FINLAY FINE JEWELRY CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended November 2, 2002
----------------

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to
--------- ---------

Commission File Number: 33-59380

FINLAY FINE JEWELRY CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 13-3287757
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

529 Fifth Avenue, New York, NY 10017
--------------------------------------- ----------
(Address of principal executive offices) (zip code)

(212) 808-2800
----------------------------------------------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X * No
------- ------

As of December 11, 2002, there were 1,000 shares of common stock, par value $.01
per share, of the Registrant outstanding. As of such date, all shares of common
stock were owned by the Registrant's parent, Finlay Enterprises, Inc., a
Delaware corporation.

*The Registrant is not subject to the filing requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934 and is voluntarily filing this Quarterly
Report on Form 10-Q.

FINLAY FINE JEWELRY CORPORATION

FORM 10-Q

QUARTERLY PERIOD ENDED NOVEMBER 2, 2002

INDEX

PAGE(S)
-------
PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

Consolidated Statements of Operations for the thirteen weeks and
thirty-nine weeks ended November 2, 2002 and November 3, 2001.......................1

Consolidated Balance Sheets as of November 2, 2002 and
February 2, 2002....................................................................3

Consolidated Statements of Changes in Stockholder's Equity for the year
ended February 2, 2002 and thirty-nine weeks ended November 2, 2002.................4

Consolidated Statements of Cash Flows for the thirteen weeks and
thirty-nine weeks ended November 2, 2002 and November 3, 2001.......................5

Notes to Consolidated Financial Statements..........................................7

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................................13

Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................21

Item 4. Controls and Procedures............................................................22

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
---------------------------------

NOVEMBER 2, NOVEMBER 3,
2002 2001
------------ ------------

Sales.................................................................... $ 168,359 $ 175,292
Cost of sales............................................................ 84,202 87,680
------------ -----------
Gross margin......................................................... 84,157 87,612
Selling, general and administrative expenses............................. 78,850 80,789
Depreciation and amortization............................................ 4,387 5,070
------------ -----------
Income (loss) from operations........................................ 920 1,753
Interest expense, net.................................................... 4,621 5,124
------------ -----------
Income (loss) before income taxes.................................... (3,701) (3,371)
Provision (benefit) for income taxes..................................... (1,684) (1,248)
------------ -----------
Net income (loss).................................................... $ (2,017) $ (2,123)
============ ===========

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 3,
2002 2001
--------------- --------------

Sales.................................................................... $ 542,854 $ 564,708
Cost of sales............................................................ 272,896 281,041
--------------- ---------------
Gross margin......................................................... 269,958 283,667
Selling, general and administrative expenses............................. 245,019 256,829
Depreciation and amortization............................................ 13,181 14,953
--------------- ---------------
Income (loss) from operations........................................ 11,758 11,885
Interest expense, net.................................................... 13,462 15,421
--------------- ---------------
Income (loss) before income taxes ................................... (1,704) (3,536)
Provision (benefit) for income taxes..................................... (1,245) (1,084)
--------------- ---------------
Net income (loss).................................................... $ (459) $ (2,452)
=============== ===============

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 2, FEBRUARY 2,
2002 2002
------------- -------------

ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 1,525 $ 49,222
Accounts receivable - department stores...................................... 34,443 17,505
Other receivables............................................................ 40,781 25,953
Merchandise inventories...................................................... 326,510 304,508
Prepaid expenses and other................................................... 4,040 2,351
------------- --------------
Total current assets...................................................... 407,299 399,539
------------- --------------
Fixed assets:
Equipment, fixtures and leasehold improvements............................... 127,227 119,743
Less - accumulated depreciation and amortization............................. 57,680 47,717
------------- --------------
Fixed assets, net......................................................... 69,547 72,026
------------- --------------
Deferred charges and other assets, net......................................... 20,736 20,811
Goodwill....................................................................... 91,046 91,046
------------- --------------
Total assets.............................................................. $ 588,628 $ 583,422
============= ==============

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Notes payable................................................................ $ 82,152 $ -
Accounts payable - trade..................................................... 77,976 132,156
Accrued liabilities:
Accrued salaries and benefits............................................. 19,557 19,369
Accrued miscellaneous taxes............................................... 5,465 6,521
Accrued interest.......................................................... 679 3,597
Other..................................................................... 14,433 13,496
Income taxes payable......................................................... 35,917 44,771
Deferred income taxes........................................................ 3,734 3,001
Due to parent................................................................ 3,152 3,294
------------- --------------
Total current liabilities................................................. 243,065 226,205
Long-term debt................................................................. 150,000 150,000
Other non-current liabilities.................................................. 15,849 13,621
------------- --------------
Total liabilities......................................................... 408,914 389,826
------------- --------------
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............................................................ 96,703 110,525
Accumulated other comprehensive income....................................... 36 96
------------- --------------
Total stockholder's equity................................................ 179,714 193,596
------------- --------------
Total liabilities and stockholder's equity................................ $ 588,628 $ 583,422
============= ==============

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 RETAINED OTHER TOTAL
NUMBER PAID- IN EARNINGS COMPREHENSIVE STOCKHOLDER'S
OF SHARES AMOUNT CAPITAL (DEFICIT) INCOME EQUITY
----------- -------- ----------- ------------ --------------- -------------

Balance, February 3, 2001........ 1,000 $ - $ 82,975 $ 96,448 $ - $ 179,423
Net income (loss).............. - - - 23,327 - 23,327
Fair value of gold forward
contracts at February 4, 2001 - - - - 24 24
Change in fair value of gold
forward contracts.......... - - - - 72 72
Dividends on common stock...... - - - (9,250) - (9,250)
----------- -------- ----------- ------------ --------------- -------------
Balance, February 2, 2002........ 1,000 - 82,975 110,525 96 193,596
Net income (loss).............. - - - (459) - (459)
Change in fair value of gold
forward contracts.......... - - - - (60) (60)
Dividends on common stock...... - - - (13,363) - (13,363)
----------- -------- ----------- ------------ --------------- -------------
Balance, November 2, 2002........ 1,000 $ - $ 82,975 $ 96,703 $ 36 $ 179,714
=========== ======== =========== ============ =============== =============

