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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 3, 2002
--------------
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: 0-25716
FINLAY ENTERPRISES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3492802
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
529 Fifth Avenue, New York, NY 10017
---------------------------------------- ----------
(Address of principal executive offices) (zip code)
(212) 808-2800
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of September 13, 2002, there were 9,446,488 shares of common stock, par value
$.01 per share, of the Registrant outstanding.
FINLAY ENTERPRISES, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED AUGUST 3, 2002
INDEX
PAGE(S)
-------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the thirteen weeks and
twenty-six weeks ended August 4, 2001 and August 3, 2002............................1
Consolidated Balance Sheets as of February 2, 2002 and
August 3, 2002......................................................................3
Consolidated Statements of Changes in Stockholders' Equity for the year
ended February 2, 2002 and twenty-six weeks ended August 3, 2002....................4
Consolidated Statements of Cash Flows for the thirteen weeks and
twenty-six weeks ended August 4, 2001 and August 3, 2002............................5
Notes to Consolidated Financial Statements..........................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................22
Item 4. Controls and Procedures............................................................23
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................................23
Item 6. Exhibits and Reports on Form 8-K...................................................23
SIGNATURES.............................................................................................25
CERTIFICATIONS.........................................................................................26
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED
---------------------------------
AUGUST 4, AUGUST 3,
2001 2002
------------ ------------
Sales.................................................................... $ 196,167 $ 187,130
Cost of sales............................................................ 98,480 95,320
------------ ------------
Gross margin......................................................... 97,687 91,810
Selling, general and administrative expenses............................. 87,107 82,097
Depreciation and amortization............................................ 5,055 4,437
------------ ------------
Income (loss) from operations........................................ 5,525 5,276
Interest expense, net.................................................... 7,031 6,302
------------ ------------
Income (loss) before income taxes.................................... (1,506) (1,026)
Provision (benefit) for income taxes..................................... (445) (553)
------------ ------------
Net income (loss).................................................... $ (1,061) $ (473)
============ ============
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share................................. $ (0.10) $ (0.05)
============ ============
Diluted net income (loss) per share............................... $ (0.10) $ (0.05)
============ ============
Weighted average shares and share equivalents outstanding -
basic and diluted............................................... 10,278,245 9,356,933
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
1
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
---------------------------------
AUGUST 4, AUGUST 3,
2001 2002
------------ ------------
Sales.................................................................... $ 389,416 $ 374,495
Cost of sales............................................................ 193,361 188,694
------------ ------------
Gross margin......................................................... 196,055 185,801
Selling, general and administrative expenses............................. 176,522 166,589
Depreciation and amortization............................................ 9,883 8,794
------------ ------------
Income (loss) from operations........................................ 9,650 10,418
Interest expense, net.................................................... 13,769 12,315
------------ ------------
Income (loss) before income taxes ................................... (4,119) (1,897)
Provision (benefit) for income taxes..................................... (1,339) (1,041)
------------ ------------
Net income (loss).................................................... $ (2,780) $ (856)
============ ============
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share................................. $ (0.27) $ (0.09)
============ ============
Diluted net income (loss) per share............................... $ (0.27) $ (0.09)
============ ============
Weighted average shares and share equivalents outstanding -
basic and diluted............................................... 10,284,316 9,535,125
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
2
FINLAY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
FEBRUARY 2, AUGUST 3,
2002 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 49,369 $ 3,440
Accounts receivable - department stores...................................... 17,505 32,517
Other receivables............................................................ 25,953 39,895
Merchandise inventories...................................................... 304,508 301,900
Prepaid expenses and other................................................... 2,365 3,582
----------- -----------
Total current assets...................................................... 399,700 381,334
----------- -----------
Fixed assets:
Equipment, fixtures and leasehold improvements............................... 119,743 124,442
Less - accumulated depreciation and amortization............................. 47,717 54,165
----------- -----------
Fixed assets, net......................................................... 72,026 70,277
----------- -----------
Deferred charges and other assets, net......................................... 22,081 22,889
Goodwill....................................................................... 91,046 91,046
----------- -----------
Total assets.............................................................. $ 584,853 $ 565,546
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................................................ $ - $ 56,634
Accounts payable - trade..................................................... 132,174 66,980
Accrued liabilities:
Accrued salaries and benefits............................................. 19,369 17,274
Accrued miscellaneous taxes............................................... 6,522 6,556
Accrued interest.......................................................... 5,284 5,419
Other..................................................................... 13,871 16,700
Income taxes payable......................................................... 16,943 10,720
Deferred income taxes........................................................ 3,001 3,436
----------- -----------
Total current liabilities................................................. 197,164 183,719
Long-term debt................................................................. 225,000 225,000
Other non-current liabilities.................................................. 13,482 14,384
----------- -----------
Total liabilities......................................................... 435,646 423,103
----------- -----------
Stockholders' equity:
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 9,946,623 and 9,445,821 shares, respectively....... 105 105
Additional paid-in capital .................................................. 78,728 79,558
Retained earnings............................................................ 76,558 75,702
Unamortized restricted stock compensation.................................... (913) (760)
Accumulated other comprehensive income....................................... 96 (280)
Less treasury stock, at cost................................................. (5,367) (11,882)
----------- -----------
Total stockholders' equity................................................ 149,207 142,443
----------- -----------
Total liabilities and stockholders' equity................................ $ 584,853 $ 565,546
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME/
COMMON STOCK UNAMORTIZED
------------------------ ADDITIONAL RETAINED RESTRICTED TOTAL
NUMBER PAID- IN EARNINGS STOCK TREASURY STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION STOCK EQUITY
--------- ------ ------- --------- ------------ ----- ------
Balance, February 3, 2001 .......... 10,336,986 $ 104 $ 77,332 $ 58,023 $ -- $ (1,119) $ 134,340
