- --------------------------------------------------------------------------------
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 May 1, 1999
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 June 11, 1999, there were 1,000 shares of common stock, par value $.01 per
share, of the Registrant outstanding. As of such date, all shares of common
stock were owned by the Registrant's parent, Finlay Enterprises, Inc., a
Delaware Corporation.
* The Registrant is not subject to the filing requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934 and is voluntarily filing this
Quarterly Report on Form 10-Q.
<PAGE>
FINLAY FINE JEWELRY CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED MAY 1, 1999
INDEX
PAGE(S)
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the thirteen weeks
ended May 2, 1998 and May 1, 1999.....................................1
Consolidated Balance Sheets as of January 30, 1999 and
May 1, 1999...........................................................2
Consolidated Statements of Changes in Stockholder's Equity for the
year ended January 30, 1999 and thirteen weeks ended May 1, 1999......3
Consolidated Statements of Cash Flows for the thirteen weeks
ended May 2, 1998 and May 1, 1999.....................................4
Notes to Consolidated Financial Statements............................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................16
SIGNATURES....................................................................17
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------------
May 2, May 1,
1998 1999
------------- -------------
<S> <C> <C>
Sales.................................................................... $ 160,992 $ 168,379
Cost of sales............................................................ 78,104 81,919
------------- -------------
Gross margin......................................................... 82,888 86,460
Selling, general and administrative expenses............................. 76,925 79,683
Depreciation and amortization............................................ 3,794 4,200
------------- -------------
Income (loss) from operations........................................ 2,169 2,577
Interest expense, net.................................................... 6,313 5,272
------------- -------------
Income (loss) before income taxes.................................... (4,144) (2,695)
Provision (benefit) for income taxes..................................... (1,570) (848)
------------- -------------
Net income (loss).................................................... $ (2,574) $ (1,847)
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
(unaudited)
January 30, May 1,
1999 1999
------------- -------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents.................................................... $ 16,631 $ 3,390
Accounts receivable - department stores...................................... 19,147 38,072
Other receivables............................................................ 23,349 22,700
Merchandise inventories...................................................... 295,265 303,259
Prepaid expenses and other................................................... 2,367 3,437
------------- -------------
Total current assets...................................................... 356,759 370,858
------------- -------------
Fixed assets
Equipment, fixtures and leasehold improvements............................... 106,735 109,567
Less - accumulated depreciation and amortization............................. 36,620 39,078
------------- -------------
Fixed assets, net......................................................... 70,115 70,489
------------- -------------
Deferred charges and other assets.............................................. 13,982 15,703
Goodwill....................................................................... 100,547 99,603
------------- -------------
Total assets.............................................................. $ 541,403 $ 556,653
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Notes payable................................................................ $ - $ 79,285
Accounts payable - trade..................................................... 160,424 93,064
Accrued liabilities
Accrued salaries and benefits............................................. 15,760 14,437
Accrued miscellaneous taxes............................................... 4,704 5,016
Accrued insurance......................................................... 755 1,837
Accrued interest.......................................................... 3,448 6,787
Accrued management transition and consulting.............................. 676 561
Other..................................................................... 14,644 15,898
Income taxes payable......................................................... 23,991 27,512
Deferred income taxes........................................................ 2,166 2,173
Due to parent................................................................ 3,468 5,339
------------- -------------
Total current liabilities................................................. 230,036 251,909
Long-term debt................................................................. 150,000 150,000
Other non-current liabilities.................................................. 9,284 9,623
------------- -------------
Total liabilities......................................................... 389,320 411,532
------------- -------------
Stockholder's equity
Common Stock, par value $.01 per share; authorized 5,000 shares;
issued and outstanding 1,000 shares....................................... - -
Additional paid-in capital .................................................. 82,975 82,975
