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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: 33-59380
FINLAY FINE JEWELRY CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3287757
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
529 Fifth Avenue, New York, NY 10017
------------------------------ -----
(Address of principal executive offices) (zip code)
(212) 808-2800
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X]* No [ ]
As of September 13, 2002, 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.
FINLAY FINE JEWELRY CORPORATION
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 Stockholder's 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......................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................21
Item 4. Controls and Procedures............................................................22
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................................22
Item 6. Exhibits and Reports on Form 8-K...................................................22
SIGNATURES..........................................................................................23
CERTIFICATIONS......................................................................................24
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(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............................. 86,881 81,911
Depreciation and amortization............................................ 5,055 4,437
------------ ------------
Income (loss) from operations........................................ 5,751 5,462
Interest expense, net.................................................... 5,296 4,565
------------ ------------
Income (loss) before income taxes.................................... 455 897
Provision (benefit) for income taxes..................................... 302 179
------------ ------------
Net income (loss).................................................... $ 153 $ 718
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
1
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(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............................. 176,040 166,169
Depreciation and amortization............................................ 9,883 8,794
------------ ------------
Income (loss) from operations........................................ 10,132 10,838
Interest expense, net.................................................... 10,297 8,841
------------ ------------
Income (loss) before income taxes ................................... (165) 1,997
Provision (benefit) for income taxes..................................... 164 439
------------ ------------
Net income (loss).................................................... $ (329) $ 1,558
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
2
FINLAY FINE JEWELRY CORPORATION
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.................................................... $ 49,222 $ 2,443
Accounts receivable - department stores...................................... 17,505 32,517
Other receivables............................................................ 25,953 38,401
Merchandise inventories...................................................... 304,508 301,900
Prepaid expenses and other................................................... 2,351 3,583
----------- -----------
Total current assets...................................................... 399,539 378,844
----------- -----------
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......................................... 20,811 21,722
Goodwill....................................................................... 91,046 91,046
----------- -----------
Total assets.............................................................. $ 583,422 $ 561,889
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable................................................................ $ - $ 56,634
Accounts payable - trade..................................................... 132,156 66,978
Accrued liabilities:
Accrued salaries and benefits............................................. 19,369 17,274
Accrued miscellaneous taxes............................................... 6,521 6,555
Accrued interest.......................................................... 3,597 3,732
Other..................................................................... 13,496 16,346
Income taxes payable......................................................... 44,771 38,548
Deferred income taxes........................................................ 3,001 3,436
Due to parent................................................................ 3,294 4,178
----------- -----------
Total current liabilities................................................. 226,205 213,681
Long-term debt................................................................. 150,000 150,000
Other non-current liabilities.................................................. 13,621 14,510
----------- -----------
Total liabilities......................................................... 389,826 378,191
----------- -----------
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............................................................ 110,525 101,003
Accumulated other comprehensive income....................................... 96 (280)
----------- -----------
Total stockholder's equity................................................ 193,596 183,698
----------- -----------
Total liabilities and stockholder's equity................................ $ 583,422 $ 561,889
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ACCUMULATED
---------------------- ADDITIONAL RETAINED OTHER TOTAL
NUMBER PAID- IN EARNINGS COMPREHENSIVE STOCKHOLDER'S
OF SHARES AMOUNT CAPITAL (DEFICIT) INCOME EQUITY
---------- --------- --------- --------- --------- ---------
Balance, February 3, 2001 1,000 $ -- $ 82,975 $ 96,448 $ -- $ 179,423
Net income (loss) -- -- -- 23,327 -- 23,327
Fair value of gold forward
contracts at February 4, 2001 -- -- -- -- 24 24
Change in fair value of gold
forward contracts -- -- -- -- 72 72
Dividends on common stock -- -- -- (9,250) -- (9,250)
----- --------- --------- --------- --------- ---------
Balance, February 2, 2002 1,000 -- 82,975 110,525 96 193,596
Net income (loss) -- -- -- 1,558 -- 1,558
Change in fair value of gold
forward contracts -- -- -- -- (376) (376)
Dividends on common stock -- -- -- (11,080) -- (11,080)
----- --------- --------- --------- --------- ---------
Balance, August 3, 2002
(unaudited) 1,000 $ -- $ 82,975 $ 101,003 $ (280) $ 183,698
===== ========= ========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
4
FINLAY FINE JEWELRY CORPORATION
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).............................................................. $ 153 $ 718
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....................................... 258 243
Other, net..................................................................... 812 293
Changes in operating assets and liabilities:
Decrease in accounts and other receivables.................................. 3,977 2,476
Decrease in merchandise inventories......................................... 11,747 6,852
(Increase) decrease in prepaid expenses and other........................... (466) 269
Decrease in accounts payable and accrued liabilities........................ (5,024) (13,793)
Decrease in due to parent................................................... (320) (618)
---------- -----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES.............................. 16,192 877
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (2,366) (2,613)
Deferred charges and other, net................................................ (933) (2,520)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES.................................... (3,299) (5,133)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 141,151 157,740
Principal payments on revolving credit facility................................ (154,749) (153,300)
---------- -----------
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES.................... (13,598) 4,440
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... (705) 184
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 2,901 2,259
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 2,196 $ 2,443
========== ===========
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 1,990 $ 1,112
Income taxes paid.............................................................. 3,013 2,427
The accompanying notes are an integral part of these
consolidated financial statements.
