- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 31, 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 December 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 OCTOBER 31, 1998
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 November 1, 1997 and October 31, 1998.........1
Consolidated Balance Sheets as of January 31, 1998 and
October 31, 1998......................................................3
Consolidated Statements of Changes in Stockholder's Equity for
the year ended January 31, 1998 and thirty-nine weeks ended
October 31, 1998......................................................4
Consolidated Statements of Cash Flows for the thirteen weeks and
thirty-nine weeks ended November 1, 1997 and October 31, 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
-----------------------------
November 1, October 31,
1997 1998
------------ -----------
<S> <C> <C>
Sales....................................................... $ 148,770 $ 165,894
Cost of sales............................................... 71,663 81,207
------------ -----------
Gross margin............................................. 77,107 84,687
Selling, general and administrative expenses................ 71,567 78,710
Depreciation and amortization............................... 3,022 3,916
------------ -----------
Income (loss) from operations............................ 2,518 2,061
Interest expense, net....................................... 6,733 6,423
------------ -----------
Income (loss) before income taxes........................ (4,215) (4,362)
Provision (credit) for income taxes......................... (1,666) (1,707)
------------ -----------
Net income (loss)........................................ $ (2,549) $ (2,655)
============ ===========
</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
-----------------------------
November 1, October 31,
1997 1998
------------ -----------
<S> <C> <C>
Sales....................................................... $ 431,422 $ 504,252
Cost of sales............................................... 209,497 246,620
------------ -----------
Gross margin............................................. 221,925 257,632
Selling, general and administrative expenses................ 202,668 235,450
Depreciation and amortization............................... 8,714 11,617
------------ -----------
Income (loss) from operations............................ 10,543 10,565
Interest expense, net....................................... 18,149 19,025
Nonrecurring interest associated with refinancing........... - 417
------------ -----------
Income (loss) before income taxes and extraordinary charges (7,606) (8,877)
Provision (credit) for income taxes......................... (2,809) (3,309)
------------ -----------
Income (loss) before extraordinary charges............... (4,797) (5,568)
Extraordinary charges from early extinguishment of debt,
net of income tax benefit of $3,236.................... - 4,755
------------ -----------
Net income (loss)........................................ $ (4,797) $ (10,323)
============ ===========
</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, October 31,
1998 1998
----------- -----------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents.................................... $ 12655 $ 2,542
Accounts receivable - department stores...................... 20,772 36,750
Other receivables............................................ 6,861 32,150
Merchandise inventories...................................... 279,766 325,756
Prepaid expenses and other................................... 1,782 4,920
----------- -----------
Total current assets....................................... 321,836 402,118
----------- -----------
Fixed assets
Equipment, fixtures and leasehold improvements............... 95,257 106,869
Less - accumulated depreciation and amortization............. 28,249 36,399
----------- -----------
Fixed assets, net.......................................... 67,008 70,470
----------- -----------
Deferred charges and other assets.............................. 8,339 12,917
Goodwill....................................................... 104,271 101,451
----------- -----------
Total assets............................................... $ 501,454 $ 586,956
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Notes payable................................................ $ - $ 150,122
Accounts payable - trade..................................... 160,424 87,200
Accrued liabilities
Accrued salaries and benefits.............................. 12,694 11,761
Accrued miscellaneous taxes................................ 5,013 4,584
Accrued insurance.......................................... 215 993
Accrued interest........................................... 3,902 7,014
Accrued management transition and consulting............... 1,092 742
Other...................................................... 14,639 14,766
Income taxes payable......................................... 15,853 15,827
Deferred income taxes........................................ 1,220 1,703
Due to parent................................................ 41,079 4,803
----------- -----------
Total current liabilities.................................. 256,131 299,515
Long-term debt................................................. 135,000 150,000
Other non-current liabilities.................................. 8,497 9,297
----------- -----------
Total liabilities.......................................... 399,628 458,812
----------- -----------
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 48,545
Foreign currency translation adjustment...................... (6,843) (3,376)
----------- -----------
Total stockholder's equity................................. 101,826 128,144
----------- -----------
Total liabilities and stockholder's equity................. $ 501,454 $ 586,956
=========== ===========
</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)............. - - - - (10,323) - (10,323)
Dividends on Common Stock..... - - - - (4,950) - (4,950)
Capital contribution from
parent....................... - - 38,124 - - - 38,124
Foreign currency translation
adjustment................... - - - - - 3,467 3,467
----------- ------- ----------- --------------- ----------- ------------- -------------
Balance, October 31, 1998
(unaudited).................. 1,000 $ - $ 107,365 $ (24,390) $ 48,545 $ (3,376) $ 128,144
=========== ======= =========== =============== =========== ============= =============