Retained earnings............................................................ 73,897 69,823
Foreign currency translation adjustment...................................... (4,789) (7,677)
------------- -------------
Total stockholder's equity................................................ 152,083 145,121
------------- -------------
Total liabilities and stockholder's equity................................ $ 541,403 $ 556,653
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Foreign
------------------ Additional Currency Total
Number Paid-in Retained Translation Stockholder's Comprehensive
of shares Amount Capital Earnings Adjustment Equity Income
---------- ------- ----------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1998............ 1,000 $ - $ 44,851 $ 63,818 $ (6,843) $ 101,826
Net income (loss).................. - - - 17,197 - 17,197 $ 17,197
Capital contribution from parent... - - 38,124 - - 38,124
Foreign currency translation
adjustment...................... - - - - 2,054 2,054 2,054
-------------
Comprehensive income (loss)........ - - - - - - $ 19,251
Dividends on Common Stock.......... - - - (7,118) - (7,118) =============
---------- ------- ----------- ---------- ------------ --------------
Balance, January 30, 1999............ 1,000 - 82,975 73,897 (4,789) 152,083
Net income (loss).................. - - - (1,847) - (1,847) $ (1,847)
Foreign currency translation
adjustment...................... - - - - (2,888) (2,888) (2,888)
-------------
Comprehensive income (loss)........ - - - - - - $ (4,735)
Dividends on Common Stock.......... - - - (2,227) - (2,227) =============
---------- ------- ----------- ---------- ------------ --------------
Balance, May 1, 1999 (unaudited)..... 1,000 $ - $ 82,975 $ 69,823 $ (7,677) $ 145,121
========== ======= =========== ========== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-------------------------------
May 2, May 1,
1998 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss).............................................................. $ (2,574) $ (1,847)
Adjustments to reconcile net income (loss) to net used in
operating activities:
Depreciation and amortization.................................................. 4,064 4,453
Other, net..................................................................... 319 550
Changes in operating assets and liabilities:
Increase in accounts and other receivables.................................. (23,994) (18,587)
Increase in merchandise inventories......................................... 20,023 (9,962)
Increase in prepaid expenses and other...................................... (2,638) (1,112)
Decrease in accounts payable and accrued liabilities........................ (81,084) (59,371)
Increase in due to parent................................................... - (355)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES.................................... (125,930) (86,231)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (3,457) (3,877)
Deferred charges and other..................................................... (1,246) (2,281)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES.................................... (4,703) (6,158)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 208,417 185,976
Principal payments on revolving credit facility................................ (208,417) (106,691)
Proceeds from senior note offering............................................. 150,000 -
Capitalized financing costs.................................................... (3,746) -
------------- -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............................. 146,254 79,285
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. 22 (137)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................................................ 15,643 (13,241)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 12,655 16,631
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 28,298 $ 3,390
============= =============
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 9,568 $ 1,680
Income taxes paid.............................................................. 912 (3,290)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<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 May 1, 1999, and the results of operations and cash flows for the
thirteen weeks ended May 2, 1998 and May 1, 1999. 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 30, 1999 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
30, 1999 ("Form 10-K") previously filed with the Commission.
Finlay's fiscal year ends on the Saturday closest to January 31. References
to 1996, 1997, 1998 and 1999 relate to the fiscal years ending February 1, 1997,
January 31, 1998, January 30, 1999 and January 29, 2000, respectively. Each of
the fiscal years includes fifty-two weeks.
In 1998, Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" was issued. As such,
Finlay is required to capitalize software purchased from third party software
vendors, external consulting costs incurred in the development and enhancement
of management information systems and certain internal payroll costs for
employees directly associated with the development of software. The Company has
adopted this statement in 1999, and does not expect it to have a material impact
on its consolidated financial statements.
NOTE 2 - DESCRIPTION OF BUSINESS
Finlay is a retailer of fine jewelry products and primarily operates leased
fine jewelry departments in 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 68% of Finlay's domestic sales in 1998 were from operations in The
May Department Stores Company ("May") and departments operated in store groups
owned by Federated Departments Stores, of which 47% represents Finlay's domestic
sales in May.
