- --------------------------------------------------------------------------------
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 August 1, 1998
--------------
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.)
529 Fifth Avenue New York, NY 10017
------------------------------------------ ----------
(Address of principal executive offices) (zip code)
(212) 808-2800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X * No ____
As of September 11, 1998, 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 13or 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 AUGUST 1, 1998
INDEX
PAGE(S)
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the thirteen weeks and
twenty-six weeks ended August 2, 1997 and August 1, 1998..............1
Consolidated Balance Sheets as of January 31, 1998
and August 1, 1998....................................................3
Consolidated Statements of Changes in Stockholder's Equity for the year
ended January 31, 1998 and twenty-six weeks ended August 1, 1998......4
Consolidated Statements of Cash Flows for the thirteen weeks and
twenty-six weeks ended August 2, 1997 and August 1, 1998..............5
Notes to Consolidated Financial Statements............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................20
SIGNATURES....................................................................21
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-----------------------------------
August 2, August 1,
1997 1998
------------- --------------
<S> <C> <C>
Sales.................................................................... $ 148,060 $ 177,366
Cost of sales............................................................ 72,112 87,309
------------- --------------
Gross margin......................................................... 75,948 90,057
Selling, general and administrative expenses............................. 66,171 79,815
Depreciation and amortization............................................ 2,939 3,907
------------- --------------
Income (loss) from operations........................................ 6,838 6,335
Interest expense, net.................................................... 6,012 6,288
Nonrecurring interest associated with refinancing........................ - 417
------------- --------------
Income (loss) before income taxes and extraordinary charges.......... 826 (370)
Provision (credit) for income taxes...................................... 475 (32)
------------- --------------
Income (loss) before extraordinary charges........................... 351 (338)
Extraordinary charges from early extinguishment of debt,
net of income tax benefit of $3,236................................ - 4,755
------------- --------------
Net income (loss).................................................... $ 351 $ (5,093)
============= ==============
</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>
Twenty-Six Weeks Ended
-----------------------------------
August 2, August 1,
1997 1998
------------- --------------
<S> <C> <C>
Sales.................................................................... $ 282,652 $ 338,358
Cost of sales............................................................ 137,834 165,413
------------- --------------
Gross margin......................................................... 144,818 172,945
Selling, general and administrative expenses............................. 131,101 156,740
Depreciation and amortization............................................ 5,692 7,701
------------- --------------
Income (loss) from operations........................................ 8,025 8,504
Interest expense, net.................................................... 11,416 12,601
Nonrecurring interest associated with refinancing........................ - 417
------------- --------------
Income (loss) before income taxes and extraordinary charges.......... (3,391) (4,514)
Provision (credit) for income taxes...................................... (1,143) (1,602)
------------- --------------
Income (loss) before extraordinary charges........................... (2,248) (2,912)
Extraordinary charges from early extinguishment of debt,
net of income tax benefit of $3,236................................ - 4,755
------------- --------------
Net income (loss).................................................... $ (2,248) $ (7,667)
============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
(unaudited)
January 31, August 1,
1998 1998
------------- --------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents.................................................... $ 12,655 $ 1,768
Accounts receivable - department stores...................................... 20,772 37,066
Other receivables............................................................ 6,861 18,454
Merchandise inventories...................................................... 279,766 307,273
Prepaid expenses and other................................................... 1,782 3,675
------------- --------------
Total current assets...................................................... 321,836 368,236
------------- --------------
Fixed assets
Equipment, fixtures and leasehold improvements............................... 95,257 102,378
Less - accumulated depreciation and amortization............................. 28,249 33,557
------------- --------------
Fixed assets, net......................................................... 67,008 68,821
------------- --------------
Deferred charges and other assets.............................................. 8,339 10,209
Goodwill....................................................................... 104,271 102,384
------------- --------------
Total assets.............................................................. $ 501,454 $ 549,650
============= ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Notes payable................................................................ $ - $ 128,695
Accounts payable - trade..................................................... 160,424 78,348
Accrued liabilities
Accrued salaries and benefits............................................. 12,694 13,646
Accrued miscellaneous taxes............................................... 5,013 3,496
Accrued insurance......................................................... 215 1,290
Accrued interest.......................................................... 3,902 3,836
Accrued management transition and consulting.............................. 1,092 808
Other..................................................................... 14,639 11,814
Income taxes payable......................................................... 15,853 14,559
Deferred income taxes........................................................ 1,220 1,846
Due to parent................................................................ 41,079 706
------------- --------------
Total current liabilities................................................. 256,131 259,044
Long-term debt................................................................. 135,000 150,000
Other non-current liabilities.................................................. 8,497 8,927
------------- --------------
Total liabilities......................................................... 399,628 417,971
------------- --------------
Stockholder's equity
Common Stock, par value $.01 per share; authorized 5,000 shares;
issued and outstanding 1,000 shares....................................... - -
Additional paid-in capital .................................................. 69,241 107,365
Distributions to investor group in excess of carryover basis................. (24,390) (24,390)
Retained earnings............................................................ 63,818 55,189
Foreign currency translation adjustment...................................... (6,843) (6,485)
------------- --------------
Total stockholder's equity................................................ 101,826 131,679
------------- --------------
Total liabilities and stockholder's equity................................ $ 501,454 $ 549,650
============= ==============
</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 Foreign
-------------------- Additional to investor Retained Currency Total
Number Paid-in group excess of Earnings Translation Stockholder's
of shares Amount Capital carryover basis (Deficit) Adjustment Equity