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 3,
2002 2001
------------ -------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................................................. $ (2,017) $ (2,123)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.................................................. 4,387 5,070
Amortization of deferred financing costs....................................... 242 257
Other, net..................................................................... 1,611 801
Changes in operating assets and liabilities:
Increase in accounts and other receivables.................................. (4,306) (5,964)
Increase in merchandise inventories......................................... (24,610) (17,247)
(Increase) decrease in prepaid expenses and other........................... (457) 196
Increase in accounts payable and accrued liabilities........................ 4,892 2,922
Increase (decrease) in due to parent........................................ 66 (1,945)
------------ -------------
NET CASH USED IN OPERATING ACTIVITIES.................................... (20,192) (18,033)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (2,684) (3,471)
Deferred charges and other, net................................................ 2 (525)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES.................................... (2,682) (3,996)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 156,645 155,073
Principal payments on revolving credit facility................................ (131,127) (129,837)
Capitalized financing costs.................................................... (187) -
Payment of dividends........................................................... (3,375) (3,375)
------------ -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............................. 21,956 21,861
------------ -------------
DECREASE IN CASH AND CASH EQUIVALENTS.................................... (918) (168)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 2,443 2,196
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 1,525 $ 2,028
============ =============
Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 7,383 $ 7,914
Income taxes paid.............................................................. 2,600 242

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 3,
2002 2001
------------ -------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................................................. $ (459) $ (2,452)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization.................................................. 13,181 14,953
Amortization of deferred financing costs....................................... 727 772
Other, net..................................................................... 2,472 2,195
Changes in operating assets and liabilities:
Increase in accounts and other receivables.................................. (31,766) (14,894)
Increase in merchandise inventories......................................... (22,002) (7,844)
Increase in prepaid expenses and other...................................... (1,689) (1,041)
Decrease in accounts payable and accrued liabilities........................ (65,149) (99,604)
Decrease in due to parent................................................... (6,274) (2,558)
------------ -------------
NET CASH USED IN OPERATING ACTIVITIES.................................... (110,959) (110,473)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, fixtures and leasehold improvements.................... (8,200) (9,694)
Deferred charges and other..................................................... (3,272) (3,626)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES.................................... (11,472) (13,320)
------------ -------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit facility........................................ 444,624 525,842
Principal payments on revolving credit facility................................ (362,472) (424,039)
Capitalized financing costs.................................................... (187) -
Payment of dividends........................................................... (7,231) (7,231)
------------ -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES.............................. 74,734 94,572
------------ -------------
DECREASE IN CASH AND CASH EQUIVALENTS.................................... (47,697) (29,221)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 49,222 31,249
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 1,525 $ 2,028
============ =============

Supplemental disclosure of cash flow information:
Interest paid.................................................................. $ 17,011 $ 17,542
Income taxes paid.............................................................. 8,508 12,111

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 2, 2002, and the
results of operations and cash flows for the thirteen weeks and thirty-nine
weeks ended November 2, 2002 and November 3, 2001. Due to the seasonal nature of
the business, results for interim periods are not indicative of annual results.
The unaudited consolidated financial statements have been prepared on a basis
consistent with that of the audited consolidated financial statements as of
February 2, 2002 referred to below. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission").

These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in
Finlay Jewelry's annual report on Form 10-K for the fiscal year ended February
2, 2002 ("Form 10-K") previously filed with the Commission.

Finlay Jewelry's fiscal year ends on the Saturday closest to January 31.
References to 1999, 2000, 2001 and 2002 relate to the fiscal years ending
January 29, 2000, February 3, 2001, February 2, 2002 and February 1, 2003,
respectively. Each of the fiscal years includes 52 weeks, except 2000 includes
53 weeks.

Finlay Jewelry recorded a tax provision based on an estimated annual income
tax rate. In addition, Finlay Jewelry has recognized an intraperiod tax benefit
as it has projected that there will be a profit in the fourth quarter and for
the fiscal year.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

MERCHANDISE INVENTORIES: Consolidated inventories are stated at the lower
of cost or market determined by the last-in, first-out ("LIFO") method. The cost
to Finlay of gold merchandise sold on consignment, which typically varies with
the price of gold, is not fixed until the merchandise is sold. Finlay at times
enters into futures contracts, such as forwards, based upon the anticipated
sales of gold product in order to hedge against the risk of gold price
fluctuations. At November 2, 2002, Finlay Jewelry had several open positions in
gold futures contracts totaling 36,500 fine troy ounces, valued at $11.6
million. At February 2, 2002, Finlay Jewelry had several open positions in gold
futures contracts totaling 17,500 fine troy ounces, valued at $4.8 million.

7

FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In 2001, Finlay Jewelry adopted Statement of Financial Accounting Standards
("SFAS") No.133, "Accounting for Derivative Instruments and Hedging Activities".
This Statement requires that all derivative instruments be recorded on the
balance sheet as either an asset or liability measured at its fair value. Finlay
Jewelry designated its derivative instruments, consisting of gold forward
contracts, as cash flow hedges. For derivative instruments designated as cash
flow hedges, the effective portion of the change in the fair value of the
derivative is recorded in accumulated other comprehensive income, a separate
component of stockholder's equity, and is reclassified into earnings when the
offsetting effects of the hedged transaction affects earnings. At February 2,
2002, the fair value of the gold forward contracts resulted in the recognition
of an asset of $160,500. The gain recorded in accumulated other comprehensive
income of $96,000, net of tax, was reclassified into earnings during 2002. At
November 2, 2002, the fair value of the gold forward contracts resulted in the
recognition of an asset of $60,300. The gain recorded in accumulated other
comprehensive income of $36,000, net of tax, will be reclassified into earnings
during the remainder of 2002.

Finlay Jewelry has documented all relationships between hedging instruments
and hedged items, as well as its risk management objectives and strategy for
undertaking various hedge transactions. Finlay Jewelry also assesses, both at
the hedge's inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in cash
flows of hedged items. Finlay Jewelry believes that the designated hedges will
be highly effective and that the related hedge accounting will not have a
material impact on Finlay Jewelry's results of operations.

COMPREHENSIVE INCOME: In 1998, Finlay Jewelry adopted SFAS No. 130,
"Reporting Comprehensive Income". This Statement requires disclosure of
comprehensive income, defined as the total of net income and all other non-owner
changes in equity, which under generally accepted accounting principles, are
recorded directly to the stockholder's equity section of the consolidated
balance sheet and, therefore, bypass net income. For 2002 and 2001, 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 2, 2002 and November 3, 2001, the comprehensive loss was $1.7 million
and $1.9 million, respectively. For the thirty-nine weeks ended November 2, 2002
and November 3, 2001, the comprehensive loss was $0.5 million and $2.1 million,
respectively.

