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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 1, 1997
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
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(Exact name of registrant as specified in its charter)
Delaware 13-3287757
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
521 Fifth Avenue, New York, NY 10175
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(Address of principal executive offices) (Zip code)
212-808-2060
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: 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' 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 1, 1997, 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' 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 1, 1997
INDEX
PART I PAGE(S)
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 16
Item 3. Legal Proceedings................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.............. 16
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................ 17
Item 6. Selected Financial Data.......................................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 19
Item 8. Financial Statements and Supplementary Data...................... 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................ 25
PART III
Item 10. Directors and Executive Officers of the Registrant............... 26
Item 11. Executive Compensation........................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 37
Item 13. Certain Relationships and Related Transactions................... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................... 42
SIGNATURES.................................................................. 49
2
PART I
Item 1. Business
The Company
Finlay Fine Jewelry Corporation, a Delaware corporation ("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.
Finlay is the largest operator of leased fine jewelry departments
("Departments") in the United States and France. As of February 1, 1997, Finlay
operated a total of 927 Departments in many of the leading department store
chains in the United States and Europe. Since opening its first Department in
1942, Finlay has grown by adding host stores and increasing sales per
Department, achieving sales of over $685 million in 1996. Finlay entered the
international fine jewelry retailing market in October 1994 by acquiring Societe
Nouvelle d'Achat de Bijouterie ("Sonab"), a French company that as of the end of
1996 operated 139 Departments and three stand- alone stores in locations in
Europe. Finlay sells a broad selection of moderately priced fine jewelry
products such as necklaces, earrings, bracelets, rings and watches and markets
these products principally as fashion accessories. In 1996, the average price of
the items sold domestically by Finlay was $151 per item. 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. All
references herein to leased Departments refer to Departments operated pursuant
to license agreements or other arrangements with host department stores.
Finlay's sales have increased from $473.7 million in 1992 to $685.3 million
in 1996, a compound annual growth rate of 9.7%. Income from operations of Finlay
Jewelry has increased from $37.1 million to $55.0 million in the same period, a
compound annual growth rate of 10.3%. Finlay has increased in size from 662
Departments at the beginning of 1992 to 927 Departments and 12 stand-alone
stores, for a total of 939 locations at the end of 1996.
Domestically, as of February 1, 1997, Finlay operated 788 Departments in 22
host store groups, located in 42 states and the District of Columbia. Finlay's
largest host store relationship is with The May Department Stores Company
("May"), for which Finlay operated all 359 Departments located in May-owned
department stores, such as Lord & Taylor and Filene's. Finlay's second largest
host store relationship is with Federated Department Stores, Inc. ("Federated"),
for which Finlay operated 153 of the Departments located in Federated- owned
department stores, including Rich's and Burdines. Finlay also operates
Departments in numerous independent host store groups, such as Liberty House,
Belk and Carson Pirie Scott. Finlay believes that it maintains excellent
relations with its host store groups, 19 of which have had leases with Finlay
for more than five years (representing 87.4% of Finlay's domestic sales in 1996)
and 15 of which have had leases with Finlay for more than ten years
(representing 78.6% of Finlay's domestic sales in 1996).
In 1996, Finlay continued its expansion into two additional areas of fine
jewelry retailing: the international market and outlet stores. Through its
French subsidiary, Sonab, Finlay is the largest operator of Departments in
France, operating its 131 French Departments in five host store groups,
including Galeries Lafayette and Nouvelles Galeries. During October 1996, Finlay
expanded into Berlin, Germany with the opening of a new Galeries Lafayette
store. In addition, in April 1996, Finlay signed a lease agreement with
Debenhams, P.L.C., a department store chain which operates 90 stores throughout
the United Kingdom and Ireland ("Debenhams"), and operated seven Debenbams
Departments in the United Kingdom at the end of 1996. As of February 1, 1997,
Finlay operated nine outlet stores at nonmetropolitan outlet shopping center
locations in Ohio, New York, Florida, South Carolina, Pennsylvania, Georgia and
California under the name "New York Jewelry Outlet." The
3
outlet stores provide Finlay with a channel to sell discontinued, close-out and
other selected merchandise.
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1992, 1993, 1994, 1995, 1996 and 1997 relate to the fiscal years ended on
January 30, 1993, January 29, 1994, January 28, 1995, February 3, 1996, February
1, 1997, and January 31, 1998, respectively. Each of the fiscal years includes
52 weeks except 1995, 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 521 Fifth Avenue,
New York, New York 10175 and its telephone number at this address is (212)
808-2060.
On April 6, 1995, the Holding Company completed an initial public offering
(the "Offering") of 2,500,000 shares of its common stock, par value $.01 per
share ("Common Stock") at a price of $14.00 per share. An additional 115,000
shares were sold by non-management selling stockholders. Net proceeds from the
Offering after deducting the underwriting discount of $2,300,000 and expenses of
approximately $2,500,000 incurred in connection with the Offering, were
$30,200,000. The net proceeds were used to repurchase $6,103,000 accreted
balance of the Holding Company's 12% Senior Discount Debentures due 2005 (the
"Debentures") at a price equal to $5,789,000, or approximately 95% of the
accreted amount. The balance of the net proceeds were used to reduce a portion
of the outstanding indebtedness under Finlay's $135,000,000 Revolving Credit
Facility (the "Revolving Credit Facility") with General Electric Capital
Corporation ("G.E. Capital").
Immediately prior to completion of the Offering, the holders of the Holding
Company's 10% Series C Cumulative Preferred Stock ("Series C Preferred Stock")
exchanged all outstanding shares of Series C Preferred Stock with the Holding
Company for 2,581,784 shares of Common Stock (the "Series C Exchange"). For
purposes of the Series C Exchange, the outstanding Series C Preferred Stock was
(i) valued at its liquidation value of $30,000,000 plus $6,145,000 of accrued
dividends through the date of completion of the Series C Exchange, paid in kind
at a quarterly rate of 2.5% and (ii) exchanged for Common Stock at the initial
public offering price of $14.00 per share. In conjunction with the Series C
Exchange, a $10,000,000 nonrecurring noncash charge representing the difference
between the liquidation value and the carrying value of the Series C Preferred
Stock was recorded.
In May 1993, an affiliate of Thomas H. Lee Company (together with its
affiliate transferees, the "Lee Investors") and partnerships managed by Desai
Capital Management Incorporated (collectively, the "Desai Investors"), acquired
36.8% and 24.5%, respectively, of the outstanding voting securities of the
Holding Company in a series of transactions which recapitalized the Holding
Company (the "Recapitalization Transactions"). Following the Recapitalization
Transactions, certain members of management (the "Management Stockholders")
maintained a substantial equity interest in the Holding Company. Following the
completion of the Offering and the Series C Exchange, the Lee Investors and
Desai Investors beneficially owned 33.1% and 22.1% of the outstanding voting
securities, respectively, and 14.8% was held by the Management Stockholders. For
information regarding the Recapitalization Transactions, see "Certain
Relationships and Related Transactions - The 1993 Recapitalization," Note 1 to
the Consolidated Financial Statements and "Security Ownership of Certain
Beneficial Owners and Management."
General
Overview. Many department stores traditionally have engaged specialized
lessees, such as Finlay, to operate their fine jewelry departments. The lessees
furnish specialized expertise in management, merchandising, selling, marketing,
inventory control and security. By engaging lessees, host stores avoid
investment of working capital and devotion of management attention in an area
outside their core apparel and home furnishings businesses.
4
Finlay also believes that, as a specialized retailer, a lessee is better
equipped than a department store to establish close relationships within the
fragmented fine jewelry vendor community. Such relationships offer advantages in
coordinating purchasing, merchandising and marketing with vendors. Accordingly,
host stores can realize higher sales productivity and greater profitability by
leasing their fine jewelry operations to third parties such as Finlay.
Finlay believes certain aspects of its business differentiate it from other
retailers. First, as a lessee operating within host department stores, Finlay
benefits from the host stores' reputation, advertising, credit services and
established customer base. Finlay also avoids the substantial capital investment
typical of stand-alone retailing formats, enabling Finlay's new Departments
generally to achieve profitability within their first 12 months of operations.
Second, Finlay believes that its working capital requirements are lower than
those for many other retailers and Finlay's exposure to changes in fashion
trends is reduced because approximately 50% of Finlay's domestic merchandise is
carried on consignment. In addition, net sales proceeds (whether generated by
cash or on credit) are generally remitted to Finlay by each host store on a
monthly basis. Third, substantially all consumer credit risk is borne by the
host store rather than by Finlay because substantially all sales proceeds are
remitted to Finlay by each store whether or not collected, provided that the
proper credit approvals have been obtained in accordance with the host store's
policy. Fourth, Finlay has developed a sophisticated management information and
inventory control system which enables Finlay to monitor merchandise trends and
control inventory.
