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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 August 3, 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 September 13, 1996, there were 7,558,838 shares of common stock, par value
$.01 per share, of the Registrant outstanding.
<PAGE>
FINLAY ENTERPRISES, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED AUGUST 3, 1996
INDEX
PAGE(S)
-------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the
thirteen weeks and twenty-six weeks ended
July 29, 1995 and August 3, 1996................................ 1
Consolidated Balance Sheets as of February 3,
1996 and August 3, 1996......................................... 3
Consolidated Statements of Changes in
Stockholders' Equity for the year
ended February 3, 1996 and twenty-six
weeks ended August 3, 1996...................................... 4
Consolidated Statements of Cash Flows
for the thirteen weeks and twenty-six
weeks ended July 29, 1995 and August 3, 1996.................... 5
Notes to Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders........................................................ 16
Item 6. Exhibits and Reports on Form 8-K............................... 16
SIGNATURES ............................................................... 17
<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)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------
July 29, August 3,
1995 1996
----------- -----------
<S> <C> <C>
Sales ................................................. $ 135,428 $ 137,188
Cost of sales ......................................... 65,101 65,845
----------- -----------
Gross margin ...................................... 70,327 71,343
Selling, general and administrative expenses .......... 62,820 62,473
Depreciation and amortization ......................... 2,485 2,746
----------- -----------
Income (loss) from operations ..................... 5,022 6,124
Proceeds from life insurance .......................... (5,000) --
Interest expense, net ................................. 7,361 7,961
----------- -----------
Income (loss) before income taxes ................. 2,661 (1,837)
Provision (credit) for income taxes ................... (510) (270)
----------- -----------
Net income (loss) ................................. $ 3,171 $ (1,567)
=========== ===========
Net income (loss) applicable to common shares ......... $ 3,171 $ (1,567)
=========== ===========
Net income (loss) per share applicable to common shares $ 0.42 $ (0.21)
=========== ===========
Weighted average shares outstanding ................... 7,538,284 7,486,456
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
1
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
--------------------------
July 29, August 3,
1995 1996
----------- ------------
<S> <C> <C>
Sales ..................................................... $ 248,144 $ 267,907
Cost of sales ............................................. 118,942 129,883
----------- ------------
Gross margin .......................................... 129,202 138,024
Selling, general and administrative expenses .............. 120,504 126,169
Depreciation and amortization ............................. 4,896 5,384
----------- ------------
Income (loss) from operations ......................... 3,802 6,471
Proceeds from life insurance .............................. (5,000) --
Interest expense, net ..................................... 14,685 15,245
----------- ------------
Income (loss) before income taxes ..................... (5,883) (8,774)
Provision (credit) for income taxes ....................... (3,673) (2,807)
----------- ------------
Net income (loss) ..................................... (2,210) (5,967)
Dividends on Preferred Stock and accretion on conversion of
Preferred Stock ....................................... 10,717 --
----------- ------------
Net income (loss) applicable to common shares ......... $ (12,927) $ (5,967)
=========== ============
Net income (loss) per share applicable to common shares ... $ (2.32) $ (0.80)
=========== ============
Weighted average shares outstanding (A) ................... 5,563,899 7,481,027
=========== ============
</TABLE>
- ----------
(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.
