Back to GetFilings.com
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 November 2, 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 December 11, 2002, there were 9,348,798 shares of common stock, par value
$.01 per share, of the Registrant outstanding.
FINLAY ENTERPRISES, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED NOVEMBER 2, 2002
INDEX
PAGE(S)
------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the thirteen weeks and
thirty-nine weeks ended November 2, 2002 and November 3, 2001.......................1
Consolidated Balance Sheets as of November 2, 2002 and
February 2, 2002....................................................................3
Consolidated Statements of Changes in Stockholders' Equity for the year
ended February 2, 2002 and thirty-nine weeks ended November 2, 2002.................4
Consolidated Statements of Cash Flows for the thirteen weeks and
thirty-nine weeks ended November 2, 2002 and November 3, 2001.......................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 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
----------------------------
NOVEMBER 2, NOVEMBER 3,
2002 2001
------------ ------------
Sales ................................................. $ 168,359 $ 175,292
Cost of sales ......................................... 84,202 87,680
------------ ------------
Gross margin ...................................... 84,157 87,612
Selling, general and administrative expenses .......... 78,995 80,918
Depreciation and amortization ......................... 4,387 5,070
------------ ------------
Income (loss) from operations ..................... 775 1,624
Interest expense, net ................................. 6,358 6,861
------------ ------------
Income (loss) before income taxes ................. (5,583) (5,237)
Provision (benefit) for income taxes .................. (2,398) (1,959)
------------ ------------
Net income (loss) ................................. $ (3,185) $ (3,278)
============ ============
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share .............. $ (0.34) $ (0.32)
============ ============
Diluted net income (loss) per share ............ $ (0.34) $ (0.32)
============ ============
Weighted average shares outstanding -
basic and diluted ............................ 9,348,990 10,191,591
============ ============
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)
THIRTY-NINE WEEKS ENDED
----------------------------
NOVEMBER 2, NOVEMBER 3,
2002 2001
------------ ------------
Sales .................................................. $ 542,854 $ 564,708
Cost of sales .......................................... 272,896 281,041
------------ ------------
Gross margin ....................................... 269,958 283,667
Selling, general and administrative expenses ........... 245,584 257,440
Depreciation and amortization .......................... 13,181 14,953
------------ ------------
Income (loss) from operations ...................... 11,193 11,274
Interest expense, net .................................. 18,673 20,630
------------ ------------
Income (loss) before income taxes .................. (7,480) (9,356)
Provision (benefit) for income taxes ................... (3,439) (3,298)
------------ ------------
Net income (loss) .................................. $ (4,041) $ (6,058)
============ ============
Net income (loss) per share applicable to common shares:
Basic net income (loss) per share ............... $ (0.43) $ (0.59)
============ ============
Diluted net income (loss) per share ............. $ (0.43) $ (0.59)
============ ============
Weighted average shares outstanding -
basic and diluted ............................. 9,473,080 10,253,407
============ ============
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)
NOVEMBER 2, FEBRUARY 2,
2002 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 2,508 $ 49,369
Accounts receivable - department stores ............................... 34,443 17,505
Other receivables ..................................................... 42,994 25,953
Merchandise inventories ............................................... 326,510 304,508
Prepaid expenses and other ............................................ 4,039 2,365
--------- ---------
Total current assets ............................................... 410,494 399,700
--------- ---------
Fixed assets:
Equipment, fixtures and leasehold improvements ........................ 127,227 119,743
Less - accumulated depreciation and amortization ...................... 57,680 47,717
--------- ---------
Fixed assets, net .................................................. 69,547 72,026
--------- ---------
Deferred charges and other assets, net .................................. 21,851 22,081
Goodwill ................................................................ 91,046 91,046
--------- ---------
Total assets ....................................................... $ 592,938 $ 584,853
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ......................................................... $ 82,152 $ -
Accounts payable - trade .............................................. 77,995 132,174
