- --------------------------------------------------------------------------------
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 3, 1997
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 13, 1997, there were 7,559,438 shares of common stock, par value $.01
per share, of the Registrant outstanding.
<PAGE>
FINLAY ENTERPRISES, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED MAY 3, 1997
INDEX
PAGE(S)
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the thirteen
weeks ended May 4, 1996 and May 3, 1997............................1
Consolidated Balance Sheets as of February 1, 1997
and May 3, 1997....................................................2
Consolidated Statements of Changes in Stockholders' Equity for the
year ended February 1, 1997 and thirteen weeks ended May 3, 1997...3
Consolidated Statements of Cash Flows for the thirteen weeks
ended May 4, 1996 and May 3, 1997..................................4
Notes to Consolidated Financial Statements..........................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................12
SIGNATURES...................................................................13
<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
------------------------------
May 4, May 3,
1996 1997
------------ ------------
<S> <C> <C>
Sales.................................................................. $ 130,719 $ 134,592
Cost of sales.......................................................... 64,038 65,722
------------ ------------
Gross margin........................................................ 66,681 68,870
Selling, general and administrative expenses........................... 63,696 65,167
Depreciation and amortization.......................................... 2,638 2,753
------------ ------------
Income (loss) from operations........................................ 347 950
Interest expense, net.................................................. 7,284 7,699
------------ ------------
Income (loss) before income taxes................................... (6,937) (6,749)
Provision (credit) for income taxes.................................... (2,537) (2,523)
------------ ------------
Net income (loss)...................................................... $ (4,400) $ (4,226)
============ ============
Net income (loss) per share applicable to common shares................ $ (0.59) $ (0.56)
============ ============
Weighted average shares outstanding ................................... 7,474,478 7,492,792
============ ============
</TABLE>
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>
(unaudited)
February 1, May 3,
1997 1997
----------- ------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents................................................... $ 20,846 $ 2,762
Accounts receivable - department stores..................................... 15,362 30,272
Other receivables........................................................... 4,350 8,841
Merchandise inventories..................................................... 222,445 246,362
Prepaid expenses and other.................................................. 1,437 1,434
----------- ------------
Total current assets..................................................... 264,440 289,671
----------- ------------
Fixed assets
Equipment, fixtures and leasehold improvements.............................. 73,223 76,404
Less - accumulated depreciation and amortization............................ 21,423 23,319
----------- ------------
Fixed assets, net........................................................ 51,800 53,085
----------- ------------
Deferred charges and other assets.............................................. 9,770 10,359
Goodwill....................................................................... 95,263 94,455
----------- ------------
Total assets............................................................. $ 421,273 $ 447,570
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable............................................................... $ - $ 101,210
Current portion of long-term debt........................................... 2 9
Accounts payable - trade.................................................... 133,252 76,634
Accrued liabilities:
Accrued salaries and benefits........................................... 15,061 12,921
Accrued miscellaneous taxes............................................. 4,148 4,495
Accrued insurance....................................................... 762 872
Accrued interest........................................................ 3,833 452
Accrued management transition and consulting............................ 1,787 1,513
Other................................................................... 15,124 11,471
Income taxes payable........................................................ 12,046 7,092
Deferred income taxes....................................................... 809 650
----------- ------------
Total current liabilities............................................... 186,824 217,319
Long-term debt................................................................. 211,427 213,685
Other non-current liabilities.................................................. 517 512
----------- ------------
Total liabilities....................................................... 398,768 431,516
----------- ------------
Stockholders' equity
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 7,558,838 and 7,559,438 shares, respectively..... 76 76
Additional paid-in capital.................................................. 47,725 47,732
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)................................................. 3,145 (1,081)
