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 November 2, 1996
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: 33-59380
FINLAY FINE JEWELRY CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3287757
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
521 Fifth Avenue, New York, NY 10175
------------------------------------ ----------
(Address of principal executive offices) (zip code)
(212) 808-2060
---------------------------------------------------
(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 13, 1996, there were 1,000 shares of common stock, par value
$.01 per share of the Registrant outstanding. As of such date, all shares of
common stock were owned by the Registrant's parent, Finlay Enterprises, Inc., a
Delaware corporation.
* The Registrant is not subject to the filing requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934 and is voluntarily filing this
Quarterly Report on Form 10-Q.
<PAGE>
FINLAY FINE JEWELRY CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED NOVEMBER 2, 1996
INDEX
PAGE(S)
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the thirteen weeks and
thirty-nine weeks ended October 28, 1995 and November 2, 1996.......1
Consolidated Balance Sheets as of February 3, 1996 and
November 2, 1996....................................................3
Consolidated Statements of Changes in Stockholder's Equity for the
year ended February 3, 1996 and thirty-nine weeks ended
November 2, 1996....................................................4
Consolidated Statements of Cash Flows for the thirteen weeks and
thirty-nine weeks ended October 28, 1995 and November 2, 1996.......5
Notes to Consolidated Financial Statements..........................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................15
SIGNATURES...................................................................16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
October 28, November 2,
1995 1996
------------ ------------
<S> <C> <C>
Sales...................................................... $ 132,058 $ 136,140
Cost of sales.............................................. 63,285 65,780
------------ ------------
Gross margin............................................ 68,773 70,360
Selling, general and administrative expenses............... 62,762 63,015
Depreciation and amortization.............................. 2,339 2,739
------------ ------------
Income (loss) from operations........................... 3,672 4,606
Interest expense, net...................................... 5,708 6,009
------------ ------------
Income (loss) before income taxes....................... (2,036) (1,403)
Provision (credit) for income taxes........................ (663) (312)
------------ ------------
Net income (loss)....................................... $ (1,373) $ (1,091)
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
1
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------
October 28, November 2,
1995 1996
------------- ------------
<S> <C> <C>
Sales...................................................... $ 380,202 $ 404,047
Cost of sales.............................................. 182,227 195,663
------------- ------------
Gross margin.......................................... 197,975 208,384
Selling, general and administrative expenses............... 182,890 188,688
Depreciation and amortization.............................. 7,235 8,123
------------- ------------
Income (loss) from operations........................... 7,850 11,573
Proceeds from life insurance............................... (5,000) -
Interest expense, net...................................... 16,510 17,042
------------- ------------
Income (loss) before income taxes....................... (3,660) (5,469)
Provision (credit) for income taxes........................ (2,730) (1,434)
------------- ------------
Net income (loss)....................................... $ (930) $ (4,035)
============= ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
2
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
(unaudited)
February 3, November 2,
1996 1996
---------- ----------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents................................ $ 25,737 $ 1,335
Accounts receivable - department stores.................. 18,889 26,298
Other receivables........................................ 2,860 11,121
Merchandise inventories.................................. 195,926 249,467
Prepaid expenses and other............................... 1,521 1,879
---------- ----------
Total current assets................................. 244,933 290,100
---------- ----------
Fixed assets
Equipment, fixtures and leasehold improvements........... 65,206 75,992
Less - accumulated depreciation and amortization......... 22,735 27,085
---------- ----------
Fixed assets, net.................................... 42,471 48,907
---------- ----------
Deferred charges and other assets.......................... 7,206 5,730
Goodwill................................................... 98,447 96,089
---------- ----------
Total assets......................................... $ 393,057 $ 440,826
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Notes payable............................................ $ - $ 99,979
Current portion of long-term debt........................ 206 7