Net income (loss) ................ -- -- -- 18,535 -- -- 18,535
Fair value of gold forward
contracts at February 4, 2001. -- -- -- -- 24 -- 24
Change in fair value of gold
forward contracts ............ -- -- -- -- 72 -- 72
Exercise of stock options ........ 16,967 -- 178 -- -- -- 178
Issuance of restricted stock ..... 100,000 1 1,218 -- (913) -- 306
Purchase of treasury stock ....... (507,330) -- -- -- -- (4,248) (4,248)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, February 2, 2002 .......... 9,946,623 105 78,728 76,558 (817) (5,367) 149,207
Net income (loss) ................ -- -- -- (856) -- -- (856)
Change in fair value of gold
forward contracts ............ -- -- -- -- (376) -- (376)
Exercise of stock options ........ 76,760 -- 830 -- -- -- 830
Amortization of restricted
stock compensation ........... -- -- -- -- 153 -- 153
Purchase of treasury stock ....... (577,562) -- -- -- -- (6,515) (6,515)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, August 3, 2002
(unaudited) ..................... 9,445,821 $ 105 $ 79,558 $ 75,702 $ (1,040) $ (11,882) $ 142,443
========= =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
----------------------------
AUGUST 4, AUGUST 3,
2001 2002
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................................................. $ (1,061) $ (473)
Adjustments to reconcile net income (loss) to net cash provided from
operating activities:
Depreciation and amortization.................................................. 5,055 4,437
Amortization of deferred financing costs....................................... 309 294
Amortization of restricted stock compensation.................................. 76 78
Other, net..................................................................... 821 302
Changes in operating assets and liabilities:
Decrease in accounts and other receivables.................................. 3,221 1,736
Decrease in merchandise inventories......................................... 11,747 6,852
(Increase) decrease in prepaid expenses and other........................... (465) 269
Decrease in accounts payable and accrued liabilities........................ (3,435) (11,976)
---------- -----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES.............................. 16,268 1,519
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (2,366) (2,613)
Deferred charges and other, net.................................................. (933) (2,519)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES.................................... (3,299) (5,132)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 141,151 157,740
Principal payments on revolving credit facility................................ (154,749) (153,300)
Purchase of treasury stock..................................................... - (712)
Stock options exercised........................................................ 155 474
---------- -----------
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES.................. (13,443) 4,202
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (474) 589
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 3,095 2,851
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 2,621 $ 3,440
========== ===========
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 1,986 $ 1,110
Income taxes paid.............................................................. 3,031 2,445
The accompanying notes are an integral part of these
consolidated financial statements.
5
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
----------------------------
AUGUST 4, AUGUST 3,
2001 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................................................. $ (2,780) $ (856)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.................................................. 9,883 8,794
Amortization of deferred financing costs....................................... 618 588
Amortization of restricted stock compensation.................................. 153 153
Other, net..................................................................... 1,404 875
Changes in operating assets and liabilities:
Increase in accounts and other receivables.................................. (10,448) (28,954)
Decrease in merchandise inventories......................................... 9,403 2,608
Increase in prepaid expenses and other...................................... (1,236) (1,217)
Decrease in accounts payable and accrued liabilities........................ (102,594) (69,868)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES.................................... (95,597) (87,877)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (6,223) (5,516)
Deferred charges and other..................................................... (3,101) (3,273)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.................................... (9,324) (8,789)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 370,769 287,979
Principal payments on revolving credit facility................................ (294,202) (231,345)
Purchase of treasury stock..................................................... (865) (6,515)
Stock options exercised........................................................ 178 618
----------- -----------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............................. 75,880 50,737
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS.................................... (29,041) (45,929)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 31,662 49,369
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 2,621 $ 3,440
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 13,004 $ 11,592
Income taxes paid.............................................................. 11,895 5,926
The accompanying notes are an integral part of these
consolidated financial statements.
6
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF ACCOUNTING AND PRESENTATION
The accompanying unaudited consolidated financial statements of Finlay
Enterprises, Inc. (the "Company" or the "Registrant"), and its wholly owned
subsidiary, Finlay Fine Jewelry Corporation and its wholly owned subsidiaries
("Finlay Jewelry"), have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. References to "Finlay" mean collectively, the 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 the Company as of August 3, 2002, and the results of
operations and cash flows for the thirteen weeks and twenty-six weeks ended
August 4, 2001 and August 3, 2002. Due to the seasonal nature of the business,
results for interim periods are not indicative of annual results. The unaudited
consolidated financial statements have been prepared on a basis consistent with
that of the audited consolidated financial statements as of February 2, 2002
referred to below. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America 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 the
Company's annual report on Form 10-K, as amended, for the fiscal year ended
February 2, 2002 ("Form 10-K") previously filed with the Commission.
The Company's fiscal year ends on the Saturday closest to January 31.
References to 1999, 2000, 2001 and 2002 relate to the fiscal years ending
January 29, 2000, February 3, 2001, February 2, 2002 and February 1, 2003,
respectively. Each of the fiscal years includes 52 weeks, except 2000 includes
53 weeks.
The Company recorded a tax provision based on an estimated annual income
tax rate. In addition, the Company has recognized an intraperiod tax benefit as
it has projected that there will be a profit in the fourth quarter and for the
fiscal year.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
MERCHANDISE INVENTORIES: Consolidated inventories are stated at the lower
of cost or market determined by the last-in, first-out ("LIFO") method. The cost
to Finlay of gold merchandise sold on consignment, which typically varies with
the price of gold, is not fixed until the merchandise is sold. Finlay at times
enters into futures contracts, such as options or forwards, based upon the
anticipated sales of gold product in order to hedge against the risk of gold
price fluctuations. 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 February 2, 2002 and the thirteen and twenty-six weeks ended August
3, 2002, the gain/loss on open futures contracts was not material. At February
2, 2002, the Company had several open positions in futures contracts for gold
totaling 17,500 fine troy ounces, valued at $4.8 million. At August 3, 2002, the
Company had several open positions in gold futures contracts totaling 35,500
fine troy ounces, valued at $10.8 million.
7
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 2001, the Company adopted Statement of Financial Accounting Standards
("SFAS") No.133, "Accounting for Derivative Instruments and Hedging Activities".
