<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 4, 1996
------------------
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
--------------- ---------------
Commission File Number: 0-25716
FINLAY ENTERPRISES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3492802
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
521 Fifth Avenue, New York, NY 10175
---------------------------------------- ----------
(Address of principal executive offices) (zip code)
(212) 808-2060
----------------------------------------------------
(Registrant's telephone number, including area code)
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
------- -------
As of June 12, 1996, there were 7,554,338 shares of common stock, par value $.01
per share, of the Registrant outstanding.
<PAGE>
FINLAY ENTERPRISES, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED MAY 4, 1996
INDEX
PAGE(S)
-------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the thirteen
weeks ended April 29, 1995 and May 4, 1996. . . . . . . . . . . 1
Consolidated Balance Sheets as of February 3, 1996 and
May 4, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Changes in Stockholders'
Equity for the year ended February 3, 1996 and thirteen
weeks ended May 4, 1996 . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the thirteen
weeks ended April 29, 1995 and May 4, 1996. . . . . . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . .13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED
--------------------
APRIL 29, MAY 4,
1995 1996
--------- ------
Sales. . . . . . . . . . . . . . . . . . . . . . . . . $ 112,716 $ 130,719
Cost of sales. . . . . . . . . . . . . . . . . . . . . 53,841 64,038
---------- ----------
Gross margin . . . . . . . . . . . . . . . . . . . . 58,875 66,681
Selling, general and administrative expenses . . . . . 57,684 63,696
Depreciation and amortization. . . . . . . . . . . . . 2,411 2,638
---------- ----------
Income (loss) from operations. . . . . . . . . . . . (1,220) 347
Interest expense, net. . . . . . . . . . . . . . . . 7,324 7,284
---------- ----------
Income (loss) before income taxes. . . . . . . . . . (8,544) (6,937)
Provision (credit) for income taxes. . . . . . . . . . (3,163) (2,537)
---------- ----------
Net income (loss). . . . . . . . . . . . . . . . . . (5,381) (4,400)
Dividends on Preferred Stock and accretion on
conversion of Preferred Stock . . . . . . . . . . . . 10,717 -
---------- ----------
Net income (loss) applicable to common shares. . . . $ (16,098) $ (4,400)
---------- ----------
---------- ----------
Net income (loss) per share applicable to common
shares. . . . . . . . . . . . . . . . . . . . . . . . $ (4.36) $ (0.59)
---------- ----------
---------- ----------
Weighted average shares outstanding (A). . . . . . . . 3,692,497 7,474,478
---------- ----------
---------- ----------
- ---------------
(A) The weighted average shares outstanding for 1995 are based on the number
of shares of Common Stock issued and outstanding after reflecting the
stock split discussed in Note 5 -Initial Public Offering and Related
Transactions, as if such split occurred on January 29, 1995.
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MAY 4,
FEBRUARY 3, 1996
1996 (UNAUDITED)
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,014 $ 3,491
Accounts receivable -- department stores . . . . . . . . . . . . . . . . . . . . . . . . . . 18,889 27,453
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,860 9,338
Merchandise inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,926 204,912
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,526 2,445
-------- --------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,215 247,639
-------- --------
Fixed assets
Equipment, fixtures and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . 65,206 68,267
Less -- accumulated depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 22,735 24,065
-------- --------
Fixed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,471 44,202
-------- --------
Deferred charges and other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,012 9,156
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,447 97,653
-------- --------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $395,145 $398,650
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 71,812
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 21
Accounts payable -- trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,817 69,781
Accrued liabilities:
Accrued salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,100 13,454
Accrued miscellaneous taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,160 3,083
Accrued insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,115 1,778
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,703 167
Accrued management transition and consulting. . . . . . . . . . . . . . . . . . . . . . . 2,418 2,215
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,093 17,100
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,372 4,777
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836 626
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,820 184,814
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,905 204,904
Other non-current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 636 625
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382,361 390,343
-------- --------
Stockholders' equity
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 7,524,356 and 7,554,205 shares, respectively . . . . . . . . . . . . 75 76
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,459 47,652
