===============================================================================
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 28, 2000
----------------
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 8, 2000, there were 10,427,353 shares of common stock, par value
$.01 per share, of the Registrant outstanding.
<PAGE>
FINLAY ENTERPRISES, INC
FORM 10-Q
QUARTERLY PERIOD ENDED OCTOBER 28, 2000
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
PAGE(S)
-------
<S> <C>
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the thirteen weeks and
thirty-nine weeks ended October 30, 1999 and October 28, 2000.......................1
Consolidated Balance Sheets as of January 29, 2000 and October 28, 2000.............3
Consolidated Statements of Changes in Stockholders' Equity for the year
ended January 29, 2000 and thirty-nine weeks ended October 28, 2000.................4
Consolidated Statements of Cash Flows for the thirteen weeks and
thirty-nine weeks ended October 30, 1999 and October 28, 2000.......................5
Notes to Consolidated Financial Statements..........................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................20
SIGNATURES..................................................................................21
</TABLE>
<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 30, OCTOBER 28,
1999 2000
--------------- ---------------
<S> <C> <C>
Sales.................................................................... $ 175,280 $ 189,728
Cost of sales............................................................ 86,631 93,233
--------------- ---------------
Gross margin......................................................... 88,649 96,495
Selling, general and administrative expenses............................. 81,813 86,616
Depreciation and amortization............................................ 4,142 4,448
--------------- ---------------
Income (loss) from operations........................................ 2,694 5,431
Interest expense, net.................................................... 7,953 8,140
--------------- ---------------
Income (loss) before income taxes.................................... (5,259) (2,709)
Provision (benefit) for income taxes..................................... (1,814) (850)
--------------- ---------------
Net income (loss).................................................... $ (3,445) $ (1,859)
=============== ===============
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share................................. $ (0.33) $ (0.18)
=============== ===============
Diluted net income (loss) per share............................... $ (0.33) $ (0.18)
=============== ===============
Weighted average shares and share equivalents outstanding................ 10,416,142 10,427,511
=============== ===============
</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 30, OCTOBER 28,
1999 2000
--------------- ---------------
<S> <C> <C>
Sales.................................................................... $ 527,026 $ 579,571
Cost of sales............................................................ 258,988 285,619
--------------- ---------------
Gross margin......................................................... 268,038 293,952
Selling, general and administrative expenses............................. 243,487 261,111
Depreciation and amortization............................................ 12,618 13,030
--------------- ---------------
Income (loss) from operations........................................ 11,933 19,811
Interest expense, net.................................................... 22,386 22,862
--------------- ---------------
Income (loss) before income taxes ................................... (10,453) (3,051)
Provision (benefit) for income taxes..................................... (3,277) (492)
--------------- ---------------
Net income (loss).................................................... $ (7,176) $ (2,559)
=============== ===============
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share................................. $ (0.69) $ (0.25)
=============== ===============
Diluted net income (loss) per share............................... $ (0.69) $ (0.25)
=============== ===============
Weighted average shares and share equivalents outstanding................ 10,411,880 10,423,595
=============== ===============
</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 29, OCTOBER 28,
2000 2000
------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................... $ 35,107 $ 4,076
Accounts receivable - department stores...................................... 22,574 47,011
Other receivables............................................................ 31,075 44,608
Merchandise inventories...................................................... 279,336 350,415
Prepaid expenses and other................................................... 2,083 3,289
------------- --------------
Total current assets...................................................... 370,175 449,399
------------- --------------
Fixed assets
Equipment, fixtures and leasehold improvements............................... 110,017 122,060
Less - accumulated depreciation and amortization............................. 40,439 47,200
------------- --------------
Fixed assets, net......................................................... 69,578 74,860
------------- --------------
Deferred charges and other assets.............................................. 20,484 20,478
Goodwill....................................................................... 96,805 95,737
============= ==============
Total assets.............................................................. $ 557,042 $ 640,474
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable................................................................ $ - $ 124,476
Accounts payable - trade..................................................... 149,799 110,275
Accrued liabilities:
Accrued salaries and benefits............................................. 23,094 19,622
Accrued miscellaneous taxes............................................... 6,296 3,705
Accrued interest.......................................................... 5,321 10,952
Other..................................................................... 19,729 21,452
Income taxes payable......................................................... 6,668 5,430
Deferred income taxes........................................................ 1,681 1,566
------------- --------------
Total current liabilities................................................. 212,588 297,478
Long-term debt................................................................. 225,000 225,000
