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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 November 1, 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 December 10, 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
10-Q.
FINLAY FINE JEWELRY CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED NOVEMBER 1, 2003
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 1, 2003 and
November 2, 2002........ ..............................................1
Consolidated Balance Sheets as of November 1, 2003 and
February 1, 2003.......................................................3
Consolidated Statements of Changes in Stockholder's Equity for the
year ended February 1, 2003 and the thirty-nine weeks ended
November 1, 2003.......................................................4
Consolidated Statements of Cash Flows for the thirteen
weeks and thirty-nine weeks ended November 1, 2003 and
November 2, 2002.......................................................5
Notes to Consolidated Financial Statements.............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................16
Item 3. Quantitative and Qualitative Disclosures about Market Risk............26
Item 4. Controls and Procedures...............................................26
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................28
SIGNATURES..................................................................................30
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
----------------------------
NOVEMBER 2,
NOVEMBER 1, 2002
2003 (AS RESTATED)
----------- -----------
Sales ......................................... $ 174,933 $168,359
Cost of sales ................................. 85,467 80,462
--------- --------
Gross margin ............................... 89,466 87,897
Selling, general and administrative expenses .. 84,695 82,852
Depreciation and amortization ................. 4,991 4,387
--------- --------
Income (loss) from operations .............. (220) 658
Interest expense, net ......................... 4,230 4,621
--------- --------
Loss before income taxes ................... (4,450) (3,963)
Benefit for income taxes ...................... (1,737) (1,790)
--------- --------
Net loss ................................... $ (2,713) $ (2,173)
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
1
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
----------------------------
NOVEMBER 2,
NOVEMBER 1, 2002
2003 (AS RESTATED)
----------- -----------
Sales .......................................... $ 553,913 $ 542,854
Cost of sales .................................. 269,929 260,839
--------- ---------
Gross margin ................................ 283,984 282,015
Selling, general and administrative expenses ... 261,489 257,205
Depreciation and amortization .................. 13,710 13,181
--------- ---------
Income from operations ...................... 8,785 11,629
Interest expense, net .......................... 12,558 13,462
--------- ---------
Loss before income taxes and cumulative
effect of accounting change .......... (3,773) (1,833)
Benefit for income taxes ....................... (1,471) (1,297)
--------- ---------
Loss before cumulative effect of accounting
change ................................... (2,302) (536)
Cumulative effect of accounting change, net of
tax ...................................... -- (17,209)
--------- ---------
Net loss .................................... $ (2,302) $ (17,745)
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NOVEMBER 1, FEBRUARY 1,
2003 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 1,136 $ 68,485
Accounts receivable - department stores ...................... 36,411 19,985
Other receivables ............................................ 41,502 30,879
Merchandise inventories ...................................... 300,221 263,544
Prepaid expenses and other ................................... 5,835 3,237
Deferred income taxes ........................................ 9,475 9,858
-------- --------
Total current assets ....................................... 394,580 395,988
-------- --------
Fixed assets:
Building, equipment, fixtures and leasehold improvements ..... 128,801 120,946
Less--accumulated depreciation and amortization .............. 60,875 50,575
-------- --------
Fixed assets, net .......................................... 67,926 70,371
-------- --------
Deferred charges and other assets, net ......................... 18,441 21,170
Goodwill ....................................................... 91,046 91,046
-------- --------
Total assets ............................................... $571,993 $578,575
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings ........................................ $ 54,546 $ --
Accounts payable--trade ...................................... 69,027 113,275
Accrued liabilities:
Accrued salaries and benefits .............................. 18,155 17,734
Accrued miscellaneous taxes ................................ 5,561 6,841
Accrued interest ........................................... 6,909 3,733
Deferred income ............................................ 7,217 10,493
Other ...................................................... 15,956 14,450
Income taxes payable ......................................... 39,895 50,035
Due to parent ................................................ 9,167 5,467
-------- --------
Total current liabilities .................................. 226,433 222,028
Long-term debt ................................................. 150,000 150,000
Deferred income taxes .......................................... 21,165 18,527
Other non-current liabilities .................................. 85 204
-------- --------
Total liabilities .......................................... 397,683 390,759
-------- --------
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 ............................................ 90,659 104,786
Accumulated other comprehensive income ....................... 676 55
-------- --------
Total stockholder's equity ................................. 174,310 187,816
-------- --------
Total liabilities and stockholder's equity ................. $571,993 $578,575
