- --------------------------------------------------------------------------------
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 2, 1998
-----------
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.)
529 Fifth Avenue, New York, NY 10017
------------------------------------------ -----------
(Address of principal executive offices) (zip code)
(212) 808-2800
-----------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of June 12, 1998, there were 10,393,053 shares of common stock, par value
$.01 per share, of the Registrant outstanding.
<PAGE>
FINLAY ENTERPRISES, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED MAY 2, 1998
INDEX
PAGE(S)
-------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the thirteen
weeks ended May 3, 1997 and May 2, 1998.............................1
Consolidated Balance Sheets as of January 31, 1998 and
May 2, 1998.........................................................2
Consolidated Statements of Changes in Stockholders' Equity for the
year ended January 31, 1998 and thirteen weeks ended May 2, 1998....3
Consolidated Statements of Cash Flows for the thirteen
weeks ended May 3, 1997 and May 2, 1998.............................4
Notes to Consolidated Financial Statements..........................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................16
SIGNATURES ..................................................................18
<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 3, May 2,
1997 1998
------------- --------------
<S> <C> <C>
Sales........................................................ $ 134,592 $ 160,992
Cost of sales................................................ 65,722 78,104
------------- --------------
Gross margin.............................................. 68,870 82,888
Selling, general and administrative expenses................. 65,167 76,948
Depreciation and amortization................................ 2,753 3,794
------------- --------------
Income (loss) from operations............................. 950 2,146
Interest expense, net........................................ 7,699 9,006
------------- --------------
Income (loss) before income taxes......................... (6,749) (6,860)
Provision (credit) for income taxes.......................... (2,523) (2,658)
------------- --------------
Net income (loss)......................................... $ (4,226) $ (4,202)
============= ==============
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share......................... $ (0.57) $ (0.43)
============= ==============
Diluted net income (loss) per share....................... $ (0.56) $ (0.43)
============= ==============
Weighted average shares and share equivalents outstanding.... 7,492,792 9,720,979
============= ==============
</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)
January 31, May 2,
1998 1998
------------- -------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents................................. $ 13,588 $ 80,395
Accounts receivable - department stores................... 20,772 38,150
Other receivables......................................... 6,862 14,448
Merchandise inventories................................... 279,766 300,484
Prepaid expenses and other................................ 1,781 4,446
------------- -------------
Total current assets................................... 322,769 437,923
------------- -------------
Fixed assets
Equipment, fixtures and leasehold improvements............ 95,257 98,657
Less - accumulated depreciation and amortization.......... 28,249 30,825
------------- -------------
Fixed assets, net...................................... 67,008 67,832
------------- -------------
Deferred charges and other assets........................... 14,188 15,610
Goodwill.................................................... 104,271 103,332
------------- -------------
Total assets........................................... $ 508,236 $ 624,697
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable............................................. $ - $ -
Current portion of long-term debt......................... - 184,540
Accounts payable - trade.................................. 160,434 87,918
Accrued liabilities:
Accrued salaries and benefits......................... 12,694 12,447
Accrued miscellaneous taxes........................... 5,014 3,416
Accrued insurance..................................... 215 1,201
Accrued interest...................................... 3,902 501
Accrued management transition and consulting.......... 1,092 886
Other................................................. 15,558 13,085
Income taxes payable...................................... 14,246 -
Deferred income taxes..................................... 1,219 1,857
------------- --------------
Total current liabilities............................. 214,374 305,851
Long-term debt............................................... 221,026 225,000
Other non-current liabilities................................ 497 8,869
------------- --------------
Total liabilities..................................... 435,897 539,720
------------- --------------
Stockholders' equity
Common Stock, par value $.01 per share; authorized
25,000,000 shares; issued and outstanding 9,779,050
and 10,374,053 shares, respectively..................... 98 104
Additional paid-in capital................................ 86,135 101,023
Distributions to investor group in excess of
carryover basis......................................... (24,390) (24,390)
Note receivable from stock sale........................... (1,001) -
Retained earnings (deficit)............................... 18,340 14,138
Foreign currency translation adjustment................... (6,843) (5,898)
