements and therefore borrowings under the
Revolving Credit Agreement can be expected to increase on an interim basis
during the first three quarters of any given fiscal year. See "--Seasonality".
The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October, November and December in
anticipation of the year-end holiday season. Accordingly, Finlay experiences
seasonal cash needs as inventory levels peak. The Revolving Credit Agreement
provides Finlay with a line of credit of up to $275.0 million to finance working
capital needs, which includes a $50.0 million acquisition facility. Amounts
outstanding under the Revolving Credit Agreement bear interest at a rate equal
to, at Finlay's option, (i) the Index Rate (as defined in the Revolving Credit
Agreement) plus a margin ranging from zero to 1.0% or (ii) adjusted LIBOR plus a
margin ranging from 1.0% to 2.0%, in each case depending on the financial
performance of Finlay.
In each year, Finlay is required to reduce the outstanding revolving credit
balance and letter of credit balance under the Revolving Credit Agreement to
$50.0 million or less and $20.0 million or less, respectively, for a 30
consecutive day period (the "Balance Reduction Requirement"). Borrowings under
the Revolving Credit Agreement at February 3, 2001 and January 29, 2000 were
zero. The average amounts outstanding under the Revolving Credit Agreement for
1999 and 2000 $104.2 million and $96.6, respectively. The maximum amount
outstanding for 2000 was $155.6 million, at which point the unused excess
availability was $65.0 million, excluding the acquisition facility.
On December 1, 2000, the Holding Company announced that its Board of
Directors had approved a stock repurchase program to acquire up to $20 million
of outstanding Common Stock. Under the program, the Holding Company may, from
time to time, at the discretion of management, purchase its Common Stock on the
open market through September 29, 2001. The extent and timing of repurchases
will depend upon general business and market conditions, stock prices,
availability under Finlay's revolving credit facility and its cash position and
requirements going forward.
24
On April 3, 2000, Finlay completed the acquisition of certain assets of
J.B. Rudolph for $20.6 million, consisting primarily of inventory and fixed
assets. The J.B. Rudolph Acquisition required additional working capital to
increase the inventory levels in anticipation of the year-end holiday season.
Inventory purchases for the former J.B. Rudolph departments are being financed
in part by trade payables combined with the utilization of consignment
inventory. Finlay financed the J.B. Rudolph Acquisition with borrowings under
its Revolving Credit Agreement.
On January 3, 2000, Sonab sold the majority of its assets for approximately
$9.9 million. As of January 29, 2000, Sonab had received $1.2 million of the
sale proceeds. Sonab received an additional $7.6 million in 2000 and the balance
remains subject to certain escrow arrangements among the parties. After the
sale, the buyer operated more than 80 locations previously included in Sonab's
130-location base in France. The remaining departments were closed. Finlay
Jewelry recorded a pre-tax charge in the fourth quarter of 1999 of $28.6 million
for the write-down of assets for disposition and related closure expenses. The
cash portion of this charge was approximately $7.8 million.
Finlay's long-term needs for external financing will depend on its rate of
growth, the level of internally generated funds and the ability to continue
obtaining substantial amounts of merchandise on advantageous terms, including
consignment arrangements with its vendors. As of February 3, 2001, $381.7
million of consignment merchandise from approximately 300 vendors was on hand as
compared to $329.9 million at January 29, 2000. For 2000, Finlay had an average
balance of consignment merchandise of $372.9 million as compared to an average
balance of $321.7 million in 1999. See "Business--Store Relationships" and
"Business--Purchasing and Inventory".
A substantial amount of Finlay's operating cash flow has been used or will
be required to pay, directly or indirectly, interest with respect to the Senior
Debentures, the Senior Notes and amounts due under the Revolving Credit
Agreement, including the payments required pursuant to the Balance Reduction
Requirement. As of February 3, 2001, Finlay Jewelry's outstanding borrowings
included a $150.0 million balance under the Senior Notes.
Finlay Jewelry is party to the Gold Consignment Agreement, which expires on
December 31, 2001. The Gold Consignment Agreement enables Finlay Jewelry to
receive merchandise by providing gold, or otherwise making payment, to certain
vendors. Finlay Jewelry can obtain, pursuant to the Gold Consignment Agreement,
up to the lesser of (i) 130,000 fine troy ounces or (ii) $37.0 million worth of
gold, subject to a formula as prescribed by the Gold Consignment Agreement. At
February 3, 2001, amounts outstanding under the Gold Consignment Agreement
totaled 118,597 fine troy ounces, valued at approximately $31.4 million. The
average amount outstanding under the Gold Consignment Agreement was $28.0
million in 2000.
