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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 April 29, 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 June 9, 2000, there were 10,421,953 shares of common stock, par value $.01
per share, of the Registrant outstanding.
<PAGE>
FINLAY ENTERPRISES, INC
FORM 10-Q
QUARTERLY PERIOD ENDED APRIL 29, 2000
INDEX
PAGE(S)
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the
thirteen weeks ended May 1, 1999 and
April 29, 2000 .......................................... 1
Consolidated Balance Sheets as of
January 29, 2000 and April 29, 2000 ..................... 2
Consolidated Statements of Changes in
Stockholders' Equity for the year ended
January 29, 2000 and thirteen weeks ended
April 29, 2000 .......................................... 3
Consolidated Statements of Cash Flows for the
thirteen weeks ended May 1, 1999 and
April 29, 2000 .......................................... 4
Notes to Consolidated Financial
Statements .............................................. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... 10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk ....................................... 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ........................ 16
SIGNATURES .................................................................. 17
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED
---------------------------
MAY 1, APRIL 29,
1999 2000
----------- -----------
Sales .......................................... $168,379 $178,614
Cost of sales .................................. 81,919 87,336
----------- -----------
Gross margin ............................... 86,460 91,278
Selling, general and administrative expenses ... 79,904 82,736
Depreciation and amortization .................. 4,200 4,204
----------- -----------
Income (loss) from operations .............. 2,356 4,338
Interest expense, net .......................... 7,006 6,897
----------- -----------
Income (loss) before income taxes .......... (4,650) (2,559)
Provision (benefit) for income taxes ........... (1,562) (787)
----------- -----------
Net income (loss) .......................... $(3,088) $(1,772)
=========== ===========
Net income (loss) per share applicable
to common shares:
Basic net income (loss) per share ....... $(0.30) $(0.17)
=========== ===========
Diluted net income (loss) per share ..... $(0.30) $(0.17)
=========== ===========
Weighted average shares and share
equivalents outstanding ...................... 10,406,738 10,419,705
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
JANUARY 29, APRIL 29,
2000 2000
-------- --------
ASSETS
Current assets
Cash and cash equivalents ............................ $ 35,107 $ 7,961
Accounts receivable - department stores .............. 22,574 36,412
Other receivables .................................... 31,075 37,024
Merchandise inventories .............................. 279,336 320,198
Prepaid expenses and other ........................... 2,083 4,224
-------- --------
Total current assets .............................. 370,175 405,819
-------- --------
Fixed assets
Equipment, fixtures and leasehold improvements ....... 110,017 116,055
Less - accumulated depreciation and amortization ..... 40,439 41,722
-------- --------
Fixed assets, net ................................. 69,578 74,333
-------- --------
Deferred charges and other assets ...................... 20,484 20,462
Goodwill ............................................... 96,805 97,614
-------- --------
Total assets ...................................... $557,042 $598,228
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable ........................................ $ -- $ 86,609
Accounts payable - trade ............................. 149,799 105,299
Accrued liabilities:
Accrued salaries and benefits ..................... 23,094 19,007
Accrued miscellaneous taxes ....................... 6,296 5,568
Accrued interest .................................. 5,321 10,685
Other ............................................. 19,729 22,215
Income taxes payable ................................. 6,668 4,173
Deferred income taxes ................................ 1,681 1,552
-------- --------
Total current liabilities ......................... 212,588 255,108
Long-term debt ......................................... 225,000 225,000
Other non-current liabilities .......................... 10,654 11,047
-------- --------
Total liabilities ................................. 448,242 491,155
-------- --------
Stockholders' equity
Common Stock, par value $.01 per share;
authorized 25,000,000 shares;
issued and outstanding 10,416,353
and 10,421,353 shares, respectively ............... 104 104
Additional paid-in capital ........................... 77,194 77,239
Retained earnings (deficit) .......................... 31,502 29,730
-------- --------
Total stockholders' equity ........................ 108,800 107,073
-------- --------
Total liabilities and stockholders' equity ........ $557,042 $598,228
======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
2
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN
--------------------- 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) .......................... -- -- -- (1,772) -- (1,772)
Exercise of stock options .................. 5,000 -- 45 -- -- 45
---------- ---- ------- -------- ------- ---------