Industry. Finlay believes that during the past ten years trends in the
retail jewelry industry have contributed to Finlay's growth. Total personal
consumption expenditures for jewelry (including both fine and costume jewelry)
in the United States in 1996 were $41.3 billion, according to the United States
Department of Commerce. This represents an increase of approximately $16.5
billion in annual expenditures since 1986 and a compound annual growth rate of
5.2% from 1986 through 1996. Finlay believes that demographic factors, such as
the maturing of the "baby boom" generation and an increase in the population of
working women, have contributed to the industry's growth.
The fine jewelry business has also developed in certain ways that have
aided Finlay's growth. Traditionally, consumers purchased fine jewelry primarily
as a gift, keepsake or other special occasion item. Finlay believes that today's
jewelry consumers have accepted fine jewelry as a fashion accessory and are
increasingly making fine jewelry an impulse purchase item. These factors have,
in Finlay's view, increased fine jewelry sales in the department store format.
Fine jewelry has become an integral part of the department store merchandising
scheme and is now marketed by department stores as a separate fashion item.
Finlay believes that these factors have made the Departments operated by Finlay
an independent attraction to department store customers, less dependent on
general store traffic.
The retail jewelry industry is highly fragmented and includes numerous
local jewelers. However, Finlay has benefited from consolidation within the
Department segment of the industry by adding host store groups which previously
leased the operation of their jewelry departments to competitors of Finlay. As a
consequence of consolidations of department stores which leased their fine
jewelry operations and the difficulties of certain of Finlay's principal
competitors, Finlay added five host store groups in 1992, which accounted for 94
of a total 124 new Departments opened in that year (exclusive of closings). In
1993, 1994, 1995 and 1996, Finlay opened 17, 8, 20 and 13 new Departments,
respectively, as the result of host department store consolidations.
Growth Strategy. Finlay's future growth strategy is based on six principal
objectives: (i) increases in comparable Department sales, (ii) addition of
Departments within existing host store groups, (iii) establishment of new host
store relationships, (iv) expansion of Department selling space, (v) continued
international expansion and (vi) development of its retail outlet format as a
channel to sell discontinued, close-out and certain other merchandise.
5
. Increase Comparable Department Sales. Increases in comparable Department
sales represent Finlay's most profitable means of growth. In addition to
its continued emphasis on broad fashion assortments, timely promotions and
extensive advertising, Finlay has continued to focus on three strategies
for improving comparable Department sales growth: (i) a more aggressive
pricing strategy and increased inventory levels on select best value
merchandise, (ii) holiday and event related promotions as well as
participating in host store special promotions and (iii) technological
advances and refinements to operating procedures at the Department level
designed to improve customer service. During 1996, Finlay continued to
intensify its promotion of key items and best value programs as well as
increase Department stock positions of such key items. In addition,
Finlay's advertising and promotional planning are closely coordinated with
this pricing strategy. During 1996, Finlay focused on holiday and event
related promotions such as Mother's Day and November's Extravaganza
promotion as well as participating in host store special promotions, such
as one- day sales. Finlay intends to continue the use of such special
marketing promotions as a means of improving comparable Department sales.
In addition, Finlay has streamlined administrative tasks including
implementing new procedures for the daily set-up and close-down of
Departments and establishing an interface between store cash registers and
Finlay's central office that reduces sales processing time. Finlay is also
exploring ways to make the receipt and transfer of merchandise more
efficient. Finlay believes that these improvements have allowed sales
personnel to spend more time servicing customers and selling merchandise
and therefore have increased sales. In management's view, such operating
changes and methods provide the necessary infrastructure to support
continued growth without a commensurate increase in administrative
expenses.
. Add Departments Within Existing Host Store Groups. Finlay has generally
been able to open Departments in new stores opened or acquired by existing
host stores. Host store expansion has added, through 1996, 114 net new
Departments since the beginning of 1992. Based on expansion plans
previously announced by May and Federated, Finlay has identified over 100
locations (without regard to possible closings) at which it has added
Departments or expects to have the opportunity to add Departments in the
future. In addition, Finlay has historically benefited from, and believes
it is well-positioned to continue to capitalize on, consolidation in the
department store industry. During 1995, Finlay opened 61 and closed 23
domestic Departments and during 1996 Finlay opened 32 and closed 30
domestic Departments within existing host store groups.
. Establish New Host Store Relationships. Finlay seeks to establish new
relationships with department stores that currently either lease their fine
jewelry departments to Finlay's competitors or operate their own fine
jewelry businesses by demonstrating to store management the potential for
improved financial performance. Since the beginning of 1992, Finlay has
added such host store groups as Burdines, Bon Marche, Elder Beerman and
Stern's.
. Expansion of Departments Selling Space. During 1996, Finlay continued to
expand the linear footage of display cases in certain high volume
Departments. The expanded Departments have enabled Finlay to enhance the
depth of the merchandise assortment resulting in increased sales volume in
these Departments. Although Finlay's average sales per linear foot was
$11,600 in 1996, these Departments may produce results significantly higher
than Finlay's average. Furthermore, these incremental sales increases are
achieved without having to incur proportionate increases in selling and
administrative expenses. Finlay views this as an opportunity for growth and
will continue to identify such Departments.
6
. Continue International Expansion. In October 1994, Finlay acquired Sonab, a
French company which operated 131 Departments and three stand-alone stores
in France at the end of 1996. Sonab operates its Departments within five
host store groups, including Galeries Lafayette and Nouvelles Galeries.
During October 1996, Finlay expanded into Berlin, Germany with the opening
of a new Galeries Lafayette store. As a continuation of Finlay's on-going
international expansion, in April 1996, Finlay signed a lease agreement
with Debenhams, a department store chain which operates 90 stores
throughout the United Kingdom and Ireland, and operated seven Debenhams
Departments in the United Kingdom at the end of 1996. Finlay believes that
fine jewelry retailing outside of the United States is highly fragmented,
consisting primarily of small regional and local operators. In Finlay's
view, its specialized expertise has enabled it to strengthen the marketing,
merchandising, inventory control and personnel training methods of its
French operation. Finlay also believes that its expertise and critical mass
will allow it to capitalize on the fragmentation of the international
jewelry retail market to expand in France and into other foreign markets.
. Develop Outlet Store Business. Management believes that outlet stores
represent a potential opportunity beyond Finlay's core leased Department
business. Finlay opened two outlet stores in 1994, five stores in 1995 and
an additional two stores in 1996. The outlet stores provide Finlay with a
channel to sell discontinued, close-out and certain other merchandise.
Outlet centers are generally located in nonmetropolitan areas so as to
avoid direct competition with traditional retail shopping areas that
typically include department stores.
Merchandising Strategy. Finlay seeks to maximize sales and profitability
through a participatory merchandising strategy known as the "Finlay Triangle,"
which integrates Finlay's store group management, central office and vendors. By
coordinating efforts and sharing on-line access to information each Finlay
Triangle participant plays a role which emphasizes its area of expertise in the
merchandising process, thereby increasing productivity. Finlay's central office
functions as a service organization, assembling an assortment of merchandise for
selection by Finlay's store group management. Within pricing 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. Vendors participate in the
decision making process and are made partners with respect to merchandise
assortment, including the testing of new products, marketing, advertising, stock
levels and pricing strategy. Through the Finlay Triangle, opportunities are
created for the vendor to assist in improving inventory turnover and
profitability, both for the vendor and Finlay. Through this strategy, Finlay
believes it capitalizes on economies of scale by centralizing certain
activities, such as vendor selection, advertising and planning, while allowing
Finlay's store group management the flexibility to implement merchandising
programs tailored to their host store environments and clientele.
The Finlay Triangle
[GRAPHIC OMITTED]
7
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. In addition, vendors may input order
recommendations through Finlay's data processing system for approval by Finlay.
New items are tested in specially selected "predictor" Departments where sales
experience can indicate an item's future performance in Finlay's other
Departments. Finlay 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. Finlay believes that these
elements of its approach differentiate 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 group'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 maintain stocks of traditional and gift
merchandise.
Store Relationships
Host Store Relationships. Domestically, as of February 1, 1997, Finlay
operated 788 Departments in 22 host store groups, located in 42 states and the
District of Columbia. Finlay's largest host store relationship is with May, for
which Finlay operates all 359 Departments located in May-owned department
stores, such as Lord & Taylor and Filene's. Finlay's second largest host store
relationship is with Federated, for which Finlay operates 153 of the Departments
located in Federated-owned department stores, including Rich's and Burdines.
