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 28, 2000
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to __________
Commission File Number: 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 8, 2000, 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 OCTOBER 28, 2000
INDEX
<TABLE>
<CAPTION>
PAGE(S)
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the thirteen weeks and
thirty-nine weeks ended October 30, 1999 and October 28, 2000.......................1
Consolidated Balance Sheets as of January 29, 2000 and October 28, 2000.............3
Consolidated Statements of Changes in Stockholder's Equity for the year
ended January 29, 2000 and thirty-nine weeks ended October 28, 2000.................4
Consolidated Statements of Cash Flows for the thirteen weeks and
thirty-nine weeks ended October 30, 1999 and October 28, 2000.......................5
Notes to Consolidated Financial Statements..........................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................19
SIGNATURES....................................................................................................20
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
------------------------------------
OCTOBER 30, OCTOBER 28,
1999 2000
--------------- ---------------
<S> <C> <C>
Sales.................................................. $ 175,280 $ 189,728
Cost of sales.......................................... 86,631 93,233
--------------- ---------------
Gross margin....................................... 88,649 96,495
Selling, general and administrative expenses........... 81,503 86,398
Depreciation and amortization.......................... 4,142 4,448
--------------- ---------------
Income (loss) from operations...................... 3,004 5,649
Interest expense, net.................................. 6,215 6,406
--------------- ---------------
Income (loss) before income taxes.................. (3,211) (757)
Provision (benefit) for income taxes................... (1,066) (140)
--------------- ---------------
Net income (loss).................................. $ (2,145) $ (617)
=============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
------------------------------------
OCTOBER 30, OCTOBER 28,
1999 2000
--------------- ---------------
<S> <C> <C>
Sales.................................................. $ 527,026 $ 579,571
Cost of sales.......................................... 258,988 285,619
--------------- ---------------
Gross margin....................................... 268,038 293,952
Selling, general and administrative expenses........... 242,742 260,430
Depreciation and amortization.......................... 12,618 13,030
--------------- ---------------
Income (loss) from operations...................... 12,678 20,492
Interest expense, net.................................. 17,179 17,656
--------------- ---------------
Income (loss) before income taxes.................. (4,501) 2,836
Provision (benefit) for income taxes................... (1,104) 1,656
--------------- ---------------
Net income (loss).................................. $ (3,397) $ 1,180
=============== ===============
</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 29, OCTOBER 28,
2000 2000
------------- --------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents......................................... $ 34,758 $ 3,796
Accounts receivable - department stores........................... 22,574 47,011
Other receivables................................................. 31,074 42,423
Merchandise inventories........................................... 279,336 350,415
Prepaid expenses and other........................................ 2,067 3,290
------------- --------------
Total current assets........................................... 369,809 446,935
------------- --------------
Fixed assets
Equipment, fixtures and leasehold improvements.................... 110,017 122,060
Less - accumulated depreciation and amortization.................. 40,439 47,200
------------- --------------
Fixed assets, net.............................................. 69,578 74,860
------------- --------------
Deferred charges and other assets................................... 18,802 18,950
Goodwill............................................................ 96,805 95,737
------------- --------------
Total assets................................................... $ 554,994 $ 636,482
============= ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Notes payable..................................................... $ - $ 124,476
Accounts payable - trade.......................................... 149,782 110,275
Accrued liabilities:
Accrued salaries and benefits.................................. 23,094 19,622
Accrued miscellaneous taxes.................................... 6,296 3,704
Accrued interest............................................... 3,633 7,577
Other.......................................................... 19,240 20,895
Income taxes payable.............................................. 28,494 27,256
Deferred income taxes............................................. 1,674 1,559
Due to parent..................................................... 4,900 7,895
------------- --------------
Total current liabilities...................................... 237,113 323,259
Long-term debt...................................................... 150,000 150,000
Other non-current liabilities....................................... 10,855 11,793
------------- --------------
Total liabilities.............................................. 397,968 485,052
------------- --------------
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................................................. 74,051 68,455
------------- --------------
Total stockholder's equity..................................... 157,026 151,430
------------- --------------
Total liabilities and stockholder's equity..................... $ 554,994 $ 636,482
============= ==============
</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 FOREIGN
------------------ ADDITIONAL CURRENCY TOTAL
NUMBER PAID-IN RETAINED TRANSLATION STOCKHOLDER'S