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(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, net of tax -- -- -- -- (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 ..................... -- -- -- (2,302) -- (2,302)
Change in fair value of gold
forward contracts, net of tax -- -- -- -- 621 621
Dividends on common stock .... -- -- -- (11,825) -- (11,825)
----- - --------- --------- ----- ---------
Balance, November 1, 2003 ..... 1,000 $-- $ 82,975 $ 90,659 $ 676 $ 174,310
===== === ========= ========= ===== =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
------------------------------
NOVEMBER 2,
NOVEMBER 1, 2002
2003 (AS RESTATED)
------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................. $ (2,713) $ (2,173)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................. 4,991 4,387
Amortization of deferred financing costs .................. 206 242
Amortization of restricted stock compensation ............. 153 76
Non-current deferred income tax liabilities ............... 1,107 1,343
Other, net ................................................ 128 268
Changes in operating assets and liabilities:
Increase in accounts and other receivables ............... (9,123) (4,306)
Increase in merchandise inventories ...................... (35,430) (30,211)
Increase in prepaid expenses and other ................... (249) (457)
Increase in deferred income tax assets ................... (11) --
Increase in accounts payable and accrued liabilities ..... 24,857 10,457
Increase in deferred tax liabilities ..................... -- 192
Decrease in due to parent ................................ (2,128) (10)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES ................... (18,212) (20,192)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements (2,971) (2,684)
Deferred charges and other, net ........................... (23) 2
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................... (2,994) (2,682)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility ................... 155,925 156,645
Principal payments on revolving credit facility ........... (135,151) (131,127)
Capitalized financing costs ............................... -- (187)
Payment of dividends ...................................... -- (3,375)
--------- ---------
NET CASH PROVIDED FROM FINANCING ACTIVITIES ............. 20,774 21,956
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS ................... (432) (918)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .............. 1,568 2,443
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................. $ 1,136 $ 1,525
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ............................................. $ 739 $ 7,383
========= =========
Income taxes paid ......................................... $ 2,866 $ 2,600
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
FINLAY FINE JEWELRY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
---------------------------
NOVEMBER 2,
NOVEMBER 1, 2002
2003 (AS RESTATED)
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................. $ (2,302) $ (17,745)
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 ............................. 13,710 13,181
Amortization of deferred financing costs .................. 621 727
Amortization of restricted stock compensation ............. 305 229
Non-current deferred income tax liabilities ............... 2,638 2,240
Other, net ................................................ 542 232
Changes in operating assets and liabilities:
Increase in accounts and other receivables ............... (27,049) (31,766)
Increase in merchandise inventories ...................... (36,677) (17,739)
Increase in prepaid expenses and other ................... (2,713) (1,689)
Decrease in deferred income tax assets ................... 383 --
Decrease in accounts payable and accrued liabilities ..... (54,491) (70,016)
Increase in deferred tax liabilities ..................... -- 681
Decrease in due to parent ................................ (5,055) (6,503)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES ................... (110,088) (110,959)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements (8,001) (8,200)
Deferred charges and other, net ........................... -- (3,272)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................... (8,001) (11,472)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility ................... 462,409 444,624
Principal payments on revolving credit facility ........... (407,863) (362,472)
Capitalized financing costs ............................... (431) (187)
Payment of dividends ...................................... (3,375) (7,231)
--------- ---------
NET CASH PROVIDED FROM FINANCING ACTIVITIES ............. 50,740 74,734
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS ................... (67,349) (47,697)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .............. 68,485 49,222
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................... $ 1,136 $ 1,525
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ............................................. $ 8,761 $ 17,011
========= =========
Income taxes paid ......................................... $ 10,518 $ 8,508
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF ACCOUNTING AND PRESENTATION
The accompanying unaudited consolidated financial statements of Finlay Fine
Jewelry Corporation and its wholly owned subsidiaries ("Finlay Jewelry" or the
"Registrant"), a wholly owned subsidiary of Finlay Enterprises, Inc. (the
"Holding Company"), have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. References to "Finlay" mean collectively, the Holding Company and
Finlay Jewelry. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of Finlay Jewelry as of November 1, 2003, and the
results of operations and cash flows for the thirteen weeks and thirty-nine
weeks ended November 1, 2003 and November 2, 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 and thirty-nine
weeks ended November 2, 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.