5
FINLAY FINE JEWELRY CORPORATION
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).............................................................. $ (329) $ 1,558
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....................................... 515 485
Other, net..................................................................... 1,394 861
Changes in operating assets and liabilities:
Increase in accounts and other receivables.................................. (8,930) (27,460)
Decrease in merchandise inventories......................................... 9,403 2,608
Increase in prepaid expenses and other...................................... (1,237) (1,232)
Decrease in accounts payable and accrued liabilities........................ (102,526) (70,041)
Decrease in due to parent................................................... (4,469) (10,196)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES.................................... (96,296) (94,623)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (6,223) (5,516)
Deferred charges and other..................................................... (3,101) (3,274)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.................................... (9,324) (8,790)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 370,769 287,979
Principal payments on revolving credit facility................................ (294,202) (231,345)
---------- -----------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............................. 76,567 56,634
---------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS.................................... (29,053) (46,779)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 31,249 49,222
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 2,196 $ 2,443
========== ===========
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 9,628 $ 8,222
Income taxes paid.............................................................. 11,869 5,908
The accompanying notes are an integral part of these
consolidated financial statements.
6
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF ACCOUNTING AND 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 accounting principles
generally accepted in the United States of America for interim financial
information. References to "Finlay" mean collectively, the Holding Company and
Finlay Jewelry. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of Finlay Jewelry as of August 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
Finlay Jewelry's annual report on Form 10-K for the fiscal year ended February
2, 2002 ("Form 10-K") previously filed with the Commission.
Finlay Jewelry'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.
Finlay Jewelry recorded a tax provision based on an estimated annual income
tax rate. In addition, Finlay Jewelry 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, Finlay Jewelry had several open positions in futures contracts for gold
totaling 17,500 fine troy ounces, valued at $4.8 million. At August 3, 2002,
Finlay Jewelry had several open positions in gold futures contracts totaling
35,500 fine troy ounces, valued at $10.8 million.
7
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 2001, Finlay Jewelry 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. Finlay
Jewelry 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 stockholder's 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.
Finlay Jewelry has documented all relationships between hedging instruments
and hedged items, as well as its risk management objectives and strategy for
undertaking various hedge transactions. Finlay Jewelry 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. Finlay Jewelry believes that the designated hedges will
be highly effective and that the related hedge accounting will not have a
material impact on Finlay Jewelry's results of operations.
COMPREHENSIVE INCOME: 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 non-owner
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. For 2001 and 2002, the only
non-owner change in equity related to the change in fair value of Finlay
Jewelry's outstanding gold forward contracts. For the thirteen weeks ended
August 4, 2001 the comprehensive income was $0.3 million and $0.4 million,
respectively. For the twenty-six weeks ended August 4, 2001 the comprehensive
loss was $0.2 million and the comprehensive income for the twenty-six weeks
ended August 3, 2002 was $1.2 million.
GOODWILL: In 2002, Finlay Jewelry 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 Finlay Jewelry 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.