2
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
August 3,
February 3, 1996
1996 (unaudited)
--------- -----------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents ............................................. $ 26,014 $ 1,731
Accounts receivable - department stores ............................... 18,889 28,105
Other receivables ..................................................... 2,860 9,326
Merchandise inventories ............................................... 195,926 209,334
Prepaid expenses and other ............................................ 1,526 3,180
--------- ---------
Total current assets .............................................. 245,215 251,676
--------- ---------
Fixed assets
Equipment, fixtures and leasehold improvements ........................ 65,206 70,775
Less - accumulated depreciation and amortization ...................... 22,735 25,235
--------- ---------
Fixed assets, net ................................................. 42,471 45,540
--------- ---------
Deferred charges and other assets ......................................... 9,012 9,378
Goodwill .................................................................. 98,447 96,889
--------- ---------
Total assets ...................................................... $ 395,145 $ 403,483
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable ......................................................... $ -- $ 77,945
Current portion of long-term debt ..................................... 206 2
Accounts payable - trade .............................................. 125,817 62,101
Accrued liabilities:
Accrued salaries and benefits .................................... 14,100 14,853
Accrued miscellaneous taxes ...................................... 4,160 3,227
Accrued insurance ................................................ 1,115 2,202
Accrued interest ................................................. 3,703 3,764
Accrued management transition and consulting ..................... 2,418 2,080
Other ............................................................ 16,093 18,426
Income taxes payable .................................................. 10,372 2,845
Deferred income taxes ................................................. 836 823
--------- ---------
Total current liabilities ........................................ 178,820 188,268
Long-term debt ............................................................ 202,905 207,038
Other non-current liabilities ............................................. 636 613
--------- ---------
Total liabilities ................................................ 382,361 395,919
--------- ---------
Stockholders' equity
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 7,524,356 and 7,555,838 shares, respectively 75 76
Additional paid-in capital ............................................ 47,459 47,667
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) (14,579)
Foreign currency translation adjustment ............................... (747) (209)
--------- ---------
12,784 7,564
--------- ---------
Total liabilities and stockholders' equity ....................... $ 395,145 $ 403,483
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Distributions to Notes
------------------------- Additional investor group Receivable
Number Paid-in in excess of from
of shares Amount Capital carryover basis Stock Sale
--------- --------- ---------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 28, 1995 ............... 2,394,632 $ 24 $ (19,237) $ (24,390) $ (1,001)
Net income (loss) ................... -- -- -- -- --
Dividends on Series C Preferred Stock -- -- -- -- --
Foreign currency translation
adjustment ....................... -- -- -- -- --
Exercise of stock options ........... 47,940 -- 444 -- --
Issuance of Common Stock ............ 2,500,000 25 30,133 -- --
Conversion of Series C Preferred
Stock to Common Stock ............ 2,581,784 26 36,119 -- --
--------- --------- --------- --------- ---------
Balance, February 3, 1996 ............... 7,524,356 75 47,459 (24,390) (1,001)
Net income (loss) ................... -- -- -- -- --
Foreign currency translation
adjustment ....................... -- -- -- -- --
Exercise of stock options ........... 31,482 1 208 -- --
--------- --------- --------- --------- ---------
Balance, August 3, 1996 (unaudited) ..... 7,555,838 $ 76 $ 47,667 $ (24,390) $ (1,001)
========= ========= ========= ========= =========
<CAPTION>
Foreign
Retained Currency Total
Earnings Translation Stockholders'
(Deficit) Adjustment Equity
--------- ----------- -------------
<S> <C> <C> <C>
Balance, January 28, 1995 ............... $(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 ........... -- -- 444
Issuance of Common Stock ............ -- -- 30,158
Conversion of Series C Preferred
Stock to Common Stock ............ (10,000) -- 26,145
--------- --------- ---------
Balance, February 3, 1996 ............... (8,612) (747) 12,784
Net income (loss) ................... (5,967) -- (5,967)
Foreign currency translation ........ --
adjustment ....................... -- 538 538
Exercise of stock options ........... -- -- 209
--------- --------- ---------
Balance, August 3, 1996 (unaudited) ..... $(14,579) $ (209) $ 7,564
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------------
July 29, August 3,
1995 1996
-------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ............................................ $ 3,171 $ (1,567)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ................................ 2,739 3,057
Imputed interest on debentures ............................... 1,888 2,121
Other, net ................................................... (461) (93)