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.
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 forward contracts 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
November 1, 2003 and February 1, 2003, Finlay Jewelry had several open positions
in gold forward contracts totaling 30,000 fine troy
7
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ounces and 4,000 fine troy ounces, respectively, to purchase gold for $10.5
million and $1.4 million, respectively.
VENDOR ALLOWANCES: Finlay Jewelry receives allowances from its vendors
through a variety of programs and arrangements, including cooperative
advertising. Vendor allowances are recognized as a reduction of cost of sales
upon the sale of merchandise 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 February 3, 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 thirty-nine weeks ended November 2, 2002 by $17.2
million, net of tax of $11.7 million. As of November 1, 2003 and February 1,
2003, deferred vendor allowances totaled (i) $16.4 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) $7.2 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 thirteen weeks and thirty-nine weeks ended November 2, 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 (in thousands):
THIRTEEN WEEKS THIRTY-NINE WEEKS
ENDED ENDED
NOVEMBER 2, NOVEMBER 2,
2002 2002
-------------- ----------------
Net loss, as previously reported ................... $ (2,017) $ (459)
Less: Cumulative effect of accounting change, net of
tax .............................................. -- (17,209)
Add: Impact on operating income, net of tax ........ (156) (77)
-------- --------
Net loss, as restated .............................. $ (2,173) $(17,745)
======== ========
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
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
8
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 November 1, 2003 and February 1, 2003, the
fair value of the gold forward contracts resulted in the recognition of an asset
of $1.1 million and $94,000, respectively. The amount recorded in accumulated
other comprehensive income at November 1, 2003 of $676,000, net of tax, is
expected to be reclassified into earnings during the remainder of 2003. The
amount recorded in accumulated other comprehensive income at February 1, 2003 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 did not 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.
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
options. As permitted by SFAS No. 123, Finlay has elected to continue to
recognize stock-based compensation for its stock option plans using the
intrinsic value method. Accordingly, no compensation expense has been recognized
for its stock option 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:
9
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------- ----------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
2003 2002 2003 2002
----------- ------------ ------------ ------------
(IN THOUSANDS)
Reported net loss ............................ $ (2,713) $ (2,173) $ (2,302) $(17,745)
Add: Stock-based compensation determined under
the fair value method, net of tax .......... (188) (196) (579) (592)
Deduct: Stock-based employee compensation
expense included in reported net loss,
net of tax ................................. 94 46 187 140
-------- -------- -------- --------
Pro forma net loss ........................... $ (2,807) $ (2,323) $ (2,694) $(18,197)
======== ======== ======== ========
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 November 1, 2003 and November 2, 2002, the comprehensive loss,
calculated as the total of the net loss plus the change in fair value of Finlay
Jewelry's outstanding gold forward contracts, was $2.6 million and $2.0 million,
respectively. For the thirty-nine weeks ended November 1, 2003 and November 2,
2002 the comprehensive loss was $1.7 million and $17.8 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. The adoption of SFAS No. 150 did 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").
10
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 November 1, 2003, $54.5 million was outstanding under this facility. The
average amounts outstanding under the Revolving Credit Agreement were $42.3
million and $63.9 million for the thirty-nine weeks ended November 1, 2003 and
November 2, 2002, respectively. The maximum amount outstanding for the
thirty-nine weeks ended November 1, 2003 was $73.5 million at which point the
unused excess availability was $142.3 million.