5
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
(unaudited)
January 30, May 1,
1999 1999
------------- -------------
(in thousands)
Jewelry goods - rings, watches and other fine jewelry
<S> <C> <C>
(specific identification basis)............................... $ 300,777 $ 308,862
Less: Excess of specific identification cost over LIFO
inventory value............................................... 5,512 5,603
------------- -------------
$ 295,265 $ 303,259
============= =============
</TABLE>
The LIFO method had the effect of increasing the loss before income taxes
for the thirteen weeks ended May 2, 1998 and May 1, 1999 by $93,000 and $92,000,
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 $283,793,000 and $305,015,000 at January 30, 1999 and May 1,
1999, respectively, of merchandise received on consignment has been excluded
from Merchandise inventories and Accounts payable-trade in the accompanying
Consolidated Balance Sheets.
Finlay Jewelry is party to a gold consignment agreement (the "Gold
Consignment Agreement"), which expires on December 31, 2001. The Gold
Consignment Agreement enables Finlay Jewelry to receive merchandise by providing
gold, or otherwise making payment, to certain vendors who supply Finlay with
merchandise on consignment. While the merchandise involved remains consigned,
title to the gold content of the merchandise transfers from the vendors to the
gold consignor. Finlay Jewelry can obtain, pursuant to the Gold Consignment
Agreement, up to the lesser of (i) 95,000 fine troy ounces or (ii) $32,000,000
worth of gold, subject to a formula as prescribed by the Gold Consignment
Agreement. At May 1, 1999, amounts outstanding under the Gold Consignment
Agreement totaled 91,202 fine troy ounces, valued at approximately $26.1
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 May 2,
1998 and May 1, 1999, 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 30, 1999 or May 1, 1999.
6
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The store leases provide for the payment of fees based on sales, plus, in
some instances, installment payments for fixed assets. Lease expense, included
in Selling, general and administrative expenses, is as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
------------------------------
May 2, May 1,
1998 1999
------------- -------------
(in thousands)
<S> <C> <C>
Minimum fees.............. $ 4,568 $ 4,163
Contingent fees........... 21,398 23,433
------------- -------------
Total................... $ 25,966 $ 27,596
============= =============
</TABLE>
NOTE 5 - 1998 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 "1998
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 1998 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, Finlay's 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.
7
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - 1998 TRANSACTIONS (continued)
On May 26, 1998, the net proceeds to the Holding Company from the 1998
Offering, the sale of the Senior Debentures, together with other available
funds, were used to redeem the Holding Company's 12% Senior Discount Debentures
due 2005 (the "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. The above transactions, excluding the 1998
Offering, are referred to herein as the "Refinancing". Finlay Jewelry recorded,
in the second quarter of 1998, a pre-tax extraordinary charge of approximately
$8.0 million, including $5.4 million for redemption premiums and $2.0 million to
write off deferred financing costs associated with the Old Notes.
8
<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
-----------------------------
May 2, May 1,
1998 1999
------------ ------------
<S> <C> <C>
Sales...................................................... 100.0% 100.0%
Cost of sales.............................................. 48.5 48.7
------------ ------------
Gross margin........................................... 51.5 51.3
Selling, general and administrative expenses............... 47.8 47.3
Depreciation and amortization.............................. 2.4 2.5
------------ ------------
Income (loss) from operations.......................... 1.3 1.5
Interest expense, net...................................... 3.9 3.1
------------ ------------
Income (loss) before income taxes ..................... (2.6) (1.6)
Provision (benefit) for income taxes....................... (1.0) (0.5)
------------ ------------
Net income (loss)...................................... (1.6)% (1.1)%
============ ============
</TABLE>
Thirteen Weeks Ended May 1, 1999 Compared with Thirteen Weeks Ended May 2, 1998
Sales. Sales for the thirteen weeks ended May 1, 1999 increased $7.4
million, or 4.6%, over the comparable period in 1998. Consolidated comparable
department sales (departments open for the same months during comparable
periods) increased 6.8% and domestic comparable department sales increased 8.9%.