This Statement requires that all derivative instruments be recorded on the
balance sheet as either an asset or liability measured at its fair value. The
Company designated its derivative instruments, consisting of gold forward
contracts, as cash flow hedges. For derivative instruments designated as cash
flow hedges, the effective portion of the change in the fair value of the
derivative is recorded in accumulated other comprehensive income, a separate
component of stockholders' equity, and is reclassified into earnings when the
offsetting effects of the hedged transaction affects earnings. At February 2,
2002, the fair value of the gold forward contracts resulted in the recognition
of an asset of $160,500. The gain recorded in accumulated other comprehensive
income of $96,000, net of tax, was reclassified into earnings during 2002. At
August 3, 2002, the fair value of the gold forward contracts resulted in the
recognition of a liability of $470,900. The loss recorded in accumulated other
comprehensive income of $280,000, net of tax, will be reclassified into earnings
during the remainder of 2002.
The Company has documented all relationships between hedging instruments
and hedged items, as well as its risk management objectives and strategy for
undertaking various hedge transactions. The Company also assesses, both at the
hedge's inception and on an ongoing basis, whether the derivatives that are used
in hedging transactions are highly effective in offsetting changes in cash flows
of hedged items. The Company believes that the designated hedges will be highly
effective and that the related hedge accounting will not have a material impact
on the Company's results of operations.
NET INCOME (LOSS) PER SHARE: Net income (loss) per share has been computed
in accordance with SFAS No. 128, "Earnings per Share". Basic and diluted net
income (loss) per share were calculated using the weighted average number of
shares outstanding during each period, with options to purchase Common Stock
included in diluted net income (loss) per share, using the treasury stock
method, to the extent that such options were dilutive. As the Company had a net
loss for the thirteen weeks and twenty-six weeks ended August 4, 2001 and August
3, 2002, the dilutive stock options outstanding are not considered in the
calculation of dilutive net income (loss) per share due to their anti-dilutive
effect. As a result, the weighted average number of shares outstanding used for
both the basic and dilutive net income (loss) per share calculations was the
same.
COMPREHENSIVE INCOME: In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This Statement requires disclosure of comprehensive
income, defined as the total of net income and all other non-owner changes in
equity, which under generally accepted accounting principles, are recorded
directly to the stockholders' equity section of the consolidated balance sheet
and, therefore, bypass net income. For 2001 and 2002, the only non-owner change
in equity related to the change in fair value of the Company's outstanding gold
forward contracts. For the thirteen weeks ended August 4, 2001 and August 3,
2002, the comprehensive loss was $0.9 million and $0.8 million, respectively.
For the twenty-six weeks ended August 4, 2001 and August 3, 2002, the
comprehensive loss was $2.7 million and $1.2 million, respectively.
8
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL: In 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", which addresses the financial accounting and reporting
standards for acquired goodwill and other intangibles and supersedes APB No. 17,
Intangible Assets. The accounting standard requires that goodwill no longer be
amortized over its estimated useful life, but tested for impairment on an annual
basis. Goodwill will be tested for impairment between annual tests if an event
occurs which indicates goodwill may be impaired. Amortization of goodwill was
discontinued as of February 3, 2002. During the first quarter of 2002, an
impairment test was performed and the Company determined that there was no
impairment of goodwill and there have been no events in the second quarter which
would indicate that an impairment has occurred.
The following is a reconciliation of reported Net income (loss) and Net
income (loss) per share adjusted to reflect the impact of the discontinuance of
goodwill amortization for the thirteen weeks and twenty-six weeks ended August
4, 2001. The Company's actual Net income (loss) and Net income (loss) per share
for the thirteen weeks and twenty-six weeks ended August 3, 2002 are shown for
comparative purposes.
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------ ----------------------------
AUGUST 4, AUGUST 3, AUGUST 4, AUGUST 3,
2001 2002 2001 2002
----------- ----------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NET INCOME (LOSS):
Reported net income (loss) .......................... $ (1,061) $ (473) $ (2,780) $ (856)
Add: Goodwill amortization ........................ 939 - 1,878 -
Less: Tax impact of deductible goodwill ............. (80) - (160) -
----------- ----------- ---------- ---------
Adjusted net income (loss) .......................... $ (202) $ (473) $ (1,062) $ (856)
=========== =========== ========== =========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
Reported net income (loss) per share ................ $ (0.10) $ (0.05) $ (0.27) $ (0.09)
Add: Goodwill amortization, net ..................... 0.08 - 0.16 -
----------- ----------- ---------- ---------
Adjusted net income (loss) per share................. $ (0.02) $ (0.05) $ (0.11) $ (0.09)
=========== =========== ========== =========
NOTE 3 - DESCRIPTION OF BUSINESS
The Company conducts business through its wholly owned subsidiary, Finlay
Jewelry. Finlay is a retailer of fine jewelry products and 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 42% of
Finlay's sales due to the seasonality of the retail jewelry industry.
Approximately 47% of Finlay's sales in 2001 were from operations in The May
Department Stores Company ("May") and 22% in departments operated in store
groups owned by Federated Department Stores ("Federated").
9
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SHORT AND LONG-TERM DEBT
Finlay's revolving credit agreement (the "Revolving Credit Agreement"),
which expires in March 2003, provides Finlay with a senior secured revolving
line of credit of up to $275.0 million, inclusive of a $50.0 million acquisition
facility, to finance working capital needs. The Company has begun the process of
renewing the Revolving Credit Agreement. There can be no assurances that a new
revolving credit facility will be executed on terms equal to or more favorable
than the expiring Revolving Credit Agreement, or that a new agreement can be
completed at all. Finlay would be adversely affected if it were unable to secure
a new revolving credit facility.
The Company has outstanding 9% Senior Debentures, due May 1, 2008, having
an aggregate principal amount of $75.0 million (the "Senior Debentures") and
Finlay Jewelry has outstanding 8% Senior Notes, due May 1, 2008, having an
aggregate principal amount of $150.0 million (the "Senior Notes"). The
indentures relating to the Senior Debentures and Senior Notes are collectively
referred to as the "Senior Indentures".