Accounts payable - trade................................. 125,817 93,143
Accrued liabilities:
Accrued salaries and benefits........................ 14,100 13,059
Accrued miscellaneous taxes.......................... 4,160 3,368
Accrued insurance.................................... 1,115 1,201
Accrued interest..................................... 3,703 581
Accrued management transition and consulting......... 2,418 1,946
Other................................................ 15,495 16,363
Income taxes payable..................................... 11,779 1,702
Deferred income taxes.................................... 831 946
---------- ---------
Total current liabilities............................ 179,624 232,295
Long-term debt............................................. 135,002 135,000
Other non-current liabilities.............................. 6,044 6,425
---------- ---------
Total liabilities.................................... 320,670 373,720
========== =========
Stockholder's equity
Common Stock, par value $.01 per share; authorized
5,000 shares; issued and outstanding 1,000
shares............................................ - -
Additional paid-in capital............................... 69,241 69,241
Distributions to investor group in excess of
carryover basis................................... (24,390) (24,390)
Retained earnings (deficit).............................. 28,283 23,021
Foreign currency translation adjustment.................. (747) (766)
---------- ---------
72,387 67,106
---------- ---------
Total liabilities and stockholder's equity........... $ 393,057 $ 440,826
========== =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Distributions to Foreign
--------------- Additional investor group Retained Currency Total
Number Paid-in in excess of Earnings Translation Stockholder's
of shares Amount Capital carryover basis (Deficit) Adjustment Equity
---------- ------- ---------- --------------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 28, 1995........ 1,000 $ - $ 42,506 $ (24,390) $ 9,924 $ (334) $ 27,706
Net income (loss)............ - - - - 19,739 - 19,739
Dividends on Common Stock.... - - - - (1,380) - (1,380)
Foreign currency translation
adjustment................. - - - - - (413) (413)
Capital contribution from
parent..................... - - 26,735 - - - 26,735
------- ------- -------- ---------- -------- -------- ---------
Balance, February 3, 1996........ 1,000 - 69,241 (24,390) 28,283 (747) 72,387
Net income (loss)............ - - - - (4,035) - (4,035)
Dividends on Common Stock.... - - - - (1,227) - (1,227)
Foreign currency translation
adjustment................. - - - - - (19) (19)
------- ------- -------- ---------- -------- -------- ---------
Balance, November 2, 1996
(unaudited)................ 1,000 $ - $ 69,241 $ (24,390) $ 23,021 $ (766) $ 67,106
======= ======= ======== ========== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------
October 28, November 2,
1995 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss)........................................ $ (1,373) $ (1,091)
Adjustments to reconcile net income (loss) to net
cash provided from (used in) operating activities:
Depreciation and amortization............................ 2,580 2,998
Other, net............................................... 268 46
Changes in operating assets and liabilities:
Increase in accounts and other receivables............. (536) (395)
Increase in merchandise inventories.................... (34,994) (40,535)
(Increase) decrease in prepaid expenses and other...... (588) 1,298
Increase in accounts payable and accrued liabilities... 34,664 21,221
---------- ----------
NET CASH PROVIDED FROM (USED IN) OPERATING
ACTIVITIES.................................... 21 (16,458)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold
improvements............................................ (3,293) (5,254)
Other, net............................................... (1,140) (219)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES.............. (4,433) (5,473)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility.................. 100,337 116,104
Principal payments on revolving credit facility.......... (96,443) (94,070)
Payment of dividends..................................... (234) -
Capital contribution from parent......................... 34 -
Other, net............................................... (51) 5
---------- ----------
NET CASH PROVIDED FROM FINANCING ACTIVITIES........ 3,643 22,039
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............ (141) (30)
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... (910) 78
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 2,384 1,257
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 1,474 $ 1,335
========== ==========
Supplemental disclosure of cash flow information:
Interest paid............................................ $ 1,764 $ 8,934
Income taxes paid........................................ 1,969 2,385
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
----------------------------
October 28, November 2,
1995 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss)........................................... $ (930) $ (4,035)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization............................... 7,903 8,896