------------- --------------
Total stockholders' equity............................ 72,339 84,977
------------- --------------
Total liabilities and stockholders' equity............ $ 508,236 $ 624,697
============= ==============
</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 Distribution 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 Equiity
---------- ------ ---------- --------------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 1, 1997........ 7,558,838 $ 76 $ 47,725 $ (24,390) $ (1,001) $ 3,145 $ (3,050) $ 22,505
Net income (loss).............. - - - - - 15,195 - 15,195
Foreign currency translation
adjustment................. - - - - - - (3,793) (3,793)
Issuance of Common Stock....... 2,196,971 22 38,102 - - - - 38,124
Exercise of stock options...... 23,241 - 308 - - - - 308
--------- ------ ---------- --------------- ----------- ---------- ------------ -------------
Balance, January 31, 1998........ 9,779,050 98 86,135 (24,390) (1,001) 18,340 (6,843) 72,339
Net income (loss).............. - - - - - (4,202) - (4,202)
Foreign currency translation
adjustment................. - - - - - - 945 945
Issuance of Common Stock....... 567,310 6 13,753 - - - - 13,759
Note Receivable repayment...... - - - - 1,001 - - 1,001
Exercise of stock options...... 27,693 - 1,135 - - - - 1,135
---------- ------ ---------- --------------- ----------- ---------- ------------ -------------
Balance, May 2, 1998............. 10,374,053 $ 104 $ 101,023 $ (24,390) $ - $ 14,138 $ (5,898) $ 84,977
========== ====== ========== =============== =========== ========== ============ =============
</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 3, May 2,
1997 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss)......................................... $ (4,226) $ (4,202)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization............................. 3,061 4,122
Imputed interest on debentures............................ 2,249 2,527
Other, net................................................ (354) 44
Changes in operating assets and liabilities:
Increase in accounts and other receivables............ (19,772) (24,811)
Increase in merchandise inventories................... (25,311) (20,023)
Increase in prepaid expenses and other................ (18) (2,638)
Decrease in accounts payable and accrued
liabilities.......................................... (70,597) (80,068)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES............... (114,968) (125,049)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold
improvements............................................. (3,375) (3,457)
Other, net................................................ (547) (769)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES............... (3,922) (4,226)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility................... 179,387 208,417
Principal payments on revolving credit facility........... (78,177) (208,417)
Prepayment of debentures.................................. - (39,027)
Net proceeds from public offering of Common Stock......... - 13,759
Proceeds from senior note offering........................ - 150,000
Proceeds from senior debenture offering................... - 75,000
Proceeds from repayment of note receivable................ - 1,001
Capitalized financing costs............................... - (5,808)
Other, net................................................ 14 1,135
------------- -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES......... 101,224 196,060
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............. (418) 22
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... (18,084) 66,807
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 20,846 13,588
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 2,762 $ 80,395
============= =============
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 8,531 $ 9,568
Income taxes paid......................................... 4,613 914
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Finlay
Enterprises, Inc. (the "Company" or the "Registrant"), and its wholly owned
subsidiary, Finlay Fine Jewelry Corporation and its wholly owned subsidiaries
("Finlay Jewelry"), have been prepared in accordance with generally accepted
accounting principles for interim financial information. References to "Finlay"
mean collectively, the Company and Finlay Jewelry. 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 2, 1998, and the results of operations and cash flows for the thirteen
weeks ended May 3, 1997 and May 2, 1998. 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
January 31, 1998 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 (the
"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 January 31, 1998
("Form 10-K") previously filed with the Commission.
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1995, 1996, 1997 and 1998 relate to the fiscal years ending February 3, 1996,
February 1, 1997, January 31, 1998 and January 30, 1999, respectively. Each of
the fiscal years includes fifty-two weeks except 1995, which includes
fifty-three weeks.
Net income (loss) per share has been computed in accordance with the
Statement of Financial Accounting Standards ("SFAS') No. 128, "Earnings per
Share" which was adopted by the Company at the end of 1997. Basic and diluted
net income (loss) per share were calculated using the weighted average number of
shares outstanding during each period, with options to purchase Common Stock
included in diluted net income (loss) per share, using the treasury stock
method, to the extent that such options were dilutive. The per share amounts for
each period presented have been restated to reflect the adoption of SFAS No.