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
NOVEMBER 1, FEBRUARY 1,
Merchandise inventories consisted of the following: 2003 2003
------------- --------------
(IN THOUSANDS)
Jewelry goods rings, watches and other fine jewelry
(first-in, first-out ( FIFO ) basis) ............ $314,326 $275,339
Less: Excess of FIFO cost over LIFO inventory value 14,105 11,795
-------- --------
$300,221 $263,544
======== ========
In accordance with EITF 02-16, merchandise inventories have been reduced by
$16.4 million and $18.5 million at November 1, 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 taxes
for the thirteen weeks ended November 1, 2003 and November 2, 2002 by $0.8
million and $0.6 million, respectively. The LIFO method had the effect of
increasing the loss before taxes for the thirty-nine weeks ended November 1,
2003 and November 2, 2002 by $2.3 million and $1.4 million, 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 $381,760,000 and $359,676,000 at November 1, 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.
11
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - MERCHANDISE INVENTORIES (CONTINUED)
Finlay Jewelry's Gold Consignment Agreement matures on July 31, 2005, and
permits Finlay Jewelry to consign 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 the gold or purchase the outstanding
gold at the prevailing gold rate in effect on that date. At November 1, 2003 and
February 1, 2003, amounts outstanding under the Gold Consignment Agreement
totaled 127,921 and 134,785 fine troy ounces, respectively, valued at
approximately $49.4 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.
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 THIRTY-NINE WEEKS ENDED
--------------------------- ---------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
2003 2002 2003 2002
------------ ----------- ------------ -----------
(IN THOUSANDS)
Minimum fees ...... $ 355 $ 603 $ 1,137 $ 1,876
Contingent fees ... 28,669 27,354 90,595 88,013
------- ------- ------- -------
Total ........... $29,024 $27,957 $91,732 $89,889
======= ======= ======= =======
12
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 November 1, 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. No changes have occurred during
the thirty-nine weeks ended November 1, 2003.
NOTE 8 - STOCK REPURCHASE PROGRAM AND RESTRICTED STOCK AWARDS
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 stock repurchase program has been extended from
time to time and, on June 19, 2003, the Holding Company's Board of Directors
approved the repurchase of an additional $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, 2004. 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
thirty-nine weeks ended November 1, 2003 and November 2, 2002, the Holding
Company repurchased 370,238 shares and 595,962 shares for $5,018,000 and
$6,744,000, 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. Compensation expense of approximately $1.2 million is being amortized
over four years. Amortization for the thirteen week periods ended November 1,
2003 and November 2, 2002 totaled $76,000. Amortization for the thirty-nine week
periods ended November 1, 2003 and November 2, 2002 totaled $229,000.
On August 14, 2003, an executive officer of Finlay was issued an
additional 50,000 shares of Restricted Stock, pursuant to a restricted stock
agreement. The Restricted Stock vests fifty percent on January 31, 2005, with
the remaining fifty percent vesting on June 30, 2007, subject to the provisions
of the restricted stock agreement, and is accounted for as a component of the
Holding Company's stockholders' equity. Compensation expense of approximately
$774,000 is being amortized over the respective vesting periods. Amortization
for the thirteen week and thirty-nine week periods ended November 1, 2003
totaled $78,000.
13
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCK REPURCHASE PROGRAM AND RESTRICTED STOCK AWARDS (CONTINUED)
On October 31, 2003, certain executives of Finlay were awarded a total of
31,250 shares of Restricted Stock, pursuant to restricted stock agreements. 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 with respect to unamortized restricted stock compensation.
However, such shares are not considered outstanding. Compensation expense of
approximately $473,000 is being amortized over four years.
NOTE 9 - EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION AND STOCK PURCHASE PLANS
On April 16, 2003, the Board of Directors of the Holding Company
adopted the Executive Deferred Compensation and Stock Purchase Plan and the
Director Deferred Compensation and Stock Purchase Plan, which was approved by
the Holding Company's stockholders on June 19, 2003 (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. As of November 1, 2003, 5,292 restricted stock units have
been awarded under the New Plans.
