**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

**forthe quarterly period ended October 29, 2005**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

**forthe transition periodfrom                to                .**

**COMMISSIONFILE NUMBER: 1-32315**

**NEW YORK & COMPANY, INC.**

(Exact name of registrantas specified in its charter)

| **DELAWARE**                                                    | ** ** | **33-1031445**                                               |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------|
| (State of  incorporation)                                       |       | (I.R.S. Employer  Identification No.)                        |
| **450 West 33rd Street   5th Floor   New York, New York 10001** | ** ** | **(212) 884-2000**                                      |
| (Address of  Principal Executive Offices,   including Zip Code) |       | (Registrant’s  Telephone Number,   Including Area Code) |

 

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

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o  No x

Indicate by check markwhether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o  No x

Asof November 25, 2005, the registrant had 54,343,861 shares of commonstock outstanding.

 

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**TABLE OF CONTENTS**
| PART I.   FINANCIAL  INFORMATION | 2                                                                                            |
|-------------------------------------------------|----------------------------------------------------------------------------------------------|
| Item 1.                                         | Financial Statements                                                                         | 2 |
| Item  2.                                        | Management’s Discussion and  Analysis of Financial Condition and Results of  Operations | 11 |
| Item  3.                                        | Quantitative and Qualitative  Disclosures About Market Risk                                  | 20 |
| Item  4.                                        | Controls and Procedures                                                                      | 20 |
| PART II.   OTHER  INFORMATION    | 21                                                                                           |
| Item 1.                                         | Legal Proceedings                                                                            | 21 |
| Item 1a.                                        | Risk Factors                                                                                 | 21 |
| Item  2.                                        | Unregistered Sales of Equity  Securities and Use of Proceeds                                 | 21 |
| Item  3.                                        | Defaults Upon Senior  Securities                                                             | 21 |
| Item  4.                                        | Submission of Matters to a  Vote of Security Holders                                         | 21 |
| Item 5.                                         | Other Information                                                                            | 21 |
| Item 6.                                         | Exhibits                                                                                     | 21 |

 

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**CAUTIONARYNOTE REGARDINGFORWARD-LOOKING STATEMENTS AND RISK FACTORS**

**(CautionaryStatements Under the Private Securities Litigation Reform Act of 1995)**

This quarterly report on Form 10-Qincludes forward-looking statements. Some of these statements can beidentified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,”“expect,” “continue,” “could,” “may,” “plan,” “project,” “predict” and similarexpressions, and include references to assumptions that the Company believesare reasonable and relate to its future prospects, developments and businessstrategies.

Factorsthat could cause the Company’s actual results to differ materially from thoseexpressed or implied in such forward-looking statements include, but arenot limited to:

·       theCompany’s ability to open and operate stores successfully;

·       seasonalfluctuations in the Company’s business;

·       theCompany’s ability to anticipate and respond to fashion trends and launch newproduct lines successfully;

·       generaleconomic conditions, consumer confidence and spending patterns;

·       theCompany’s dependence on mall traffic for its sales;

·       thesusceptibility of the Company’s business to extreme and/or unseasonable weatherconditions;

·       theCompany’s ability to retain and recruit key personnel;

·       theCompany’s reliance on third parties to manage some aspects of its business;

·       changesin the cost of raw materials, distribution services or labor;

·       theCompany’s reliance on foreign sources of production;

·       thepotential impact of natural disasters and health concerns relating to outbreaksof widespread diseases, particularly on manufacturing operations of the Company’svendors;

·       theability of the Company’s manufacturers to manufacture and deliver products in atimely manner while meeting the Company’s quality standards;

·       theCompany’s ability to successfully integrate the newly acquired Jasmine Company, Inc.business into the Company’s existing business;

·       theCompany’s reliance on manufacturers to maintain ethical business practices;

·       theCompany’s ability to protect its trademarks and other intellectual propertyrights;

·       theCompany’s dependence on the success of its brand;

·       competitionin the Company’s market, including promotional and pricing competition;

·       theCompany’s reliance on the effective use of customer information;

·       theeffects of government regulation;

·       thecontrol of the Company by its sponsors; and

·       risksand uncertainties as described in the Company’s documents filed with the UnitedStates Securities and Exchange Commission, including its Annual Report on Form 10-K,as filed on April 19, 2005.

The Company undertakes noobligation to revise the forward-looking statements included in thisquarterly report on Form 10-Q to reflect any future events orcircumstances. The Company’s actual results, performance or achievements coulddiffer materially from the results expressed or implied by these forward-lookingstatements.

