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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 3, 2003
-----------
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
----- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- ----
As of June 13, 2003 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 Exchange Act and is voluntarily filing this Quarterly Report on Form 10Q.
FINLAY FINE JEWELRY CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED MAY 3, 2003
INDEX
PAGE(S)
-------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations for the thirteen weeks ended
May 3, 2003 and May 4, 2002.........................................................1
Consolidated Balance Sheets as of May 3, 2003 and
February 1, 2003....................................................................2
Consolidated Statements of Changes in Stockholder's Equity for the year
ended February 1, 2003 and the thirteen weeks ended May 3, 2003.....................3
Consolidated Statements of Cash Flows for the thirteen weeks ended
May 3, 2003 and May 4, 2002.........................................................4
Notes to Consolidated Financial Statements..........................................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................20
Item 4. Controls and Procedures............................................................21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................22
SIGNATURES....................................................................................................24
CERTIFICATIONS................................................................................................25
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
------------------------------------
MAY 4,
MAY 3, 2002
2003 (AS RESTATED)
--------------- ---------------
Sales.................................................................... $ 186,208 $ 187,365
Cost of sales............................................................ 89,859 89,209
--------- ---------
Gross margin......................................................... 96,349 98,156
Selling, general and administrative expenses............................. 88,269 87,835
Depreciation and amortization............................................ 4,366 4,357
--------- ---------
Income from operations............................................... 3,714 5,964
Interest expense, net.................................................... 4,083 4,276
--------- ---------
Income (loss) before income taxes and cumulative effect
of accounting change........................................... (369) 1,688
Provision (benefit) for income taxes..................................... (135) 498
--------- ---------
Income (loss) before cumulative effect of accounting change.......... (234) 1,190
Cumulative effect of accounting change, net of tax....................... - (17,209)
--------- ---------
Net loss............................................................. $ (234) $ (16,019)
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
1
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
MAY 3, FEBRUARY 1,
2003 2003
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 1,597 $ 68,485
Accounts receivable - department stores...................................... 40,775 19,985
Other receivables............................................................ 35,361 30,879
Merchandise inventories...................................................... 279,870 263,544
Prepaid expenses and other................................................... 4,906 3,237
Deferred income taxes........................................................ 7,366 9,858
------------- --------------
Total current assets...................................................... 369,875 395,988
------------- --------------
Fixed assets:
Building, equipment, fixtures and leasehold improvements..................... 123,800 120,946
Less - accumulated depreciation and amortization............................. 53,998 50,575
------------- --------------
Fixed assets, net......................................................... 69,802 70,371
------------- --------------
Deferred charges and other assets, net......................................... 20,487 21,170
Goodwill....................................................................... 91,046 91,046
------------- --------------
Total assets.............................................................. $ 551,210 $ 578,575
============= ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings........................................................ $ 36,217 $ -
Accounts payable - trade..................................................... 62,975 113,275
Accrued liabilities:
Accrued salaries and benefits............................................. 17,787 17,734
Accrued miscellaneous taxes............................................... 5,585 6,841
Accrued interest.......................................................... 522 3,733
Deferred income........................................................... 8,674 10,493
Other..................................................................... 17,168 14,450
Income taxes payable......................................................... 44,737 50,035
Due to parent................................................................ 4,601 5,467
------------- --------------
Total current liabilities................................................. 198,266 222,028
Long-term debt................................................................. 150,000 150,000
Deferred income taxes.......................................................... 19,293 18,527
Other non-current liabilities.................................................. 194 204
------------- --------------
Total liabilities......................................................... 367,753 390,759
------------- --------------
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............................................................ 100,482 104,786
Accumulated other comprehensive income.......................................
- 55
------------- --------------
Total stockholder's equity................................................ 183,457 187,816
------------- --------------
Total liabilities and stockholder's equity................................ $ 551,210 $ 578,575
============= ==============
The accompanying notes are an integral part of these consolidated
financial statements
2
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
COMMON STOCK ACCUMULATED
--------------------- ADDITIONAL OTHER TOTAL
NUMBER PAID-IN RETAINED COMPREHENSIVE STOCKHOLDER'S
OF SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
--------- ------- ---------- -------- ------------- -------------
Balance February 2, 2002................ 1,000 $ - $ 82,975 $110,525 $ 96 $ 193,596
Net income.......................... - - - 11,819 - 11,819
Change in fair value of gold
forward contracts.............. - - - - (41) (41)
Dividends on common stock .......... - - - (17,558) - (17,558)
----- ------- -------- -------- -------- ---------
Balance February 1, 2003................ 1,000 $ - $ 82,975 $104,786 $ 55 $ 187,816
Net loss............................ - - - (234) - (234)
Change in fair value of gold
forward contracts.............. - - - - (55) (55)
Dividends on common stock .......... - - - (4,070) - (4,070)
----- ------- -------- -------- -------- ---------
Balance May 3, 2003..................... 1,000 $ - $ 82,975 $100,482 $ - $ 183,457
===== ======= ======== ======== ======== =========
The accompanying notes are an integral part of these consolidated
financial statements.