</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
---------------------------
November 1, October 31,
1997 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss)............................................. $ (2,549) $ (2,655)
Adjustments to reconcile net income (loss) to net cash
provided from (used in) operating activities:
Depreciation and amortization................................. 3,281 4,114
Other, net.................................................... 319 (828)
Changes in operating assets and liabilities, net of
effects from purchase of Diamond Park assets (Note 6):
Increase in accounts and other receivables.................. (6,921) (13,039)
Increase in merchandise inventories......................... (44,811) (16,478)
Increase in prepaid expenses and other...................... (49) (1,204)
Increase in accounts payable and accrued liabilities........ 25,566 15,460
Increase (decrease) in due to parent........................ 35,846 (845)
------------ ------------
NET CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES.... 10,682 (15,475)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements... (6,829) (4,483)
Payment for purchase of Diamond Park assets................... (57,642) -
Deferred charges and other, net............................... (550) (1,626)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES.................... (65,021) (6,109)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility....................... 162,478 139,894
Principal payments on revolving credit facility............... (103,804) (118,467)
Capitalized financing costs................................... (1,954) (35)
Other, net.................................................... (1) 686
------------ ------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............. 56,719 22,078
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................. 237 280
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS.................... 2,617 774
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................. 3,236 1,768
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................ $ 5,853 $ 2,542
============ ============
Supplemental disclosure of cash flow information:
Interest paid................................................. $ 2,462 $ 2,997
Income taxes paid............................................. 1,129 (818)
</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
---------------------------
November 1, October 31,
1997 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss)............................................... $ (4,797) $ (10,323)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization................................... 9,487 12,349
Write-off of deferred financing costs........................... - 2,023
Redemption premium.............................................. - 5,378
Other extraordinary charges from early extinguishment of debt... - 589
Other, net...................................................... 980 (629)
Changes in operating assets and liabilities, net of
effects from purchase of Diamond Park assets (Note 6):
Increase in accounts and other receivables.................... (24,932) (40,768)
Increase in merchandise inventories........................... (46,957) (43,302)
Increase in prepaid expenses and other........................ (724) (3,080)
Decrease in accounts payable and accrued liabilities.......... (76,112) (69,539)
Increase (decrease) in due to parent.......................... 35,846 (41,201)
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES...................... (107,209) (188,503)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements..... (15,306) (11,661)
Payment for purchase of Diamond Park assets..................... (57,642) -
Deferred charges and other, net................................. (2,363) (3,830)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES...................... (75,311) (15,491)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility......................... 459,587 643,436
Principal payments on revolving credit facility................. (289,391) (493,314)
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..................................... (1,954) (4,118)
Other, net...................................................... 1 -
------------ -----------
NET CASH PROVIDED FROM FINANCING ACTIVITIES................ 168,243 193,750
------------ -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................... (262) 131
------------ -----------
DECREASE IN CASH AND CASH EQUIVALENTS...................... (14,539) (10,113)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................... 20,392 12,655
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................... $ 5,853 $ 2,542
============ ===========
Supplemental disclosure of cash flow information:
Interest paid................................................... $ 13,010 $ 15,546
Income taxes paid............................................... 9,113 277
</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 October 31, 1998, and the results of operations and cash flows for
the thirteen weeks and thirty-nine weeks ended November 1, 1997 and October 31,
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 Thirty-Nine Weeks Ended
---------------------------- --------------------------
November 1, October 31, November 1, October 31,
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss)............................. $ (2,549) $ (2,655) $ (4,797) $ (10,323)
Foreign currency translation adjustment, net.. 1,718 1,850 (1,015) 2,063
----------- ----------- ----------- -----------
Comprehensive income (loss)................... $ (831) $ (805) $ (5,812) $ (8,260)
=========== =========== =========== ===========
</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. At October 31, 1998, Finlay Jewelry did not have any open positions
in futures contracts for gold or other outstanding derivative instruments. 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. Over the
past three fiscal years, the fourth quarter accounted for an average of 42% of
Finlay's sales due to the seasonality of the retail industry. Approximately 72%
of Finlay's domestic sales in 1997 were from operations in May Department Stores
("May") and departments operated in store groups owned by Federated Departments
Stores, of which 49% represents Finlay's domestic sales in May.
