- --------------------------------------------------------------------------------
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 1, 1999
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 11, 1999, there were 10,410,353 shares of common stock, par value
$.01 per share, of the Registrant outstanding.
<PAGE>
FINLAY ENTERPRISES, INC
FORM 10-Q
QUARTERLY PERIOD ENDED MAY 1, 1999
INDEX
PAGE(S)
-------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the thirteen weeks
ended May 2, 1998 and May 1, 1999.....................................1
Consolidated Balance Sheets as of January 30, 1999 and May 1, 1999....2
Consolidated Statements of Changes in Stockholders' Equity for the
year ended January 30, 1999 and thirteen weeks ended May 1, 1999......3
Consolidated Statements of Cash Flows for the thirteen weeks
ended May 2, 1998 and May 1, 1999.....................................4
Notes to Consolidated Financial Statements............................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................16
SIGNATURES....................................................................17
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------------
May 2, May 1,
1998 1999
------------- -------------
<S> <C> <C>
Sales.................................................................... $ 160,992 $ 168,379
Cost of sales............................................................ 78,104 81,919
------------- -------------
Gross margin......................................................... 82,888 86,460
Selling, general and administrative expenses............................. 76,948 79,904
Depreciation and amortization............................................ 3,794 4,200
------------- -------------
Income (loss) from operations........................................ 2,146 2,356
Interest expense, net.................................................... 9,006 7,006
------------- -------------
Income (loss) before income taxes.................................... (6,860) (4,650)
Provision (benefit) for income taxes..................................... (2,658) (1,562)
------------- -------------
Net income (loss).................................................... $ (4,202) $ (3,088)
============= =============
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share.................................... $ (0.43) $ (0.30)
============= =============
Diluted net income (loss) per share.................................. $ (0.43) $ (0.30)
============= =============
Weighted average shares and share equivalents outstanding................ 9,720,979 10,406,738
============= =============
</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 30, May 1,
1999 1999
------------- -------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents.................................................... $ 17,328 $ 3,851
Accounts receivable - department stores...................................... 19,147 38,072
Other receivables............................................................ 23,353 23,421
Merchandise inventories...................................................... 295,265 303,259
Prepaid expenses and other................................................... 2,366 3,436
------------- -------------
Total current assets...................................................... 357,459 372,039
------------- -------------
Fixed assets
Equipment, fixtures and leasehold improvements............................... 106,735 109,567
Less - accumulated depreciation and amortization............................. 36,620 39,078
------------- -------------
Fixed assets, net......................................................... 70,115 70,489
------------- -------------
Deferred charges and other assets.............................................. 15,871 17,540
Goodwill....................................................................... 100,547 99,603
------------- -------------
Total assets.............................................................. $ 543,992 $ 559,671
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable................................................................ $ - $ 79,285
Accounts payable - trade..................................................... 160,434 93,096
Accrued liabilities:
Accrued salaries and benefits............................................. 15,760 14,437
Accrued miscellaneous taxes............................................... 4,704 5,016
Accrued insurance......................................................... 755 1,836
Accrued interest.......................................................... 5,135 10,162
Accrued management transition and consulting.............................. 676 561
Other..................................................................... 15,409 16,203
Income taxes payable......................................................... 5,076 8,598
Deferred income taxes........................................................ 2,173 2,180
------------- -------------
Total current liabilities................................................. 210,122 231,374
Long-term debt................................................................. 225,000 225,000
Other non-current liabilities.................................................. 9,059 9,404
------------- -------------
Total liabilities......................................................... 444,181 465,778
------------- -------------
Stockholders' equity
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 10,403,353 and 10,410,353 shares, respectively..... 104 104
Additional paid-in capital .................................................. 77,057 77,115
Retained earnings (deficit).................................................. 27,439 24,351
Foreign currency translation adjustment...................................... (4,789) (7,677)
------------- -------------
Total stockholders' equity................................................ 99,811 93,893
------------- -------------