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**PART I.FINANCIAL INFORMATION**

**ITEM 1.**   FINANCIALSTATEMENTS

**New York & Company, Inc. andSubsidiariesCondensed ConsolidatedStatements of Operations(Unaudited)**

| ** **                                                                                   | ** ** | **Three Months  Ended  October 29,  2005**                               | ** ** | **Three Months  Ended  October 30,  2004** | ** ** | **Nine Months  Ended  October 29,  2005** | ** ** | **Nine Months  Ended  October 30,  2004** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **(Amounts in thousands, except per share amounts)** | ** ** |
| Net sales                                                                                    |       |                                                                               | $          | 254,388                                              |       |                                                |       | $                                                   | 242,264    |   |   |   | $ | 778,944 |   |   |   | $ | 737,183 |   |   |
| Cost of goods sold, buying and occupancy costs                                               |       |                                                                               | 179,896    |                                                 |       |                                                | 156,759    |                                                |       |   | 524,124 |   |   |   | 479,715 |   |   |
| Gross profit                                                                                 |       |                                                                               | 74,492     |                                                 |       |                                                | 85,505     |                                                |       |   | 254,820 |   |   |   | 257,468 |   |   |
| Selling, general and administrative expenses                                                 |       |                                                                               | 65,830     |                                                 |       |                                                | 67,156     |                                                |       |   | 187,034 |   |   |   | 194,028 |   |   |
| Operating income                                                                             |       |                                                                               | 8,662      |                                                 |       |                                                | 18,349     |                                                |       |   | 67,786 |   |   |   | 63,440 |   |   |
| Interest expense, net of interest income of $337,  $197, $1,313, and $588, respectively |       |                                                                               | 1,675      |                                                 |       |                                                | 3,008      |                                                |       |   | 4,385 |   |   |   | 7,686 |   |   |
| Accrued dividends-redeemable preferred stock                                                 |       |                                                                               | —     |                                                 |       |                                                | —     |                                                |       |   | — |   |   |   | 2,703 |   |   |
| Loss on modification and extinguishment of debt                                              |       |                                                                               | —     |                                                 |       |                                                | 1,682      |                                                |       |   | — |   |   |   | 2,034 |   |   |
| Loss on derivative instrument (related to  LFAS, Inc. warrant)                          |       |                                                                               | —     |                                                 |       |                                                | 12,630     |                                                |       |   | — |   |   |   | 29,398 |   |   |
| Income before income taxes                                                                   |       |                                                                               | 6,987      |                                                 |       |                                                | 1,029      |                                                |       |   | 63,401 |   |   |   | 21,619 |   |   |
| Provision for income taxes                                                                   |       |                                                                               | 2,833      |                                                 |       |                                                | 5,659      |                                                |       |   | 25,517 |   |   |   | 22,192 |   |   |
| Net income (loss)                                                                            |       |                                                                               | $          | 4,154                                                |       |                                                |       | $                                                   | (4,630     | ) |   |   | $ | 37,884 |   |   |   | $ | (573 | ) |   |
| Basic earnings  (loss) per share:                                                            |       |                                                                               | $          | 0.08                                                 |       |                                                |       | $                                                   | (0.10      | ) |   |   | $ | 0.70 |   |   |   | $ | (0.01 | ) |   |
| Diluted earnings  (loss) per share:                                                          |       |                                                                               | $          | 0.07                                                 |       |                                                |       | $                                                   | (0.10      | ) |   |   | $ | 0.66 |   |   |   | $ | (0.01 | ) |   |
| Weighted average  shares outstanding:                                                        |       |                                                                               |       |                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Basic                                                                                        |       |                                                                               | 54,297     |                                                 |       |                                                | 47,488     |                                                |       |   | 53,764 |   |   |   | 45,505 |   |   |
| Diluted                                                                                      |       |                                                                               | 57,675     |                                                 |       |                                                | 47,488     |                                                |       |   | 57,182 |   |   |   | 45,505 |   |   |

 

See accompanying notes.

