Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (do not check if a smaller reporting company)	Smaller reporting company x

 

 

		Page(s)
PART I
Item 1.	Business
Item 1A.	Risk Factors
Item 1B.	Unresolved Staff Comments
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.	Selected Consolidated Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.	Controls and Procedures
Item 9B.	Other Information
PART III
Item 10.	Directors, Executive Officers and Corporate Governance
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.	Certain Relationships and Related Transactions, and Director Independence
Item 14.	Principal Accountant Fees and Services
PART IV
Item 15.	Exhibits and Financial Statement Schedules
SIGNATURES

 

PART I

Item 1. Business

General Overview

Finlay Enterprises, Inc., a Delaware corporation (the “Company”, the “Registrant”, “we”, “us” and “our”), conducts business through its wholly-owned subsidiary, Finlay Fine Jewelry Corporation, a Delaware corporation, and its wholly-owned subsidiaries (“Finlay Jewelry”). References to “Finlay” mean, collectively, the Company and Finlay Jewelry. All references herein to “departments” refer to fine jewelry departments operated pursuant to license agreements with host stores and all references herein to “stand-alone jewelry stores” refer to our specialty jewelry stores.

Description of the Business

We manage our operations under two business segments: Licensed Department Store Based Fine Jewelry Departments and Stand-Alone Specialty Jewelry Stores, which consists of Bailey Banks & Biddle, Carlyle and Congress stores, as defined below. As of February 2, 2008, we operated a total of 793 locations, including 687 Finlay departments in ten host store groups in 40 states and the District of Columbia, as well as 106 stand-alone jewelry stores operating as 69 Bailey Banks & Biddle stores in 24 states, 32 Carlyle stores in nine states and five Congress stores located in southwest Florida.

 We are one of the leading retailers of fine jewelry in the United States. We operate licensed fine jewelry departments in major department stores for retailers such as Macy’s, Inc. (“Macy’s”) formerly known as Federated Department Stores, Inc., The Bon-Ton Stores, Inc. (the “Bon-Ton”) and Dillard’s, Inc. (“Dillard’s”). We sell a broad selection of moderately priced fine jewelry, including necklaces, earrings, bracelets, rings and watches, and market these items principally as fashion accessories with an average sales price of approximately $272 per item.

In November 2007, Finlay Jewelry completed its acquisition of substantially all of the assets and specified liabilities of the Bailey Banks & Biddle division of Zale Corporation, a chain of 70 stand-alone retail stores with a focus on the luxury market, offering jewelry and watches under high-end name brands, with an average selling price of approximately $1,200 per item and an average store size of approximately 3,950 square feet. With the November 2007 acquisition of Bailey Banks & Biddle, we will have a significantly larger portion of our business dedicated to the high-end sector. The Bailey Banks & Biddle stand-alone jewelry stores provide us with a national presence in addition to further diversifying our revenue stream between the department store based fine jewelry business and the stand-alone jewelry store business.

For over 175 years, Bailey Banks & Biddle has combined classic jewelry with contemporary designs, offering a compelling shopping environment for the high-end luxury consumer. Bailey Banks & Biddle stores are among the preeminent jewelers in their markets. They carry both exclusive and recognized branded and designer merchandise selections to appeal to the more affluent customer. The Bailey Banks & Biddle merchandise assortments focus on diamonds, precious gemstones, gold and branded designer jewelry, which is complemented by an extensive assortment of prestige watch brands and giftware.

In conjunction with the Bailey Banks & Biddle acquisition, Finlay Jewelry’s revolving credit agreement with General Electric Capital Corporation (“G.E. Capital”) and certain other lenders was amended and restated (the “Revolving Credit Agreement”) in November 2007. The Revolving Credit Agreement, which matures in November 2012, provides Finlay Jewelry with a senior secured revolving line of credit up to $550.0 million (the “Revolving Credit Facility”).

In November 2006, Finlay Jewelry completed the acquisition of L. Congress, Inc. (“Congress”), a privately-owned regional chain of five jewelry stores located in southwest Florida, with annual sales of approximately $23.0 million in 2007 and a focus on the luxury market. The average sales price per item was $1,800 in 2007 with an average store size of approximately 4,000 square feet.