Accrued liabilities:
Accrued salaries and benefits ...................................... 19,557 19,369
Accrued miscellaneous taxes ........................................ 5,466 6,522
Accrued interest ................................................... 679 5,284
Other .............................................................. 14,995 13,871
Income taxes payable .................................................. 8,089 16,943
Deferred income taxes ................................................. 3,734 3,001
--------- ---------
Total current liabilities .......................................... 212,667 197,164
Long-term debt .......................................................... 225,000 225,000
Other non-current liabilities ........................................... 15,728 13,482
--------- ---------
Total liabilities .................................................. 453,395 435,646
--------- ---------
Stockholders' equity:
Common Stock, par value $.01 per share; authorized 25,000,000 shares;
issued and outstanding 9,438,288 and 9,946,623 shares,
respectively ....................................................... 105 105
Additional paid-in capital ............................................ 79,680 78,728
Retained earnings ..................................................... 72,517 76,558
Unamortized restricted stock compensation ............................. (684) (913)
Accumulated other comprehensive income ................................ 36 96
Less treasury stock, at cost .......................................... (12,111) (5,367)
--------- ---------
Total stockholders' equity ......................................... 139,543 149,207
--------- ---------
Total liabilities and stockholders' equity ......................... $ 592,938 $ 584,853
========= =========
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)
(UNAUDITED)
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON STOCK INCOME/
-------------------- 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)................... - - - (4,041) - - (4,041)
Change in fair value of gold
forward contracts............... - - - - (60) - (60)
Exercise of stock options........... 87,627 - 952 - - - 952
Amortization of restricted
stock compensation.............. - - - - 229 - 229
Purchase of treasury stock.......... (595,962) - - - - (6,744) (6,744)
----------- ------- ----------- ---------- ------------ ------------ -------------
Balance, November 2, 2002............. 9,438,288 $ 105 $ 79,680 $ 72,517 $ (648) $ (12,111) $ 139,543
=========== ======= =========== ========== ============ ============ =============
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
-------------------------
NOVEMBER 2, NOVEMBER 3,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ....................................................... $ (3,185) $ (3,278)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization ........................................... 4,387 5,070
Amortization of deferred financing costs ................................ 294 309
Amortization of restricted stock compensation ........................... 76 76
Other, net .............................................................. 1,616 808
Changes in operating assets and liabilities:
Increase in accounts and other receivables ........................... (5,025) (6,676)
Increase in merchandise inventories .................................. (24,610) (17,247)
(Increase) decrease in prepaid expenses and other .................... (457) 195
Increase in accounts payable and accrued liabilities ................. 3,467 1,212
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES ............................. (23,437) (19,531)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements ............. (2,684) (3,471)
Deferred charges and other, net ......................................... 1 (525)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ............................. (2,683) (3,996)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility ................................. 156,645 155,073
Principal payments on revolving credit facility ......................... (131,127) (129,837)
Capitalized financing costs ............................................. (187) -
Purchase of treasury stock .............................................. (229) (2,009)
Stock options exercised ................................................. 86 -
--------- ---------
NET CASH PROVIDED FROM FINANCING ACTIVITIES ....................... 25,188 23,227
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS ............................. (932) (300)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................ 3,440 2,621
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 2,508 $ 2,321
========= =========
Supplemental disclosure of cash flow information:
Interest paid ........................................................... $ 12,162 $ 11,279
Income taxes paid ....................................................... 2,610 251
The accompanying notes are an integral part of these consolidated financial statements.