Distributions to investor group in excess of carryover basis . . . . . . . . . . . . . . . . (24,390) (24,390)
Note receivable from stock sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,001) (1,001)
Retained earnings (deficit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,612) (13,012)
Foreign currency translation adjustment. . . . . . . . . . . . . . . . . . . . . . . . . . . (747) (1,018)
-------- --------
12,784 8,307
-------- --------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . $395,145 $398,650
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DISTRIBUTIONS
TO INVESTOR
COMMON STOCK GROUP IN NOTES FOREIGN
----------------- ADDITIONAL EXCESS OF RECEIVABLE RETAINED CURRENCY TOTAL
NUMBER PAID-IN CARRYOVER FROM EARNINGS TRANSLATION STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL BASIS STOCK SALE (DEFICIT) ADJUSTMENT EQUITY
--------- ------ ---------- ------------- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 28, 1995. . . . 2,394,632 $24 $(19,237) $(24,390) $(1,001) $(12,146) $(334) $(57,084)
Net income (loss). . . . . . . - - - - - 14,251 - 14,251
Dividends on Series C
Preferred Stock . . . . . . . - - - - - (717) - (717)
Foreign currency translation
adjustment. . . . . . . . . . - - - - - - (413) (413)
Exercise of stock options. . . 47,940 - 444 - - - - 444
Issuance of Common Stock . . . 2,500,000 25 30,133 - - - - 30,158
Conversion of Series C
Preferred Stock to Common
Stock . . . . . . . . . . . . 2,581,784 26 36,119 - - (10,000) - 26,145
--------- --- ------- -------- ------- -------- ------- ------
Balance, February 3, 1996. . . . 7,524,356 75 47,459 (24,390) (1,001) (8,612) (747) 12,784
Net income (loss). . . . . . . - - - - - (4,400) - (4,400)
Foreign currency translation
adjustment. . . . . . . . . . - - - - - - (271) (271)
Exercise of stock
options . . . . . . . . . . . 29,849 1 193 - - - - 194
--------- --- ------- -------- ------- -------- ------- ------
Balance, May 4, 1996
(unaudited) . . . . . . . . . . 7,554,205 $76 $47,652 $(24,390) $(1,001) $(13,012) $(1,018) $8,307
--------- --- ------- -------- ------- -------- ------- ------
--------- --- ------- -------- ------- -------- ------- ------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------
APRIL 29, MAY 4,
1995 1996
--------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,381) $ (4,400)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,668 2,938
Imputed interest on debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,921 2,001
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (130) (423)
Changes in operating assets and liabilities:
Increase in accounts and other receivables. . . . . . . . . . . . . . . . . . . . . . . . (15,611) (15,048)
Increase in merchandise inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,503) (9,202)
Increase in prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . . . . . (2,108) (918)
Decrease in accounts payable and accrued liabilities. . . . . . . . . . . . . . . . . . . (61,850) (65,613)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . . . . (99,994) (90,665)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements. . . . . . . . . . . . . . . . . (2,728) (3,602)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (457) (34)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . . . . (3,185) (3,636)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility. . . . . . . . . . . . . . . . . . . . . . . . . . . 149,615 153,633
Principal payments on revolving credit facility. . . . . . . . . . . . . . . . . . . . . . . (91,179) (81,821)
Repurchase of debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,789) -
Net proceeds from initial public offering of common stock. . . . . . . . . . . . . . . . . . 30,158 -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 7
-------- --------
NET CASH PROVIDED FROM FINANCING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . 83,136 71,819
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH. . . . . . . . . . . . . . . . . . . . . . . . 101 (41)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . . . . (19,942) (22,523)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . 23,608 26,014
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,666 $ 3,491
-------- --------
-------- --------
Supplemental disclosure of cash flow information:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,614 $8,537
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,180 4,833
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Finlay
Enterprises, Inc. (the "Company" or the "Registrant"), and its wholly owned
subsidiary, Finlay Fine Jewelry Corporation ("Finlay Jewelry"), have been
prepared in accordance with generally accepted accounting principles for interim
financial information. References to "Finlay" mean collectively, the Company,
Finlay Jewelry and all predecessor businesses. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all normal
and recurring adjustments necessary to present fairly the financial position of
the Company as of May 4, 1996, and the results of operations and cash flows for
the thirteen weeks ended April 29, 1995 and May 4, 1996. Due to the seasonal
nature of the business, results for interim periods are not indicative of annual
results. The unaudited consolidated financial statements have been prepared on
a basis consistent with that of the audited consolidated financial statements as
of February 3, 1996 referred to below. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the fiscal year ended February 3, 1996
("Form 10-K"), previously filed.