Other non-current liabilities.................................................. 10,654 11,610
------------- --------------
Total liabilities......................................................... 448,242 534,088
------------- --------------
Stockholders' equity
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 10,416,353 and 10,429,753 shares, respectively..... 104 104
Additional paid-in capital .................................................. 77,194 77,339
Retained earnings ........................................................... 31,502 28,943
------------- --------------
Total stockholders' equity................................................ 108,800 106,386
------------- --------------
Total liabilities and stockholders' equity................................ $ 557,042 $ 640,474
============= ==============
</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>
FOREIGN
COMMON STOCK ADDITIONAL RETAINED CURRENCY TOTAL
------------------
NUMBER PAID-IN EARNINGS TRANSLATION STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT EQUITY
---------- ------ ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 30, 1999........ 10,403,353 $ 104 $ 77,057 $ 27,439 $ (4,789) $ 99,811
Net income (loss).............. - - - 4,063 - 4,063
Foreign currency translation
adjustment.................. - - - - 4,789 4,789
Exercise of stock options...... 13,000 - 137 - - 137
----------- ------ ---------- --------- --------- ---------
Balance, January 29, 2000 ....... 10,416,353 104 77,194 31,502 - 108,800
Net income (loss).............. - - - (2,559) - (2,559)
Exercise of stock options...... 13,400 - 145 - - 145
----------- ------ ---------- --------- --------- ---------
Balance, October 28, 2000
(unaudited).................... 10,429,753 $ 104 $ 77,339 $ 28,943 $ - $ 106,386
=========== ====== ========== ========= ========= =========
</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 30, OCTOBER 28,
1999 2000
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................................................. $ (3,445) $ (1,859)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.................................................. 4,452 4,754
Other, net..................................................................... 349 298
Changes in operating assets and liabilities:
Increase in accounts and other receivables.................................. (8,529) (19,656)
Increase in merchandise inventories......................................... (24,663) (40,736)
(Increase) decrease in prepaid expenses and other........................... (248) 949
Increase in accounts payable and accrued liabilities........................ 22,075 23,420
------------ -------------
NET CASH USED IN OPERATING ACTIVITIES.................................... (10,009) (32,830)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (3,650) (3,955)
Deferred charges and other................................ .................... (1,200) (655)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES............................................ (4,850) (4,610)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 145,285 173,520
Principal payments on revolving credit facility................................ (130,824) (136,602)
Stock options exercised ....................................................... 16 23
------------ -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............................. 14,477 36,941
------------ -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. (75) (278)
------------ -------------
DECREASE IN CASH AND CASH EQUIVALENTS.................................... (457) (777)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 4,640 4,853
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 4,183 $ 4,076
============ =============
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 2,745 $ 2,708
Income taxes paid.............................................................. 3,006 1,725
</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 30, OCTOBER 28,
1999 2000
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................................................. $ (7,176) $ (2,559)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.................................................. 13,532 13,946
Other, net..................................................................... 1,306 1,354
Changes in operating assets and liabilities, net of effect from purchase of
J.B. Rudolph assets (Note 6):
Increase in accounts and other receivables.................................. (32,353) (44,943)
Increase in merchandise inventories......................................... (24,156) (54,796)
Increase in prepaid expenses and other...................................... (1,570) (1,241)
Decrease in accounts payable and accrued liabilities........................ (72,121) (40,206)
------------ -------------
NET CASH USED IN OPERATING ACTIVITIES.................................... (122,538) (128,445)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (11,565) (11,696)
Deferred charges and other..................................................... (6,413) (1,730)
Proceeds from sale of Sonab assets............................................. - 6,792
Proceeds from sale of outlet assets............................................ - 752
Payment for purchase of J.B. Rudolph assets.................................... - (20,605)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES.................................... (17,978) (26,487)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 500,291 536,252
Principal payments on revolving credit facility................................ (372,893) (411,776)
Stock options exercised........................................................ 137 145
------------ -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............................. 127,535 124,621
------------ -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. (164) (720)
------------ -------------
DECREASE IN CASH AND CASH EQUIVALENTS.................................... (13,145) (31,031)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 17,328 35,107
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 4,183 $ 4,076
============ =============
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 16,329 $ 16,315
Income taxes paid.............................................................. 2,479 4,471
</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 28, 2000, and the results of operations and cash flows for the
thirteen weeks and thirty-nine weeks ended October 30, 1999 and October 28,
2000. 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 29, 2000 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 29, 2000
("Form 10-K") previously filed with the Commission.