NOTE 10 - STORE GROUP AND DEPARTMENT CLOSINGS
On August 26, 2003, the Holding Company announced that Federated will
not renew Finlay's lease in the Burdine's department store division due to the
planned consolidation of the Burdine's and Macy's fine jewelry departments in
2004. The termination of the lease, which expires January 31, 2004, will result
in the closure of 46 Finlay departments in the Burdine's division. In fiscal
2002, Finlay generated approximately $50 million in sales from the Burdine's
departments. In 2003, Finlay estimates recording charges amounting to
approximately $1.5 million for closing costs associated with the accelerated
depreciation of fixed assets and severance, excluding the non-cash charge for
the write-down of goodwill resulting from the department closings. During the
third quarter of 2003, Finlay recorded charges of approximately $690,000
relating to the accelerated depreciation of fixed assets and severance.
On July 30, 2003, May announced its intention to divest 32 Lord & Taylor
stores, as well as two other stores in its Famous-Barr division. Finlay
currently operates the jewelry departments in each of
14
FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - STORE GROUP AND DEPARTMENT CLOSINGS (CONTINUED)
these locations, with the exception of one department which closed during the
third quarter of 2003 and two departments which closed during the fourth quarter
of 2003. In fiscal 2002, Finlay generated approximately $17 million in sales
from these 34 departments. At this time, May has not announced a specific
timeline for when these stores will close. However, Finlay estimates recording
charges during 2003 and 2004 amounting to approximately $1.5 million for closing
costs associated with the accelerated depreciation of fixed assets and severance
from the date of the announcement through the estimated dates of the store
closings, excluding the non-cash charge for the write-down of goodwill resulting
from the department closings. During the third quarter of 2003, Finlay recorded
charges of approximately $264,000 relating to the accelerated depreciation of
fixed assets and severance.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
From time to time, Finlay is involved in litigation relating to claims
arising out of its operations in the normal course of business. As of December
10, 2003, Finlay is not a party to any legal proceedings that, individually or
in the aggregate, are reasonably expected to have a material adverse effect on
Finlay's business, results of operations, financial condition or cash flows.
However, the results of these matters cannot be predicted with certainty, and an
unfavorable resolution of one or more of these matters could have a material
adverse effect on Finlay's business, results of operations, financial condition
or cash flows.
Finlay Jewelry has not provided any third-party financial guarantees as of
November 1, 2003.
15
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 forward contracts 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 Finlay Jewelry's
financial condition, results of operations and cash flows for the thirteen weeks
and thirty-nine weeks ended November 1, 2003.
VENDOR ALLOWANCES
Finlay Jewelry receives allowances from its vendors through a variety of
programs and arrangements, including cooperative advertising. Vendor allowances
are recognized as a reduction of cost of sales upon the sale of merchandise 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.
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").
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 thirty-nine weeks ended November 2, 2002 by $17.2
million, net of tax of $11.7 million. As of November 1, 2003 and February 1,
2003, deferred vendor allowances totaled (i) $16,353,000 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) $7,217,000 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 and thirty-nine weeks ended November 1, 2003.
Previously reported results for the thirteen weeks and thirty-nine weeks ended
November 2, 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 for impairment 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
thirty-nine weeks ended November 1, 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 lenders
17
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 did not have a material 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. The adoption of SFAS No. 150 did not have
a material impact on Finlay Jewelry's results of operations, financial position
or cash flows.
18
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 THIRTY-NINE WEEKS ENDED
-------------------------- ---------------------------
NOVEMBER 2, NOVEMBER 2,
NOVEMBER 1, 2002 NOVEMBER 1, 2002
2003 (AS RESTATED) 2003 (AS RESTATED)
----------- ------------- ------------ ------------
Sales............................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................... 48.9 47.8 48.7 48.1
--------- --------- --------- ---------
Gross margin.................................. 51.1 52.2 51.3 51.9
Selling, general and administrative expenses..... 48.4 49.2 47.2 47.4
Depreciation and amortization.................... 2.8 2.6 2.5 2.4
--------- --------- --------- ---------
Income (loss) from operations................. (0.1) 0.4 1.6 2.1
Interest expense, net............................ 2.4 2.7 2.3 2.5
--------- --------- --------- ---------
Loss before income taxes and
cumulative effect of accounting change...... (2.5) (2.3) (0.7) (0.4)
Benefit for income taxes......................... (1.0) (1.0) (0.3) (0.3)
--------- --------- --------- ---------
Loss before cumulative effect of
accounting change.......................... (1.5) (1.3) (0.4) (0.1)
Cumulative effect of accounting change, net of tax - - - (3.2)
--------- --------- --------- ---------
Net loss...................................... (1.5)% (1.3)% (0.4)% (3.3)%
========= ========= ========= =========
THIRTEEN WEEKS ENDED NOVEMBER 1, 2003 COMPARED WITH THIRTEEN WEEKS ENDED
NOVEMBER 2, 2002
SALES. Sales for the thirteen weeks ended November 1, 2003, increased $6.6
million, or 3.9%, over the comparable period in 2002. Comparable department
sales (departments open for the same months during comparable periods) increased
3.1%. Management attributes this increase in sales primarily to emphasizing its
"Key Item" and "Best Value" merchandising programs, which provide a targeted
assortment of items at competitive prices.