Changes in operating assets and liabilities:
Increase in accounts and other receivables .............. (2,102) (474)
Increase in merchandise inventories ..................... (2,620) (3,763)
(Increase) decrease in prepaid expenses and other ....... 1,404 (724)
Decrease in accounts payable and accrued liabilities .... (16,821) (2,780)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES ................ (12,802) (4,223)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements .. (3,484) (3,622)
Other, net ................................................... 43 (65)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................ (3,441) (3,687)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility ...................... 115,367 106,788
Principal payments on revolving credit facility .............. (99,838) (100,655)
Other, net ................................................... (494) (3)
--------- ---------
NET CASH PROVIDED FROM FINANCING ACTIVITIES .......... 15,035 6,130
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .............. 1 20
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS ................ (1,207) (1,760)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................... 3,666 3,491
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................... $ 2,459 $ 1,731
========= =========
Supplemental disclosure of cash flow information:
Interest paid ................................................ $ 8,561 $ 1,936
Income taxes paid ............................................ 2,043 1,492
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
---------------------------
July 29, August 3,
1995 1996
-------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ............................................ $ (2,210) $ (5,967)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ................................ 5,407 5,995
Imputed interest on debentures ............................... 3,809 4,122
Other, net ................................................... (591) (516)
Changes in operating assets and liabilities:
Increase in accounts and other receivables .............. (17,713) (15,522)
Increase in merchandise inventories ..................... (22,123) (12,965)
Increase in prepaid expenses and other .................. (704) (1,642)
Decrease in accounts payable and accrued liabilities .... (78,671) (68,393)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES ................ (112,796) (94,888)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements .. (6,212) (7,224)
Other, net ................................................... (414) (99)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................ (6,626) (7,323)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility ...................... 264,982 260,421
Principal payments on revolving credit facility .............. (191,017) (182,476)
Repurchase of debentures ..................................... (5,789) --
Net proceeds from initial public offering of common stock .... 30,158 --
Other, net ................................................... (163) 4
--------- ---------
NET CASH PROVIDED FROM FINANCING ACTIVITIES .......... 98,171 77,949
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .............. 102 (21)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS ................ (21,149) (24,283)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................... 23,608 26,014
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......................... $ 2,459 $ 1,731
========= =========
Supplemental disclosure of cash flow information:
Interest paid ................................................ $ 10,175 $ 10,473
Income taxes paid ............................................ 6,223 6,325
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
6
<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 August 3, 1996, and the results of operations and cash flows for
the thirteen weeks and twenty-six weeks ended July 29, 1995 and August 3, 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 the leading operator of
leased fine jewelry departments in department stores in the United States and
France. Finlay also operates leased fine jewelry departments in the United
Kingdom. 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:
<TABLE>
<CAPTION>
(unaudited)
February 3, August 3,
1996 1996
-------- -----------
(in thousands)
<S> <C> <C>
Jewelry goods - rings, watches and other fine jewelry
(specific identification basis) .................... $202,860 $216,659
Less: Excess of specific identification cost over LIFO
inventory value .................................... 6,934 7,325
-------- --------
$195,926 $209,334
======== ========
</TABLE>
7
<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 July 29, 1995 and August 3, 1996 by $202,000
and $200,000, respectively. The effect of applying the LIFO method for the
twenty-six weeks ended July 29, 1995 and August 3, 1996 was to decrease income
(loss) before income taxes by $376,000 and $391,000, 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 $194,704,000 at February 3, 1996 and August
3, 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 July 29, 1995 and
August 3, 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 August 3, 1996, amounts outstanding under the Gold Consignment
Agreement totalled 28,289 fine troy ounces, valued at approximately $10.9
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. All references
herein to leased departments refer to departments operated pursuant to license
agreements or the arrangements with host department stores.
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.