GOODWILL: In 2002, Finlay Jewelry adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", which addresses the financial accounting and reporting
standards for acquired goodwill and other intangibles and supersedes APB No. 17,
Intangible Assets. The accounting standard requires that goodwill no longer be
amortized over its estimated useful life, but tested for impairment on an annual
basis. Goodwill will be tested for impairment between annual tests if an event
occurs which indicates goodwill may be impaired. Amortization of goodwill was
discontinued as of February 3, 2002. During the first quarter of 2002, an
impairment test was performed and Finlay Jewelry determined that there was no
impairment of goodwill. Further, there have been no events since the first
quarter of 2002 which would indicate that an impairment has occurred.

8

FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The following is a reconciliation of reported Net income (loss) adjusted to
reflect the impact of the discontinuance of goodwill amortization for the
thirteen weeks and thirty-nine weeks ended November 3, 2001. Finlay Jewelry's
actual Net income (loss) for the thirteen weeks and thirty-nine weeks ended
November 2, 2002 is shown for comparative purposes.

THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------- -------------------------------
NOVEMBER 2, NOVEMBER 3, NOVEMBER 2, NOVEMBER 3,
2002 2001 2002 2001
------------- ------------- -------------- -------------
(IN THOUSANDS)

NET INCOME (LOSS):
Reported net income (loss) .......................... $ (2,017) $ (2,123) $ (459) $ (2,452)
Add: Goodwill amortization ........................ - 939 - 2,817
Less: Tax impact of deductible goodwill ............. - 80 - (240)
------------- ------------- -------------- -------------
Adjusted net income (loss) .......................... $ (2,017) $ (1,264) $ (459) $ 125
============= ============= ============== =============

NOTE 3 - DESCRIPTION OF BUSINESS

Finlay is a retailer of fine jewelry products and operates leased fine
jewelry departments in department stores throughout the United States. Over the
past three fiscal years, the fourth quarter accounted for an average of 42% of
Finlay's sales due to the seasonality of the retail jewelry industry.
Approximately 47% of Finlay's sales in 2001 were from operations in The May
Department Stores Company ("May") and 22% in departments operated in store
groups owned by Federated Department Stores ("Federated").

NOTE 4 - SHORT AND LONG-TERM DEBT

Finlay's revolving credit agreement (the "Revolving Credit Agreement"),
which expires in March 2003, provides Finlay with a senior secured revolving
line of credit of up to $275.0 million, inclusive of a $50.0 million acquisition
facility, to finance working capital needs. Finlay is in the process of renewing
the Revolving Credit Agreement. There can be no assurances that a new revolving
credit facility will be executed on terms equal to or more favorable than the
expiring Revolving Credit Agreement, or that a new agreement can be completed at
all. Finlay would be adversely affected if it were unable to secure a new
revolving credit facility.

The 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
indentures relating to the Senior Debentures and Senior Notes are collectively
referred to as the "Senior Indentures".

9

FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - MERCHANDISE INVENTORIES

Merchandise inventories consisted of the following:

NOVEMBER 2, FEBRUARY 2,
2002 2002
---------------- ------------------
(IN THOUSANDS)

Jewelry goods - rings, watches and other fine jewelry
(first-in, first-out ("FIFO") basis).......................... $ 337,979 $ 314,473
Less: Excess of FIFO cost over LIFO
inventory value............................................... 11,469 9,965
---------------- ------------------
$ 326,510 $ 304,508
================ ==================

The LIFO method had the effect of increasing the loss before income taxes
for the thirteen weeks ended November 2, 2002 and November 3, 2001 by $589,000
and $989,000, respectively. The effect of applying the LIFO method for the
thirty-nine weeks ended November 2, 2002 and November 3, 2001 was to increase
the loss before income taxes by $1,505,000 and $1,983,000, respectively. Finlay
determines its LIFO inventory value by utilizing selected producer price indices
published for jewelry and watches by the Bureau of Labor Statistics.

Approximately $381,209,000 and $359,729,000 at November 2, 2002 and
February 2, 2002, respectively, of merchandise received on consignment has been
excluded from Merchandise inventories and Accounts payable-trade in the
accompanying Consolidated Balance Sheets.

Finlay Jewelry is party to an amended and restated gold consignment
agreement (as amended, the "Gold Consignment Agreement") which enables Finlay
Jewelry to receive consignment merchandise by providing gold, or otherwise
making payment, to certain vendors. While the merchandise involved remains
consigned, title to the gold content of the merchandise transfers from the
vendors to the gold consignor.

Effective September 30, 2002, Finlay Jewelry amended the Gold Consignment
Agreement to extend the term to July 31, 2005, and to permit Finlay Jewelry to
obtain up to the lesser of (i) 165,000 fine troy ounces or (ii) $50.0 million
worth of gold, subject to a formula as prescribed by the Gold Consignment
Agreement. In the event this arrangement is terminated or not renewed at the
maturity date, Finlay Jewelry would be required to return or repurchase the
outstanding gold at the prevailing gold rate in effect on that date. At November
2, 2002, amounts outstanding under the Gold Consignment Agreement totaled
121,600 fine troy ounces, valued at approximately $38.5 million. For financial
statement purposes, the consigned gold is not included in Merchandise
inventories on Finlay Jewelry's Consolidated Balance Sheets and, therefore, no
related liability has been recorded.

10

FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - LEASE AGREEMENTS

Finlay conducts all of its operations as leased departments in department
stores. All of these leases, as well as rentals for office space and equipment,
are accounted for as operating leases. A substantial number of such operating
leases expire on various dates through 2008. All references herein to leased
departments refer to departments operated pursuant to license agreements or
other arrangements with host department stores.

Substantially all of the department store leases provide that the title to
certain fixed assets of Finlay transfers upon termination of the leases, and
that Finlay will receive the undepreciated value of such fixed assets from the
host store in the event such transfers occur. The depreciation schedule provided
for in the lease may differ from that used for financial reporting purposes. The
values of such fixed assets are recorded at the inception of the lease
arrangement and are reflected in the accompanying Consolidated Balance Sheets.