Total liabilities and stockholders' equity................................ $ 543,992 $ 559,671
============= =============
</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 Note Foreign
------------------ Additional Receivable Retained Currency Total
Number Paid-in from Earnings Translation Stockholders' Comprehensive
of shares Amount Capital Stock Sale (Deficit) Adjustment Equity Income
---------- ------ ---------- ----------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1998........ 9,779,050 $ 98 $ 61,745 $ (1,001) $ 18,340 $ (6,843) $ 72,339
Net income (loss).............. - - - - 9,099 - 9,099 $ 9,099
Foreign currency translation
adjustment.................. - - - - - 2,054 2,054 2,054
------------
Comprehensive income (loss).... - - - - - - - $ 11,153
Issuance of Common Stock....... 567,310 6 13,753 - - - 13,759 ============
Note receivable repayment...... - - - 1,001 - - 1,001
Exercise of stock options...... 56,993 - 1,559 - - - 1,559
---------- ------ ---------- ----------- ---------- ------------ -------------
Balance, January 30, 1999........ 10,403,353 104 77,057 - 27,439 (4,789) 99,811
Net income (loss).............. - - - - (3,088) - (3,088) $ (3,088)
Foreign currency translation
adjustment.................. - - - - - (2,888) (2,888) (2,888)
------------
Comprehensive income (loss).... - - - - - - - $ (5,974)
Exercise of stock options...... 7,000 - 58 - - - 58 ============
---------- ------ ---------- ----------- ---------- ------------ -------------
Balance, May 1, 1999 (unaudited). 10,410,353 $ 104 $ 77,115 $ - $ 24,351 $ (7,677) $ 93,893
========== ====== ========== =========== ========== ============ =============
</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 2, May 1,
1998 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss).............................................................. $ (4,202) $ (3,088)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.................................................. 4,122 4,505
Imputed interest on debentures................................................. 2,527 -
Other, net..................................................................... 44 556
Changes in operating assets and liabilities:
Increase in accounts and other receivables.................................. (24,811) (19,301)
Increase in merchandise inventories......................................... (20,023) (9,962)
Increase in prepaid expenses and other...................................... (2,638) (1,110)
Decrease in accounts payable and accrued liabilities........................ (80,068) (58,124)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES.................................... (125,049) (86,524)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (3,457) (3,877)
Deferred charges and other..................................................... (769) (2,281)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES.................................... (4,226) (6,158)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 208,417 185,976
Principal payments on revolving credit facility................................ (208,417) (106,691)
Prepayment of Old 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) -
Stock options exercised and other, net......................................... 1,135 57
------------- -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............................. 196,060 79,342
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. 22 (137)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ 66,807 (13,477)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 13,588 17,328
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 80,395 $ 3,851
============= =============
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 9,568 $ 1,674
Income taxes paid.............................................................. 914 (3,269)
</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 1, 1999, and the results of operations and cash flows for the thirteen
weeks ended May 2, 1998 and May 1, 1999. 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 30, 1999 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 30, 1999
("Form 10-K") previously filed with the Commission.
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1996, 1997, 1998 and 1999 relate to the fiscal years ending February 1, 1997,
January 31, 1998, January 30, 1999 and January 29, 2000, respectively. Each of
the fiscal years includes fifty-two weeks.
Net income (loss) per share has been computed in accordance with the
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". 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
following is an analysis of the differences between basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-------------------------------------------------------------------
May 2, 1998 May 1, 1999
------------------------------- --------------------------------
No. of Per No. of Per
Shares Share Shares Share
--------------- ------------ --------------- -------------
Weighted average shares
<S> <C> <C> <C> <C>
outstanding.................... 9,720,979 $ (0.43) 10,406,738 $ (0.30)
Dilutive stock options........... - - - -
--------------- ------------ --------------- -------------
Weighted average shares
and share equivalents.......... 9,720,979 $ (0.43) 10,406,738 $ (0.30)
=============== ============ =============== =============
</TABLE>
In 1998, Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" was issued. As such,
Finlay is required to capitalize software purchased from third party software
vendors, external consulting costs incurred in the development and enhancement
of management information systems and certain internal payroll costs for
employees
5
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION (continued)
directly associated with the development of software. The Company has adopted
this statement in 1999, and does not expect it to have a material impact on its
consolidated financial statements.