5
FINLAY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
--------------------------
NOVEMBER 2, NOVEMBER 3,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ............................................... $ (4,041) $ (6,058)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ................................... 13,181 14,953
Amortization of deferred financing costs ........................ 882 927
Amortization of restricted stock compensation ................... 229 229
Other, net ...................................................... 2,491 2,212
Changes in operating assets and liabilities:
Increase in accounts and other receivables ................... (33,979) (17,124)
Increase in merchandise inventories .......................... (22,002) (7,844)
Increase in prepaid expenses and other ....................... (1,674) (1,041)
Decrease in accounts payable and accrued liabilities ......... (66,401) (101,382)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES ..................... (111,314) (115,128)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements ..... (8,200) (9,694)
Deferred charges and other ...................................... (3,272) (3,626)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ..................... (11,472) (13,320)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility ......................... 444,624 525,842
Principal payments on revolving credit facility ................. (362,472) (424,039)
Capitalized financing costs ..................................... (187) -
Purchase of treasury stock ...................................... (6,744) (2,874)
Stock options exercised ......................................... 704 178
--------- ---------
NET CASH PROVIDED FROM FINANCING ACTIVITIES ............... 75,925 99,107
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS ..................... (46,861) (29,341)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................... 49,369 31,662
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .......................... $ 2,508 $ 2,321
========= =========
Supplemental disclosure of cash flow information:
Interest paid ................................................... $ 23,754 $ 24,283
Income taxes paid ............................................... 8,536 12,146
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 November 2, 2002, and the results of
operations and cash flows for the thirteen weeks and thirty-nine weeks ended
November 2, 2002 and November 3, 2001. 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 forwards, based upon the anticipated
sales of gold product in order to hedge against the risk of gold price
fluctuations. At November 2, 2002, the Company had several open positions in
gold futures contracts totaling 36,500 fine troy ounces, valued at $11.6
million. At February 2, 2002, the Company had several open positions in gold
futures contracts totaling 17,500 fine troy ounces, valued at $4.8 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
November 2, 2002, the fair value of the gold forward contracts resulted in the
recognition of an asset of $60,300. The gain recorded in accumulated other
comprehensive income of $36,000, 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 thirty-nine weeks ended November 2, 2002 and
November 3, 2001, 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 2002 and 2001, 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 November 2, 2002 and November 3,
2001, the comprehensive loss was $2.9 million and $3.0 million, respectively.
For the thirty-nine weeks ended November 2, 2002 and November 3, 2001, the
comprehensive loss was $4.1 million and $5.7 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. Further, there have been no events since the first
quarter of 2002 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 thirty-nine weeks ended
November 3, 2001. The Company's actual Net income (loss) and Net income (loss)
per share for the thirteen weeks and thirty-nine weeks ended November 2, 2002
are shown for comparative purposes.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------------- -------------------------
NOVEMBER 2, NOVEMBER 3, NOVEMBER 2, NOVEMBER 3,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NET INCOME (LOSS):
Reported net income (loss) ...................... $ (3,185) $ (3,278) $(4,041) $ (6,058)
Add: Goodwill amortization ...................... - 939 - 2,817
Less: Tax impact of deductible goodwill ......... - (80) - (240)
--------- --------- ------- ---------
Adjusted net income (loss) ...................... $ (3,185) $ (2,419) $(4,041) $ (3,481)
========= ========= ======= =========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
Reported net income (loss) per share ............ $ (0.34) $ (0.32) $ (0.43) $ (0.59)
Add: Goodwill amortization, net ................. - 0.08 - 0.24
---------- ---------- ------- ---------
Adjusted net income (loss) per share ............ $ (0.34) $ (0.24) $ (0.43) $ (0.35)
========= ========= ======= =========
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. Finlay is in 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 3/8% 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:
NOVEMBER 2, FEBRUARY 2,
2002 2002
---------- -----------
(IN THOUSANDS)
Jewelry goods - rings, watches and other fine jewelry
(first-in, first-out ("FIFO") basis) ............ $337,979 $314,473
Less: Excess of FIFO cost over LIFO inventory
value ............................................ 11,469 9,965
-------- --------
$326,510 $304,508
======== ========
The LIFO method had the effect of increasing the loss before income taxes
for the thirteen weeks ended November 2, 2002 and November 3, 2001 by $589,000
and $989,000, respectively. The effect of applying the LIFO method for the
thirty-nine weeks ended November 2, 2002 and November 3, 2001 was to increase
the loss before income taxes by $1,505,000 and $1,983,000, 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 $381,209,000 and $359,729,000 at November 2, 2002 and
February 2, 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 (as amended, the "Gold Consignment Agreement") which enables Finlay
Jewelry to receive consignment merchandise
10
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - MERCHANDISE INVENTORIES (CONTINUED)
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.