Finlay also operates Departments in numerous independent host store groups, such
as Liberty House, Belk and Carson Pirie Scott. Finlay believes that it maintains
excellent relations with its host store groups, 19 of which have had leases with
Finlay for more than five years (representing 87.4% of Finlay's domestic sales
in 1996) and 15 of which have had leases with Finlay for more than ten years
(representing 78.6% of Finlay's domestic sales in 1996). 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. Finlay
believes that the majority of its lease agreements will continue to be renewed
routinely.
Store groups owned by May and Federated accounted for an average of 49% and
23%, respectively, of Finlay's domestic annual sales for 1994, 1995 and 1996.
The following table identifies the host store groups in which Finlay
operated Departments at February 1, 1997, the year in which Finlay's
relationship with each host store group commenced and the number of Departments
in each host store group. The table also identifies Finlay's outlet and French
stand-alone locations and the date on which such locations opened.
8
Inception of Number of
Host Store Group/Location Relationship Departments/Stores
May
L.S. Ayres/Famous Barr..................... 1979 31
Filene's................................... 1977 38
Foley's.................................... 1986 53
Hecht's/Strawbridge's...................... 1986 70
Kaufmann's................................. 1979 47
Lord & Taylor.............................. 1978 59
Meier & Frank.............................. 1988 8
Robinsons - May............................ 1948 53
---
359
---
Federated
The Bon Marche............................. 1993 18
Burdines................................... 1992 44
Lazarus/Rich's/Goldsmith's................. 1983 71
Stern's.................................... 1994 20
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153
---
Other Domestic Departments
Belk/Leggett............................... 1975 50
Bergner's/Boston Store/Carson
Pirie Scott.............................. 1977 51
The Bon-Ton/AM&A's......................... 1986 34
Crowley's/Steinbach........................ 1968 19
Dillard's.................................. 1988 5
Elder Beerman.............................. 1992 35
Gottschalks................................ 1969 30
Liberty House.............................. 1983 11
Proffitt's................................. 1991 9
Younkers................................... 1973 32
---
276
---
Total Domestic Departments................. 788
Domestic Stand-Alone Stores
New York Jewelry Outlet.................... 1994 9
International Departments (Sonab)
Bazar de l'Hotel de Ville.................. 1994(1) 6
Debenhams.................................. 1996 7
Galeries Lafayette......................... 1994(1) 30
Monoprix/Inno/Baze......................... 1994(1) 36
Nouvelles Galeries......................... 1994(1) 59
Jeanteur................................... 1996 1
---
139
---
Sonab Stand-Alone Stores
New Gold................................... 1994(1) 3
---
Total...................................... 939
===
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(1) Year of Finlay's acquisition of Sonab (which occurred on October 28, 1994).
9
Terms of Domestic Lease Agreements. Finlay's domestic 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 policy.
Finlay's domestic lease agreements 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). The host store is generally responsible for paying
utility costs, maintenance and certain other expenses associated with the
operation of the Departments.
Finlay's domestic 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. However, during the months of November and December, 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 made 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. All of the domestic lease agreements 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 domestic lease agreements provide that Finlay must furnish its
employees with salaries and certain benefits comparable to those received by the
host store's employees. Many of Finlay's domestic 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 domestic 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 restrain Finlay from further expanding into
areas where it currently operates Departments. However, certain lease agreements
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 the prohibited area. May has granted to Finlay
this type of consent with respect to Federated host stores and Federated has
granted this type of consent with respect to May host stores. In addition, in
certain cases, Finlay has found that, notwithstanding the absence of any
geographical limitation in a lease agreement, it is limited as a practical
matter from opening Departments for competing host store groups in close
proximity to each other because of the adverse effect such openings might have
on its overall host store group relationships.
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.
10
Departments Opened/Closed. During 1996, Department openings offset by
closings resulted in a net decrease of two Departments. There were 36 openings
within existing store groups. In addition, Department openings include 13
Departments in the Hecht's division of May, as a result of May's acquisition of
the Strawbridge's stores, 26 Departments in Monoprix S.A., a department store in
France ("Monoprix"), the opening of seven Departments in Debenhams and the
opening of two additional outlet stores. These openings were offset by
Department closings including 29 Departments in the Emporium/Weinstock's chain,
eight Departments in The Jones Store Inc. ("Jones") and 17 Departments in the
Maison Blanche/Gayfers chain. In addition, there were 32 Departments closed
within existing host store groups. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - 1996 Compared with 1995."
The following table sets forth data regarding the number of Departments and
stand-alone stores which Finlay has operated from the beginning of 1992:
Fiscal Year Ended
----------------------------------------------------------------
Jan. 30, Jan. 29, Jan. 28, Feb. 3, Feb. 1,
1993 1994 1995 1996 1997
------------ ------------ ----------- ---------- -----------
Departments/Stores:
Open at beginning of period........... 662 746 757 903 941
Opened during period.................. 124 69 159 70 84
Closed during period.................. (40) (58) (13) (32) (86)
------------ ----------- ----------- ---------- -----------
Open at end of period................. 746 757 903 941 939
------------ ----------- ----------- ---------- -----------
Net increase (decrease)......... 84 11 146 38 (2)
------------ ----------- ----------- ---------- -----------
For the periods presented in the table above, Department closings were
primarily attributable to: the bankruptcy of host store groups; the
consolidation of, or ownership changes in, certain host store groups, in
particular internal consolidation within May; the closing or sale by host store
groups of individual stores; the closing of Departments in a host store group as
a result of the opening of Departments in another host store group that competes
in the same geographic market; the host store group's 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 domestic 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. With respect to watches,
Finlay emphasizes brand name vendors, including Gucci, Seiko, Citizen and
Movado. Many of Finlay's lease agreements with host store groups restrict Finlay
from selling certain brand name items or, in some cases, set price minimums
below which Finlay may not sell particular items. In France, Sonab's watch
selection is limited to private label watches marketed under Sonab's "New Gold"
and "Gold Line" names. All other watch brands are sold by the host stores, which
in France have historically retained the fine watch business for themselves.
11
The following table sets forth the domestic sales and percentage of sales
by category of merchandise for 1992, 1993, 1994, 1995 and 1996:
Fiscal Year Ended
------------------------------------------------------------------------------------------------------
Jan. 30, 1993 Jan. 29, 1994 Jan. 28, 1995 Feb. 3, 1996 Feb. 1, 1997
------------------- ------------------ ----------------- --------------- ------------------
% of % of % of % of % of
Category: Sales Sales Sales Sales Sales Sales Sales Sales Sales Sales
-------- ------- -------- -------- -------- -------- -------- -------- -------- --------
(dollars in millions)
Gemstones..... $ 114.7 24.2% $ 119.0 23.6% $ 132.3 24.5% $ 148.6 24.4% $ 153.1 24.1%
Gold.......... 105.4 22.2 113.3 22.4 123.7 22.9 142.8 23.5 144.8 22.8
Watches....... 87.8 18.5 96.0 19.0 105.1 19.5 115.2 19.0 114.3 18.0
Diamonds...... 95.4 20.2 101.3 20.0 102.7 19.1 118.3 19.5 129.2 20.3
Other (1)..... 70.4 14.9 76.0 15.0 75.5 14.0 82.8 13.6 93.5 14.8
-------- ------ -------- -------- -------- -------- -------- -------- -------- --------
Total Sales... $ 473.7 100.0% $ 505.6 100.0% $ 539.3 100.0% $ 607.7 100.0% $ 634.9 100.0%
======== ====== ======== ======== ======== ========= ======== ======== ======== ========
- ---------------------------
(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 1996, the average price of the items sold domestically by Finlay was
$151 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 domestically has been to lower
the 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, on average,
approximately 50% of Finlay's domestic merchandise is obtained on consignment
and certain additional inventory is purchased with extended payment terms. In
1996, Finlay's net monthly investment in inventory (i.e., the total cost of
inventory owned and paid for) averaged 33% of the total cost of its on-hand
merchandise. Finlay is frequently 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 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
and Finlay's sensitivity to changes in fashion trends is reduced.
Finlay 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
the nationwide distribution network which Finlay's Departments provide. By
offering their merchandise through Finlay's Departments, vendors are able to
reach a broad spectrum of the marketplace in coordination with national or
regional advertising campaigns conducted by the vendors or their service
organizations.
