- --------------------------------------------------------------------------------
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 October 30, 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 December 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 OCTOBER 30, 1999
INDEX
PAGE(S)
-------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the thirteen weeks and
thirty-nine weeks ended October 31, 1998 and October 30, 1999.........1
Consolidated Balance Sheets as of January 30, 1999 and
October 30, 1999......................................................3
Consolidated Statements of Changes in Stockholders' Equity for the
year ended January 30, 1999 and thirty-nine weeks ended
October 30, 1999......................................................4
Consolidated Statements of Cash Flows for the thirteen weeks and
thirty-nine weeks ended October 31, 1998 and October 30, 1999.........5
Notes to Consolidated Financial Statements............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................22
SIGNATURES....................................................................23
<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
-----------------------------------
October 31, October 30,
1998 1999
-------------- --------------
<S> <C> <C>
Sales.................................................................... $ 165,894 $ 175,280
Cost of sales............................................................ 81,207 86,631
-------------- --------------
Gross margin......................................................... 84,687 88,649
Selling, general and administrative expenses............................. 78,927 81,813
Depreciation and amortization............................................ 3,916 4,142
-------------- --------------
Income (loss) from operations........................................ 1,844 2,694
Interest expense, net.................................................... 8,153 7,953
-------------- --------------
Income (loss) before income taxes.................................... (6,309) (5,259)
Provision (benefit) for income taxes..................................... (2,458) (1,814)
-------------- --------------
Net income (loss).................................................... $ (3,851) $ (3,445)
============== ==============
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share................................. $ (0.37) $ (0.33)
============== ==============
Diluted net income (loss) per share:.............................. $ (0.37) $ (0.33)
============== ==============
Weighted average shares and share equivalents outstanding................ 10,402,653 10,416,142
============== ==============
</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>
Thirty-Nine Weeks Ended
----------------------------------
October 31, October 30,
1998 1999
-------------- --------------
<S> <C> <C>
Sales.................................................................... $ 504,252 $ 527,026
Cost of sales............................................................ 246,620 258,988
-------------- --------------
Gross margin......................................................... 257,632 268,038
Selling, general and administrative expenses............................. 235,874 243,487
Depreciation and amortization............................................ 11,617 12,618
-------------- --------------
Income (loss) from operations........................................ 10,141 11,933
Interest expense, net.................................................... 25,183 22,386
Nonrecurring interest associated with refinancing........................ 655 -
-------------- --------------
Income (loss) before income taxes and extraordinary charges.......... (15,697) (10,453)
Provision (benefit) for income taxes..................................... (5,927) (3,277)
-------------- --------------
Income (loss) before extraordinary charges........................... (9,770) (7,176)
Extraordinary charges from early extinguishment of debt,
net of income tax benefit of $4,765................................ 7,415 -
-------------- --------------
Net income (loss).................................................... $ (17,185) $ (7,176)
============== ==============
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share:
Before extraordinary charges...................................... $ (0.96) $ (0.69)
============== ==============
Extraordinary charges from early extinguishment of debt........... $ (0.73) $ -
============== ==============
Net income (loss)................................................. $ (1.69) $ (0.69)
============== ==============
Diluted net income (loss) per share:
Before extraordinary charges...................................... $ (0.96) $ (0.69)
============== ==============
Extraordinary charges from early extinguishment of debt........... $ (0.73) $ -
============== ==============
Net income (loss)................................................. $ (1.69) $ (0.69)
============== ==============
Weighted average shares and share equivalents outstanding................ 10,171,712 10,411,880
============== ==============
</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, October 30,
1999 1999
------------- -------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents.................................................... $ 17,328 $ 4,183
Accounts receivable - department stores...................................... 19,147 38,241
Other receivables............................................................ 23,353 36,289
Merchandise inventories...................................................... 295,265 317,345
Prepaid expenses and other................................................... 2,366 3,906
------------- -------------
Total current assets...................................................... 357,459 399,964
------------- -------------
Fixed assets
Equipment, fixtures and leasehold improvements............................... 106,735 116,960
Less - accumulated depreciation and amortization............................. 36,620 44,681
