- --------------------------------------------------------------------------------
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 July 31, 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 September 10, 1999, there were 10,416,353 shares of common stock, par
value $.01 per share, of the Registrant outstanding.
<PAGE>
FINLAY ENTERPRISES, INC
FORM 10-Q
QUARTERLY PERIOD ENDED JULY 31, 1999
INDEX
PAGE(S)
-------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the thirteen weeks and
twenty-six weeks ended August 1, 1998 and July 31, 1999.............1
Consolidated Balance Sheets as of January 30, 1999
and July 31, 1999...................................................3
Consolidated Statements of Changes in Stockholders' Equity for the
year ended January 30, 1999 and twenty-six weeks ended
July 31, 1999.......................................................4
Consolidated Statements of Cash Flows for the thirteen weeks and
twenty-six weeks ended August 1, 1998 and July 31, 1999.............5
Notes to Consolidated Financial Statements..........................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........19
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................20
Item 6. Exhibits and Reports on Form 8-K...................................20
SIGNATURES....................................................................22
<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
----------------------------------
August 1, July 31,
1998 1999
------------- -------------
<S> <C> <C>
Sales.................................................................... $ 177,366 $ 183,367
Cost of sales............................................................ 87,309 90,438
------------- -------------
Gross margin......................................................... 90,057 92,929
Selling, general and administrative expenses............................. 79,998 81,770
Depreciation and amortization............................................ 3,907 4,276
------------- -------------
Income (loss) from operations........................................ 6,152 6,883
Interest expense, net.................................................... 8,025 7,427
Nonrecurring interest associated with refinancing........................ 655 -
------------- -------------
Income (loss) before income taxes and extraordinary charges.......... (2,528) (544)
Provision (benefit) for income taxes..................................... (811) 99
------------- -------------
Income (loss) before extraordinary charges........................... (1,717) (643)
Extraordinary charges from early extinguishment of debt,
net of income tax benefit of $4,765................................ 7,415 -
------------- -------------
Net income (loss).................................................... $ (9,132) $ (643)
============= =============
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share:
Before extraordinary charges...................................... $ (0.17) $ (0.06)
============= =============
Extraordinary charges from early extinguishment of debt........... $ (0.71) $ -
============= =============
Net income (loss)................................................. $ (0.88) $ (0.06)
============= =============
Diluted net income (loss) per share:
Before extraordinary charges...................................... $ (0.17) $ (0.06)
============= =============
Extraordinary charges from early extinguishment of debt........... $ (0.71) $ -
============= =============
Net income (loss)................................................. $ (0.88) $ (0.06)
============= =============
Weighted average shares and share equivalents outstanding................ 10,393,086 10,412,762
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
------------------------------------
August 1, July 31,
1998 1999
-------------- --------------
<S> <C> <C>
Sales.................................................................... $ 338,358 $ 351,746
Cost of sales............................................................ 165,413 172,357
-------------- --------------
Gross margin......................................................... 172,945 179,389
Selling, general and administrative expenses............................. 156,947 161,674
Depreciation and amortization............................................ 7,701 8,476
-------------- --------------
Income (loss) from operations........................................ 8,297 9,239
Interest expense, net.................................................... 17,030 14,433
Nonrecurring interest associated with refinancing........................ 655 -
-------------- --------------
Income (loss) before income taxes and extraordinary charges.......... (9,388) (5,194)
Provision (benefit) for income taxes..................................... (3,469) (1,463)
-------------- --------------
Income (loss) before extraordinary charges........................... (5,919) (3,731)
Extraordinary charges from early extinguishment of debt,
net of income tax benefit of $4,765................................ 7,415 -
-------------- --------------
Net income (loss).................................................... $ (13,334) $ (3,731)
============== ==============
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share:
Before extraordinary charges...................................... $ (0.59) $ (0.36)
============== ==============
Extraordinary charges from early extinguishment of debt........... $ (0.74) $ -
============== ==============
Net income (loss)................................................. $ (1.33) $ (0.36)
============== ==============
Diluted net income (loss) per share:
Before extraordinary charges...................................... $ (0.59) $ (0.36)
============== ==============
Extraordinary charges from early extinguishment of debt........... $ (0.74) $ -
============== ==============
Net income (loss)................................................. $ (1.33) $ (0.36)
============== ==============
Weighted average shares and share equivalents outstanding................ 10,057,033 10,409,750
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
(unaudited)
January 30, July 31,
1999 1999
------------- -------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents.................................................... $ 17,328 $ 4,640
Accounts receivable - department stores...................................... 19,147 41,534
Other receivables............................................................ 23,353 24,509
Merchandise inventories...................................................... 295,265 293,041
Prepaid expenses and other................................................... 2,366 3,671
------------- -------------
Total current assets...................................................... 357,459 367,395
------------- -------------
Fixed assets
Equipment, fixtures and leasehold improvements............................... 106,735 113,661
Less - accumulated depreciation and amortization............................. 36,620 41,962
------------- -------------
Fixed assets, net......................................................... 70,115 71,699
------------- -------------
Deferred charges and other assets.............................................. 15,871 19,644
Goodwill....................................................................... 100,547 98,672
------------- -------------
Total assets.............................................................. $ 543,992 $ 557,410
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable................................................................ $ - $ 112,937
Accounts payable - trade..................................................... 160,434 61,949
Accrued liabilities:
Accrued salaries and benefits............................................. 15,760 15,505
Accrued miscellaneous taxes............................................... 4,704 4,887
Accrued insurance......................................................... 755 1,658
Accrued interest.......................................................... 5,135 5,380
Accrued management transition and consulting.............................. 676 498
Other..................................................................... 15,409 17,562
Income taxes payable......................................................... 5,076 6,530
Deferred income taxes........................................................ 2,173 2,124
------------- -------------
Total current liabilities................................................. 210,122 229,030
Long-term debt................................................................. 225,000 225,000
Other non-current liabilities.................................................. 9,059 9,748
------------- -------------
Total liabilities......................................................... 444,181 463,778
------------- -------------
Stockholders' equity
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 10,410,353 and 10,414,753 shares, respectively..... 104 104
Additional paid-in capital .................................................. 77,057 77,178
Retained earnings (deficit).................................................. 27,439 23,708
Foreign currency translation adjustment...................................... (4,789) (7,358)
------------- -------------
Total stockholders' equity................................................ 99,811 93,632
------------- -------------