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. Over the past three fiscal years, the fourth quarter
accounted for an average of 42% of Finlay's sales due to the seasonality of the
retail industry. Approximately 68% of Finlay's domestic sales in 1998 were from
operations in The May Department Stores Company ("May") and departments operated
in store groups owned by Federated Departments Stores, of which 47% represents
Finlay's domestic sales in May.
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
(unaudited)
January 30, May 1,
1999 1999
-------------- -------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
<S> <C> <C>
(specific identification basis)............................... $ 300,777 $ 308,862
Less: Excess of specific identification cost over LIFO
inventory value............................................... 5,512 5,603
-------------- -------------
$ 295,265 $ 303,259
============== =============
</TABLE>
The LIFO method had the effect of increasing the loss before income taxes
for the thirteen weeks ended May 2, 1998 and May 1, 1999 by $93,000 and $92,000,
respectively. Finlay determines its LIFO inventory value by utilizing selected
producer price indices published for jewelry and watches by the Bureau of Labor
Statistics.
Approximately $283,793,000 and $305,015,000 at January 30, 1999 and May 1,
1999, 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"), 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 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 the
gold consignor. Finlay Jewelry can obtain, pursuant to the Gold Consignment
Agreement, up to the lesser of (i) 95,000 fine troy ounces or (ii) $32,000,000
worth of gold, subject to a formula as prescribed by the Gold Consignment
Agreement. At May 1, 1999, amounts outstanding under the Gold Consignment
Agreement totaled 91,202 fine troy ounces, valued at approximately $26.1
million. For financial statement purposes, the consigned gold is
6
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MERCHANDISE INVENTORIES (continued)
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 to the gold consignor 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 2,
1998 and May 1, 1999, 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 30, 1999 or May 1, 1999.
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. The department operating
leases expire on various dates through 2003 and the office space and equipment
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.
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, although the depreciation schedule
provided for in the lease may differ from that used for financial reporting
purposes. 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:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------------
May 2, May 1,
1998 1999
------------- -------------
(in thousands)
<S> <C> <C>
Minimum fees.............. $ 4,568 $ 4,163
Contingent fees........... 21,398 23,433
------------- -------------
Total................... $ 25,966 $ 27,596
============= =============
</TABLE>
7
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - 1998 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 "1998 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 1998 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 8-3/8% Senior
Notes due May 1, 2008 (the "Senior Notes"), respectively. In addition, on April
24, 1998, Finlay's 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 12% Senior Discount Debentures due
2005 (the "Old Debentures") as of such date.
On May 26, 1998, the net proceeds to the Company from the 1998 Offering,
the sale of the Senior Debentures, together with other available funds, 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 10-5/8% Senior Notes due 2003 (the "Old
Notes"), including associated premiums. The above transactions, excluding the
1998 Offering, are referred to herein as the "Refinancing". The Company
recorded, in the second quarter of 1998, a pre-tax extraordinary charge of
approximately $12.2 million, including $7.1 million for redemption premiums and
$3.9 million to write off deferred financing and debt discount costs associated
with the Old Debentures and the Old Notes.
8
<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:
Statements of Operations Data
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-----------------------------
May 2, May 1,
1998 1999
------------ ------------
<S> <C> <C>
Sales...................................................... 100.0% 100.0%
Cost of sales.............................................. 48.5 48.7
------------ ------------
Gross margin........................................... 51.5 51.3
Selling, general and administrative expenses............... 47.8 47.4
Depreciation and amortization.............................. 2.4 2.5
------------ ------------
Income (loss) from operations.......................... 1.3 1.4
Interest expense, net...................................... 5.6 4.2
------------ ------------
Income (loss) before income taxes ..................... (4.3) (2.8)
Provision (benefit) for income taxes....................... (1.7) (1.0)
------------ ------------
Net income (loss)...................................... (2.6)% (1.8)%
============ ============
</TABLE>
Thirteen Weeks Ended May 1, 1999 Compared with Thirteen Weeks Ended May 2, 1998
Sales. Sales for the thirteen weeks ended May 1, 1999 increased $7.4
million, or 4.6%, over the comparable period in 1998. Consolidated comparable
department sales (departments open for the same months during comparable
periods) increased 6.8% and domestic comparable department sales increased 8.9%.