In May 2005, Finlay Jewelry completed the acquisition of Carlyle & Co. Jewelers (“Carlyle”). Carlyle currently operates 32 specialty jewelry stores located primarily in the southeastern United States under the Carlyle & Co., J.E. Caldwell & Co. and Park Promenade trade names, which sell luxury priced jewelry with an average sales price of approximately $1,200 per item. The Carlyle stores are principally located in shopping malls and lifestyle centers and focus on the designer and high-end jewelry markets. Average sales per store were $3.2 million in 2007 and the average size of a store is approximately 2,100 square feet. Carlyle generated sales of approximately $103.4 million in 2007.

 

   In 2007, our department store based fine jewelry sales comprised 73% of our total sales. Our largest host store relationship is with Macy’s, for which we have operated departments since 1983. As a result of Macy’s corporate restructuring initiatives, 194 departments were either divested or phased into existing Macy’s divisions in 2006. Total sales generated from these departments in 2006 were approximately $105.9 million. Macy’s announced further corporate restructuring initiatives in February 2008, which will result in the loss of 94 departments at the end of 2008. Total sales generated from these departments in 2007 were approximately $120.0 million. In March 2008, Macy's signed a two-year extension of Finlay Jewelry’s license agreement through January 29, 2011, for Macy’s Central, the newly-merged divisions of Macy's Midwest and Macy’s South, which will consist of 222 departments. The agreement has no impact on the Bloomingdale’s division whose license agreement covering 34 departments, currently runs through January 30, 2010. As of February 2, 2008, we operated a total of 350 departments in five of Macy’s eight divisions (including Bloomingdale’s) which accounted for $438.6 million or 52% of our total sales in 2007. We expect that Macy’s will comprise approximately 43% and 36% of our total sales over the next two years (after factoring in projected full year results for Bailey Banks & Biddle and the loss of the two Macy’s groups in 2009).

In October 2006, Macy’s sold its Lord & Taylor division to NRDC Equity Partners LLC (“NRDC”). In February 2008, we received notification from NRDC that Finlay Jewelry’s license agreement would not be renewed upon expiration on January 31, 2009, and Finlay Jewelry will close a total of 47 Lord & Taylor departments at the end of 2008. In 2007, the Lord & Taylor departments generated approximately $44.0 million in sales.

In May 2006, the Company announced that Belk, Inc. (“Belk”) would not renew Finlay Jewelry’s license agreement due to Belk’s acquisition of a privately-held company that licensed fine jewelry departments in certain of the Belk stores. The termination of the license agreement, effective at the end of 2006, resulted in the closure of 75 departments. In 2006, we generated sales of approximately $51.9 million from the Belk departments. Further, as a result of Belk’s acquisition of Parisian from Saks Incorporated (“Saks”) in October 2006, 33 Parisian departments closed in July 2007. In 2007 and 2006, we generated sales of approximately $9.8 million and $22.8 million, respectively, from our Parisian departments.

Finlay Jewelry was initially incorporated on August 2, 1985 as SL Holdings Corporation (“SL Holdings”), and the Company was incorporated on November 22, 1988. In connection with a reorganization transaction in 1988, SL Holdings changed its name to Finlay Fine Jewelry Corporation and became a wholly-owned subsidiary of the Company. Additionally, in connection with the Carlyle and Congress acquisitions, each became a wholly-owned subsidiary of Finlay Jewelry. Upon acquisition, Bailey Banks & Biddle became an unincorporated division of Finlay Jewelry. We are a holding company and have no operations of our own. Our primary asset is the common stock of Finlay Jewelry, which conducts all of our operations. Our principal executive offices are located at 529 Fifth Avenue, New York, New York 10017 and our telephone number at this address is (212) 808-2800.