128. The following is an analysis of the differences between basic and diluted
net income (loss) per share:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------------------------------------------------
May 3, 1997 May 2,1998
-------------------------------- --------------------------------
No. of Per No. of Per
Shares Share Shares Share
-------------- --------------- -------------- ---------------
Weighted average shares
<S> <C> <C> <C> <C>
outstanding.................... 7,420,419 $ (0.57) 9,720,979 $ (0.43)
Dilutive stock options............. 72,373 0.01 - -
-------------- --------------- -------------- ---------------
Weighted average shares
and share equivalents.......... 7,492,792 $ (0.56) 9,720,979 $ (0.43)
============== =============== ============== ===============
</TABLE>
5
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION (continued)
For each of the periods above, there were no adjustments to Net income
(loss) applicable to common shares used to calculate basic and diluted net
income (loss) per share.
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income", which became effective for fiscal years
beginning after December 15, 1997. This Statement requires disclosure of
comprehensive income, defined as the total of net income and all other nonowner
changes in equity, which under generally accepted accounting principles, are
recorded directly to the stockholders' equity section of the consolidated
balance sheet and, therefore bypass net income. In Finlay's case, the only
nonowner change in equity relates to the foreign currency translation
adjustment.
Comprehensive income (loss) is as follows (in thousands):
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------
May 3, May 2,
1997 1998
------------ -------------
<S> <C> <C>
Net income.................................... $ (4,226) $ (4,202)
Foreign currency translation adjustment....... (2,232) 945
------------ -------------
Comprehensive income (loss)................... $ (6,458) $ (3,257)
============ =============
</TABLE>
NOTE 2 - DESCRIPTION OF BUSINESS
The Company conducts business through its wholly owned subsidiary, Finlay
Jewelry. Finlay is a retailer of fine jewelry products and primarily operates
leased fine jewelry departments in department stores throughout the United
States and France. A significant portion of Finlay's revenues are generated in
the fourth quarter due to the seasonality of the retail industry. Approximately
72% of Finlay's domestic sales in 1997 were from operations in two major
department store groups, of which 49% represents Finlay's domestic sales from
one department store group.
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
(unaudited)
January 31, May 2,
1998 1998
------------- -------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
<S> <C> <C>
(specific identification basis)........................... $ 286,289 $ 307,100
Less: Excess of specific identification cost over LIFO
inventory value........................................... 6,523 6,616
------------- -------------
$ 279,766 $ 300,484
============= =============
</TABLE>
6
<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 May 3, 1997 and May 2, 1998 by $191,000 and
$93,000, respectively. Finlay determines its LIFO inventory value by utilizing
selected producer price indices published for jewelry and watches by the Bureau
of Labor Statistics. Due to the application of APB Opinion No. 16, inventory
valued at LIFO for income tax reporting purposes was approximately $21,000,000
lower than that for financial reporting purposes at January 31, 1998.
Approximately $219,822,000 and $245,892,000 at January 31, 1998 and May 2,
1998, respectively, of merchandise received on consignment has been excluded
from Merchandise inventories and Accounts payable-trade in the accompanying
Consolidated Balance Sheets.
Finlay Jewelry is party to a gold consignment agreement (the "Gold
Consignment Agreement') with Rhode Island Hospital Trust National Bank ('RIHT"),
which expires on December 31, 2001. The Gold Consignment Agreement enables
Finlay Jewelry to receive 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, title to the gold
content of the merchandise transfers from the vendors to RIHT. As a result, such
vendors have reduced their working capital requirements and associated financing
costs. Consequently, Finlay has negotiated more favorable prices and terms with
the participating vendors. Finlay Jewelry can obtain, pursuant to the Gold
Consignment Agreement, up to the lesser of (i) 85,000 fine troy ounces or (ii)
$32,000,000 worth of gold, subject to a formula as prescribed by the Gold
Consignment Agreement. At May 2, 1998, amounts outstanding under the Gold
Consignment Agreement totaled 44,592 fine troy ounces, valued at approximately
$13.9 million. For financial statement purposes, the consigned gold is not
included in Merchandise inventories on the Company's Consolidated Balance Sheets
and, therefore, no related liability has been recorded.
The cost to Finlay of gold merchandise sold on consignment in some cases is
not fixed until the sale is reported to the vendor or RIHT in the case of
merchandise sold pursuant to the Gold Consignment Agreement. Finlay at times
enters into futures contracts, such as options or forwards, based upon the
anticipated sales of gold product, 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 3,
1997 and May 2, 1998, the gain/loss on open futures contracts was not material.