Foreign currency translation adjustment..................................... (3,050) (5,282)
----------- ------------
22,505 16,054
----------- ------------
Total liabilities and stockholders' equity.............................. $ 421,273 $ 447,570
=========== ============
</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>
Common Stock Distributions to Note Foreign
--------------------- Additional investor group Receivable Retained Currency Total
Number Paid-in in excess of from Earnings Translation Stockholders'
of shares Amount Capital carryover basis Stock Sale (Deficit) Adjustment Equity
----------- -------- ---------- ---------------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 3, 1996..... 7,524,356 $ 75 $ 47,459 $ (24,390) $ (1,001) $ (8,612) $ (747) $ 12,784
Net income (loss)............ - - - - - 11,757 - 11,757
Foreign currency
translation adjustment - - - - - - (2,303) (2,303)
Exercise of stock options..... 34,482 1 266 - - - - 267
----------- -------- ----------- ---------------- ----------- ---------- ----------- -------------
Balance, February 1, 1997..... 7,558,838 76 47,725 (24,390) (1,001) 3,145 (3,050) 22,505
Net income (loss)............ - - - - - (4,226) - (4,226)
Foreign currency
translation adjustment - - - - - - (2,232) (2,232)
Exercise of stock options.... 600 - 7 - - - - 7
----------- -------- ----------- ---------------- ----------- ---------- ----------- -------------
Balance, May 3, 1997
(unaudited).................. 7,559,438 $ 76 $ 47,732 $ (24,390) $ (1,001) $ (1,081) $ (5,282) $ 16,054
=========== ======== =========== ================ =========== ========== =========== =============
</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
--------------------------------
May 4, May 3,
1996 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss)............................................................ $ (4,400) $ (4,226)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization................................................ 2,938 3,061
Imputed interest on debentures............................................... 2,001 2,249
Other, net................................................................... (423) (354)
Changes in operating assets and liabilities:
Increase in accounts and other receivables............................... (15,048) (19,772)
Increase in merchandise inventories...................................... (9,202) (25,311)
Increase in prepaid expenses and other................................... (918) (18)
Decrease in accounts payable and accrued liabilities..................... (65,613) (70,597)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES.................................. (90,665) (114,968)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................. (3,602) (3,375)
Other, net................................................................... (34) (547)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES.................................. (3,636) (3,922)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility...................................... 153,633 179,387
Principal payments on revolving credit facility.............................. (81,821) (78,177)
Other, net................................................................... 7 14
------------- -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES............................ 71,819 101,224
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................................ (41) (418)
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS.................................. (22,523) (18,084)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 26,014 20,846
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ 3,491 $ 2,762
============= =============
Supplemental disclosure of cash flow information:
Interest paid................................................................ $ 8,537 $ 8,531
Income taxes paid............................................................ 4,833 4,613
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
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 adjustments
necessary to present fairly the financial position of the Company as of May 3,
1997, and the results of operations and cash flows for the thirteen weeks ended
May 4, 1996 and May 3, 1997. 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 1, 1997
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 1, 1997
("Form 10-K"), previously filed.
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1994, 1995, 1996 and 1997 relate to the fiscal years ended or ending January
28, 1995, February 3, 1996, February 1, 1997 and January 31, 1998, respectively.
Each of the fiscal years includes fifty-two weeks except 1995, which includes
fifty-three weeks.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Under
SFAS No. 128, the presentation of both basic and diluted earnings per share is
required on the statements of operations for periods ending after December 15,
1997, at which time restatement for prior periods will be necessary. Had the
provisions of SFAS No. 128 been in effect during 1997, the Company would have
reported basic net income (loss) per share of $(0.59) and $(0.57) for the
thirteen weeks ended May 4, 1996 and May 3, 1997, respectively. Under SFAS No.
128, diluted net income (loss) per share is equal to the net income (loss) per
share currently disclosed by the Company.
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 and Germany. A significant portion of Finlay's revenues are generated in
the fourth quarter due to the seasonality of the retail industry. Approximately
70% of Finlay's sales in 1996 were from operations in two major department store
groups of which 48% represents Finlay's sales from one department store group.