Effective September 30, 2002, Finlay Jewelry amended the Gold Consignment
Agreement to extend the term to July 31, 2005, and to permit Finlay Jewelry to
obtain up to the lesser of (i) 165,000 fine troy ounces or (ii) $50.0 million
worth of gold, subject to a formula as prescribed by the Gold Consignment
Agreement. In the event this arrangement is terminated or not renewed at the
maturity date, Finlay Jewelry would be required to return or repurchase the
outstanding gold at the prevailing gold rate in effect on that date. At November
2, 2002, amounts outstanding under the Gold Consignment Agreement totaled
121,600 fine troy ounces, valued at approximately $38.5 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. 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. Only minimum fees, as
represented in the table below, are 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 THIRTY-NINE WEEKS ENDED
------------------------ ------------------------
NOVEMBER 2, NOVEMBER 3, NOVEMBER 2, NOVEMBER 3,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(IN THOUSANDS)
Minimum fees ..... $ 603 $ 1,885 $ 1,876 $ 5,960
Contingent fees .. 27,354 26,879 88,013 86,982
------- ------- ------- -------
Total .......... $27,957 $28,764 $89,889 $92,942
======= ======= ======= =======
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 29, 2003. 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 a total of 599,330 shares for approximately $5,367,000.
For the thirty-nine weeks ended November 2, 2002, the Company repurchased an
additional 595,962 shares for $6,744,000, including (i) the repurchase of
526,562 shares for $5,792,000 from a partnership, the managing
12
FINLAY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCK REPURCHASE PROGRAM AND RESTRICTED STOCK (CONTINUED)
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 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 thirty-nine week periods ended November 2, 2002
and November 3, 2001 totaled $76,000 and $229,000, 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 thirty-nine weeks
ended November 2, 2002, sales were reduced by approximately $28.3 million
compared to the prior year 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 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 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 thirty-nine weeks ended November 2, 2002.
REVENUE RECOGNITION
The Company recognizes revenue upon the sale of merchandise, either owned
or consigned, to its customers, net of anticipated returns.
14
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 thirty-nine weeks ended November 2, 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.
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
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------------------- -------------------------------
NOVEMBER 2, NOVEMBER 3, NOVEMBER 2, NOVEMBER 3,
2002 2001 2002 2001
------------- ------------- ------------- ------------
Sales............................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................... 50.0 50.0 50.3 49.8
------------- ------------- ------------- ------------
Gross margin................................. 50.0 50.0 49.7 50.2
Selling, general and administrative expenses..... 46.9 46.2 45.2 45.6
Depreciation and amortization.................... 2.6 2.9 2.4 2.6
------------- ------------- ------------- ------------
Income (loss) from operations................ 0.5 0.9 2.1 2.0
Interest expense, net............................ 3.8 3.9 3.4 3.7
------------- ------------- ------------- ------------
Income (loss) before income taxes............ (3.3) (3.0) (1.3) (1.7)
Provision (benefit) for income taxes............. (1.4) (1.1) (0.6) (0.6)
------------- ------------- ------------- ------------
Net income (loss)............................ (1.9)% (1.9)% (0.7)% (1.1)%
============= ============= ============= ============
THIRTEEN WEEKS ENDED NOVEMBER 2, 2002 COMPARED WITH THIRTEEN WEEKS ENDED
NOVEMBER 3, 2001
SALES. Sales for the thirteen weeks ended November 2, 2002, decreased $6.9
million, or 4.0%, over the comparable period in 2001. Comparable department
sales (departments open for the same months during comparable periods) decreased
1.6%. Management attributes this decrease in sales primarily due to the 2001
closing of two host store groups, which contributed approximately $5.0 million
of sales in the third quarter of 2001, and general softening in the retail
environment, offset by the net effect of new store openings and closings.