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
(unaudited)
January 31, October 31,
1998 1998
------------ -----------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
<S> <C> <C>
(specific identification basis)......................... $ 286,289 $ 331,756
Less: Excess of specific identification cost over LIFO
inventory value......................................... 6,523 6,000
------------ -----------
$ 279,766 $ 325,756
============ ===========
</TABLE>
The LIFO method had the effect of decreasing the loss before income taxes
for the thirteen weeks ended November 1, 1997 and October 31, 1998 by $655,000
and $177,000, respectively. The effect of applying the LIFO method for the
thirty-nine weeks ended November 1, 1997 and October 31, 1998 was to decrease
the loss before income taxes by $655,000 and $523,000, 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 $219,822,000 and $315,730,000 at January 31, 1998 and October
31, 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 supply Finlay with
merchandise on consignment. While the merchandise involved remains consigned,
title to the gold content of the merchandise transfers from the vendors to the
gold consignor. Finlay Jewelry can
8
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MERCHANDISE INVENTORIES (continued)
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 October 31, 1998, amounts
outstanding under the Gold Consignment Agreement totaled 64,313 fine troy
ounces, valued at approximately $18.8 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
November 1, 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 October 31, 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. The department operating
leases expire on various dates through 2003 and the office space and equipment
operating leases expire on various dates through 2008. All references herein to
leased departments refer to departments operated pursuant to license agreements
or other arrangements with host department stores.
Substantially all of the department store leases provide that the title to
certain fixed assets of Finlay transfers upon termination of the leases, and
that Finlay will receive the undepreciated value of such fixed assets from the
host store in the event such transfers occur, although the depreciation schedule
provided for in the lease may differ from that used for financial reporting
purposes. The values of such fixed assets are recorded at the inception of the
lease arrangement and are reflected in the accompanying Consolidated Balance
Sheets.
In many cases, Finlay is subject to limitations under its lease agreements
with host department stores which prohibit Finlay from operating departments for
other store groups within a certain geographical radius of the host store.
9
<PAGE>
FINLAY 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
-------------------------- --------------------------
November 1, October 31, November 1, October 31,
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Minimum fees................... $ 1,935 $ 5,911 $ 5,745 $ 15,567
Contingent fees................ 22,201 21,248 63,906 66,499
----------- ----------- ----------- -----------
Total........................ $ 24,136 $ 27,159 $ 69,651 $ 82,066
=========== =========== =========== ===========
</TABLE>
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, as of October
31, 1998, are subject to options granted to certain senior management, key
employees and directors. 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").
On December 1, 1998, the Compensation Committee of the Board of Directors
of the Holding Company approved the repricing of 292,103 of the Holding
Company's outstanding stock options at an exercise price of $8.25, which
excludes stock options previously granted to certain senior executives and
members of the Board of Directors. Shares acquired upon the exercise of such
repriced options may not be sold for a period of one year. On December 1, 1998,
60,000 stock options were granted to three senior executives of Finlay at an
exercise price of $8.25. Such options vest over a period of three years, in the
second and third years.