OF SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY
--------- ------ ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 30, 1999......... 1,000 - $ 82,975 $ 73,897 $ (4,789) $ 152,083
Net income (loss)............... - - - 9,062 - 9,062
Foreign currency translation
adjustment................... - - - - 4,789 4,789
Dividends on Common Stock....... - - - (8,908) - (8,908)
-------- -------- ----------- ----------- ---------- ------------
Balance, January 29, 2000......... 1,000 - 82,975 74,051 - 157,026
Net income (loss)............... - - - 1,180 - 1,180
Dividends on Common Stock....... - - - (6,776) - (6,776)
-------- -------- ----------- ----------- ---------- ------------
Balance, October 28, 2000 (unaudited) 1,000 $ - $ 82,975 $ 68,455 $ - $ 151,430
======== ======== =========== ========== ========== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
------------------------------
OCTOBER 30, OCTOBER 28,
1999 2000
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................................. $ (2,145) $ (617)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization...................................... 4,400 4,702
Other, net......................................................... 345 296
Changes in operating assets and liabilities:
Increase in accounts and other receivables...................... (7,777) (18,920)
Increase in merchandise inventories............................. (24,663) (40,736)
(Increase) decrease in prepaid expenses and other............... (258) 949
Increase in accounts payable and accrued liabilities............ 20,244 21,642
Increase (decrease) in due to parent............................ (437) 5
------------ -------------
NET CASH USED IN OPERATING ACTIVITIES........................ (10,291) (32,679)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements........ (3,650) (3,955)
Deferred charges and other......................................... (1,200) (655)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES........................ (4,850) (4,610)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility............................ 145,285 173,520
Principal payments on revolving credit facility.................... (130,824) (136,602)
Other, net......................................................... 13 -
------------ -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.................. 14,474 36,918
------------ -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH...................... (75) (278)
------------ -------------
DECREASE IN CASH AND CASH EQUIVALENTS........................ (742) (649)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....................... 4,412 4,445
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................. $ 3,670 $ 3,796
============ =============
Supplemental disclosure of cash flow information:
Interest paid...................................................... $ 2,745 $ 2,717
Income taxes paid.................................................. 2,987 1,715
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
------------------------------
OCTOBER 30, OCTOBER 28,
1999 2000
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................................................. $ (3,397) $ 1,180
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.................................................. 13,377 13,791
Other, net..................................................................... 1,291 1,338
Changes in operating assets and liabilities, net of effect from purchase of J.B.
Rudolph assets (Note 6):
Increase in accounts and other receivables.................................. (30,167) (42,758)
Increase in merchandise inventories......................................... (24,156) (54,796)
Increase in prepaid expenses and other...................................... (1,571) (1,258)
Decrease in accounts payable and accrued liabilities........................ (73,488) (41,948)
Decrease in due to parent................................................... (4,119) (3,780)
------------ -------------
NET CASH USED IN OPERATING ACTIVITIES.................................... (122,230) (128,231)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (11,565) (11,696)
Deferred charges and other..................................................... (6,413) (1,730)
Proceeds from sale of Sonab assets............................................. - 6,792
Proceeds from sale of outlet assets............................................ - 752
Payment for purchase of J. B. Rudolph assets................................... - (20,605)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES.................................... (17,978) (26,487)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 500,291 536,252
Principal payments on revolving credit facility................................ (372,893) (411,776)
Other, net..................................................................... 13 -
------------ -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............................. 127,411 124,476
------------ -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. (164) (720)
------------ -------------
DECREASE IN CASH AND CASH EQUIVALENTS.................................... (12,961) (30,962)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 16,631 34,758
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 3,670 $ 3,796
============ =============
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 12,965 $ 12,951
Income taxes paid.............................................................. 2,420 4,434
</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 28, 2000, and the results of operations and cash flows for
the thirteen weeks and thirty-nine weeks ended October 30, 1999 and October 28,
2000. Due to the seasonal nature of the business, results for interim periods
are not indicative of annual results. The unaudited consolidated financial
statements have been prepared on a basis consistent with that of the audited
consolidated financial statements as of January 29, 2000 referred to below.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission").