Total liabilities and stockholders' equity................................ $ 543,992 $ 557,410
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock 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).............. - - - - (3,731) - (3,731) $ (3,731)
Foreign currency translation
adjustment.................. - - - - - (2,569) (2,569) (2,569)
-------------
Comprehensive income (loss).... - - - - - - - $ (6,300)
Exercise of stock options...... 11,400 - 121 - - - 121 =============
------------ ------ ---------- ----------- ---------- ------------ -------------
Balance, July 31, 1999 (unaudited) 10,414,753 $ 104 $ 77,178 $ - $ 23,708 $ (7,358) $ 93,632
============ ====== ========== =========== ========== ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-----------------------------
August 1, July 31,
1998 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss).............................................................. $ (9,132) $ (643)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.................................................. 4,237 4,575
Write-off of deferred financing costs and debt discount........................ 3,900 -
Redemption premiums............................................................ 7,102 -
Other, net..................................................................... 271 401
Changes in operating assets and liabilities:
Increase in accounts and other receivables.................................. (5,577) (4,523)
(Increase) decrease in merchandise inventories.............................. (6,801) 10,469
(Increase) decrease in prepaid expenses and other........................... 762 (212)
Decrease in accounts payable and accrued liabilities........................ (4,039) (36,072)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES.................................... (9,277) (26,005)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (3,721) (4,038)
Deferred charges and other, net................................................ 27 (2,932)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES.................................... (3,694) (6,970)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 295,125 169,030
Principal payments on revolving credit facility................................ (166,430) (135,378)
Prepayment of Old Notes........................................................ (135,000) -
Prepayment of Old Debentures................................................... (50,266) -
Payment of redemption premiums................................................. (7,102) -
Capitalized financing costs.................................................... (336) -
Stock options exercised and other, net......................................... (354) 64
------------ ------------
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES.................... (64,363) 33,716
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. (171) 48
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (77,505) 789
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 80,395 3,851
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 2,890 $ 4,640
============ ============
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 3,178 $ 11,910
Income taxes paid.............................................................. 197 2,742
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
-----------------------------
August 1, July 31,
1998 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss).............................................................. $ (13,334) $ (3,731)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.................................................. 8,359 9,080
Imputed interest on debentures................................................. 2,527 -
Write-off of deferred financing costs and debt discount........................ 3,900 -
Redemption premiums............................................................ 7,102 -
Other, net..................................................................... 315 957
Changes in operating assets and liabilities:
Increase in accounts and other receivables.................................. (30,388) (23,824)
(Increase) decrease in merchandise inventories.............................. (26,824) 507
Increase in prepaid expenses and other...................................... (1,876) (1,322)
Decrease in accounts payable and accrued liabilities........................ (84,107) (94,196)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES.................................... (134,326) (112,529)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (7,178) (7,915)
Deferred charges and other, net................................................ (742) (5,213)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES.................................... (7,920) (13,128)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 503,542 355,006
Principal payments on revolving credit facility................................ (374,847) (242,069)
Prepayment of Old Notes........................................................ (135,000) -
Prepayment of Old Debentures................................................... (89,293) -
Payment of redemption premiums................................................. (7,102) -
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.................................................... (6,144) -
Stock options exercised and other, net......................................... 781 121
------------ ------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............................. 131,697 113,058
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. (149) (89)
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS.................................... (10,698) (12,688)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 13,588 17,328
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 2,890 $ 4,640
============ ============
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 12,746 $ 13,584
Income taxes paid.............................................................. 1,111 (527)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Finlay
Enterprises, Inc. (the "Company" or the "Registrant"), and its wholly owned
subsidiary, Finlay Fine Jewelry Corporation 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 July 31, 1999, and the results of operations and cash flows for the thirteen
weeks and twenty-six weeks ended August 1, 1998 and July 31, 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. For
the thirteen weeks and twenty-six weeks ended August 1, 1998 and July 31, 1999,
there were no dilutive stock options outstanding. As a result, the weighted
average number of shares outstanding used for both the basic and dilutive net
income (loss) per share calculations was the same.
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". 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.
7
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION (continued)
Comprehensive income (loss) is as follows (in thousands):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------------- ------------------------------
August 1, July 31, August 1, July 31,
1998 1999 1998 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss)....................................... $ (9,132) $ (643) $ (13,334) $ (3,731)
Foreign currency translation adjustment................. (587) 319 358 (2,569)
------------ ------------ ------------- -------------
Comprehensive income (loss)............................. $ (9,719) $ (324) $ (12,976) $ (6,300)
============ ============ ============= =============
</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 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 47% of Finlay's domestic sales in 1998 were from
operations in The May Department Stores Company and 21% in departments operated
in store groups owned by Federated Department Stores.
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
(unaudited)
January 30, July 31,
1999 1999
-------------- --------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
<S> <C> <C>
(specific identification basis)............................... $ 300,777 $ 298,742
Less: Excess of specific identification cost over LIFO
inventory value............................................... 5,512 5,701
-------------- --------------
$ 295,265 $ 293,041
============== ==============
</TABLE>
The LIFO method had the effect of decreasing the loss before income taxes
for the thirteen weeks and twenty-six weeks ended August 1, 1998 by $439,000 and
$346,000, respectively. The effect of applying the LIFO method for the thirteen
weeks and twenty-six weeks ended July 31, 1999 was to increase the loss before
income taxes by $98,000 and $191,000, respectively. Finlay determines its LIFO
8
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MERCHANDISE INVENTORIES (continued)
inventory value by utilizing selected producer price indices published for
jewelry and watches by the Bureau of Labor Statistics.
Approximately $283,793,000 and $308,353,000 at January 30, 1999 and July
31, 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 July 31, 1999, amounts outstanding under the Gold Consignment
Agreement totaled 77,049 fine troy ounces, valued at approximately $19.7
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 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. The
Company did not have any open positions in futures contracts for gold at January
30, 1999 or July 31, 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.