5
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
(unaudited)
February 1, May 3,
1997 1997
-------------- --------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
<S> <C> <C>
(specific identification basis)................................ $ 231,298 $ 255,406
Less: Excess of specific identification cost over LIFO
inventory value................................................ 8,853 9,044
-------------- --------------
$ 222,445 $ 246,362
============== ==============
</TABLE>
The LIFO method had the effect of decreasing income (loss) before income
taxes for the thirteen weeks ended May 4, 1996 and May 3, 1997 by $191,000 for
each period. Finlay determines its LIFO inventory value by utilizing selected
producer price indices published for jewelry and watches by the Bureau of Labor
Statistics.
Approximately $194,276,000 and $220,154,000 at February 1, 1997 and May 3,
1997, 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 May 4, 1996 and May
3, 1997, 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 3, 1997, amounts outstanding under the Gold Consignment
Agreement totaled 39,596 fine troy ounces, valued at approximately $13.5
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.
6
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LEASE AGREEMENTS (continued)
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.
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):
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------
May 4, May 3,
1996 1997
---------- ----------
(in thousands)
<S> <C> <C>
Minimum fees.............................. $ 1,172 $ 1,842
Contingent fees........................... 19,634 19,891
---------- ----------
Total................................ $ 20,806 $ 21,733
---------- ----------
</TABLE>
NOTE 5 - STOCKHOLDERS' EQUITY
On March 5, 1997, a senior officer of the Company received options under
the Company's Long Term Incentive Plan (the "Incentive Plan") to purchase an
aggregate of 139,719 shares of Common Stock at an exercise price of $14.00 per
share. Such options vest and become exercisable on January 2, 2001.
On March 6, 1997, the Board of Directors of the Company adopted the 1997
Long Term Incentive Plan ("1997 Plan"), subject to approval by the Company's
stockholders. The 1997 Plan, which is similar to the Incentive Plan, is intended
as a successor to the Incentive Plan and will provide for the grant of the same
types of awards as are currently available under the Incentive Plan. An
aggregate of 350,000 shares of the Company's Common Stock have been reserved for
issuance pursuant to the 1997 Plan, of which a total of 315,148 shares are
subject to options granted to certain senior management, key employees and a
director, subject to stockholder approval of the 1997 Plan. The exercise price
of such options range from $13.875 per share to $14.875 per share.
7
<PAGE>
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
-------------------------
May 4, May 3,
1996 1997
---------- ----------
<S> <C> <C>
Sales................................................................... 100.0% 100.0%
Cost of sales........................................................... 49.0 48.8
---------- ----------
Gross margin........................................................ 51.0 51.2
Selling, general and administrative expenses............................ 48.7 48.4
Depreciation and amortization........................................... 2.0 2.1
---------- ----------
Income (loss) from operations....................................... 0.3 0.7
Interest expense, net................................................... 5.6 5.7
---------- ----------
Income (loss) before income taxes................................... (5.3) (5.0)
Provision (credit) for income taxes..................................... (1.9) (1.9)
---------- ----------
Net income (loss)................................................... (3.4)% (3.1)%
========== ==========
</TABLE>
Thirteen Weeks Ended May 3, 1997 Compared with Thirteen Weeks Ended May 4, 1996
Sales. Sales for the thirteen weeks ended May 3, 1997 increased $3.9
million, or 3.0%, over the comparable period in 1996. Comparable department
sales (departments open for the same months during comparable periods) increased
4.3%. Management attributes this increase in comparable department sales
primarily to the promotion of "Key Item' and "Best Value" programs, an increased
emphasis on holiday and event related promotions as well as participating in
host store special promotions and to the marketing of its departments as a
"destination location" for fine jewelry. The increase in comparable departments
sales was offset by a $1.7 million decrease in sales resulting from the net
effect of department openings and closings. During the thirteen weeks ended May
3, 1997, Finlay opened 17 departments and closed four departments. The openings
and closings were all within existing store groups. The closings resulted from
host store decisions to close the stores, with one of the stores reopening at a
new location with a Finlay operated department.