NOTE 5 - MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
(UNAUDITED)
FEBRUARY 2, AUGUST 3,
2002 2002
------------ ------------
(IN THOUSANDS)
Jewelry goods - rings, watches and other fine jewelry
(specific identification basis)............................... $ 314,473 $ 312,781
Less: Excess of specific identification cost over LIFO
inventory value............................................... 9,965 10,881
------------ ------------
$ 304,508 $ 301,900
============ ============
The LIFO method had the effect of increasing the loss before income taxes
for the thirteen weeks ended August 4, 2001 and August 3, 2002 by $803,000 and
$716,000, respectively. The effect of applying the LIFO method for the
twenty-six weeks ended August 4, 2001 and August 3, 2002 was to increase the
loss before income taxes by $994,000 and $916,000, 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 $359,729,000 and $348,157,000 at February 2, 2002 and August
3, 2002, 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 an amended and restated gold consignment
agreement (the "Gold Consignment Agreement"), which expires on September 30,
2002. Finlay Jewelry is currently in the process of amending and extending the
Gold Consignment Agreement. The Gold Consignment Agreement enables Finlay
Jewelry to receive consignment merchandise by providing gold, or otherwise
making
10
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - MERCHANDISE INVENTORIES (CONTINUED)
payment, to certain vendors. While the merchandise involved remains consigned,
title to the gold content of the merchandise transfers from the vendors to the
gold consignor.
Although the gold consignor has increased the limit to the lesser of (i)
160,000 fine troy ounces or (ii) $45.0 million worth of gold, subject to a
formula as prescribed by the Gold Consignment Agreement, at August 3, 2002,
Finlay Jewelry was limited by the Senior Indentures to a consignment total of
$37.0 million worth of gold. During August 2002, Finlay obtained the requisite
approvals from holders of the Senior Notes and Senior Debentures to increase the
consignment limit from $37.0 million to $50.0 million worth of gold. At August
3, 2002, amounts outstanding under the Gold Consignment Agreement totaled
121,242 fine troy ounces, valued at approximately $36.9 million. For financial
statement purposes, the consigned gold is not included in Merchandise
inventories on the Company's Consolidated Balance Sheets and, therefore, no
related liability has been recorded.
NOTE 6 - LEASE AGREEMENTS
Finlay conducts 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 several 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. Contingent fees, as
represented in the table below, are not guaranteed by the lease agreements with
host department stores. Lease expense, included in Selling, general and
administrative expenses, is as follows:
11
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LEASE AGREEMENTS (CONTINUED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
--------------------------------- ---------------------------------
AUGUST 4, AUGUST 3, AUGUST 4, AUGUST 3,
2001 2002 2001 2002
--------------- -------------- -------------- ---------------
(IN THOUSANDS)
Minimum fees.............. $ 2,143 $ 633 $ 4,075 $ 1,273
Contingent fees........... 30,101 30,256 60,103 60,659
---------- ---------- ---------- ----------
Total................... $ 32,244 $ 30,889 $ 64,178 $ 61,932
========== ========== ========== ==========
NOTE 7 - SALE AND CLOSURE OF SONAB
During 1998, Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B. ("Sonab"),
the Company's European leased jewelry department subsidiary, 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 1999. As a result of the
foregoing, on January 3, 2000, Sonab sold the majority of its assets for
approximately $9.9 million. 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.
The Company recorded a pre-tax charge in the fourth quarter of 1999 of
$28.6 million, or $1.62 per share on a diluted basis after-tax. The charge
included the write down of inventory and fixed assets, employee payroll and
severance costs, realization of foreign exchange losses and other close-down
costs. As of February 2, 2002, the Company's exit plan was completed with the
exception of certain employee litigation and other legal matters. To date, the
Company has charged a total of approximately $26.0 million against its original
estimate of $28.6 million. All of Sonab's employees, excluding those that were
hired by the buyer, were involuntarily terminated, including sales associates,
supervisors and corporate personnel. The Company does not believe future
operating results will be materially impacted by any remaining payments.
NOTE 8 - STOCK REPURCHASE PROGRAM AND RESTRICTED STOCK
On December 1, 2000, the Company announced that its Board of Directors had
approved a stock repurchase program to acquire up to $20 million of outstanding
Common Stock. The Company may, at the discretion of management, purchase its
Common Stock, from time to time through September 30, 2002. The extent and
timing of repurchases will depend upon general business and market conditions,
stock prices, availability under Finlay's revolving credit facility, compliance
with certain restrictive covenants 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. During fiscal 2000 and 2001, the Company
repurchased 599,330 shares for approximately $5,367,000. During the first half
of fiscal 2002, the Company repurchased an additional 577,562 shares for
$6,515,000, including (i) the repurchase of 526,562 shares for $5,792,000 from a
partnership, the managing partner of the general
12
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCK REPURCHASE PROGRAM AND RESTRICTED STOCK (CONTINUED)
partner of which is also a director of Finlay and (ii) the repurchase of an
aggregate 50,000 shares for $712,500 from a partnership and a trust affiliated
with a director of Finlay and certain other persons affiliated therewith.
On February 4, 2001, an executive officer of the Company was issued 100,000
shares of Common Stock, subject to restrictions ("Restricted Stock"), pursuant
to a restricted stock agreement. The Restricted Stock becomes fully vested after
four years of continuous employment by the Company and is accounted for as a
component of stockholders' equity. Compensation expense of approximately $1.2
million is being amortized over four years. Amortization for both of the
thirteen week and twenty-six week periods ended August 4, 2001 and August 3,
2002 totaled approximately $78,000 and $153,000, respectively.
NOTE 9 - STORE GROUP CLOSINGS
On February 8, 2001, Federated announced its plans to close its Stern's
division of which Finlay operated 23 departments. During March 2001, Finlay
closed two departments and the remaining 21 Stern's departments were closed
during the second quarter of 2001. Finlay recorded a charge of approximately
$1.0 million, during the first half of 2001, related to the write-off of fixed
assets and employee severance. During 2001, Federated acquired the Liberty House
department store chain. Finlay operated in all twelve of the Liberty House
department stores through mid-November 2001. Finlay recorded a charge of
approximately $150,000, during the fourth quarter of 2001, related to the
write-off of fixed assets and employee severance. During the first half of 2002,
sales were reduced by approximately $23.0 million compared to the first half of
2001 as a result of the closings of Stern's, Liberty House and another smaller
host store group.
13
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States.
These generally accepted accounting principles require management to make
estimates and assumptions that affect certain financial statement accounts
reported and disclosed at the date of the financial statements. Actual results
could differ from those estimates.