During the thirteen weeks ended November 1, 2003, Finlay opened 22
departments and closed one department. The openings and closing were all within
existing store groups.
GROSS MARGIN. Gross margin for the period increased by $1.6 million in 2003
compared to 2002, and as a percentage of sales, gross margin decreased by 1.1%.
Gross margin was impacted by successful promotional events in the quarter, which
positively affected sales, but negatively affected margin. The decrease also
reflected a higher LIFO provision coupled with an increase in gold prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $1.8 million,
or 2.2% due primarily to payroll expense and lease fees associated with the
increase in Finlay Jewelry's sales. As a percentage of sales, SG&A decreased
0.8% due to the favorable leveraging of payroll and other expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $0.6
million reflecting additional depreciation and amortization as a result of
capital expenditures for the most recent twelve months, offset by the effect of
certain assets becoming fully depreciated. In addition, accelerated depreciation
costs associated with the Burdine's and Lord & Taylor store closings totaling
approximately $0.7 million were recorded in the period.
19
INTEREST EXPENSE, NET. Interest expense decreased by $0.4 million primarily
due to a decrease in average borrowings ($203.5 million for the period in 2003
compared to $230.9 million for the comparable period in 2002). The weighted
average interest rate was approximately 6.9% for the 2003 period compared to
6.8% for the comparable period in 2002.
BENEFIT FOR INCOME TAXES. The income tax 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.
NET LOSS. Net loss of $2.7 million for the 2003 period represents an
increase of $0.5 million as compared to the net loss in the prior period as a
result of the factors discussed above.
THIRTY-NINE WEEKS ENDED NOVEMBER 1, 2003 COMPARED WITH THIRTY-NINE WEEKS ENDED
NOVEMBER 2, 2002
SALES. Sales for the thirty-nine weeks ended November 1, 2003 increased
$11.1 million, or 2.0%, over the comparable period in 2002. Comparable
department sales increased 1.6%. Management attributes this increase in sales
primarily to emphasizing its "Key Item" and "Best Value" merchandising programs,
which provide a targeted assortment of items at competitive prices.
During the thirty-nine weeks ended November 1, 2003, Finlay opened 31
departments and closed 18 departments. The openings and closings were all within
existing store groups.
GROSS MARGIN. Gross margin for the period increased by $2.0 million, in 2003
compared to 2002, and as a percentage of sales, gross margin decreased by 0.6%.
The decrease primarily reflected a higher LIFO provision coupled with an
increase in gold prices and a continued promotional environment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $4.3 million,
or 1.7%, due primarily to payroll expense and lease fees associated with the
increase in Finlay Jewelry's sales. SG&A as a percentage of sales decreased by
0.2%.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$0.5 million due to additional depreciation and amortization as a result of
capital expenditures for the most recent twelve months, offset by the effect of
certain assets becoming fully depreciated. In addition, accelerated depreciation
costs associated with the Burdine's and Lord & Taylor store closings totaling
approximately $0.7 million were recorded in the period.
INTEREST EXPENSE, NET. Interest expense decreased by $0.9 million primarily
due to a decrease in average borrowings ($192.3 million for the period in 2003
compared to $213.9 million for the comparable period in 2002). The weighted
average interest rate was approximately 7.3% for the 2003 period compared to
7.0% for the comparable period in 2002.