Other, net.................................................. 644 977
Changes in operating assets and liabilities:
Increase in accounts and other receivables................ (17,532) (15,678)
Increase in merchandise inventories....................... (57,117) (53,500)
Increase in prepaid expenses and other.................... (1,279) (350)
Decrease in accounts payable and accrued liabilities...... (44,538) (47,113)
--------- -----------
NET CASH USED IN OPERATING ACTIVITIES................. (112,849) (110,803)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold
improvements............................................... (9,505) (12,478)
Other, net.................................................. (1,955) (439)
--------- -----------
NET CASH USED IN INVESTING ACTIVITIES................. (11,460) (12,917)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility..................... 365,319 376,525
Principal payments on revolving credit facility............. (287,460) (276,546)
Payment of dividends........................................ (1,366) (409)
Capital contribution from parent............................ 26,662 -
Other, net.................................................. (515) (201)
--------- -----------
NET CASH PROVIDED FROM FINANCING ACTIVITIES........... 102,640 99,369
--------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............... (39) (51)
--------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS................. (21,708) (24,402)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................. 23,182 25,737
--------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................ $ 1,474 $ 1,335
========= ===========
Supplemental disclosure of cash flow information:
Interest paid............................................... $ 11,939 $ 19,407
Income taxes paid........................................... 8,191 8,674
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
6
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Finlay Fine
Jewelry Corporation ("Finlay Jewelry" or the "Registrant"), a wholly owned
subsidiary of Finlay Enterprises, Inc. (the "Holding Company"), have been
prepared in accordance with generally accepted accounting principles for interim
financial information. References to "Finlay" mean collectively, the Holding
Company, Finlay Jewelry and all predecessor businesses. In the opinion of
management, the accompanying unaudited consolidated financial statements contain
all normal and recurring adjustments necessary to present fairly the financial
position of Finlay Jewelry as of November 2, 1996, and the results of operations
and cash flows for the thirteen weeks and thirty-nine weeks ended October 28,
1995 and November 2, 1996. 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 February 3, 1996
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.
These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in
Finlay Jewelry's annual report on Form 10-K for the fiscal year ended February
3, 1996 ("Form 10-K"), previously filed.
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1993, 1994, 1995 and 1996 relate to the fiscal years ended or ending January
29, 1994, January 28, 1995, February 3, 1996 and February 1, 1997, respectively.
Each of the fiscal years includes fifty-two weeks except 1995, which includes
fifty-three weeks. Certain prior year balances have been reclassified to conform
with the current year presentation.
NOTE 2 - DESCRIPTION OF BUSINESS
Finlay is a retailer of fine jewelry products and the leading operator of
leased fine jewelry departments in department stores in the United States and
France. Finlay also operates leased fine jewelry departments in the United
Kingdom and Germany. A significant portion of Finlay's revenues are generated in
the fourth quarter due to the seasonality of the retail industry. Approximately
71% of Finlay's domestic sales in 1995 were from operations in two major
department store groups of which 48% represents Finlay's domestic sales from one
department store group.
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
(unaudited)
February 3, November 2,
1996 1996
------------- ------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
<S> <C> <C>
(specific identification basis).................... $ 202,860 $ 257,000
Less: Excess of specific identification cost over LIFO
inventory value.................................... 6,934 7,533
------------ ------------
$ 195,926 $ 249,467
============ ============
</TABLE>
7
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MERCHANDISE INVENTORIES (continued)
The LIFO method had the effect of decreasing income (loss) before income
taxes for the thirteen weeks ended October 28, 1995 and November 2, 1996 by
$206,000 and $208,000, respectively. The effect of applying the LIFO method for
the thirty-nine weeks ended October 28, 1995 and November 2, 1996 was to
decrease income (loss) before income taxes by $582,000 and $599,000,
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 $199,079,000 and $214,832,000 at February 3, 1996 and
November 2, 1996, respectively, of merchandise received on consignment has been
excluded from Merchandise inventories and Accounts payable-trade in the
accompanying Consolidated Balance Sheets.