These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in
Finlay Jewelry's annual report on Form 10-K for the fiscal year ended January
29, 2000 ("Form 10-K") previously filed with the Commission.
Finlay Jewelry's fiscal year ends on the Saturday closest to January 31.
References to 1997, 1998, 1999 and 2000 relate to the fiscal years ending
January 31, 1998, January 30, 1999, January 29, 2000 and February 3, 2001,
respectively. Each of the fiscal years includes 52 weeks, except 2000 includes
53 weeks.
In 1998, Finlay Jewelry adopted SFAS No. 130, "Reporting Comprehensive
Income". This Statement requires disclosure of comprehensive income, defined as
the total of net income and all other nonowner changes in equity, which under
generally accepted accounting principles, are recorded directly to the
stockholder's equity section of the consolidated balance sheet and, therefore,
bypass net income. In 1999, the only nonowner change in equity related to the
foreign currency translation adjustment. For the thirteen weeks and thirty-nine
weeks ended October 30, 1999, the comprehensive loss was $2.7 million and $6.5
million, respectively. In 2000, there were no such adjustments and, therefore,
comprehensive income (loss) was the same as Finlay Jewelry's net income (loss).
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. Over
the past three fiscal years, the fourth quarter accounted for an average of 43%
of Finlay's domestic sales due to the seasonality of the retail jewelry
industry. Approximately 46% of Finlay's domestic sales in 1999 were from
operations in The May Department Stores Company ("May") and 22% in departments
operated in store groups owned by Federated Department Stores.
7
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
JANUARY 29, OCTOBER 28,
2000 2000
---------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Jewelry goods - rings, watches and other fine jewelry
(specific identification basis)............................... $ 283,717 $ 355,887
Less: Excess of specific identification cost over LIFO
inventory value............................................... 4,381 5,472
---------------- ------------------
$ 279,336 $ 350,415
================ ==================
</TABLE>
The LIFO method had the effect of increasing the loss before income taxes
for the thirteen weeks ended October 30, 1999 and October 28, 2000 by $95,000
and $405,000, respectively. The effect of applying the LIFO method for the
thirty-nine weeks ended October 30, 1999 and October 28, 2000 was to increase
the loss before income taxes by $286,000 and $1,092,000, respectively. Finlay
determines its LIFO inventory value by utilizing selected producer price indices
published for jewelry and watches by the Bureau of Labor Statistics.
Approximately $329,850,000 and $421,267,000 at January 29, 2000 and October
28, 2000, respectively, of merchandise received on consignment has been excluded
from Merchandise inventories and Accounts payable-trade in the accompanying
Consolidated Balance Sheets.
Finlay Jewelry is party to a gold consignment agreement (the "Gold
Consignment Agreement"), which expires on December 31, 2001. The Gold
Consignment Agreement enables Finlay Jewelry to receive merchandise by providing
gold, or otherwise making payment, to certain vendors who supply Finlay Jewelry
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) 105,000 fine troy ounces or (ii)
$32,000,000 worth of gold, subject to a formula as prescribed by the Gold
Consignment Agreement. At October 28, 2000, amounts outstanding under the Gold
Consignment Agreement totaled 104,869 fine troy ounces, valued at approximately
$27.7 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.
8
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - MERCHANDISE INVENTORIES (CONTINUED)
The cost to Finlay of gold merchandise sold on consignment in some cases is
not fixed until the sale is reported to the vendor or to the gold consignor in
the case of merchandise sold pursuant to the Gold Consignment Agreement. Finlay
at times enters into futures contracts, such as options or forwards, based upon
the anticipated sales of gold product, to hedge against the risk arising from
those payment arrangements. At January 29, 2000, Finlay Jewelry had two open
positions in futures contracts for gold totaling 25,000 fine troy ounces, valued
at $7.3 million, which expired during the first quarter of 2000. At October 28,
2000, Finlay Jewelry had two open positions in futures contracts for gold
totaling 16,000 fine troy ounces, valued at $4.2 million, which expire through
April 2001.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This Statement requires that all derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative instrument's fair
value be recognized currently in earnings or in comprehensive income. SFAS No.