The Company's fiscal year ends on the Saturday closest to January 31.
References to 1997, 1998, 1999 and 2000 relate to the fiscal years ending
January 31, 1998, January 30, 1999, January 29, 2000 and February 3, 2001,
respectively. Each of the fiscal years includes 52 weeks, except 2000 includes
53 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 30, 1999 and October 28, 2000, 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 1999, the only nonowner change in equity related to the
foreign currency translation adjustment. For the thirteen weeks and thirty-nine
weeks ended October 30, 1999, the comprehensive loss was $4.0 million and $10.3
million, respectively. In 2000, there were no such adjustments and, therefore,
comprehensive income (loss) was the same as the Company's net income (loss).
7
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO 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. Over the past three fiscal years, the fourth quarter accounted for an
average of 43% of Finlay's domestic sales due to the seasonality of the retail
jewelry industry. Approximately 46% of Finlay's domestic sales in 1999 were from
operations in The May Department Stores Company ("May") and 22% 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 29, OCTOBER 28,
2000 2000
---------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Jewelry goods - rings, watches and other fine jewelry
(specific identification basis)............................... $ 283,717 $ 355,887
Less: Excess of specific identification cost over LIFO
inventory value............................................... 4,381 5,472
---------------- ------------------
$ 279,336 $ 350,415
================ ==================
</TABLE>
The LIFO method had the effect of increasing the loss before income taxes
for the thirteen weeks ended October 30, 1999 and October 28, 2000 by $95,000
and $405,000, respectively. The effect of applying the LIFO method for the
thirty-nine weeks ended October 30, 1999 and October 28, 2000 was to increase
the loss before income taxes by $286,000 and $1,092,000, respectively. Finlay
determines its LIFO inventory value by utilizing selected producer price indices
published for jewelry and watches by the Bureau of Labor Statistics.
Approximately $329,850,000 and $421,267,000 at January 29, 2000 and October
28, 2000, 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 Jewelry
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) 105,000 fine troy ounces or (ii)
$32,000,000 worth of gold, subject to a formula as prescribed by the Gold
Consignment Agreement. At October 28, 2000, amounts outstanding under the Gold
Consignment Agreement totaled 104,869 fine troy ounces, valued at approximately
$27.7 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.
8
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MERCHANDISE INVENTORIES (CONTINUED)
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. At January 29, 2000, the Company had two open
positions in futures contracts for gold totaling 25,000 fine troy ounces, valued
at $7.3 million, which expired during the first quarter of 2000. At October 28,
2000, the Company had two open positions in futures contracts for gold totaling
16,000 fine troy ounces, valued at $4.2 million, which expire through April
2001.
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 or in comprehensive income. SFAS No.
133 is effective for fiscal years beginning after June 15, 2000. The Company has
determined that the existing derivative instruments, consisting of forward
contracts, will be designated and accounted for as cash flow hedges as of the
February 4, 2001 adoption date. Upon adoption, the fair value of the forward
contracts will be recorded, as either an asset or liability, with a
corresponding adjustment to comprehensive income. The Company believes that the
designated hedges will be highly effective and the related hedge accounting will
not have a material impact on the Company's results of operations. There are no
other freestanding or embedded derivative instruments that have been identified
by the Company as of October 28, 2000 and, accordingly, the Company does not
expect to record any other adjustments pursuant to the adoption of SFAS No. 133.
NOTE 4 - LEASE AGREEMENTS
Finlay conducts substantially all of its operations as leased departments
in department stores. All of these leases, as well as rentals for office space
and equipment, are accounted for as operating leases. A substantial number of
such operating leases expire on various dates through 2008. All references
herein to leased departments refer to departments operated pursuant to license
agreements or other arrangements with host department stores.
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.
9
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LEASE AGREEMENTS (CONTINUED)
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 30, OCTOBER 28, OCTOBER 30, OCTOBER 28,
1999 2000 1999 2000
--------------- -------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Minimum fees.............. $ 4,297 $ 2,985 $ 12,935 $ 9,008
Contingent fees........... 24,396 28,412 73,405 86,542
--------------- -------------- -------------- ----------------
Total................... $ 28,693 $ 31,397 $ 86,340 $ 95,550
=============== ============== ============== ===============
</TABLE>
NOTE 5 - SALE AND CLOSURE OF SONAB
On January 3, 2000, Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B.