8
<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 Twenty-Six Weeks Ended
------------------------ -------------------------
July 29, August 3, July 29, August 3,
1995 1996 1995 1996
--------- --------- -------- ----------
(in thousands) (in thousands)
Minimum fees ....... $ 2,152 $ 1,265 $ 3,982 $ 2,437
Contingent fees 16,758 20,808 35,796 40,442
------- ------- ------- -------
Total ............ $18,910 $22,073 $39,778 $42,879
======= ======= ======= =======
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
9
<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 and twenty-six weeks ended July 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. The pro forma consolidated financial information also excludes
proceeds of $5.0 million from a life insurance policy Finlay maintained on a
senior executive, which was recorded in the second quarter of 1995. 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
<TABLE>
<CAPTION>
Thirteen Twenty-Six
Weeks Ended Weeks Ended
----------- ------------
<S> <C> <C>
Net income (loss) applicable to common shares per
Consolidated Statements of Operations .......................... $ 3,171 $ (12,927)
Add: Dividends and amortization of discount on Preferred Stock and
accretion on conversion of Preferred Stock ................... -- 10,717
Add: Interest expense reduction, net of tax, as a result of
the adjusted debt structure .................................. -- 474
Less: Eliminate life insurance proceeds ........................... (5,000) (5,000)
----------- -----------
Pro Forma net income (loss) ....................................... $ (1,829) $ (6,736)
=========== ===========
Weighted average shares:
Weighted average shares - Common (1) .............................. 2,294,174 2,289,717
Common shares - Offering (2) ..................................... 2,500,000 2,500,000
Common share - Series C Exchange (3) .............................. 2,581,784 2,581,784
Common stock equivalent pursuant to APB 15 (4) .................... 62,014 63,165
----------- -----------
Total weighted average shares ..................................... 7,437,972 7,434,666
=========== ===========
Net income (loss) per share applicable to common shares ........... $ (0.25) $ (0.91)
=========== ===========
</TABLE>
10
<PAGE>
NOTE 6 - UNAUDITED PRO FORMA AND SUPPLEMENTAL FINANCIAL INFORMATION
(continued)
- ----------
(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.
Excluding the effect of the Revolving Credit Reduction and the interest
rate reduction on the Revolving Credit Facility and including the effect of the
proceeds from life insurance, net income (loss) per share applicable to common
shares, on a supplemental basis, would have been income of $0.43 for the
thirteen weeks ended July 29, 1995 and a loss of $0.28 for the twenty-six weeks
ended July 29, 1995.
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)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
----------------------- ----------------------
July 29, August 3, July 29, August 3,
1995 1996 1995 1996
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Sales ...................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 48.1 48.0 47.9 48.5
----- ----- ----- -----
Gross margin ........................... 51.9 52.0 52.1 51.5
Selling, general and administrative expenses 46.4 45.5 48.6 47.1
Depreciation and amortization .............. 1.8 2.0 2.0 2.0
----- ----- ----- -----
Income (loss) from operations .......... 3.7 4.5 1.5 2.4
Preceeds from life insurance ............... (3.7) -- (2.0) --
Interest expense, net ...................... 5.5 5.8 5.9 5.7
----- ----- ----- -----
Income (loss) before income taxes ...... 1.9 (1.3) (2.4) (3.3)
Provision (credit) for income taxes ........ (0.4) (0.2) (1.5) (1.1)
----- ----- ----- -----
Net income (loss) ...................... 2.3% (1.1)% (0.9)% (2.2)%
===== ===== ===== =====
</TABLE>
Thirteen Weeks Ended August 3, 1996 Compared with Thirteen Weeks Ended July 29,
1995
Sales. Sales for the thirteen weeks ended August 3, 1996 increased $1.8
million, or 1.3%, over the comparable period for 1995. Comparable department
sales (departments open for the same months during comparable periods) increased
1.7%. The comparable department sales percentage increase in the second quarter
was negatively impacted by approximately 3%, due to one less week of sales in
the pre-Mother's Day period.