9
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LEASE AGREEMENTS (continued)
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 Twenty-Six Weeks Ended
------------------------------- ------------------------------
August 1, July 31, August 1, July 31,
1998 1999 1998 1999
------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Minimum fees.............. $ 5,088 $ 4,475 $ 9,656 $ 8,638
Contingent fees........... 23,853 25,576 45,251 49,009
------------- ------------- ------------- -------------
Total................... $ 28,941 $ 30,051 $ 54,907 $ 57,647
============= ============= ============= =============
</TABLE>
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 costs and debt discount associated
with the Old Debentures and the Old Notes.
10
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table presents the calculation of pro forma earnings per
share data for the thirteen weeks and twenty-six weeks ended August 1, 1998. The
pro forma consolidated financial information excludes the extraordinary charge
of $12.2 million, on a pre-tax basis, 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. The
income tax benefit on the extraordinary charges totaled $4.8 million. In
addition, the pro forma consolidated financial information excludes the
nonrecurring interest associated with refinancing as a result of certain call
requirements on the debt retired.
In thousands, except share and
per share amounts
<TABLE>
<CAPTION>
(unaudited)
August 1, 1998
-----------------------------------
Thirteen Twenty-Six
Weeks Ended Weeks Ended
-------------- --------------
<S> <C> <C>
Net income (loss) per Consolidated Statements of Operations......... $ (9,132) $ (13,334)
Add: Extraordinary charges from early extinguishment of
debt, net of income tax benefit.............................. 7,415 7,415
Add: Nonrecurring interest associated with refinancing,
net of income tax benefit.................................... 400 400
-------------- --------------
Pro Forma net income (loss)......................................... $ (1,317) $ (5,519)
============== ==============
Pro Forma net income (loss) per share applicable to
common shares:
Basic net income (loss) per share............................... $ (0.13) $ (0.55)
============== ==============
Diluted net income (loss) per share............................. $ (0.13) $ (0.55)
============== ==============
Weighted average shares and share equivalents outstanding........... 10,393,086 10,057,033
============== ==============
</TABLE>
11
<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 Twenty-Six Weeks Ended
---------------------------- -----------------------------
August 1, July 31, August 1, July 31,
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales...................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................................. 49.2 49.3 48.9 49.0
----------- ----------- ----------- -----------
Gross margin........................................... 50.8 50.7 51.1 51.0
Selling, general and administrative expenses............... 45.1 44.6 46.4 46.0
Depreciation and amortization.............................. 2.2 2.3 2.3 2.4
----------- ----------- ----------- -----------
Income (loss) from operations.......................... 3.5 3.8 2.4 2.6
Interest expense, net...................................... 4.5 4.1 5.0 4.1
Nonrecurring interest associated with refinancing.......... 0.4 - 0.2 -
----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary charges................................ (1.4) (0.3) (2.8) (1.5)
Provision (benefit) for income taxes....................... (0.5) 0.1 (1.0) (0.4)
----------- ----------- ----------- -----------
Income (loss) before extraordinary charges............. (0.9) (0.4) (1.8) (1.1)
Extraordinary charges from early extinguishment
of debt, net of income tax benefit................... 4.2 - 2.2 -
----------- ----------- ----------- -----------
Net income (loss)...................................... (5.1)% (0.4)% (4.0)% (1.1)%
=========== =========== =========== ===========
</TABLE>
Thirteen Weeks Ended July 31, 1999 Compared with Thirteen Weeks Ended August 1,
1998
Sales. Sales for the thirteen weeks ended July 31, 1999 increased $6.0
million, or 3.4%, over the comparable period in 1998. Consolidated comparable
department sales (departments open for the same months during comparable
periods) increased 6.4% and domestic comparable department sales increased 9.5%.
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. Total consolidated sales were negatively impacted by $5.4 million
primarily relating to Dillard's purchase of the Mercantile Stores and the change
to an everyday low price strategy as well as the net effect of new store
openings offset by store 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. The adverse impact of such change continued through July 31,
1999 and is expected to continue at least through the third quarter of
12
<PAGE>
1999. The Company is presently exploring various alternatives to address this
continuing adverse impact.
During the thirteen weeks ended July 31, 1999, Finlay opened four
departments and closed six departments. The openings were all within existing
store groups, with the exception of one department in Herberger's, a division of
Saks Incorporated. The closings were within existing store groups.
Gross margin. Gross margin for the period increased by $2.9 million,
primarily as a result of the sales increase. As a percentage of sales, gross
margin decreased by 0.1%. Gross margin for the Company's domestic operations
improved over the prior year but was offset by the effect of the LIFO
adjustment. For the thirteen weeks ended July 31, 1999, there was a LIFO charge
of $0.1 million as compared to a LIFO benefit of $0.4 million in the prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") increased $1.8 million, or 2.2%, due primarily
to payroll expense and lease fees associated with the increase in the Company's
domestic sales as well as expenses relating to the Company's year 2000
remediation project, which totaled approximately $1.2 million in the current
quarter. There were no charges relating to the year 2000 remediation project in
the prior year. SG&A as a percentage of sales decreased by 0.5% as a result of
the leveraging of these expenses and lower advertising expenditures, net of
increased vendor participation. The slowdown of sales in France had a negative
impact on SG&A as a percentage of sales.
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 $0.6 million primarily
due to a decrease in average borrowings ($339.0 million for the period in 1999
compared to $379.0 million for the comparable period in 1998) as well as a lower
weighted average interest rate (8.0% for the 1999 period compared to 8.2% for
the comparable period in 1998). The 1998 average borrowings were adjusted to
exclude the timing impact of the call requirements on the Old Debentures and the
Old Notes, discussed below.
Nonrecurring interest associated with refinancing. As a result of certain
call requirements associated with the Old Debentures and the Old Notes, the debt
could not be repaid until May 26, 1998. Thus, for twenty-five days in the second
quarter of 1998, Finlay was required to maintain as outstanding both the new
debt issued on April 24, 1998 as well as the old debt retired on May 26, 1998.