Certain of the Company's significant accounting policies are described in
Note 2 of Notes to the Consolidated Financial Statements. The Company believes
that the following discussion addresses the critical accounting policies, which
are those that are most important to the portrayal of the Company's financial
condition and results and require management's most difficult, subjective or
complex judgments. The Company is not aware of any likely events or
circumstances which would result in different amounts being reported that would
materially affect its financial condition or results of operations.
MERCHANDISE INVENTORIES
The Company values its inventories at the lower of cost or market. The cost
is determined by the last-in, first-out method utilizing selected producer price
indices published for jewelry and watches by the Bureau of Labor Statistics.
Factors related to inventories such as future consumer demand and the economy's
impact on consumer discretionary spending, inventory aging, ability to return
merchandise to vendors, merchandise condition and anticipated markdowns are
analyzed to determine estimated net realizable values. A provision is recorded
to reduce the cost of inventories, if required. Any significant unanticipated
changes in the factors above could have a significant impact on the value of the
inventories and the Company's reported operating results.
The Company is exposed to market risk related to changes in the price of
gold and at times enters into futures contracts, such as options or forwards, to
hedge against the risk of gold price fluctuations. In 2001, the Company adopted
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities",
which requires that all derivative instruments be recorded on the balance sheet
as either an asset or a liability measured at its fair value. Accounting for
derivative instruments under this pronouncement did not have a material impact
on the Company's financial condition, results of operations and cash flows for
the thirteen weeks and twenty-six weeks ended August 3, 2002.
REVENUE RECOGNITION
The Company recognizes revenue upon the sale of merchandise, either owned
or consigned, to its customers, net of anticipated returns.
COVENANT REQUIREMENTS
The Company's agreements covering the Revolving Credit Agreement, the
Senior Debentures and the Senior Notes each require that Finlay comply with
certain restrictive and financial covenants. In addition, Finlay Jewelry is
party to the Gold Consignment Agreement, which also contains certain covenants.
As of and for the twenty-six weeks ended August 3, 2002, the Company was in
compliance with all of its covenants. Should the Company's results of operations
significantly erode, the Company may not be in compliance with its covenants.
Although management believes that the Company would be able to obtain a waiver
or amendment, if required, in the event that the Company is unable to obtain
such waiver or amendment, the outstanding balances could become due immediately.
14
EFFECT OF NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142 "Goodwill and Other Intangible Assets". SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives are no longer to be
amortized but tested for impairment on an annual basis. Goodwill will be tested
for impairment between annual tests if an event occurs which indicates goodwill
may be impaired. The Company adopted this pronouncement in 2002 and has
determined that there was no impairment of goodwill as of February 3, 2002. The
Company's annual goodwill amortization in 2001 totaled $3.7 million.
In October 2001, the FASB issued SFAS No. 144 "Accounting for Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This extends the
reporting requirements to include reporting separately as discontinued
operations components of an entity that have either been disposed of or
classified as held-for-sale. The Company has adopted the provisions of SFAS No.
144 in 2002 and does not anticipate that such adoption will have a significant
effect on the Company's results of operations or financial position.
ACCOUNTING STANDARDS NOT YET ADOPTED
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB No. 13, and Technical Corrections". This
statement amends certain existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. Additionally, the provisions provide that gains and losses
from debt-extinguishment are not automatically shown as an extraordinary item on
a company's statement of operations. The provisions of SFAS No. 145 are
effective for fiscal years beginning after May 15, 2002. The adoption of SFAS
No. 145 is not expected to have a material impact on the financial position or
results of operations of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities.
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. This statement
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS No.
146 is not expected to have a material impact on the financial position or
results of operations of the Company.
15
RESULTS OF OPERATIONS
The following table sets forth operating results as a percentage of sales
for the periods indicated:
STATEMENTS OF OPERATIONS DATA
(UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------------- -----------------------------
AUGUST 4, AUGUST 3, AUGUST 4, AUGUST 3,
2001 2002 2001 2002
----------- ----------- ----------- -----------
Sales...................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................................. 50.2 50.9 49.7 50.4
----------- ----------- ----------- -----------
Gross margin........................................... 49.8 49.1 50.3 49.6
Selling, general and administrative expenses............... 44.4 43.9 45.3 44.5
Depreciation and amortization.............................. 2.6 2.4 2.5 2.3
----------- ----------- ----------- -----------
Income (loss) from operations.......................... 2.8 2.8 2.5 2.8
Interest expense, net...................................... 3.6 3.4 3.5 3.3
----------- ----------- ----------- -----------
Income (loss) before income taxes...................... (0.8) (0.6) (1.0) (0.5)
Provision (benefit) for income taxes....................... (0.2) (0.3) (0.3) (0.3)
----------- ----------- ----------- -----------
Net income (loss)...................................... (0.6)% (0.3)% (0.7)% (0.2)%
=========== =========== =========== ===========
THIRTEEN WEEKS ENDED AUGUST 3, 2002 COMPARED WITH THIRTEEN WEEKS ENDED AUGUST 4,
2001
SALES. Sales for the thirteen weeks ended August 3, 2002, decreased $9.0
million, or 4.6%, over the comparable period in 2001. Comparable department
sales (departments open for the same months during comparable periods) increased
0.3%. The decrease in total sales is the result of the 2001 closing of three
host store groups, which contributed approximately $11.0 million of sales in the
second quarter of 2001, offset by the net effect of new store openings and
closings.
During the thirteen weeks ended August 3, 2002, Finlay opened two
departments and closed five departments. The openings and closings were all
within existing store groups.
With the continuing weak retail environment, the Company experienced softer
than anticipated sales trends in the month of August.
GROSS MARGIN. Gross margin for the period decreased by $5.9 million in 2002
compared to 2001, primarily as a result of the sales decrease. As a percentage
of sales, gross margin decreased by 0.7%, primarily reflecting a continued
emphasis on clearance events.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") decreased $5.0 million, or 5.8%, due primarily
to payroll expense and lease fees associated with the decrease in the Company's
sales. As a percentage of sales, SG&A decreased 0.5% due to the Company's
continued focus on appropriate expense reductions, specifically relating to
payroll and other expenses. Included in the 2001 period were charges of
approximately $0.9 million relating to the closure of a host store group.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$0.6 million, which reflects the discontinuance of goodwill amortization of
approximately $0.9 million and the effect of certain assets becoming fully
depreciated, offset by additional depreciation and amortization as a result of
capital expenditures and capitalized software costs for the most recent twelve
months.