Management attributes this increase in the comparable department sales to the
following 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 decreased by $3.6 million as a result of the net effect of new
store openings offset by store closings, particularly relating to Dillard's
purchase of the Mercantile Stores and the change to an everyday low price
strategy, as well as the timing of such department openings and closings.
In the second quarter of 1998, Sonab began to experience lower sales trends
due to the transition from a promotional pricing strategy to an everyday low
price strategy. This change was made as a result of Sonab reassessing its
pricing policy following certain local French court decisions. The adverse
impact of such change continued through May 1, 1999 and is expected to continue
at least through the third quarter of 1999.
During the thirteen weeks ended May 1, 1999, Finlay opened 23 departments
and closed 38 departments. The openings were all within existing store groups.
The closings included 14 departments
9
<PAGE>
in Crowley's and Steinbach due to the bankruptcy of the host store and 11
smaller volume departments in Monoprix in France, with the remaining 13
departments closed within existing store groups.
Gross margin. Gross margin for the period increased by $3.6 million,
primarily as a result of the sales increase. As a percentage of sales, gross
margin decreased by 0.2%, which is primarily attributed to a decrease in
purchase discounts and a softening of margins in France. The higher purchase
discounts in 1998 was a result of the temporary excess funds from the
Refinancing.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") increased $3.0 million, or 3.8%, due primarily
to payroll expense and lease fees associated with the increase in the Company's
domestic sales and expenses relating to the Company's year 2000 remediation
project, which totaled approximately $0.5 million. SG&A as a percentage of sales
decreased by 0.4% as a result of the leveraging of these expenses offset by the
negative impact on SG&A as a result of the slowdown of sales in France.
Depreciation and amortization. Depreciation and amortization increased by
$0.4 million, reflecting an increase in capital expenditures and capitalized
software costs 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 and the renovation of existing departments.
Interest expense, net. Interest expense decreased by $2.0 million
reflecting a lower weighted average interest rate (8.3% for the 1999 period
compared to 10.1% for the comparable period in 1998) relating to the lower
interest rates on the Senior Debentures and the Senior Notes as compared to the
Old Debentures and the Old Notes, as well as a decrease in average borrowings
($305.0 million for the period in 1999 compared to $330.0 million for the
comparable period in 1998).
Provision (benefit) for income taxes. The income tax provision for the 1999
and 1998 periods reflects an effective tax rate of 40.5%.
Net income (loss). The net loss of $3.1 million for the 1999 period was
$1.1 million lower than the net loss of $4.2 million for the comparable period
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, renovating
existing departments and information technology investments. For the thirteen
weeks ended May 2, 1998 and May 1, 1999, capital expenditures totaled $3.5
million and $3.9 million, respectively. For 1998, capital expenditures totaled
$14.9 million and for 1999 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 49% 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 $140.7 million at May 1,
1999, a decrease of $6.7 million from January 30, 1999. The decrease resulted
primarily from the impact of the interim net loss exclusive of depreciation and
amortization, capital expenditures, an increase in deferred
10
<PAGE>
charges and the movement in the foreign exchange rate with France. 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, November and December 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 working
capital needs. Amounts outstanding under the Revolving Credit Agreement bear
interest at a rate equal to, at Finlay's option, (i) the Index Rate (as defined
in the Revolving Credit Agreement) 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"). Borrowings under
the Revolving Credit Agreement at May 1, 1999 were $79.3 million, compared to a
zero balance at January 30, 1999 and May 2, 1998. There were no borrowings at
May 2, 1998 due to the temporary paydown of the Revolving Credit Facility with
the excess funds from the Refinancing, as a result of certain call requirements
on the Old Debentures and the Old Notes. The average amounts outstanding under
the Revolving Credit Agreement were $90.3 million and $80.0 million for the
thirteen weeks ended May 2, 1998 and May 1, 1999, respectively. The maximum
amount outstanding for the thirteen weeks ended May 1, 1999 was $103.5 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 1998, Finlay had an average
balance of consignment merchandise of $268.5 million from approximately 300
vendors as compared to an average balance of $216.5 million in 1997. As of May
1, 1999, $305.0 million of consignment merchandise was on hand as compared to
$283.8 million at January 30, 1999 and $245.9 million at May 2, 1998.