Our fiscal year ends on the Saturday closest to January 31. References to 2008, 2007, 2006, 2005, 2004 and 2003 relate to the fiscal years ending or ended on January 31, 2009, February 2, 2008, February 3, 2007, January 28, 2006, January 29, 2005 and January 31, 2004, respectively. Each of the fiscal years includes 52 weeks except 2006, which includes 53 weeks.

Overview of Operations

Licensed Department Store Based Fine Jewelry Departments. In connection with our licensed fine jewelry departments operation, we sell a broad selection of moderately priced fine jewelry, including necklaces, earrings, bracelets, rings and watches, and market these items principally as fashion accessories with an average sales price of approximately $272 per item.

Host stores benefit from outsourcing the operation of their fine jewelry departments. By engaging us, host stores gain specialized managerial, merchandising, selling, marketing, inventory control and security expertise. Additionally, by avoiding the high working capital investment typically required of the jewelry business, host stores improve their return on investment and can potentially increase their profitability.

As a licensee, we benefit from the host stores’ reputation, customer traffic, advertising, credit services and established customer base. We also avoid the substantial capital investment in fixed assets typical of stand-alone retail formats. These factors have generally enabled our new departments to achieve profitability within their first twelve months of operation. We further benefit because net sales proceeds are generally remitted to us by each host store on a monthly basis with essentially all customer credit risk borne by the host store.

We have established separate group service organizations responsible for managing departments operated for each host store. Staffing for each group service organization varies with the number of departments in each group. Typically, we service each host store group with a group manager, an assistant group manager or director of stores, one merchandise manager, one operations manager, one human resources manager, three or more regional supervisors who oversee the individual department managers and a number of clerical employees. Each group manager reports to one of two regional vice presidents.

As a result of our strong relationships with our vendors, our management believes that our working capital requirements are lower than those of many other jewelry retailers. At the end of 2007, approximately 25% of our merchandise was held on consignment. The use of consignment merchandise also reduces our inventory exposure to changing fashion trends because unsold consigned merchandise can be returned to the vendor.

Most of our departments have between 50 and 150 linear feet of display cases (with an average of approximately 80 linear feet) generally located in high traffic areas on the main floor of our host stores. Each department is supervised by a manager whose primary duties include customer sales and service, scheduling and training of personnel, maintaining security controls and merchandise presentation. Each department is open for business during the same hours as its host store.

We had average sales per linear foot of approximately $11,000 over the past three years. We determine average sales per linear foot by dividing our sales by the aggregate estimated measurements of the outer perimeters of the display cases of our departments. We had average sales per department of approximately $891,000, $928,000 and $924,000 in 2007, 2006 and 2005, respectively.

Stand-Alone Specialty Jewelry Stores. Our stand-alone jewelry stores, comprised of Bailey Banks & Biddle, Carlyle and Congress, are luxury jewelry stores offering compelling shopping environments for the high-end consumer. Our stand-alone jewelry stores carry exclusive and recognized branded and designer merchandise selections and merchandise assortments with a focus on watches, gold, designer jewelry, diamonds and precious gemstones, complemented by an assortment of giftware.

Our stores strive to provide their customers with a premier shopping experience by utilizing knowledgeable, professional and well-trained sales associates, marketing programs designed to promote customer awareness of their merchandise assortments and extending credit to their customers through their credit card programs.

Advertising. With respect to our licensed department store based fine jewelry business, we promote our products primarily through four-color direct mail catalogs using targeted mailing lists developed by our host stores, and newspaper advertising. We maintain an in-house advertising staff responsible for preparing the majority of our advertisements and for coordinating the finished advertisements with our host stores. We also participate in the majority of our host stores’ promotional activities including direct mail postcards and coupons. The majority of our license agreements require us to expend certain specified minimum percentages of the respective department’s annual sales on advertising and promotional activities. With respect to our stand-alone jewelry stores, products are promoted through direct mail, outdoor and regional print advertising and sponsorships.

Inventory Loss Prevention and Insurance. We undertake substantial efforts to safeguard our merchandise from loss or theft, including the installation of safes and lockboxes at each location and the taking of a daily diamond inventory count. Additionally, with respect to our stand-alone jewelry stores, each store has a sophisticated security system in place. During 2007, inventory shrinkage amounted to approximately 0.4% of sales. We maintain insurance covering the risk of loss of merchandise in transit or on our premises (whether owned or on consignment) in amounts that management believes are reasonable and adequate for the types and amounts of merchandise we offer for sale.