The Company did not have any open positions in futures contracts for gold at
January 31, 1998 or May 2, 1998.
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 other arrangements with host department stores.
7
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LEASE AGREEMENTS (continued)
Substantially all of the department store 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
host store 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 3, May 2,
1997 1998
----------- -----------
(in thousands)
<S> <C> <C>
Minimum fees....................... $ 1,842 $ 4,568
Contingent fees.................... 19,891 21,398
----------- -----------
Total......................... $ 21,733 $ 25,966
=========== ===========
</TABLE>
NOTE 5 - STOCKHOLDERS' EQUITY
On March 5, 1997, an executive officer of the Company received options
under the Company's Long Term Incentive Plan (the "1993 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 (the "1997 Plan"), which was approved by the Company's
stockholders in June 1997. The 1997 Plan, which is similar to the 1993 Plan, is
intended as a successor to the 1993 Plan and provides for the grant of the same
types of awards as are currently available under the 1993 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 349,448 shares are subject to
options granted to certain senior management, key employees and a director. The
exercise prices of such options range from $13.875 per share to $23.188 per
share. The Board of Directors has adopted, subject to the approval of the
Company's stockholders, an amendment of the 1997 Plan pursuant to which options
available for issuance under the 1997 Plan shall be increased to 850,000.
Upon the commencement of his employment, an executive officer of the
Company purchased 138,525 shares of Common Stock (the "Purchased Shares"), at a
price of $7.23 per share. The aggregate purchase price of these shares was paid
in the form of a note issued to the Company in the amount of $1,001,538.
Pursuant to the terms of the note, the amount of the note has historically been
reflected as a reduction to equity and reflected in the Company's Consolidated
Balance Sheets as Note receivable from stock sale. On
8
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - STOCKHOLDERS' EQUITY (continued)
April 24, 1998, the executive officer sold 100,000 of the Purchased Shares and
repaid the outstanding balance of the note ("Note Receivable Repayment") in the
amount of $1.3 million.
NOTE 6 - OTHER TRANSACTIONS
On April 24, 1998, the Company completed a public offering of 1,800,000
shares of its Common Stock at a price of $27.50 per share (the "Equity
Offering"), of which 567,310 shares were sold by the Company and 1,232,690
shares were sold by certain selling stockholders. Concurrently with the Equity
Offering, the Company and Finlay Jewelry completed the public offering of $75.0
million aggregate principal amount of 9% Senior Debentures due May 1, 2008 (the
"Senior Debentures") and $150.0 million aggregate principal amount of 83/8%
Senior Notes due May 1, 2008 (the "Senior Notes"), respectively. In addition, on
April 24, 1998, the existing revolving credit agreement (the "Revolving Credit
Agreement") was amended to increase the line of credit thereunder to $275.0
million and to make certain other changes.
On May 1, 1998, the Company prepaid all of the $39.0 million of accreted
interest on the Company's existing 12% Senior Discount Debentures due 2005 (the
"Old Debentures") as of such date, in accordance with the indenture relating to
the Debentures (the "Old Debenture Indenture"). The Company exercised its option
to prepay all such accreted interest to reduce outstanding indebtedness and to
take advantage of the resulting tax benefits relating to the deductibility of
such prepayment in 1998.
On May 26, 1998, the net proceeds to the Company from the Equity Offering,
the sale of the Senior Debentures, the Note Receivable Repayment and the
repayment of approximately $2.0 million of an intercompany liability by Finlay
Jewelry (the "Intercompany Repayment") were used to redeem the Company's Old
Debentures, including associated premiums. Also, on May 26, 1998, Finlay Jewelry
used the net proceeds from the sale of the Senior Notes to redeem Finlay
Jewelry's 105/8% Senior Notes due 2003 (the "Old Notes"), including associated
premiums, and to make the Intercompany Repayment. The above transactions,
excluding the Equity Offering, are referred to herein as the "Refinancing". The
Company expects to record, in the second quarter, a pre-tax nonrecurring charge
of approximately $12.2 million, including $7.1 million for redemption premiums
and approximately $3.9 million to write off deferred financing costs and debt
discount associated with the Old Debentures and the Old Notes.