----------- ------- ----------- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 1, 1997...... 1,000 $ - $ 69,241 $ (24,390) $ 44,609 $ (3,050) $ 86,410
Net income (loss)............ - - - - 20,921 - 20,921
Dividends on Common Stock.... - - - - (1,712) - (1,712)
Foreign currency translation
adjustment.................. - - - - - (3,793) (3,793)
----------- ------- ----------- --------------- ----------- ------------- -------------
Balance, January 31, 1998...... 1,000 - 69,241 (24,390) 63,818 (6,843) 101,826
Net income (loss)............ - - - - (7,667) - (7,667)
Dividends on Common Stock.... - - - - (962) - (962)
Capital contribution from
parent...................... - - 38,124 - - - 38,124
Foreign currency translation
adjustment.................. - - - - - 358 358
----------- ------- ----------- --------------- ----------- ------------- -------------
Balance, August 1, 1998
(unaudited)................... 1,000 $ - $ 107,365 $ (24,390) $ 55,189 $ (6,485) $ 131,679
=========== ======= =========== =============== =========== ============= =============
</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
------------------------------
August 2, August 1,
1997 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss).............................................................. $ 351 $ (5,093)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.................................................. 3,196 4,171
Write-off deferred financing costs............................................. - 2,023
Redemption premium............................................................. - 5,378
Other extraordinary charges from early extinguishment of debt.................. - 589
Other, net..................................................................... 233 (120)
Changes in operating assets and liabilities:
(Increase) decrease in accounts and other receivables....................... 1,650 (3,735)
(Increase) decrease in merchandise inventories.............................. 23,165 (6,801)
(Increase) decrease in prepaid expenses and other........................... (657) 762
Decrease in accounts payable and accrued liabilities........................ (31,056) (3,915)
Decrease in due to parent................................................... - (40,357)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES.................................... (3,138) (47,098)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (5,102) (3,721)
Other, net..................................................................... (1,190) (958)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES.................................... (6,292) (4,679)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 117,722 295,125
Principal payments on revolving credit facility................................ (107,410) (166,430)
Prepayment of notes............................................................ - (135,000)
Payment of redemption premium.................................................. - (5,378)
Capital contribution from parent............................................... - 38,124
Capitalized financing costs.................................................... - (337)
Other, net..................................................................... (5) (686)
------------ -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............................. 10,307 25,418
------------ -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. (81) (171)
------------ -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 796 (26,530)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 2,440 28,298
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 3,236 $ 1,768
============ =============
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 2,017 $ 2,981
Income taxes paid.............................................................. 3,385 183
</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>
Twenty-Six Weeks Ended
------------------------------
August 2, August 1,
1997 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss).............................................................. $ (2,248) $ (7,667)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.................................................. 6,206 8,235
Write-off deferred financing costs............................................. - 2,023
Redemption premium............................................................. - 5,378
Other extraordinary charges from early extinguishment of debt.................. - 589
Other, net..................................................................... 661 199
Changes in operating assets and liabilities:
Increase in accounts and other receivables.................................. (18,011) (27,729)
Increase in merchandise inventories......................................... (2,146) (26,824)
Increase in prepaid expenses and other...................................... (675) (1,876)
Decrease in accounts payable and accrued liabilities........................ (101,678) (84,999)
Decrease in due to parent................................................... - (40,357)
------------ -------------
NET CASH USED IN OPERATING ACTIVITIES.................................... (117,891) (173,028)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (8,477) (7,178)
Other, net..................................................................... (1,813) (2,204)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES.................................... (10,290) (9,382)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 297,109 503,542
Principal payments on revolving credit facility................................ (185,587) (374,847)
Prepayment of notes............................................................ - (135,000)
Payment of redemption premium.................................................. - (5,378)
Capital contribution from parent............................................... - 38,124
Proceeds from senior note offering............................................. - 150,000
Capitalized financing costs.................................................... - (4,083)
Other, net..................................................................... 2 (686)
------------ -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............................. 111,524 171,672
------------ -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. (499) (149)
------------ -------------
DECREASE IN CASH AND CASH EQUIVALENTS.................................... (17,156) (10,887)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 20,392 12,655
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 3,236 $ 1,768
============ =============
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 10,548 $ 12,549
Income taxes paid.............................................................. 7,984 1,095
</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 and its wholly owned subsidiaries ("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 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 Finlay
Jewelry as of August 1, 1998, and the results of operations and cash flows for
the thirteen weeks and twenty-six weeks ended August 2, 1997 and August 1, 1998.
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 31, 1998 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
Finlay Jewelry's annual report on Form 10-K for the fiscal year ended January
31, 1998 ("Form 10-K") previously filed with the Commission.
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1995, 1996, 1997 and 1998 relate to the fiscal years ending February 3, 1996,
February 1, 1997, January 31, 1998 and January 30, 1999, respectively. Each of
the fiscal years includes fifty-two weeks except 1995, which includes
fifty-three weeks.
During the first quarter of 1998, Finlay Jewelry adopted SFAS No. 130,
"Reporting Comprehensive Income", which became effective for fiscal years
beginning after December 15, 1997. This Statement requires disclosure of
comprehensive income, defined as the total of net income and all other nonowner
changes in equity, which under generally accepted accounting principles, are
recorded directly to the stockholders' equity section of the consolidated
balance sheet and, therefore bypass net income. In Finlay's case, the only
nonowner change in equity relates to the foreign currency translation
adjustment.
