Finlay Enterprises (FNLY)

Item 1.01         Entry into a Material Definitive Agreement.

On November 17, 2008, Finlay Fine Jewelry Corporation, a Delaware corporation (the “Company”), announced an agreement in principle to exchange its outstanding 8 3/8% Senior Notes due June 1, 2012 (the “Existing Notes”) held by certain noteholders (the “Participating Noteholders”), which were issued pursuant to its Indenture (the “Existing Indenture”), dated as of June 3, 2004, between the Company, and HSBC Bank USA, National Association, as Trustee (the “Trustee”), for new 8.375%/8.945% Senior Secured Third Lien Notes due June 1, 2012 of the Company (the “Third Lien Notes”). In addition, the Participating Noteholders agreed in principle to purchase new 11.375%/12.125% Senior Secured Second Lien Notes due June 1, 2012 of the Company (the “Second Lien Notes,” together with the Third Lien Notes, the “Secured Notes”).

In order to consummate these transactions, on November 17, 2008, the Company commenced a solicitation of consents to amend, and waivers of compliance with, certain provisions of the Existing Indenture (the “Solicitation”). The Solicitation expired at 5:00 P.M., New York City time, on November 25, 2008. Consents and waivers were received and accepted with respect to $162.8 million aggregate principal amount, or 81.4%, of the Existing Notes. The Company has received the requisite consents and on November 26, 2008, entered into a supplemental indenture (the “Supplemental Indenture”) between the Company and HSBC Bank USA, National Association, as trustee.

On November 26, 2008, the Company and the Participating Noteholders entered into an Exchange and Purchase Agreement (the “Exchange and Purchase Agreement”), pursuant to which the Participating Noteholders (a) exchanged (the “Exchange”) $139,640,000 in principal amount of their Existing Notes for new Third Lien Notes, and (b) purchased (the “Purchase,” and together with the Exchange, the “Exchange and Purchase”) $20,000,000 in principal amount of new Second Lien Notes. The Participating Noteholders beneficially own approximately 70% of the aggregate amount of the Existing Notes outstanding immediately prior to the Exchange and Purchase. The closing of the Exchange and Purchase occurred on November 26, 2008.

The Company also entered into an indenture, dated November 26, 2008, governing the Second Lien Notes (the “Second Lien Indenture”) among the Company, HSBC Bank USA, National Association, as trustee and collateral agent, and the guarantors named therein (including Finlay Enterprises, Inc.) and an indenture, dated November 26, 2008, governing the Third Lien Notes (the “Third Lien Indenture”) among the Company, HSBC Bank USA, National Association, as trustee and collateral agent, and the guarantors named therein (including Finlay Enterprises, Inc.).

The Secured Notes are guaranteed on a senior basis by substantially all of the Company’s wholly owned U.S. subsidiaries and by Finlay Enterprises, Inc. The Second Lien Notes are secured by perfected second priority liens and the Third Lien Notes are secured by perfected third priority liens on the collateral more fully described in the second lien security agreement, dated November 26, 2008 (the “Second Lien Security Agreement”) among the Company, the grantors named therein and HSBC Bank USA, National Association, as Collateral Agent (the “Collateral Agent”) and the third lien security agreement, dated November 26, 2008 (the “Third Lien Security Agreement”) among the Company, the grantors named therein and the Collateral Agent, respectively. The first priority security interests of the lenders under the Credit Agreement, the second priority security interests of the holders of the Second Lien Notes and the third priority security interest of the holders of the Third Lien Notes are governed by an intercreditor agreement, dated November 26, 2008 (the “Intercreditor Agreement”) among General Electric Capital Corporation, as first lien agent and HSBC Bank USA, National Association, as second lien agent and third lien agent.

Interest on the Secured Notes will be payable semiannually in arrears on June 1 and December 1 of each year. Interest on the Second Lien Notes will begin to accrue as of November 26, 2008 and will be payable beginning on June 1, 2009, at the sole option of the Company, (a) in cash at 11.375% per annum, or (b) in payment-in-kind (“PIK Interest”) at 12.125% per annum from November 26, 2008 until December 1, 2010 and thereafter in cash at 11.375% per annum. Interest on the Third Lien Notes will begin to accrue as of June 1, 2008 and will be payable beginning on December 1, 2008, at the sole option of the Company,

(a) in cash at 8.375% per annum, or (b) in PIK Interest at 8.945% per annum from June 1, 2008 until December 1, 2010 and thereafter in cash at 8.375% per annum. The initial interest payment on the Third Lien Notes will be payable on December 1, 2008 in the form of PIK Interest.

Participating Noteholders who exchanged Existing Notes for new Third Lien Notes in like principal amount gave up cash interest payable on December 1, 2008 under the Existing Notes with respect to interest accruing from June 1, 2008 and instead received PIK Interest for the same period under the Third Lien Notes.

Furthermore, each of the Second Lien Indenture and Third Lien Indenture contains covenants that are similar to the covenants in the Company’s Existing Indenture that will limit the Company’s and the Guarantors’ ability to (i) pay dividends or distributions, repurchase equity, prepay subordinated debt or make certain investments, (ii) incur additional debt or issue preferred stock, (iii) incur liens on assets,(iv) merge or consolidate with another company or sell all or substantially all assets, (v) enter into transactions with affiliates, and (vi) allow to exist certain restrictions on the ability of subsidiaries to transfer assets.

In addition, as a condition precedent to the transactions, the Company entered into an amendment (the “Credit Amendment”) to the existing senior credit agreement (the “Credit Agreement”), pursuant to which the lenders thereunder consented to the transactions under the Exchange and Purchase Agreement and related documents.

The foregoing description of the Exchange and Purchase Agreement, the Supplemental Indenture, the Credit Amendment, the Second Lien Indenture, the Third Lien Indenture, the Second Lien Security Agreement, the Third Lien Security Agreement and the Intercreditor Agreement does not purport to be complete and is qualified in its entirety by reference to the full terms of the Exchange and Purchase Agreement, the Supplemental Indenture and the Credit Amendment which are filed as Exhibits 10.1, 4.1, 10.2, 4.2, 4.3, 10.3, 10.4 and 4.4, respectively, hereto. Each of the foregoing documents is incorporated by reference herein.

Entry into a Material Definitive Agreement.

On December 27, 2006, Finlay Fine Jewelry Corporation ("Finlay Jewelry", a wholly-owned subsidiary of Finlay Enterprises, Inc. ("Finlay Enterprises”) and collectively the “Company”)) entered into Amendment No. 4, dated as of December 27, 2006 (the "Amendment"), to the Third Amended and Restated Credit Agreement dated as of May 19, 2005 among Finlay Jewelry, Carlyle & Co. Jewelers, Finlay Enterprises, General Electric Capital Corporation, individually and in its capacity as administrative agent, and certain other banks and institutions (as amended, the “Credit Agreement”).  

Among other changes, the Amendment:

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extends the maturity date of the Credit Agreement from January 15, 2008 to January 15, 2011,

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allows for a facilities increase under the Credit Agreement of up to $75,000,000 in the aggregate pursuant to a Company request for such facilities increase and agreement by the Lenders to provide the same,

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eliminates the Company’s yearly outstanding balance reduction requirement under the Credit Agreement,

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eliminates all of the financial covenants contained in the Credit Agreement except for the requirement to maintain a certain fixed charge coverage ratio at certain times, and

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allows for the Company to engage in business acquisitions of a certain size without obtaining the prior approval of the Lenders.

The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the Amendment which is filed as Exhibit 10.10(e) hereto and is incorporated herein by reference.