3
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THIRTEEN WEEKS ENDED
----------------------------
MAY 4,
2002
MAY 3, (AS
2003 RESTATED)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................. $ (234) $ (16,019)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative effect of accounting change, net of tax...................... - 17,209
Depreciation and amortization............................................ 4,366 4,357
Amortization of deferred financing costs................................ 206 242
Non-current deferred income tax liabilities............................. 766 467
Other, net............................................................... (32) 101
Changes in operating assets and liabilities:
Increase in accounts and other receivables............................ (25,272) (29,936)
Increase in merchandise inventories................................... (16,326) (4,832)
Increase in prepaid expenses and other................................ (1,668) (1,501)
Decrease in deferred income tax assets................................ 2,492 -
Decrease in accounts payable and accrued liabilities.................. (59,113) (56,791)
Increase in deferred tax liabilities.................................. - 781
Decrease in due to parent............................................. (1,561) (5,722)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES............................. (96,376) (91,644)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.............. (2,946) (2,903)
Deferred charges and other, net.......................................... 23 (754)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES.............................. (2,923) (3,657)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility.................................. 159,458 130,239
Principal payments on revolving credit facility.......................... (123,241) (78,045)
Capitalized financing costs ............................................. (431) -
Payment of dividends..................................................... (3,375) (3,856)
------------ ------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES .................... 32,411 48,338
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS........................... (66,888) (46,963)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 68,485 49,222
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $ 1,597 $ 2,259
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid.......................................................... $ 7,088 $ 7,110
============ ============
Income taxes paid...................................................... $ 5,246 $ 3,481
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
4
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 May 3, 2003, and the
results of operations and cash flows for the thirteen weeks ended May 3, 2003
and May 4, 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 1, 2003 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
1, 2003 ("Form 10-K") previously filed with the Commission.
The consolidated financial statements for the thirteen weeks ended May 4,
2002 have been restated to reflect the retroactive adoption in the fiscal year
ended February 1, 2003 of Emerging Issues Task Force ("EITF") Issue No. 02-16
("EITF 02-16"), "Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor." See Note 2 herein and Form 10-K.
Additionally, certain prior period balances have been reclassified to conform to
the current period presentation.
Finlay Jewelry's fiscal year ends on the Saturday closest to January 31.
References to 2003, 2002, 2001 and 2000 relate to the fiscal years ending
January 31, 2004, February 1, 2003, February 2, 2002 and February 3, 2001,
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.
Inventory is reduced for estimated obsolescence or unmarketable inventory equal
to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions.
5
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Such contracts typically have durations ranging from one to
nine months. At May 3, 2003 and February 1, 2003, Finlay Jewelry had several
open positions in gold futures contracts totaling 59,000 fine troy ounces and
4,000 fine troy ounces, respectively, valued at $20.1 million and $1.4 million,
respectively. The fair value of gold under such contracts was $20.1 million and
$1.5 million at May 3, 2003 and February 1, 2003, respectively.
VENDOR ALLOWANCES: Finlay Jewelry receives allowances from its vendors
through a variety of programs and arrangements, including cooperative
advertising. The allowances are generally intended to offset Finlay Jewelry's
costs of promoting, advertising and selling the vendors' products in its
departments. Vendor allowances are recognized as a reduction of cost of sales or
selling, general and administrative expenses ("SG&A") when the purpose for which
the vendor funds were intended to be used has been fulfilled. Accordingly, a
reduction or increase in vendor allowances has an inverse impact on cost of
sales and/or SG&A.
Effective in 2002, Finlay Jewelry adopted EITF 02-16. EITF 02-16 addresses
the accounting treatment for vendor allowances and provides that cash
consideration received from a vendor should be presumed to be a reduction of the
prices of the vendors' product and should therefore be shown as a reduction in
the purchase price of the merchandise. Further, these allowances should be
recognized as a reduction in cost of sales when the related product is sold. To
the extent that the cash consideration represents a reimbursement of a specific,
incremental and identifiable cost, then those vendor allowances should be used
to offset such costs.