The net effect of carrying the new and old debt, offset by reduced interest
expense on the Company's revolving credit facility and interest income on excess
cash balances, was an increase to interest expense of $0.7 million.
Provision (benefit) for income taxes. The income tax provision for the 1999
and 1998 periods reflects an effective tax rate of 40.5%.
Extraordinary charges from early extinguishment of debt, net of income tax
benefit. In conjunction with the repayment of the Old Debentures and the Old
Notes, the Company recorded a pre-tax extraordinary charge of $12.2 million in
the second quarter of 1998, including $7.1 million for redemption premiums and
approximately $3.9 million to write off deferred financing costs and debt
13
<PAGE>
discount associated with the Old Debentures and the Old Notes. The income tax
benefit on the extraordinary charges totaled $4.8 million.
Net income (loss). The net loss of $0.6 million for the 1999 period was
$8.5 million lower than the net loss of $9.1 million for the comparable period
as a result of the factors discussed above. Excluding the extraordinary charge
in 1998, the net loss for 1999 was $1.1 million lower than the prior year.
Twenty-Six Weeks Ended July 31, 1999 Compared with Twenty-Six Weeks Ended August
1, 1998
Sales. Sales for the twenty-six weeks ended July 31, 1999 increased $13.4
million, or 4.0%, over the comparable period in 1998. Consolidated comparable
department sales increased 6.6% and domestic comparable department sales
increased 9.2%. Management attributes this increase in the comparable department
sales primarily to the "Key Item" and "Best Value" merchandising programs and to
the marketing initiatives discussed above. Total consolidated sales were
negatively impacted by $8.9 million primarily relating to Dillard's purchase of
the Mercantile Stores and the change to an everyday low price strategy as well
as the net effect of new store openings offset by store closings. The adverse
impact of Sonab's change to an everyday low price strategy continued through
July 31, 1999 and is expected to continue at least through the third quarter of
1999. The Company is presently exploring various alternatives to address this
continuing adverse impact.
During the twenty-six weeks ended July 31, 1999, Finlay opened 27
departments and closed 44 departments. The openings were all within existing
store groups, with the exception of one department in Herberger's, a division of
Saks Incorporated. The closings included 14 departments in Crowley's and
Steinbach due to the bankruptcy of the host store and 13 smaller volume
departments in Monoprix in France, with the remaining 17 departments closed
within existing store groups.
Gross margin. Gross margin for the period increased by $6.4 million,
primarily as a result of the sales increase. As a percentage of sales, gross
margin decreased by 0.1%. For the twenty-six weeks ended July 31, 1999, there
was a LIFO charge of $0.2 million as compared to a LIFO benefit of $0.3 million
in the prior year.
Selling, general and administrative expenses. SG&A increased $4.7 million,
or 3.0%, due primarily to payroll expense and lease fees associated with the
increase in the Company's domestic sales as well as expenses relating to the
Company's year 2000 remediation project, which totaled approximately $1.7
million in 1999. There were no charges relating to the year 2000 remediation
project in the prior year. SG&A as a percentage of sales decreased by 0.4% as a
result of the leveraging of these expenses and lower advertising expenditures,
net of increased vendor participation. The slowdown of sales in France had a
negative impact on SG&A as a percentage of sales.
Depreciation and amortization. Depreciation and amortization increased by
$0.8 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 $2.6 million
reflecting a lower weighted average interest rate (8.1% for the 1999 period
compared to 9.1% 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, which were outstanding for a portion of the
1998 period. In addition, there was a decrease in average borrowings ($322.0
million for the period in 1999 compared to $353.7
14
<PAGE>
million for the comparable period in 1998). The 1998 average borrowings were
adjusted to exclude the timing impact of the call requirements on the Old
Debentures and the Old Notes, discussed above.
Nonrecurring interest associated with refinancing. For the reasons
discussed above, the Company incurred nonrecurring interest expense of $0.7
million, in the second quarter of 1998, relating to the net effect of carrying
the new and old debt, offset by reduced interest expense on the Company's
revolving credit facility and interest income on excess cash balances.
Provision (benefit) for income taxes. The income tax provision for the 1999
and 1998 periods reflects an effective tax rate of 40.5%.
Extraordinary charges from early extinguishment of debt, net of income tax
benefit. In conjunction with the repayment of the Old Debentures and the Old
Notes, the Company recorded a pre-tax extraordinary charge of $12.2 million in
the second quarter of 1998, 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. The income tax
benefit on the extraordinary charges totaled $4.8 million.
Net income (loss). The net loss of $3.7 million for the 1999 period was
$9.6 million lower than the net loss of $13.3 million for the comparable period
as a result of the factors discussed above. Excluding the extraordinary charge
in 1998, the net loss for 1999 was $2.2 million lower than the prior year.
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 twenty-six
weeks ended August 1, 1998 and July 31, 1999, capital expenditures totaled $7.2
million and $7.9 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 $138.4 million at July 31,
1999, a decrease of $9.0 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 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
15
<PAGE>
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 July 31, 1999 were $112.9 million, compared to
a zero balance at January 30, 1999 and $128.7 million at August 1, 1998. The
average amounts outstanding under the Revolving Credit Agreement were $122.2
million (adjusted for the impact of the temporary paydown of the revolving
credit facility due to certain call requirements associated with the Old
Debentures and the Old Notes) and $97.0 million for the twenty-six weeks ended
August 1, 1998 and July 31, 1999, respectively. The maximum amount outstanding
for the twenty-six weeks ended July 31, 1999 was $132.6 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 July
31, 1999, $308.4 million of consignment merchandise was on hand as compared to
$283.8 million at January 30, 1999 and $247.9 million at August 1, 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 July 31,
1999, Finlay's outstanding borrowings were $337.9 million, which included a
$75.0 million balance under the Senior Debentures, a $150.0 million balance
under the Senior Notes and a $112.9 million balance under the Revolving Credit
Facility.
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
July 31, 1999, amounts outstanding under the Gold Consignment Agreement totaled
77,049 fine troy ounces, valued at approximately $19.7 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 $12.0 million for software and implementation costs, to be
included in Deferred charges and other assets, and approximately $4.0 million
for hardware and related equipment, to be included as a component of the
Company's capital expenditures and reflected in Fixed assets. At July 31, 1999,
a total of approximately $9.8 million has been expended.