Gross margin. Gross margin for the period increased by $2.2 million and, as
a percentage of sales, gross margin increased by 0.2% primarily related to the
lower average price of gold in the 1997 period compared to the 1996 period.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") increased $1.5 million, or 2.3%, due primarily
to payroll and lease fees associated with the increase in the Company's sales.
In addition, through increased vendor participation, net advertising
expenditures were comparable with the 1996 period. As a percentage of sales,
SG&A decreased by 0.3% as a result of the leveraging of these expenses.
8
<PAGE>
Depreciation and amortization. Depreciation and amortization was
essentially unchanged, reflecting an increase in capital expenditures for the
most recent twelve months, offset by the effect of certain assets becoming fully
depreciated. The increase in fixed assets was due to the addition of new
departments, the renovation of existing departments and construction relating to
the Company's distribution and warehouse facility.
Interest expense, net. Interest expense increased by $0.4 million
reflecting an increase in average borrowings ($294.0 million for the period in
1997 compared to $260.7 million for the comparable period in 1996) primarily as
a result of the timing of inventory receipts during the 1997 period and an
increase in the outstanding balance of the Company's 12% Senior Discount
Debentures due 2005 (the "Debentures") due to the accretion of interest. The
increase in average borrowings is partially offset by a lower weighted average
interest rate (10.3% for the 1997 period compared to 10.5% for the comparable
period in 1996).
Provision (credit) for income taxes. The income tax provision for the 1997
and 1996 periods reflects an effective tax rate of 41.5%.
Net income (loss). The net loss of $4.2 million for the 1997 period was
$0.2 million lower than the net loss of $4.4 million for the comparable period
in 1996 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. For the thirteen weeks ended May 4, 1996 and May 3, 1997,
capital expenditures totaled $3.6 million and $3.4 million, respectively.
Capital expenditures for 1997, in total, are estimated to be approximately $12.0
million. Although capital expenditures are limited by the terms of the Company's
$135.0 million Revolving Credit Facility (the "Revolving Credit Facility"), to
date this limitation has not precluded the Company from satisfying its capital
expenditure requirements.
Finlay's operations substantially preclude consumer receivables and in
recent years, on average, approximately 50% of Finlay's domestic merchandise has
been carried on consignment. Accordingly, management believes that relatively
modest levels of working capital are required in comparison to many other
retailers. The Company's working capital balance was $72.4 million at May 3,
1997, a decrease of $5.3 million from February 1, 1997. 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 requirements and therefore, borrowings under the
Revolving Credit Facility, can be expected to increase on an interim basis
during the first three quarters of any given fiscal year. See "-Seasonality."
The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October and November in anticipation
of the year-end holiday season. Accordingly, Finlay experiences seasonal cash
needs as inventory levels peak. The Revolving Credit Facility 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. and
Sonab) for the benefit of the lenders under the Revolving Credit Facility.
9
<PAGE>
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 ten consecutive days (the
"Balance Reduction Requirement"). Borrowings under the Revolving Credit Facility
at May 3, 1997 were $101.2 million, compared to a zero balance at February 1,
1997 in accordance with the Balance Reduction Requirement, and $71.8 million at
May 4, 1996. The average amounts outstanding were $56.0 million and $80.7
million for the thirteen weeks ended May 4, 1996 and May 3, 1997, respectively.
The maximum amount outstanding for the thirteen weeks ended May 3, 1997 was
$108.0 million.
Finlay's long-term needs for external financing will depend on its rate of
growth, the level of internally generated funds and the ability to continue
obtaining substantial amounts of merchandise on advantageous terms, including
consignment arrangements with its vendors. For 1996, Finlay had an average
balance of consignment merchandise of $201.8 million from over 200 vendors as
compared to an average balance of $208.5 million in 1995. As of May 3, 1997,
$220.2 million of consignment merchandise was on hand as compared to $194.3
million at February 1, 1997 and $198.8 million at May 4, 1996.