11
<PAGE>
Sales decreased by $0.5 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 the thirteen weeks ended August 3, 1996, Finlay
opened 28 departments and closed 11 departments. The openings included 13
departments at the end of the second quarter in the Hecht's division of The May
Department Stores Company ("May"), as a result of May's acquisition of the
Strawbridge's stores, and five additional department openings in Debenhams,
P.L.C., a department store chain in the United Kingdom ("Debenhams"). The
remaining 10 departments were opened within existing store groups. The closings
included seven departments in the Emporium/Weinstock's chain, which was acquired
by Federated Department Stores, Inc. and will operate under the Macy's name. The
remaining four departments closed within existing host store groups.
Gross margin. Gross margin for the period increased by $1.0 million and, as
a percentage of sales, gross margin increased 0.1%.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") as a percentage of sales decreased 0.9%. SG&A
decreased $0.3 million due to reduced advertising expenses, as a result of the
shift in the retail calendar for the Mother's Day selling period, partially
offset by additional lease fees associated with increased sales volume.
Depreciation and amortization. Depreciation and amortization increased by
$0.3 million, reflecting $15.9 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.
Proceeds from Life Insurance. The Company 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 $0.6 million
reflecting an increase in average borrowings ($291.9 million for the period in
1996 compared to $271.0 million for the comparable period in 1995) partially
offset by a lower weighted average interest rate (10.2% for the period in 1996
compared to 10.5% 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). The net loss of $1.6 million for the 1996 period was
$4.7 million lower than the net income for the comparable period in 1995 as a
result of the factors discussed above. Excluding the effect of the receipt of
life insurance proceeds of $5.0 million in 1995, the net loss of $1.6 million in
1996 compares to a net loss of $1.8 million in 1995.
Twenty-Six Weeks Ended August 3, 1996 Compared with Twenty-Six Weeks Ended July
29, 1995
Sales. Sales for the twenty-six weeeks ended August 3, 1996 increased $19.8
million, or 8.0%, over the comparable period for 1995. Comparable department
sales increased 7.8%. 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. Sales from the operation of net new departments (departments not
included in comparable department sales) contributed $0.5 million. During the
twenty-six weeks ended August 3, 1996, Finlay opened 37 departments and closed
54 departments. The openings were all within existing store groups with the
exception of the 13 department openings in Strawbridge's and the
12
<PAGE>
six department openings in Debenhams. The closings included 29 departments in
the Emporium/Weinstock's chain and eight departments in The Jones Store Inc.,
which the lessor decided to consolidate with one lessee. The remaining 17
departments closed within existing host store groups.
Gross margin. Gross margin for the period increased by $8.8 million but, as
a percentage of sales, gross margin decreased 0.6% 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. SG&A as a percentage of sales
decreased 1.5%. SG&A increased $5.7 million, or 4.7%, 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.
Depreciation and amortization. Depreciation and amortization increased by
$0.5 million, reflecting $15.9 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.
Proceeds from Life Insurance. The Company 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 $0.6 million
reflecting an increase in average borrowings ($276.3 million for the period in
1996 compared to $268.2 million for the comparable period in 1995) partially
offset by a lower weighted average interest rate (10.3% for the period in 1996
compared to 10.6% 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). The net loss of $6.0 million for the 1996 period was
$3.8 million higher than the net loss for the comparable period in 1995 as a
result of the factors discussed above. Excluding the effect of the receipt of
life insurance proceeds in 1995, the net loss of $6.0 million in 1996 compares
to a net loss of $7.2 million in 1995.
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. For
the twenty-six weeks ended July 29, 1995 and August 3, 1996, capital
expenditures totalled $6.2 million and $7.2 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
13
<PAGE>
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"). Borrowings under the Revolving Credit Facility
at August 3, 1996 were $77.9 million compared to a zero balance at February 3,
1996, pursuant to the Balance Reduction Requirement, and $74.0 million at July
29, 1995. The average amounts outstanding were $67.8 million and $70.5 million
for the twenty-six weeks ended July 29, 1995 and August 3, 1996, respectively.
The maximum amount outstanding under the Revolving Credit Facility during the
twenty-six weeks ended August 3, 1996 was $94.1 million.