BENEFIT FOR INCOME TAXES. The income tax benefit for the 2003 and 2002
periods reflects an effective tax rate 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.
20
NET LOSS. The net loss of $2.3 million for the 2003 period represents a
decrease of $15.4 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 thirty-nine
weeks ended November 1, 2003 and November 2, 2002, capital expenditures totaled
$8.0 million and $8.2 million, respectively. For 2002, capital expenditures
totaled $12.5 million and for 2003 are estimated to be approximately $12.0
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 $168.1
million at November 1, 2003, a decrease of $5.8 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 $5.4 million, or 1.8%, as compared to November 2, 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 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 3.3% and 3.9% for the thirty-nine weeks ended
November 1, 2003 and November 2, 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 November 1, 2003 were $54.5 million, compared
to a zero balance at February 1, 2003 and $82.2 million at November 2, 2002. The
average amounts outstanding under the Revolving Credit Agreement were $42.3
million and $63.9 million for the thirty-nine weeks ended November 1, 2003 and
November 2, 2002, respectively. The maximum amount outstanding for the
21
thirty-nine weeks ended November 1, 2003 was $73.5 million, at which point the
unused excess availability was $139.1 million. At November 1, 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 November 1, 2003, $381.8 million of
consignment merchandise from approximately 300 vendors was on hand as compared
to $381.2 million at November 2, 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 November 1, 2003, Finlay Jewelry's outstanding borrowings
were $204.5 million, which included a $150.0 million balance under the Senior
Notes and a $54.5 million balance under the Revolving Credit Agreement. At
November 1, 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.
Finlay Jewelry's Gold Consignment Agreement matures on July 31, 2005 and
permits Finlay to consign 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 November 1, 2003, amounts outstanding under the Gold
Consignment Agreement totaled 127,921 fine troy ounces, valued at approximately
$49.4 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 the gold or purchase 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 November 1, 2003, Finlay Jewelry was in
compliance with all of its covenants under the Gold Consignment Agreement.
22
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 November 1, 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) . $ 54,546 $ 4,546 $ -- $50,000 $ --
Gold Consignment
Agreement (due 2005) ..... 49,409 -- 49,409 -- --
Letters of credit .......... 8,950 8,700 -- -- 250
-------- ------- ------- ------- ------
Total ...................... $112,905 $13,246 $49,409 $50,000 $ 250
======== ======= ======= ======= ======
- ----------
(1) The outstanding balance on the Revolving Credit Agreement at December 1,
2003 was $86.6 million.
Finlay has not created, and is not party to, any off-balance sheet entities
for the purpose of raising capital, incurring debt or operating Finlay's
business. Finlay does not have any arrangements or relationships with entities
that are not consolidated into the financial statements that are reasonably
likely to materially affect Finlay's liquidity or the availability of capital
resources.
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 $8.8 million and $17.0 million for the thirty-nine week
periods ended November 1, 2003 and November 2, 2002, respectively. As a result
of the retail calendar closing date for the third quarter of 2003, the
semi-annual interest payment with respect to the Senior Notes totaling $6.3
million was paid in the fourth quarter of 2003, whereas the third quarter of
2002 included such payment.
23
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
fourteen months and has a remaining aggregate minimum value of $1,244,000 as of
November 1, 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 stock repurchase program has been extended from
time to time and, on June 19, 2003, the Holding Company's Board of Directors
approved the repurchase of an additional $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, 2004 under the stock
repurchase program. 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. As of November 1, 2003,
the Holding Company has repurchased 1,703,000 shares for $18.8 million.
From time to time, Finlay enters into forward contracts based upon the
anticipated sales of gold product in order to hedge against the risk arising
from its payment arrangements. At November 1, 2003 and February 1, 2003, Finlay
Jewelry had various open positions in forward contracts for gold totaling 30,000
and 4,000 fine troy ounces of gold, to purchase gold for $10.5 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 November 1, 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. No changes have occurred during the
thirty-nine weeks ended November 1, 2003.