16
<PAGE>
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's interest expense and
required amortization payments totaled $12.7 million and $13.6 million for the
twenty-six weeks ended August 1, 1998 and July 31, 1999, respectively.
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 was structured
into five primary phases: identification, assessment, remediation, testing and
implementation. The Company has completed the identification, assessment,
remediation and testing phases of all critical components and is currently in
the process of implementing all remediated applications.
17
<PAGE>
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 $3.6 million has
been spent through July 31, 1999 ($1.9 million in fiscal 1998 and $1.7 million
to date in fiscal 1999). The Company will fund the remaining year 2000 costs
through operating cash flows.
The Company has been formally communicating 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.
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 Company has assessed the potential effects
of a year 2000 related failure and, to the extent deemed appropriate, is in the
process of identifying tasks necessary to address such effects. The Company
expects to complete its contingency plan by the end of the third quarter. In
addition, progress reports on the year 2000 project continue to be 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.
18
<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 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.
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 July 31, 1999.
19
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Stockholders of the Company was held on June 22,
1999, pursuant to notice, at which Messrs. Rohit M. Desai, Michael Goldstein and
Thomas H. Lee were re-elected directors of the Company to serve a three-year
term in the class of directors whose term expires in 2002. Such members have
been elected to serve until the expiration of their respective terms of office
and until their successors are dully elected and qualified. At such meeting,
votes were cast as follows:
Name Votes for Votes Withheld
----- ----------- ----------------
Rohit M. Desai 6,583,611 968,900
Michael Goldstein 7,570,011 -0-
Thomas H. Lee 7,570,011 -0-
Messrs. David B. Cornstein, James Martin Kaplan, Arthur E. Reiner, Norman
S. Matthews and Warren C. Smith and Ms. Hanne M. Merriman continued to serve as
members of the Board of Directors after the meeting.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
2 Not applicable.
3 Not applicable.
4 Not applicable.
10.1 Separation Agreement and Release dated June 6, 1999 between
Barry D. Scheckner and Finlay Jewelry.
10.2 Consulting Agreement dated as of July 31, 1999 between BFM
Advisors LLC and Finlay Jewelry.
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.
20
<PAGE>
23 Not applicable.
24 Not applicable.
27 Financial Data Schedule.
99 Not applicable.
B. Reports on Form 8-K
On June 16, 1999, the Company filed with the Commission a Current Report on
Form 8-K regarding the resignation of Barry D. Scheckner, Senior Vice President
and Chief Financial Officer of the Company, effective July 31, 1999.
21
<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: September 10, 1999 FINLAY ENTERPRISES, INC.
By: /s/ Bruce E. Zurlnick
-------------------------------------
Bruce E. Zurlnick
Treasurer
(As both a duly authorized officer of
Registrant and as principal financial
officer of Registrant)
22
SEPARATION AGREEMENT AND RELEASE
FINLAY FINE JEWELRY CORPORATION ("Finlay") and BARRY D. SCHECKNER ("you"),
hereby agree that:
1. You have resigned effective July 31, 1999 (the "Resignation Date"). You
agree that in addition to resigning your employment with Finlay you also resign,
effective July 31, 1999, from any other positions you hold as a Director,
Officer, employee or otherwise of Finlay or Finlay's parent and any of Finlay's
subsidiaries.
2. You will be paid your salary earned through the Resignation Date in
accordance with Finlay's regular payroll cycle.
3. Under Finlay's regular policies, you will be eligible:
a. To receive your vested accounts, if any, under the 401(k) plan. You
will receive more detailed information regarding your 401(k) benefits under
separate cover;
b. To receive payment fo your accrued but unused vacation and
personal days, totaling $23,976.30 on Finlay's regular pay date immediately
following the Resignation Date;
c. To continue your health insurance coverage, in accordance with
COBRA, for a minimum of eighteen (18) months from your Resignation Date, upon
payment of the full applicable premiums. You will receive under separate cover
more detailed information regarding insurance benefits under COBRA. Nothing
contained in this Agreement is intended to impair any of these rights; and
d. To exercise your vested stock options. You have twenty-one (21)
days from the Resignation Date in which to exercise such options.
4. In consideration for signing this Separation Agreement and Release (the
"Agreement"), Finlay will also provide you with the following payments and
benefits:
a. You will receive a total separation payment equal to $320,000.00 plus
a $50,000.00 subjective bonus for 1998 for a total of $370,000.00 The bonus of
$50,000.00, less applicable taxes and other withholdings, will be paid
immediately following the fifth day after the Employee Irrevocability Date as
defined below. Payment of the $320,000.00 will be made in two installments as
follows: (i) on the later of Finlay's regular pay date immediately following the
Resignation Date or the Employee Irrevocability Date as defined below, you will
receive in a lump sum $220,000.00, less applicable taxes and other withholdings
and, (ii) the balance of $100,000.00 will be paid in a lump sum, less applicable
taxes and other withholdings, in January 2000.
This separation amount exceeds, and is in lieu of, any other severance to
which you might otherwise be entitled.
<PAGE>
b. Cobra coverage will commence on August 1, 1999. You will be
responsible for making Cobra payments monthly at the appropriate employee
contribution level in effect for active employees in the plan, which amount is
currently $234.00 per month. Your current coverage level, including the
executive medical plan, will continue subject to whatever changes or revisions
are made to the plan.
c. You or your designee will receive a twelve (12) month
consulting agreement (the "Consulting Agreement") with total compensation of
$50,000.00 to be paid upon the completion of the twelve (12) month assignment in
a lump sum, subject to the terms in such Agreement and which Agreement shall be
signed by Finlay immediately following the fifth day after the Employee
Irrevocability Date.
d. You will have sixty (60) days from December 31, 1999 in which
to exercise five thousand (5,000) option shares at $8.25 per share and until
sixty (60) days from December 31, 1999 in which to exercise any other vested
options which have heretofore been granted to you.
e. You may keep the computer equipment which currently resides in
your office for your personal use, including the installed operating software.