------------- -------------
Fixed assets, net......................................................... 70,115 72,279
------------- -------------
Deferred charges and other assets.............................................. 15,871 20,312
Goodwill....................................................................... 100,547 97,739
------------- -------------
Total assets.............................................................. $ 543,992 $ 590,294
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable................................................................ $ - $ 127,398
Accounts payable - trade..................................................... 160,434 83,450
Accrued liabilities:
Accrued salaries and benefits............................................. 15,760 15,261
Accrued miscellaneous taxes............................................... 4,704 5,150
Accrued insurance......................................................... 755 1,538
Accrued interest.......................................................... 5,135 10,278
Accrued management transition and consulting.............................. 676 435
Other..................................................................... 15,409 16,302
Income taxes payable......................................................... 5,076 3,569
Deferred income taxes........................................................ 2,173 2,132
------------- -------------
Total current liabilities................................................. 210,122 265,513
Long-term debt................................................................. 225,000 225,000
Other non-current liabilities.................................................. 9,059 10,089
------------- -------------
Total liabilities......................................................... 444,181 500,602
------------- -------------
Stockholders' equity
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 10,410,353 and 10,416,353 shares, respectively..... 104 104
Additional paid-in capital .................................................. 77,057 77,194
Retained earnings (deficit).................................................. 27,439 20,263
Foreign currency translation adjustment...................................... (4,789) (7,869)
------------- -------------
Total stockholders' equity................................................ 99,811 89,692
------------- -------------
Total liabilities and stockholders' equity................................ $ 543,992 $ 590,294
============= =============
</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).............. - - - - (7,176) - (7,176) $ (7,176)
Foreign currency translation
adjustment.................. - - - - - (3,080) (3,080) (3,080)
-------------
Comprehensive income (loss).... - - - - - - - $ (10,256)
Exercise of stock options...... 13,000 - 137 - - - 137 =============
------------ ------ ---------- ----------- ---------- ------------ -------------
Balance, October 30, 1999
(unaudited).................... 10,416,353 $ 104 $ 77,194 $ - $ 20,263 $ (7,869) $ 89,692
============ ====== ========== =========== ========== ============ =============
</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
-------------------------------
October 31, October 30,
1998 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss).............................................................. $ (3,851) $ (3,445)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.................................................. 4,216 4,452
Other, net..................................................................... (398) 349
Changes in operating assets and liabilities:
Increase in accounts and other receivables.................................. (12,742) (8,529)
Increase in merchandise inventories......................................... (16,478) (24,663)
Increase in prepaid expenses and other...................................... (1,203) (248)
Increase in accounts payable and accrued liabilities....................... 16,125 22,075
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES.................................... (14,331) (10,009)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (4,483) (3,650)
Deferred charges and other, net................................................ (3,088) (1,200)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES.................................... (7,571) (4,850)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 139,894 145,285
Principal payments on revolving credit facility................................ (118,467) (130,824)
Capitalized financing costs.................................................... (36) -
Stock options exercised and other, net......................................... 775 16
------------- -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............................. 22,166 14,477
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. 280 (75)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 544 (457)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 2,890 4,640
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 3,434 $ 4,183
============= =============
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 2,989 $ 2,745
Income taxes (received) paid................................................... (811) 3,006
</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>
Thirty-Nine Weeks Ended
------------------------------
October 31, October 30,
1998 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss).............................................................. $ (17,185) $ (7,176)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.................................................. 12,575 13,532
Imputed interest on debentures................................................. 2,527 -
Write-off of deferred financing costs and debt discount........................ 3,900 -
Redemption premiums............................................................ 7,102 -
Other, net..................................................................... (83) 1,306