In several cases, Finlay is subject to limitations under its lease
agreements with host department stores which prohibit Finlay from operating
departments for other store groups within a certain geographical radius of the
host store.

The store leases provide for the payment of fees based on sales, plus, in
some instances, installment payments for fixed assets. Only minimum fees, as
represented in the table below, are guaranteed by the lease agreements with host
department stores. Lease expense, included in Selling, general and
administrative expenses, is as follows:

THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
--------------------------------- ---------------------------------
NOVEMBER 2, NOVEMBER 3, NOVEMBER 2, NOVEMBER 3,
2002 2001 2002 2001
--------------- -------------- -------------- ---------------
(IN THOUSANDS)

Minimum fees.............. $ 603 $ 1,885 $ 1,876 $ 5,960
Contingent fees........... 27,354 26,879 88,013 86,982
--------------- -------------- -------------- ---------------
Total................... $ 27,957 $ 28,764 $ 89,889 $ 92,942
=============== ============== ============== ===============

NOTE 7 - SALE AND CLOSURE OF SONAB

During 1998, Societe Nouvelle d'Achat de Bijouterie - S.O.N.A.B. ("Sonab"),
Finlay Jewelry's European leased jewelry department subsidiary, began to
experience lower sales trends due to the transition from a promotional pricing
strategy to an everyday low price strategy. This change was made as a result of
Sonab reassessing its pricing policy following certain local French court
decisions. The adverse impact of such change continued through 1999. As a result
of the foregoing, on January 3, 2000, Sonab sold the majority of its assets for
approximately $9.9 million. After the sale, the buyer operated more than 80
locations previously included in Sonab's 130-location base in France. The
remaining departments were closed.

Finlay Jewelry recorded a pre-tax charge in the fourth quarter of 1999 of
$28.6 million. The charge included the write down of inventory and fixed assets,
employee payroll and severance costs, realization

11

FINLAY FINE JEWELRY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - SALE AND CLOSURE OF SONAB (CONTINUED)

of foreign exchange losses and other close-down costs. As of February 2, 2002,
Finlay Jewelry's exit plan was completed with the exception of certain employee
litigation and other legal matters. To date, Finlay Jewelry has charged a total
of approximately $26.0 million against its original estimate of $28.6 million.
All of Sonab's employees, excluding those that were hired by the buyer, were
involuntarily terminated, including sales associates, supervisors and corporate
personnel. Finlay Jewelry does not believe future operating results will be
materially impacted by any remaining payments.

NOTE 8 - STOCK REPURCHASE PROGRAM AND RESTRICTED STOCK

On December 1, 2000, the Holding Company announced that its Board of
Directors had approved a stock repurchase program to acquire up to $20 million
of outstanding Common Stock. The Holding Company may, at the discretion of
management, purchase its Common Stock, from time to time through September 29,
2003. The extent and timing of repurchases will depend upon general business and
market conditions, stock prices, availability under Finlay's revolving credit
facility, compliance with certain restrictive covenants and its cash position
and requirements going forward. The repurchase program may be modified, extended
or terminated by the Board of Directors at any time. During fiscal 2000 and
2001, the Holding Company repurchased a total of 599,330 shares for
approximately $5,367,000. For the thirty-nine weeks ended November 2, 2002, the
Holding Company repurchased an additional 595,962 shares for $6,744,000,
including (i) the repurchase of 526,562 shares for $5,792,000 from a
partnership, the managing partner of the general partner of which is also a
director of Finlay and (ii) the repurchase of an aggregate 50,000 shares for
$712,500 from a partnership and a trust affiliated with a director of Finlay and
certain other persons affiliated therewith.

On February 4, 2001, an executive officer of Finlay was issued 100,000
shares of Common Stock, subject to restrictions ("Restricted Stock"), pursuant
to a restricted stock agreement. The Restricted Stock becomes fully vested after
four years of continuous employment by Finlay and is accounted for as a
component of the Holding Company's stockholders' equity. Compensation expense of
approximately $1.2 million is being amortized over four years. Amortization for
both of the thirteen week and thirty-nine week periods ended November 2, 2002
and November 3, 2001 totaled $76,000 and $229,000, respectively.

NOTE 9 - STORE GROUP CLOSINGS

On February 8, 2001, Federated announced its plans to close its Stern's
division of which Finlay operated 23 departments. During March 2001, Finlay
closed two departments and the remaining 21 Stern's departments were closed
during the second quarter of 2001. Finlay recorded a charge of approximately
$1.0 million, during the first half of 2001, related to the write-off of fixed
assets and employee severance. During 2001, Federated acquired the Liberty House
department store chain. Finlay operated in all twelve of the Liberty House
department stores through mid-November 2001. Finlay recorded a charge of
approximately $150,000, during the fourth quarter of 2001, related to the
write-off of fixed assets and employee severance. During the thirty-nine weeks
ended November 2, 2002, sales were reduced by approximately $28.3 million
compared to the prior year as a result of the closings of Stern's, Liberty House
and another smaller host store group.

12

PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Finlay Jewelry's Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States.
These generally accepted accounting principles require management to make
estimates and assumptions that affect certain financial statement accounts
reported and disclosed at the date of the financial statements. Actual results
could differ from those estimates.

Certain of Finlay Jewelry's significant accounting policies are described
in Note 2 of Notes to Consolidated Financial Statements. Finlay believes that
the following discussion addresses the critical accounting policies, which are
those that are most important to the portrayal of Finlay Jewelry's financial
condition and results and require management's most difficult, subjective or
complex judgments. Finlay Jewelry is not aware of any likely events or
circumstances which would result in different amounts being reported that would
materially affect its financial condition or results of operations.

MERCHANDISE INVENTORIES

Finlay Jewelry values its inventories at the lower of cost or market. The
cost is determined by the last-in, first-out method utilizing selected producer
price indices published for jewelry and watches by the Bureau of Labor
Statistics. Factors related to inventories such as future consumer demand and
the economy's impact on consumer discretionary spending, inventory aging,
ability to return merchandise to vendors, merchandise condition and anticipated
markdowns are analyzed to determine estimated net realizable values. A provision
is recorded to reduce the cost of inventories, if required. Any significant
unanticipated changes in the factors above could have a significant impact on
the value of the inventories and Finlay Jewelry's reported operating results.