In accordance with EITF 02-16, Finlay Jewelry recorded a cumulative effect
of accounting change as of February 3, 2002, the date of adoption, that
increased the net loss for the first quarter of 2002 by $17.2 million, net of
tax. As of May 3, 2003 and February 1, 2003, deferred vendor allowances totaled
(i) $16.7 million and $18.5 million, respectively, for owned merchandise, which
allowances are included as an offset to merchandise inventories on Finlay
Jewelry's Consolidated Balance Sheet, and (ii) $8.7 million and $10.5 million,
respectively, for merchandise received on consignment, which allowances are
included as deferred income on Finlay Jewelry's Consolidated Balance Sheet. The
consolidated financial statements for the quarter ended May 4, 2002 have been
restated to reflect this change in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 3, "Reporting Accounting Changes in Interim
Financial Statements" as follows:
THIRTEEN WEEKS ENDED
MAY 4, 2002
--------------------
(IN THOUSANDS)
Net income, as previously reported......................... $ 840
Less: Cumulative effect of accounting change, net of tax... (17,209)
Add: Impact on operating income for quarter, net of tax... 350
----------
Net loss, as restated...................................... $ (16,019)
==========
6
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HEDGING: SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Under SFAS No. 133, all
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. SFAS No. 133 defines
requirements for designation and documentation of hedging relationships, as well
as ongoing effectiveness assessments, which must be met in order to qualify for
hedge accounting. For a derivative that does not qualify as a hedge, changes in
fair value would be recorded in earnings immediately. Finlay Jewelry has
designated its existing 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 cost of sales when
the offsetting effects of the hedged transaction affects earnings. Changes in
the fair value of the derivative attributable to hedge ineffectiveness are
recorded in earnings immediately. At May 3, 2003, the fair value of the gold
forward contracts approximated that of the contractual value and, therefore, no
gain or loss was recognized. At February 1, 2003, the fair value of the gold
forward contracts resulted in the recognition of an asset of $93,600. The amount
recorded in accumulated other comprehensive income of $55,000, net of tax, was
reclassified into earnings in the first quarter of 2003.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and
Hedging Activities". SFAS No. 149 amends and clarifies the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133. This Statement
is effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of SFAS No.
149 is not expected to have a material impact on the financial position or
results of operations of Finlay Jewelry.
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.
STOCK-BASED COMPENSATION: In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" which
became effective in 2002. This Statement amends SFAS No. 123 "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for an
entity that voluntarily changes to the fair value method of accounting for
stock-based compensation. As permitted by SFAS No. 123, Finlay has elected to
continue to recognize stock-based compensation using the intrinsic value method.
Accordingly, no compensation expense has been recognized for its stock-based
compensation plans. Had the fair value method of accounting been applied to the
Holding Company's stock option plans, which requires recognition of compensation
costs ratably over the vesting period of the stock options, the net loss would
be as follows:
7
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
THIRTEEN WEEKS ENDED
--------------------
MAY 3, MAY 4,
2003 2002
------ ---------
(IN THOUSANDS)
Reported net loss..................................... $(234) $(16,019)
Add: Stock-based compensation determined
under the fair value method, net of tax...... (147) (198)
------ ---------
Pro forma net loss.................................... $(381) $(16,217)
====== =========
COMPREHENSIVE INCOME: SFAS No. 130, "Reporting Comprehensive Income"
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 2003
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 May 3, 2003 and May 4, 2002, the comprehensive loss was $0.3 million
and $16.1 million, respectively.
NEW ACCOUNTING PRONOUNCEMENT: In May 2003, the FASB issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity". This Statement establishes standards for how a company
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Although Finlay Jewelry is still in the process of reviewing the new
Statement, Finlay Jewelry believes this pronouncement will not have a material
impact on Finlay Jewelry's results of operations, financial position or cash
flows.
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 41% of
Finlay's sales and approximately 79% of its income from operations, due to the
seasonality of the retail jewelry industry. Approximately 49% of Finlay's sales
in 2002 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
On January 22, 2003, Finlay Jewelry's revolving credit agreement with
General Electric Capital Corporation and certain other lenders was amended and
restated (the "Revolving Credit Agreement"). The Revolving Credit Agreement,
which matures in January 2008, provides Finlay Jewelry with a senior secured
revolving line of credit up to $225.0 million (the "Revolving Credit Facility").
At May 3, 2003, $36.2 million was outstanding under this facility and $152.8
million was available for borrowing.
8
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SHORT AND LONG-TERM DEBT (CONTINUED)
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 3/8% Senior Notes, due May 1, 2008, having
an aggregate principal amount of $150.0 million (the "Senior Notes"). The
indenture relating to the Senior Notes is referred to as the "Senior Note
Indenture".