133 is effective for fiscal years beginning after June 15, 2000. Finlay has
determined that the existing derivative instruments, consisting of forward
contracts, will be designated and accounted for as cash flow hedges as of the
February 4, 2001 adoption date. Upon adoption, the fair value of the forward
contracts will be recorded, as either an asset or liability, with a
corresponding adjustment to comprehensive income. Finlay Jewelry believes that
the designated hedges will be highly effective and the related hedge accounting
will not have a material impact on Finlay Jewelry's results of operations. There
are no other freestanding or embedded derivative instruments that have been
identified by Finlay Jewelry as of October 28, 2000 and, accordingly, Finlay
Jewelry does not expect to record any other adjustments pursuant to the adoption
of SFAS No. 133.
NOTE 4 - LEASE AGREEMENTS
Finlay conducts substantially all of its operations as leased departments
in department stores. All of these leases, as well as rentals for office space
and equipment, are accounted for as operating leases. A substantial number of
such operating leases expire on various dates through 2008. All references
herein to leased departments refer to departments operated pursuant to license
agreements or other arrangements with host department stores.
Substantially all of the department store leases provide that the title to
certain fixed assets of Finlay transfers upon termination of the leases, and
that Finlay will receive the undepreciated value of such fixed assets from the
host store in the event such transfers occur, although the depreciation schedule
provided for in the lease may differ from that used for financial reporting
purposes. The values of such fixed assets are recorded at the inception of the
lease arrangement and are reflected in the accompanying Consolidated Balance
Sheets.
In many cases, Finlay is subject to limitations under its lease agreements
with host department stores which prohibit Finlay from operating departments for
other store groups within a certain geographical radius of the host store.
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:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
--------------------------------- ---------------------------------
OCTOBER 30, OCTOBER 28, OCTOBER 30, OCTOBER 28,
1999 2000 1999 2000
--------------- -------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Minimum fees.............. $ 4,297 $ 2,985 $ 12,935 $ 9,008
Contingent fees........... 24,396 28,412 73,405 86,542
--------------- -------------- -------------- ---------------
Total................... $ 28,693 $ 31,397 $ 86,340 $ 95,550
=============== ============== ============== ===============
</TABLE>
NOTE 5 - SALE AND CLOSURE OF SONAB
On January 3, 2000, Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B.
("Sonab"), Finlay's European leased jewelry department subsidiary, sold the
majority of its assets for approximately $9.9 million. As of January 29, 2000,
Sonab had received $1.2 million of the sale proceeds. Sonab received an
additional $6.8 million in February 2000 upon the completion of the post-closing
audit, and the balance of $1.9 million remains subject to certain escrow
arrangements among the parties. After the sale, the buyer operated more than 80
locations previously included in Sonab's 130-location base in France. The
remaining departments were closed. Finlay recorded a pre-tax charge in the
fourth quarter of 1999 of $28.6 million for the write-down of assets for
disposition and related closure expenses.
NOTE 6 - JAY B. RUDOLPH, INC. ACQUISITION
On April 3, 2000, Finlay completed the acquisition of certain assets of Jay
B. Rudolph, Inc. ("J.B. Rudolph") for $20.6 million, consisting primarily of
inventory and fixed assets. By acquiring J.B. Rudolph (the "J.B. Rudolph
Acquisition"), Finlay added 57 departments and also added new host store
relationships with Bloomingdale's, Dayton's, and Hudson's. Finlay financed the
J.B. Rudolph Acquisition with borrowings under Finlay's revolving credit
agreement with General Electric Capital Corporation and the other lenders
thereto (the "Revolving Credit Agreement").
The J.B. Rudolph Acquisition was accounted for as a purchase, and,
accordingly, the operating results of the former J.B. Rudolph departments have
been included in Finlay's consolidated financial statements since the date of
acquisition. Finlay has recorded goodwill of $1.7 million based on a preliminary
purchase price allocation. Goodwill is being amortized over a period of ten
years.
10
<PAGE>
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SUBSEQUENT EVENT
On December 1, 2000, the Holding Company announced that its Board of
Directors had approved a stock repurchase program to acquire up to $20 million
of outstanding common stock. Under the program, the Holding Company, from time
to time, at the discretion of management, may purchase its common stock on the
open market through September 29, 2001. The extent and timing of repurchases
will depend upon general business and market conditions, stock prices,
availability under Finlay's revolving credit facility and its cash position and
requirements going forward. The repurchase program may be modified, extended or
terminated by the Board of Directors at any time.