12
In 1996, merchandise obtained by Finlay from its 40 largest vendors (out of
a total of approximately 400 vendors) generated approximately 78% of domestic
sales, and merchandise obtained from Finlay's largest vendor generated
approximately 12% of domestic sales. Finlay acquires substantially all of its
merchandise from domestic vendors, although these vendors source a substantial
number of products from foreign suppliers. Finlay does not believe the loss of
any one of its vendors would have a material adverse effect on its business.
Gold Consignment Agreement. In August 1995, Finlay Jewelry consummated a
gold consignment agreement (the "Gold Consignment Agreement") with Rhode Island
Hospital Trust National Bank ("RIHT"), which matures on February 28, 1998. The
Gold Consignment Agreement enables Finlay to pay for 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, the consignor and title to the gold content of the merchandise
changes from the vendors to RIHT. As a result, such vendors have reduced their
working capital requirements and associated financing costs. Consequently,
Finlay has negotiated more favorable terms with the participating vendors.
Finlay can obtain, pursuant to the Gold Consignment Agreement, up to the lesser
of (i) 85,000 fine troy ounces or (ii) $25.0 million worth of gold, subject to a
formula as prescribed by the Gold Consignment Agreement. At February 1, 1997,
amounts outstanding under the Gold Consignment Agreement totalled 36,916 fine
troy ounces, valued at approximately $12.8 million.
RIHT charges Finlay a daily consignment fee on the dollar equivalent value
of ounces outstanding, a floating rate which, as of February 1, 1997, was
approximately 4.5% per annum. In addition, Finlay is required to pay an unused
line fee of 0.5% if the amount of gold consigned has a value equal to or below
$10.0 million. In conjunction with the Gold Consignment Agreement, Finlay
granted RIHT, subject to the terms of an intercreditor agreement between RIHT
and G.E. Capital, a first priority perfected lien on, and a security interest
in, specified gold jewelry of participating vendors approved under the Gold
Consignment Agreement and certain cash on deposit with the consignor and a lien
on proceeds and products of such jewelry and cash deposits.
Operations
General. Most of Finlay's Departments have between 30 and 150 linear feet
of display cases (with an average of approximately 60 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 from 105
to 260 staff hours per week on a permanent basis, depending on the Department's
sales volume, and employ additional sales staff hours during the peak Christmas
selling season. Each Department is kept 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 in each of its Departments.
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 seven host store groups.
In its continued efforts to improve comparable Department sales through improved
operating efficiency, Finlay has taken steps to minimize administrative tasks at
the Department level by introducing advanced technology such as an interface
between store cash registers and Finlay's central office. These steps are
designed to reduce administrative time requirements, thereby improving customer
service and, as a result, sales.
13
Finlay had average sales per linear foot of approximately $11,200 in 1994,
$11,800 in 1995 and $11,600 in 1996. The decrease in sales per linear foot
during 1996 is attributed to more European Departments, which on average, have
lower sales per linear foot as compared to the domestic Departments. Finlay had
average sales per Department of approximately $674,000, $710,000 and $729,000 in
1994, 1995 and 1996, respectively. 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.
Management Information and Inventory Control Systems. Finlay believes that
its management information systems provide a significant advantage in competing
with other fine jewelry retailers. Finlay and its vendors use this system 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, 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 1996, Finlay employed approximately 6,000 persons in the
United States and approximately 500 persons in France, the United Kingdom and
Germany, approximately 90% of whom were regional and local sales and supervisory
personnel and the balance of whom were employed in administrative or executive
capacities. Of Finlay's 6,000 domestic employees as of the end of 1996,
approximately 2,400 were part-time employees, working less than 20 hours per
week. Finlay's labor requirements fluctuate because of the seasonal nature of
Finlay's business. See "- Seasonality." Finlay believes that its relations with
its employees are good. Fewer than 1% of Finlay's domestic employees are
unionized. Substantially all of Finlay's employees in France are unionized. The
average length of service for Finlay's domestic employees at the group manager
level and above is approximately 12 years, which in Finlay's view represents a
low turnover rate in the jewelry retailing industry.
Advertising. Finlay promotes its products through four-color direct mail
catalogs 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 domestic lease
agreements require Finlay to expend certain specified minimum percentages of its
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 security alarm systems and safes at each location and the taking
of a daily diamond inventory. During 1996, inventory shrinkage amounted to
approximately 0.8% 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 Finlay believes are reasonable and adequate for the
types and amounts of merchandise carried by Finlay.
14
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 RIHT 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 must lock-in 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 less than 1% of
Finlay's cost of goods sold in 1996. 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 six months, generally priced at the spot gold rate 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.
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 consignment 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, implemented and monitored on a regular basis by Finlay's senior
management. Finlay Jewelry did not have any open positions in futures contracts
for gold at February 3, 1996 or February 1, 1997.
Competition
Finlay faces competition for retail jewelry sales from national and
regional jewelry chains, other department stores, local independently owned
jewelry stores and chains, mass merchandisers, catalog showrooms, discounters,
direct mail suppliers and televised home shopping. Certain of such competitors
are substantially larger and have greater financial resources than Finlay.
Finlay 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.
To operate Departments in host store groups, Finlay competes with a limited
number of other established Department lessees and department store chains.
Finlay believes that competition for the operation of Departments is based
principally on the reputation of the operator for integrity, the expertise and
experience of the operator in offering an attractive selection of merchandise at
competitive prices, and the operator's ability to generate lease fees for the
host stores. Finlay's principal competitors in this market include the Diamond
Park Division of Zale Corporation and J.B. Rudolph. Zale Corporation is larger
and may have greater financial resources than Finlay.
Seasonality
The retail jewelry business is highly seasonal. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Seasonality."
15
Item 2. Properties
The only real estate owned by Finlay is the recently acquired distribution
and warehouse facility, totalling 75,000 square feet, at 205 Edison Avenue,
Orange, Connecticut. Finlay leases approximately 18,000 square feet at 521 Fifth
Avenue, New York, New York for its executive and administrative offices. The
lease for such space expires September 30, 2008. Finlay also leases
approximately 49,000 square feet at 529 Fifth Avenue, New York, New York for its
accounting, advertising, the majority of its data processing operations and
other administrative functions. The lease for such space expires September 30,
2008. For certain operations at 500 Eighth Avenue, New York, New York, Finlay
has leased approximately 8,000 square feet under a lease which expires January
31, 2000. Finlay also leases retail space for its New York Jewelry Outlet and
French stand-alone stores and office space in France for Sonab's corporate
operations. Generally, as part of Finlay's domestic lease arrangements, host
stores provide office space to Finlay's host store group management personnel
without charging any additional amount.
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.
Finlay has received inquiries and has been subject to investigation from time to
time by various states with respect to its compliance with such regulations. In
1987 and 1989, Finlay entered into consent decrees with the states of Wisconsin
and Georgia, respectively, in connection with Finlay's past sales discounting
and other practices and paid nominal fines to both states. In addition, one of
Finlay's store groups entered into a consent decree with the state of Oregon in
1988 and two others are subject to standing injunctions, one issued at the
request of the state of California in 1988 and the other issued at the request
of the state of Colorado in 1990, regarding the sales discounting practices of
the host store groups in the respective states. As a lessee of the host store
groups, Finlay is obligated to comply with the consent decree and injunctions in
effect with respect to the host store groups. To Finlay's knowledge, no other
state is currently conducting an investigation of its pricing practices. Finlay
believes it is in substantial compliance with all applicable Federal and state
laws 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 1996.
16
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 1996, cash dividends of $818,000 were distributed by Finlay Jewelry
to the Holding Company. The distributions were utilized to pay certain expenses
of the Holding Company such as legal, accounting and directors' fees. The amount
of cash dividends Finlay Jewelry can distribute to the Holding Company may not
exceed 0.25% of Finlay Jewelry's net sales for the preceding fiscal year by the
terms of the credit agreement (the "Revolving Credit Agreement") related to
Finlay's Revolving Credit Facility with G.E. Capital, the Gold Consignment
Agreement with RIHT and the indenture relating to the 105/8% Senior Notes due
2003 (the "Notes").
There was one record holder of Finlay Jewelry's common stock at April 1,
1997.
Item 6. Selected 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."