NOTE 5 - MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following:
MAY 3, FEBRUARY 1,
2003 2003
-------- -----------
(IN THOUSANDS)
Jewelry goods - rings, watches and other fine
jewelry (first-in, first-out ("FIFO") basis)......... $291,863 $275,339
Less: Excess of FIFO cost over LIFO inventory value...... 11,993 11,795
-------- --------
$279,870 $263,544
======== ========
In accordance with EITF 02-16, merchandise inventories have been reduced by
$16.7 million and $18.5 million at May 3, 2003 and February 1, 2003,
respectively, to reflect the vendor allowances as a reduction in the cost of
merchandise. The LIFO method had the effect of increasing the loss before income
taxes for the thirteen weeks ended May 3, 2003 and May 4, 2002 by $200,000 and
$157,000, 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 $365,552,000 and $359,676,000 at May 3, 2003 and February 1,
2003, respectively, of merchandise received on consignment is not included in
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 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 agreement is terminated, Finlay Jewelry will be
required to return or repurchase the outstanding gold at the prevailing gold
rate in effect on that date. At May 3, 2003 and February 1, 2003, amounts
outstanding under the Gold Consignment Agreement totaled 132,050 and134,785 fine
troy ounces, respectively, valued at approximately $44.5 million and $49.5
million, respectively. 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.
9
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. The values of such fixed assets
are recorded at cost 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:
THIRTEEN WEEKS ENDED
---------------------------------
MAY 3, MAY 4,
2003 2002
-------------- --------------
(IN THOUSANDS)
Minimum fees..................... $ 386 $ 640
Contingent fees.................. 30,424 30,403
----------- -----------
Total.......................... $ 30,810 $ 31,043
=========== ===========
NOTE 7 - SALE AND CLOSURE OF SONAB
In January 2000, Societe Nouvelle d' Achat de Bijouterie - S.O.N.A.B.
("Sonab"), Finlay Jewelry's European leased jewelry department subsidiary, 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 for the write-down of assets for disposition and related closure
expenses. All of Sonab's employees, excluding those that were hired by the
buyer, were involuntarily terminated, including sales associates, supervisors
and corporate personnel. As of May 3, 2003, the Company's exit plan has been
completed with the exception of certain employee litigation and other legal
matters. To date, Finlay Jewelry has charged a total of $26.4 million against
its estimate of $27.2 million. Finlay Jewelry does not believe future results
will be materially impacted by any remaining payments.
10
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 29,
2003. The extent and timing of repurchases will depend upon general business and
market conditions, stock prices, availability under the Revolving Credit
Facility, compliance with certain restrictive covenants and Finlay's cash
position and requirements going forward. The repurchase program may be modified,
extended or terminated by the Board of Directors at any time. Through fiscal
2002, the Holding Company repurchased a total of 1,332,942 shares for
approximately $13,793,000. For the thirteen weeks ended May 3, 2003 and May 4,
2002, the Holding Company repurchased 144,630 shares and 527,562 shares for
$1,801,000 and $5,803,000, respectively.
On February 4, 2001, an executive officer of Finlay was issued 100,000
shares of Common Stock of the Holding Company, 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.
NOTE 9 - EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION AND STOCK PURCHASE PLANS
On April 16, 2003, the Board of Directors adopted the Executive
Deferred Compensation and Stock Purchase Plan and the Director Deferred
Compensation and Stock Purchase Plan, subject in each case to the approval of
the Holding Company's stockholders at the 2003 annual meeting (the "New Plans").
Under the New Plans, key executives of Finlay and the Holding Company's
non-employee directors as directed by the Holding Company's Compensation
Committee, will be eligible to acquire restricted stock units ("RSUs"). An RSU
is a unit of measurement equivalent to one share of common stock, but with none
of the attendant rights of a stockholder of a share of common stock. Two types
of RSUs will be awarded under the New Plans: (i) participant RSUs, where a plan
participant may elect to defer, in the case of an executive employee, a portion
of his or her actual or target bonus, and in the case of a non-employee
director, his or her retainer fees and Committee chairmanship fees, and receive
RSUs in lieu thereof and (ii) matching RSUs, where the Holding Company will
credit a participant's plan account with one matching RSU for each participant
RSU that a participant elects to purchase. While participant RSUs are fully
vested at all times, matching RSUs will be subject to vesting and forfeiture as
set forth in the New Plans. At the time of distribution under the New Plans,
RSUs will be converted into actual shares of Common Stock of the Holding
Company. Purchases and awards of RSUs under the New Plans will not further
dilute any stockholder's ownership percentage beyond the dilution already
permitted under the existing long term incentive plans because the shares of
Common Stock to be issued or used under the New Plans will be funded solely from
shares of Common Stock already available for issuance under the existing long
term incentive plans.
11
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 of
America. 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
may differ from those estimates.
Certain of Finlay Jewelry's significant accounting policies are described
in Note 2 of Notes to the Consolidated Financial Statements in Finlay Jewelry's
Form 10-K for the fiscal year ended February 1, 2003. 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 of operations 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. An
adjustment is recorded to reduce the LIFO 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.
DERIVATIVE INSTRUMENTS
Finlay 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, Finlay Jewelry 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 ended May 3, 2003.