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
------------------------------- ---------------------------------
OCTOBER 30, OCTOBER 28, OCTOBER 30, OCTOBER 28,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales.................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................ 49.4 49.1 49.1 49.3
------------- ------------- ------------- -------------
Gross margin......................................... 50.6 50.9 50.9 50.7
Selling, general and administrative expenses............. 46.5 45.5 46.1 45.0
Depreciation and amortization............................ 2.4 2.4 2.4 2.2
------------- ------------- ------------- -------------
Income (loss) from operations........................ 1.7 3.0 2.4 3.5
Interest expense, net.................................... 3.5 3.4 3.3 3.0
------------- ------------- ------------- -------------
Income (loss) before income taxes.................... (1.8) (0.4) (0.9) 0.5
Provision (benefit) for income taxes..................... (0.6) (0.1) (0.2) 0.3
------------- ------------- ------------- -------------
Net income (loss).................................... (1.2)% (0.3)% (0.7)% 0.2%
============= ============= ============= =============
</TABLE>
THIRTEEN WEEKS ENDED OCTOBER 28, 2000 COMPARED WITH THIRTEEN WEEKS ENDED
OCTOBER 30, 1999
SALES. Sales for the thirteen weeks ended October 28, 2000 increased $14.4
million, or 8.2%, over the comparable period in 1999. On a domestic basis, sales
increased $20.8 million, or 12.3%, over the 1999 period. Comparable department
sales (departments open for the same months during comparable periods) increased
0.6%. Management attributes this nominal increase in the comparable department
sales to a general softening in the retail environment and, to a greater degree,
the jewelry sector. Sales from the operation of net new departments contributed
$13.4 million, primarily relating to the J.B. Rudolph Acquisition offset by the
sale and closure of Sonab at the end of 1999.
During the thirteen weeks ended October 28, 2000, Finlay opened twelve
departments and closed two departments. The openings and closings were all
within existing store groups.
GROSS MARGIN. Gross margin for the period increased by $7.8 million,
primarily as a result of the sales increase. As a percentage of sales, gross
margin increased by 0.3%. On a domestic basis, gross margin as a percentage of
sales decreased by 0.2% primarily attributable to an increase in the LIFO
provision of $0.3 million.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") increased $4.9 million, or 6.0%, due primarily
to payroll expense and lease fees associated with the increase in Finlay
Jewelry's sales. SG&A as a percentage of sales decreased by 1.0%, and on a
domestic basis by 0.5%, as a result of the leveraging of these expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$0.3 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 as well as the disposition and
write-off of Sonab's fixed assets. On a domestic basis, depreciation and
amortization increased by $0.5 million. The increase in fixed assets was due to
the addition of new departments, the renovation of existing departments and the
inclusion of the cost of fixed assets acquired in connection with the J.B.
Rudolph Acquisition.
INTEREST EXPENSE, NET. Interest expense increased by $0.2 million primarily
due to a higher weighted average interest rate (8.5% for the 2000 period
compared to 7.8% for the comparable period in 1999) offset by a decrease in
average borrowings ($272.1 million for the period in 2000 compared to $284.9
million for the comparable period in 1999).
PROVISION (BENEFIT) FOR INCOME TAXES. The income tax provision for the 2000
and 1999 periods reflects an effective tax rate of 40.5%.
NET INCOME (LOSS). The net loss of $0.6 million for the 2000 period was
$1.5 million less than the net loss in the prior period as a result of the
factors discussed above. On a domestic basis, the net loss for the 2000 period
was $1.2 million less than the net loss in the prior period, which totaled $1.8
million.
THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000 COMPARED WITH THIRTY-NINE WEEKS ENDED
OCTOBER 30, 1999
SALES. Sales for the thirty-nine weeks ended October 28, 2000 increased
$52.5 million, or 10.0%, over the comparable period in 1999. On a domestic
basis, sales increased $71.7 million, or 14.1%, over the 1999 period. Comparable
department sales increased 4.4%. Management attributes this increase in the
comparable department sales to the following initiatives: (i) emphasizing its
"Key Item" and "Best Value" merchandising programs, which provide a targeted
assortment of items at competitive prices; (ii) increasing focus on holiday and
event-driven promotions as well as host store marketing programs; and (iii)
positioning its departments as a "destination location" for fine jewelry. These
factors were offset by a general softening in the retail environment in the
third quarter. Sales from the operation of net new departments contributed $30.2
million, primarily relating to the J.B. Rudolph Acquisition and the net effect
of new store openings and closings offset by the sale and closure of Sonab at
the end of 1999.
During the thirty-nine weeks ended October 28, 2000, Finlay opened 80
departments and closed 16 departments. The openings included 57 departments as a
result of the J.B. Rudolph Acquisition, including 23 departments in
Bloomingdale's, 13 departments in Dayton's and 21 departments in Hudson's, seven
departments as a result of May's acquisition of ZCMI and 16 departments within
existing store groups. The closings were all within existing store groups,
including six of Finlay's outlet stores which were sold in May 2000.
GROSS MARGIN. Gross margin for the period increased by $25.9 million,
primarily as a result of the sales increase. As a percentage of sales, gross
margin decreased by 0.2%. On a domestic basis, gross margin as a percentage of
sales decreased by 0.4% primarily attributable to (i) management's efforts to
increase market penetration and market share through its pricing strategy, (ii)
intensified promotional
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activity by the host stores, including an increased usage of in-store coupons
and (iii) an increase in the LIFO provision of $0.8 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $17.7 million,
or 7.3%, due primarily to payroll expense and lease fees associated with the
increase in Finlay Jewelry's sales. SG&A as a percentage of sales decreased by
1.1%, and on a domestic basis by 0.6%, as a result of the leveraging of these
expenses. In addition, expenses related to Finlay's year 2000 remediation
project totaled approximately $2.0 million for the thirty-nine weeks ended
October 30, 1999. There were no such expenses recorded in the current year.
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 as well as the disposition and
write-off of Sonab's fixed assets. On a domestic basis, depreciation and
amortization increased by $0.9 million. The increase in fixed assets was due to
the addition of new departments, the renovation of existing departments and the
inclusion of the cost of fixed assets acquired in connection with the J.B.
Rudolph Acquisition.
INTEREST EXPENSE, NET. Interest expense increased by $0.5 million primarily
due to a higher weighted average interest rate (8.4% for the 2000 period
compared to 7.9% for the comparable period in 1999) offset by a decrease in
average borrowings ($249.1 million for the period in 2000 compared to $259.6
million for the comparable period in 1999).
PROVISION (BENEFIT) FOR INCOME TAXES. The income tax provision for the 2000
and 1999 periods reflects an effective tax rate of 40.5%.
NET INCOME (LOSS). The net income of $1.2 million for the 2000 period was
$4.6 million higher than the net loss in the prior period as a result of the
factors discussed above. On a domestic basis, the net income for the 2000 period
was $3.3 million higher than the net loss in the prior period, which totaled
$2.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Finlay's primary capital requirements are for funding working capital for
new departments and for working capital growth of existing departments and, to a
lesser extent, capital expenditures for opening new departments, renovating
existing departments and information technology investments. For the thirty-nine
weeks ended October 30, 1999 and October 28, 2000, capital expenditures totaled
$11.6 million and $11.7 million (exclusive of the fixed assets acquired in the
J.B. Rudolph Acquisition, which totaled $4.0 million), respectively. For 1999,
capital expenditures totaled $15.0 million and for 2000 are estimated to be
approximately $15.0 million, exclusive of the fixed assets acquired in the J.B.
Rudolph Acquisition. Although capital expenditures are limited by the terms of
the Revolving Credit Agreement, to date this limitation has not precluded 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 $123.7 million at
October 28, 2000, a decrease of $9.0 million from January 29, 2000. The decrease
resulted primarily from the impact of the interim net income, exclusive of
depreciation and amortization, dividends declared to parent, and capital
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expenditures including fixed assets acquired in the J.B. Rudolph Acquisition.