The cost to Finlay of gold merchandise sold on consignment, which typically
varies with the price of gold, is not fixed until the sale is reported to the
vendor following the sale of the merchandise. Finlay frequently enters into
futures contracts, based upon the anticipated sales of gold product, such as
options or forwards, 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 October 28, 1995 and
November 2, 1996, the gain/loss on open futures contracts was not material.
In August 1995, Finlay Jewelry consummated a gold consignment agreement
(the "Gold Consignment Agreement") with Rhode Island Hospital Trust National
Bank ("RIHT"), which matures on February 28, 1998. The Gold Consignment
Agreement enables Finlay Jewelry to pay for merchandise by providing gold, or
otherwise making payment, to certain vendors who currently supply Finlay with
merchandise on consignment. While the merchandise involved remains consigned,
the consignor and title to the gold content of the merchandise changes from the
vendors to RIHT. Finlay Jewelry can obtain, pursuant to the Gold Consignment
Agreement, up to the lesser of (i) 85,000 fine troy ounces or (ii) $25,000,000
worth of gold, subject to a formula as prescribed by the Gold Consignment
Agreement. At November 2, 1996, amounts outstanding under the Gold Consignment
Agreement totalled 46,409 fine troy ounces, valued at approximately $17.5
million. For financial statement purposes, the consigned gold is not included in
merchandise inventories on Finlay Jewelry's consolidated balance sheet and
therefore no related liability has been recorded.
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 the arrangements with host department stores.
Substantially all of the 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 lessor in the
event such transfers occur. 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.
8
<PAGE>
FINLAY FINE JEWELRY CORPORATION
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 (unaudited):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
October 28, November 2, October 28, November 2,
1995 1996 1995 1996
----------- ----------- ----------- -----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Minimum fees....................... $ 2,181 $ 1,290 $ 6,163 $ 3,727
Contingent fees.................... 19,226 20,476 55,022 60,918
----------- --------- ---------- ----------
Total......................... $ 21,407 $ 21,766 $ 61,185 $ 64,645
=========== ========= ========== ==========
</TABLE>
Future minimum payments under noncancellable operating leases having
initial or remaining noncancellable lease terms in excess of one year are as
follows:
(in thousands)
--------------
1996.............................. 6,188
1997.............................. 3,804
1998.............................. 2,679
1999.............................. 2,381
2000.............................. 2,200
Thereafter...................... 11,600
---------
Total minimum payments required............ $ 28,852
=========
Minimum payments shown above have not been reduced by minimum sublease
payments of $253,000 due in the future under noncancellable subleases.
NOTE 5 - INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS
On April 6, 1995, the Holding Company completed an initial public offering
(the "Offering") of 2,500,000 shares of its Common Stock at a price of $14.00
per share. An additional 115,000 shares were sold by non-management selling
stockholders. Net proceeds from the Offering after deducting the underwriting
discount of $2,300,000 and estimated expenses of $2,500,000 incurred in
connection with the Offering, were $30,200,000. The net proceeds were used to
repurchase $6,103,000 accreted balance of the Holding Company's 12% Senior
Discount Debentures due 2005 (the "Debentures") at a price equal to $5,789,000,
or approximately 95% of the accreted amount. The balance of the net proceeds
were used to reduce a portion of the outstanding indebtedness ("Revolving Credit
Reduction") under Finlay's $135,000,000 Revolving Credit Facility (the
"Revolving Credit Facility") with General Electric Capital Corporation ("G.E.
Capital"), which was accounted for as a capital contribution to Finlay Jewelry.
Immediately prior to completion of the Offering, the holders of the Holding
Company's 10% Series C Cumulative Preferred Stock ("Series C Preferred Stock")
exchanged all outstanding shares of Series C Preferred Stock with the Holding
Company for 2,581,784 shares of Common Stock (the "Series C Exchange"). For
purposes of the Series C Exchange, the outstanding Series C Preferred Stock was
(i) valued at its liquidation value of $30,000,000 plus $6,145,000 of accrued
dividends through the date of completion of the Series C Exchange, paid in kind
at a quarterly rate of 2.5% and (ii) exchanged for Common Stock at the initial
public offering price of $14.00 per share.