2

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**New York & Company, Inc. andSubsidiariesCondensed ConsolidatedBalance Sheets**

 

| ** **                                                                                                                                  | ** ** | **October 29,  2005**                                                            | ** ** | **January 29,  2005** | ** ** | **October 30,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                  | ** ** | **(Unaudited)**                                                                       | ** ** | **(Audited)**              | ** ** | **(Unaudited)**            | ** ** |
| ** **                                                                                                                                  | ** ** | **(Amounts in thousands,   except per share  amounts)** | ** ** |
| **Assets**                                                                                                                                  |       |                                                                                  |       |                       |       |                       |       |   |   |   |   |   |   |
| Current assets:                                                                                                                             |       |                                                                                  |       |                       |       |                       |       |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                                                   |       |                                                                                  | $          | 30,027                     |       |                       |       | $ | 85,161 |   |   |   | $ | 33,285 |   |   |
| Accounts receivable                                                                                                                         |       |                                                                                  | 21,642     |                       |       |                       | 13,069     |   |   |   | 16,574 |   |   |
| Inventories, net                                                                                                                            |       |                                                                                  | 136,772    |                       |       |                       | 93,379     |   |   |   | 108,316 |   |   |
| Prepaid expenses                                                                                                                            |       |                                                                                  | 16,466     |                       |       |                       | 17,875     |   |   |   | 21,948 |   |   |
| Other current assets                                                                                                                        |       |                                                                                  | 3,088      |                       |       |                       | 1,256      |   |   |   | 1,522 |   |   |
| Total current  assets                                                                                                                       |       |                                                                                  | 207,995    |                       |       |                       | 210,740    |   |   |   | 181,645 |   |   |
| Property and equipment, net                                                                                                                 |       |                                                                                  | 154,338    |                       |       |                       | 100,681    |   |   |   | 96,099 |   |   |
| Goodwill and  intangible assets                                                                                                             |       |                                                                                  | 41,024     |                       |       |                       | 14,843     |   |   |   | 14,515 |   |   |
| Other assets                                                                                                                                |       |                                                                                  | 2,887      |                       |       |                       | 3,924      |   |   |   | 4,652 |   |   |
| Total assets                                                                                                                                |       |                                                                                  | $          | 406,244                    |       |                       |       | $ | 330,188 |   |   |   | $ | 296,911 |   |   |
| **Liabilities  and stockholders’ equity**                                                                                              |       |                                                                                  |       |                       |       |                       |       |   |   |   |   |   |   |
| Current liabilities:                                                                                                                        |       |                                                                                  |       |                       |       |                       |       |   |   |   |   |   |   |
| Accounts payable                                                                                                                            |       |                                                                                  | $          | 84,762                     |       |                       |       | $ | 74,045 |   |   |   | $ | 64,738 |   |   |
| Accrued expenses                                                                                                                            |       |                                                                                  | 53,350     |                       |       |                       | 51,802     |   |   |   | 50,418 |   |   |
| Income taxes payable                                                                                                                        |       |                                                                                  | 730        |                       |       |                       | —     |   |   |   | — |   |   |
| Deferred income taxes                                                                                                                       |       |                                                                                  | 586        |                       |       |                       | 1,788      |   |   |   | 1,108 |   |   |
| Total current  liabilities                                                                                                                  |       |                                                                                  | 139,428    |                       |       |                       | 127,635    |   |   |   | 116,264 |   |   |
| Long-term debt                                                                                                                              |       |                                                                                  | 75,000     |                       |       |                       | 75,000     |   |   |   | 75,000 |   |   |
| Deferred income  taxes                                                                                                                      |       |                                                                                  | 2,282      |                       |       |                       | 6,698      |   |   |   | 6,696 |   |   |
| Deferred rent and  other liabilities                                                                                                        |       |                                                                                  | 34,591     |                       |       |                       | 17,572     |   |   |   | 14,335 |   |   |
| Total liabilities                                                                                                                           |       |                                                                                  | 251,301    |                       |       |                       | 226,905    |   |   |   | 212,295 |   |   |
| Commitments and contingencies                                                                                                               |       |                                                                                  | —     |                       |       |                       | —     |   |   |   | — |   |   |
| Stockholders’  equity:                                                                                                                 |       |                                                                                  |       |                       |       |                       |       |   |   |   |   |   |   |
| Common stock, voting, par value $0.001; 300,000  shares authorized; 54,324, 53,283, and 52,594 shares issued and outstanding,  respectively |       |                                                                                  | 54         |                       |       |                       | 53         |   |   |   | 53 |   |   |
| Additional paid-in capital                                                                                                                  |       |                                                                                  | 123,223    |                       |       |                       | 109,448    |   |   |   | 108,088 |   |   |
| Retained earnings (deficit)                                                                                                                 |       |                                                                                  | 32,370     |                       |       |                       | (5,514     | ) |   |   | (23,525 | ) |   |
| Accumulated other comprehensive loss                                                                                                        |       |                                                                                  | (704       | )                          |       |                       | (704       | ) |   |   | — |   |   |
| Total  stockholders’ equity                                                                                                            |       |                                                                                  | 154,943    |                       |       |                       | 103,283    |   |   |   | 84,616 |   |   |
| Total liabilities and  stockholders’ equity                                                                                            |       |                                                                                  | $          | 406,244                    |       |                       |       | $ | 330,188 |   |   |   | $ | 296,911 |   |   |

 

See accompanying notes.