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, which includes a $50.0 million acquisition facility. 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 October 28, 2000 were $124.5 million, compared
to a zero balance at January 29, 2000 and $127.4 million at October 30, 1999.
The average amounts outstanding under the Revolving Credit Agreement were $109.6
million and $99.1 million for the thirty-nine weeks ended October 30, 1999 and
October 28, 2000, respectively. The maximum amount outstanding for the
thirty-nine weeks ended October 28, 2000 was $145.7 million, at which point the
unused excess availability was $75.0 million, excluding the acquisition
facility.
On December 1, 2000, the Holding Company announced that its Board of
Directors had approved a stock repurchase program to acquire up to $20 million
of outstanding common stock. Under the program, the Holding Company, from time
to time, at the discretion of management, may purchase its common stock on the
open market through September 29, 2001. The extent and timing of repurchases
will depend upon general business and market conditions, stock prices,
availability under Finlay's revolving credit facility and its cash position and
requirements going forward. The repurchase program may be modified, extended or
terminated by the Board of Directors at any time.
On April 3, 2000 Finlay completed the acquisition of certain assets of J.B.
Rudolph for $20.6 million, consisting primarily of inventory and fixed assets.
The J.B. Rudolph Acquisition did not require significant additional working
capital with respect to the operation of the former J.B. Rudolph departments
because Finlay purchased the inventory of those J.B. Rudolph departments which
it acquired. On a going-forward basis, inventory purchases for the former J.B.
Rudolph departments are being financed in part by trade payables combined with
the utilization of consignment inventory. Finlay financed the J.B. Rudolph
Acquisition with borrowings under its Revolving Credit Agreement.
On January 3, 2000, Sonab sold the majority of its assets for approximately
$9.9 million. As of January 29, 2000, Sonab had received $1.2 million of the
sale proceeds. Sonab received an additional $6.8 million in February 2000 upon
the completion of the post-closing audit, and the balance of $1.9 million
remains subject to certain escrow arrangements among the parties. After the
sale, the buyer operated more than 80 locations previously included in Sonab's
130-location base in France. The remaining departments were closed. Finlay
recorded a pre-tax charge in the fourth quarter of 1999 of $28.6 million for the
write-down of assets for disposition and related closure expenses. The cash
portion of this charge was $7.8 million.
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Finlay's long-term needs for external financing will depend on its rate of
growth, the level of internally generated funds and the ability to continue
obtaining substantial amounts of merchandise on advantageous terms, including
consignment arrangements with its vendors. For 1999, Finlay had an average
balance of consignment merchandise of $329.9 million from approximately 300
vendors as compared to an average balance of $283.8 million in 1998. As of
October 28, 2000, $421.3 million of consignment merchandise was on hand as
compared to $355.1 million at October 30, 1999.
A substantial amount of Finlay's operating cash flow has been used or will
be required to pay interest, directly or indirectly, with respect to the Holding
Company's 9% Senior Debentures due May 1, 2008 (the "Senior Debentures"), Finlay
Jewelry's 8 3/8 Senior Notes due May 1, 2008 (the "Senior Notes") and amounts
due under the Revolving Credit Agreement, including the payments required
pursuant to the Balance Reduction Requirement. As of October 28, 2000, Finlay
Jewelry's outstanding borrowings were $274.5 million, which included a $150.0
million balance under the Senior Notes and a $124.5 million balance under the
Revolving Credit Agreement.
Finlay Jewelry is party to the Gold Consignment Agreement, which expires on
December 31, 2001. The Gold Consignment Agreement enables Finlay Jewelry to
receive merchandise by providing gold, or otherwise making payment, to certain
vendors. Finlay Jewelry can obtain, pursuant to the Gold Consignment Agreement,
up to the lesser of (i) 105,000 fine troy ounces or (ii) $32.0 million worth of
gold, subject to a formula as prescribed by the Gold Consignment Agreement. At
October 28, 2000, amounts outstanding under the Gold Consignment Agreement
totaled 104,869 fine troy ounces, valued at approximately $27.7 million. Finlay
Jewelry is in discussions with its gold consignor regarding an increase in the
existing limits under the Gold Consignment Agreement. The average amount
outstanding under the Gold Consignment Agreement was $23.5 million in 1999.