("Sonab"), the Company's European leased jewelry department subsidiary, sold the
majority of its assets for approximately $9.9 million. As of January 29, 2000,
Sonab had received $1.2 million of the sale proceeds. Sonab received an
additional $6.8 million in February 2000 upon the completion of the post-closing
audit, and the balance of $1.9 million remains subject to certain escrow
arrangements among the parties. After the sale, the buyer operated more than 80
locations previously included in Sonab's 130-location base in France. The
remaining departments were closed. The Company recorded a pre-tax charge in the
fourth quarter of 1999 of $28.6 million, or $1.62 per share on a diluted basis
after-tax, for the write-down of assets for disposition and related closure
expenses.
NOTE 6 - JAY B. RUDOLPH, INC. ACQUISITION
On April 3, 2000, Finlay completed the acquisition of certain assets of Jay
B. Rudolph, Inc. ("J.B. Rudolph") for $20.6 million, consisting primarily of
inventory and fixed assets. By acquiring J.B. Rudolph (the "J.B. Rudolph
Acquisition"), Finlay added 57 departments and also added new host store
relationships with Bloomingdale's, Dayton's, and Hudson's. Finlay financed the
J.B. Rudolph Acquisition with borrowings under Finlay's revolving credit
agreement with General Electric Capital Corporation and the other lenders
thereto (the "Revolving Credit Agreement").
The J.B. Rudolph Acquisition was accounted for as a purchase, and,
accordingly, the operating results of the former J.B. Rudolph departments have
been included in the Company's consolidated financial statements since the date
of acquisition. The Company has recorded goodwill of $1.7 million based on a
preliminary purchase price allocation. Goodwill is being amortized over a period
of ten years.
10
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DOMESTIC OPERATIONS UNAUDITED PROFORMA FINANCIAL
INFORMATION
The following tables present proforma domestic statements of operations for
the thirteen weeks and thirty-nine weeks ended October 30, 1999, which reflects
the Company's domestic operations only and excludes the operating results of
Sonab. Refer to Note 5 for additional information regarding the disposition and
close-down of Sonab. In addition, the Company's actual results of operations for
the thirteen weeks and thirty-nine weeks ended October 28, 2000 are shown for
comparative purposes.
IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
--------------------------------------------------------------------
OCTOBER 30, 1999 OCTOBER 28, 2000
PROFORMA ACTUAL
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Sales ......................................... $ 168,927 100.0% $ 189,728 100.0%
Cost of sales.................................. 82,624 48.9 93,233 49.1
----------- ----------- ----------- ------------
Gross margin.................................. 86,303 51.1 96,495 50.9
Selling, general and administrative
expenses...................................... 78,098 46.2 86,616 45.7
Depreciation and amortization.................. 3,970 2.4 4,448 2.3
----------- ----------- ----------- ------------
Income (loss) from operations................. 4,235 2.5 5,431 2.9
Interest expense, net.......................... 7,448 4.4 8,140 4.3
----------- ----------- ---------- ------------
Income (loss) before income taxes............. (3,213) (1.9) (2,709) (1.4)
Provision (benefit) for income taxes........... (1,002) (0.6) (850) (0.4)
----------- ----------- ---------- ------------
Net income (loss)............................. $ (2,211) (1.3)% $ (1,859) (1.0)%
=========== =========== ========== ============
Net income (loss) per share applicable to
common shares:
Basic net income (loss) per share............. $ (0.21) $ (0.18)
=========== ===========
Diluted net income (loss) per share........... $ (0.21) $ (0.18)
=========== ===========
Weighted average shares and share
equivalents outstanding....................... 10,416,142 10,427,511
=========== ============
</TABLE>
11
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DOMESTIC OPERATIONS UNAUDITED
PROFORMA FINANCIAL INFORMATION (CONTINUED)
IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
--------------------------------------------------------------------
OCTOBER 30, 1999 OCTOBER 28, 2000
PROFORMA ACTUAL
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Sales ......................................... $ 507,894 100.0% $ 579,571 100.0%
Cost of sales.................................. 248,142 48.9 285,619 49.3
----------- ----------- ----------- ------------
Gross margin.................................. 259,752 51.1 293,952 50.7
Selling, general and administrative
expenses...................................... 232,025 45.7 261,111 45.1
Depreciation and amortization.................. 12,103 2.3 13,030 2.2