Comprehensive income (loss) is as follows (in thousands):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------------- -------------------------------
August 2, August 1, August 2, August 1,
1997 1998 1997 1998
------------ ------------ -------------- -------------
<S> <C> <C> <C> <C>
Net income (loss)....................................... $ 351 $ (5,093) $ (2,248) $ (7,667)
Foreign currency translation adjustment................. (2,440) (587) (4,672) 358
------------ ------------ -------------- -------------
Comprehensive income (loss)............................. $ (2,089) $ (5,680) $ (6,920) $ (7,309)
============ ============ ============== =============
</TABLE>
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring 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's fair value be
recognized currently
7
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION (continued)
in earnings. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999 and is not expected to have a material impact on Finlay Jewelry's financial
position or results of operations.
NOTE 2 - DESCRIPTION OF BUSINESS
Finlay is a retailer of fine jewelry products and primarily operates leased
fine jewelry department stores throughout the United States and France. A
significant portion of Finlay's revenues are generated in the fourth quarter due
to the seasonality of the retail industry. Approximately 72% of Finlay's
domestic sales in 1997 were from operations in two major department store
groups, of which 49% represents Finlay's domestic sales from one department
store group.
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
(unaudited)
January 31, August 1,
1998 1998
---------------- ------------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
<S> <C> <C>
(specific identification basis)............................... $ 286,289 $ 313,449
Less: Excess of specific identification cost over LIFO
inventory value............................................... 6,523 6,176
---------------- ------------------
$ 279,766 $ 307,273
================ ==================
</TABLE>
The LIFO method had the effect of increasing income before income taxes for
the thirteen weeks ended August 2, 1997 by $191,000 and decreasing the loss
before income taxes by $439,000 for the thirteen weeks ended August 1, 1998. The
LIFO method had no effect on the loss before income taxes for the twenty-six
weeks ended August 2, 1997. The effect of applying the LIFO method for the
twenty-six weeks ended August 1, 1998 was to decrease the loss before income
taxes by $346,000. Finlay determines its LIFO inventory value by utilizing
selected producer price indices published for jewelry and watches by the Bureau
of Labor Statistics. Due to the application of APB Opinion No. 16, inventory
valued at LIFO for income tax reporting purposes was approximately $21,000,000
lower than that for financial reporting purposes at January 31, 1998.
Approximately $219,822,000 and $247,908,000 at January 31, 1998 and August
1, 1998, 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 currently 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. As a result, such vendors have reduced their
working capital requirements and associated financing costs.
8
<PAGE>
FINLAY FINE JEWELRY
CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MERCHANDISE INVENTORIES (continued)
Consequently, Finlay has negotiated more favorable prices and terms with the
participating vendors. Finlay Jewelry can obtain, pursuant to the Gold
Consignment Agreement, up to the lesser of (i) 85,000 fine troy ounces or (ii)
$32,000,000 worth of gold, subject to a formula as prescribed by the Gold
Consignment Agreement. At August 1, 1998, amounts outstanding under the Gold
Consignment Agreement totaled 42,021 fine troy ounces, valued at approximately
$12.1 million. For financial statement purposes, the consigned gold is not
included in Merchandise inventories on Finlay Jewelry's Consolidated Balance
Sheets and, therefore, no related liability has been recorded.
The cost to Finlay of gold merchandise sold on consignment in some cases is
not fixed until the sale is reported to the vendor or to the gold consignor in
the case of merchandise sold pursuant to the Gold Consignment Agreement. Finlay
at times enters into futures contracts, such as options or forwards, based upon
the anticipated sales of gold product, to hedge against the risk arising from
those payment arrangements. Changes in the market value of futures contracts are
accounted for as an addition to or reduction from the inventory cost. At August
2, 1997, the gain/loss on open futures contracts was not material. Finlay
Jewelry did not have any open positions in futures contracts for gold at January
31, 1998 or August 1, 1998.
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. The values of such fixed assets
are recorded at the inception of the lease arrangement and are reflected in the
accompanying Consolidated Balance Sheets.
In many cases, Finlay is subject to limitations under its lease agreements
with host department stores which prohibit Finlay from operating departments for
other store groups within a certain geographical radius of the host store.
The store leases provide for the payment of fees based on sales, plus, in
some instances, installment payments for fixed assets. Lease expense, included
in Selling, general and administrative expenses, is as follows (unaudited):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty - Six Weeks Ended
------------------------------ -------------------------------
August 2, August 1, August 2, August 1,
1997 1998 1997 1998
-------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Minimum fees.......................... $ 1,968 $ 5,088 $ 3,810 $ 9,656
Contingent fees....................... 21,814 23,853 41,705 45,251
-------------- ------------ ------------- ------------
Total............................... $ 23,782 $ 28,941 $ 45,515 $ 54,907
============== ============ ============= ============
</TABLE>
9
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LONG TERM INCENTIVE PLANS
On March 5, 1997, an executive officer of Finlay received options under the
Holding Company's Long Term Incentive Plan (the "1993 Plan") to purchase an
aggregate of 139,719 shares of Common Stock at an exercise price of $14.00 per
share. Such options vest and become exercisable on January 2, 2001.