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, (ii)
the operation of seven departments in Debenhams and (iii) the planned opening in
the Fall of 1996 of 25 additional departments in France with Monoprix S.A., a
subsidiary of SAGL, the parent of Galeries Lafayette.
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. The Company's working
capital balance was $63.4 million at August 3, 1996, a decrease of $3.0 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."
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 August 3, 1996,
$194.7 million of consignment merchandise was on hand as compared to $199.1
million at February 3, 1996 and $201.4 million at July 29, 1995.
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 August 3, 1996, the
Company's outstanding borrowings were $284.9 million, which included a $72.0
million balance under the Debentures, a $135.0 million balance under the Notes
and a $77.9 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 August 3, 1996,
amounts outstanding under the Gold Consignment Agreement totalled 28,289 fine
troy ounces, valued at approximately $10.9 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
14
<PAGE>
the aggregate of Finlay Jewelry's interest expense and required amortization
payments totalled $11.1 million and $10.7 million for the twenty-six weeks ended
July 29, 1995 and August 3, 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 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.
15
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Stockholders of the Company was held on June 11,
1996, pursuant to notice, at which Messrs. Rohit M. Desai and Thomas H. Lee were
re-elected directors of the Company to serve a three-year term in the class of
directors whose term expires in 1999. Such members have been elected to serve
until the expiration of their respective terms of office and until their
successors are duly elected and qualified.
Messrs. Damon H. Ball, David B. Cornstein, James Martin Kaplan, Norman S.
Matthews, Arthur E. Reiner and Warren C. Smith, Jr. continued to serve as
members of the Board of Directors after the meeting.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
2 Not applicable.
4 Not applicable.
10 Not applicable.
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.
16
<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: September 13, 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)
17
Exhibit 11 - Computation of earnings per share
Earnings per common share were computed as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
------------------------------ ---------------------------------
In thousands, except share and per share amounts July 29, August 3, July 29, August 3,
1995 1996 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) ......................... $ 3,171 $ (1,567) $ (2,210) $ (5,967)
Less: Dividends on Preferred Stock and
accretion on conversion of Preferred
Stock ............................... -- -- 10,717 --
----------- ----------- ----------- -----------
Net income (loss) applicable to common
shares .................................. $ 3,171 $ (1,567) $ (12,927) $ (5,967)
=========== =========== =========== ===========
Weighted average shares:
Weighted average shares - Common (1) 7,375,958 7,415,878 5,500,734 7,414,555
Common stock equivalent pursuant to
APB 15 (2) ........................ 162,326 70,578 63,165 66,472
----------- ----------- ----------- -----------
Total weighted average shares ............. 7,538,284 7,486,456 5,563,899 7,481,027
=========== =========== =========== ===========
Net income (loss) per share applicable to
common shares ........................... $ 0.42 $ (0.21) $ (2.32) $ (0.80)
=========== =========== =========== ===========
</TABLE>
- ----------
(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>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINLAY 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> 6-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-START> FEB-04-1996
<PERIOD-END> AUG-03-1996
<CASH> 1,731
<SECURITIES> 0
<RECEIVABLES> 28,105
<ALLOWANCES> 0
<INVENTORY> 209,334
<CURRENT-ASSETS> 251,676
<PP&E> 70,775
<DEPRECIATION> 25,235
<TOTAL-ASSETS> 403,483
<CURRENT-LIABILITIES> 188,268
<BONDS> 207,038
0
0
<COMMON> 76
<OTHER-SE> 7,488
<TOTAL-LIABILITY-AND-EQUITY> 403,483
<SALES> 267,907
<TOTAL-REVENUES> 267,907
<CGS> 129,883
<TOTAL-COSTS> 129,883
<OTHER-EXPENSES> 131,553
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,245
<INCOME-PRETAX> (8,774)
<INCOME-TAX> (2,807)
<INCOME-CONTINUING> (5,967)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,967)
<EPS-PRIMARY> 0
<EPS-DILUTED> (0.80)
</TABLE>