Industry

Consumers spent approximately $65.0 billion on jewelry (including both fine and costume jewelry) in the United States in 2007, an increase of approximately $24.0 billion over 1997, according to the United States Department of Commerce. Our management believes that greater disposable income in the United States population in general has contributed to the growth of the fine jewelry retailing industry. Our management also believes that jewelry consumers today increasingly perceive fine jewelry as a fashion accessory, resulting in purchases which augment our gift and special occasion sales.

Competition

We face competition for retail jewelry sales from national and regional jewelry chains, other department stores in which we do not operate fine jewelry departments, local independently owned jewelry stores, specialty stores, mass merchandisers, catalog showrooms, discounters, direct mail suppliers, televised home shopping and internet merchants. Our management believes that competition in the retail jewelry industry is based primarily on quality, fashion appeal and perceived value of the product offered and on the reputation, integrity and service of the retailer.

Strategies

Growth Strategy. We intend to continue to pursue the following key initiatives to increase sales and earnings:

·

Increase Comparable Store Sales in our Licensed Departments and Stand-Alone Specialty Jewelry Stores. Increasing comparable store sales (sales from locations open for the same months during the comparable period) is part of our long-term growth plan. In our department store based fine jewelry departments, our merchandising and marketing strategy includes emphasizing key merchandise items, increasing focus on holiday and event-driven promotions, participating in host store marketing programs and positioning our departments as “destination locations” for fine jewelry. Over the past decade, we have generally experienced comparable store sales increases and have consistently outperformed our host store groups with respect to these increases.

·

Open New Channels of Distribution. An important initiative and focus of management is developing opportunities for our growth. We consider it a high priority to identify new businesses, such as additional regional jewelry chains that offer growth, financial viability and manageability that will have a positive impact on shareholder value.

·

Add New Stand-Alone Specialty Jewelry Stores.   Opening new stand-alone specialty stores is part of our long-term growth plan. In November 2007, Finlay Jewelry completed its acquisition of substantially all of the assets and specified liabilities of the Bailey Banks & Biddle division of Zale Corporation, a chain of 70 stand-alone retail stores in 24 states with a focus on the luxury market, offering jewelry and watches under high-end name brands. In 2008, we plan on opening four Carlyle stores and two Bailey Banks & Biddle stores.

·

Improve Operating Leverage. We seek to continue to leverage expenses both by increasing sales at a faster rate than expenses and by reducing our current level of certain operating expenses. For example, we have demonstrated that by increasing the selling space (with host store approval) of certain high volume departments, incremental sales can be achieved without having to incur proportionate increases in selling and administrative expenses. In addition, our management believes we will benefit from further investments in technology and refinements of operating procedures designed to allow our sales associates more time for customer sales and service. Our merchandising and inventory control systems and our point-of-sale systems for our locations provide the foundation for improved productivity and expense control initiatives. Further, our central distribution facilities enhance our ability to optimize the flow of merchandise to selling locations and to reduce payroll and freight costs.

·

Enhance Customer Service Standards and Strengthen Selling Teams. We are continuously developing and evaluating our selling teams. One of our priorities is to effectively manage personnel at our store locations, as they are the talent driving our business at the critical point of sale. We place strong emphasis on training and customer service. We have expanded our interactive, web-based training programs in recent years to provide our associates with a uniform training experience. In order to further our goals of optimizing service levels and driving sales growth, we provide incentives to our sales associates in the form of performance-based compensation and recognition.