----------- ----------- ----------- ------------
Income (loss) from operations 15,624 3.1 19,811 3.4
Interest expense, net.......................... 20,737 4.1 22,862 3.9
----------- ----------- ---------- ------------
Income (loss) before income taxes............. (5,113) (1.0) (3,051) (0.5)
Provision (benefit) for income taxes........... (1,170) (0.2) (492) (0.1)
----------- ----------- ---------- ------------
Net income (loss)............................. $ (3,943) (0.8)% $ (2,559) (0.4)%
=========== =========== ========== ============
Net income (loss) per share applicable to
common shares:
Basic net income (loss) per share............. $ (0.38) $ (0.25)
=========== ===========
Diluted net income (loss) per share........... $ (0.38) $ (0.25)
=========== ===========
Weighted average shares and share
equivalents outstanding....................... 10,411,880 10,423,595
=========== ============
</TABLE>
NOTE 8 - SUBSEQUENT EVENT
On December 1, 2000, the Company announced that its Board of Directors had
approved a stock repurchase program to acquire up to $20 million of outstanding
common stock. Under the program, the Company, from time to time, at the
discretion of management, may purchase its common stock on the open market
through September 29, 2001. The extent and timing of repurchases will depend
upon general business and market conditions, stock prices, availability under
Finlay's revolving credit facility and its cash position and requirements going
forward. The repurchase program may be modified, extended or terminated by the
Board of Directors at any time.
12
<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 30, OCTOBER 28, OCTOBER 30, OCTOBER 28,
1999 2000 1999 2000
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Sales...................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................................. 49.4 49.1 49.1 49.3
------------- ------------- ------------- -------------
Gross margin........................................... 50.6 50.9 50.9 50.7
Selling, general and administrative expenses............... 46.7 45.7 46.2 45.1
Depreciation and amortization.............................. 2.4 2.3 2.4 2.2
------------- ------------- ------------- -------------
Income (loss) from operations.......................... 1.5 2.9 2.3 3.4
Interest expense, net...................................... 4.5 4.3 4.3 3.9
------------- ------------- ------------- -------------
Income (loss) before income taxes...................... (3.0) (1.4) (2.0) (0.5)
Provision (benefit) for income taxes....................... (1.0) (0.4) (0.6) (0.1)
------------- ------------- ------------- -------------
Net income (loss)...................................... (2.0)% (1.0)% (1.4)% (0.4)%
============= ============= ============= =============
</TABLE>
THIRTEEN WEEKS ENDED OCTOBER 28, 2000 COMPARED WITH THIRTEEN WEEKS ENDED
OCTOBER 30, 1999
SALES. Sales for the thirteen weeks ended October 28, 2000 increased $14.4
million, or 8.2%, over the comparable period in 1999. On a domestic basis, sales
increased $20.8 million, or 12.3%, over the 1999 period. Comparable department
sales (departments open for the same months during comparable periods) increased
0.6%. Management attributes this nominal increase in the comparable department
sales to a general softening in the retail environment and, to a greater degree,
the jewelry sector. Sales from the operation of net new departments contributed
$13.4 million, primarily relating to the J.B. Rudolph Acquisition offset by the
sale and closure of Sonab at the end of 1999.
During the thirteen weeks ended October 28, 2000, Finlay opened twelve
departments and closed two departments. The openings and closings were all
within existing store groups.
GROSS MARGIN. Gross margin for the period increased by $7.8 million,
primarily as a result of the sales increase. As a percentage of sales, gross
margin increased by 0.3%. On a domestic basis, gross margin as a percentage of
sales decreased by 0.2% primarily attributable to an increase in the LIFO
provision of $0.3 million.
13
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") increased $4.8 million, or 5.9%, due primarily
to payroll expense and lease fees associated with the increase in the Company's
sales. SG&A as a percentage of sales decreased by 1.0%, and on a domestic basis
by 0.5%, as a result of the leveraging of these expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$0.3 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 as well as the disposition and
write-off of Sonab's fixed assets. On a domestic basis, depreciation and
amortization increased by $0.5 million. The increase in fixed assets was due to
the addition of new departments, the renovation of existing departments and the
inclusion of the cost of fixed assets acquired in connection with the J.B.
Rudolph Acquisition.