Changes in operating assets and liabilities:
Increase in accounts and other receivables.................................. (43,130) (32,353)
Increase in merchandise inventories......................................... (43,302) (24,156)
Increase in prepaid expenses and other...................................... (3,079) (1,570)
Decrease in accounts payable and accrued liabilities........................ (67,982) (72,121)
------------ -------------
NET CASH USED IN OPERATING ACTIVITIES.................................... (148,657) (122,538)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (11,661) (11,565)
Deferred charges and other, net................................................ (3,830) (6,413)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES.................................... (15,491) (17,978)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 643,436 500,291
Principal payments on revolving credit facility................................ (493,314) (372,893)
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.................................................... (6,180) -
Stock options exercised and other, net......................................... 1,556 137
------------ -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............................. 153,863 127,535
------------ -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. 131 (164)
------------ -------------
DECREASE IN CASH AND CASH EQUIVALENTS.................................... (10,154) (13,145)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 13,588 17,328
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 3,434 $ 4,183
============ =============
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 15,735 $ 16,329
Income taxes paid.............................................................. 300 2,479
</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 October 30, 1999, and the results of operations and cash flows for the
thirteen weeks and thirty-nine weeks ended October 31, 1998 and October 30,
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 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. As the
Company had a net loss for the thirteen weeks and thirty-nine weeks ended
October 31, 1998 and October 30, 1999, the dilutive stock options outstanding
are not considered in the calculation of dilutive net income (loss) per share
due to their anti-dilutive effect. 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 Thirty-Nine Weeks Ended
------------------------------- ------------------------------
October 31, October 30, October 31, October 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss).................................... $ (3,851) $ (3,445) $ (17,185) $ (7,176)
Foreign currency translation adjustment.............. 1,850 (511) 2,063 (3,080)
------------- ------------- ------------- -------------
Comprehensive income (loss).......................... $ (2,001) $ (3,956) $ (15,122) $ (10,256)
============= ============= ============= =============
</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
adopted this statement in 1999, and it will not 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 jewelry 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, October 30,
1999 1999
-------------- --------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
<S> <C> <C>
(specific identification basis)............................... $ 300,777 $ 323,142
Less: Excess of specific identification cost over LIFO
inventory value............................................... 5,512 5,797
-------------- ---------------
$ 295,265 $ 317,345
============== ===============
</TABLE>
The LIFO method had the effect of decreasing the loss before income taxes
for the thirteen weeks and thirty-nine weeks ended October 31, 1998 by $177,000
and $523,000, respectively. The effect of applying the LIFO method for the
thirteen weeks and thirty-nine weeks ended October 30, 1999 was to increase the
loss before income taxes by $95,000 and $286,000, 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 $355,114,000 at January 30, 1999 and October
30, 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 October 30, 1999, amounts outstanding under the Gold Consignment
Agreement totaled 78,637 fine troy ounces, valued at approximately $23.5
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. At October 30, 1999, the Company had two open positions in futures
contracts for gold totaling 25,000 fine troy ounces or approximately $8.1
million, which expire at the end of November 1999.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This Statement requires that all derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative instrument's fair
value be recognized currently in earnings. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000 and, based on current levels of hedging
activities, is not expected to have a material impact on the Company's financial
position or results of operations.
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.
9
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LEASE AGREEMENTS (continued)
Substantially all of the department store leases provide that the title to
certain fixed assets of Finlay transfers upon termination of the leases, and
that Finlay will receive the undepreciated value of such fixed assets from the
host store in the event such transfers occur, 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 Thirty-Nine Weeks Ended
-------------------------------- --------------------------------
October 31, October 30, October 31, October 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Minimum fees.............. $ 5,911 $ 4,297 $ 15,567 $ 12,935
Contingent fees........... 21,248 24,396 66,499 73,405
------------- ------------- ------------- -------------
Total................... $ 27,159 $ 28,693 $ 82,066 $ 86,340
============= ============= ============= =============
</TABLE>
NOTE 5 - PENDING SALE AND DISPOSITION OF SONAB
On November 29, 1999, Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B.