Finlay is exposed to market risk related to changes in the price of gold
and at times enters into futures contracts, such as forwards, to hedge against
the risk of gold price fluctuations. In 2001, Finlay adopted SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities", which requires
that all derivative instruments be recorded on the balance sheet as either an
asset or a liability measured at its fair value. Accounting for derivative
instruments under this pronouncement did not have a material impact on Finlay
Jewelry's financial condition, results of operations and cash flows for the
thirteen weeks and thirty-nine weeks ended November 2, 2002.

REVENUE RECOGNITION

Finlay Jewelry recognizes revenue upon the sale of merchandise, either
owned or consigned, to its customers, net of anticipated returns.

COVENANT REQUIREMENTS

Finlay Jewelry's agreements covering the Revolving Credit Agreement and
the Senior Notes each require that Finlay comply with certain restrictive and
financial covenants. In addition, Finlay Jewelry is party to the Gold
Consignment Agreement, which also contains certain covenants. As of and for the
thirty-nine weeks ended November 2, 2002, Finlay was in compliance with all of
its covenants.

13

Should Finlay's results of operations significantly erode, Finlay may not be in
compliance with its covenants. Although management believes that Finlay would be
able to obtain a waiver or amendment, if required, in the event that Finlay is
unable to obtain such waiver or amendment, the outstanding balances could become
due immediately.

EFFECT OF NEW ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives are no longer to be
amortized but tested for impairment on an annual basis. Goodwill will be tested
for impairment between annual tests if an event occurs which indicates goodwill
may be impaired. Finlay Jewelry adopted this pronouncement in 2002 and has
determined that there was no impairment of goodwill as of February 3, 2002.
Finlay Jewelry's annual goodwill amortization in 2001 totaled $3.7 million.

In October 2001, the FASB issued SFAS No. 144 "Accounting for Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This extends the
reporting requirements to include reporting separately as discontinued
operations components of an entity that have either been disposed of or
classified as held-for-sale. Finlay Jewelry has adopted the provisions of SFAS
No. 144 in 2002 and does not anticipate that such adoption will have a
significant effect on Finlay Jewelry's results of operations or financial
position.

ACCOUNTING STANDARDS NOT YET ADOPTED

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB No. 13, and Technical Corrections". This
statement amends certain existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. Additionally, the provisions provide that gains and losses
from debt-extinguishment are not automatically shown as an extraordinary item on
a company's statement of operations. The provisions of SFAS No. 145 are
effective for fiscal years beginning after May 15, 2002. The adoption of SFAS
No. 145 is not expected to have a material impact on the financial position or
results of operations of Finlay Jewelry.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities.
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. This statement
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS No.
146 is not expected to have a material impact on the financial position or
results of operations of Finlay Jewelry.

14

RESULTS OF OPERATIONS

The following table sets forth operating results as a percentage of sales for
the periods indicated:

STATEMENTS OF OPERATIONS DATA

THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------------------- -------------------------------
NOVEMBER 2, NOVEMBER 3, NOVEMBER 2, NOVEMBER 3,
2002 2001 2002 2001
------------- ------------- ------------- ------------

Sales............................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................... 50.0 50.0 50.3 49.8
------------- ------------- ------------- ------------
Gross margin................................. 50.0 50.0 49.7 50.2
Selling, general and administrative expenses..... 46.8 46.1 45.1 45.5
Depreciation and amortization.................... 2.6 2.9 2.4 2.6
------------- ------------- ------------- ------------
Income (loss) from operations................ 0.6 1.0 2.2 2.1
Interest expense, net............................ 2.7 2.9 2.5 2.7
------------- ------------- ------------- ------------
Income (loss) before income taxes............ (2.1) (1.9) (0.3) (0.6)
Provision (benefit) for income taxes............. (1.0) (0.7) (0.2) (0.2)
------------- ------------- ------------- ------------
Net income (loss)............................ (1.1)% (1.2)% (0.1)% (0.4)%
============= ============= ============= ============

THIRTEEN WEEKS ENDED NOVEMBER 2, 2002 COMPARED WITH THIRTEEN WEEKS ENDED
NOVEMBER 3, 2001

SALES. Sales for the thirteen weeks ended November 2, 2002, decreased $6.9
million, or 4.0%, over the comparable period in 2001. Comparable department
sales (departments open for the same months during comparable periods) decreased
1.6%. Management attributes this decrease in sales primarily due to the 2001
closing of two host store groups, which contributed approximately $5.0 million
of sales in the third quarter of 2001, and general softening in the retail
environment, offset by the net effect of new store openings and closings.

During the thirteen weeks ended November 2, 2002, Finlay opened 12
departments and had no closings. The openings were all within existing store
groups.

GROSS MARGIN. Gross margin for the period decreased by $3.5 million in 2002
compared to 2001, primarily as a result of the sales decrease. As a percentage
of sales, gross margin was the same as the prior year period.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") decreased $1.9 million, or 2.4%, due primarily
to lease fees associated with the decrease in Finlay Jewelry's sales and reduced
advertising expenditures. As a percentage of sales, SG&A increased 0.7% due to
the negative impact of payroll and other expenses on the lower sales volume.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$0.7 million, which reflects the discontinuance of goodwill amortization of
approximately $0.9 million and the effect of certain assets becoming fully
depreciated, offset by additional depreciation and amortization as a result of
capital expenditures and capitalized software costs for the most recent twelve
months.

INTEREST EXPENSE, NET. Interest expense decreased by $0.5 million primarily
due to a lower weighted average interest rate (6.8% for the 2002 period compared
to 7.0% for the comparable period in 2001)

15

and a decrease in average borrowings ($230.9 million for the period in 2002
compared to $247.4 million for the comparable period in 2001).

PROVISION (BENEFIT) FOR INCOME TAXES. The income tax provision for the 2002
and 2001 periods reflects an effective tax rate of 40.5% adjusted for certain
prior year income tax provisions no longer required and non-deductible goodwill
amortization in 2001.

NET INCOME (LOSS). The net loss of $2.0 million for the 2002 period was
$0.1 million lower as compared to the net loss in the prior period as a result
of the factors discussed above.