Finlay's fiscal year ends on the Saturday closest to January 31.
References to 1993, 1994, 1995 and 1996 relate to the fiscal years ended or
ending January 29, 1994, January 28, 1995, February 3, 1996 and February 1,
1997, respectively. Each of the fiscal years includes fifty-two weeks except
1995, which includes fifty-three weeks. Certain prior year balances have been
reclassified to conform with the current year presentation.
NOTE 2 - DESCRIPTION OF BUSINESS
Finlay is a retailer of fine jewelry products and primarily operates leased
fine jewelry departments in department stores throughout the United States and
France. A significant portion of Finlay's revenues are generated in the fourth
quarter due to the seasonality of the retail industry. Approximately 71% of
Finlay's domestic sales in 1995 were from operations in two major department
store groups of which 48% represents Finlay's domestic sales from one department
store group.
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
(UNAUDITED)
FEBRUARY 3, MAY 4,
1996 1996
----------- ----------
(IN THOUSANDS)
Jewelry goods - rings, watches and other
fine jewelry (specific identification
basis). . . . . . . . . . . . . . . . . . . $202,860 $212,037
Less: Excess of specific identification
cost over LIFO inventory value. . . . . . . 6,934 7,125
-------- --------
$195,926 $204,912
-------- --------
-------- --------
5
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MERCHANDISE INVENTORIES (CONTINUED)
The LIFO method had the effect of decreasing income (loss) before income
taxes for the thirteen weeks ended April 29, 1995 and May 4, 1996 by $174,000
and $191,000, respectively. Finlay determines its LIFO inventory value by
utilizing selected producer price indices published for jewelry and watches by
the Bureau of Labor Statistics.
Approximately $199,079,000 and $198,825,000 at February 3, 1996 and May 4,
1996, respectively, of merchandise received on consignment has been excluded
from Merchandise inventories and Accounts payable-trade in the accompanying
Consolidated Balance Sheets.
The cost to Finlay of gold merchandise sold on consignment, which typically
varies with the price of gold, is not fixed until the sale is reported to the
vendor following the sale of the merchandise. Finlay frequently enters into
futures contracts, based upon the anticipated sales of gold product, such as
options or forwards, to hedge against the risk arising from those payment
arrangements. Changes in the market value of futures contracts are accounted
for as an addition to or reduction from the inventory cost. At April 29, 1995
and May 4, 1996, the gain/loss on open futures contracts was not material.
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 Jewelry 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. Finlay Jewelry can obtain, pursuant to the Gold Consignment
Agreement, up to the lesser of (I) 85,000 fine troy ounces or (ii) $25,000,000
worth of gold, subject to a formula as prescribed by the Gold Consignment
Agreement. At May 4, 1996, amounts outstanding under the Gold Consignment
Agreement totalled 20,284 fine troy ounces, valued at approximately $7.9
million. For financial statement purposes, the consigned gold is not included
in merchandise inventories on the Company's consolidated balance sheet and
therefore no related liability has been recorded.
NOTE 4 - LEASE AGREEMENTS
Finlay conducts substantially all of its operations as leased departments
in department stores. All of these leases, as well as rentals for office space
and equipment, are accounted for as operating leases. A substantial number of
such operating leases expire on various dates through 2008.
Substantially all of the leases provide that the title to certain fixed
assets of Finlay transfers upon termination of the leases, and that Finlay will
receive the undepreciated value of such fixed assets from the lessor in the
event such transfers occur. The values of such fixed assets are recorded at the
inception of the lease arrangement and are reflected in the accompanying
Consolidated Balance Sheets.
In many cases, Finlay is subject to limitations under its lease agreements
with host department stores which prohibit Finlay from operating departments for
other store groups within a certain geographical radius of the host store.