9
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 -INITIAL PUBLIC OFFERING (continued)
G.E. Capital agreed to reduce the interest rate on the Revolving Credit
Facility by 0.5% concurrent with the Offering. Finlay and G.E. Capital amended
the Revolving Credit Facility in March, 1995 pursuant to which the Holding
Company became a co-obligor with Finlay Jewelry under the Revolving Credit
Facility with respect to a portion of the borrowings thereunder. Borrowings
under the Revolving Credit Facility at November 2, 1996 were $99,979,000, and
are included in the Notes payable caption on the accompanying Consolidated
Balance Sheet.
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:
Statement of Operations Data
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
October 28, November 2, October 28, November 2,
1995 1996 1995 1996
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Sales......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 47.9 48.3 47.9 48.4
---------- ----------- ---------- -----------
Gross margin.............................. 52.1 51.7 52.1 51.6
Selling, general and administrative expenses.. 47.5 46.3 48.1 46.7
Depreciation and amortization................. 1.8 2.0 1.9 2.0
---------- ----------- ---------- -----------
Income (loss) from operations............. 2.8 3.4 2.1 2.9
Proceeds from life insurance.................. - - (1.3) -
Interest expense, net......................... 4.3 4.4 4.3 4.2
---------- ----------- ---------- -----------
Income (loss) before income taxes......... (1.5) (1.0) (0.9) (1.3)
Provision (credit) for income taxes........... (0.5) (0.2) (0.7) (0.4)
---------- ----------- ---------- -----------
Net income (loss)......................... (1.0)% (0.8)% (0.2)% (0.9)%
========== =========== ========== ===========
</TABLE>
Thirteen Weeks Ended November 2, 1996 Compared with Thirteen Weeks Ended
October 28, 1995
Sales. Sales for the thirteen weeks ended November 2, 1996 increased $4.1
million, or 3.1%, over the comparable period for 1995. Comparable department
sales (departments open for the same months during comparable periods) increased
3.6%. Sales decreased by $0.7 million as a result of the net effect of new store
openings offset by store closings, as well as the timing of such department
openings and closings. During the thirteen weeks ended November 2, 1996, Finlay
opened 33 departments and closed six departments. The openings included 17
departments operated by Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B
("Sonab"), a French subsidiary. Included in the Sonab openings were 15
departments in Monoprix S.A., a department store in France ("Monoprix"), one
department in Debenhams, P.L.C., a department store chain in the United Kingdom
("Debenhams"), and one department in the new Galeries Lafayette store in Berlin,
Germany. The remaining 16 departments were opened within existing domestic store
groups. The six department closings were also within existing domestic host
store groups.
10
<PAGE>
Gross margin. Gross margin for the period increased by $1.6 million but, as
a percentage of sales, gross margin decreased 0.4% as a result of management's
efforts to increase market penetration and market share through a more
aggressive pricing strategy.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") as a percentage of sales decreased 1.2%. SG&A
increased $0.3 million or 0.4% due to additional expenses, primarily payroll and
lease fees associated with increased sales volume. Although these expenses
increased, the growth was at a slower rate than sales.
Depreciation and amortization. Depreciation and amortization increased by
$0.4 million, reflecting $17.9 million in capital expenditures for the most
recent 12 months, offset by the effect of certain assets becoming fully
depreciated. The increase in fixed assets was due to the addition of new
departments and the renovation of existing departments.
Interest expense, net. Interest expense increased by $0.3 million
reflecting an increase in average borrowings ($232.7 million for the period in
1996 compared to $219.8 million for the comparable period in 1995) partially
offset by a lower weighted average interest rate (9.5% for the period in 1996
compared to 9.8% for the comparable period in 1995).
Provision (credit) for income taxes. The income tax provision for the 1995
and 1996 periods reflects the effective tax rate of 41.5%.