10
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
redemption premiums 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'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 Thirty-Nine Weeks Ended
------------------------- ------------------------
November 1, October 31, November 1, October 31,
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 48.2 49.0 48.6 48.9
----------- ----------- ----------- -----------
Gross margin................................... 51.8 51.0 51.4 51.1
Selling, general and administrative expenses...... 48.1 47.4 47.0 46.7
Depreciation and amortization..................... 2.0 2.4 2.0 2.3
----------- ----------- ----------- -----------
Income (loss) from operations.................. 1.7 1.2 2.4 2.1
Interest expense, net............................. 4.5 3.8 4.2 3.8
Nonrecurring interest associated with refinancing. - - - 0.1
----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary charges........................ (2.8) (2.6) (1.8) (1.8)
Provision (credit) for income taxes............... (1.1) (1.0) (0.7) (0.7)
----------- ----------- ----------- -----------
Income (loss) before extraordinary charges..... (1.7) (1.6) (1.1) (1.1)
Extraordinary charges from early extinguishment
of debt, net of income tax benefit........... - - - 0.9
----------- ----------- ----------- -----------
Net income (loss).............................. (1.7)% (1.6)% (1.1)% (2.0)%
=========== =========== =========== ===========
</TABLE>
Thirteen Weeks Ended October 31, 1998 Compared witsh Thirteen Weeks Ended
November 1, 1997
Sales. Sales for the thirteen weeks ended October 31, 1998 increased $17.1
million, or 11.5%, over the comparable period in 1997. Consolidated comparable
department sales (departments open for the same months during comparable
periods) increased 0.9% and domestic comparable department sales increased 1.8%.
During the third quarter of 1998, Sonab, Finlay Jewelry's French subsidiary,
continued to experience 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 at least until mid-1999. Sales from the operation of net new
departments (departments not included in comparable department sales)
contributed $15.8 million, which included $14.4 million from the former Diamond
Park departments. During the thirteen weeks ended October 31, 1998, Finlay
opened nine departments and closed eight departments. The openings and closings
were all within existing store groups. As a result of Dillard's purchase of
Mercantile Stores in August 1998 and the subsequent sale of 31 of these stores
to other Finlay host department stores, department openings in such stores are
considered to be replacement stores and are excluded from the openings and
closings above.
12
<PAGE>
Gross margin. Gross margin for the period increased by $7.6 million,
primarily as a result of the sales increase. As a percentage of sales, gross
margin decreased by 0.8%, which is primarily attributed to (i) a $0.5 million
lower LIFO benefit in the 1998 period versus the 1997 period, (ii) 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 (iii) management's efforts to increase market penetration and market
share through its competitive pricing strategy.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") increased $7.1 million, or 10.0%, due primarily
to payroll expense and lease fees associated with the increase in Finlay
Jewelry's sales. Excluding the effect of the 1997 service fee of $1.9 million
relating to the purchase of inventory from the Holding Company, SG&A as a
percentage of sales increased by 0.6%. The increase is a result of the slowdown
of sales, particularly in Europe, which has adversely impacted Finlay Jewelry's
historical ability to leverage SG&A, and expenses relating to Finlay's Year 2000
remediation project, which totaled approximately $0.9 million.
Depreciation and amortization. Depreciation and amortization increased by
$0.9 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 decreased by $0.3 million
reflecting a lower weighted average interest rate (7.9% for the 1998 period
compared to 9.2% for the comparable period in 1997) relating to the lower
interest rate on the Senior Notes as compared to the Old Notes offset by an
increase in average borrowings ($300.0 million for the period in 1998 compared
to $272.8 million for the comparable period in 1997). The increase in average
borrowings is primarily a result of additional indebtedness outstanding under
the Revolving Credit Agreement.
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.
Net income (loss). The net loss of $2.7 million for the 1998 period was
$0.2 million higher than the net loss of $2.5 million for the comparable period
as a result of the factors discussed above.