Management attributes this increase in the comparable department sales to the
following initiatives: (i) emphasizing its "Key Item" and "Best Value"
merchandising programs, which provide a targeted assortment of items at
competitive prices; (ii) increasing focus on holiday and event-driven promotions
as well as host store marketing programs; (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. Sales
decreased by $3.6 million as a result of the net effect of new store openings
offset by store closings, particularly relating to Dillard's purchase of the
Mercantile Stores and the change to an everyday low price strategy, as well as
the timing of such department openings and closings.
In the second quarter of 1998, Sonab began 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. The adverse
impact of such change continued through May 1, 1999 and is expected to continue
at least through the third quarter of 1999.
During the thirteen weeks ended May 1, 1999, Finlay opened 23 departments
and closed 38 departments. The openings were all within existing store groups.
The closings included 14 departments
9
<PAGE>
in Crowley's and Steinbach due to the bankruptcy of the host store and 11
smaller volume departments in Monoprix in France, with the remaining 13
departments closed within existing store groups.
Gross margin. Gross margin for the period increased by $3.6 million,
primarily as a result of the sales increase. As a percentage of sales, gross
margin decreased by 0.2%, which is primarily attributed to a decrease in
purchase discounts and a softening of margins in France. The higher purchase
discounts in 1998 was a result of the temporary excess funds from the
Refinancing.
Selling, general and administrative expenses. Selling, general and
administrative expenses ("SG&A") increased $2.8 million, or 3.6%, due primarily
to payroll expense and lease fees associated with the increase in Finlay
Jewelry's domestic sales and expenses relating to Finlay's year 2000 remediation
project, which totaled approximately $0.5 million. SG&A as a percentage of sales
decreased by 0.5% as a result of the leveraging of these expenses offset by the
negative impact on SG&A as a result of the slowdown of sales in France.
Depreciation and amortization. Depreciation and amortization increased by
$0.4 million, reflecting an increase in capital expenditures and capitalized
software costs for the most recent twelve months, offset by the effect of
certain assets becoming fully depreciated. The increase in fixed assets was due
to the addition of new departments and the renovation of existing departments.
Interest expense, net. Interest expense decreased by $1.0 million
reflecting a lower weighted average interest rate (8.1% for the 1999 period
compared to 9.5% for the comparable period in 1998) relating to the lower
interest rates on the Senior Notes as compared to the Old Notes, as well as a
decrease in average borrowings ($230.0 million for the period in 1999 compared
to $237.0 million for the comparable period in 1998).
Provision (benefit) for income taxes. The income tax provision for the 1999
and 1998 periods reflects an effective tax rate of 40.5%.
Net income (loss). The net loss of $1.8 million for the 1999 period was
$0.8 million lower than the net loss of $2.6 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, renovating
existing departments and information technology investments. For the thirteen
weeks ended May 2, 1998 and May 1, 1999, capital expenditures totaled $3.5
million and $3.9 million, respectively. For 1998, capital expenditures totaled
$14.9 million and for 1999 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 49% 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 $119.0 million at May 1,
1999, a decrease of $7.8 million from January 30, 1999. The decrease resulted
primarily from the impact of the interim net loss exclusive of depreciation and
amortization, capital expenditures, an increase in deferred
10
<PAGE>
charges and the movement in the foreign exchange rate with France. Based on the
seasonal nature of Finlay's business, working capital requirements and therefore
borrowings under the Revolving Credit Agreement can be expected to increase on
an interim basis during the first three quarters of any given fiscal year. See
"--Seasonality".