On October 6, 1997, Finlay completed the acquisition of certain assets of
the Diamond Park Fine Jewelers division of Zale Corporation ("Diamond Park"), a
leading operator of departments, for approximately $63.0 million. By acquiring
Diamond Park (the "Diamond Park Acquisition"), Finlay added 139 departments that
had total sales of approximately $103.0 million for the twelve months ended
January 31, 1998 and also added new host store relationships with Mercantile
Stores, Marshall Field's and Parisian. Finlay financed the Diamond Park
Acquisition with borrowings under the Revolving Credit Agreement.
9
<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 3, May 2,
1997 1998
------------- -------------
<S> <C> <C>
Sales....................................................... 100.0% 100.0%
Cost of sales............................................... 48.8 48.5
------------- -------------
Gross margin............................................ 51.2 51.5
Selling, general and administrative expenses................ 48.4 47.8
Depreciation and amortization............................... 2.1 2.4
------------- -------------
Income (loss) from operations........................... 0.7 1.3
Interest expense, net....................................... 5.7 5.6
------------- -------------
Income (loss) before income taxes....................... (5.0) (4.3)
Provision (credit) for income taxes......................... (1.9) (1.7)
------------- -------------
Net income (loss)....................................... (3.1)% (2.6)%
============= =============
</TABLE>
Thirteen Weeks Ended May 2, 1998 Compared with Thirteen Weeks Ended May 3, 1997
Sales. Sales for the thirteen weeks ended May 2, 1998 increased $26.4
million, or 19.6%, over the comparable period in 1997. Comparable department
sales (departments open for the same months during comparable periods) increased
3.4%. Management attributes this increase in comparable department sales to the
following Company initiatives: (i) emphasizing its "Key Item" and "Best Value"
merchandising programs, which provide a targeted assortment of items at
competitive prices; (ii) increasing focus on holiday and event-driven promotions
as well as host store marketing programs; (iii) positioning the Company's
departments as a "destination location" for fine jewelry; and (iv) continuing
project PRISM (Promptly Reduce Inefficiencies and Sales Multiply), a program
designed to allow Finlay's sales associates more time for customer sales and
service. Sales from the operation of net new departments (departments not
included in comparable department sales) contributed $21.8 million, which
included $21.0 million from the Diamond Park departments. During the thirteen
weeks ended May 2, 1998, Finlay opened 14 departments and closed 22 departments.
The openings were all within existing store groups. The closings included all
five departments in Dillard's and all seven departments in Debenhams, with the
remaining 10 departments closed within existing store groups.
10
<PAGE>
Gross margin. Gross margin for the period increased by $14.0 million,
primarily as a result of the sales increase and, as a percentage of sales, gross
margin increased by 0.3%.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") increased $11.8 million, or 18.1%, due
primarily to payroll expense 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 1997 period. As a percentage
of sales, SG&A decreased by 0.6%, as a result of the leveraging of these
expenses.
Depreciation and amortization. Depreciation and amortization increased by
$1.0 million, 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, including the Diamond Park departments and the renovation of
existing departments.
Interest expense, net. Interest expense increased by $1.3 million
reflecting an increase in average borrowings ($330.0 million for the period in
1998 compared to $294.0 million for the comparable period in 1997) primarily as
a result of additional indebtedness outstanding relating to the Senior
Debentures and the Senior Notes and an increase in the outstanding balance of
the Company's Old Debentures due to the accretion of interest. The increase in
average borrowings was partially offset by the repayment of indebtedness
outstanding under the Revolving Credit Agreement using the net proceeds to the
Company from the Equity Offering and the sale of the Senior Debentures and the
Senior Notes and by a lower weighted average interest rate (10.1% for the 1998
period compared to 10.3% for the comparable period in 1997). In addition,
interest expense, net was reduced by $0.3 for interest income relating to the
Note Receivable Repayment.
Provision (credit) for income taxes. The income tax provision for the 1998
and 1997 periods reflects effective tax rates of 40.5% and 41.5%, respectively.
Net income (loss). The net loss for the 1998 and 1997 periods was $4.2
million as a result of the factors discussed above.
Liquidity and Capital Resources
Finlay's primary capital requirements are 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 3, 1997 and May 2, 1998,
capital expenditures totaled $3.4 million and $3.5 million, respectively. For
1997, capital expenditures totaled $19.3 million, which included construction
costs related to the Company's distribution and warehouse facility, and in 1996
totaled $17.5 million. Total capital expenditures for 1998 are estimated to be
approximately $15.0 million. Although capital expenditures are limited by the
terms of the Revolving Credit Agreement, to date this limitation has not
precluded the Company from satisfying its capital expenditure requirements.