3

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**New York & Company, Inc. andSubsidiariesCondensed ConsolidatedStatements of Cash Flows(Unaudited)**

| ** **                                                                                                | ** ** | **Nine Months  Ended  October 29,  2005** | ** ** | **Nine Months  Ended  October 30,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **(Amounts in thousands)**                | ** ** |
| **Operating activities**                                                                                  |       |                                                |       |                                                |       |   |   |   |   |
| Net income (loss)                                                                                         |       |                                                | $          | 37,884                                              |       |   |   | $ | (573 | ) |   |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating  activities: |       |                                                |       |                                                |       |   |   |   |   |
| Depreciation and amortization                                                                             |       |                                                | 17,638     |                                                |       |   | 13,985 |   |   |
| Amortization / write-off of deferred financing costs                                                      |       |                                                | 866        |                                                |       |   | 3,016 |   |   |
| Share-based compensation                                                                                  |       |                                                | 803        |                                                |       |   | 5,698 |   |   |
| Deferred income taxes                                                                                     |       |                                                | (5,618     | )                                                   |       |   | 9,775 |   |   |
| Changes in  operating assets and liabilities:                                                             |       |                                                |       |                                                |       |   |   |   |   |
| Accounts receivable                                                                                       |       |                                                | (8,573     | )                                                   |       |   | (5,708 | ) |   |
| Inventories, net                                                                                          |       |                                                | (39,606    | )                                                   |       |   | (30,096 | ) |   |
| Prepaid expenses                                                                                          |       |                                                | 1,430      |                                                |       |   | (7,040 | ) |   |
| Accounts payable                                                                                          |       |                                                | 8,703      |                                                |       |   | 16,967 |   |   |
| Accrued expenses                                                                                          |       |                                                | 1,488      |                                                |       |   | (3,073 | ) |   |
| Income taxes payable                                                                                      |       |                                                | 730        |                                                |       |   | (10,118 | ) |   |
| Other assets and liabilities                                                                              |       |                                                | 15,442     |                                                |       |   | (747 | ) |   |
| Net cash provided  by (used in) operating activities                                                      |       |                                                | 31,187     |                                                |       |   | (7,914 | ) |   |
| **Investing  activities**                                                                                 |       |                                                |       |                                                |       |   |   |   |   |
| Acquisition of  Jasmine Company, Inc., net of cash acquired of $1,261                                |       |                                                | (21,350    | )                                                   |       |   | — |   |   |
| Capital  expenditures                                                                                     |       |                                                | (68,566    | )                                                   |       |   | (42,825 | ) |   |
| Net cash used in  investing activities                                                                    |       |                                                | (89,916    | )                                                   |       |   | (42,825 | ) |   |
| **Financing  activities**                                                                                 |       |                                                |       |                                                |       |   |   |   |   |
| Net proceeds from  initial public offering                                                                |       |                                                | —     |                                                |       |   | 105,400 |   |   |
| Payment of  offering costs related to initial public offering                                             |       |                                                | —     |                                                |       |   | (3,071 | ) |   |
| Proceeds from  issuance of long-term debt                                                                 |       |                                                | —     |                                                |       |   | 150,000 |   |   |
| Repayment of  Jasmine Company, Inc. debt acquired                                                         |       |                                                | (1,327     | )                                                   |       |   | — |   |   |
| Repayment of  other long-term debt                                                                        |       |                                                | —     |                                                |       |   | (157,500 | ) |   |
| Repurchase common  stock warrant                                                                          |       |                                                | —     |                                                |       |   | (36,271 | ) |   |
| Payment of  financing costs                                                                               |       |                                                | —     |                                                |       |   | (4,046 | ) |   |
| Redemption of  Series A preferred stock                                                              |       |                                                | —     |                                                |       |   | (69,696 | ) |   |
| Tax benefit from  exercise of stock options                                                               |       |                                                | 4,679      |                                                |       |   | 281 |   |   |
| Other financing  activities                                                                               |       |                                                | 243        |                                                |       |   | 129 |   |   |
| Net cash provided  by (used in) financing activities                                                      |       |                                                | 3,595      |                                                |       |   | (14,774 | ) |   |
| Net decrease in cash and cash equivalents                                                                 |       |                                                | (55,134    | )                                                   |       |   | (65,513 | ) |   |
| Cash and cash  equivalents at beginning of period                                                         |       |                                                | 85,161     |                                                |       |   | 98,798 |   |   |
| Cash and cash equivalents at end of period                                                                |       |                                                | $          | 30,027                                              |       |   |   | $ | 33,285 |   |   |
| **Supplemental  disclosure of non-cash financing activities**                                             |       |                                                |       |                                                |       |   |   |   |   |
| Issuance of common stock  for the acquisition of Jasmine Company, Inc.                               |       |                                                | $          | 8,050                                               |       |   |   | $ | — |   |   |