VENDOR ALLOWANCES
Finlay Jewelry receives allowances from its vendors through a variety of
programs and arrangements, including cooperative advertising. The allowances are
generally intended to offset Finlay Jewelry's costs of promoting, advertising
and selling the vendors' products in its departments. Vendor allowances are
recognized as a reduction of cost of sales or SG&A when the purpose for which
the vendor funds were intended to be used has been fulfilled. Accordingly, a
reduction or increase in vendor allowances has an inverse impact on cost of
sales and/or SG&A.
12
Effective in 2002, Finlay Jewelry adopted Emerging Issues Task Force Issue
No. 02-16, "Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor" ("EITF 02-16"). EITF 02-16 addresses the
accounting treatment for vendor allowances and provides that cash consideration
received from a vendor should be presumed to be a reduction of the prices of the
vendors' product and should therefore be shown as a reduction in the purchase
price of the merchandise. Further, these allowances should be recognized as a
reduction in cost of sales when the related product is sold. To the extent that
the cash consideration represents a reimbursement of a specific, incremental and
identifiable cost, then those vendor allowances should be used to offset such
costs.
In accordance with EITF 02-16, Finlay Jewelry recorded a cumulative effect
of accounting change as of February 3, 2002, the date of adoption, that
increased the net loss for the first quarter of 2002 by $17.2 million, net of
tax. As of May 3, 2003 and February 1, 2003, deferred vendor allowances totaled
(i) $16,682,000 and $18,452,000, respectively, for owned merchandise, which
allowances are included as an offset to merchandise inventories on Finlay
Jewelry's Consolidated Balance Sheet, and (ii) $8,674,000 and $10,493,000,
respectively, for merchandise received on consignment, which allowances are
included as deferred income on Finlay Jewelry's Consolidated Balance Sheet. The
adoption of EITF 02-16 did not have a material impact on the financial position
or results of operations of Finlay Jewelry for the thirteen weeks ended May 3,
2003. Previously reported results for the thirteen weeks ended May 4, 2002 have
been restated as a result of the retroactive adoption of EITF 02-16.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
recoverable. If the undiscounted future cash flows from the long-lived assets
are less than the carrying value, Finlay Jewelry recognizes a loss equal to the
difference between the carrying value and the discounted future cash flows of
the assets. Factors used in the valuation of long-lived assets include, but are
not limited to, management's plans for future operations, recent operating
results and projected cash flows.
GOODWILL
Finlay Jewelry evaluates goodwill annually or whenever events and changes
in circumstances suggest that the carrying amount may not be recoverable from
its estimated future cash flows. To the extent these future projections or
Finlay's strategies change, the conclusion regarding impairment may differ from
current estimates.
REVENUE RECOGNITION
Finlay Jewelry recognizes revenue upon the sale of merchandise, either
owned or consigned, to its customers, net of anticipated returns. The provision
for sales returns is based on Finlay Jewelry's historical return rate.
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
thirteen weeks ended May 3, 2003, Finlay Jewelry was in compliance with all of
its covenants. Management expects to be in compliance with all of its covenants
through 2003. Because compliance is based, in part, on management estimates and
actual results can differ from those estimates, there can be no assurance that
Finlay Jewelry will be in compliance with the covenants in the future or that
the
13
lenders will waive or amend any of the covenants should Finlay Jewelry be in
violation of any such covenants. Finlay Jewelry believes the assumptions used
are appropriate.
The Revolving Credit Agreement contains customary covenants, including
limitations on, or relating to capital expenditures, liens, indebtedness,
investments, mergers, acquisitions, affiliate transactions, management
compensation and the payment of dividends and other restricted payments. The
Revolving Credit Agreement also contains various financial covenants, including
minimum earnings and fixed charge coverage ratio requirements and certain
maximum debt limitations.
The Senior Note Indenture contain restrictions relating to, among other
things, the payment of dividends, the making of certain investments or other
restricted payments, the incurrence of additional indebtedness, the creation of
certain liens, entering into transactions with affiliates, the disposition of
certain assets and engaging in mergers and consolidations.
The Gold Consignment Agreement requires Finlay Jewelry to comply with
certain covenants, including restrictions on the incurrence of certain
indebtedness, the creation of liens, engaging in transactions with affiliates
and limitations on the payment of dividends. In addition, the Gold Consignment
Agreement also contains various financial covenants, including minimum earnings
and fixed charge coverage ratio requirements and certain maximum debt
limitations.
SELF-INSURANCE RESERVES
Finlay Jewelry is self-insured for worker's compensation claims up to a
certain maximum liability amount. Although the amount accrued is actuarially
determined based on analysis of historical trends of losses, settlements,
litigation costs and other factors, the amount Finlay Jewelry will ultimately
disburse could differ materially from the accrued amount.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This Statement is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 is not expected to have an impact on the
financial position or results of operations of Finlay Jewelry.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". This
Statement establishes standards for how a company classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This Statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. Although Finlay Jewelry is
still in the process of reviewing the new Statement, Finlay Jewelry believes
this pronouncement will not have a material impact on Finlay Jewelry's results
of operations, financial position or cash flows.