Thirty-Nine Weeks Ended October 31, 1998 Compared with Thirty-Nine Weeks Ended
November 1, 1997
Sales. Sales for the thirty-nine weeks ended October 31, 1998 increased
$72.8 million, or 16.9%, over the comparable period in 1997. Consolidated
comparable department sales increased 2.3% and domestic comparable department
sales increased 3.4%. 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 third quarter of 1998, Sonab continued to experience 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
13
<PAGE>
certain local French court decisions and the adverse impact of such change is
expected to continue at least until mid-1999. Sales from the operation of net
new departments contributed $62.9 million, which included $60.4 million from the
former Diamond Park departments. During the thirty-nine weeks ended October 31,
1998, Finlay opened 31 departments and closed 35 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 23 departments closed within existing store groups. As a result of
Dillard's purchase of Mercantile Stores in August 1998 and the subsequent sale
of 31 of these stores to other Finlay host department stores, department
openings in such stores are considered to be replacement stores and are excluded
from the openings and closings above.
Gross margin. Gross margin for the period increased by $35.7 million,
primarily as a result of the sales increase. As a percentage of sales, gross
margin decreased by 0.3%, 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) management's efforts to increase market penetration and market
share through its "Key Item" and "Best Value" programs, which produce higher
sales volume and a slightly lower gross margin, on average, than other
merchandise.
Selling, general and administrative expenses. SG&A increased $32.8 million,
or 16.2%, due primarily to payroll expense and lease fees associated with the
increase in Finlay Jewelry's sales. Excluding the effect of the 1997 service fee
of $1.9 million relating to the purchase of inventory from the Holding Company,
SG&A as a percentage of sales increased by 0.2%. The increase relates to the
higher than anticipated expenses experienced by Finlay relating to the central
distribution facility, increased medical expenses associated with the
implementation of a new medical benefit plan and expenses relating to Finlay's
Year 2000 remediation project, which totaled approximately $0.9 million, offset
by lower advertising expenditures as a percentage of sales.
Depreciation and amortization. Depreciation and amortization increased by
$2.9 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 $0.9 million
reflecting an increase in average borrowings ($279.7 million for the period in
1998 compared to $245.2 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 (8.4% for the 1998 period
compared to 9.4% for the comparable period in 1997) 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 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's revolving
credit facility and interest income on excess cash balances, was an increase to
interest expense of $0.4 million, on a pre-tax basis.
14
<PAGE>
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 $10.3 million for the 1998 period was
$5.5 million higher than the net loss of $4.8 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 and information technology investments. For the thirty-nine
weeks ended November 1, 1997 and October 31, 1998, capital expenditures totaled
$15.3 million and $11.7 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 $102.6 million at
October 31, 1998, an increase of $36.9 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, November and December in
anticipation of the year-end holiday season. Accordingly, Finlay experiences
seasonal cash needs as inventory levels peak. The Revolving Credit Agreement
provides Finlay with a line of credit of up to $275.0 million to finance
seasonal cash and 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 late
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
15
<PAGE>
relating to the Senior Notes do not have a balance reduction requirement.
Borrowings under the Revolving Credit Agreement at October 31, 1998 were $150.1
million, compared to a zero balance at January 31, 1998 and $170.2 million at
November 1, 1997. The average amounts outstanding under the Revolving Credit
Agreement were $110.2 million and $131.4 million (adjusted for the impact of the
temporary paydown of the revolving credit facility due to certain call
requirements associated with the Old Notes) for the thirty-nine weeks ended
November 1, 1997 and October 31, 1998, respectively. The maximum amount
outstanding for the thirty-nine weeks ended October 31, 1998 was $162.9 million.
Significant additional working capital has not been 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 have 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 October 31,
1998, $315.7 million of consignment merchandise was on hand as compared to
$219.8 million at January 31, 1998 and $237.7 million at November 1, 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
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 October 31, 1998, Finlay Jewelry's outstanding
borrowings were $300.1 million, which included a $150.0 million balance under
the Senior Notes and a $150.1 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 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 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 Jewelry 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
October 31, 1998,
16
<PAGE>
amounts outstanding under the Gold Consignment Agreement totaled 64,313 fine
troy ounces, valued at approximately $18.8 million. The average amount
outstanding under the Gold Consignment Agreement was $14.3 million in 1997.