On March 6, 1997, the Board of Directors of the Holding Company adopted the
1997 Long Term Incentive Plan (the "1997 Plan"), which was approved by the
Holding Company's stockholders in June 1997. The 1997 Plan, which is similar to
the 1993 Plan, is intended as a successor to the 1993 Plan and provides for the
grant of the same types of awards as are currently available under the 1993
Plan. The Board of Directors adopted an amendment to the 1997 Plan, which was
approved by the Holding Company's stockholders in June 1998, pursuant to which
options available for issuance under the 1997 Plan were increased to 850,000. Of
the 850,000 shares of the Holding Company's Common Stock that have been reserved
for issuance pursuant to the 1997 Plan, a total of 481,915 shares are subject to
options granted to certain senior management, key employees and a director. The
exercise prices of such options range from $13.875 per share to $24.313 per
share.
Upon the commencement of his employment, an executive officer of Finlay
purchased 138,525 shares of Common Stock of the Holding Company (the "Purchased
Shares"), at a price of $7.23 per share. The aggregate purchase price of these
shares was paid in the form of a note issued to the Holding Company in the
amount of $1,001,538. On April 24, 1998, the executive officer sold 100,000 of
the Purchased shares and repaid the note ("Note Receivable Repayment").
NOTE 6 - OTHER TRANSACTIONS
On April 24, 1998, the Holding Company completed a public offering of
1,800,000 shares of its Common Stock at a price of $27.50 per share (the "Equity
Offering"), of which 567,310 shares were sold by the Holding Company and
1,232,690 shares were sold by certain selling stockholders. Concurrently with
the Equity Offering, the Holding Company and Finlay Jewelry completed the public
offering of $75.0 million aggregate principal amount of 9% Senior Debentures due
May 1, 2008 (the "Senior Debentures") and $150.0 million aggregate principal
amount of 8-3/8% Senior Notes due May 1, 2008 (the "Senior Notes"),
respectively. In addition, on April 24, 1998, the existing revolving credit
agreement (the "Revolving Credit Agreement") was amended to increase the line of
credit thereunder to $275.0 million and to make certain other changes.
On May 1, 1998, the Holding Company prepaid all of the $39.0 million of
accreted interest on the Holding Company's 12% Senior Discount Debentures due
2005 (the "Old Debentures") as of such date, in accordance with the indenture
relating to the Debentures (the "Old Debenture Indenture"). The Holding Company
exercised its option to prepay all such accreted interest to reduce outstanding
indebtedness and to take advantage of the resulting tax benefits relating to the
deductibility of such prepayment in 1998.
10
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - OTHER TRANSACTIONS (continued)
On May 26, 1998, the net proceeds to the Holding Company from the Equity
Offering, the sale of the Senior Debentures, the Note Receivable Repayment and
the repayment of approximately $1.0 million of an intercompany liability by
Finlay Jewelry (the "Intercompany Repayment") were used to redeem the Holding
Company's Old Debentures, including associated premiums. Also, on May 26, 1998,
Finlay Jewelry used the net proceeds from the sale of the Senior Notes to redeem
Finlay Jewelry's 10-5/8% Senior Notes due 2003 (the "Old Notes"), including
associated premiums, and to make the Intercompany Repayment. The above
transactions, excluding the Equity Offering, are referred to herein as the
"Refinancing". Finlay Jewelry recorded, in the second quarter, a pre-tax
extraordinary charge of approximately $8.0 million, including $5.4 million for
the redemption premium on the Old Notes and approximately $2.0 million to write
off deferred financing costs associated with the Old Notes. As a result of
certain call requirements associated with the Old Notes, the debt could not be
repaid until May 26 , 1998. Thus, for twenty-five days in the second quarter,
Finlay Jewelry was required to maintain as outstanding both the new debt issued
on April 24, 1998 as well as the old debt retired on May 26, 1998. The net
effect of carrying the new and old debt, offset by reduced interest expense on
Finlay Jewelry's revolving credit facility and interest income on excess cash
balances, was an increase to interest expense of $0.4 million.
On October 6, 1997, Finlay completed the acquisition of certain assets of
the Diamond Park Fine Jewelers division of Zale Corporation ("Diamond Park"), a
leading operator of departments, for approximately $63.0 million. By acquiring
Diamond Park (the "Diamond Park Acquisition"), Finlay added 139 departments that
had total sales of approximately $103.0 million for the twelve months ended
January 31, 1998 and also added new host store relationships with Mercantile
Stores, Marshall Field's and Parisian. Finlay financed the Diamond Park
Acquisition with borrowings under the Revolving Credit Agreement.