("Sonab"), the Company's European leased jewelry department subsidiary, signed a
letter of intent to sell the majority of its assets. Under the current terms of
the letter of intent, the buyer will operate more than 80 locations of Sonab's
130-location base in France. The remaining departments will be closed. Finlay
anticipates that a final agreement will be entered into before the end of the
fiscal year.
Pending final negotiations, the Company anticipates it will record a pretax
charge in the fourth quarter of 1999 of approximately $25 million to $27
million, or $1.42 to $1.53 per share on a diluted basis after-tax, for the
write-down of assets for disposition and related closure expenses. The cash
portion of this charge is estimated to be approximately $7 to $8 million.
10
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PENDING SALE AND DISPOSITION OF SONAB (continued)
The preliminary estimate of the pre-tax components of the charge for
write-down of assets for disposition and related closure expenses, the related
income tax effects and the net cash portion of the charge are approximately as
follows (in millions):
<TABLE>
<CAPTION>
<S> <C> <C>
Costs associated with the write-down of inventory for liquidation $ 8.0 - $ 8.5
Costs associated with the write off of undepreciated fixed assets 1.5 - 1.5
Realization of foreign exchange losses 8.0 - 8.5
Payroll and severance costs 4.0 - 4.5
Other closing costs (a) 3.5 - 4.0
-------------------------
Sub-total 25.0 - 27.0
Income tax benefit (10.1) - (10.9)
-------------------------
Net after tax 14.9 - 16.1
Non cash - Foreign exchange losses (above) (8.0) - (8.5)
-------------------------
Net cash portion of charge $ 6.9 - $ 7.6
=========================
</TABLE>
(a) Including transfer of inventory, furniture removal, main office costs
during close down period, lease termination costs and professional fees.
11
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - DOMESTIC OPERATIONS UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table presents pro forma statements of operations for the
Company's domestic operations for the thirteen and thirty-nine weeks ended
October 31, 1998 and October 30, 1999. The pro forma financial information
excludes the operating results of Sonab and reflects a reduction in the
consolidated interest expense as a portion has been allocated to Sonab.
In thousands, except share
and per share amounts
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------------------------ -----------------------------------------------
Oct. 31, 1998 Oct. 30, 1999 Oct. 31, 1998 (1) Oct. 30, 1999
---------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 157,100 100.0% $ 168,927 100.0% $ 474,682 100.0% $ 507,894 100.0%
Cost of sales 76,805 48.9 82,624 48.9 231,988 48.9 248,142 48.9
----------- -------- ----------- --------- ----------- --------- ----------- ---------
Gross margin 80,295 51.1 86,303 51.1 242,694 51.1 259,752 51.1
Selling, general and
administrative expenses 74,172 47.2 78,098 46.2 220,914 46.5 232,025 45.7
Depreciation and amortization 3,768 2.4 3,970 2.4 11,122 2.4 12,103 2.3
----------- -------- ----------- --------- ----------- --------- ----------- ---------
Income (loss) from
operations 2,355 1.5 4,235 2.5 10,658 2.2 15,624 3.1
Interest expense, net 7,447 4.7 7,448 4.4 23,205 4.9 20,736 4.1
----------- -------- ----------- --------- ----------- --------- ----------- ---------
Income (loss) before income taxes (5,092) (3.2) (3,213) (1.9) (12,547) (2.7) (5,112) (1.0)
Provision (benefit) for income
taxes (1,971) (1.2) (1,002) (0.6) (4,699) (1.0) (1,169) (0.2)
----------- -------- ----------- --------- ----------- --------- ----------- ---------
Net income (loss) $ (3,121) (2.0)% $ (2,211) (1.3)% $ (7,848) (1.7)% $ (3,943) (0.8)%
=========== ======== =========== ========= =========== ========= =========== =========
Net income (loss) per share
applicable to common shares:
Basic net income (loss) per share $ (0.30) $ (0.21) $ (0.77) $ (0.38)
=========== =========== =========== ===========
Diluted net income (loss) per
share $ (0.30) $ (0.21) $ (0.77) $ (0.38)
=========== =========== =========== ===========
Weighted average shares and
share equivalents outstanding 10,402,653 10,416,142 10,171,712 10,411,880
========== ========== =========== ===========
</TABLE>
__________________________________________________________________________
(1) Refer to Note 8 for additional 1998 pro forma financial information.