       Merchandising Strategy. In our licensed department store based fine jewelry departments, we seek to maximize sales and profitability through a unique merchandising strategy known as the “Finlay Triangle”, which integrates store management (including host store management and our store group management), vendors and our central office. By coordinating efforts and sharing access to information, each Finlay Triangle participant plays a role which emphasizes its area of expertise in the merchandising process, thereby increasing productivity. Our advertising initiatives and promotional planning are closely coordinated with both host store management and our store group management to ensure the effective use of our marketing programs. Vendors participate in the decision-making process with respect to merchandise assortment, including the testing of new products, marketing, advertising and stock levels. In this way, opportunities are created for the vendor to assist in identifying fashion trends thereby improving inventory turnover and profitability, both for the vendor and us. As a result, our management believes it capitalizes on economies of scale by centralizing certain activities, such as vendor selection, advertising and planning, while allowing store management the flexibility to implement merchandising programs tailored to the host store environments and clientele.

 

We have structured our relationships with vendors to encourage sharing of responsibility for marketing and merchandise management. We furnish to vendors, through on-line access to our information systems, the same sales, stock and gross margin information that is available to our store group management and central office for each of the vendor’s styles in our 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. Our management believes that the access and input which vendors have in the merchandising process results in a better assortment, more timely replenishment, higher turnover and higher sales of inventory.

Since many of the host store groups in which we operate differ in fashion image and customer demographics, our flexible approach to merchandising is designed to complement each host store’s own merchandising philosophy. We emphasize a “fashion accessory” approach to fine jewelry and watches, and seek to provide items that coordinate with the host store’s fashion focus as well as to maintain stocks of traditional and gift merchandise.

        The merchandising strategy for our stand-alone jewelry stores is built around their customer profiles and partnerships with suppliers. Through analysis of customer demographics, fashion trends, industry trends and vendor and store management recommendations, we seek to maximize sales and profitability by merchandising to the customer tastes within the geographic areas in which the stores operate.

Store Relationships

 

Department Store Based Fine Jewelry Relationships. The following table identifies the host store groups in which we operated department store based fine jewelry departments at February 2, 2008, the year in which our relationship with each host store group commenced and the number of departments operated by us in each host store group.

Host Store Group		Inception of Relationship			Number of  Departments
Macy’s
Macy’s South
Macy’s Midwest				*
Macy’s Northwest (1)
Macy’s North (1)				*
Subtotal Macy’s
Bloomingdale’s
Total Macy’s Departments
Bon-Ton
The Bon-Ton/Elder-Beerman...
Carson Pirie Scott/Bergner’s/Boston Store/Younkers/Herberger’s
Total Bon-Ton Departments
Other Departments
Gottschalks
Lord & Taylor (1)				*
Dillard’s
Total Other Departments
Total Departments

* Represents the year in which our relationship began with the host store group previously owned by May.

(1) Finlay Jewelry will close 94 Macy’s departments and 47 Lord & Taylor departments at the end of 2008.

       Terms of Department Store Based Fine Jewelry License Agreements. Our license agreements typically have an initial term of one to five years. All of our license agreements contain provisions for automatic renewal absent prior notice of termination by either party. License agreement renewals range from one to five year periods. In exchange for the right to operate a department within the host store, we pay each host store group a license fee, calculated as a percentage of sales.

Our license agreements typically 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 us approximately three weeks after the end of such month. Additionally, substantially all of our license agreements provide for accelerated payments during the months of November and December, which require the host store groups to remit to us 75% of the estimated months’ sales prior to or shortly following the end of each such month. Each host store group withholds from the remittance of sales proceeds a license fee and other expenditures, such as advertising costs, which the host store group may have incurred on our behalf.

We are usually responsible for providing and maintaining any fixtures and other equipment necessary to operate our departments, while the host store is typically required to provide clean space for installation of any necessary fixtures. The host store is generally responsible for paying utility costs (except certain telephone charges), maintenance and certain other expenses associated with the operation of the departments. Our license agreements typically provide that we are responsible for the hiring (subject to the suitability of such employees to the host store) and discharge of our sales and department supervisory personnel, and substantially all license agreements require us to provide our employees with salaries and certain benefits comparable to those received by the host store’s employees. Many of our license agreements provide that we may operate the departments in any new stores opened by the host store group. In certain instances, we are operating departments without written agreements, although the arrangements in respect of such departments are generally in accordance with the ter