6
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LEASE AGREEMENTS (CONTINUED)
The store leases provide for the payment of fees based on sales, plus, in
some instances, installment payments for fixed assets. Lease expense, included
in Selling, general and administrative expenses, is as follows (unaudited):
THIRTEEN WEEKS ENDED
--------------------------
APRIL 29, MAY 4,
1995 1996
--------- ------
(IN THOUSANDS)
Minimum fees. . . . . . . . . . . . . . . . $ 1,830 $ 1,172
Contingent fees . . . . . . . . . . . . . . 16,283 19,634
------- -------
Total. . . . . . . . . . . . . . . . . $18,113 $20,806
------- -------
------- -------
Future minimum payments under noncancellable operating leases having
initial or remaining noncancellable lease terms in excess of one year are as
follows:
(IN THOUSANDS)
--------------
1996 . . . . . . . . . . . . . . . . . . . . . . . $ 6,188
1997 . . . . . . . . . . . . . . . . . . . . . . . 3,804
1998 . . . . . . . . . . . . . . . . . . . . . . . 2,679
1999 . . . . . . . . . . . . . . . . . . . . . . . 2,381
2000 . . . . . . . . . . . . . . . . . . . . . . . 2,200
Thereafter . . . . . . . . . . . . . . . . . . . . 11,600
-------
Total minimum payments required . . . . . . . $28,852
-------
-------
Minimum payments shown above have not been reduced by minimum sublease
payments of $253,000 due in the future under noncancellable subleases.
NOTE 5 - INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS
On April 6, 1995, the Company completed an initial public offering (the
"Offering") of 2,500,000 shares of its 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 estimated expenses of $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 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 ("Revolving Credit
Reduction") under Finlay's $135,000,000 Revolving Credit Facility (the
"Revolving Credit Facility") with General Electric Capital Corporation ("G.E.
Capital"), which was accounted for as a capital contribution to Finlay Jewelry.
Immediately prior to completion of the Offering, the holders of the
Company's 10% Series C Cumulative Preferred Stock ("Series C Preferred Stock")
exchanged all outstanding shares of Series C Preferred Stock with the 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
7
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 -INITIAL PUBLIC OFFERING (CONTINUED)
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, decreasing net
income (loss) applicable to common shares in the first quarter of 1995.
G.E. Capital agreed to reduce the interest rate on the Revolving Credit
Facility by 0.5% concurrent with the Offering. The Company and G.E. Capital
amended the Revolving Credit Facility in March, 1995 pursuant to which the
Company became a co-obligor with Finlay Jewelry under the Revolving Credit
Facility with respect to a portion of the borrowings thereunder.
In connection with and prior to the Offering and the related transactions,
the Board of Directors approved a change in the Company's capital stock to
authorize 25,000,000 shares of Common Stock, par value $.01 per share. On March
7, 1995, the Company effected a two-for-three stock combination of its issued
and outstanding Common Stock (the "Reverse Stock Split"). The Stockholders'
equity has been retroactively restated to reflect the impact of the Reverse
Stock Split.
NOTE 6 - UNAUDITED PRO FORMA AND SUPPLEMENTAL FINANCIAL INFORMATION
The following table presents the calculation of pro forma earnings per
share data for the thirteen weeks ended April 29, 1995. The pro forma
consolidated financial information gives effect to the Offering and related
transactions as if such transactions had occurred at the beginning of the
period. Net income (loss) was derived by adjusting the historical amounts to
reflect interest expense on the adjusted debt structure and the related income
tax effects thereon.
IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
Net income (loss). . . . . . . . . . . . . . . . . . . . . . $ (4,907)
Less: Dividends on Preferred Stock and accretion on
conversion of Preferred Stock . . . . . . . . . . . . -
----------
Net income (loss) applicable to common shares. . . . . . . . $ (4,907)
----------
----------
Weighted average shares:
Weighted average shares - Common (1) . . . . . . . . . . . . 2,293,471
Common shares - Offering (2) . . . . . . . . . . . . . . . . 2,500,000
Common shares - Series C Exchange (3). . . . . . . . . . . . 2,581,784
Common stock equivalent pursuant to APB 15 (4) . . . . . . . 66,987
----------
Total weighted average shares. . . . . . . . . . . . . . . . 7,442,242
----------
----------
Net income (loss) per share applicable to common shares. . . $ (0.66)
----------
----------
- ---------------
(1) The weighted average shares outstanding are based on the number of shares
of Common Stock issued and outstanding.
(2) Shares of Common Stock sold in connection with the Offering.