INTEREST EXPENSE, NET. Interest expense decreased by $0.7 million primarily
due to a lower weighted average interest rate (7.4% for the 2002 period compared
to 7.7% for the comparable period in 2001)
16
and a decrease in average borrowings ($296.8 million for the period in 2002
compared to $321.2 million for the comparable period in 2001).
PROVISION (BENEFIT) FOR INCOME TAXES. The income tax provision for the 2002
and 2001 periods reflects an effective tax rate of 40.5%.
NET INCOME (LOSS). The net loss of $0.5 million for the 2002 period was
$0.6 million lower as compared to the net loss in the prior period as a result
of the factors discussed above.
TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 COMPARED WITH TWENTY-SIX WEEKS ENDED
AUGUST 4, 2001
SALES. Sales for the twenty-six weeks ended August 3, 2002 decreased $14.9
million, or 3.8%, over the comparable period in 2001. Comparable department
sales increased 1.2%. The decrease in total sales is the result of the 2001
closing of three host store groups, which contributed approximately $23.0 of
sales in the first half of 2001, offset by the net effect of new store openings
and closings.
During the twenty-six weeks ended August 3, 2002, Finlay opened eight
departments and closed 13 departments. The openings and closings were all within
existing store groups.
GROSS MARGIN. Gross margin for the period decreased by $10.3 million,
primarily as a result of the sales decrease. As a percentage of sales, gross
margin decreased by 0.7% due to management's continued efforts to increase
market penetration and market share through its pricing strategy, as well as a
continued emphasis on clearance events.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A decreased $9.9 million,
or 5.6%, due primarily to payroll expense and lease fees associated with the
decrease in the Company's sales. SG&A as a percentage of sales decreased by 0.8%
due to (i) a charge of $0.4 million relating to the consolidation of a host
store group in 2002 compared to a charge of $1.0 million relating to the closure
of a host store group in 2001, (ii) a decrease in gross advertising expenditures
and (iii) the leverage generated through higher than planned sales.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$1.1 million, reflecting the discontinuance of goodwill amortization of $1.9
million and the effect of certain assets becoming fully depreciated, offset by
additional depreciation and amortization as a result of capital expenditures and
capitalized software costs for the most recent twelve months.
INTEREST EXPENSE, NET. Interest expense decreased by $1.5 million primarily
due to a lower weighted average interest rate (7.7% for the 2002 period compared
to 8.0% for the comparable period in 2001) and a decrease in average borrowings
($280.4 million for the period in 2002 compared to $306.0 million for the
comparable period in 2001).
PROVISION (BENEFIT) FOR INCOME TAXES. The income tax provision for the 2002
and 2001 periods reflects an effective tax rate of 40.5%.
NET INCOME (LOSS). The net loss of $0.9 million for the 2002 period was
$1.9 million lower than the net loss in the prior period as a result of the
factors discussed above.
17
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 twenty-six
weeks ended August 4, 2001 and August 3, 2002, capital expenditures totaled $6.2
million and $5.5 million, respectively. For 2001, capital expenditures totaled
$13.9 million and for 2002 are estimated to be approximately $12.0 to $13.0
million. Although capital expenditures are limited by the terms of the Revolving
Credit Agreement, to date this limitation has not precluded the Company from
satisfying its capital expenditure requirements.
Finlay's operations substantially preclude customer receivables as Finlay's
lease agreements require host stores to remit sales proceeds for each month
(without regard to whether such sales were cash, store credit or national credit
card) to Finlay approximately three weeks after the end of such month. 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.
The Company's working capital balance was $197.6 million at August 3, 2002, a
decrease of $4.9 million from February 2, 2002. The decrease resulted primarily
from the impact of the interim net loss (exclusive of depreciation and
amortization), capital expenditures, additions to deferred charges and the
purchase of treasury stock.
The seasonality of Finlay's business causes working capital requirements,
and therefore borrowings under the Revolving Credit Agreement, 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. Additionally, Finlay's lease agreements provide for
accelerated payments during the months of November and December, which require
most host store groups to remit to Finlay 75% of the estimated months' sales
prior to or shortly following the end of that month. These proceeds result in a
significant increase in the Company's cash, which is used to reduce the
Company's borrowings under the Revolving Credit Agreement. Inventory levels
decreased by $13.0 million, or 4.1%, as compared to August 4, 2001, as a result
of the closing of three host store groups and a continued monitoring of
inventory levels. The reduced inventory levels favorably impacted the Company's
outstanding borrowings under the Revolving Credit Agreement.
The Revolving Credit Agreement, which expires in March 2003, provides
Finlay with a line of credit of up to $275.0 million, inclusive of a $50.0
million acquisition facility, to finance working capital needs. The Company has
begun the process of renewing the Revolving Credit Agreement. There can be no
assurances that a new revolving credit facility will be executed on terms equal
to or more favorable than the expiring Revolving Credit Agreement, or that a new
agreement can be completed at all. Finlay would be adversely affected if it were
unable to secure a new revolving credit 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 the Company.
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 August 3, 2002 were $56.6 million, compared to
a zero balance at February 2, 2002 and $76.6 million at August 4, 2001. The
average amounts outstanding under the Revolving Credit Agreement were $81.0
million and $55.4 million for the twenty-six weeks ended August 4, 2001 and
August 3, 2002, respectively. The maximum amount outstanding for the twenty-six
18
weeks ended August 3, 2002 was $88.9 million, at which point the unused excess
availability was $127.4 million, excluding the acquisition facility.
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 2001, Finlay had an average
balance of consignment merchandise of $377.4 million as compared to an average
balance of $372.9 million in 2000. As of August 3, 2002, $348.2 million of
consignment merchandise from approximately 300 vendors was on hand as compared
to $370.1 million at August 4, 2001.