All data files pertaining to Finlay will be purged from the equipment.
You understand and agree that you would not receive the monies and
other benefits specified in this section 4 except for your execution of this
Agreement and the fulfillment of the promises contained in this Agreement.
5. You may immediately begin your employment search provided it does not
interfere with the performance of your regular job duties, which duties will be
performed in a competent and professional manner. Nothing in this Agreement
shall be construed as a restriction on your ability to obtain employment or be
associated or affiliated with a competitor of Finlay in any capacity.
6. Finlay hereby confirms that the Directors and Officers Liability
Insurance coverage currently in effect with respect to you will continue to
cover your acts in accordance with the terms of that policy through the
Resignation Date.
7. You understand that Finlay makes no representation as to the income tax
treatment of any payments hereunder and that any and all payments (and all
compensation, benefits and/or other payments previously made to you by Finlay)
will be subject to such tax treatment and to such deductions, if any, as may be
required under applicable tax laws.
8. You agree that you will take no action which is intended to, or would
reasonably be expected to harm or disparage Finlay, to impair Finlay's
reputation, or to lead to unwanted or unfavorable publicity to Finlay, nor will
you disclose any confidential or proprietary information obtained by you during
the course of your employment.
-2-
<PAGE>
a. You shall refer all inquiries with respect to future employment
to Arthur Reiner, Chairman and CEO, or Joseph Melvin, President and COO, who
shall not make any statements intended to harm your character, reputation or
business prospects. In addition, you shall be provided with a mutually
acceptable written reference.
b. You agree to cooperate fully with Finlay, specifically including
any attorney retained by Finlay, in connection with any pending or future
litigation, business, or investigatory matter. The parties acknowledge and agree
that such cooperation may include, but shall in no way be limited to, your
making yourself available for interview by Finlay, or any attorney retained by
Finlay, and providing to Finlay any documents in your possession or under your
control relating to the litigation, business or investigatory matter. Finlay
agrees to provide you with reasonable notice of the need for assistance when
feasible. Finlay additionally agrees to schedule such assistance in such a
manner as not to interfere with any alternative employment obtained by you when
possible. If the request for assistance exceeds the 250 hours of service
contemplated by the Consulting Agreement or occurs after the termination of the
Consulting Agreement, you shall be reimbursed for the reasonable cost of your
time.
9. It is expressly understood and agreed that this Agreement and the
effectuation of its terms do not constitute an admission or statement by any
party that Finlay has acted unlawfully or is otherwise liable in any respect. It
is further agreed that evidence of this Agreement, its terms or the
circumstances surrounding the parties entering into this Agreement, shall be
inadmissible in any action or lawsuit of any kind, except for an action for
alleged breach of this Agreement.
10. a. You agree not to disclose any information regarding the existence or
substance of this Agreement, except to an attorney, accountant, spouse or
financial advisor with whom you choose to consult regarding your consideration
of this Agreement.
b. Finlay and only Finlay, will issue a press release to announce
your resignation from Finlay, including information indicating that you have
resigned to "pursue other interests". You specifically agree not to issue any
public statement concerning your employment at Finlay containing information
which would be inconsistent with that contained in said press release.
11. You agree that for a period of one year following the Resignation Date,
you will not solicit or offer employment to any Finlay employee or offer
employment to any Finlay consultant without Finlay's written authorization.
12. You knowingly and voluntarily release and forever discharge Finlay, and
its current and former parent, subsidiary, affiliated and related corporations,
partnerships and entities, their successors and assigns, and the current and
former owners, shareholders, directors, officers and/or employees of such
corporations, partnerships and entities, and their affiliates, successors,
assigns, heirs, executors and administrators (referred to collectively
throughout this Agreement as "Finlay") from and against any and all claims,
actions, demands, contracts and causes of action, known and unknown, which you
or your heirs,
-3-
<PAGE>
executors, administrators, successors and assigns (referred to collectively
throughout this Agreement as "you") now or may have as of the date of execution
of this Agreement against Finlay, including, but not limited to, any alleged
violation of:
. The National Labor Relations Act, as amended;
. Title VII of the Civil Rights Act of 1964, as amended;
. Sections 1981 through 1988 of Title 42 of the United States Code,
as amended;
. The Civil Rights Act of 1991;
. The Age Discrimination in Employment Act of 1967, as amended;
. The Employee Retirement Income Security Act of 1974, as amended;
. The Immigration Reform Control Act, as amended;
. The Americans with Disabilities Act of 1990, as amended;
. The Fair Labor Standards Act, as amended;
. The Occupational Safety and Health Act, as amended;
. The Family and Medical Leave Act of 1993;
. The New York Human Rights Act, as amended;
. The New York Minimum Wage Law, as amended;
. Equal Pay Law for New York, as amended;
. any other federal, state or local civil or human rights law or
any other local, state or federal law, regulation or ordinance;
. any public policy, contract, tort, or common law; or
. any allegation for costs, fees, or other expenses including
attorneys' fees incurred in these matters.
You further acknowledge and agree that you shall, on the Resignation Date,
provide to Finlay an additional release in substantially the same form as set
forth above covering the period from the execution of this Agreement through the
Resignation Date.
13. You confirm and agree that, except for the purpose of seeking
enforcement of the terms of this Agreement, you have not and will not file or
institute any claims, charges,
-4-
<PAGE>
actions, complaints or any other proceedings against Finlay before any court,
administrative agency or any other forum based upon or arising out of any
claims, actions, demands, contracts and causes of action by or in respect of you
against Finlay. In the event that any such claim, charge, action, complaint or
other proceeding is filed, you shall not be entitled to recover any relief or
recovery therefrom, including costs and attorneys' fees.
14. You understand that if this Agreement were not signed, you would have
the right to voluntarily assist other individuals or entities in bringing claims
against Finlay. You hereby waive that right and you will not provide any such
assistance other than assistance in an investigation or proceeding conducted by
a government agency or as required by law.
15. Except as provided in section 4 (e) hereof, you agree to return to
Finlay on the Resignation Date, your keys, identification and any other
equipment, data file (excluding personal files), documents or materials
belonging to Finlay that you have in your possession.