(3) Shares of Common Stock issued in connection with the Series C Exchange.
(4) In accordance with APB 15, the common stock equivalents were calculated by
applying the treasury stock method, and limiting the number of shares of
Common Stock obtainable upon exercise of outstanding options and warrants
in the aggregate to 20% of the number of shares outstanding at the end of
the period for which the computation is being made.
8
<PAGE>
NOTE 6 - UNAUDITED PRO FORMA AND SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)
Excluding the effect of the Revolving Credit Reduction and the interest
rate reduction on the Revolving Credit Facility, net income (loss) per share
applicable to common shares, on a supplemental basis, for the thirteen weeks
ended April 29, 1995 would have been a loss of $0.71.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth operating results as a percentage of sales for
the periods indicated:
STATEMENT OF OPERATIONS DATA
(UNAUDITED)
THIRTEEN WEEKS ENDED
--------------------
APRIL 29, MAY 4,
1995 1996
-------- ------
Sales 100.0% 100.0%
Cost of sales 47.8 49.0
----- -----
Gross margin 52.2 51.0
Selling, general and administrative expenses 51.2 48.7
Depreciation and amortization 2.1 2.0
----- -----
Income (loss) from operations (1.1) 0.3
Interest expense, net 6.5 5.6
----- -----
Income (loss) before income taxes (7.6) (5.3)
Provision (credit) for income taxes (2.8) (1.9)
----- -----
Net income (loss) (4.8)% (3.4)%
----- -----
----- -----
THIRTEEN WEEKS ENDED MAY 4, 1996 COMPARED WITH THIRTEEN WEEKS ENDED APRIL 29,
1995
SALES. Sales for the thirteen weeks ended May 4, 1996 increased $18.0
million, or 16.0%, over the comparable period for 1995. Comparable
department sales (departments open for the same months during comparable
periods) increased 14.9%. Management attributes this increase in comparable
department sales primarily to intensified promotion of key items and best
value programs as well as joint marketing efforts coordinated with several
host store groups. In addition, there was one additional week of sales in the
pre-Mother's Day period, in the first quarter of 1996 as compared to 1995,
which added approximately 4.0% to the comparable sales increase. Sales from
the operation of net new departments (departments not included in comparable
department sales) contributed $1.2 million. During the thirteen weeks
ended May 4, 1996, Finlay opened nine departments and closed 43 departments.
The openings were all within existing store groups with the exception of the
first department opening in Debenhams P.L.C., a department store chain in the
United Kingdom ("Debenhams"), at the end of the first quarter. The closings
included 22 departments in the Emporium/Weinstocks chain, which was acquired
by Federated Department Stores, Inc. and will operate under the Macy's name.
Seven additional Emporium stores closed in the second quarter. In addition,
the closings included eight departments in The Jones Store Inc., which the
lessor decided to consolidate with one lessee. The remaining 13 departments
closed within existing host store groups.
9
<PAGE>
GROSS MARGIN. Gross margin for the period increased by $7.8 million but,
as a percentage of sales, gross margin decreased 1.2% as a result of
management's efforts to increase market penetration and market share through a
pricing strategy that has become more competitive.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") as a percentage of sales decreased 2.5%.
SG&A increased $6.0 million, or 10.4%, 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 $0.2 million, reflecting $15.8 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.
INTEREST EXPENSE, NET. Interest expense was approximately the same for
both periods. The weighted average interest rate for the period in 1996 was
10.5% compared to 10.7% for the comparable period in 1995. Average borrowings
totalled $260.7 million and $265.5 million for the 1996 and 1995 periods,
respectively.
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). The net loss of $4.4 million for the 1996 period was
$1.0 million lower than the net loss for the comparable period in 1995 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 should the Company grow through further
international expansion or by opening additional outlet stores. For the
thirteen weeks ended April 29, 1995 and May 4, 1996, capital expenditures
totalled $2.7 million and $3.6 million, respectively. Capital expenditures
are estimated to be approximately $17.0 million in 1996. Capital
expenditures are limited by the terms of the Revolving Credit Facility.
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 l.0% or (ii) adjusted
LIBOR plus 2.0%. Pursuant to the Debenture indenture, the 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.