THIRTY-NINE WEEKS ENDED NOVEMBER 2, 2002 COMPARED WITH THIRTY-NINE WEEKS ENDED
NOVEMBER 3, 2001

SALES. Sales for the thirty-nine weeks ended November 2, 2002 decreased
$21.9 million, or 3.9%, over the comparable period in 2001. Comparable
department sales increased 0.3%, which management attributes to the general
softening in the retail environment during 2002. The decrease in total sales is
the result of the 2001 closing of three host store groups, which contributed
approximately $28.3 of sales in the thirty-nine weeks ended November 3, 2001
offset by the net effect of new store openings and closings.

During the thirty-nine weeks ended November 2, 2002, Finlay opened 20
departments and closed 13 departments. The openings and closings were all within
existing store groups.

GROSS MARGIN. Gross margin for the period decreased by $13.7 million,
primarily as a result of the sales decrease. As a percentage of sales, gross
margin decreased by 0.5% due to management's continued efforts to increase
market penetration and market share through its pricing strategy, as well as a
continued emphasis on clearance events.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A decreased $11.8 million,
or 4.6%, due primarily to payroll expense and lease fees associated with the
decrease in Finlay Jewelry's sales, in addition to reduced advertising
expenditures. SG&A as a percentage of sales decreased by 0.4%.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$1.8 million, reflecting the discontinuance of goodwill amortization of $2.8
million and the effect of certain assets becoming fully depreciated, offset by
additional depreciation and amortization as a result of capital expenditures and
capitalized software costs for the most recent twelve months.

INTEREST EXPENSE, NET. Interest expense decreased by $2.0 million primarily
due to a lower weighted average interest rate (7.0% for the 2002 period compared
to 7.5% for the comparable period in 2001) and a decrease in average borrowings
($213.9 million for the period in 2002 compared to $236.5 million for the
comparable period in 2001).

PROVISION (BENEFIT) FOR INCOME TAXES. The income tax provision for the 2002
and 2001 periods reflects an effective tax rate of 40.5% adjusted for certain
prior year income tax provisions no longer required and non-deductible goodwill
amortization in 2001.

NET INCOME (LOSS). The net loss of $0.5 million for the 2002 period was
$2.0 million lower than the net loss in the prior period as a result of the
factors discussed above.

16

LIQUIDITY AND CAPITAL RESOURCES

Finlay's primary capital requirements are for funding working capital for
new departments and for working capital growth of existing departments and, to a
lesser extent, capital expenditures for opening new departments, renovating
existing departments and information technology investments. For the thirty-nine
weeks ended November 2, 2002 and November 3, 2001, capital expenditures totaled
$8.2 million and $9.7 million, respectively. For 2002, capital expenditures are
estimated to be approximately $12.0 million and for 2001 totaled $13.9 million.
Although capital expenditures are limited by the terms of the Revolving Credit
Agreement, to date this limitation has not precluded 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 assure the collection of the sales proceeds from its host stores.
Additionally, on average, approximately 50% of Finlay's domestic merchandise has
been carried on consignment. Finlay Jewelry's working capital balance was $164.2
million at November 2, 2002, a decrease of $9.1 million from February 2, 2002.
The decrease resulted primarily from the impact of the interim net loss
(exclusive of depreciation and amortization), capital expenditures, additions to
deferred charges and the payment 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 $5.6 million, or 1.7%, as compared to November 3, 2001, as a
result of the closing of two host store groups and a continued monitoring of
inventory levels. During 2002, the reduced inventory levels favorably impacted
Finlay's outstanding borrowings under the Revolving Credit Agreement.

The Revolving Credit Agreement, which expires in March 2003, provides
Finlay with a line of credit of up to $275.0 million, inclusive of a $50.0
million acquisition facility, to finance working capital needs. Finlay is in the
process of renewing the Revolving Credit Agreement. There can be no assurances
that a new revolving credit facility will be executed on terms equal to or more
favorable than the expiring Revolving Credit Agreement, or that a new agreement
can be completed at all. Finlay would be adversely affected if it were unable to
secure a new revolving credit facility. Amounts outstanding under the Revolving
Credit Agreement bear interest at a rate equal to, at Finlay's option, (i) the
Index Rate (as defined in the Revolving Credit Agreement) plus a margin ranging
from zero to 1.0% or (ii) adjusted LIBOR plus a margin ranging from 1.0% to
2.0%, in each case depending on the financial performance of Finlay.

In each year, Finlay is required to reduce the outstanding revolving credit
balance and letter of credit balance under the Revolving Credit Agreement to
$50.0 million or less and $20.0 million or less, respectively, for a 30
consecutive day period (the "Balance Reduction Requirement"). Borrowings under
the Revolving Credit Agreement at November 2, 2002 were $82.2 million, compared
to a zero balance at February 2, 2002 and $101.8 million at November 3, 2001.
The average amounts outstanding under the Revolving Credit Agreement were $63.9
million and $86.5 million for the thirty-nine weeks ended

17

November 2, 2002 and November 3, 2001, respectively. The maximum amount
outstanding for the thirty-nine weeks ended November 2, 2002 was $99.8 million,
at which point the unused excess availability was $118.0 million, excluding the
acquisition facility.

Finlay's long-term needs for external financing will depend on its rate of
growth, the level of internally generated funds and the ability to continue
obtaining substantial amounts of merchandise on advantageous terms, including
consignment arrangements with its vendors. For 2001, Finlay had an average
balance of consignment merchandise of $377.4 million as compared to an average
balance of $372.9 million in 2000. As of November 2, 2002, $381.2 million of
consignment merchandise from approximately 300 vendors was on hand as compared
to $394.1 million at November 3, 2001.

A significant amount of Finlay's operating cash flow has been used or will
be required to pay interest, directly or indirectly, with respect to the Senior
Debentures, the Senior Notes and amounts due under the Revolving Credit
Agreement, including the payments required pursuant to the Balance Reduction
Requirement. As of November 2, 2002, Finlay Jewelry's outstanding borrowings
were $232.2 million, which included a $150.0 million balance under the Senior
Notes and an $82.2 million balance under the Revolving Credit Agreement. At
November 2, 2002, Finlay was in compliance with all of its covenants under the
Revolving Credit Agreement and the Senior Indentures.