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
----------------------
MAY 4,
2002
MAY 3, (AS
2003 RESTATED)
------- --------
Sales........................................... 100.0% 100.0%
Cost of sales................................... 48.3 47.6
----- -----
Gross margin................................ 51.7 52.4
Selling, general and administrative expenses.... 47.4 46.9
Depreciation and amortization................... 2.3 2.3
----- -----
Income from operations...................... 2.0 3.2
Interest expense, net........................... 2.2 2.3
----- -----
Income (loss) before income taxes and
cumulative effect of accounting change.... (0.2) 0.9
Provision (benefit) for income taxes............ (0.1) 0.3
----- -----
Income (loss) before cumulative effect of
accounting change........................ (0.1) 0.6
Cumulative effect of accounting change,
net of tax............................... - (9.2)
----- -----
Net loss........................................ (0.1)% (8.6)%
===== =====
THIRTEEN WEEKS ENDED MAY 3, 2003 COMPARED WITH THIRTEEN WEEKS ENDED MAY 4, 2002
SALES. Sales for the thirteen weeks ended May 3, 2003, decreased $1.2
million, or 0.6%, over the comparable period in 2002. Comparable department
sales (departments open for the same months during comparable periods) decreased
0.6%. Management attributes this decrease in sales primarily due to the
continued challenging retail environment offset by the net effect of new store
openings and closings.
During the thirteen weeks ended May 3, 2003, Finlay opened four departments
and closed 11 departments. The openings and closings were all within existing
store groups.
GROSS MARGIN. Gross margin for the period decreased by $1.8 million in 2003
compared to 2002, and as a percentage of sales, gross margin decreased by 0.7%.
The decrease primarily reflected a continued promotional environment and an
increase in gold prices. Offsetting these factors were favorable physical
inventory shortage results.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $0.4 million,
or 0.5%, due primarily to payroll expense. As a percentage of sales, SG&A
increased 0.5% due to the negative impact of payroll and other expenses on the
lower sales volume.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization remained the
same at $4.4 million reflecting additional depreciation and amortization as a
result of capital expenditures and capitalized software costs for the most
recent twelve months offset by the effect of certain assets becoming fully
depreciated.
15
INTEREST EXPENSE, NET. Interest expense decreased by $0.2 million primarily
due to a decrease in average borrowings ($173.1 million for the period in 2003
compared to $189.0 million for the comparable period in 2002). The weighted
average interest rate was approximately 7.8% in each period.
PROVISION (BENEFIT) FOR INCOME TAXES. The income tax provision (benefit)
for the 2003 and 2002 periods reflects effective tax rates of 39% and 40.5%,
respectively, adjusted in 2002 for certain income tax provisions which were no
longer required.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES. Finlay Jewelry
adopted EITF 02-16 as of the beginning of 2002 and recorded a cumulative effect
after-tax reduction to earnings of $17.2 million. The charge relates to the
deferral of a portion of Finlay Jewelry's previously collected vendor allowances
relating to both owned merchandise and merchandise received on consignment.
NET LOSS. Net loss of $0.2 million for the 2003 period represents a
decrease of $15.8 million as compared to 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 thirteen
weeks ended May 3, 2003 and May 4, 2002, capital expenditures totaled $2.9
million in each period. For 2002, capital expenditures totaled $12.5 million and
for 2003 are estimated to be approximately $12.0 million 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.
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 ensure the collection of sales proceeds from its host stores.
Additionally, on average, approximately 50% of Finlay's merchandise has been
carried on consignment. Finlay Jewelry's working capital balance was $171.6
million at May 3, 2003, a decrease of $2.4 million from February 1, 2003. The
decrease resulted primarily from the impact of the interim net loss (exclusive
of depreciation and amortization), capital expenditures and the declaration of
dividends 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, 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 Finlay's cash, which is used
to reduce Finlay's borrowings under the Revolving Credit Agreement. Inventory
levels decreased by $5.8 million, or 2.0%, as compared to May 4, 2002, as a
result of the continued monitoring of inventory levels. During 2003, the reduced
inventory levels favorably impacted Finlay's outstanding borrowings under the
Revolving Credit Agreement.
In January 2003, Finlay entered into the Revolving Credit Agreement, which
expires in January 2008. The Revolving Credit Agreement provides Finlay Jewelry
with a line of credit of up to $225.0 million to finance working capital needs.