The year 2000 issue did not pose significant operational problems to
Finlay. Finlay used a combination of internal and external resources to execute
its year 2000 project plan. The costs related to Finlay's year 2000 efforts
totaled approximately $4.0 million, of which approximately $2.1 million was
spent in 1999. Finlay funded the year 2000 costs through operating cash flows.
Finlay is in the process of implementing several information technology
initiatives, including the design and development of a new merchandising system
and a point-of-sale system for Finlay's Departments. These projects will serve
to support future growth of Finlay as well as provide improved analysis and
reporting capabilities and more timely sales and inventory information to
facilitate merchandising solutions. These systems will provide the foundation
for future productivity and expense control initiatives. At February 3, 2001, a
total of approximately $14.5 million has been expended for software and
implementation costs and is included in Deferred charges and other assets.
Approximately $4.0 million for hardware and related equipment was expended in
1999 to upgrade Finlay's Departments
25
and is reflected in Fixed assets. Finlay expects these systems to be completed
by mid-2001 and anticipates it will spend an additional $5.0 to $7.5 million.
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code")
restricts utilization of net operating loss ("NOL") carryforwards after an
ownership change exceeding 50%. As a result of the 1993 Recapitalization, a
change in ownership of the Holding Company exceeding 50% occurred within the
meaning of Section 382 of the Code. Similar restrictions apply to other
carryforwards. Consequently, there is a material limitation on Finlay Jewelry's
annual utilization of its NOLs and other carryforwards which requires a deferral
or loss of the utilization of such NOLs or other carryforwards. Finlay Jewelry
had, at October 31, 2000 (Finlay Jewelry's tax year end), a NOL for tax purposes
of approximately $5.5 million which is subject to an annual limit of
approximately $2.0 million per year. However, for financial reporting purposes,
no NOL exists as of February 3, 2001.
From time to time, Finlay enters into futures contracts, such as options or
forwards, based upon the anticipated sales of gold product in order to hedge
against the risk arising from its payment arrangements. Changes in the market
value of futures contracts are accounted for as an addition to or reduction from
the inventory cost. For the year ended February 3, 2001, the gain or loss on
open futures contracts was not material. At February 3, 2001, Finlay Jewelry had
several open positions in futures contracts for gold totaling 46,300 fine troy
ounces, valued at $12.6 million, which expire during 2001. There can be no
assurance that these hedging techniques will be successful or that hedging
transactions will not adversely affect Finlay Jewelry's results of operations or
financial position.
Finlay believes that, based upon current operations, anticipated growth,
and availability under the Revolving Credit Agreement, Finlay Jewelry will, for
the foreseeable future, be able to meet its debt service and anticipated working
capital obligations, and to make distributions to the Holding Company sufficient
to permit the Holding 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 Holding Company to meet their debt
service and other obligations. Currently, Finlay Jewelry's principal financing
arrangements 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. The amounts required to satisfy the aggregate
of Finlay Jewelry's interest expense and required amortization payments totaled
$21.4 million and $22.2 million for 1999 and 2000, respectively.
SEASONALITY
Finlay's business is highly seasonal, with a significant portion of its
sales and income from operations generated during the fourth quarter of each
year, which includes the year-end holiday season. The fourth quarter accounted
for an average of 42% of Finlay's domestic sales and 78% of its domestic income
from operations for 1998, 1999 and 2000. Finlay has typically experienced net
losses in the first three quarters of its fiscal year, although Finlay Jewelry
did achieve a net profit in the second quarter of 2000. During these periods,
working capital requirements have been funded by borrowings under the Revolving
Credit Agreement. Accordingly, the results for any of the first three quarters
of any given fiscal year, taken individually or in the aggregate, are not
indicative of annual results. See Note 10 of Notes to Consolidated Financial
Statements of Finlay Jewelry.
26
Finlay Jewelry's Sales and Income (loss) from operations for each quarter
of 1998, 1999 and 2000 were as follows:
Fiscal Quarter
-------------------------------------------------------------
First Second Third Fourth
------------ ------------ ------------ ------------
(dollars in thousands)
1998:
Sales ........................................ $160,992 $177,366 $165,894 $359,176
Income (loss) from operations ................ 2,169 6,335 2,061 51,739
1999:
Sales ........................................ 168,379 183,367 175,280 385,952
Income (loss) from operations (1) ............ 2,577 7,097 3,004 26,750
2000:
Sales ........................................ 178,614 211,229 189,728 420,549
Income (loss) from operations ................ 4,580 10,263 5,649 56,769
- ----------------
(1) The fourth quarter of 1999 includes $28.6 million (pre-tax) of expenses
associated with the sale and closure of Sonab.