Balance, April 29, 2000
(unaudited) ................................ 10,421,353 $104 $77,239 $29,730 $ -- $107,073
========== ==== ======= ======== ======= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
----------------------
MAY 1, APRIL 29,
1999 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .................................. $ (3,088) $ (1,772)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization ...................... 4,505 4,510
Other, net ......................................... 556 827
Changes in operating assets and liabilities,
net of effect from purchase of
J.B. Rudolph assets (Note 6):
Increase in accounts and other receivables ...... (19,301) (26,850)
Increase in merchandise inventories ............. (9,962) (24,579)
Increase in prepaid expenses and other .......... (1,110) (2,154)
Decrease in accounts payable and
accrued liabilities .......................... (58,124) (45,007)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES ........ (86,524) (95,025)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and
leasehold improvements .......................... (3,877) (3,833)
Deferred charges and other, net .................... (2,281) (554)
Proceeds from sale of Sonab assets ................. -- 6,792
Payment for purchase of J. B. Rudolph assets ....... -- (20,605)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ........ (6,158) (18,200)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility ............ 185,976 202,919
Principal payments on revolving credit facility .... (106,691) (116,310)
Stock options exercised and other, net ............. 57 45
--------- ---------
NET CASH PROVIDED FROM FINANCING ACTIVITIES .. 79,342 86,654
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ...... (137) (575)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS ........ (13,477) (27,146)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ....... 17,328 35,107
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............. $ 3,851 $ 7,961
========= =========
Supplemental disclosure of cash flow information:
Interest paid ...................................... $ 1,674 $ 1,227
Income taxes paid (received) ....................... (3,269) 2,663
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Finlay
Enterprises, Inc. (the "Company" or the "Registrant"), and its wholly owned
subsidiary, Finlay Fine Jewelry Corporation and its wholly owned subsidiaries
("Finlay Jewelry"), have been prepared in accordance with generally accepted
accounting principles for interim financial information. References to "Finlay"
mean collectively, the Company and Finlay Jewelry. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all
adjustments necessary to present fairly the financial position of the Company as
of April 29, 2000, and the results of operations and cash flows for the thirteen
weeks ended May 1, 1999 and April 29, 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.
Finlay'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 ended May 1, 1999 and April 29,
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 ended May 1,
1999, the comprehensive loss was $6.0 million. In 2000, there were no such
adjustments and, therefore, comprehensive income (loss) was the same as the
Company's net income (loss).
5
<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:
(UNAUDITED)
JANUARY 29, APRIL 29,
2000 2000
--------- ---------
(IN THOUSANDS)
Jewelry goods - rings, watches and
other fine jewelry (specific
identification basis) ...................... $ 283,717 $ 324,666
Less: Excess of specific identification
cost over LIFO inventory value ............. 4,381 4,468
--------- ---------
$ 279,336 $ 320,198
========= =========
The LIFO method had the effect of increasing the loss before income taxes
for the thirteen weeks ended May 1, 1999 and April 29, 2000 by $92,000 and
$88,000, 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 $359,593,000 at January 29, 2000 and April
29, 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 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) 100,000 fine troy ounces or (ii) $32,000,000
worth of gold, subject to a formula as prescribed by the Gold Consignment
Agreement. At April 29, 2000, amounts outstanding under the Gold Consignment
Agreement totaled 91,426 fine troy ounces, valued at approximately $25.2
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.
6
<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. Changes in the market value of futures contracts are
accounted for as an addition to or reduction from the inventory cost. 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 April 29, 2000, the Company had two open positions
in futures contracts for gold totaling 38,000 fine troy ounces, valued at $10.8
million, which expire during the fall of 2000.
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 is
currently evaluating the impact of adopting 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.
7
<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:
THIRTEEN WEEKS ENDED
-----------------------------
MAY 1, APRIL 29,
1999 2000
--------- ---------
(IN THOUSANDS)
Minimum fees .............................. $ 4,163 $ 2,764
Contingent fees ........................... 23,433 26,463
--------- ---------
Total ................................... $ 27,596 $ 29,227
========= =========
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.