During the thirteen weeks ended November 2, 2002, Finlay opened 12
departments and had no closings. The openings were all within existing store
groups.
GROSS MARGIN. Gross margin for the period decreased by $3.5 million in 2002
compared to 2001, primarily as a result of the sales decrease. As a percentage
of sales, gross margin was the same as the prior year period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") decreased $1.9 million, or 2.4%, due primarily
to lease fees associated with the decrease in the Company's sales and reduced
advertising expenditures. As a percentage of sales, SG&A increased 0.7% due to
the negative impact of payroll and other expenses on the lower sales volume.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$0.7 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.
16
INTEREST EXPENSE, NET. Interest expense decreased by $0.5 million primarily
due to a lower weighted average interest rate (7.3% for the 2002 period compared
to 7.5% for the comparable period in 2001) and a decrease in average borrowings
($305.9 million for the period in 2002 compared to $322.4 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% adjusted for certain
prior year income tax provisions no longer required and non-deductible goodwill
amortization in 2001.
NET INCOME (LOSS). The net loss of $3.2 million for the 2002 period was
$0.1 million lower as compared to the net loss in the prior period as a result
of the factors discussed above.
THIRTY-NINE WEEKS ENDED NOVEMBER 2, 2002 COMPARED WITH THIRTY-NINE WEEKS ENDED
NOVEMBER 3, 2001
SALES. Sales for the thirty-nine weeks ended November 2, 2002 decreased
$21.9 million, or 3.9%, over the comparable period in 2001. Comparable
department sales increased 0.3%, which management attributes to the general
softening in the retail environment during 2002. The decrease in total sales is
the result of the 2001 closing of three host store groups, which contributed
approximately $28.3 of sales in the thirty-nine weeks ended November 3, 2001
offset by the net effect of new store openings and closings.
During the thirty-nine weeks ended November 2, 2002, Finlay opened 20
departments and closed 13 departments. The openings and closings were all within
existing store groups.
GROSS MARGIN. Gross margin for the period decreased by $13.7 million,
primarily as a result of the sales decrease. As a percentage of sales, gross
margin decreased by 0.5% 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 $11.9 million,
or 4.6%, due primarily to payroll expense and lease fees associated with the
decrease in the Company's sales, in addition to reduced advertising
expenditures. SG&A as a percentage of sales decreased by 0.4%.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$1.8 million, reflecting the discontinuance of goodwill amortization of $2.8
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 $2.0 million primarily
due to a lower weighted average interest rate (7.6% for the 2002 period compared
to 7.8% for the comparable period in 2001) and a decrease in average borrowings
($288.9 million for the period in 2002 compared to $311.5 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% adjusted for certain
prior year income tax provisions no longer required and non-deductible goodwill
amortization in 2001.
17
NET INCOME (LOSS). The net loss of $4.0 million for the 2002 period was
$2.0 million lower 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 thirty-nine
weeks ended November 2, 2002 and November 3, 2001, capital expenditures totaled
$8.2 million and $9.7 million, respectively. For 2002, capital expenditures are
estimated to be approximately $12.0 million and for 2001 totaled $13.9 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. However,
Finlay cannot assure the collection of the sales proceeds from its host stores.