INTEREST EXPENSE, NET. Interest expense increased by $0.2 million primarily
due to a higher weighted average interest rate (8.6% for the 2000 period
compared to 8.1% for the comparable period in 1999) offset by a decrease in
average borrowings ($347.1 million for the period in 2000 compared to $360.0
million for the comparable period in 1999).
PROVISION (BENEFIT) FOR INCOME TAXES. The income tax provision for the 2000
and 1999 periods reflects an effective tax rate of 40.5%.
NET INCOME (LOSS). The net loss of $1.9 million for the 2000 period was
$1.6 million less than the net loss in the prior period as a result of the
factors discussed above. On a domestic basis, the net loss for the 2000 period
was $0.3 million less than the net loss in the prior period, which totaled $2.2
million.
THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000 COMPARED WITH THIRTY-NINE
WEEKS ENDED OCTOBER 30, 1999
SALES. Sales for the thirty-nine weeks ended October 28, 2000 increased
$52.5 million, or 10.0%, over the comparable period in 1999. On a domestic
basis, sales increased $71.7 million, or 14.1%, over the 1999 period. Comparable
department sales increased 4.4%. 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; and (iii)
positioning the Company's departments as a "destination location" for fine
jewelry. These factors were offset by a general softening in the retail
environment in the third quarter. Sales from the operation of net new
departments contributed $30.2 million, primarily relating to the J.B. Rudolph
Acquisition and the net effect of new store openings and closings offset by the
sale and closure of Sonab at the end of 1999.
During the thirty-nine weeks ended October 28, 2000, Finlay opened 80
departments and closed 16 departments. The openings included 57 departments as a
result of the J.B. Rudolph Acquisition, including 23 departments in
Bloomingdale's, 13 departments in Dayton's and 21 departments in Hudson's, seven
departments as a result of May's acquisition of ZCMI and 16 departments within
existing store groups. The closings were all within existing store groups,
including six of the Company's outlet stores which were sold in May 2000.
GROSS MARGIN. Gross margin for the period increased by $25.9 million,
primarily as a result of the sales increase. As a percentage of sales, gross
margin decreased by 0.2%. On a domestic basis, gross margin as a percentage of
sales decreased by 0.4% primarily attributable to (i) management's efforts to
14
<PAGE>
increase market penetration and market share through its pricing strategy, (ii)
intensified promotional activity by the host stores, including an increased
usage of in-store coupons and (iii) an increase in the LIFO provision of $0.8
million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $17.6 million,
or 7.2%, due primarily to payroll expense and lease fees associated with the
increase in the Company's sales. SG&A as a percentage of sales decreased by
1.1%, and on a domestic basis by 0.6%, as a result of the leveraging of these
expenses. In addition, expenses related to the Company's year 2000 remediation
project totaled approximately $2.0 million for the thirty-nine weeks ended
October 30, 1999. There were no such expenses recorded in the current year.
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 as well as the disposition and
write-off of Sonab's fixed assets. On a domestic basis, depreciation and
amortization increased by $0.9 million. The increase in fixed assets was due to
the addition of new departments, the renovation of existing departments and the
inclusion of the cost of fixed assets acquired in connection with the J.B.
Rudolph Acquisition.
INTEREST EXPENSE, NET. Interest expense increased by $0.5 million primarily
due to a higher weighted average interest rate (8.6% for the 2000 period
compared to 8.1% for the comparable period in 1999) offset by a decrease in
average borrowings ($324.1 million for the period in 2000 compared to $334.6
million for the comparable period in 1999).
PROVISION (BENEFIT) FOR INCOME TAXES. The income tax provision for the 2000
and 1999 periods reflects an effective tax rate of 40.5%.
NET INCOME (LOSS). The net loss of $2.6 million for the 2000 period was
$4.6 million lower than the net loss in the prior period as a result of the
factors discussed above. On a domestic basis, the net loss for the 2000 period
was $1.3 million lower than the net loss in the prior period, which totaled $3.9
million.
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 30, 1999 and October 28, 2000, capital expenditures totaled
$11.6 million and $11.7 million (exclusive of the fixed assets acquired in the
J.B. Rudolph Acquisition, which totaled $4.0 million), respectively. For 1999,
capital expenditures totaled $15.0 million and for 2000 are estimated to be
approximately $15.0 million, exclusive of the fixed assets acquired in the J.B.
Rudolph Acquisition. Although capital expenditures are limited by the terms of
the Revolving Credit Agreement, to date this limitation has not precluded the
Company from satisfying its capital expenditure requirements.