11
<PAGE>
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The following table sets forth operating results as a percentage of sales
for the periods indicated:
Statements of Operations Data
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------------- -----------------------------
August 2, August 1, August 2, August 1,
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................................... 48.7 49.2 48.8 48.9
----------- ----------- ----------- -----------
Gross margin...................................... 51.3 50.8 51.2 51.1
Selling, general and administrative expenses.......... 44.7 45.0 46.4 46.3
Depreciation and amortization......................... 2.0 2.2 2.0 2.3
----------- ----------- ----------- -----------
Income (loss) from operations..................... 4.6 3.6 2.8 2.5
Interest expense, net................................. 4.1 3.6 4.0 3.7
Nonrecurring interest associated with refinancing..... - 0.2 - 0.1
----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary charges........................... 0.5 (0.2) (1.2) (1.3)
Provision (credit) for income taxes................... 0.3 - (0.4) (0.5)
----------- ----------- ----------- -----------
Income (loss) before extraordinary charges........ 0.2 (0.2) (0.8) (0.8)
Extraordinary charges from early extinguishment
of debt, net of income tax benefit.............. - 2.7 - 1.4
----------- ----------- ----------- -----------
Net income (loss)................................. 0.2% (2.9)% (0.8)% (2.2)%
=========== =========== =========== ===========
</TABLE>
Thirteen Weeks Ended August 1, 1998 Compared with Thirteen Weeks Ended August 2,
1997
Sales. Sales for the thirteen weeks ended August 1, 1998 increased $29.3
million, or 19.8%, over the comparable period in 1997. Comparable department
sales (departments open for the same months during comparable periods) increased
2.8%. Management attributes this increase in comparable department sales to the
following initiatives: (i) emphasizing its "Key Item" and "Best Value'
merchandising programs, which provide a targeted assortment of items at
competitive prices; (ii) increasing focus on holiday and event-driven promotions
as well as host store marketing programs; (iii) positioning its departments as a
"destination location" for fine jewelry, and (iv) continuing project PRISM
(Promptly Reduce Inefficiencies and Sales Multiply), a program designed to allow
Finlay's sales associates more time for customer sales and service. During the
second quarter, Sonab, the Company's French subsidiary, experienced lower sales
trends due to the transition from a promotional pricing strategy to an everyday
low price strategy. This change was made as a result of Sonab reassessing its
pricing policy following certain local French court decisions and the adverse
impact of such change is expected to continue for the balance of the year. Sales
from the operation of net new departments (departments not included in
comparable department sales) contributed $25.2 million, which included $25.0
million from the former Diamond Park departments. During the thirteen weeks
ended August 1, 1998, Finlay opened eight departments and closed five
departments. The openings were all within
12
<PAGE>
existing store groups, with the exception of two departments opened in new store
groups in the United Kingdom. The closings were all within existing store
groups.
Gross margin. Gross margin for the period increased by $14.1 million,
primarily as a result of the sales increase. As a percentage of sales, gross
margin decreased by 0.5%, which is primarily attributed to (i) lower gross
margins experienced by the former Diamond Park departments, particularly as the
merchandise acquired as part of the Diamond Park Acquisition continues to be
sold and (ii) duplicative freight costs relating to certain operational aspects
of Finlay's new central distribution facility that are not yet fully functional.
These factors were offset by a $0.2 million decrease in the LIFO provision.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") increased $13.6 million, or 20.6%, due
primarily to payroll expense and lease fees associated with the increase in
Finlay Jewelry's sales. The increased sales generated by the former Diamond Park
departments enabled Finlay Jewelry to leverage administrative and certain other
expenses. Offsetting this were higher than anticipated expenses relating to the
central distribution facility, increased medical expenses associated with the
implementation of a new medical benefit plan and rising wage rates related to a
challenging employment market. These factors are expected to have a similar
effect on performance for the balance of the year. In addition, Finlay Jewelry
increased its advertising expenditures, net of increased vendor participation,
as compared with the 1997 period. As a result of the factors discussed above,
SG&A as a percentage of sales increased by 0.3%.
Depreciation and amortization. Depreciation and amortization increased by
$1.0 million, reflecting an increase in capital expenditures for the most recent
twelve months, depreciation on Finlay's new central distribution facility and
amortization related to the Diamond Park Acquisition, offset by the effect of
certain assets becoming fully depreciated. The increase in fixed assets was due
to the addition of new departments, including the former Diamond Park
departments, and the renovation of existing departments.
Interest expense, net. Interest expense increased by $0.3 million
reflecting an increase in average borrowings ($304.0 million for the period in
1998 compared to $247.2 million for the comparable period in 1997) primarily as
a result of additional indebtedness outstanding under the Revolving Credit
Agreement (adjusted to exclude the timing impact of the call requirements on the
Old Notes, discussed below). The increase in average borrowings was partially
offset by a lower weighted average interest rate (8.0% for the 1998 period
compared to 9.4% for the comparable period in 1997) primarily relating to the
lower interest rate on the Senior Notes as compared to the Old Notes.
Nonrecurring interest associated with refinancing. As a result of certain
call requirements associated with the Old Notes, the debt could not be repaid
until May 26, 1998. Thus, for twenty-five days in the second quarter, Finlay was
required to maintain as outstanding both the Senior Notes issued on April 24,
1998 as well as the Old Notes retired on May 26, 1998. The net effect of
carrying the new and old debt, offset by reduced interest expense on Finlay's
revolving credit facility and interest income on excess cash balances, was an
increase to interest expense of $0.4 million.
Provision (credit) for income taxes. The income tax provision for the 1998
and 1997 periods reflects effective tax rates of 40.5% and 41.5%, respectively.
Extraordinary charges from early extinguishment of debt, net of income tax
benefit. In conjunction with the repayment of the Old Notes, Finlay Jewelry
recorded a pre-tax extraordinary charge of $8.0 million, including $5.4 million
for the redemption premium on the Old Notes and approximately
13
<PAGE>
$2.0 million to write off deferred financing costs associated with the Old
Notes. The income tax benefit on the extraordinary charges totaled $3.2 million.
Net income (loss). The net loss of $5.1 million for the 1998 period was
$5.4 million lower than the net income of $0.3 million for the comparable period
as a result of the factors discussed above.