Finlay Jewelry is party to the Gold Consignment Agreement which enables
Finlay Jewelry to receive consignment merchandise by providing gold, or
otherwise making payment, to certain vendors. While the merchandise involved
remains consigned, title to the gold content of the merchandise transfers from
the vendors to the gold consignor. Effective September 30, 2002, Finlay Jewelry
amended the Gold Consignment Agreement to extend the term to July 31, 2005, and
to permit Finlay Jewelry to obtain up to the lesser of (i) 165,000 fine troy
ounces or (ii) $50.0 million worth of gold, subject to a formula as prescribed
by the Gold Consignment Agreement. In the event this arrangement is terminated
or not renewed at the maturity date, Finlay Jewelry would be required to return
or repurchase the outstanding gold at the prevailing gold rate in effect on that
date. At November 2, 2002, amounts outstanding under the Gold Consignment
Agreement totaled 121,600 fine troy ounces, valued at approximately $38.5
million. The average amount outstanding under the Gold Consignment Agreement was
$36.7 million for the thirty-nine weeks ended November 2, 2002. At November 2,
2002, Finlay Jewelry was in compliance with the covenants under the Gold
Consignment Agreement.

The following tables summarize Finlay Jewelry's contractual and commercial
obligations which may have an impact on future liquidity and the availability of
capital resources, as of November 2, 2002 (dollars in thousands):

PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 1 - 3 YEARS 4 - 5 YEARS AFTER 5 YEARS
- ------------------------------- --------- ------------------ ------------- -------------- ----------------

Senior Notes (due 2008) (1)... $ 150,000 $ - $ - $ - $ 150,000
Operating leases (2).......... 19,346 3,263 6,481 6,407 3,195
--------- ------------------ ------------- ------------- ---------------
Total......................... $ 169,346 $ 3,263 $ 6,481 $ 6,407 $ 153,195
========= ================== ============= ============== ===============

- ------------------
(1) The Holding Company has $75.0 million of Senior Debentures due 2008
outstanding. Refer to Note 4 of Notes to Consolidated Financial Statements.

(2) Represents future minimum payments under noncancellable operating leases as
of February 2, 2002.

18

AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
OTHER COMMERCIAL ----------------------------------------------------------------------------------
COMMITMENTS TOTAL LESS THAN 1 YEAR 1 - 3 YEARS 4 - 5 YEARS AFTER 5 YEARS
- ------------------------------- --------- ------------------ ------------- -------------- ----------------

Revolving Credit
Agreement (due 2003) (1).. $ 82,152 $ 82,152 $ - $ - $ -
Gold Consignment
Agreement (due 2005)....... 38,535 - 38,535 - -
Letters of credit............. 7,250 2,000 5,250 - -
--------- ------------------ ------------- ------------- ---------------
Total......................... $127,937 $ 84,152 $ 43,785 $ - $ -
========= ================== ============= ============== ===============

- ------------------
(1) The outstanding balance on the Revolving Credit Agreement at December 9,
2002 was $80.7 million.

Finlay believes that, based upon current operations, anticipated growth,
and continued availability under the Revolving Credit Agreement, Finlay Jewelry
will, for the foreseeable future, be able to meet its debt service and
anticipated working capital obligations, and to make distributions to the
Holding Company sufficient to permit the Holding Company to meet its debt
service obligations and to pay certain other expenses as they come due. No
assurances, however, can be given that Finlay Jewelry's current level of
operating results will continue or improve or that Finlay Jewelry's income from
operations will continue to be sufficient to permit Finlay Jewelry and the
Holding Company to meet their debt service and other obligations. Currently,
Finlay Jewelry's principal financing arrangements restrict annual distributions
from Finlay Jewelry to the Holding Company to 0.25% of Finlay Jewelry's net
sales for the preceding fiscal year and also allow distributions to the Holding
Company to enable it to make interest payments on the Senior Debentures. Other
distributions, including those required to fund stock repurchases, are subject
to Finlay's satisfaction of certain restrictive covenants. The amounts required
to satisfy the aggregate of Finlay Jewelry's interest expense and required
amortization payments totaled $17.0 million and $17.5 million for the
thirty-nine week periods ended November 2, 2002 and November 3, 2001,
respectively.

In December 2000, the 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 depend upon general business and market conditions, stock prices,
availability under Finlay's revolving credit facility, compliance with certain
restrictive covenants and its cash position and requirements going forward. From
the inception of the program through November 2, 2002, the Holding Company has
repurchased 1,195,292 shares for $12.1 million.

In March 2002, Finlay implemented a new merchandising and inventory control
system and a point-of-sale system for Finlay's departments. These systems will
serve to support future growth of Finlay as well as provide improved analysis
and reporting capabilities and more timely sales and inventory information to
facilitate merchandising solutions. Additionally, these systems will provide the
foundation for future productivity and expense control initiatives. At November
2, 2002, a total of approximately $22.1 million has been expended for software
and implementation costs and is included in Deferred charges and other assets.

From time to time, Finlay enters into futures contracts, such as forwards,
based upon the anticipated sales of gold product in order to hedge against the
risk arising from its payment arrangements. At November 2, 2002, Finlay Jewelry
had several open positions in futures contracts for gold. There can be no
assurance that these hedging techniques will be successful or that hedging
transactions will not adversely affect Finlay Jewelry's results of operations or
financial position.

19

In February 2001, Federated announced its plans to close its Stern's
division of which Finlay operated 23 departments. During March 2001, Finlay
closed two departments and the remaining 21 Stern's departments were closed
during the second quarter of 2001. Finlay recorded a charge of approximately
$0.9 million, during the second quarter of 2001, related to the write-off of
fixed assets and employee severance. During 2001, Federated acquired the Liberty
House department store chain. Finlay operated in all twelve of the Liberty House
department stores through mid-November 2001. Finlay recorded a charge of
approximately $150,000, during the fourth quarter of 2001, related to the
write-off of fixed assets and employee severance. During the thirty-nine weeks
ended November 2, 2002, sales were reduced by approximately $28.3 million
compared to the prior year as a result of the department closings of Stern's,
Liberty House and another smaller host store group.