A significant amount of Finlay's operating cash flow has been used or will
be required to pay interest, directly or indirectly, 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 August 3, 2002, Finlay's outstanding borrowings were $281.6
million, which included a $75.0 million balance under the Senior Debentures, a
$150.0 million balance under the Senior Notes and a $56.6 million balance under
the Revolving Credit Agreement. At August 3, 2002, the Company was in compliance
with all of its covenants under the Revolving Credit Agreement and the Senior
Indentures.
Finlay Jewelry is party to the Gold Consignment Agreement, which expires on
September 30, 2002. The Gold Consignment Agreement enables Finlay Jewelry to
receive consignment merchandise by providing gold, or otherwise making payment,
to certain vendors. While the merchandise involved remains consigned, title to
the gold content of the merchandise transfers from the vendors to the gold
consignor. Although the gold consignor has increased the limit to the lesser of
(i) 160,000 fine troy ounces or (ii) $45.0 million worth of gold, subject to a
formula as prescribed by the Gold Consignment Agreement, at August 3, 2002,
Finlay Jewelry was limited by the Senior Indentures to a consignment total of
$37.0 million worth of gold. During August 2002, Finlay obtained the requisite
approvals from holders of the Senior Notes and Senior Debentures to increase the
consignment limit from $37.0 million to $50.0 million worth of gold. Finlay
Jewelry is currently in the process of amending and extending the Gold
Consignment Agreement, however there are no assurances that this will be
completed. At August 3, 2002, amounts outstanding under the Gold Consignment
Agreement totaled 121,242 fine troy ounces, valued at approximately $36.9
million. The average amount outstanding under the Gold Consignment Agreement was
$33.3 million in 2001. At August 3, 2002, Finlay Jewelry was in compliance with
the covenants under the Gold Consignment Agreement.
The following tables summarize the Company's contractual and commercial
obligations which may have an impact on future liquidity and the availability of
capital resources, as of August 3, 2002 (dollars in thousands):
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 1 - 3 YEARS 4 - 5 YEARS AFTER 5 YEARS
- ------------------------------- --------- ---------------- ----------- ----------- -------------
Senior Notes (due 2008)........ $ 150,000 $ - $ - $ - $ 150,000
Senior Debentures (due 2008)... 75,000 - - - 75,000
Operating leases (1)........... 19,346 3,263 6,481 6,407 3,195
--------- --------- --------- --------- ----------
Total ......................... $ 244,346 $ 3,263 $ 6,481 $ 6,407 $ 228,195
========= ========= ========= ========= ==========
- --------------------
(1) Represents future minimum payments under noncancellable operating leases as
of February 2, 2002.
19
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
OTHER COMMERCIAL --------------------------------------------------------------------------------
COMMITMENTS TOTAL LESS THAN 1 YEAR 1 - 3 YEARS 4 - 5 YEARS AFTER 5 YEARS
-------------- ---------------- ----------- ----------- -------------
Revolving Credit
Agreement (due 2003) (1)... $ 56,634 $ 56,634 $ - $ - $ -
Gold Consignment
Agreement (due 2002)........ 36,900 36,900 - - -
Letters of credit.............. 4,250 2,000 2,250 - -
--------- --------- --------- ---- -----
Total ......................... $ 97,784 $ 95,534 $ 2,250 $ - $ -
========= ========= ========= ==== =====
- --------------------
(1) The outstanding balance on the Revolving Credit Agreement at September 10,
2002 was $87.1 million.
Finlay believes that, based upon current operations, anticipated growth,
and continued 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
Company sufficient to permit the 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 Company to meet their debt service
and other obligations. Currently, Finlay Jewelry's principal financing
arrangements restrict annual distributions from Finlay Jewelry to the Company to
0.25% of Finlay Jewelry's net sales for the preceding fiscal year and also allow
distributions to the Company to enable it to make interest payments on the
Senior Debentures. Other distributions, including those required to fund stock
repurchases, are subject to Finlay's satisfaction of certain restrictive
covenants. The amounts required to satisfy the aggregate of Finlay Jewelry's
interest expense and required amortization payments totaled $9.6 million and
$8.2 million for the twenty-six week periods August 4, 2001 and August 3, 2002,
respectively.
In December 2000, the Company announced that its Board of Directors had
approved a stock repurchase program to acquire up to $20 million of outstanding
Common Stock. The Company may, at the discretion of management, purchase its
Common Stock, from time to time through September 30, 2002, under the stock
repurchase program. The extent and timing of repurchases will depend upon
general business and market conditions, stock prices, availability under
Finlay's revolving credit facility, compliance with certain restrictive
covenants and its cash position and requirements going forward. To date, the
Company has repurchased 1,176,892 shares for $11.9 million.
In March 2002, the Company implemented a new merchandising and inventory
control system and a point-of-sale system for Finlay's departments. These
systems will serve to support future growth of the Company as well as provide
improved analysis and reporting capabilities and more timely sales and inventory
information to facilitate merchandising solutions. Additionally, these systems
will provide the foundation for future productivity and expense control
initiatives. At August 3, 2002, a total of approximately $22.1 million has been
expended for software and implementation costs and is included in Deferred
charges and other assets.
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 February 2, 2002 and the twenty-six weeks
ended August 3, 2002, the gain or loss on open futures contracts was not
material. At August 3, 2002, the Company had several open positions in futures
contracts for gold. There can be no assurance that these
20
hedging techniques will be successful or that hedging transactions will not
adversely affect the Company's results of operations or financial position.
In February 2001, Federated announced its plans to close its Stern's
division of which Finlay operated 23 departments. During March 2001, Finlay
closed two departments and the remaining 21 Stern's departments were closed
during the second quarter of 2001. Finlay recorded a charge of approximately
$0.9 million, during the second quarter of 2001, related to the write-off of
fixed assets and employee severance. During 2001, Federated acquired the Liberty
House department store chain. Finlay operated in all twelve of the Liberty House
department stores through mid-November 2001. Finlay recorded a charge of
approximately $150,000, during the fourth quarter of 2001, related to the
write-off of fixed assets and employee severance. During the first half of 2002,
sales were reduced by approximately $23.0 million compared to the first half of
2001 as a result of the department closings of Stern's, Liberty House and
another smaller host store group.