NOTE 7 - 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
12
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - 1998 TRANSACTIONS (continued)
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.
NOTE 8 - 1998 UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
The following table presents the calculation of consolidated pro forma
earnings per share data for thirty-nine weeks ended October 31, 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.
<TABLE>
<CAPTION>
In thousands, except share and Thirty-Nine
Per share amounts Weeks Ended
(unaudited) October 31, 1998
------------------
<S> <C>
Net income (loss) per Consolidated Statements of Operations......... $ (17,185)
Add: Extraordinary charges from early extinguishment of
debt, net of income tax benefit.............................. 7,415
Add: Nonrecurring interest associated with refinancing,
net of income tax benefit.................................... 400
------------------
Pro Forma net income (loss)......................................... $ (9,370)
==================
Pro Forma net income (loss) per share applicable to
common shares:
Basic net income (loss) per share............................... $ (0.92)
==================
Diluted net income (loss) per share............................. $ (0.92)
==================
Weighted average shares and share equivalents outstanding........... 10,171,712
==================
</TABLE>
13
<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 Thirty-Nine Weeks Ended
------------------------------ -------------------------------
October 31, October 30, October 31, October 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales..................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................. 49.0 49.4 48.9 49.1
------------- ------------- ------------- -------------
Gross margin.......................................... 51.0 50.6 51.1 50.9
Selling, general and administrative expenses.............. 47.6 46.7 46.8 46.2
Depreciation and amortization............................. 2.3 2.4 2.3 2.4
------------- ------------- ------------- -------------
Income (loss) from operations......................... 1.1 1.5 2.0 2.3
Interest expense, net..................................... 4.9 4.5 5.0 4.3
Nonrecurring interest associated with refinancing......... - - 0.1 -
------------- ------------- ------------- -------------
Income (loss) before income taxes and
extraordinary charges............................... (3.8) (3.0) (3.1) (2.0)
Provision (benefit) for income taxes...................... (1.5) (1.0) (1.2) (0.6)
------------- ------------- ------------- -------------
Income (loss) before extraordinary charges............ (2.3) (2.0) (1.9) (1.4)
Extraordinary charges from early extinguishment
of debt, net of income tax benefit.................. - - 1.5 -
------------- ------------- ------------- -------------
Net income (loss)..................................... (2.3)% (2.0)% (3.4)% (1.4)%
============= ============= ============= =============
</TABLE>
Thirteen Weeks Ended October 30, 1999 Compared with Thirteen Weeks Ended October
31, 1998
Sales. Sales for the thirteen weeks ended October 30, 1999 increased $9.4
million, or 5.7%, over the comparable period in 1998. Consolidated comparable
department sales (departments open for the same months during comparable
periods) increased 5.8% and domestic comparable department sales increased 6.8%.
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.
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 October 30,
1999. As discussed in Note 5 of Notes to Consolidated Financial Statements,
Sonab has signed a letter of intent to sell the majority of its assets. The
buyer will operate more than 80 locations of Sonab's 130-location base, with the
remaining departments to be closed. Finlay anticipates that a final agreement
will be entered into before the end of the fiscal year.
14
<PAGE>
During the thirteen weeks ended October 30, 1999, Finlay opened 26
departments and closed nine departments. The openings were all within existing
store groups, with the exception of two departments in Herberger's, a division
of Saks Incorporated. The closings were within existing store groups, including
four departments in France and one of the Company's outlet stores.