During 1998, Sonab, Finlay Jewelry's European leased jewelry department
subsidiary, began to experience lower sales trends due to the transition from a
promotional pricing strategy to an everyday low price strategy. This change was
made as a result of Sonab reassessing its pricing policy following certain local
French court decisions. The adverse impact of such change continued through
1999. As a result of the foregoing, on January 3, 2000, Sonab sold the majority
of its assets for approximately $9.9 million. After the sale, the buyer operated
more than 80 locations previously included in Sonab's 130-location base in
France. The remaining departments were closed. Finlay Jewelry recorded a pre-tax
charge in the fourth quarter of 1999 of $28.6 million. The charge included the
write down of inventory and fixed assets, employee payroll and severance costs,
realization of foreign exchange losses and other close-down costs. As of
February 2, 2002, Finlay Jewelry's exit plan was completed with the exception of
certain employee litigation and other legal matters. To date, Finlay Jewelry has
charged a total of approximately $26.0 million against its original estimate of
$28.6 million. All of Sonab's employees, excluding those that were hired by the
buyer, were involuntarily terminated, including sales associates, supervisors
and corporate personnel. Finlay Jewelry does not believe future operating
results or liquidity will be materially impacted by any remaining payments.

SEASONALITY

Finlay's business is highly seasonal, with a significant portion of its
sales and income from operations generated during the fourth quarter of each
year, which includes the year-end holiday season. The fourth quarter accounted
for an average of 42% of Finlay's sales and 77% of its income from operations
for 1999, 2000 and 2001, on a domestic basis. Finlay has typically experienced
net losses in the first three quarters of its fiscal year. During these periods,
working capital requirements have been funded by borrowings under the Revolving
Credit Agreement. Accordingly, the results for any of the first three quarters
of any given fiscal year, taken individually or in the aggregate, are not
indicative of annual results.

INFLATION

The effect of inflation on Finlay's results of operations has not been
material in the periods discussed.

20

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1993 and Section 21E
of the Securities Exchange Act of 1934 (the "Exchange Act"). All statements
other than statements of historical information provided herein are
forward-looking statements and may contain information about financial results,
economic conditions, trends and known uncertainties. The forward-looking
statements contained herein are subject to certain risks and uncertainties that
could cause actual results, performances or achievements to differ materially
from those reflected in, or implied by, the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed under "Management's Discussion and Analysis of Financial Condition and
Results of Operations", as well as trends in the general economy in the United
States, low or negative growth in the economy or in the financial markets which
reduce discretionary spending on goods perceived to be luxury items, attacks or
threats of attacks by terrorists or war which may negatively impact the economy
and/or the financial markets and reduce discretionary spending on such goods,
competition in the retail jewelry business, the seasonality of the retail
jewelry business, Finlay Jewelry's ability to increase comparable department
sales and to open new departments, Finlay Jewelry's dependence on certain host
store relationships due to the concentration of sales generated by such host
stores, the impact of any host store bankruptcy, the availability to Finlay
Jewelry of alternate sources of merchandise supply in the case of an abrupt loss
of any significant supplier, Finlay Jewelry's ability to continue to obtain
substantial amounts of merchandise on consignment, Finlay Jewelry's 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, Finlay Jewelry's dependence on key officers,
Finlay Jewelry's ability to integrate future acquisitions into its existing
business, Finlay Jewelry's high degree of leverage and the availability to
Finlay Jewelry of financing and credit on favorable terms and changes in
regulatory requirements which are applicable to Finlay Jewelry's business. Other
such factors include the ability of the Holding Company to complete the
repurchases contemplated under its stock repurchase program, the adequacy of
Finlay's working capital to complete the repurchases, the availability and
liquidity of the Holding Company's Common Stock, and overall market conditions
for the Holding Company's Common Stock.

Readers are cautioned not to rely on these forward-looking statements,
which reflect management's analysis, judgment, belief or expectation only as of
the date hereof. Finlay Jewelry undertakes no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof or to reflect the occurrence of unanticipated events. In
addition to the disclosure contained herein, readers should carefully review any
disclosure of risks and uncertainties contained in other documents Finlay
Jewelry files or has filed from time to time with the Commission pursuant to the
Exchange Act.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Finlay Jewelry is exposed to market risk through the interest rate on its
borrowings under the Revolving Credit Agreement, which has a variable interest
rate. In seeking to minimize the risks from interest rate fluctuations, Finlay
Jewelry manages exposures through its regular operating and financing
activities. In addition, the majority of Finlay Jewelry's borrowings are under
fixed rate arrangements. In addition, Finlay Jewelry is exposed to market risk
related to changes in the price of gold, and selectively uses forward contracts
to manage this risk. Finlay Jewelry enters into forward contracts for the
purchase of gold to hedge the risk of gold price fluctuations for future sales
of gold consignment merchandise. Finlay Jewelry does not enter into forward
contracts or other financial instruments for

21

speculation or trading purposes. The aggregate amount of forward contracts was
$11.6 million at November 2, 2002, which expire during 2002.

ITEM 4. CONTROLS AND PROCEDURES

Based upon an evaluation conducted by Finlay Jewelry's Chief Executive
Officer and Chief Financial Officer of Finlay Jewelry's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934) as of a date within 90 days of the filing date of this
Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial
Officer have concluded that Finlay Jewelry's disclosure controls and procedures
are effective to ensure that information required to be disclosed in the reports
that Finlay Jewelry files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods
specified in the Securities Exchange Commission's rules and forms.

There were no significant changes in Finlay Jewelry's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their most recent evaluation.

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A. EXHIBITS

2 Not applicable.

3 Not applicable.

4 Not applicable.

10 Second Amendment, dated September 30, 2002, to the Amended and
Restated Gold Consignment Agreement, dated March 30, 2001,
between Finlay Jewelry, eFinlay, Inc. and Sovereign Bank.

11 Not applicable.

15 Not applicable.

18 Not applicable.

19 Not applicable.

22 Not applicable.

23 Not applicable.

24 Not applicable.

22

99.1 Certification of principal executive officer and principal
financial officer pursuant to the Sarbanes-Oxley Act of 2002,
Section 906.

B. REPORTS ON FORM 8-K

None.

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: December 11, 2002 FINLAY FINE JEWELRY CORPORATION

By: /s/ Bruce E. Zurlnick
-------------------------------------
Bruce E. Zurlnick
Senior Vice President, Treasurer
and Chief Financial Officer
(As both a duly authorized officer of
Registrant and as principal financial
officer of Registrant)

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: December 11, 2002
/s/ Arthur E. Reiner
--------------------
Arthur E. Reiner
Chairman, President 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: December 11, 2002
/s/ Bruce E. Zurlnick
---------------------
Bruce E. Zurlnick
Senior Vice President, Treasurer
and Chief Financial Officer

26