The year 2000 issue did not pose significant operational problems to
Finlay. Finlay used a combination of internal and external resources to execute
its year 2000 project plan. The costs related to Finlay's year 2000 efforts
totaled approximately $4.0 million, of which approximately $1.9 million and $2.1
million was spent in 1998 and 1999, respectively. Finlay funded the year 2000
costs through operating cash flows.
Finlay is in the process of implementing several information technology
initiatives, including the design and development of a new merchandising system
and a point-of-sale system in Finlay's departments. These projects will serve to
support future growth of Finlay as well as provide improved analysis and
reporting capabilities and more timely sales and inventory information to
facilitate merchandising solutions. These systems will provide the foundation
for future productivity and expense control initiatives. At October 28, 2000, a
total of approximately $12.1 million has been expended for software and
implementation costs and is included in Deferred charges and other assets.
Approximately $4.0 million for hardware and related equipment was expended in
1999 to upgrade Finlay's departments and is reflected in Fixed assets. Finlay
expects these systems to be completed by mid-2001 and anticipates it will spend
an additional $6-9 million.
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code")
restricts utilization of net operating loss carryforwards ("NOLs") after an
ownership change exceeding 50%. As a result certain recapitalization
transactions in 1993, a change in ownership of the 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, 1999 (Finlay Jewelry's tax
year end), a NOL for tax
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purposes of approximately $7.5 million which is subject to an annual limit of
approximately $2.0 million per year. However, for financial reporting purposes,
no NOL exists as of January 29, 2000.
From time to time, Finlay enters into futures contracts, such as options or
forwards, based upon the anticipated sales of gold product in order to hedge
against the risk arising from its payment arrangements. For the year ended
January 29, 2000, the gain or loss on open futures contracts was not material.
At October 28, 2000, Finlay Jewelry had two open positions in futures contracts
for gold totaling 16,000 fine troy ounces, valued at $4.2 million, which expire
through April 2001. 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
$13.0 million for each of the thirty-nine week periods ended October 30, 1999
and October 28, 2000.
SEASONALITY
Finlay's business is highly seasonal, with a significant portion of its
sales and income from operations generated during the fourth quarter of each
year, which includes the year-end holiday season. The fourth quarter accounted
for an average of 43% of Finlay's sales and 81% of its income from operations
for 1997, 1998 and 1999. Finlay has typically experienced net losses in the
first three quarters of its fiscal year, although Finlay Jewelry did achieve a
net profit in the second quarter this 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.
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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, performances or achievements to differ materially
from those reflected in, or implied by, the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed under "Management's Discussion and Analysis of Financial Condition and
Results of Operations", as well as trends in the general economy in the United
States, competition in the retail jewelry business, the seasonality of the
retail jewelry business, Finlay Jewelry's ability to increase comparable
department sales and to open new departments, 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 compliance with applicable
contractual covenants, 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. Other such
factors include the ability of the Holding Company to complete the repurchases
contemplated under its stock repurchase program, the adequacy of Finlay's
working capital to complete the repurchases, the availability and liquidity of
the Holding Company's common stock, and overall market conditions for the
Holding Company's common stock.
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 or to reflect the occurrence of unanticipated events. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Finlay Jewelry is exposed to market risk through the interest rate on its
borrowings under the Revolving Credit Agreement, which has a variable interest
rate. In seeking to minimize the risks from interest rate fluctuations, 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. In addition, Finlay Jewelry is exposed to market risk
related to changes in the price of gold, and selectively uses forward contracts
to manage this risk. Finlay Jewelry enters into forward contracts for the
purchase of gold to hedge the risk of gold price fluctuations for future sales
of gold consignment merchandise. Finlay Jewelry does not enter into forward
contracts or other financial instruments for speculation or trading purposes.
The aggregate amount of forward contracts was $4.2 million at October 28, 2000,
which expire through April 2001.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
2 Not applicable.
3 Not applicable.
4 Not applicable.
10 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.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 8, 2000 FINLAY FINE JEWELRY CORPORATION
By: /s/ Bruce E. Zurlnick
-------------------------------------
Bruce E. Zurlnick
Senior Vice President, Treasurer
and Chief Financial Officer
(As both a duly authorized officer of
Registrant and as principal financial
officer of Registrant)
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