16. In the event that you or your affiliates breach this Agreement or the
Consulting Agreement, Finlay will be entitled to recover or withhold any payment
and/or other benefits paid or payable under this Agreement or the Consulting
Agreement and to obtain all other relief provided by law or equity. The
prevailing party in any litigation resulting from any such claim shall be
entitled to recover reasonable attorneys' fees and expenses of litigation from
the losing party.
17. This Agreement shall be binding on the parties and their respective
heirs, successors and assigns.
18. This Agreement and the Consulting Agreement sets forth the entire
agreement between the parties and their affiliates with respect to the subject
matter herein and therein and fully supersedes any and all prior agreements or
understandings between them pursuant to such subject matter.
19. This Agreement may not be modified, altered or changed except upon
express written consent of both parties wherein specific reference is made to
this Agreement.
20. If any provision of this Agreement should be held invalid or
unenforceable by operation of law or by any tribunal of competent jurisdiction,
or if compliance with or enforcement of any provision is restrained by such
tribunal, the application of any and all provisions other than those which have
been held invalid or unenforceable shall not be affected.
21. This Agreement shall be governed and construed in accordance with the
laws of the State of New York (without reference to its rules as to conflicts of
laws). Any dispute arising hereunder shall be brought before a court of
competent jurisdiction in the City, County and State of New York.
22. You may revoke this Agreement for a period of seven (7) days following
the day you execute this Agreement. Any revocation within this period must be
submitted, in
-5-
<PAGE>
writing, to Joseph Melvin, President, and state, "I hereby revoke my acceptance
of our Separation Agreement and Release." The revocation must be personally
delivered to Mr. Melvin or his designee, or mailed to Mr. Melvin at Finlay Fine
Jewelry Corporation, 521 5th Avenue, 4th Floor, New York, NY 10175 and
postmarked within seven (7) days of execution of this Agreement. This Agreement
shall not become effective or enforceable until the revocation period has
expired (the "Employee Irrevocability Date"). If the last day of the revocation
period is a Saturday, Sunday or legal holiday in New York, then the revocation
period shall not expire until the next following day which is not a Saturday,
Sunday or legal holiday.
YOU ACKNOWLEDGE THAT YOU HAVE BEEN ADVISED IN WRITING THAT YOU HAVE
TWENTY-ONE (21) DAYS TO CONSIDER THIS AGREEMENT AND TO CONSULT WITH AN ATTORNEY
PRIOR TO EXECUTION OF THIS AGREEMENT. YOU AGREE THAT ANY MODIFICATIONS, MATERIAL
OR OTHERWISE, MADE TO THIS AGREEMENT DO NOT RESTART OR AFFECT IN ANY MANNER THE
ORIGINAL TWENTY-ONE (21) DAY CONSIDERATION PERIOD.
HAVING ELECTED TO EXECUTE THIS AGREEMENT, TO FULFILL THE PROMISES SET FORTH
HEREIN, AND TO RECEIVE THEREBY THE SUMS AND BENEFITS SET FORTH IN SECTION "4"
ABOVE, YOU FREELY AND KNOWINGLY, AND AFTER DUE CONSIDERATION, ENTER INTO THIS
AGREEMENT INTENDING TO FOREVER WAIVE, SETTLE AND RELEASE ALL CLAIMS YOU HAVE OR
MIGHT HAVE AGAINST FINLAY.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto knowingly and voluntarily execute
this Separation Agreement and Release as of the date set forth below:
Sworn to before me this
6th day of June, 1999.
/s/Bonni G. Davis /s/Barry D. Scheckner
- ------------------------- ----------------------------------
Notary Public Barry D. Scheckner
June 6, 1999
----------------------------------
Date
Finlay Fine Jewelry Corporation
By /s/ Joseph M. Melvin
------------------------------
Joseph M. Melvin, President
June 6, 1999
----------------------------------
Date
-7-
CONSULTING AGREEMENT
Agreement, dated as of July 31, 1999, by and between FINLAY FINE JEWELRY
CORPORATION at 529 Fifth Avenue, New York, N.Y. 10017, a Delaware corporation
(the "Corporation"), and BFM Advisors LLC at 40 East 19th Street, New York, NY
10003 (the "Consultant").
WHEREAS, the Corporation wishes to retain the Consultant and the Consultant
has agreed to undertake and perform the obligations set forth in this Agreement,
subject to the terms hereof.
NOW, THEREFORE, in consideration of the promises, covenants and agreements
set forth in this Agreement, the parties agree as follows:
1. Engagement of Consultant; Duties. The Corporation hereby engages the
Consultant, and the Consultant agrees to be engaged, as a consultant on the
terms and conditions set forth below. The Consultant agrees that it will serve
as an independent contractor, on a non-exclusive basis, as a consultant to the
Corporation and its affiliates, performing such services, as the Corporation
shall reasonably request, subject to the direction and control of the
Corporation's President and Chief Operating Officer and the Corporation's Board
of Directors. The Consultant's role is that of a consultant and advisor to, and
not that of a manager or employee of the Corporation. The Consultant represents
and warrants that it is not subject to any agreement, covenant or legal
restraint which precludes or otherwise restricts its ability to enter into this
Agreement and perform the services contemplated hereby.
2. Time. The Consultant will devote, subject to availability, such mutually
agreeable time to the affairs of the Corporation (and its affiliates) as is
necessary to perform the services contemplated hereby in a professional and
effective manner, such time not to exceed 250 hours during the term hereof (not
more than 25 hours in any month). Consultant shall not be required to travel
overseas. Consultant agrees that all of Consultant's services hereunder shall be
performed by Barry D. Scheckner.
3. Term. The Consultant's engagement shall commence effective as of August
1, 1999 and shall continue until July 31, 2000 (the "Termination Date").
4. Compensation. As compensation for the Consultant's services hereunder,
the Consultant shall receive a fee of $50,000 ("Compensation"), payable within
thirty (30) days of the Termination Date to BFM Advisors LLC.