During 1998, Sonab, the Company's European leased jewelry department
subsidiary, 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
1999. As a result of the foregoing, on January 3, 2000, Sonab sold the majority
of its assets for approximately $9.9 million. 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. The Company recorded a pre-tax
charge in the fourth quarter of 1999 of $28.6 million, or $1.62 per share on a
diluted basis after-tax. The charge included the write down of inventory and
fixed assets, employee payroll and severance costs, realization of foreign
exchange losses and other close-down costs. As of February 2, 2002, the
Company's exit plan was completed with the exception of certain employee
litigation and other legal matters. To date, the Company has charged a total of
approximately $26.0 million against its original estimate of $28.6 million. All
of Sonab's employees, excluding those that were hired by the buyer, were
involuntarily terminated, including sales associates, supervisors and corporate
personnel. The Company does not believe future operating results or liquidity
will be materially impacted by any remaining payments.
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 77% of its income from operations
for 1999, 2000 and 2001, on a domestic basis. 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.
21
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, low or negative growth in the economy or in the financial markets which
reduce discretionary spending on goods perceived to be luxury items, attacks or
threats of attacks by terrorists or war which may negatively impact the economy
and/or the financial markets and reduce discretionary spending on such goods,
competition in the retail jewelry business, the seasonality of the retail
jewelry business, the Company's ability to increase comparable department sales
and to open new departments, the Company's dependence on certain host store
relationships due to the concentration of sales generated by such host stores,
the availability to the Company of alternate sources of merchandise supply in
the case of an abrupt loss of any significant supplier, the Company's ability to
continue to obtain substantial amounts of merchandise on consignment, the
Company's compliance with applicable contractual covenants, the Company's
dependence on key officers, the Company's ability to integrate future
acquisitions into its existing business, the Company's high degree of leverage
and the availability to the Company of financing and credit on favorable terms
and changes in regulatory requirements which are applicable to the Company's
business. Other such factors include the ability of the 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 Company's Common Stock, and overall market conditions for the
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. The Company 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 the Company
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
The Company 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, the
Company manages exposures through its regular operating and financing
activities. In addition, the majority of the Company's borrowings are under
fixed rate arrangements. In addition, the Company is exposed to market risk
related to changes in the price of gold, and selectively uses forward contracts
to manage this risk. The Company enters into forward contracts for the purchase
of gold to hedge the risk of gold price fluctuations for future sales of gold
consignment merchandise. The Company does not enter into forward contracts or
other financial instruments for speculation or trading purposes. The aggregate
amount of forward contracts was $10.8 million at August 3, 2002, which expire
during 2002.
22
ITEM 4. CONTROLS AND PROCEDURES
Not applicable.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders of the Company was held on June 20,
2002, pursuant to notice, at which Messrs. Rohit M. Desai, Michael Goldstein and
Thomas H. Lee were re-elected directors of the Company to serve a three-year
term in the class of directors whose term expires in 2005. Such members have
been elected to serve until the expiration of their respective terms of office
and until their successors are duly elected and qualified. At such meeting,
votes were cast as follows:
Name Votes For Votes Withheld
---- --------- --------------
Rohit M. Desai 8,507,556 400
Michael Goldstein 8,507,556 400
Thomas H. Lee 8,507,556 400
Messrs. David B. Cornstein, James Martin Kaplan, John D. Kerin, Arthur E.
Reiner, Norman S. Matthews and Warren C. Smith, Jr. and Ms. Hanne M. Merriman
continued to serve as members of the Board of Directors after the meeting.
On June 26, 2002, the Company and Finlay Jewelry commenced a consent
solicitation with respect to the Company's 9% Senior Debentures due 2008 (the
"Debentures") and Finlay Jewelry's 8 3/8% Senior Notes due 2008 (the "Notes")
for approval of proposed amendments to certain provisions of the indentures
under which the Debentures and Notes were issued (the "Indentures"); the
amendments, as proposed, would modify the consignment dollar limit in respect of
Finlay Jewelry's gold consignment agreement. Holders of 56.71% of the aggregate
principal amount of the outstanding Debentures and 71.44% of the aggregate
principal amount of the outstanding Notes consented to such amendments and,
accordingly, the Indentures were modified by supplemental indentures dated as of
August 8, 2002 (copies of which are filed as exhibits hereto).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
2 Not applicable.
3 Not applicable.
4.1 First Supplemental Indenture dated as of August 8, 2002 among
the Company and HSBC Bank USA (formerly known as Marine
Midland Bank), as Trustee.
10 Not applicable.
23
11 Statement re: computation of earnings per share (not required
because the relevant computation can be clearly determined
from material contained in the financial statements).
15 Not applicable.
18 Not applicable.
19 Not applicable.
22 Not applicable.
23 Not applicable.
24 Not applicable.
99.1 First Supplemental Indenture dated as of August 8, 2002 among
Finlay Jewelry and HSBC Bank USA (formerly known as Marine
Midland Bank), as Trustee.
99.2 Certification of principal executive officer and principal
financial officer pursuant to the Sarbanes-Oxley Act of 2002,
Section 906.
B. REPORTS ON FORM 8-K
On June 21, 2002, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K reporting that the Board of Directors of
the Company had decided not to reengage Arthur Andersen LLP and engaged Deloitte
& Touche LLP as its new independent accountants for fiscal year 2002.
24
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 13, 2002 FINLAY ENTERPRISES, INC.
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)
25
CERTIFICATIONS
I, Arthur E. Reiner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Finlay Enterprises,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002
/s/ Arthur E. Reiner
--------------------
Arthur E. Reiner
Chairman, President and Chief
Executive Officer
I, Bruce E. Zurlnick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Finlay Enterprises,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002
/s/ Bruce E. Zurlnick
---------------------
Bruce E. Zurlnick
Senior Vice President,
Treasurer and Chief Financial
Officer
EXPLANATORY NOTE REGARDING CERTIFICATIONS: Representations 4, 5 and 6 of the
Certifications as set forth in this Quarterly Report on Form 10-Q have been
omitted, consistent with the Transition Provisions of SEC Exchange Act Release
No. 34-46427, because this Quarterly Report on Form 10-Q covers a period ending
before the Effective Date of Exchange Act Rules 13a-14 and 15d-14.
26