Finlay's operations substantially preclude customer 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 $132.1 million at May 2,
1998, an increase of $23.7 million from January 31, 1998. The increase resulted
primarily from the net proceeds to the Company
11
<PAGE>
from the Equity Offering and the sale of the Senior Debentures and the Senior
Notes, partially offset by the use of such proceeds to repay indebtedness
outstanding under the Revolving Credit Agreement, the reclassification of the
Old Debentures and Old Notes to Current portion of long-term debt as a result of
their redemption on May 26, 1998, the impact of the interim net loss exclusive
of depreciation and amortization and capital expenditures. Based on the seasonal
nature of Finlay's business, working capital requirements and therefore
borrowings under the Revolving Credit Agreement 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 Agreement provides Finlay
with a line of credit of up to $275.0 million to finance seasonal cash and other
working capital needs. Amounts outstanding under the Revolving Credit Agreement
presently bear interest at a rate equal to, at Finlay's option, (i) the Index
Rate (as defined in the Revolving Credit Agreement) plus 0.5% or (ii) adjusted
LIBOR plus 1.5%. Commencing in late 1998, amounts outstanding under the
Revolving Credit Agreement will bear interest at a rate equal to, at Finlay's
option, (i) the Index Rate plus a margin ranging from zero to 1.0% or (ii)
adjusted LIBOR plus a margin ranging from 1.0% to 2.0%, in each case depending
on the financial performance of the Company.
In each year, Finlay is required to reduce the outstanding revolving credit
balance and letter of credit balance under the Revolving Credit Agreement to
$50.0 million or less and $20.0 million or less, respectively, for a 30
consecutive day period (the "Balance Reduction Requirement"). In addition, the
indenture relating to Finlay Jewelry's Notes and the Debenture Indenture require
Finlay to reduce the balance under the Revolving Credit Agreement in each year
to $10.0 million or less for a specified 25 consecutive day period; the
indentures relating to the Senior Debentures and the Senior Notes, however, do
not have a balance reduction requirement. Borrowings under the Revolving Credit
Agreement at May 2, 1998 and January 31, 1998 were zero compared to $101.2
million at May 3, 1997. The average amounts outstanding under the Revolving
Credit Agreement were $80.7 million and $90.3 million for the thirteen weeks
ended May 3, 1997 and May 2, 1998, respectively. The maximum amount outstanding
for the thirteen weeks ended May 2, 1998 was $122.7 million.
Finlay does not expect that significant additional working capital will be
required with respect to the operation of the Diamond Park departments because
Finlay purchased the inventory of those Diamond Park departments which it
acquired. On a going-forward basis, inventory purchases for the Diamond Park
departments will be financed in part by trade payables combined with an
increased utilization of consignment inventory compared to the amount of
consignment merchandise on hand at the time of the Diamond Park Acquisition. As
such, management believes that future working capital requirements for the
Diamond Park departments may be reduced as compared to the amount of working
capital required at the time of the Diamond Park Acquisition.
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 1997, Finlay had an average
balance of consignment merchandise of $216.5 million from over 200 vendors as
compared to an average balance of $201.8 million in 1996. As of May 2, 1998,
$245.9 million of consignment merchandise was on hand as compared to $219.8
million at January 31, 1998 and $220.2 million at May 3, 1997.
12
<PAGE>
A substantial amount of Finlay's operating cash flow has been used or will
be required to pay, directly or indirectly, interest with respect to the Old
Debentures and the Old Notes and amounts due under the Revolving Credit
Agreement, including the payments required pursuant to the Balance Reduction
Requirement and, as a result of the completion of the Equity Offering and
Refinancing, the Senior Debentures and the Senior Notes. As of May 2, 1998,
Finlay's outstanding borrowings were $409.5 million, which included a $49.5
million balance under the Old Debentures and a $135.0 million balance under the
Old Notes and, after giving effect to the Refinancing, a $75.0 million balance
under the Senior Debentures and a $150.0 million balance under the Senior Notes.
On May 1, 1998, the Company prepaid in accordance with the Old Debenture
Indenture, all of the $39.0 million of accreted interest on the Old Debentures
as of such date. The Company exercised its option to prepay all such accreted
interest to reduce outstanding indebtedness and to take advantage of the
resulting tax benefits relating to the deductibility of such prepayment in 1998.