10
<PAGE>
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"). Borrowings under the Revolving Credit
Facility at May 4, 1996 were $71.8 million compared to a zero balance at
February 3, 1996, pursuant to the Balance Reduction Requirement, and $58.4
million at April 29, 1995. The average amounts outstanding were $63.6 million
and $56.0 million for the thirteen weeks ended April 29, 1995 and May 4, 1996,
respectively. The maximum amount outstanding under the Revolving Credit
Facility during the thirteen weeks ended May 4, 1996 was $71.8 million.
Finlay's operations substantially preclude consumer receivables and over
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. The Company's working capital balance was
$62.8 million at May 4, 1996, a decrease of $3.6 million from February 3, 1996.
The decrease resulted from capital expenditures and the impact of the interim
net loss exclusive of depreciation and amortization. Based on the seasonal
nature of Finlay's business, working capital levels typically can be expected to
decrease on an interim basis during the first three quarters of a year.
See "- Seasonality."
On April 13, 1995, the 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.
A substantial amount of operating cash flow of Finlay is or will be
required to pay, directly or indirectly, interest with respect to the 10 5/8%
Senior Notes due 2003 of Finlay Jewelry (the "Notes") and the Debentures and
amounts due under the Revolving Credit Facility. As of May 4, 1996, the
Company's outstanding borrowings were $276.7 million, which included a $69.9
million balance under the Debentures, a $135.0 million balance under the Notes
and a $71.8 million balance under the Revolving Credit Facility. The Debentures
do not pay cash interest until November 1, 1998.
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) $25,000,000 worth of gold, subject
to a formula as prescribed by the Gold Consignment Agreement. At May 4, 1996,
amounts outstanding under the Gold Consignment Agreement totalled 20,284 fine
troy ounces, valued at approximately $7.9 million.
Finlay believes that, based upon current operations, anticipated
growth, availability under the Revolving Credit Facility 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 Company sufficient to
permit the Company to meet its debt service obligations and to pay certain other
expenses as they come due. No assurances, however, can be given that Finlay
Jewelry's current level of operating results will continue or improve or that
Finlay Jewelry's income from operations will continue to be sufficient to permit
Finlay Jewelry and the Company to meet their debt service and other obligations.
The Revolving Credit Facility, the Note indenture and the Gold Consignment
Agreement restrict distributions from Finlay Jewelry to the 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 $2.0 million and $8.7 million for the thirteen
weeks ended April 29, 1995 and May 4, 1996, respectively. This increase was
attributable to the retail calendar. The current quarter included the May 1
semi-annual interest payment on the Notes totalling $7.2 million. The payment
in the prior year was made in the second quarter.
11
<PAGE>
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 1995, Finlay had an average
balance of consignment merchandise of $208.5 million from over 200 vendors as
compared to an average balance of $194.2 million in 1994. As of May 4, 1996,
$198.8 million of consignment merchandise was on hand as compared to $199.1
million at February 3, 1996 and $211.7 million at April 29, 1995.
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. The Company believes
that, with the increased borrowing capacity under the Revolving Credit Facility
resulting from the Revolving Credit Reduction, it has sufficient liquidity to
meet Sonab's anticipated working capital requirements. In addition, the Company
believes that it has sufficient liquidity to meet anticipated working capital
requirements relating to (i) the planned 1996 expansion of outlet stores and
(ii) the operation of seven departments in Debenhams.
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 certain recapitalization
transactions in 1993, a change in ownership of the 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
the Company's annual utilization of its NOLs and other carryforwards which
requires a deferral or loss of the utilization of such NOLs or other
carryforwards. The Company had, at October 31, 1995 (the Company's tax year
end), a NOL for tax purposes of approximately $16.0 million which is subject to
an annual limit of approximately $2.0 million per year. For financial reporting
purposes, no NOLs existed as of February 3, 1996.
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 92% of its income from operations
(excluding nonrecurring charges) for 1993, 1994 and 1995. 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. Generally, Finlay's
operations during the first three quarters of a year are financed by increased
borrowings under the Revolving Credit Facility.
INFLATION
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
2 Not applicable.
4 Not applicable.
10.1 Amendment No. 2 to the Finlay Retirement Income Plan
11 Computation of earnings per share.
15 Not Applicable.
18 Not Applicable.
19 Not Applicable.
22 Not Applicable.
23 Not Applicable.
24 Not Applicable.
27 Financial Data Schedule.
99 Not Applicable.
B. REPORTS ON FORM 8-K
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINLAY ENTERPRISES, INC.