Twenty-Six Weeks Ended August 1, 1998 Compared with Twenty-Six Weeks Ended
August 2, 1997
Sales. Sales for the twenty-six weeks ended August 1, 1998 increased $55.7
million, or 19.7%, over the comparable period in 1997. Comparable department
sales increased 3.1%. Management attributes this increase in comparable
department sales primarily to the "Key Item" and "Best Value" merchandising
programs and to the marketing initiatives discussed above. During the second
quarter, Sonab experienced lower sales trends due to the transition from a
promotional pricing strategy to an everyday low price strategy. This change was
made as a result of Sonab reassessing its pricing policy following certain local
French court decisions and the adverse impact of such change is expected to
continue for the balance of the year. Sales from the operation of net new
departments contributed $46.9 million, which included $46.0 million from the
former Diamond Park departments. During the twenty-six weeks ended August 1,
1998, Finlay opened 22 departments and closed 27 departments. The openings were
all within existing store groups, with the exception of two departments opened
in new store groups in the United Kingdom. The closings included all five
departments in Dillard's and all seven departments in Debenhams, with the
remaining 15 departments closed within existing store groups.
Gross margin. Gross margin for the period increased by $28.1 million,
primarily as a result of the sales increase. As a percentage of sales, gross
margin decreased by 0.1%, which is primarily attributed to (i) lower gross
margins experienced by the former Diamond Park departments, particularly as the
merchandise acquired as part of the Diamond Park Acquisition continues to be
sold and (ii) duplicative freight costs relating to certain operational aspects
of Finlay's central distribution facility that are not yet fully functional.
These factors were offset by a $0.3 million decrease in the LIFO provision.
Selling, general and administrative expenses. SG&A increased $25.6 million,
or 19.6%, due primarily to payroll expense and lease fees associated with the
increase in the Finlay Jewelry's sales. The increased sales generated by the
former Diamond Park departments enabled Finlay Jewelry to leverage
administrative and certain other expenses. Offsetting this were higher than
anticipated expenses relating to the central distribution facility, increased
medical expenses associated with the implementation of a new medical benefit
plan and rising wage rates related to a challenging employment market. These
factors are expected to have a similar effect on performance for the balance of
the year. As a result of the factors discussed above, SG&A as a percentage of
sales decreased by 0.1%
Depreciation and amortization. Depreciation and amortization increased by
$2.0 million, reflecting an increase in capital expenditures for the most recent
twelve months, depreciation on Finlay's new central distribution facility and
amortization related to the Diamond Park Acquisition, offset by the effect of
certain assets becoming fully depreciated. The increase in fixed assets was due
to the addition of new departments, including the former Diamond Park
departments and the renovation of existing departments.
Interest expense, net. Interest expense increased by $1.2 million
reflecting an increase in average borrowings ($269.7 million for the period in
1998 compared to $231.4 million for the comparable period in 1997) primarily as
a result of additional indebtedness outstanding under the Revolving Credit
14
<PAGE>
Agreement (adjusted to exclude the timing impact of the call requirements on the
Old Notes, discussed above). The increase in average borrowings was partially
offset by a lower weighted average interest rate (8.7% for the 1998 period
compared to 9.5% for the comparable period in 1997) primarily relating to the
lower interest rate on the Senior Notes as compared to the Old Notes.
Nonrecurring interest associated with refinancing. For the reasons
discussed above, Finlay Jewelry incurred nonrecurring interest expense of $0.4
million relating to the net effect of carrying the Senior Notes and Old Notes,
offset by reduced interest expense on Finlay's revolving credit facility and
interest income on excess cash balances.
Provision (credit) for income taxes. The income tax provision for the 1998
and 1997 periods reflects effective tax rates of 40.5% and 41.5%, respectively.
Extraordinary charges from early extinguishment of debt, net of income tax
benefit. In conjunction with the repayment of the Old Notes, Finlay Jewelry
recorded a pre-tax extraordinary charge of $8.0 million, including $5.4 million
for the redemption premium on the Old Notes and approximately $2.0 million to
write off deferred financing costs associated with the Old Notes. The income tax
benefit on the extraordinary charges totaled $3.2 million.
Net income (loss). The net loss of $7.7 million for the 1998 period was
$5.5 million higher than the net loss of $2.2 million for the comparable period
as a result of the factors discussed above.
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 and renovating
existing departments. For the twenty-six weeks ended August 2, 1997 and August
1, 1998, capital expenditures totaled $8.5 million and $7.2 million,
respectively. For 1997, capital expenditures totaled $19.3 million, which
included construction costs related to Finlay's central distribution facility,
and in 1996 totaled $17.5 million. Total capital expenditures for 1998 are
estimated to be approximately $15.0 million. Although capital expenditures are
limited by the terms of the Revolving Credit Agreement, to date this limitation
has not precluded Finlay Jewelry 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. Finlay Jewelry's working capital balance was $109.2 million at August
1, 1998, an increase of $43.5 million from January 31, 1998. The increase
resulted primarily from a capital contribution from the Holding Company and the
sale of the Senior Notes, partially offset by the use of such proceeds to prepay
the Old Notes, the impact of the 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 and November 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 seasonal cash and
15
<PAGE>
other working capital needs. Amounts outstanding under the Revolving Credit
Agreement presently bear interest at a rate equal to, at Finlay's option, (i)
the Index Rate (as defined in the Revolving Credit Agreement) plus 0.5% or (ii)
adjusted LIBOR plus 1.5%. Commencing in December 1998, amounts outstanding under
the Revolving Credit Agreement will bear interest at a rate equal to, at
Finlay's option, (i) the Index Rate 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 Finlay.