Net income (loss). The net loss of $1.1 million for the 1996 period was
$0.3 million lower than the net loss for the comparable period in 1995 as a
result of the factors discussed above.
Thirty-Nine Weeks Ended November 2, 1996 Compared with Thirty-Nine Weeks
Ended October 28, 1995
Sales. Sales for the thirty-nine weeks ended November 2, 1996 increased
$23.8 million, or 6.3%, over the comparable period for 1995. Comparable
department sales increased 6.3%. Management attributes this increase in
comparable department sales primarily to intensified promotion of key items and
best value programs as well as joint marketing efforts coordinated with several
host store groups. Sales from the operation of net new departments (departments
not included in comparable department sales) was not material. During the
thirty-nine weeks ended November 2, 1996, Finlay opened 70 departments and
closed 60 departments. There were 31 openings within existing store groups. in
addition, Finlay opened 13 departments in the Hecht's division of The May
Department Stores Company ("May") as a result of May's acquisition of the
Strawbridge's stores, 19 departments in Monoprix and seven departments in
Debenhams. The closings included 29 departments in the Emporium/Weinstock's
chain, which was acquired by Federated Department Stores, Inc. and will operate
under the Macy's name, and eight departments in The Jones Store Inc., which the
lessor decided to consolidate with one lessee. The remaining 23 departments
closed within existing host store groups.
Gross margin. Gross margin for the period increased by $10.4 million but,
as a percentage of sales, gross margin decreased 0.5% as a result of
management's efforts to increase market penetration and market share through a
more aggressive pricing strategy.
Selling, general and administrative expenses. SG&A as a percentage of sales
decreased 1.4%. SG&A increased $5.8 million, or 3.2%, due to additional
expenses, primarily payroll and lease fees associated with increased sales
volume. Although these expenses increased, the growth was at a slower rate than
sales.
Depreciation and amortization. Depreciation and amortization increased by
$0.9 million, reflecting $17.9 million in capital expenditures for the most
recent 12 months, offset by the effect of certain assets becoming fully
depreciated. The increase in fixed assets was due to the addition of new
departments and the renovation of existing departments.
11
<PAGE>
Proceeds from Life Insurance. The Company received, during the second
quarter of 1995, proceeds of $5.0 million from a life insurance policy
maintained on a senior executive.
Interest expense, net. Interest expense increased by $0.5 million
reflecting an increase in average borrowings ($214.6 million for the period in
1996 compared to $208.5 million for the comparable period in 1995) partially
offset by a lower weighted average interest rate (9.7% for the period in 1996
compared to 10.0% for the comparable period in 1995).
Provision (credit) for income taxes. The income tax provision for the 1995
and 1996 periods reflects the effective tax rate of 41.5%.
Net income (loss). The net loss of $4.0 million for the 1996 period was
$3.1 million higher than the net loss for the comparable period in 1995 as a
result of the factors discussed above. Excluding the effect of the receipt of
life insurance proceeds in 1995, the net loss of $4.0 million in 1996 compares
to a net loss of $5.9 million in 1995.
Liquidity and Capital Resources
Finlay's capital requirements are primarily 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 and renovating
existing departments. In addition, future working capital requirements would be
increased by further international expansion. For the thirty-nine weeks ended
October 28, 1995 and November 2, 1996, capital expenditures totalled $9.5
million and $12.5 million, respectively. Capital expenditures are estimated to
be approximately $17.0 million in 1996. Capital expenditures are limited by the
terms of the Revolving Credit Facility.
Finlay's operations substantially preclude consumer receivables and
approximately 50% of Finlay's domestic merchandise is carried on consignment.
Accordingly, Finlay believes that relatively modest levels of working capital
are required in comparison to many other retailers. Finlay Jewelry's working
capital balance was $57.8 million at November 2, 1996, a decrease of $7.5
million from February 3, 1996. The decrease resulted from capital expenditures
and the impact of the interim net loss exclusive of depreciation and
amortization. Based on the seasonal nature of Finlay's business, working capital
levels typically can be expected to decrease on an interim basis during the
first three quarters of a year. See "-Seasonality."