A substantial amount of Finlay's operating cash flow has been used or will
be required to pay interest with respect to the Senior Debentures, the Senior
Notes and amounts due under the Revolving Credit Agreement, including the
payments required pursuant to the Balance Reduction Requirement. As of May 1,
1999, Finlay's outstanding borrowings were $304.3 million, which included a
$75.0 million balance under the Senior Debentures, a $150.0 million balance
under the Senior Notes and a $79.3 million balance under the Revolving Credit
Facility. On May 26, 1998, Finlay 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 1998 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 recorded, in the second quarter of
1998, a pre-tax nonrecurring charge of approximately $12.2 million, including
$7.1 million for redemption premiums and $3.9 million to write off deferred
financing and debt discount costs associated with the Old Debentures and the Old
Notes.
11
<PAGE>
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) 95,000 fine troy ounces or (ii) $32.0 million worth of
gold, subject to a formula as prescribed by the Gold Consignment Agreement. At
May 1, 1999, amounts outstanding under the Gold Consignment Agreement totaled
91,202 fine troy ounces, valued at approximately $26.1 million. The average
amount outstanding under the Gold Consignment Agreement was $15.6 million in
1998.
During 1998, the Company began several information technology initiatives,
including the design and development of a new merchandising system and the
upgrade of point-of-sale systems and related hardware in the majority of
Finlay's departments. These projects will serve to support future growth of the
Company as well as provide improved analysis and reporting capabilities and are
expected to be completed in mid-2000. The cost associated with these projects is
estimated to be $11.0 million for software and implementation costs, to be
included in Deferred charges and other assets, and approximately $3.0 million
for hardware and related equipment, to be included as a component of the
Company's capital expenditures and reflected in Fixed assets. At May 1, 1999, a
total of approximately $5.1 million has been expended and included in Deferred
charges and other assets.
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code")
restricts utilization of net operating loss ("NOLs") carryforwards after an
ownership change exceeding 50%. As a result 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, 1998 (the Company's tax year
end), a NOL for tax purposes of approximately $11.5 million which is subject to
an annual limit of approximately $2.0 million per year. However, for financial
reporting purposes, no NOL exists as of January 30, 1999.
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 30, 1999, 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 30, 1999. 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.
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 and also allow distributions to the
Company to enable it to make interest payments on the Senior Debentures. The
amounts required to satisfy the aggregate of Finlay Jewelry's interest expense
and required amortization payments totaled $9.6 million and $1.7 million for the
thirteen weeks ended May 2, 1998 and May 1, 1999, respectively.
12
<PAGE>
As a result of the closing date for the first quarter of 1999 under the retail
calendar, the semiannual interest payment with respect to the Senior Debentures
and the Senior Notes was not paid until the second quarter, whereas the first
quarter of 1998 included the interest payments.
Year 2000
Many of Finlay's existing computer systems, software products, other
systems using embedded chips ("non-information technology systems") and third
party systems, accept only two entries in the date field to distinguish the
year. Beginning in the year 2000, these date fields will need to accept four
digit entries, or properly handle two digit entries, to distinguish 21st century
dates from 20th century dates. As a result, Finlay's date critical functions may
be adversely affected unless the computer systems and software products of both
Finlay and significant third parties are or become year 2000 compliant.
A comprehensive plan is being executed to ensure that all systems critical
to the operation of the Company are year 2000 compliant. The plan is structured
into five primary phases: identification, assessment, remediation, testing and
implementation. The Company has completed the identification and assessment
phases of all critical components and has substantially completed the
remediation phase. The Company expects that the testing and implementation
phases of all internal systems, including its non-information technology
systems, will be completed by the end of August 1999.