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"). The indentures
relating to the Senior Debentures and the Senior Notes do not have a balance
reduction requirement. Borrowings under the Revolving Credit Agreement at August
1, 1998 were $128.7 million, compared to a zero balance at January 31, 1998 and
$111.5 million at August 2, 1997. The average amounts outstanding under the
Revolving Credit Agreement were $96.4 million and $122.2 million (adjusted for
the impact of the temporary paydown of the revolving credit facility due to
certain call requirements associated with the Old Notes) for the twenty-six
weeks ended August 2, 1997 and August 1, 1998, respectively. The maximum amount
outstanding for the twenty-six weeks ended August 1, 1998 was $154.2 million.
Finlay does not expect that significant additional working capital will be
required with respect to the operation of the former Diamond Park departments
because Finlay purchased the inventory of those Diamond Park departments which
it acquired. Inventory purchases for the former Diamond Park departments has
been and will continue to be financed in part by trade payables combined with an
increased utilization of consignment inventory compared to the amount of
consignment merchandise on hand at the time of the Diamond Park Acquisition. As
such, management believes that working capital requirements for the former
Diamond Park departments has been and will continue to be reduced as compared to
the amount of working capital required at the time of the Diamond Park
Acquisition.
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 1997, Finlay had an average
balance of consignment merchandise of $216.5 million from over 200 vendors as
compared to an average balance of $201.8 million in 1996. As of August 1, 1998,
$247.9 million of consignment merchandise was on hand as compared to $219.8
million at January 31, 1998 and $205.5 million at August 2, 1997.
A substantial amount of Finlay's operating cash flow has been used or will
be required to pay, directly or indirectly, interest with respect to the Old
Debentures and the Old Notes and amounts due under the Revolving Credit
Agreement, including the payments required pursuant to the Balance Reduction
Requirement and, as a result of the completion of the Equity Offering and
Refinancing, the Senior Debentures and the Senior Notes. As of August 1, 1998,
Finlay Jewelry's outstanding borrowings were $278.7 million, which included a
$150.0 million balance under the Senior Notes and a $128.7 million balance under
the Revolving Credit Agreement. On May 1, 1998, the Holding Company prepaid in
accordance with the Old Debenture Indenture, all of the $39.0 million of
accreted interest on the Old Debentures as of such date. The Holding Company
exercised its option to prepay all such accreted interest to reduce outstanding
indebtedness and to take advantage of the resulting tax benefits relating to the
deductibility of such prepayment in 1998. In addition, on May 26, 1998, the
Holding Company and Finlay Jewelry redeemed the outstanding principal amounts,
including associated premiums, of the Old Debentures and the Old Notes. Finlay
funded the prepayment and the redemptions using the proceeds
16
<PAGE>
from the sale of the Senior Debentures, the Equity Offering and the sale of the
Senior Notes, together with other available funds. In connection with the
redemption of the Old Notes, Finlay Jewerly recorded, in the second quarter, a
pre-tax nonrecurring charge of approximately $8.0 million, including $5.4
million for the redemption premium on the Old Notes and approximately $2.0
million to write off deferred financing costs associated with the Old Notes.
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) 85,000 fine troy ounces or (ii) $32.0 million worth of
gold, subject to a formula as prescribed by the Gold Consignment Agreement. At
August 1, 1998, amounts outstanding under the Gold Consignment Agreement totaled
42,021 fine troy ounces, valued at approximately $12.1 million. The average
amount outstanding under the Gold Consignment Agreement was $14.3 million in
1997.
An organization-wide program is currently being executed to ensure that all
systems critical to the operation of Finlay Jewelry are Year 2000 compliant.
This process includes the review of various information technology systems,
including Finlay Jewelry's core business systems, end user systems as well as
non-information technology systems. Finlay is using, and will continue to use, a
combination of internal and external resources to assess, remediate and test
such systems to ensure that all are Year 2000 compliant by August 1999. Finlay
is in the process of contacting its software and hardware vendors to determine
Year 2000 compliance and is communicating with all of its host stores and
merchandise vendors on their compliance and testing.
Finlay has estimated the costs related to its Year 2000 efforts to be
approximately $4.0 million and is expected to incur these costs over the next
six quarters. The consequences of a disruption of Finlay Jewelry's operations,
whether caused by Finlay Jewelry's computer systems or those of any of its host
stores or vendors, could have a material adverse effect on Finlay Jewelry's
financial position or results of operations. In addition, there can be no
assurances that Finlay will not experience significant cost overruns or delays
in addressing this issue. Finlay intends to develop a contingency plan in the
event that remediation of its critical systems, or those of significant third
parties, are not completed in the required time frame.
Finlay is in the process of implementing several information technology
initiatives, including the design and development of a new merchandising system
and the upgrade of point-of-sale systems and related hardware in the majority of
Finlay's departments. These projects will serve to support future growth of
Finlay Jewelry as well as provide improved analysis and reporting capabilities.