Amounts outstanding under the Revolving Credit Agreement
16
bear interest at a rate equal to, at Finlay's option, (i) the prime rate plus a
margin ranging from zero to 1.0% or (ii) adjusted Eurodollar rate plus a margin
ranging from 1.0% to 2.0%, in each case depending on the financial performance
of Finlay. The weighted average interest rate was 4.3% and 4.1% at May 3, 2003
and May 4, 2002, respectively.
In each year, Finlay is required to reduce the outstanding revolving credit
balance and letter of credit balance under the Revolving Credit Agreement to
$50.0 million or less and $20.0 million or less, respectively, for a 30
consecutive day period (the "Balance Reduction Requirement"). Borrowings under
the Revolving Credit Agreement at May 3, 2003 were $36.2 million, compared to a
zero balance at February 1, 2003 and $52.2 million at May 4, 2002. The average
amounts outstanding under the Revolving Credit Agreement were $23.1 million and
$39.0 million for the thirteen weeks ended May 3, 2003 and May 4, 2002,
respectively. The maximum amount outstanding for the thirteen weeks ended May 3,
2003 was $45.0 million, at which point the unused excess availability was $164.1
million. At May 3, 2003, Finlay was in compliance with all of its covenants
under the Revolving Credit Agreement.
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 2002, Finlay had an average
balance of consignment merchandise of $360.5 million as compared to an average
balance of $377.4 million in 2001. As of May 3, 2003, $365.6 million of
consignment merchandise from approximately 300 vendors was on hand as compared
to $358.2 million at May 4, 2002.
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 May 3, 2003, Finlay Jewelry's outstanding borrowings were
$186.2 million, which included a $150.0 million balance under the Senior Notes
and a $36.2 million balance under the Revolving Credit Agreement. At May 3,
2003, Finlay was in compliance with all of its covenants under the Senior Note
Indenture.
Finlay may, at the discretion of management, purchase Senior Debentures
and/or Senior Notes from time to time in the open market. Additionally,
beginning on May 1, 2003, the Senior Debentures and Senior Notes became
redeemable, in whole or in part, at the option of Finlay, at specified
redemption prices plus accrued and unpaid interest, if any, to the date of the
redemption. The extent and timing of any bond repurchases will depend upon
general business and market conditions, bond prices, availability under the
Revolving Credit Facility, compliance with certain restrictive covenants and
Finlay's cash position and requirements going forward.
Effective September 30, 2002, Finlay Jewelry amended the Gold Consignment
Agreement to extend the term to July 31, 2005 and to permit Finlay 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. At
May 3, 2003, amounts outstanding under the Gold Consignment Agreement totaled
132,050 fine troy ounces, valued at approximately $44.5 million. The average
amount outstanding under the Gold Consignment Agreement was $39.1 million in
2002. In the event this agreement is terminated, Finlay Jewelry will be required
to return or repurchase the outstanding gold at the prevailing gold rate in
effect on that date. 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. At May 3, 2003,
Finlay Jewelry was in compliance with all of its covenants under the Gold
Consignment Agreement.
17
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 May 3, 2003 (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) ...... 11,011 1,974 3,925 3,834 1,278
-------- -------- -------- -------- --------
Total ..................... $161,011 $ 1,974 $ 3,925 $ 3,834 $151,278
======== ======== ======== ======== ========
- ----------
(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 1, 2003.
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 2008) (1) . $36,217 $ - $ - $36,217 $ -
Gold Consignment
Agreement (due 2005) ...... 44,468 - 44,468 - -
Letters of credit ............ 8,950 8,700 - - 250
------- ------- ------- ------- -------
Total ........................ $89,635 $ 8,700 $44,468 $36,217 $ 250
======= ======= ======= ======= =======
- ----------
(1) The outstanding balance on the Revolving Credit Agreement at June 13, 2003
was $60.2 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
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
dividends and distributions, including those required to fund stock or bond
repurchases, are subject to Finlay's satisfaction of certain restrictive
covenants. The amounts required to satisfy the aggregate of Finlay Jewelry's
interest expense totaled $7.1 million in each of the thirteen week periods ended
May 3, 2003 and May 4, 2002.
Finlay has an employment agreement with one senior executive which provides
for a minimum salary level as well as incentive compensation based on meeting
specific financial goals. The agreement has a remaining term of approximately
two years and has a remaining aggregate minimum value of $1,731,000 as of May 3,
2003.
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 29,
2003 under the stock repurchase program. The extent and timing of repurchases
will
18
depend upon general business and market conditions, stock prices, availability
under the Revolving Credit Facility, compliance with certain restrictive
covenants and Finlay's cash position and requirements going forward. To date,
the Holding Company has repurchased 1,477,572 shares for $15.6 million.