Finlay's operations substantially preclude customer receivables and in
recent years, on average, approximately 50% of Finlay's domestic merchandise has
been carried on consignment. Accordingly, management believes that relatively
modest levels of working capital are required in comparison to many other
retailers. The Company's working capital balance was $151.9 million at October
28, 2000, a decrease of $5.7 million from January 29, 2000. The decrease
resulted primarily from the impact of the interim net loss, exclusive of
depreciation and amortization, and capital expenditures including fixed
15
<PAGE>
assets acquired in the J.B. Rudolph Acquisition. 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, which includes a $50.0 million acquisition facility. 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 28, 2000 were $124.5 million, compared
to a zero balance at January 29, 2000 and $127.4 million at October 30, 1999.
The average amounts outstanding under the Revolving Credit Agreement were $109.6
million and $99.1 million for the thirty-nine weeks ended October 30, 1999 and
October 28, 2000, respectively. The maximum amount outstanding for the
thirty-nine weeks ended October 28, 2000 was $145.7 million, at which point the
unused excess availability was $75.0 million, excluding the acquisition
facility.
On December 1, 2000, the Company announced that its Board of Directors had
approved a stock repurchase program to acquire up to $20 million of outstanding
common stock. Under the program, the Company, from time to time, at the
discretion of management, may purchase its common stock on the open market
through September 29, 2001. The extent and timing of repurchases will depend
upon general business and market conditions, stock prices, availability under
Finlay's revolving credit facility and its cash position and requirements going
forward. The repurchase program may be modified, extended or terminated by the
Board of Directors at any time.
On April 3, 2000 Finlay completed the acquisition of certain assets of J.B.
Rudolph for $20.6 million, consisting primarily of inventory and fixed assets.
The J.B. Rudolph Acquisition did not require significant additional working
capital with respect to the operation of the former J.B. Rudolph departments
because Finlay purchased the inventory of those J.B. Rudolph departments which
it acquired. On a going-forward basis, inventory purchases for the former J.B.
Rudolph departments are being financed in part by trade payables combined with
the utilization of consignment inventory. Finlay financed the J.B. Rudolph
Acquisition with borrowings under its Revolving Credit Agreement.
On January 3, 2000, Sonab sold the majority of its assets for approximately
$9.9 million. As of January 29, 2000, Sonab had received $1.2 million of the
sale proceeds. Sonab received an additional $6.8 million in February 2000 upon
the completion of the post-closing audit, and the balance of $1.9 million
remains subject to certain escrow arrangements among the parties. After the
sale, the buyer operated more than 80 locations previously included in Sonab's
130-location base in France. The remaining departments were closed. The Company
recorded a pre-tax charge in the fourth quarter of 1999 of $28.6 million, or
$1.62 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 was
$7.8 million.
16
<PAGE>
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 1999, Finlay had an average
balance of consignment merchandise of $329.9 million from approximately 300
vendors as compared to an average balance of $283.8 million in 1998. As of
October 28, 2000, $421.3 million of consignment merchandise was on hand as
compared to $355.1 million at October 30, 1999.
A substantial amount of Finlay's operating cash flow has been used or will
be required to pay interest, directly or indirectly, with respect to the
Company's 9% Senior Debentures due May 1, 2008 (the "Senior Debentures"), Finlay
Jewelry's 8 3/8 Senior Notes due May 1, 2008 (the "Senior Notes") and amounts
due under the Revolving Credit Agreement, including the payments required
pursuant to the Balance Reduction Requirement. As of October 28, 2000, Finlay's
outstanding borrowings were $349.5 million, which included a $75.0 million
balance under the Senior Debentures, a $150.0 million balance under the Senior
Notes and a $124.5 million balance under the Revolving Credit Agreement.
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) 105,000 fine troy ounces or (ii) $32.0 million worth of
gold, subject to a formula as prescribed by the Gold Consignment Agreement. At
October 28, 2000, amounts outstanding under the Gold Consignment Agreement
totaled 104,869 fine troy ounces, valued at approximately $27.7 million. Finlay
Jewelry is in discussions with its gold consignor regarding an increase in the
existing limits under the Gold Consignment Agreement. The average amount
outstanding under the Gold Consignment Agreement was $23.5 million in 1999.
The year 2000 issue did not pose significant operational problems to
Finlay. Finlay used a combination of internal and external resources to execute
its year 2000 project plan. The costs related to Finlay's year 2000 efforts
totaled approximately $4.0 million, of which approximately $1.9 million and $2.1
million was spent in 1998 and 1999, respectively. Finlay funded the year 2000
costs through operating cash flows.