In addition, on May 26, 1998, the Company redeemed the outstanding principal
amounts, including associated premiums, of the Old Debentures and the Old Notes.
Finlay funded the prepayment and the redemptions using the proceeds from the
sale of the Senior Debentures, the Equity Offering and the sale of the Senior
Notes, together with other available funds. In connection with the redemption of
the Old Debentures and the Old Notes, the Company expects to record, in the
second quarter, a pre-tax non-recurring charge of approximately $12.2 million,
including $7.1 million for redemption premiums and approximately $3.9 million to
write off deferred financing and debt discount costs associated with the Old
Debentures and the Old Notes.
Finlay Jewelry is party to the Gold Consignment Agreement, which expires on
December 31, 2001. The Gold Consignment Agreement enables Finlay Jewelry to
receive 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) $32.0 million worth of
gold, subject to a formula as prescribed by the Gold Consignment Agreement. At
May 2, 1998, amounts outstanding under the Gold Consignment Agreement totaled
44,592 fine troy ounces, valued at approximately $13.9 million. The average
amount outstanding under the Gold Consignment Agreement was $14.3 million in
1997.
Although Finlay implemented financial and distribution software during 1997
that is Year 2000 compliant, Finlay has not yet fully assessed the impact of the
Year 2000 issue on its other computer systems and its operations, including the
development of cost estimates and the extent of computer programming changes
required to address this issue. Any disruption of its operations, whether caused
by the Company's computer systems or those of any of its host stores or vendors,
could have a material adverse effect on the Company's financial position or
results of operations. Although final cost estimates have yet to be determined,
it is anticipated that these Year 2000 costs will result in an increase in
Finlay's expenses during 1998 and 1999. In addition, there can be no assurance
that the Company will not experience significant cost overruns or delays in
connection with upgrading software or the programming of changes required to
address this issue.
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, 1997 (the Company's tax year
end), a NOL for tax purposes of approximately $12.0 million which is subject to
an annual limit of approximately $2.0 million per year. For financial reporting
purposes, no NOL exists as of January 31, 1998. An additional change in
ownership within the meaning of Section 382
13
<PAGE>
of the Code has occurred as a result of the sale of shares of Common Stock of
the Company in 1997. However, there are no additional restrictions upon the
Company's ability to utilize its NOLs or other carryforwards as a result of such
ownership change.
From time to time, Finlay enters into futures contracts, such as options or
forwards, based upon the anticipated sales of gold product in order to hedge
against the risk arising from its payment arrangements. Changes in the market
value of futures contracts are accounted for as an addition to or reduction from
the inventory cost. For the year ended January 31, 1998 and the thirteen weeks
ended May 2, 1998, the gain or loss on open futures contracts was not material.
The Company did not have any open positions in futures contracts for gold at
January 31, 1998. There can be no assurance that these hedging techniques will
be successful or that hedging transactions will not adversely affect the
Company's results of operations or financial position.
On March 19, 1998, Liberty House, one of the host stores in which Finlay
operates, filed a voluntary petition in bankruptcy under Title 11 of the United
States Code (the "Bankruptcy Code"). The Company is currently receiving weekly
payments towards the outstanding balance of approximately $2.0 million that was
due to the Company prior to the filing of the bankruptcy petition. Finlay
believes that the bankruptcy of Liberty House will not have a material adverse
effect on Finlay's financial position or results of operations.
Finlay believes that, based upon current operations, anticipated growth,
and availability under the Revolving Credit Agreement, 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.
Currently, Finlay Jewelry's principal financing arrangements restrict annual
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 $8.6 million and $9.6 million for the thirteen weeks ended May
3, 1997 and May 2, 1998, respectively.
Seasonality
Finlay's business is highly seasonal, with a significant portion of its
sales and income from operations generated 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 sales and 82% of its income from operations
(excluding nonrecurring charges) for 1995, 1996 and 1997. Finlay has typically
experienced net losses in the first three quarters of its fiscal year. During
these periods, working capital requirements have been funded by borrowings under
the Revolving Credit Agreement. 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.