On August 26, 2003, the Holding Company announced that Federated will not
renew Finlay's lease in the Burdine's department store division due to the
planned consolidation of the Burdine's and Macy's fine jewelry departments in
2004. The termination of the lease, which expires January 31, 2004, will result
in the closure of 46 Finlay departments in the Burdine's division. In fiscal
2002, Finlay generated approximately $50 million in sales from the Burdine's
departments. In 2003, Finlay estimates recording charges amounting to
approximately $1.5 million for closing costs associated with the accelerated
depreciation of fixed assets and severance, excluding the non-cash charge for
the write-down of goodwill resulting from the department closings. During the
third quarter of 2003, Finlay recorded charges of approximately $690,000
relating to the accelerated depreciation of fixed assets and severance.
On July 30, 2003, May announced its intention to divest 32 Lord & Taylor
stores, as well as two other stores in its Famous-Barr division. Finlay
currently operates the jewelry departments in each of these locations, with the
exception of one department which closed during the third quarter of 2003 and
two departments which closed during the fourth quarter of 2003. In fiscal 2002,
Finlay generated approximately $17 million in sales from these 34 departments.
At this time, May has not announced a
24
specific timeline for when these stores will close. However, Finlay estimates
recording charges during 2003 and 2004 amounting to approximately $1.5 million
for closing costs associated with the accelerated depreciation of fixed assets
and severance from the date of the announcement through the estimated dates of
the store closings, excluding the non-cash charge for the write-down of goodwill
resulting from the department closings. During the third quarter of 2003, Finlay
recorded charges of approximately $264,000 relating to the accelerated
depreciation of fixed assets and severance.
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.
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
25
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.
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 $11.6 million
at November 1, 2003.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of Finlay Jewelry's most recently completed fiscal quarter
covered by this report, Finlay Jewelry carried out an evaluation 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 pursuant to Securities
Exchange Act Rule 13a-15. Based upon that evaluation, Finlay Jewelry's CEO and
CFO concluded that Finlay Jewelry's disclosure controls and procedures are
effective in ensuring that material financial and non-financial 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 the Commission's rules and forms.
26
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no changes in Finlay Jewelry's internal controls over
financial reporting that occurred during Finlay Jewelry's last fiscal quarter to
which this report relates that have materially affected, or are reasonably
likely to materially affect, Finlay Jewelry's internal controls over financial
reporting.
27
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
2 Not applicable.
3.2 Second Amendment, dated as of September 10, 2003, to the Amended and
Restated By-Laws of Finlay Jewelry.
3 Not applicable.
4 Not applicable.
10.1 Fourth Amendment, dated as of July 6, 2003, among Sovereign Bank, as
agent and a bank, Sovereign Precious Metals, LLC, Finlay Jewelry and
eFinlay, Inc., to the Amended and Restated Gold Consignment Agreement
dated as of March 30, 2001, as amended.
10.2 Restricted Stock Agreement, dated as of August 14, 2003, between the
Holding Company and Arthur E. Reiner.
10.3 Form of Restricted Stock Agreement entered into by the Holding
Company, in connection with October 2003 awards of restricted stock.
10.4 Form of 2003 Deferral Agreement under the Holding Company's Director
Deferred Compensation and Stock Purchase Plan.
10.5 Form of 2003 Deferral Agreement under the Holding Company's Executive
Deferred Compensation and Stock Purchase Plan.
11 Not applicable.
15 Not applicable.
18 Not applicable.
19 Not applicable.
22 Not applicable.
23 Not applicable.
24 Not applicable.
31.1 Certification of principal executive officer pursuant to the
Sarbanes-Oxley Act of 2002, Section 302.
31.2 Certification of principal financial officer pursuant to the
Sarbanes-Oxley Act of 2002, Section 302.
28
32.1 Certification of principal executive officer pursuant to the
Sarbanes-Oxley Act of 2002, Section 906.
32.2 Certification of principal financial officer pursuant to the
Sarbanes-Oxley Act of 2002, Section 906.
B. REPORTS ON FORM 8-K
On November 6, 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 third quarter and the
nine months ended November 1, 2003.
On November 20, 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 third quarter
and the nine months ended November 1, 2003.
29
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 10, 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)
30