The seasonality of Finlay's business causes working capital requirements to
reach their highest level in the months of October, November and December in
anticipation of the year-end holiday season. Accordingly, Finlay experiences
seasonal cash needs as inventory levels peak. The Revolving Credit Agreement
provides Finlay with a line of credit of up to $275.0 million to finance working
capital needs. Amounts outstanding under the Revolving Credit Agreement bear
interest at a rate equal to, at Finlay's option, (i) the Index Rate (as defined
in the Revolving Credit Agreement) plus a margin ranging from zero to 1.0% or
(ii) adjusted LIBOR plus a margin ranging from 1.0% to 2.0%, in each case
depending on the financial performance of 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"). Borrowings under
the Revolving Credit Agreement at May 1, 1999 were $79.3 million, compared to a
zero balance at January 30, 1999 and May 2, 1998. There were no borrowings at
May 2, 1998 due to the temporary paydown of the Revolving Credit Facility with
the excess funds from the Refinancing, as a result of certain call requirements
on the Old Debentures and the Old Notes. The average amounts outstanding under
the Revolving Credit Agreement were $90.3 million and $80.0 million for the
thirteen weeks ended May 2, 1998 and May 1, 1999, respectively. The maximum
amount outstanding for the thirteen weeks ended May 1, 1999 was $103.5 million.
Finlay's long-term needs for external financing will depend on its rate of
growth, the level of internally generated funds and the ability to continue
obtaining substantial amounts of merchandise on advantageous terms, including
consignment arrangements with its vendors. For 1998, Finlay had an average
balance of consignment merchandise of $268.5 million from approximately 300
vendors as compared to an average balance of $216.5 million in 1997. As of May
1, 1999, $305.0 million of consignment merchandise was on hand as compared to
$283.8 million at January 30, 1999 and $245.9 million at May 2, 1998.
A substantial amount of Finlay's operating cash flow has been used or will
be required to pay interest with respect to the Senior Debentures, the Senior
Notes and amounts due under the Revolving Credit Agreement, including the
payments required pursuant to the Balance Reduction Requirement. As of May 1,
1999, Finlay's outstanding borrowings were $229.3 million, which included a
$150.0 million balance under the Senior Notes and a $79.3 million balance under
the Revolving Credit Facility. On May 26, 1998, Finlay 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 1998 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 of
1998, a pre-tax nonrecurring charge of approximately $8.0 million, including
$5.4 million for redemption premiums and $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
11
<PAGE>
Consignment Agreement, up to the lesser of (i) 95,000 fine troy ounces or (ii)
$32.0 million worth of gold, subject to a formula as prescribed by the Gold
Consignment Agreement. At May 1, 1999, amounts outstanding under the Gold
Consignment Agreement totaled 91,202 fine troy ounces, valued at approximately
$26.1 million. The average amount outstanding under the Gold Consignment
Agreement was $15.6 million in 1998.
During 1998, Finlay began 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 as well as provide improved analysis and reporting capabilities and are
expected to be completed in mid-2000. 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
Jewelry's capital expenditures and reflected in Fixed assets. At May 1, 1999, a
total of approximately $5.1 million has been expended and included in Deferred
charges and other assets.
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code")
restricts utilization of net operating loss ("NOLs") carryforwards after an
ownership change exceeding 50%. As a result 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, 1998 (Finlay Jewelry's tax
year end), a NOL for tax purposes of approximately $11.5 million which is
subject to an annual limit of approximately $2.0 million per year. However, for
financial reporting purposes, no NOL exists as of January 30, 1999.
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 30, 1999, 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 30, 1999. 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 Jewelry's interest expense and required amortization payments totaled
$9.6 million and $1.7 million for the thirteen weeks ended May 2, 1998 and May
1, 1999, respectively. As a result of the closing date for the first quarter of
1999 under the retail calendar, the semiannual interest payment with respect to
the Senior Notes was not paid until the second quarter, whereas the first
quarter of 1998 included the interest payment.
12
<PAGE>
Year 2000
Many of Finlay's existing computer systems, software products, other
systems using embedded chips ("non-information technology systems") and third
party systems, accept only two entries in the date field to distinguish the
year. Beginning in the year 2000, these date fields will need to accept four
digit entries, or properly handle two digit entries, to distinguish 21st century
dates from 20th century dates. As a result, Finlay's date critical functions may
be adversely affected unless the computer systems and software products of both
Finlay and significant third parties are or become year 2000 compliant.
A comprehensive plan is being executed to ensure that all systems critical
to the operation of Finlay are year 2000 compliant. The plan is structured into
five primary phases: identification, assessment, remediation, testing and
implementation. Finlay has completed the identification and assessment phases of
all critical components and has substantially completed the remediation phase.