"Year 2000" computer software and hardware failures of internal systems
and/or third party systems could have a significant, adverse impact on all
aspects of Finlay Jewelry's operations. Finlay recognizes the need to ensure
that its operations and its relationship with its host stores, vendors and other
third parties will not be adversely affected. Consequently, a comprehensive plan
is being executed to ensure that all systems critical to the operation of Finlay
Jewelry are Year 2000 compliant.
The Year 2000 plan incorporates various information technology systems,
including Finlay Jewelry's core business systems, end user systems,
non-information technology systems and significant third party systems. The plan
is structured into five primary phases: identification, assessment, remediation,
testing and implementation. In addition, management recognizes the importance of
developing a contingency plan in the event of a Year 2000 failure, the
development of which is in progress. Finlay has completed the identification and
assessment phases of all critical components and is in the remediation phase.
Finlay expects that all internal systems, including its non-information
technology systems, will be Year 2000 compliant by August 1999. In addition,
Finlay has communicated, and will continue to communicate, with all of its host
stores, vendors and other third parties to obtain Year 2000 compliance
certification. Progress reports on the Year 2000 project are presented regularly
to senior management and Finlay Jewelry's Board of Directors.
Finlay is using, and will continue to use, a combination of internal and
external resources. Finlay has estimated that the direct costs related to its
Year 2000 efforts total approximately $4.0 million, of which approximately $0.9
million has been recorded in the third quarter. Finlay expects to incur the
balance of these costs during 1998 and 1999 and expects to fund such costs
through operating cash flows.
The consequences of a disruption of Finlay Jewelry's operations, whether
caused by Finlay's internal systems or those of any significant third party,
could have a material adverse effect on Finlay Jewelry's financial position or
results of operations. The likely worst case scenario may be an inability to
distribute merchandise to its departments and to process its daily business for
some period of time. The lost revenues, if any, resulting from a worst case
scenario would depend on the time period in which the failure goes uncorrected
and the difficulty to remediate such failure. There can be no assurances that
Finlay will not experience significant cost overruns or delays in addressing
this issue.
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 $11.0 million for
software and implementation costs, to be included in Deferred charges and other
assets, and approximately $3.0 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
17
<PAGE>
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 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 thirty-nine
weeks ended October 31, 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 or at October 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.
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's interest expense and required amortization payments totaled $13.0
million and $15.5 million for the thirty-nine weeks ended November 1, 1997 and
October 31, 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.
Inflation
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
18
<PAGE>
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements'
within the meaning of Section 27A of the Securities Act of 1993 and Section 21E
of the Securities Exchange Act of 1934 (the "Exchange Act"). All statements
other than statements of historical information provided herein are
forward-looking statements and may contain information about financial results,
economic conditions, trends and known uncertainties. The forward-looking
statements contained herein are subject to certain risks and uncertainties that
could cause actual results 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 and the impact on Finlay Jewelry's operations of a Year 2000
failure, 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 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
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 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> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 2,542
<SECURITIES> 0
<RECEIVABLES> 36,750
<ALLOWANCES> 0
<INVENTORY> 325,756
<CURRENT-ASSETS> 402,118
<PP&E> 106,869
<DEPRECIATION> 36,399
<TOTAL-ASSETS> 586,956
<CURRENT-LIABILITIES> 299,515
<BONDS> 150,000
0
0
<COMMON> 0
<OTHER-SE> 128,144
<TOTAL-LIABILITY-AND-EQUITY> 586,956
<SALES> 504,252
<TOTAL-REVENUES> 504,252
<CGS> 246,620
<TOTAL-COSTS> 246,620
<OTHER-EXPENSES> 247,067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,442
<INCOME-PRETAX> (8,877)
<INCOME-TAX> (3,309)
<INCOME-CONTINUING> (5,568)
<DISCONTINUED> 0
<EXTRAORDINARY> 4,755
<CHANGES> 0
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