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 3, 1997, the
Company's outstanding borrowings were $314.9 million, which included a $78.7
million balance under the Debentures, a $135.0 million balance under the Notes
and a $101.2 million balance under the Revolving Credit Facility. The Debentures
do not pay cash interest until November 1, 1998.
In August 1995, Finlay Jewelry entered into 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 3, 1997,
amounts outstanding under the Gold Consignment Agreement totaled 39,596 fine
troy ounces, valued at approximately $13.5 million. The average amount
outstanding under the Gold Consignment Agreement was $11.9 million in 1996.
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 totaled $8.7 million and $8.6 million for the thirteen
weeks ended May 4, 1996 and May 3, 1997, 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, 1996 (the Company's tax year
end), a NOL for tax purposes of approximately $14.0 million which is subject to
an annual limit of approximately $2.0 million per year. For financial reporting
purposes, no NOL exists as of February 1, 1997.
10
<PAGE>
Seasonality
Finlay's business is highly seasonal, with peak sales occurring during the
fourth quarter of each year, which includes the year-end holiday season. The
fourth quarter accounted for an average of 42% of Finlay's annual sales and
approximately 86% of its income from operations (excluding nonrecurring charges)
for 1994, 1995 and 1996. Accordingly, the results for any of the first three
quarters of any given fiscal year, taken individually or in the aggregate, are
not indicative of annual results. Generally, Finlay's operations during the
first three quarters of any given fiscal 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.
Forward - Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements'
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 (the "Exchange Act"). All statements
other than statements of historical information provided herein are
forward-looking statements and may contain information about financial results,
economic conditions, trends and known uncertainties. The forward-looking
statements contained herein are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, trends in the general economy, competition in the retail
jewelry business, the seasonality of the retail business, the ability to
increase comparable department sales and to open new departments, the dependence
on certain host store relationships due to the concentration of sales generated
by such host stores, the availability of alternate sources of merchandise supply
in the case of an abrupt loss of any significant supplier, the ability to
continue to obtain substantial amounts of merchandise on consignment, the
dependence on key officers, the high degree of leverage and the availability of
financing and credit on favorable terms and changes in regulatory requirements
which are applicable to the Company's business.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief or expectation
only as of the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof. In addition to the disclosure contained herein,
readers should carefully review any disclosure of risks and uncertainties
contained in other documents the Company files or has filed from time to time
with the Securities and Exchange Commission pursuant to the Exchange Act.
11
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
2 Not applicable.
4 Not applicable.
10 Amendment No. 2 to Employment Agreement, dated as of March 5, 1997,
among the Company, Finlay Jewelry and Arthur E. Reiner.
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.
12
<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 13, 1997 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)
13
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT
AMENDMENT NO. 2, dated as of March 5, 1997, to the Employment Agreement,
dated as of January 3, 1995 (as previously amended by the Amendment to
Employment Agreement dated as of May 17, 1995, the "Employment Agreement") by
and among Finlay Enterprises, Inc., a Delaware corporation, Finlay Fine Jewelry
Corporation, a Delaware corporation, and Arthur E. Reiner (the "Executive").
W I T N E S S E T H :
WHEREAS, the parties hereto mutually desire to amend certain provisions of
the Employment Agreement;
NOW, THEREFORE, for good and valuable consideration, the parties hereto
agree as follows:
1. The provisions of Section 1 of the Employment Agreement shall be amended
so that the ending date is January 31, 2001.
2. The provisions of Section 5(b) of the Employment Agreement shall be
amended so that the following sentence is inserted at the end of said paragraph:
"The Company shall pay additional compensation to the Executive to hold
him harmless from any income taxes he may owe as a result of the premiums
paid by the Company with respect to any and all life insurance provided
under this paragraph and as a result of such additional compensation."