Fiscal Year Ended (1)
-------------------------------------------------------------------------
Jan. 30, 1993 Jan. 29, 1994 Jan. 28, 1995 Feb. 3, 1996 Feb. 1, 1997
------------- ------------- ------------- ------------ ------------
(dollars in thousands, except per share data)
Statement of Operations Data:
Sales............................................. $ 473,746 $ 505,639 $ 552,090 $ 654,491 $ 685,274
Cost of sales..................................... 220,352 237,864 261,263 314,029 330,300
------------- ------------ ------------- ------------ ------------
Gross margin (2).................................. 253,394 267,775 290,827 340,462 354,974
Selling, general and administrative expenses...... 209,245 222,789 239,281 281,693 289,145
Depreciation and amortization..................... 7,037 8,761 8,910 9,659 10,840
Management transition and consulting expense (3) - - 5,144 - -
Nonrecurring expenses associated with
recapitalization (4)........................... - 1,915 - - -
------------- ------------- ------------- ------------ ------------
Income (loss) from operations..................... 37,112 34,310 37,492 49,110 54,989
Other nonrecurring (income) expense (5)........... 2,100 15,995 - (5,000) -
Interest expense, net............................. 23,841 20,753 20,927 21,844 22,526
------------- ------------- ------------- ------------ ------------
Income (loss) before income taxes and
cumulative effect of accounting change......... 11,171 (2,438) 16,565 32,266 32,463
Provision (credit) for income taxes............... 5,608 2,204 8,349 12,527 14,501
------------- ------------- ------------- ------------ ------------
Income (loss) before cumulative effect of
accounting change.............................. 5,563 (4,642) 8,216 19,739 17,962
Cumulative effect of accounting change (6)........ 465 - - - -
------------- ------------- ------------- ------------ ------------
Net income (loss)................................. $ 6,028 $ (4,642) $ 8,216 $ 19,739 $ 17,962
============= ============= ============= ============ ============
17
Fiscal Year Ended (1)
-------------------------------------------------------------------------
Jan. 30, 1993 Jan. 29, 1994 Jan. 28, 1995 Feb. 3, 1996 Feb. 1, 1997
------------- ------------- ------------- ------------ ------------
(dollars in thousands, except per share data)
Operating and Financial Data:
Number of Departments (end of period) (7)......... 746 757 903 941 939
Percentage increase in sales...................... 16.1% 6.7% 9.2% 18.5% 4.7%
Percentage increase (decrease) in comparable
Department sales (7)(8)........................ 1.9% 0.7% 4.5% 5.7% 5.9%
Average sales per Department (7)(9)............... $ 673 $ 673 $ 674 $ 710 $ 729
EBITDA (10)....................................... $ 44,149 $ 43,071 $ 46,402 $ 58,769 $ 65,829
EBITDA-FIFO (as adjusted) (11).................... $ 43,579 $ 46,915 $ 52,391 $ 59,712 $ 67,748
Balance Sheet Data - End of Period:
Working capital................................... $ 5,789 $ 21,771 $ 26,864 $ 65,309 $ 75,692
Total assets...................................... 273,018 290,248 338,129 393,057 416,808
Long-term debt, excluding current portion......... 132,221 135,412 135,004 135,002 135,000
Stockholder's equity (deficit).................... 1,553 20,808 27,706 72,387 86,410
- ---------------------------
(1) Each of the fiscal years for which information is presented includes 52
weeks except 1995, which includes 53 weeks.
(2) 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: $(0.6) million, $1.9 million, $0.8
million, $0.9 million and $1.9 million for 1992, 1993, 1994, 1995 and 1996,
respectively.
(3) Included in 1994 in connection with certain management changes are
compensation and benefits for a former senior executive totalling $3.1
million as a result of the termination of his employment agreement and
other management transition expenses totalling $1.0 million. See "Executive
Compensation - Employment Agreements and Change of Control Arrangements."
In addition, included in 1994, are consulting expenses totalling $1.0
million in connection with a program undertaken with a management
consulting firm to increase comparable Department sales and improve
operating efficiencies.
(4) Included in 1993 in connection with the Recapitalization Transactions is
the redemption of the outstanding equity participation units in accordance
with the terms and conditions of the Holding Company's former equity
participation plan (the "Equity Plan") totalling $0.9 million as a result
of the Lee Investment and the Desai Investment, as defined in Note 1 to the
Consolidated Financial Statements, and bonuses totalling $1.0 million.
(5) Included in 1992 are $2.1 million of nonrecurring expenses associated with
a withdrawn initial public offering. Included in 1993 in connection with
the Recapitalization Transactions is the write-off of deferred financing
costs totalling $4.0 million, the elimination of the remaining discount on
the subordinated WCC Term Loans, as defined in Note 1 to the Consolidated
Financial Statements, of $6.7 million and other expenses totalling $5.3
million. Included in 1995 are proceeds of $5.0 million from a life
insurance policy Finlay maintained on a senior executive.
(6) This item represents the cumulative effect of change in accounting for
income taxes in 1992.
(7) Includes, beginning in 1994, Departments and stand-alone locations.
(8) Comparable Department sales are calculated by comparing the sales from
Departments open for the same months in the comparable periods.
(9) Average sales per Department is determined by dividing sales by the average
of the number of Departments open at the beginning and at the end of each
period. For 1994, the effect of the acquisition of Sonab, and subsequent
Department openings by Sonab, was prorated in determining average sales per
Department.
(10) EBITDA represents income from operations before depreciation and
amortization expenses. For 1993, EBITDA includes the effect of nonrecurring
expenses totalling $1.9 million described in Note 4 above and for 1994,
EBITDA includes the effect of management transition and consulting expense
totalling $5.1 million described in Note 3 above. Finlay Jewelry believes
EBITDA provides additional information for determining its ability to meet
future debt service requirements.
(11) EBITDA-FIFO (as adjusted) represents EBITDA before the LIFO provision and
before nonrecurring expenses of $1.9 million deducted in arriving at income
from operations for 1993 and management transition and consulting expense
of $5.1 million deducted in arriving at income from operations for 1994.
18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with "Selected Financial Data"
and the Consolidated Financial Statements and Notes thereto included elsewhere
in this Form 10-K.
General
On April 6, 1995, the Holding Company completed the Offering of 2,500,000
shares of its Common Stock at a price of $14.00 per share. Net proceeds from the
Offering were $30.2 million and were used to repurchase $6.1 million accreted
balance of the Holding Company's Debentures with the balance of the net proceeds
used to reduce a portion of the outstanding indebtedness under the Revolving
Credit Facility with G.E. Capital.
Finlay entered the international fine jewelry retailing market in October
1994 by acquiring Sonab, a French company that as of the end of 1996 operated
139 Departments and three stand-alone stores in locations in Europe. Results of
operations for 1995 reflect the first full year of Sonab's operations. In 1996,
Finlay expanded its international operations into the United Kingdom with the
opening of seven Departments in the Debenhams department store chain as well as
into Germany with the opening of a Galeries Lafayette store in Berlin.
Results of Operations
The following table sets forth operating results as a percentage of sales
for the periods indicated:
Fiscal Year Ended
------------------------------------
Jan. 28, Feb. 3, Feb. 1,
1995 1996 1997
---------- --------- ---------
Statement of Operations Data:
Sales............................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 47.3 48.0 48.2
---------- --------- ---------
Gross margin..................................... 52.7 52.0 51.8
Selling, general and administrative expenses........ 43.3 43.0 42.2
Depreciation and amortization....................... 1.6 1.5 1.6
Management transition and consulting expense (1).... 1.0 - -
---------- --------- ---------
Income (loss) from operations....................... 6.8 7.5 8.0
Other nonrecurring income (2)....................... - (0.7) -
Interest expense, net............................... 3.8 3.3 3.3
---------- --------- ---------
Income (loss) before income taxes................... 3.0 4.9 4.7
Provision (credit) for income taxes................. 1.5 1.9 2.1
---------- --------- ---------
Net income (loss)................................... 1.5% 3.0% 2.6%
========== ========= =========
Other Supplemental Data:
EBITDA (3).......................................... 8.4% 9.0% 9.6%
EBITDA-FIFO (as adjusted) (4)....................... 9.5% 9.1% 9.9%
- ---------------------------
(1) Included in 1994 in connection with certain management changes are
compensation and benefits for a former senior executive totalling $3.1
million as a result of the termination of his employment agreement and
other management transition expenses totalling $1.0 million. In addition,
included in 1994 are consulting expenses totalling $1.0 million in
connection with a program undertaken with a management consulting firm to
increase comparable Department sales and improve operating efficiencies.
(2) Included in Other nonrecurring income for 1995 are proceeds of $5.0 million
from a life insurance policy Finlay maintained on a senior executive.
19
(3) EBITDA represents income from operations before depreciation and
amortization expenses. For 1994, EBITDA includes the effect of management
transition and consulting expense totalling $5.1 million described in Note
1 above. Finlay Jewelry believes EBITDA provides additional information for
determining its ability to meet future debt service requirements.
(4) EBITDA-FIFO (as adjusted) represents EBITDA before the LIFO provision and
before management transition and consulting expense of $5.1 million
deducted in arriving at income from operations in 1994.