Gross margin. Gross margin for the period increased by $4.0 million,
primarily as a result of the sales increase. As a percentage of sales, gross
margin decreased by 0.4%. Gross margin as a percentage of sales for the
Company's domestic operations was the same as the prior year although there was
a LIFO charge of $0.1 million for the thirteen weeks ended October 30, 1999, as
compared to a LIFO benefit of $0.2 million in the prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") increased $2.9 million, or 3.7%, due primarily
to payroll expense and lease fees associated with the increase in the Company's
domestic sales. SG&A as a percentage of sales decreased by 0.9% as a result of
the leveraging of these expenses and lower expenses related to the Company's
year 2000 remediation project, which totaled approximately $0.3 million for the
thirteen weeks ended October 30, 1999 as compared to $0.9 million in the prior
year. 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
$0.2 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 $0.2 million primarily
due to a decrease in average borrowings ($360.0 million for the period in 1999
compared to $375.0 million for the comparable period in 1998). The weighted
average interest rate was 8.1% for both the 1999 and 1998 periods.
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 $3.4 million for the 1999 period was
$0.4 million lower than the net loss in the prior year as a result of the
factors discussed above.
Thirty-Nine Weeks Ended October 30, 1999 Compared with Thirty-Nine Weeks Ended
October 31, 1998
Sales. Sales for the thirty-nine weeks ended October 30, 1999 increased
$22.8 million, or 4.5%, over the comparable period in 1998. Consolidated
comparable department sales increased 6.3% and domestic comparable department
sales increased 8.4%. 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 $9.0 million primarily relating to Dillard's
purchase of the Mercantile Stores in the fall of 1998 and the change to an
everyday low price strategy as well as the net effect of new store openings
offset by store closings.
During the thirty-nine weeks ended October 30, 1999, Finlay opened 53
departments and closed 53 departments. The openings were all within existing
store groups, with the exception of three departments in Herberger's. The
closings included 14 departments in Crowley's and Steinbach due to
15
<PAGE>
the bankruptcy of the host store, 22 departments in France and one of the
Company's outlet stores, with the remaining 16 departments closed within
existing store groups.
Gross margin. Gross margin for the period increased by $10.4 million,
primarily as a result of the sales increase. As a percentage of sales, gross
margin decreased by 0.2%. Gross margin as a percentage of sales for the
Company's domestic operations was the same as the prior year although there was
a LIFO charge of $0.3 million for the thirty-nine weeks ended October 30, 1999
as compared to a LIFO benefit of $0.5 million in the prior year.
Selling, general and administrative expenses. SG&A increased $7.6 million,
or 3.2%, 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 $2.0
million in 1999 as compared to $0.9 million in the prior year. SG&A as a
percentage of sales decreased by 0.6% as a result of the leveraging of these
expenses. 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
$1.0 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 $2.8 million
reflecting a lower weighted average interest rate (8.1% for the 1999 period
compared to 8.8% 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 ($334.6
million for the period in 1999 compared to $360.7 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. 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
discount associated with the Old Debentures and the Old Notes. The income tax
benefit on the extraordinary charges totaled $4.8 million.
16
<PAGE>
Net income (loss). The net loss of $7.2 million for the 1999 period was
$10.0 million lower than the net loss of $17.2 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 $2.6 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 thirty-nine
weeks ended October 31, 1998 and October 30, 1999, capital expenditures totaled
$11.7 million and $11.6 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 $134.5 million at October
30, 1999, a decrease of $12.9 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 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 October 30, 1999 were $127.4 million, compared
to a zero balance at January 30, 1999 and $150.1 million at October 31, 1998.
The average amounts outstanding under the Revolving Credit Agreement were $131.4
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 $109.6 million for the thirty-nine weeks ended
October 31, 1998 and October 30, 1999, respectively. The maximum amount
outstanding for the thirty-nine weeks ended October 30, 1999 was $153.3 million.