Date: June 12, 1996 By: /s/ Barry D. Scheckner
-------------------------------------
Barry D. Scheckner, Senior Vice
President and Chief Financial Officer
(As both a duly authorized officer of
Registrant and as principal financial officer
of Registrant)
14
<PAGE>
EXHIBIT 10.1
AMENDMENT NO. 2
TO THE
FINLAY RETIREMENT INCOME PLAN
(As Restated March 23, 1995)
The Finlay Retirement Income Plan as heretofore amended (the
"Plan") is hereby further amended by revising the beginning of the first
sentence of Section 1.11 to read as follows:
"Total compensation as that term is defined in Treasury Regulation
section 1.415-2(d)(11)(i), paid by an Employer to an individual after
he has become a Participant for service as an Eligible Employee, but
determined before giving effect to any Contribution Agreement under this
Plan or to any similar reduction agreement pursuant to any cafeteria plan
(within the meaning of section 125 of the Code), excluding the
following:...."
IN WITNESS WHEREOF, the Company has caused this instrument to be
executed by its duly authorized officer the 3rd day of May, 1996.
FINLAY ENTERPRISES, INC.
By: /s/ David B. Cornstein
-------------------------------
Chairman
ATTEST:
/s/ Bonni G. Davis
- --------------------------
Secretary
<PAGE>
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
Earnings per common share were computed as follows:
THIRTEEN WEEKS ENDED
-----------------------
In thousands, except share and per share amounts APRIL 29, MAY 4,
1995 1996
----------- -----------
Net income (loss). . . . . . . . . . . . . . . . $ (5,381) $ (4,400)
Less: Dividends on Preferred Stock and
accretion on conversion of Preferred
Stock . . . . . . . . . . . . . . . . . . 10,717 -
----------- -----------
Net income (loss) applicable to common
shares . . . . . . . . . . . . . . . . . . . . $ (16,098) $ (4,400)
----------- -----------
----------- -----------
Weighted average shares:
Weighted average shares - Common (1). . . . 3,625,510 7,413,232
Common stock equivalent pursuant to
APB 15 (2). . . . . . . . . . . . . . . . . 66,987 61,246
----------- -----------
Total weighted average shares. . . . . . . . . . 3,692,497 7,474,478
----------- -----------
----------- -----------
Net income (loss) per share applicable to
common shares. . . . . . . . . . . . . . . . . $ (4.36) $ (0.59)
----------- -----------
----------- -----------
(1) The weighted average shares outstanding are based on the number of shares
of Common Stock issued and outstanding. The weighted average shares
outstanding for 1995 are based on the number of shares of Common Stock
issued and outstanding after reflecting the stock split discussed in
Note 5 - Initial Public Offering and Related Transactions, as if such split
occurred on January 29, 1995.
(2) In accordance with APB 15, the common stock equivalents were calculated by
applying the treasury stock method, and limiting the number of shares of
Common Stock obtainable upon exercise of outstanding options and warrants
in the aggregate to 20% of the number of shares outstanding at the end of
the period for which the computation is being made.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINALY ENTERPRISES, INC. FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-START> FEB-04-1996
<PERIOD-END> MAY-04-1996
<CASH> 3,491
<SECURITIES> 0
<RECEIVABLES> 27,453
<ALLOWANCES> 0
<INVENTORY> 204,912
<CURRENT-ASSETS> 247,639
<PP&E> 68,267
<DEPRECIATION> 24,065
<TOTAL-ASSETS> 398,650
<CURRENT-LIABILITIES> 184,814
<BONDS> 204,904
0
0
<COMMON> 76
<OTHER-SE> 8,231
<TOTAL-LIABILITY-AND-EQUITY> 398,650
<SALES> 130,719
<TOTAL-REVENUES> 130,719
<CGS> 64,038
<TOTAL-COSTS> 64,038
<OTHER-EXPENSES> 66,334
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,284
<INCOME-PRETAX> (6,937)
<INCOME-TAX> (2,537)
<INCOME-CONTINUING> (4,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,400)
<EPS-PRIMARY> 0
<EPS-DILUTED> (0.59)
</TABLE>