1996 Compared with 1995
Sales. Sales increased $30.8 million, or 4.7%, in 1996 compared to 1995.
Comparable Department sales (Departments open for the same months during
comparable periods) increased 5.9%. Management attributes this increase in
comparable Department sales primarily to intensified promotion of key items and
best value programs, increased emphasis on holiday and event related promotions
as well as participating in host store special promotions. Sales decreased $7.8
million as a result of the net effect of new store openings offset by store
closings as well as the timing of such department openings and closings. During
1996, Finlay opened 84 Departments and closed 86 Departments. The openings were
comprised of the following:
Number of
Departments/
Store Group Stores Reason
- ------------------------ ------------- ---------------------------------------
Hecht's 13 May's acquisition of the Strawbridge's
stores.
Monoprix 26 Expansion in France.
Debenhams 7 Initial Departments in the United
Kingdom.
New York Jewelry Outlet 2 Additional outlet stores.
Other 36 Department openings within existing
-- store groups.
84
==
The closings were comprised of the following:
Number of
Departments/
Store Group Stores Reason
- ------------------------ ------------- ---------------------------------------
Emporium/Weinstock's 29 Acquired by Federated and will operate
under the Macy's name.
Jones 8 Lessor consolidated with one lessee.
Maison Blanche/Gayfers 17 Lessor consolidated with one lessee.
Other 32 Department closings within existing
-- store groups.
86
==
Gross margin. Gross margin for the period increased by $14.5 million but,
as a percentage of sales, gross margin decreased by 0.2% primarily due to an
increase in the LIFO provision and to a lesser extent as a result of
management's efforts to increase market penetration and market share through a
more aggressive pricing strategy.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") as a percentage of sales decreased by 0.8%.
SG&A increased $7.5 million, or 2.6%, due to additional expenses, primarily
payroll and lease fees, associated with increased sales volume. Although these
expenses grew, the growth was at a slower rate than sales.
Depreciation and amortization. Depreciation and amortization increased by
$1.2 million, reflecting $17.5 million in capital expenditures for the most
recent 12 months, offset by the effect of certain assets becoming fully
depreciated. The increase in fixed assets was due to the addition of new
Departments and the renovation of existing Departments.
20
Other nonrecurring (income) expense. Finlay Jewelry received during the
second quarter of 1995, proceeds of $5.0 million from a life insurance policy
maintained on a senior executive.
Interest expense, net. Interest expense increased by $0.7 million,
reflecting an increase in average borrowings ($210.4 million for the 1996 period
compared to $203.4 million for the comparable period in 1995) partially offset
by a lower weighted average interest rate (9.7% for the 1996 period compared to
10.0% for the comparable period in 1995).
Provision (credit) for income taxes. The income tax provision for the 1995
and 1996 periods reflects the effective tax rate of 41.5%.
Net income (loss). Net income of $18.0 million for 1996 represents a
decrease of $1.7 million as compared to the net income of $19.7 million in 1995
as a result of the factors discussed above. Excluding the effect of the receipt
of life insurance proceeds in 1995, net income of $18.0 million in 1996
represents an increase of $3.3 million above the net income of $14.7 million in
1995.
1995 Compared with 1994
Sales. Sales increased $102.4 million, or 18.5%, in 1995 compared to 1994.
Comparable Department sales increased 5.7%. Management attributes this increase
in comparable Department sales primarily to joint marketing efforts coordinated
with several host store groups and intensified promotion of key items and best
value programs. Sonab had total sales of $46.8 million and accounted for $34.0
million of the total sales increase. Sales from the operation of net new
Departments contributed $70.9 million. During 1995, Finlay opened 70 Departments
and closed 32 Departments. The new openings included 14 Departments in the
Hecht's division of May, as a result of May's acquisition of the Wanamaker's
stores, four Departments in Sonab and five additional outlet stores. The balance
of openings consisted of Departments within existing host store groups. The
closings consisted of four Departments in Lamonts as a result of bankruptcy,
four Departments due to the sale by The Popular and the balance of closings
consisted of Departments within existing host store groups.
Gross margin. Gross margin for the period increased by $49.6 million but,
as a percentage of sales, gross margin decreased by 0.7% as a result of
management's efforts to increase market penetration and market share through a
pricing strategy that has become more competitive. Sonab accounted for $17.3
million of the total increase in gross margin primarily due to the full year of
operation of Sonab as part of Finlay in 1995.
Selling, general and administrative expenses. SG&A as a percentage of sales
decreased by 0.3%. SG&A increased $42.4 million, or 17.7%, due to additional
expenses, primarily payroll and lease fees, associated with increased sales
volume. Although these expenses grew, the growth was at a slower rate than
sales. Sonab accounted for $13.7 million of the total increase in SG&A.
Depreciation and amortization. Depreciation and amortization increased by
$0.7 million, reflecting $14.9 million in capital expenditures for the most
recent 12 months, offset by the effect of certain assets becoming fully
depreciated. The increase in fixed assets was due to the addition of new
Departments and the renovation of existing Departments, including $0.9 million
in opening additional outlet stores.
Management transition and consulting expense. Included in 1994 in
connection with certain management changes are compensation and benefits for a
former senior executive totalling $3.1 million as a result of the termination of
his employment agreement and other management transition expenses totalling $1.0
million. In addition, included in 1994 are consulting expenses totalling $1.0
million in connection with a program undertaken with a management consulting
firm to increase comparable Department sales and improve operating efficiencies.
21
Other nonrecurring (income) expense. Finlay Jewelry received during the
second quarter of 1995, proceeds of $5.0 million from a life insurance policy
maintained on a senior executive.
Interest expense, net. Interest expense increased by $0.9 million,
reflecting a higher weighted average interest rate (10.0% for the 1995 period
compared to 9.6% for the comparable period in 1994) partially offset by a
decrease in average borrowings ($203.4 million for the 1995 period compared to
$204.3 million for the comparable period in 1994).
Provision (credit) for income taxes. The income tax provision for the 1994
and 1995 periods reflects the effective tax rate of 41.5%.
Net income (loss). Net income of $19.7 million for 1995 represents an
increase of $11.5 million above the net income of $8.2 million in 1994 as a
result of the factors discussed above.
Liquidity and Capital Resources
Finlay's capital requirements are primarily 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 and renovating
existing Departments. In addition, future working capital requirements would be
increased by further international expansion. For 1996, capital expenditures
totalled $17.5 million and in 1995 totalled $14.9 million. Capital expenditures
are estimated to be approximately $12.0 million in 1997. Capital expenditures
are limited by the terms of the Revolving Credit Facility.
Finlay's operations substantially preclude consumer receivables and
approximately 50% of Finlay's domestic merchandise is carried on consignment.
Accordingly, Finlay believes that relatively modest levels of working capital
are required in comparison to many other retailers. Finlay Jewelry's working
capital balance was $75.7 million at February 1, 1997, an increase of $10.4
million from February 3, 1996. The increase resulted primarily from the impact
of 1996's net income exclusive of depreciation and amortization, partially
offset by capital expenditures. Based on the seasonal nature of Finlay's
business, working capital levels can be expected to decrease on an interim basis
during the first three quarters of a year. See "- Seasonality."
The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October and November in anticipation
of the holiday shopping season. Accordingly, Finlay experiences seasonal cash
needs as inventory levels peak. The Revolving Credit Facility with G.E. Capital
provides Finlay with a line of credit of up to $135.0 million which is available
to finance seasonal cash and other working capital needs. The Revolving Credit
Facility bears interest at a rate equal to, at Finlay's option, (i) the Index
Rate (as defined in the Revolving Credit Facility) plus 1.0% or (ii) adjusted
LIBOR plus 2.0%. Pursuant to the Debenture indenture, the Holding Company has
pledged all of the issued and outstanding shares of capital stock of Finlay
Jewelry for the benefit of the Debenture holders. Pursuant to the Revolving
Credit Facility, Finlay Jewelry has pledged or caused to be pledged all of the
issued and outstanding capital stock (or other equity securities) of each of its
direct and indirect subsidiaries (including Sonab Holdings, Inc., Sonab
International, Inc. and Sonab) for the benefit of the lenders under the
Revolving Credit Facility.
Finlay is required to reduce the balance of the Revolving Credit Facility
in each year to $10.0 million or less for a 20 consecutive day period, and
immediately thereafter to zero for an additional 10 consecutive days (the
"Balance Reduction Requirement"). There were no borrowings under the Revolving
Credit Facility at February 3, 1996 or at February 1, 1997 in accordance with
the Balance Reduction Requirement. The average amounts outstanding for 1995 and
1996 were $68.4 million and $75.4 million, respectively. The maximum amount
outstanding under the Revolving Credit Facility in 1996 was $114.1 million.