Finlay expects that the testing and implementation phases of all internal
systems, including its non-information technology systems, will be completed by
the end of August 1999.
Finlay is using, and will continue to use, a combination of internal and
external resources to execute its year 2000 project plan. Finlay has estimated
that the costs related to its year 2000 efforts will total approximately $4.0
million, of which a total of approximately $2.4 million has been spent through
May 1, 1999 ($1.9 million in fiscal 1998 and $0.5 million in the first quarter
of fiscal 1999). Finlay will incur the balance of these costs during 1999 and
will fund such costs through operating cash flows.
During 1998, Finlay began formal communications with all of its host
stores, vendors and other third parties in an effort to determine the extent to
which Finlay may be vulnerable to the failure of their systems and to obtain
year 2000 compliance certification. To date, none of the third parties that have
responded have raised any year 2000 issues which Finlay believes would have a
material adverse effect on Finlay. Finlay has continued this communication
process during 1999.
Management expects that with the successful implementation of the year 2000
project, the year 2000 issue will not pose significant operational problems.
There can be no assurance, however, that Finlay's systems and software will be
rendered year 2000 compliant in a timely manner, or that Finlay will not incur
significant unforeseen additional expenses to ensure such compliance. The
consequences of a disruption of Finlay'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
Finlay's 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.
Management recognizes the importance of developing a contingency plan in
the event of a year 2000 failure, the development of which is in progress and is
expected to be completed by the end of the third quarter of 1999. Finlay is
currently gathering data in an effort to assess the potential effects on its
mission critical functions of a failure of its year 2000 plan to be fully
effective and, to the extent deemed appropriate, to address such effects. In
addition, progress reports on the year 2000 project are presented regularly to
senior management and Finlay's Board of Directors.
13
<PAGE>
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
for 1996, 1997 and 1998. Finlay has typically experienced net losses in the
first three quarters of its fiscal year. During these periods, working capital
requirements have been funded by borrowings under the Revolving Credit
Agreement. Accordingly, the results for any of the first three quarters of any
given fiscal year, taken individually or in the aggregate, are not indicative of
annual results.
Inflation
The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1993 and Section 21E
of the Securities Exchange Act of 1934 (the "Exchange Act"). All statements
other than statements of historical information provided herein are
forward-looking statements and may contain information about financial results,
economic conditions, trends and known uncertainties. The forward-looking
statements contained herein are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations", as well as trends in
the general economy in the United States 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.
14
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Finlay Jewelry is exposed to market risk primarily through the interest
rate on its borrowings under the Revolving Credit Agreement, which has a
variable interest rate. In seeking to minimize the risks from interest rate
fluctuations, Finlay Jewelry manages exposures through its regular operating and
financing activities. In addition, the majority of Finlay Jewelry's borrowings
are under fixed rate arrangements, and as such, there was no material market
risk exposure to Finlay Jewelry's financial position, results of operations or
cash flows as of January 30, 1999 or May 1, 1999.
15
<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.
16
<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: June 11, 1999 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)
17
<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> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 3,390
<SECURITIES> 0
<RECEIVABLES> 38,072
<ALLOWANCES> 0
<INVENTORY> 303,259
<CURRENT-ASSETS> 370,858
<PP&E> 109,567
<DEPRECIATION> 39,078
<TOTAL-ASSETS> 556,653
<CURRENT-LIABILITIES> 251,909
<BONDS> 150,000
0
0
<COMMON> 0
<OTHER-SE> 145,121
<TOTAL-LIABILITY-AND-EQUITY> 556,653
<SALES> 168,379
<TOTAL-REVENUES> 168,379
<CGS> 81,919
<TOTAL-COSTS> 81,919
<OTHER-EXPENSES> 83,883
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,272
<INCOME-PRETAX> (2,695)
<INCOME-TAX> (848)
<INCOME-CONTINUING> (1,847)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,847)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