The cost associated with these projects is estimated to be $10-12 million for
software and implementation costs and such costs will be included in Deferred
charges and other assets with approximately $4-6 million for hardware and
related equipment to be included as a component of Finlay's capital expenditures
and 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 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, 1997 (Finlay Jewelry's tax
year end), a NOL for tax
17
<PAGE>
purposes of approximately $12.0 million which is subject to an annual limit of
approximately $2.0 million per year. For financial reporting purposes, no NOL
existed as of January 31, 1998. An additional change in ownership within the
meaning of Section 382 of the Code has occurred as a result of the sale of
shares of Common Stock of the Holding Company in 1997. However, there are no
additional restrictions upon Finlay Jewelry's ability to utilize its NOLs or
other carryforwards as a result of such ownership change.
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 31, 1998 and the twenty-six weeks
ended August 1, 1998, the gain or loss on open futures contracts was not
material. Finlay Jewelry did not have any open positions in futures contracts
for gold at January 31, 1998. There can be no assurance that these hedging
techniques will be successful or that hedging transactions will not adversely
affect Finlay Jewelry's results of operations or financial position.
On March 19, 1998 Liberty House, one of the host stores in which Finlay
operates, filed a voluntary petition in bankruptcy under Title 11 of the United
States Code ( the "Bankruptcy Code"). Finlay is currently receiving weekly
payments towards the outstanding balance that was due to Finlay prior to the
filing of the bankruptcy petition, which as of September 11, 1998 totaled $0.5
million. Finlay believes that the bankruptcy of Liberty House will not have a
material adverse effect on Finlay's financial position or results of operations.
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 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. Currently, Finlay Jewelry's principal financing
arrangements restrict annual distributions from Finlay Jewelry to the Holding
Company to 0.25% of Finlay Jewelry's net sales for the preceding fiscal year and
also allow distributions to the Holding 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
$10.6 million and $12.5 million for the twenty-six weeks ended August 2, 1997
and August 1, 1998, 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 42% of Finlay's sales and 82% of its income from operations
(excluding nonrecurring charges) for 1995, 1996 and 1997. 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.
18
<PAGE>
Inflation
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1993 and Section 21E
of the Securities Exchange Act of 1934 (the "Exchange Act"). All statements
other than statements of historical information provided herein are
forward-looking statements and may contain information about financial results,
economic conditions, trends and known uncertainties. The forward-looking
statements contained herein are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations", as well as trends in
the general economy in the United States and France, competition in the retail
jewelry business, the seasonality of the retail jewelry business, Finlay
Jewelry's ability to increase comparable department sales and to open new
departments, Finlay Jewelry's estimate of the cost to address Year 2000
compliance issues, Finlay Jewelry's dependence on certain host store
relationships due to the concentration of sales generated by such host stores,
the availability to Finlay Jewelry of alternate sources of merchandise supply in
the case of an abrupt loss of any significant supplier, Finlay Jewelry's ability
to continue to obtain substantial amounts of merchandise on consignment, Finlay
Jewelry's dependence on key officers, Finlay Jewelry's ability to integrate the
former Diamond Park departments (and any future acquisitions ) into its existing
business, Finlay Jewelry's high degree of leverage and the availability to
Finlay Jewelry of financing and credit on favorable terms and changes in
regulatory requirements which are applicable to Finlay Jewelry'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. Finlay Jewelry 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 Finlay Jewelry files or has filed from time to time with the
Commission pursuant to the Exchange Act.
19
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
2 Not applicable.
3 Not applicable.
4 Not applicable.
10 Not applicable.
11 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
On May 11, 1998, Finlay Jewelry filed with the Commission a Current Report
on Form 8-K regarding (i) the sale by Finlay Jewelry of $150.0 million aggregate
principal amount of its 8-3/8% Senior Notes due May 1, 2008; (ii) the concurrent
sale (a) by the Holding Company and certain stockholders of the Holding Company
of an aggregate of 1,800,000 shares of Common Stock of the Holding Company (of
which 567,310 shares were sold by the Holding Company and 1,232,690 shares were
sold by the selling stockholders) and (b) by the Holding Company of $75.0
million aggregate principal amount of its 9% Senior Debentures due May 1, 2008;
(iii) the amendment of the Revolving Credit Agreement to increase the line of
credit thereunder from $225.0 million to $275.0 million and to make certain
other changes; and (iv) the amendment of the Gold Consignment Agreement to renew
the agreement through December 31, 2001, to allow Finlay Jewelry to obtain up to
the lesser of (x) 85,000 fine troy ounces or (y) $32.0 million worth of gold,
and to make certain other modifications.
20
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 11, 1998 FINLAY FINE JEWELRY CORPORATION
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)
21
<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> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> AUG-01-1998
<CASH> 1,768
<SECURITIES> 0
<RECEIVABLES> 37,066
<ALLOWANCES> 0
<INVENTORY> 307,273
<CURRENT-ASSETS> 368,236
<PP&E> 102,378
<DEPRECIATION> 33,557
<TOTAL-ASSETS> 549,650
<CURRENT-LIABILITIES> 259,044
<BONDS> 150,000
0
0
<COMMON> 0
<OTHER-SE> 131,679
<TOTAL-LIABILITY-AND-EQUITY> 549,650
<SALES> 338,358
<TOTAL-REVENUES> 338,358
<CGS> 165,413
<TOTAL-COSTS> 165,413
<OTHER-EXPENSES> 164,441
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,018
<INCOME-PRETAX> (4,514)
<INCOME-TAX> (1,602)
<INCOME-CONTINUING> (2,912)
<DISCONTINUED> 0
<EXTRAORDINARY> 4,755
<CHANGES> 0
<NET-INCOME> (7,667)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