The Company is in the process of implementing several information
technology initiatives, including the design and development of a new
merchandising system and a point-of-sale system in Finlay's departments. These
projects will serve to support future growth of the Company as well as provide
improved analysis and reporting capabilities and more timely sales and inventory
information to facilitate merchandising solutions. These systems will provide
the foundation for future productivity and expense control initiatives. At
October 28, 2000, a total of approximately $12.1 million has been expended for
software and implementation costs and is included in Deferred charges and other
assets. Approximately $4.0 million for hardware and related equipment was
expended in 1999 to upgrade Finlay's departments and is reflected in Fixed
assets. The Company expects these systems to be completed by mid-2001 and
anticipates it will spend an additional $6-9 million.
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, 1999 (the Company's tax year
end), a NOL for tax purposes of
17
<PAGE>
approximately $7.5 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 29, 2000.
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. For the year ended
January 29, 2000, the gain or loss on open futures contracts was not material.
At October 28, 2000, the Company had two open positions in futures contracts for
gold totaling 16,000 fine troy ounces, valued at $4.2 million, which expire
through April 2001. There can be no assurance that these hedging techniques will
be successful or that hedging transactions will not adversely affect the
Company's results of operations or financial position.
Finlay believes that, based upon current operations, anticipated growth,
and availability under the Revolving Credit Agreement, Finlay Jewelry will, for
the foreseeable future, be able to meet its debt service and anticipated working
capital obligations, and to make distributions to the Company sufficient to
permit the Company to meet its debt service obligations and to pay certain other
expenses as they come due. No assurances, however, can be given that Finlay
Jewelry's current level of operating results will continue or improve or that
Finlay Jewelry's income from operations will continue to be sufficient to permit
Finlay Jewelry and the Company to meet their debt service and other obligations.
Currently, Finlay Jewelry's principal financing arrangements restrict annual
distributions from Finlay Jewelry to the Company to 0.25% of Finlay Jewelry's
net sales for the preceding fiscal year and also allow distributions to the
Company to enable it to make interest payments on the Senior Debentures. The
amounts required to satisfy the aggregate of Finlay Jewelry's interest expense
and required amortization payments totaled $13.0 million for each of the
thirty-nine week periods ended October 30, 1999 and October 28, 2000.
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 43% of Finlay's sales and 81% of its income from operations
for 1997, 1998 and 1999. Finlay has typically experienced net losses in the
first three quarters of its fiscal year, although the Company did achieve a net
profit in the second quarter this 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, performances or achievements to differ materially
from those reflected in, or implied by, 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, competition in the retail jewelry business, the seasonality of the
retail jewelry business, the Company's ability to increase comparable department
sales and to open new departments, the Company's dependence on certain host
store relationships due to the concentration of sales generated by such host
stores, the availability to the Company of alternate sources of merchandise
supply in the case of an abrupt loss of any significant supplier, the Company's
ability to continue to obtain substantial amounts of merchandise on consignment,
the Company's compliance with applicable contractual covenants, 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. Other such factors include the ability of the Company to complete the
repurchases contemplated under its stock repurchase program, the adequacy of
Finlay's working capital to complete the repurchases, the availability and
liquidity of the Company's common stock, and overall market conditions for the
Company's common stock.
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 or to reflect the occurrence of unanticipated events. 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 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. In addition, the Company is exposed to market risk
related to changes in the price of gold, and selectively uses forward contracts
to manage this risk. The Company enters into forward contracts for the purchase
of gold to hedge the risk of gold price fluctuations for future sales of gold
consignment merchandise. The Company does not enter into forward contracts or
other financial instruments for speculation or trading purposes. The aggregate
amount of forward contracts was $4.2 million at October 28, 2000, which expire
through April 2001.
19
<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
On December 1, 2000, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K reporting the announcement by the
Company of the approval by its Board of Directors of a stock repurchase program
to acquire up to $20 million of outstanding common stock.
20
<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 8, 2000 FINLAY ENTERPRISES, INC.
By: /s/ Bruce E. Zurlnick
---------------------------------------
Bruce E. Zurlnick
Senior Vice President, Treasurer
and Chief Financial Officer
(As both a duly authorized officer of
Registrant and as principal financial
officer of Registrant)
21