22
Simultaneously with the acquisition of Sonab on October 28, 1994, G.E.
Capital agreed to provide additional financing by increasing the Revolving
Credit Facility from $110.0 million to $135.0 million. Finlay Jewelry believes
that, with the increased borrowing capacity under the Revolving Credit Facility,
it has sufficient liquidity to meet Sonab's anticipated working capital
requirements.
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. For 1996, Finlay had an average
balance of consignment merchandise of $201.8 million from over 200 vendors as
compared to an average balance of $208.5 million in 1995. At the end of 1996,
$194.3 million of consignment merchandise was on hand as compared with $199.1
million at the end of 1995. See "Business - Store Relationships" and "Business -
Purchasing and Inventory."
A substantial amount of operating cash flow of Finlay is or will be
required to pay, directly or indirectly, interest with respect to the Notes and
the Debentures and amounts due under the Revolving Credit Facility. As of
February 1, 1997, Finlay Jewelry's outstanding borrowings included a $135.0
million balance under the Notes.
In August 1995, Finlay Jewelry consummated the Gold Consignment Agreement
with RIHT. The Gold Consignment Agreement enables Finlay Jewelry to pay for
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) 85,000 fine troy ounces or (ii) $25.0 million worth of gold,
subject to a formula as prescribed by the Gold Consignment Agreement. At
February 1, 1997, amounts outstanding under the Gold Consignment Agreement
totalled 36,916 fine troy ounces, valued at approximately $12.8 million.
On April 13, 1995, the Holding Company received net proceeds of $30.2
million as a result of the Offering of 2,500,000 shares of its Common Stock. Of
the net proceeds, $5.8 million was utilized to repurchase $6.1 million accreted
balance of Debentures. The balance of the net proceeds were contributed to
Finlay Jewelry by reducing a portion of the outstanding indebtedness under the
Revolving Credit Facility.
Finlay believes that, based upon current operations, anticipated growth,
availability under the Revolving Credit Facility (including availability as a
result of the Offering) and the anticipated availability of additional debt
financing, 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. The Revolving
Credit Facility, the Note indenture and the Gold Consignment Agreement restrict
distributions from Finlay Jewelry to the Holding Company to 0.25% of Finlay
Jewelry's net sales for the preceding fiscal year. The amounts required to
satisfy the aggregate of Finlay Jewelry's interest expense and required
amortization payments totalled $21.0 million and $21.7 million for 1995 and
1996, respectively.
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code")
restricts utilization of net operating loss carryforwards ("NOLs") after an
ownership change exceeding 50%. As a result of the Recapitalization
Transactions, 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, 1996 (Finlay Jewelry's tax
year end), a NOL for tax purposes of approximately $14.0 million which is
subject to an
23
annual limit of approximately $2.0 million per year. For financial reporting
purposes, no NOL exists as of February 1, 1997. See Note 8 to the Consolidated
Financial Statements.
Seasonality
Finlay's business is highly seasonal, with peak sales occurring during the
fourth quarter of each year, which includes the Christmas season
(November/December). The fourth quarter accounted for an average of 42% of
Finlay's annual sales and approximately 86% of its income from operations
(excluding nonrecurring charges) for 1994, 1995 and 1996. Accordingly, the
results for any of the first three quarters of a year, taken individually or in
the aggregate, are not indicative of annual results. See Note 10 to the
Consolidated Financial Statements. Generally, Finlay's operations during the
first three quarters of a year are financed by increased borrowings under the
Revolving Credit Facility.
Finlay Jewelry's Sales and Income (loss) from operations for each quarter
of 1994, 1995 and 1996 were as follows:
Fiscal Quarter
--------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(dollars in thousands)
1994:
Sales..................................... $ 93,858 $ 109,209 $ 109,657 $ 239,366
Income (loss) from operations (1)......... (1,987) 2,481 2,724 34,274
1995:
Sales..................................... 112,716 135,428 132,058 274,289
Income (loss) from operations ............ (1,071) 5,249 3,672 41,260
1996:
Sales..................................... 130,719 137,188 136,140 281,227
Income (loss) from operations............. 596 6,371 4,606 43,416
- --------------------------
(1) The fourth quarter of 1994 includes $5.1 million (pre-tax) of expenses
related to the management transition and consulting expense.
Inflation
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
Forward-Looking Information
This Annual Report on Form 10-K contains certain forward-looking
statements, including statements concerning expected capital expenditures and
the adequacy of Finlay's sources of cash to finance its current and future
operations as well as its debt service and other obligations. These
forward-looking statements involve a number of risks and uncertainties that
could cause actual results to differ materially, including such factors as:
trends in the general economy; competition in the retail jewelry business; the
seasonality of the retail business; the ability to increase comparable store
sales and to open new Departments; the dependence on certain host store
relationships due to the concentration of sales generated by such host stores;
the availability of alternate sources of merchandise supply in the case of an
abrupt loss of any significant supplier; the ability to continue to obtain
substantial amounts of merchandise on consignment; the dependence on key
officers; and changes in regulatory requirements which are applicable to Finlay
Jewelry's business.
24
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants...................................F-2
Consolidated Statements of Operations for the years ended
January 28, 1995, February 3, 1996 and February 1, 1997...................F-3
Consolidated Balance Sheets as of February 3, 1996 and
February 1, 1997..........................................................F-4
Consolidated Statements of Changes in Stockholder's Equity for the
years ended January 28, 1995, February 3, 1996 and February 1, 1997.......F-5
Consolidated Statements of Cash Flows for the years ended
January 28, 1995, February 3, 1996 and February 1, 1997...................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.
25
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below is certain information with respect to each of the current
executive officers and directors of the 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 Held
- ----------------------- ----- -----------------------------------------------
David B. Cornstein 58 Chairman of the Holding Company and Director
Arthur E. Reiner 56 President, Chief Executive Officer and Vice
Chairman of the Holding Company, Chairman and
Cheif Executive Officer of Finlay Jewelry
and Director
Leslie A. Philip 50 Executive Vice President - Merchandising and
Sales Promotion of Finlay Jewelry
Barry D. Scheckner 48 Senior Vice President and Chief Financial
Officer of Finlay Jewelry and the Holding
Company
Edward Stein 52 Senior Vice President and Director of Stores
of Finlay Jewelry
Rohit M. Desai 58 Director
James Martin Kaplan 52 Director
Thomas H. Lee 53 Director
Norman S. Matthews 64 Director
Warren C. Smith, Jr. 40 Director
The Lee Investors, the Desai Investors, the Management Stockholders and
certain third parties are parties to a Stockholders' Agreement that was amended
prior to completion of the Offering (the "Amended Stockholders' Agreement"). The
Amended Stockholders' Agreement provides, among other things, that all parties
thereto, subject to certain conditions, vote their shares to fix the number of
members of the Board of Directors of the Holding Company at ten and to vote in
favor of seven directors who will be nominated as follows: two will be nominated
by the Lee Investors, two may be nominated by the Desai Investors, two will be
nominated by Mr. Cornstein and one will by nominated by Mr. Reiner. The
nomination and election of the remaining three directors is not governed by the
Amended Stockholders' Agreement. Such directors may be nominated by the Holding
Company and elected by the stockholders of the Holding Company and at least two
will be independent directors.
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.
Pursuant to a predecessor agreement to the Amended Stockholders' Agreement
entered into in May 1993 (the "1993 Stockholders' Agreement"), (i) Messrs. Lee
and Smith were nominated to the Board of Directors as the designees of the Lee
Investors; (ii) Messrs. Desai and Damon Ball were nominated by the Desai
Investors; (iii) Messrs. Cornstein and Kaplan were nominated by Mr. Cornstein;
and (iv) Mr. Reiner nominated himself. During 1996, Mr. Ball resigned as a
director.
26
The Amended Stockholders' Agreement also provides that the executive
committee of the Board of Directors will consist of five directors, including
one independent director selected by the Board of Directors, one member
designated by Mr. Lee (so long as the Lee Investors have the right to designate
a nominee for director), one member designated by the Desai Investors (so long
as the Desai Investors have the right to designate a nominee for director) and
two members designated by Mr. Cornstein (which number will be reduced to one if
Mr. Cornstein is only entitled to designate one nominee for director and none if
Mr. Cornstein ceases to have the right to designate a nominee for director). The
executive committee for the Holding Company presently consists of Messrs. Lee,
Desai, Matthews, Cornstein and Kaplan. See "Certain Relationships and Related
Transactions - Stockholders' Agreement."