8
<PAGE>
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - DOMESTIC OPERATIONS UNAUDITED PROFORMA FINANCIAL INFORMATION
The following table presents proforma domestic statement of operations for
the thirteen weeks ended May 1, 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
ended April 29, 2000 are shown for comparative purposes.
IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS
(UNAUDITED)
THIRTEEN WEEKS ENDED
------------------------------------------
MAY 1, 1999 APRIL 29, 2000
PROFORMA ACTUAL
------------------- -------------------
Sales ............................ $ 162,651 100.0% $ 178,614 100.0%
Cost of sales .................... 78,897 48.5 87,336 48.9
----------- ----- ----------- -----
Gross margin ..................... 83,754 51.5 91,278 51.1
Selling, general and
administrative expenses ........ 76,144 46.8 82,736 46.3
Depreciation and amortization .... 4,024 2.5 4,204 2.4
----------- ----- ----------- -----
Income (loss) from operations .. 3,586 2.2 4,338 2.4
Interest expense, net ............ 6,368 3.9 6,897 3.8
----------- ----- ----------- -----
Income (loss) before
income taxes ................. (2,782) (1.7) (2,559) (1.4)
Provision (benefit) for
income taxes ................. (827) (0.5) (787) (0.4)
----------- ----- ----------- -----
Net income (loss) .............. $ (1,955) (1.2)% $ (1,772) (1.0)%
=========== ===== =========== =====
Net income (loss) per share
applicable to common shares:
Basic net income (loss)
per share ...................... $ (0.19) $ (0.17)
=========== ===========
Diluted net income (loss)
per share ...................... $ (0.19) $ (0.17)
=========== ===========
Weighted average shares and
share equivalents outstanding .. 10,406,738 10,419,705
=========== ===========
9
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth operating results as a percentage of sales
for the periods indicated:
STATEMENTS OF OPERATIONS DATA
(UNAUDITED)
THIRTEEN WEEKS ENDED
----------------------
MAY 1, APRIL 29,
1999 2000
------ ------
Sales ................................................ 100.0% 100.0%
Cost of sales ........................................ 48.7 48.9
------ ------
Gross margin ..................................... 51.3 51.1
Selling, general and administrative expenses ......... 47.4 46.3
Depreciation and amortization ........................ 2.5 2.4
------ ------
Income (loss) from operations .................... 1.4 2.4
Interest expense, net ................................ 4.2 3.8
------ ------
Income (loss) before income taxes ................ (2.8) (1.4)
Provision (benefit) for income taxes ................. (1.0) (0.4)
------ ------
Net income (loss) ................................ (1.8)% (1.0)%
====== ======
THIRTEEN WEEKS ENDED APRIL 29, 2000 COMPARED WITH THIRTEEN WEEKS ENDED
MAY 1, 1999
SALES. Sales for the thirteen weeks ended April 29, 2000 increased $10.2
million, or 6.1%, over the comparable period in 1999. On a domestic basis, sales
increased $16.0 million, or 9.8%, over the 1999 period. Comparable department
sales (departments open for the same months during comparable periods) increased
4.7%. 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. Sales from the
operation of net new departments contributed $2.3 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 thirteen weeks ended April 29, 2000, Finlay opened 66
departments and closed seven 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 two departments within
existing store groups. The closings were all within existing store groups.
GROSS MARGIN. Gross margin for the period increased by $4.8 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 management's efforts to
10
<PAGE>
increase market penetration and market share through its pricing strategy as
well as intensified promotional activity by the host stores, including an
increased usage of in-store coupons. There was a LIFO charge of approximately
$0.1 million in each of the thirteen week periods ended May 1, 1999 and April
29, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") increased $2.8 million, or 3.5%, 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 0.5%, as a result of the leveraging of these expenses. In addition, expenses
related to the Company's year 2000 remediation project totaled approximately
$0.5 million for the thirteen weeks ended May 1, 1999. There were no such
expenses recorded in the current year's quarter.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $4.2
million in both periods, 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 $0.2 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 decreased by $0.1 million primarily
due to a decrease in average borrowings ($287.3 million for the period in 2000
compared to $305.0 million for the comparable period in 1999) offset by a higher
weighted average interest rate (8.6% for the 2000 period compared to 8.3% 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 $1.8 million for the 2000 period was
$1.3 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 $0.2 million lower than the net loss in the prior period, which totaled $2.0
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 thirteen
weeks ended May 1, 1999 and April 29, 2000, capital expenditures totaled $3.9
million and $3.8 million (exclusive of the fixed assets acquired in the J.B.