Additionally, on average, approximately 50% of Finlay's domestic merchandise has
been carried on consignment. The Company's working capital balance was $197.8
million at November 2, 2002, a decrease of $4.7 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, substantially all of Finlay's lease
agreements provide for accelerated payments during the months of November and
December, which require the 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 $5.6 million, or 1.7%, as compared to November 3,
2001, as a result of the closing of two host store groups and a continued
monitoring of inventory levels. During 2002, 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. Finlay is in 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,
18
respectively, for a 30 consecutive day period (the "Balance Reduction
Requirement"). Borrowings under the Revolving Credit Agreement at November 2,
2002 were $82.2 million, compared to a zero balance at February 2, 2002 and
$101.8 million at November 3, 2001. The average amounts outstanding under the
Revolving Credit Agreement were $63.9 million and $86.5 million for the
thirty-nine weeks ended November 2, 2002 and November 3, 2001, respectively. The
maximum amount outstanding for the thirty-nine weeks ended November 2, 2002 was
$99.8 million, at which point the unused excess availability was $118.0 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 November 2, 2002, $381.2 million of
consignment merchandise from approximately 300 vendors was on hand as compared
to $394.1 million at November 3, 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 November 2, 2002, Finlay's outstanding borrowings were $307.2
million, which included a $75.0 million balance under the Senior Debentures, a
$150.0 million balance under the Senior Notes and an $82.2 million balance under
the Revolving Credit Agreement. At November 2, 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 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. Effective September 30, 2002, Finlay Jewelry
amended the Gold Consignment Agreement to extend the term to July 31, 2005, and
to permit Finlay Jewelry to obtain up to the lesser of (i) 165,000 fine troy
ounces or (ii) $50.0 million worth of gold, subject to a formula as prescribed
by the Gold Consignment Agreement. In the event this arrangement is terminated
or not renewed at the maturity date, Finlay Jewelry would be required to return
or repurchase the outstanding gold at the prevailing gold rate in effect on that
date. At November 2, 2002, amounts outstanding under the Gold Consignment
Agreement totaled 121,600 fine troy ounces, valued at approximately $38.5
million. The average amount outstanding under the Gold Consignment Agreement was
$36.7 million for the thirty-nine weeks ended November 2, 2002. At November 2,
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 November 2, 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
========== ========= ======== ======== ========
19
- ------------
(1) 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) .... $ 82,152 $ 82,152 $ - $ - $ -
Gold Consignment
Agreement (due 2005) ......... 38,535 - 38,535 - -
Letters of credit ............... 7,250 2,000 5,250 - -
---------- --------- --------- -------- ---------
Total ........................... $127,937 $ 84,152 $ 43,785 $ - $ -
========== ========= ========= ======== =========
- ------------
(1) The outstanding balance on the Revolving Credit Agreement at December 9,
2002 was $80.7 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 $17.0 million and
$17.5 million for the thirty-nine week periods ended November 2, 2002 and
November 3, 2001, 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 29, 2003, 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. From the
inception of the program through November 2, 2002, the Company has repurchased
1,195,292 shares for $12.1 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 November 2, 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 forwards,
based upon the anticipated sales of gold product in order to hedge against the
risk arising from its payment arrangements. At November 2, 2002, the Company had
several open positions in futures contracts for gold. There can be
20
no assurance that these 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 thirty-nine weeks
ended November 2, 2002, sales were reduced by approximately $28.3 million
compared to the prior year 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 impact of any host store bankruptcy, 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, Finlay Jewelry's continuation of its Gold
Consignment Agreement, the Company's compliance with applicable contractual
covenants, the impact of future claims and legal actions arising in the ordinary
course of business, 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
22
trading purposes. The aggregate amount of forward contracts was $11.6 million at
November 2, 2002, which expire during 2002.
ITEM 4. CONTROLS AND PROCEDURES
Based upon an evaluation conducted by the Company's Chief Executive
Officer and Chief Financial Officer of the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934) as of a date within 90 days of the filing date of this
Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports
that the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities Exchange Commission's rules and forms.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their most recent evaluation.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
2 Not applicable.
3 Not applicable.
4 Not applicable.
10 Second Amendment, dated September 30, 2002, to the Amended and
Restated Gold Consignment Agreement, dated March 30, 2001, between
Finlay Jewelry, eFinlay, Inc. and Sovereign Bank.
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.
23
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
None.
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: December 11, 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;
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 11, 2002
/s/ Arthur E. Reiner
--------------------
Arthur E. Reiner
Chairman, President and Chief
Executive Officer
26
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;
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 11, 2002
/s/ Bruce E. Zurlnick
---------------------
Bruce E. Zurlnick
Senior Vice President,
Treasurer and Chief Financial Officer