8
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is a reconciliation of reported Net income (loss) adjusted to
reflect the impact of the discontinuance of goodwill amortization for the
thirteen weeks and twenty-six weeks ended August 4, 2001. Finlay Jewelry's
actual Net income (loss) for the thirteen weeks and twenty-six weeks ended
August 3, 2002 is 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)
NET INCOME (LOSS):
Reported net income (loss) .......................... $ 153 $ 718 $ (329) $ 1,558
Add: Goodwill amortization .......................... 939 - 1,878 -
Less: Tax impact of deductible goodwill ............. (80) - (160) -
---------- ---------- ----------- ---------
Adjusted net income (loss) .......................... $ 1,012 $ 718 $ 1,389 $ 1,558
========== ========== =========== =========
NOTE 3 - DESCRIPTION OF BUSINESS
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").
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. Finlay 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 Holding 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".
9
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 decreasing income 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 decrease the income before income taxes
by $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 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 Finlay Jewelry's Consolidated Balance Sheets and, therefore, no
related liability has been recorded.
10
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
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"),
Finlay Jewelry'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.
Finlay Jewelry recorded a pre-tax charge in the fourth quarter of 1999 of
$28.6 million. The charge included the write down of inventory and fixed assets,
employee payroll and severance costs, realization
11
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SALE AND CLOSURE OF SONAB (CONTINUED)
of foreign exchange losses and other close-down costs. As of February 2, 2002,
Finlay Jewelry's exit plan was completed with the exception of certain employee
litigation and other legal matters. To date, Finlay Jewelry 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. Finlay Jewelry 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 Holding Company announced that its Board of
Directors had approved a stock repurchase program to acquire up to $20 million
of outstanding Common Stock. The Holding 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 Holding Company repurchased 599,330 shares for approximately
$5,367,000. During the first half of fiscal 2002, the Holding 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 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 Finlay 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 Finlay and is accounted for as a
component of the Holding Company's 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.
12
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Finlay Jewelry'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 Finlay Jewelry's significant accounting policies are described
in Note 2 of Notes to the Consolidated Financial Statements. Finlay believes
that the following discussion addresses the critical accounting policies, which
are those that are most important to the portrayal of Finlay Jewelry's financial
condition and results and require management's most difficult, subjective or
complex judgments. Finlay Jewelry 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
Finlay Jewelry 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 Finlay Jewelry's reported operating results.
Finlay 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, Finlay 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 Finlay Jewelry's financial condition, results of operations and cash flows
for the thirteen weeks and twenty-six weeks ended August 3, 2002.
REVENUE RECOGNITION
Finlay Jewelry recognizes revenue upon the sale of merchandise, either
owned or consigned, to its customers, net of anticipated returns.
COVENANT REQUIREMENTS
Finlay Jewelry's agreements covering the Revolving Credit Agreement 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, Finlay was in compliance with all of its
covenants. Should Finlay's results of operations significantly erode, Finlay may
not be in compliance with its covenants. Although management believes that
Finlay would be able to obtain a waiver or amendment, if required, in the event
that Finlay is unable to obtain such waiver or amendment, the outstanding
balances could become due immediately.
EFFECT OF NEW ACCOUNTING STANDARDS
13
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. Finlay Jewelry adopted this pronouncement in 2002 and has
determined that there was no impairment of goodwill as of February 3, 2002.
Finlay Jewelry'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. Finlay Jewelry has adopted the provisions of SFAS
No. 144 in 2002 and does not anticipate that such adoption will have a
significant effect on Finlay Jewelry'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 Finlay Jewelry.
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 Finlay Jewelry.
14
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............... 44.3 43.8 45.2 44.4
Depreciation and amortization.............................. 2.6 2.4 2.5 2.3
----------- ----------- ----------- -----------
Income (loss) from operations.......................... 2.9 2.9 2.6 2.9
Interest expense, net...................................... 2.7 2.4 2.6 2.4
----------- ----------- ----------- -----------
Income (loss) before income taxes...................... 0.2 0.5 - 0.5
Provision (benefit) for income taxes....................... 0.1 0.1 - 0.1
----------- ----------- ----------- -----------
Net income (loss)...................................... 0.1% 0.4% - % 0.4%
=========== =========== =========== ===========
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, Finlay Jewelry 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 5.7%, due primarily
to payroll expense and lease fees associated with the decrease in Finlay
Jewelry's sales. As a percentage of sales, SG&A decreased 0.5% due to Finlay
Jewelry'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 (6.9% for the 2002 period compared
to 7.4% for the comparable period in 2001) and a decrease in average borrowings
($221.8 million for the period in 2002 compared to $246.2 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%.