Finlay is using, and will continue to use, a combination of internal and
external resources to execute its year 2000 project plan. The Company has
estimated that the costs related to its year 2000 efforts will total
approximately $4.0 million, of which a total of approximately $2.4 million has
been spent through May 1, 1999 ($1.9 million in fiscal 1998 and $0.5 million in
the first quarter of fiscal 1999). Finlay will incur the balance of these costs
during 1999 and will fund such costs through operating cash flows.
During 1998, the Company began formal communications with all of its host
stores, vendors and other third parties in an effort to determine the extent to
which the Company may be vulnerable to the failure of their systems and to
obtain year 2000 compliance certification. To date, none of the third parties
that have responded have raised any year 2000 issues which the Company believes
would have a material adverse effect on Finlay. The Company has continued this
communication process during 1999.
Management expects that with the successful implementation of the year 2000
project, the year 2000 issue will not pose significant operational problems.
There can be no assurance, however, that Finlay's systems and software will be
rendered year 2000 compliant in a timely manner, or that Finlay will not incur
significant unforeseen additional expenses to ensure such compliance. The
consequences of a disruption of the Company's operations, whether caused by the
Company's internal systems or those of any significant third party, could have a
material adverse effect on the Company's financial position or results of
operations. The likely worst case scenario may be an inability to distribute
merchandise to the Company's departments and to process its daily business for
some period of time. The lost revenues, if any, resulting from a worst case
scenario would depend on the time period in which the failure goes uncorrected
and the difficulty to remediate such failure.
Management recognizes the importance of developing a contingency plan in
the event of a year 2000 failure, the development of which is in progress and is
expected to be completed by the end of the third quarter of 1999. The Company is
currently gathering data in an effort to assess the potential effects on the
Company's mission critical functions of a failure of the Company's year 2000
plan to be fully effective and, to the extent deemed appropriate, to address
such effects. In addition, progress reports on
13
<PAGE>
the year 2000 project are presented regularly to senior management and the
Company's Board of Directors.
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
for 1996, 1997 and 1998. 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.
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 1993 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, those discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations", as well as trends in
the general economy in the United States and France, 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 estimate of the cost to address year 2000 compliance issues and the
impact on the Company's operations of a year 2000 failure, 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 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.
14
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk primarily through the interest rate
on its borrowings under the Revolving Credit Agreement, which has a variable
interest rate. In seeking to minimize the risks from interest rate fluctuations,
the Company manages exposures through its regular operating and financing
activities. In addition, the majority of the Company's borrowings are under
fixed rate arrangements, and as such, there was no material market risk exposure
to the Company's financial position, results of operations or cash flows as of
January 30, 1999 or May 1, 1999.
15
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
2 Not applicable.
3 Not applicable.
4 Not applicable.
10 Not applicable.
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.
27 Financial Data Schedule.
99 Not applicable.
B. Reports on Form 8-K
None
16
<PAGE>
SIGNATURES
Pursuant to the requirement 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.
Date: June 11, 1999 FINLAY ENTERPRISES, INC.
By: /s/ Barry D. Scheckner
--------------------------------------
Barry D. Scheckner, Senior Vice
President and Chief Financial Officer
(As both a duly authorized officer of
Registrant and as principal financial
officer of Registrant)
17
<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-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 3,851
<SECURITIES> 0
<RECEIVABLES> 38,072
<ALLOWANCES> 0
<INVENTORY> 303,259
<CURRENT-ASSETS> 372,039
<PP&E> 109,567
<DEPRECIATION> 39,078
<TOTAL-ASSETS> 559,671
<CURRENT-LIABILITIES> 231,374
<BONDS> 225,000
0
0
<COMMON> 104
<OTHER-SE> 93,789
<TOTAL-LIABILITY-AND-EQUITY> 559,671
<SALES> 168,379
<TOTAL-REVENUES> 168,379
<CGS> 81,919
<TOTAL-COSTS> 81,919
<OTHER-EXPENSES> 84,104
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,006
<INCOME-PRETAX> (4,650)
<INCOME-TAX> (1,562)
<INCOME-CONTINUING> (3,088)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,088)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