In March 2002, Finlay implemented a new merchandising and inventory control
system and a point-of-sale system for its 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 May 3,
2003, 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 May 3, 2003 and February 1, 2003,
Finlay Jewelry had various open positions in futures contracts for gold totaling
59,000 and 4,000 fine troy ounces of gold, valued at $19.9 million and $1.4
million, respectively. 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 January 2000, Sonab, Finlay Jewelry's European leased jewelry
department subsidiary, 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. All of Sonab's employees, excluding those that were hired by the buyer,
were involuntary terminated, including sales associates, supervisors and
corporate personnel. 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 May 3, 2003, Finlay
Jewelry's exit plan has been completed with the exception of certain employee
litigation and other legal matters. To date, Finlay Jewelry has charged a total
of $26.4 million against its estimate of $27.2 million. 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 41% of Finlay's sales and 79% of its income from operations
for 2002, 2001 and 2000. 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.
19
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 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 or loss of certain host store relationships,
particularly with respect to May and Federated, due to the concentration of
sales generated by such host stores, the impact of any host store bankruptcy,
the impact of declining mall traffic levels, 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, the impact of fluctuations in gold and
diamond prices, Finlay Jewelry's continuation of its Gold Consignment Agreement,
Finlay Jewelry's compliance with applicable contractual covenants, the impact of
future claims and legal actions arising in the ordinary course of business, the
impact of recent accounting developments, 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. Based on the average amounts outstanding under the Revolving Credit
Agreement for 2002, a 100 basis point change in interest rates would have
resulted in an increase in interest expense of approximately $600,000 in 2002.
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, as described in Note 4 of Notes to Consolidated Financial
Statements.
20
The jewelry industry in general is affected by fluctuations in the prices
of precious metals and precious and semi-precious stones. The availability and
prices of gold, diamonds and other precious metals and precious and
semi-precious stones may be influenced by cartels, political instability in
exporting countries and inflation. Shortages of these materials or sharp changes
in their prices could have a material adverse effect on Finlay Jewelry's results
of operations or financial condition. 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 fair value of gold under the forward contracts was $20.1 million
at May 1, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of Finlay
Jewelry's management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of Finlay Jewelry's disclosure
controls and procedures. Based on that evaluation, the CEO and CFO have
concluded that Finlay Jewelry's disclosure controls and procedures are effective
to ensure that information required to be disclosed by Finlay Jewelry in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Commission rules
and forms. Subsequent to the date of their evaluation, there were no significant
changes in Finlay Jewelry's internal controls, or in other factors that could
significantly affect the internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
21
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
2 Not applicable.
3 Not applicable.
4 Not applicable.
10.1 Amendment No. 1, dated April 1, 2003, to the Holding Company's
Retirement Income Plan, as amended and restated February 2002.
10.2 Amendment No. 2, dated May 29, 2003, to the Holding Company's
Retirement Income Plan, as amended and restated February 2002.
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 pursuant to the
Sarbanes-Oxley Act of 2002, Section 906.
99.2 Certification of principal financial officer pursuant to the
Sarbanes-Oxley Act of 2002, Section 906.
B. REPORTS ON FORM 8-K
On April 1, 2003, Finlay Jewelry filed a Current Report on Form 8-K
providing information under Item 5 to announce the resignation of Thomas H. Lee
and Warren C. Smith, Jr. from the Holding Company's Board of Directors and the
sale by Mr. Lee and Mr. Smith, along with Thomas H. Lee Equity Partners, L.P.
and other affiliates, of all of their equity holdings of the Holding Company to
a private investor.
On April 18, 2003, Finlay Jewelry filed a Current Report on Form 8-K
furnishing information under Item 12 relating to the Holding Company's press
release announcing the Holding Company's adoption of new accounting guidance for
vendor allowances (EITF No. 02-16) retroactive to the beginning of
22
fiscal 2002 and that the Holding Company has changed its method of accounting
for such allowances going forward.
On May 14, 2003, Finlay Jewelry filed a Current Report on Form 8-K
furnishing information under Item 12 relating to the Holding Company's press
release announcing the Holding Company's sales for the quarter ended May 3,
2003.
On May 22, 2003, Finlay Jewelry filed a Current Report on Form 8-K
providing information under Item 5 relating to the Holding Company's press
release announcing the appointment of Richard E. Kroon to the Holding Company's
Board of Directors.
On May 30, 2003, Finlay Jewelry filed a Current Report on Form 8-K
furnishing information under Item 12 relating to the Holding Company's press
release reporting the Holding Company's financial results for the quarter ended
May 3, 2003.
23
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 13, 2003 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)
24
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;
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: June 13, 2003
/s/ Arthur E. Reiner
------------------------------------
Arthur E. Reiner
Chairman and Chief Executive Officer
25
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;
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: June 13, 2003
/s/ Bruce E. Zurlnick
-----------------------------
Bruce E. Zurlnick
Senior Vice President,
Treasurer and Chief Financial
Officer
26