Rudolph Acquisition), 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 $150.7 million at April 29,
2000, a decrease of $6.9 million from January 29, 2000. The decrease resulted
primarily from the impact of the
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interim net loss, exclusive of depreciation and amortization, and capital
expenditures. Based on the seasonal nature of Finlay's business, working capital
requirements and therefore borrowings under the Revolving Credit Agreement can
be expected to increase on an interim basis during the first three quarters of
any given fiscal year. See "--Seasonality".
The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October, 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 April 29, 2000 were $86.6 million, compared to
a zero balance at January 29, 2000 and $79.3 million at May 1, 1999. The average
amounts outstanding under the Revolving Credit Agreement were $80.0 million and
$62.3 million for the thirteen weeks ended May 1, 1999 and April 29, 2000,
respectively. The maximum amount outstanding for the thirteen weeks ended April
29, 2000 was $102.7 million.
Finlay does not expect that significant additional working capital will be
required 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, Finlay expects that inventory purchases
for the former J.B. Rudolph departments will be 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
approximately $7.8 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 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 April
29, 2000, $359.6 million of consignment merchandise was on hand as compared to
$305.0 million at May 1, 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
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(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 April 29, 2000, Finlay's outstanding borrowings were $311.6 million, which
included a $75.0 million balance under the Senior Debentures, a $150.0 million
balance under the Senior Notes and an $86.6 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) 100,000 fine troy ounces or (ii) $32.0 million worth of
gold, subject to a formula as prescribed by the Gold Consignment Agreement. At
April 29, 2000, amounts outstanding under the Gold Consignment Agreement totaled
91,426 fine troy ounces, valued at approximately $25.2 million. The average
amount outstanding under the Gold Consignment Agreement was $23.5 million in
1999.
The year 2000 issue has not posed 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 are expected to be completed by
mid-2001. The cost associated with these projects is estimated to be $14.0
million for software and implementation costs, to be included in Deferred
charges and other assets. At April 29, 2000, a total of approximately $10.2
million has been expended and 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.
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 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. 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 29, 2000, the gain or loss on
open futures contracts was not material. At April 29, 2000, the Company had two
open positions in futures contracts for gold totaling 38,000 fine troy ounces,
valued at $10.8 million, which expire during the fall of 2000. 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.
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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 $1.7
million and $1.2 million for the thirteen weeks ended May 1, 1999 and April 29,
2000, respectively.
SEASONALITY
Finlay's business is highly seasonal, with a significant portion of its
sales and income from operations generated during the fourth quarter of each
year, which includes the year-end holiday season. The fourth quarter accounted
for an average of 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. 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, 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 ability to
estimate the costs relating to the closure of Sonab, 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
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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 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 $10.8 million at April 29, 2000, which expire
during the fall of 2000.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
2 Not applicable.
3 Not applicable.
4 Not applicable.
10.1 Amendment No. 10 and Limited Consent, dated as of April 21,
2000, to the Gold Consignment Agreement dated as of June 15,
1995, as amended, between Finlay Jewelry and Sovereign Bank, as
successor to Fleet National Bank, formerly known as BankBoston,
N.A., as successor to Rhode Island Hospital Trust National
Bank.
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 April 17, 2000, the Company filed with the Commission a
Current Report on Form 8-K reporting the purchase by Finlay
Jewelry of certain assets of Jay B. Rudolph, Inc. relating to
the operation of leased fine jewelry departments in Dayton's
and Hudson's department stores owned by Target Corporation and
in department stores owned by Bloomingdale's, Inc.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 9, 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)
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