The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October and November in anticipation
of the holiday shopping season. Accordingly, Finlay experiences seasonal cash
needs as inventory levels peak. The Revolving Credit Facility with G.E. Capital
provides Finlay with a line of credit of up to $135.0 million which is available
to finance seasonal cash and other working capital needs. The Revolving Credit
Facility bears interest at a rate equal to, at Finlay's option, (i) the Index
Rate (as defined in the Revolving Credit Facility) plus l.0% or (ii) adjusted
LIBOR plus 2.0%. Pursuant to the Debenture indenture, the Holding Company has
pledged all of the issued and outstanding shares of capital stock of Finlay
Jewelry for the benefit of the Debenture holders. Pursuant to the Revolving
Credit Facility, Finlay Jewelry has pledged or caused to be pledged all of the
issued and outstanding capital stock (or other equity securities) of each of its
direct and indirect subsidiaries (including Sonab Holdings, Inc., Sonab
International, Inc. and Sonab) for the benefit of the lenders under the
Revolving Credit Facility.
Finlay is required to reduce the balance of the Revolving Credit Facility
in each year to $10.0 million or less for a 20 consecutive day period, and
immediately thereafter to zero for an additional 10 consecutive days (the
"Balance Reduction Requirement"). Borrowings under the Revolving Credit Facility
at November 2, 1996 were $100.0 million compared to a zero balance at February
3, 1996, pursuant to the Balance Reduction Requirement,
12
<PAGE>
and $77.9 million at October 28, 1995. The average amounts outstanding were
$73.5 million and $79.6 million for the thirty-nine weeks ended October 28, 1995
and November 2, 1996, respectively. The maximum amount outstanding under the
Revolving Credit Facility during the thirty-nine weeks ended November 2, 1996
was $110.0 million.
Simultaneously with the acquisition of Sonab on October 28, 1994, G.E.
Capital agreed to provide additional financing by increasing the Revolving
Credit Facility from $110.0 million to $135.0 million. Finlay Jewelry believes
that, with the increased borrowing capacity under the Revolving Credit Facility
resulting from the Revolving Credit Reduction, it has sufficient liquidity to
meet Sonab's anticipated working capital requirements. In addition, Finlay
Jewelry believes that it has sufficient liquidity to meet anticipated working
capital requirements relating to (i) the operation of the outlet stores, (ii)
the operation of the seven departments in Debenhams and (iii) the planned
opening in the fourth quarter of 1996 of 10 additional departments in Monoprix
and the operation of 15 such departments, which opened during the third quarter
of 1996.
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 1995, Finlay had an average
balance of consignment merchandise of $208.5 million from over 200 vendors as
compared to an average balance of $194.2 million in 1994. As of November 2,
1996, $214.8 million of consignment merchandise was on hand as compared to
$199.1 million at February 3, 1996 and $220.1 million at October 28, 1995.
On April 13, 1995, the Holding Company received net proceeds of $30.2
million as a result of the Offering of 2,500,000 shares of its Common Stock. Of
the net proceeds, $5.8 million was utilized to repurchase $6.1 million accreted
balance of Debentures. The balance of the net proceeds were contributed to
Finlay Jewelry by reducing a portion of the outstanding indebtedness under the
Revolving Credit Facility.
A substantial amount of operating cash flow of Finlay is or will be
required to pay, directly or indirectly, interest with respect to the 10 5/8%
Senior Notes due 2003 of Finlay Jewelry (the "Notes") and the Debentures and
amounts due under the Revolving Credit Facility. As of November 2, 1996, Finlay
Jewelry's outstanding borrowings were $235.0 million, which included a $135.0
million balance under the Notes and a $100.0 million balance under the Revolving
Credit Facility. The Debentures do not pay cash interest until November 1, 1998.