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 and
Lee are Class I directors; Messrs. Cornstein, Kaplan and Reiner are Class II
directors; and Messrs. Matthews and Smith are Class III directors. The terms of
the Class II, Class III and Class I directors expire at the annual meeting of
stockholders to be held in 1997, 1998 and 1999, respectively. Officers serve at
the discretion of the Board of Directors. Directors who are employees receive no
additional compensation for serving as members of the Board. Messrs. Lee, Desai,
Smith and Kaplan receive no compensation for serving as directors of the Holding
Company. Affiliates of Messrs. Lee and Desai receive fees pursuant to the
Management Agreements (as defined in "Executive Compensation - Compensation
Committee Interlocks and Insider Participation"). Messrs. Cornstein and Reiner
have employment contracts with the Holding Company. See "Executive Compensation
- - Employment Agreements and Change of Control Arrangements."
The business experience, principal occupations and employment of each of
the executive officers and directors of the Holding Company and Finlay Jewelry
during the past five years, together with their periods of service as directors
and executive officers of the Holding Company and Finlay Jewelry, are set forth
below.
David B. Cornstein has been Chairman of the Holding Company since May 1993
and has been a director of the Holding Company and Finlay Jewelry since their
inception in December 1988. Mr. Cornstein was named Chairman and Chief Executive
Officer of Finlay International in January 1996. 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. Cornstein was President, Chief
Executive Officer and a director of SL Holdings (as defined in "Certain
Transactions - 1985 Acquisition and 1988 Leveraged Recapitalization"). Prior
thereto, Mr. Cornstein was the Chief Executive Officer of Tru-Run, Inc., a
corporation principally owned by Mr. Cornstein which was engaged in the
operation of leased jewelry departments and leased jewelry and watch repair
departments. Mr. Cornstein is a director of What A World!, Inc., a public
specialty gift retailer, and a director of a privately-held corporation.
Arthur E. Reiner became President and Chief Executive Officer of the
Holding Company effective January 30, 1996. He has been Vice Chairman of the
Board of the Holding Company and Chairman of the Board and Chief Executive
Officer of Finlay Jewelry since January 3, 1995. From February 1992 to October
1994, Mr. Reiner was Chairman and Chief Executive Officer of Macy's East, a
subsidiary of R.H. Macy & Co., Inc. 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. Mr. Reiner became Chairman and
Chief Executive Officer of Macy's New York (now part of Macy's East) in 1980.
Prior to joining Finlay, Mr. Reiner had spent over 25 years with the Macy's
organization. In January 1992, Macy's filed for protection under Chapter 11 of
the Bankruptcy Code. Mr. Reiner is also a director of Loehmann's, Inc.
27
Leslie A. Philip has been Executive Vice President - Merchandising and
Sales Promotion of Finlay Jewelry since May 1995. 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.
Barry D. Scheckner has been Senior Vice President and Chief Financial
Officer of Finlay Jewelry since December 1988. Mr. Scheckner has also been
Senior Vice President and Chief Financial Officer of the Holding Company since
September 1992. Prior to September 1992, he was Treasurer of the Holding
Company. From December 1985 until December 1988, Mr. Scheckner was Corporate
Controller of S&L Acquisition (as defined in "Certain Transactions - 1985
Acquisition and 1988 Leveraged Recapitalization"), and from October 1983 to
December 1985, he was Controller of the fine jewelry division of S&L (as defined
in "Certain Transactions - 1985 Acquisition and 1988 Leveraged
Recapitalization"). Mr. Scheckner joined S&L as its Manager of Internal
Consulting and Director of Internal Audit in February 1983. Mr. Scheckner began
his career as a management consultant with Price Waterhouse in 1973.
Edward Stein has been Senior Vice President - 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 S&L Acquisition from December 1985 to December 1988 and with S&L
from 1983 to December 1985. Mr. Stein held various other positions at Finlay
from 1965 to 1983.
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,
L.P., Equity-Linked Investors-II and a public mutual fund. Mr. Desai is also the
managing general partner of the general partners of each of Equity-Linked
Investors, L.P. and Equity-Linked Investors-II. Mr. Desai serves as a director
of the Rouse Company, Sunglass Hut International, Incorporated and several
privately-held companies.
James Martin Kaplan has been a director of the Holding Company and Finlay
Jewelry since their inception in December 1988 and was a director of SL Holdings
from December 1985 to December 1988. Mr. Kaplan has been a partner with the law
firm of Zimet, Haines, Friedman & Kaplan, counsel to the Holding Company, since
1977. Mr. Kaplan is also a director of What A World!, Inc.
Thomas H. Lee has been a director of the Holding Company and Finlay Jewelry
since May 1993. Since 1974, Mr. Lee has been President of Thomas H. Lee Company.
He is a director of Autotote Corporation, Livent Inc., Playtex Products, Inc.,
Signature Brands, Inc. and Vail Resorts, Inc. Mr. Lee is also a director of a
number of privately- held companies. Mr. Lee is a general partner of ML-Lee
Acquisition Fund, L.P., ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition
Fund (Retirements Accounts) II, L.P. (collectively, the "ML-Lee Funds"). Mr. Lee
is Chairman of Thomas H. Lee Advisors I and general partner of Thomas H. Lee
Advisors II, L.P., the investment advisors to the ML-Lee Funds. He is the
general partner of THL Equity Advisors Limited Partnership, the general partner
of and investment advisor to Thomas H. Lee Equity Partners, L.P., and an officer
and director of THL Equity Trust III, the general partner of THL Equity Advisors
III Limited Partnership, the general partner and investment advisor to Thomas H.
Lee Equity Fund III, L.P.
Norman S. Matthews has been a director of the Holding Company and Finlay
Jewelry since July 1993. Mr. Matthews has been a retail consultant based in New
York for over six years. Prior to that time, Mr. Matthews served as President of
Federated. He is also a director of Toys "R" Us, Inc., The Progressive
Corporation, Loehmann's, Inc. and Lechters, Inc.
28
Warren C. Smith, Jr. has served as a director of the Holding Company and
Finlay Jewelry since May 1993. Mr. Smith is a Managing Director of Thomas H. Lee
Company and has been employed by Thomas H. Lee Company since 1990. In addition,
Mr. Smith is Vice President of Thomas H. Lee Advisors II. He is also a director
of Rayovac Corporation and various private corporations.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth information with respect to the compensation
of Finlay's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Holding Company or Finlay Jewelry,
including the Holding Company's former Chief Executive Officer, in 1996, 1995
and 1994 (collectively, the "Named Executive Officers"):
Long Term
Annual Compensation Compensation
------------------------------------------------ -----------------------
Number of
Securities
Restricted Underlying
Name and Other Annual Stock Options/ All Other
Principal Position Year Salary Bonuses Compensation (1) Awards SARs (2) Compensation (3)
------------------ ---- -------- --------- --------------- ------- ---------- ----------------
Arthur E. Reiner (4) 1996 $700,000 $253,750 - - - $ 27,495
President, Chief Executive 1995 666,660 215,900 - - - 22,315
Officer and Vice Chairman 1994 55,555 - - - 69,263 -
of the Holding Company
and Chairman and Chief
Executive Officer of
Finlay Jewelry
David B. Cornstein 1996 600,000 137,500 $42,977 - - 51,623
Chairman and former 1995 600,000 65,900 41,011 - 66,667 51,753
Chief Executive Officer of 1994 500,000 275,000 36,318 - - 47,225
the Holding Company and
Chairman of Finlay
International
Leslie A. Philip (5) 1996 320,000 116,000 - - - 8,730
Executive Vice President - 1995 213,710 75,000 - - 33,333 1,974
Merchandising and Sales 1994 - - - - - -
Promotion of Finlay
Jewelry
Barry D. Scheckner 1996 300,000 108,750 - - - 8,398
Senior Vice President and 1995 300,000 35,000 - - 10,000 8,528
Chief Financial Officer of 1994 275,004 - - - - 108,615
the Holding Company and
Finlay Jewelry
Edward Stein 1996 275,000 107,360 - - - 9,105
Senior Vice President and 1995 267,086 40,000 - - 8,333 8,716
Director of Stores of 1994 183,500 62,500 - - - 8,686
Finlay Jewelry
- --------------------------------
(1) Represents tax equalization payments made in connection with life insurance
premiums paid by Finlay on behalf of the Named Executive Officers.
(2) See "- Option/SAR Grants in Fiscal 1996"
(3) Includes for each Named Executive Officer the sum of the following amounts
earned in 1996, 1995 and 1994 for such Named Executive Officer:
<