Inflation
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
14
<PAGE>
Special Note Regarding 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 Securites 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, those discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations", as well as trends in the general
economy, competition in the retail jewelry business, the seasonality of the
retail jewelry business, the Company's ability to increase comparable department
sales and to open new departments, the Company's dependence on certain host
store relationships due to the concentration of sales generated by such host
stores, the availability to the Company of alternate sources of merchandise
supply in the case of an abrupt loss of any significant supplier, the Company's
ability to continue to obtain substantial amounts of merchandise on consignment,
the Company's dependence on key officers, the Company's ability to integrate
Diamond Park (and any future acquisitions) into its existing business, the
Company's high degree of leverage and the availability to the Company 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 rely 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 Commission
pursuant to the Exchange Act.
15
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
2 Not applicable.
3 Not applicable.
4.1 Indenture between Finlay Enterprises, Inc. and Marine Midland Bank, as
Trustee, dated as of April 24, 1998 (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated April
24, 1998, as filed with the Commission on May 8, 1998).
4.2 Indenture between Finlay Fine Jewelry Corporation and Marine Midland
Bank, as Trustee, dated as of April 24, 1998 (incorporated by
reference to Exhibit 4.2 to the Company's Current Report on Form 8-K
dated April 24, 1998, as filed with the Commission on May 8, 1998).
10.1 Amendment No. 3 dated as of April 24, 1998 to the Amended and Restated
Credit Agreement dated as of September 11, 1997, as amended, by and
among General Electric Capital Corporation, individually and as agent,
certain other lenders and financial institutions parties thereto,
Finlay Fine Jewelry Corporation and Finlay Enterprises, Inc.
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K dated April 24, 1998, as filed with the Commission
on May 8, 1998).
10.2 Amendment No. 6 dated as of April 24, 1998 to Gold Consignment
Agreement dated as of June 15, 1995, as amended, between Finlay Fine
Jewelry Corporation and Rhode Island Hospital Trust National Bank
(incorporated by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K dated April 24, 1998, as filed with the Commission
on May 8, 1998).
11 Statement re: computation of earnings per share (not required because
the relevant computation can be clearly determined from material
contained in the financial statements).
15 Not applicable.
18 Not applicable.
19 Not applicable.
22 Not applicable.
23 Not applicable.
24 Not applicable.
16
<PAGE>
27 Financial Data Schedule.
99 Not applicable.
B. Reports on Form 8-K
On May 8, 1998, the Company filed with the Securities and Exchange
Commission (the "Commission") a Current Report on Form 8-K regarding (i) the
sale by the Company of $75.0 million aggregate principal amount of its 9% Senior
Debentures due May 1, 2008; (ii) the concurrent sale (a) by the Company and
certain stockholders of the Company of an aggregate of 1,800,000 shares of
Common Stock of the Company (of which 567,310 shares were sold by the Company
and 1,232,690 shares were sold by the selling stockholders) and (b) by Finlay
Jewelry of $150.0 million aggregate principal amount of its 8-3/8% Senior Notes
due May 1, 2008; (iii) the amendment of the Revolving Credit Agreement to
increase the line of credit thereunder from $225.0 million to $275.0 million and
to make certain other changes; and (iv) the amendment of the Gold Consignment
Agreement to renew the agreement through December 31, 2001, to allow Finlay
Jewelry to obtain up to the lesser of (x) 85,000 fine troy ounces or (y) $32.0
million worth of gold, and to make certain other modifications.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINLAY ENTERPRISES, INC.
Date: June 12, 1998 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)
18
<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-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> MAY-02-1998
<CASH> 80,395
<SECURITIES> 0
<RECEIVABLES> 38,150
<ALLOWANCES> 0
<INVENTORY> 300,484
<CURRENT-ASSETS> 437,923
<PP&E> 98,657
<DEPRECIATION> 30,825
<TOTAL-ASSETS> 624,697
<CURRENT-LIABILITIES> 305,851
<BONDS> 225,000
0
0
<COMMON> 104
<OTHER-SE> 84,873
<TOTAL-LIABILITY-AND-EQUITY> 624,697
<SALES> 160,992
<TOTAL-REVENUES> 160,992
<CGS> 78,104
<TOTAL-COSTS> 78,104
<OTHER-EXPENSES> 80,742
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,006
<INCOME-PRETAX> (6,860)
<INCOME-TAX> (2,658)
<INCOME-CONTINUING> (4,202)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,202)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