In August 1995, Finlay Jewelry consummated the Gold Consignment Agreement
with RIHT. The Gold Consignment Agreement enables Finlay Jewelry to pay for
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) 85,000 fine troy ounces or (ii) $25,000,000 worth of gold, subject
to a formula as prescribed by the Gold Consignment Agreement. At November 2,
1996, amounts outstanding under the Gold Consignment Agreement totalled 46,409
fine troy ounces, valued at approximately $17.5 million.
Finlay believes that, based upon current operations, anticipated growth,
availability under the Revolving Credit Facility and the anticipated
availability of additional debt financing, 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 Holding Company sufficient
to permit the Holding 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 Holding Company to meet their debt
service and other obligations. The Revolving Credit Facility, the Note indenture
and the Gold Consignment Agreement restrict distributions from Finlay Jewelry to
the Holding Company to 0.25% of Finlay Jewelry's net sales for the preceding
fiscal year. The amounts required to satisfy the aggregate of Finlay Jewelry's
interest expense and required amortization payments totalled $12.9 million and
$19.7 million for the thirty-nine weeks ended October 28, 1995 and November 2,
1996, respectively. As a result of the closing date for the quarter under the
retail calendar, the 1996 period includes two semiannual interest payments with
respect to the Notes of $7.2 million each, whereas the comparable period in 1995
includes only one payment of $7.2 million.
13
<PAGE>
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 of certain recapitalization
transactions in 1993, a change in ownership of the Holding 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
Finlay Jewelry's annual utilization of its NOLs and other carryforwards which
requires a deferral or loss of the utilization of such NOLs or other
carryforwards. Finlay Jewelry had, at October 31, 1995 (Finlay Jewelry's tax
year end), a NOL for tax purposes of approximately $16.0 million which is
subject to an annual limit of approximately $2.0 million per year. For financial
reporting purposes, no NOLs existed as of February 3, 1996.
Seasonality
Finlay's business is highly seasonal, with peak sales occurring during the
fourth quarter of each year, which includes the Christmas season
(November/December). The fourth quarter accounted for an average of 42% of
Finlay's annual sales and approximately 92% of its income from operations
(excluding nonrecurring charges) for 1993, 1994 and 1995. Accordingly, the
results for any of the first three quarters of a year, taken individually or in
the aggregate, are not indicative of annual results. Generally, Finlay's
operations during the first three quarters of a year are financed by increased
borrowings under the Revolving Credit Facility.
Inflation
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
2 Not applicable.
4 Not applicable.
10 Not applicable.
11 Not applicable.
15 Not applicable.
18 Not applicable.
19 Not applicable.
22 Not applicable.
23 Not applicable.
24 Not applicable.
27 Financial Data Schedule.
99 Not applicable.
B. Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
FINLAY FINE JEWELRY CORPORATION
Date: December 13, 1996 By: /s/ Barry D. Scheckner
-----------------------------------
Barry D. Scheckner, Senior Vice
President and Chief Financial
Officer
(As both a duly authorized officer of
Registrant and as principal financial
officer of Registrant)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINLAY FINE
JEWELRY CORPORATION FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-START> FEB-04-1996
<PERIOD-END> NOV-02-1996
<CASH> 1,335
<SECURITIES> 0
<RECEIVABLES> 26,298
<ALLOWANCES> 0
<INVENTORY> 249,467
<CURRENT-ASSETS> 290,100
<PP&E> 75,992
<DEPRECIATION> 27,085
<TOTAL-ASSETS> 440,826
<CURRENT-LIABILITIES> 232,295
<BONDS> 135,000
0
0
<COMMON> 0
<OTHER-SE> 67,106
<TOTAL-LIABILITY-AND-EQUITY> 440,826
<SALES> 404,047
<TOTAL-REVENUES> 404,047
<CGS> 195,663
<TOTAL-COSTS> 195,663
<OTHER-EXPENSES> 196,811
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,042
<INCOME-PRETAX> (5,469)
<INCOME-TAX> (1,434)
<INCOME-CONTINUING> (4,035)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,035)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