5. Expense Reimbursement. The Corporation will reimburse the Consultant for
any and all actual preapproved expenses incident to the Consultant's rendering
of services hereunder upon presentation of expense vouchers or other
documentation in such detail as the Corporation may from time to time reasonably
require.
6. Nonsolicitation. (a) The Consultant agrees that during the term hereof,
it shall not, on behalf of itself or any business it is interested in or
associated with, employ or
<PAGE>
otherwise engage, or seek to employ or engage, any consultant of or individual
employed by the Corporation, its parent, affiliates or subsidiaries.
(b) The Corporation shall be entitled, in addition to any other right and
remedy it may have, at law or in equity, to an injunction, without the posting
of any bond or other security, enjoining or restraining the Consultant from any
violation or threatened violation of this Section 6, and the Consultant hereby
consents to the issuance of such injunction; provided, however, that the
foregoing shall not prevent the Consultant from contesting the issuance of any
such injunction on the ground that no violation or threatened violation of this
Section 6 has occurred.
7. Confidentiality. The Consultant shall not divulge to anyone, either
during or at any time after the termination of its engagement, any information
constituting a trade secret or other confidential information acquired by it
concerning the Corporation, its parent, affiliates or subsidiaries, except in
the performance of its duties hereunder, without the prior written consent of
the Corporation, or if required by law. The Consultant acknowledges that any
such information is of a confidential and secret character and of great value to
the Corporation, and upon the termination of its engagement the Consultant shall
forthwith deliver up to the Corporation all notebooks and other data in its
possession relating to the Corporation, its parent, affiliates, or subsidiaries
as the case may be. The Corporation shall be entitled, in addition to any other
right and remedy it may have, at law or in equity, to an injunction, without the
posting of any bond or other security, enjoining or restraining the Consultant
from any violation or threatened violation of this Section 7, and the Consultant
hereby consents to the issuance of such injunction; provided, however, that the
foregoing shall not prevent the Consultant from contesting the issuance of any
such injunction on the ground that no violation or threatened violation of this
Section 7 has occurred.
8. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall attach only
to such provision and shall not affect or render invalid or unenforceable any
other provision of this Agreement, and this Agreement shall be construed as if
such provision had been drawn so as not to be invalid or unenforceable.
9. Entire Agreement, Etc. This Agreement together with the Separation
Agreement and Release dated the date hereof between the Corporation and Barry D.
Scheckner (the "Separation Agreement and Release") sets forth the parties' and
their affiliates' final and entire agreement, and supersedes any and all prior
understandings with respect to its subject matter. This Agreement shall bind and
benefit the parties hereto and their respective heirs, successors and assigns,
except as otherwise set forth in this Agreement. This Agreement is personal in
nature and none of the Consultant's obligations under this Agreement may be
assigned or delegated by the Consultant. The Corporation may assign this
Agreement to any affiliate thereof. This Agreement shall also be assignable by
the Corporation or any of its affiliates to any other person in connection with
the sale, transfer or other disposition of all or a substantial portion of its
business and assets; and this Agreement shall inure to and be binding upon any
successor to all or a substantial portion of the business, or to all or
substantially all of the assets, of the Corporation, whether by merger,
consolidation, purchase of stock or assets or otherwise. This Agreement cannot
be changed,
2
<PAGE>
waived or terminated except by a writing signed by both the Consultant and the
Corporation and shall be governed by, and construed in accordance with, the laws
of the State of New York applicable to contracts made and performed entirely
within such state.
10. Independent Contractor, Etc. The parties agree that the Corporation
shall have no right to control or direct the details, manner or means by which
the Consultant accomplishes the results of the services performed hereunder, it
being acknowledged that the Consultant shall for all purposes be an independent
contractor of the Corporation. Nothing in this Agreement shall be construed as a
restriction on the ability of the Consultant (or any affiliate thereof) to
obtain employment or be associated or affiliated with a competitor of the
Corporation in any capacity.
11. Counterparts. This instrument may be executed in two or more
counterparts each of which shall be deemed an original but all of which together
shall constitute one and the same instrument.
12. Notices. Any notice or other communication required to or which may be
given to any party hereunder shall be in writing and shall be delivered
personally to such party (or the Secretary thereof in the case of the
Corporation) or if mailed, by registered or certified mail, postage prepaid,
return receipt requested, addressed to such other party at the address first set
forth above and shall be deemed delivered in all cases upon receipt. Any party
may change the address to which notices are to be sent by giving written notice
of any change in the manner provided herein.
13. Breach; Attorneys' Fees. In the event Consultant or any affiliate
breaches this Agreement or the Separation Agreement and Release, the Corporation
will be entitled to recover or withhold any payment and/or other benefits paid
or payable under this Agreement or the Separation Agreement and Release and to
obtain all other relief provided by law or equity. The prevailing party in any
litigation resulting from any such claim shall be entitled to recover reasonable
attorneys' fees and expenses of litigation from the losing party.
14. Captions. The descriptive headings of the several sections of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands as of the date
first written above.
FINLAY FINE JEWELRY CORPORATION
By: /s/ Joseph M. Melvin
---------------------------------
Name: Joseph M. Melvin
Title: President & COO
BFM ADVISORS LLC
By: /s/ Barry D. Scheckner
---------------------------------
Name: Barry D. Scheckner
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINLAY
ENTERPRISES, INC. FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 4,640
<SECURITIES> 0
<RECEIVABLES> 41,534
<ALLOWANCES> 0
<INVENTORY> 293,041
<CURRENT-ASSETS> 367,395
<PP&E> 113,661
<DEPRECIATION> 41,962
<TOTAL-ASSETS> 557,410
<CURRENT-LIABILITIES> 229,030
<BONDS> 225,000
0
0
<COMMON> 104
<OTHER-SE> 93,528
<TOTAL-LIABILITY-AND-EQUITY> 557,410
<SALES> 351,746
<TOTAL-REVENUES> 351,746
<CGS> 172,357
<TOTAL-COSTS> 172,357
<OTHER-EXPENSES> 170,150
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,433
<INCOME-PRETAX> (5,194)
<INCOME-TAX> (1,463)
<INCOME-CONTINUING> (3,731)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,731)
<EPS-BASIC> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