3. The existing provisions of Section 6 of the Employment Agreement shall
become a sub-paragraph (a) of such Section and a new sub-paragraph (b) added as
follows:
"(b) In addition to expenses reimbursable pursuant to paragraph (a) above,
the Company shall reimburse Executive for the use, for business purposes,
of an automobile purchased by or leased to him, including all expenses
of purchase, lease, operation, maintenance and insurance thereof, in the
amount of up to $15,000 per year."
<PAGE>
4. Section 7(b) of the Employment Agreement shall be, and hereby is amended
so that the reference (appearing on the eighteenth line of such Section) to
"7.92%" shall be modified effective as of the date hereof to "6.92%". The
parties agree that a corresponding change shall be made to the interest rate
reference in the Note.
5. Except as amended hereby, the Employment Agreement shall remain in full
force and effect, without change or modification. The Employment Agreement,
together with this Amendment No. 2 and the other documents referred to in the
Employment Agreement, is intended by the parties as a final expression of their
agreement and understanding in respect of the subject matter contained herein
and therein. The Employment Agreement, this Amendment No. 2 and such other
documents supersede all prior agreements and understandings between the parties
with respect to such subject matter.
6. This instrument may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
7. Terms defined in the Employment Agreement and not otherwise defined
herein shall have the meanings set forth in the Employment Agreement.
8. This Amendment No. 2 to Employment Agreement shall become effective upon
the receipt of all required third-party consents, including, without limitation:
(a) consent under the Amended and Restated Credit Agreement, dated as of March
28, 1995, as amended, among the Parent, Finlay, General Electric Capital
Corporation, individually and as agent for the lenders named therein (the
"Lenders") and the Lenders, as amended; and (b) consent under the Amended and
Restated Stockholders' Agreement, dated as of March 6, 1995, among the Parent
and certain stockholders of the Parent.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Amendment No. 2 as
of the day and year first above written.
/s/ Arthur E. Reiner
--------------------
Arthur E. Reiner
FINLAY ENTERPRISES, INC.
By /s/ Barry Scheckner
----------------------------
Name: Barry Scheckner
Title: Senior Vice President
FINLAY FINE JEWELRY CORPORATION
By /s/ Barry Scheckner
----------------------------
Name: Barry Scheckner
Title: Senior Vice President
Exhibit 11 - Computation of earnings per share
Earnings per common share were computed as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-------------------------------------
In thousands, except share and per share amounts May 4, May 3,
1996 1997
------------------ -----------------
<S> <C> <C>
Net income (loss)....................................... $ (4,400) $ (4,226)
================== =================
Weighted average shares:
Weighted average shares - Common (1) 7,413,232 7,420,419
Common stock equivalent pursuant to
APB 15 (2)..................................... 61,246 72,373
------------------ -----------------
Total weighted average shares........................... 7,474,478 7,492,792
================== =================
Net income (loss) per share applicable to
common shares...................................... $ (0.59) $ (0.56)
================== =================
</TABLE>
______________________
(1) The weighted average shares outstanding are based on the number of shares
of Common Stock issued and outstanding.
(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> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> MAY-03-1997
<CASH> 2,762
<SECURITIES> 0
<RECEIVABLES> 30,272
<ALLOWANCES> 0
<INVENTORY> 246,362
<CURRENT-ASSETS> 289,671
<PP&E> 76,404
<DEPRECIATION> 23,319
<TOTAL-ASSETS> 447,570
<CURRENT-LIABILITIES> 217,319
<BONDS> 213,685
0
0
<COMMON> 76
<OTHER-SE> 15,978
<TOTAL-LIABILITY-AND-EQUITY> 447,570
<SALES> 134,592
<TOTAL-REVENUES> 134,592
<CGS> 65,722
<TOTAL-COSTS> 65,722
<OTHER-EXPENSES> 67,920
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,699
<INCOME-PRETAX> (6,749)
<INCOME-TAX> (2,523)
<INCOME-CONTINUING> (4,226)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,226)
<EPS-PRIMARY> 0
<EPS-DILUTED> (0.56)
</TABLE>