Inflation
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K ("Form 10-K") includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. All statements other than statements of historical
information provided herein are forward-looking statements and may contain
information about financial results, economic conditions, trends and known
uncertainties. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations", as well as trends in the general economy in the United States,
competition in the retail jewelry business, the seasonality of the retail
jewelry business, Finlay Jewelry's ability to increase comparable Department
sales and to open new Departments, Finlay Jewelry's dependence on certain host
store relationships due to the concentration of sales generated by such host
stores, the availability to Finlay Jewelry of alternate sources of merchandise
supply in the case of an abrupt loss of any significant supplier, Finlay
Jewelry's ability to continue to obtain substantial amounts of merchandise on
consignment, Finlay Jewelry's compliance with applicable contractual covenants,
Finlay Jewelry's dependence on key officers, Finlay Jewelry's ability to
integrate future acquisitions into its existing business, Finlay Jewelry's high
degree of leverage and the availability to Finlay Jewelry of financing and
credit on favorable terms and changes in regulatory requirements which are
applicable to Finlay Jewelry's business. Other factors include the ability of
the Holding Company to complete the repurchases contemplated under its stock
repurchase program, the adequacy of Finlay's working capital to complete the
repurchases, the availability and liquidity of the Holding Company's Common
Stock, and overall market conditions for the Holding Company's Common Stock.
Readers are cautioned not to rely on these forward-looking statements,
which reflect management's analysis, judgment, belief or expectation only as of
the date hereof. Finlay Jewelry undertakes no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. In addition to the disclosure contained herein, readers
should carefully review any disclosure of risks and uncertainties contained in
other documents Finlay Jewelry files or has filed from
27
time to time with the Securities and Exchange Commission (the "Commission")
pursuant to the Exchange Act.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Finlay Jewelry is exposed to market risk through the interest rate on its
borrowings under the Revolving Credit Agreement, which has a variable interest
rate. In seeking to minimize the risks from interest rate fluctuations, Finlay
Jewelry manages exposures through its regular operating and financing
activities. In addition, the majority of Finlay Jewelry's borrowings are under
fixed rate arrangements, as described in Note 4 of Notes to Consolidated
Financial Statements. In addition, Finlay Jewelry is exposed to market risk
related to changes in the price of gold, and selectively uses forward contracts
to manage this risk. Finlay Jewelry enters into forward contracts for the
purchase of gold to hedge the risk of gold price fluctuations for future sales
of gold consignment merchandise. Finlay Jewelry does not enter into forward
contracts or other financial instruments for speculation or trading purposes.
The aggregate amount of forward contracts was $12.6 million at February 3, 2001,
which expire during 2001.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Finlay Fine Jewelry Corporation
Report of Independent Public Accountants.....................................................F-2
Consolidated Statements of Operations for the years ended January 30, 1999,
January 29, 2000 and February 3, 2001......................................................F-3
Consolidated Balance Sheets as of January 29, 2000 and February 3, 2001......................F-4
Consolidated Statements of Changes in Stockholder's Equity for the years
ended January 30, 1999, January 29, 2000 and February 3, 2001..............................F-5
Consolidated Statements of Cash Flows for the years ended January 30, 1999,
January 29, 2000 and February 3, 2001......................................................F-6
Notes to Consolidated Financial Statements...................................................F-7
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with Finlay Jewelry's
accountants on matters of accounting or financial disclosure.
28
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below is certain information with respect to each of the current
executive officers and directors of the Holding Company and Finlay Jewelry. Each
of the persons listed as a director is a member of the Board of Directors of
both the Holding Company and Finlay Jewelry.
Name Age Position
- ---------------------------------------- ------- ------------------------------------------------------------
Arthur E. Reiner.................... 60 Chairman of the Board, President and Chief Executive
Officer of the Holding Company, Chairman and Chief
Executive Officer of Finlay Jewelry and Director
Joseph M. Melvin.................... 50 Executive Vice President and Chief Operating Officer of
the Holding Company and President and Chief Operating
Officer of Finlay Jewelry
Leslie A. Philip.................... 54 Executive Vice President and Chief Merchandising Officer
of the Holding Company and Finlay Jewelry
Edward Stein........................ 56 Senior Vice President and Director of Stores of Finlay
Jewelry
Bruce E. Zurlnick................... 49 Senior Vice President, Treasurer and Chief Financial
Officer of the Holding Company and Finlay Jewelry
David B. Cornstein.................. 62 Director
Rohit M. Desai...................... 62 Director
Michael Goldstein................... 59 Director
James Martin Kaplan................. 56 Director
John D. Kerin....................... 62 Director
Thomas H. Lee....................... 57 Director
Norman S. Matthews.................. 68 Director
Hanne M. Merriman................... 59 Director
Warren C. Smith, Jr................. 44 Director
The Holding Company, an affiliate of Thomas H. Lee Company (together with
its affiliate transferees, the "Lee Investors"), partnerships managed by Desai
Capital Management Incorporated (collectively, the "Desai Investors"), Mr.