On November 29, 1999, Sonab, Finlay's European leased jewelry department
subsidiary, signed a letter of intent to sell the majority of its assets. Under
the current terms of the letter of intent, the buyer will operate more than 80
locations of Sonab's 130-location base in France. The remaining departments
17
<PAGE>
will be closed. Finlay anticipates that a final agreement will be entered into
before the end of the fiscal year. Pending final negotiations, the Company
anticipates it will record a pretax charge in the fourth quarter of 1999 of
approximately $25 million to $27 million, or $1.42 to $1.53 per share on a
diluted basis after-tax, for the write-down of assets for disposition and
related closure expenses. The cash portion of this charge is estimated to be
approximately $7 to $8 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
October 30, 1999, $355.1 million of consignment merchandise was on hand as
compared to $283.8 million at January 30, 1999 and $315.7 million at October 31,
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 October
30, 1999, Finlay's outstanding borrowings were $352.4 million, which included a
$75.0 million balance under the Senior Debentures, a $150.0 million balance
under the Senior Notes and a $127.4 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
October 30, 1999, amounts outstanding under the Gold Consignment Agreement
totaled 78,637 fine troy ounces, valued at approximately $23.5 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 October 30,
1999, a total of approximately $9.8 million has been expended.
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code")
restricts utilization of net operating loss carryforwards ("NOLs") after an
ownership change exceeding 50%. As a result 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.
18
<PAGE>
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. At October 30,
1999, the Company had two open positions in futures contracts for gold totaling
25,000 fine troy ounces or approximately $8.1 million, which expire at the end
of November 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 $15.7 million and $16.3 million for the
thirty-nine weeks ended October 31, 1998 and October 30, 1999, respectively.
Year 2000
Many of Finlay's computer systems, software products, other systems using
embedded chips ("non-information technology systems") and third party systems,
accepted 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 would be adversely
affected unless the computer systems and software products of both Finlay and
significant third parties were year 2000 compliant.
A comprehensive plan was prepared so that all systems critical to the
operation of the Company would be year 2000 compliant. The plan was structured
into five primary phases: identification, assessment, remediation, testing and
implementation. The Company has completed all phases and has implemented all
remediated applications. The Company continues to conduct general systems
testing as well as testing of specific year 2000 scenarios in an effort to
verify that the systems are year 2000 compliant.
Finlay used a combination of internal and external resources to execute its
year 2000 project plan. The Company estimates that the costs related to its year
2000 efforts will total approximately $4.0 million, of which a total of
approximately $3.9 million has been spent through October 30, 1999 ($1.9 million
in fiscal 1998 and $2.0 million in fiscal 1999). The Company has funded the year
2000 costs through operating cash flows.
The Company has formally communicated with its host stores, vendors and
other third parties to determine the extent to which the Company may be
vulnerable to the failure of their systems and to
19
<PAGE>
obtain year 2000 compliance certification. To date, none of the third parties
contacted have raised 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.
Although the Company has implemented its remediated applications and completed
its year 2000 plan, there can be no assurance that Finlay's systems and software
will not experience year 2000 related issues, or that Finlay will not incur
significant unforeseen additional expenses to address any such issues. 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, has
identified tasks necessary to address such effects in its contingency plan. 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.
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
20
<PAGE>
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 October 30, 1999.
21
<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.
22
<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: December 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)
23
<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> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> OCT-30-1999
<CASH> 4,183
<SECURITIES> 0
<RECEIVABLES> 38,241
<ALLOWANCES> 0
<INVENTORY> 317,345
<CURRENT-ASSETS> 399,964
<PP&E> 116,960
<DEPRECIATION> 44,681
<TOTAL-ASSETS> 590,294
<CURRENT-LIABILITIES> 265,513
<BONDS> 225,000
0
0
<COMMON> 104
<OTHER-SE> 89,588
<TOTAL-LIABILITY-AND-EQUITY> 590,294
<SALES> 527,026
<TOTAL-REVENUES> 527,026
<CGS> 258,988
<TOTAL-COSTS> 258,988
<OTHER-EXPENSES> 256,105
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,386
<INCOME-PRETAX> (10,453)
<INCOME-TAX> (3,277)
<INCOME-CONTINUING> (7,176)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,176)
<EPS-BASIC> (0.69)
<EPS-DILUTED> (0.69)
</TABLE>