15
NET INCOME (LOSS). The net income of $0.7 million for the 2002 period was
$0.6 million higher as compared to the net income 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 Finlay Jewelry'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 (7.2% for the 2002 period compared
to 7.7% for the comparable period in 2001) and a decrease in average borrowings
($205.4 million for the period in 2002 compared to $231.0 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 income of $1.6 million for the 2002 period was
$1.9 million higher than the net loss in the prior period as a result of the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Finlay's primary capital requirements are for funding working capital for
new departments and for working capital growth of existing departments and, to a
lesser extent, capital expenditures for opening new departments, renovating
existing departments and information technology investments. For the 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 Finlay Jewelry from
satisfying its capital expenditure requirements.
16
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.
Finlay Jewelry's working capital balance was $165.2 million at August 3, 2002, a
decrease of $8.2 million from February 2, 2002. The decrease resulted primarily
from the impact of the interim net income (exclusive of depreciation and
amortization), capital expenditures, additions to deferred charges and
distributions to the Holding Company.
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 Finlay's cash, which is used to reduce Finlay'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 Finlay'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. Finlay 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 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 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
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
17
under the Revolving Credit Agreement, including the payments required pursuant
to the Balance Reduction Requirement. As of August 3, 2002, Finlay Jewelry's
outstanding borrowings were $206.6 million, which included a $150.0 million
balance under the Senior Notes and a $56.6 million balance under the Revolving
Credit Agreement. At August 3, 2002, Finlay 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
ConsignmentAgreement, 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 Finlay Jewelry'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) (1).... $ 150,000 $ - $ - $ - $ 150,000
Operating leases (2)........... 19,346 3,263 6,481 6,407 3,195
---------- -------- -------- --------- ----------
Total ......................... $ 169,346 $ 3,263 $ 6,481 $ 6,407 $ 153,195
========== ======== ======== ========= ==========
- ----------------------------
(1) The Holding Company has $75.0 million of Senior Debentures due 2008
outstanding. Refer to Note 4 of Notes to the Consolidated Financial Statements.
(2) Represents future minimum payments under noncancellable operating leases as
of February 2, 2002.
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.
18
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
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. 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 Holding Company announced that its Board of Directors
had approved a stock repurchase program to acquire up to $20 million of
outstanding Common Stock. The Holding 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 Holding Company has repurchased 1,176,892 shares for $11.9 million.
In March 2002, Finlay 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 Finlay 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, Finlay Jewelry had several open positions in
futures contracts for gold. 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.
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
19
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, Finlay Jewelry'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. Finlay Jewelry recorded a pre-tax
charge in the fourth quarter of 1999 of $28.6 million. 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, Finlay Jewelry's exit plan was completed with the exception of
certain employee litigation and other legal matters. To date, Finlay Jewelry 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. Finlay Jewelry 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.
20
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, 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 $10.8 million at August 3, 2002,
which expire during 2002.
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ITEM 4. CONTROLS AND PROCEDURES
Not applicable.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 26, 2002, the Holding Company and Finlay Jewelry commenced a
consent solicitation with respect to the Holding 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 (copy of the supplemental indenture for the Notes is filed
as an exhibit 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
Finlay Jewelry and HSBC Bank USA (formerly known as Marine
Midland Bank), as Trustee.
10 Not applicable.
11 Not applicable.
15 Not applicable.
18 Not applicable.
19 Not applicable.
22 Not applicable.
23 Not applicable.
24 Not applicable.
99.1 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, Finlay Jewelry filed with the Securities and Exchange
Commission a Current Report on Form 8-K reporting that the Board of Directors of
Finlay Jewelry had decided not to reengage Arthur Andersen LLP and engaged
Deloitte & Touche LLP as its new independent accountants for fiscal year 2002.
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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: September 13, 2002 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)
23
CERTIFICATIONS
I, Arthur E. Reiner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Finlay Fine Jewelry
Corporation
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 Fine Jewelry
Corporation
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.
24