Cornstein, Mr. Reiner and certain others are parties to a Stockholders'
Agreement (the "Stockholders' Agreement") which provides, among other things,
the parties thereto must vote their shares in favor of certain directors who are
nominated by the Lee Investors, the Desai Investors, Mr. Cornstein and Mr.
Reiner. Notwithstanding the foregoing, the right of various persons to designate
directors will be reduced or eliminated at such time as they own less than
certain specified percentages of the shares of Common Stock then outstanding or
in certain cases are no longer an employee of the Holding Company. The various
designees currently serving on the Board of Directors are Messrs. Lee, Smith,
Desai, Cornstein, Kaplan, and Reiner. The Stockholders' Agreement also provides
for an Executive Committee to consist of at least five directors, including,
under certain conditions, designees of Mr. Lee, the Desai Investors and Mr.
Cornstein. The Executive Committee of the Holding Company's Board consists at
present of Messrs. Lee, Desai, Matthews, Cornstein, Kaplan and Reiner. See
information under the caption "Certain Relationships and Related
Transactions--Stockholders' Agreement".
29
Under the Holding Company's Restated Certificate of Incorporation, the
Holding Company's Board of Directors is classified into three classes. The
members of each class will serve staggered three-year terms. Messrs. Desai,
Goldstein and Lee are Class I directors; Messrs. Cornstein, Kaplan, Kerin and
Reiner are Class II directors; and Messrs. Matthews and Smith and Ms. Merriman
are Class III directors. The terms of the Class III, Class I and Class II
directors expire at the annual meeting of stockholders to be held in 2001, 2002
and 2003, respectively. Officers serve at the discretion of the Board of
Directors.
The business experience, principal occupations and employment of each of
the executive officers and directors of the Holding Company and Finlay Jewelry,
together with their periods of service as directors and executive officers of
the Holding Company and Finlay Jewelry, are set forth below.
Arthur E. Reiner became Chairman of the Holding Company effective February
1, 1999 and, from January 1995 to such date, served as Vice Chairman of the
Holding Company. Mr. Reiner has also served as President and Chief Executive
Officer of the Holding 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 Holding Company and President and Chief Operating
Officer of Finlay Jewelry on May 1, 1997. From September 1975 to March 1997, Mr.
Melvin served in various positions with May, including, from 1990 to March 1997,
as Chairman of the Board and Chief Operating Officer of Filene's (a division of
May).
Leslie A. Philip has been Executive Vice President and Chief Merchandising
Officer of the Holding Company and Finlay Jewelry since May 1997. From May 1995
to May 1997, Ms. Philip was Executive Vice President-Merchandising and Sales
Promotion of Finlay Jewelry. From 1993 to May 1995, Ms. Philip was Senior Vice
President--Advertising and Sales Promotion of Macy's, and from 1988 to 1993, Ms.
Philip was Senior Vice President--Merchandise--Fine Jewelry at Macy's. Ms.
Philip held various other positions at Macy's from 1970 to 1988.
Edward Stein has been Senior Vice President and Director of Stores of
Finlay Jewelry since July 1995. From December 1988 to June 1995, Mr. Stein was
Vice President - Regional Supervisor of Finlay Jewelry, and occupied similar
positions with Finlay's predecessors from 1983 to December 1988. Mr. Stein held
various other positions at Finlay from 1965 to 1983.
Bruce E. Zurlnick has been Senior Vice President, Treasurer and Chief
Financial Officer of the Holding Company and Finlay Jewelry since January 2000.
From June 1990 to December 1999, he was Treasurer of the Holding 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 Holding Company since
his retirement from day-to-day involvement with the Holding Company effective
January 31, 1999. He served as Chairman of the Holding Company from May 1993
until his retirement, and has been a director of the Holding 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 Holding Company. From December 1985
to December 1988, Mr.
30
Cornstein was President, Chief Executive Officer and a director of a predecessor
of the Holding Company. Mr. Cornstein is a director of TeleHubLink Corporation.
Rohit M. Desai has been a director of the Holding Company and Finlay
Jewelry since May 1993. Mr. Desai is the founder of and, since its formation in
1984, has been Chairman and President of Desai Capital Management Incorporated,
a specialized equity investment management firm in New York which manages the
assets of various institutional clients, including Equity-Linked Investors-II,
Private Equity Investors III, L.P. and Private Equity Investors IV, L.P. Mr.
Desai is also the managing general partner of the general partner of
Equity-Linked Investors-II and the managing member of the general partners of
Private Equity Investors