 

See accompanying notes.

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**New York & Company, Inc. Notes to Condensed ConsolidatedFinancial StatementsOctober 29, 2005(Unaudited)**

**1.**   Organizationand Basis of Presentation

New York and Company, Inc.(together with its subsidiaries, collectively the “Company”) is a leading specialtyretailer of fashion-oriented, moderately-priced women’s apparel. The Companydesigns and sources its proprietary branded *NewYork & CompanyTM* merchandise sold exclusively through itsnational network of retail stores. The target customers for the Company’s *New York & CompanyTM* merchandiseare fashion-conscious, value-sensitive women between the ages of 25 and45 with annual household incomes ranging from $40,000 to $75,000. On July 19,2005, the Company acquired Jasmine Company, Inc. (“JasmineSola”), a Boston-based,privately held women’s retailer of upscale and contemporary apparel, footwearand accessories sold through its chain of *JasmineSolaTM* branded retail stores. As of October 29,2005, the Company operated 523 retail stores in 45 states,including 16 JasmineSola stores. Trademarks referenced in this quarterly reporton Form 10-Q appear in italic type and are the property of New Yorkand Company, Inc. or its subsidiaries.

The accompanyingconsolidated financial statements include the accounts for New York &Company, Inc. and all of its subsidiaries, including Lerner New YorkHolding, Inc. (“Lerner Holding”), Lerner New York, Inc., Lernco, Inc.,Nevada Receivable Factoring, Inc., and JasmineSola. The Company’sconsolidated financial statements include JasmineSola’s results of operationsand cash flows from July 19, 2005 (date of acquisition) to October 29,2005. All significant intercompany balances and transactions have beeneliminated in consolidation. Certain amounts in prior periods have been reclassifiedto conform to the current period presentation.

The consolidated financialstatements as of October 29, 2005 and October 30, 2004 andfor the thirteen-weeks (“three months”) and thirty-nine weeks (“nine months”)ended October 29, 2005 and October 30, 2004 are unaudited andare presented pursuant to the rules and regulations of the United StatesSecurities and Exchange Commission (“SEC”). Accordingly, these unauditedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and notes thereto for the fiscal yearended January 29, 2005, which were filed with the Company’s Annual Reporton Form 10-K with the SEC on April 19, 2005. In the opinion ofmanagement, the accompanying consolidated financial statements reflect alladjustments, which are of a normal recurring nature, necessary to presentfairly the financial condition, results of operations and cash flows for theinterim periods. The terms “fiscal year 2005” and “fiscal year 2004” includedherein refer to the Company’s fiscal year ending January 28, 2006 and thefiscal year ended January 29, 2005, respectively.

Due to seasonal variationsin the retail industry, the results of operations for any interim period arenot necessarily indicative of the results expected for the full fiscal year.

**2.**   Acquisition

On July 19, 2005, theCompany entered into a Stock Purchase Agreement to acquire all of theoutstanding common stock of JasmineSola for $22.5 million in cash and350,000 shares of New York & Company, Inc. common stock,$0.001 par value, valued at $8.1 million based upon the closing stockprice of New York & Company, Inc. on July 19, 2005. Thepurchase price is subject to a post-closing adjustment based on JasmineSola’sworking capital, long-term indebtedness and certain other liabilities as of theacquisition date, and acquisition fees and expenses. This post-closingadjustment, if any, has not yet been determined. In addition, the Company willissue up to 200,000 shares of its common stock as additional 

5

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considerationfor the acquisition of JasmineSola contingent upon the achievement of certainearnings targets over the three full fiscal years following the acquisition.These contingent shares, if issued, will be recorded as an adjustment to thepurchase price and goodwill.

Thepurchase price allocation has been prepared on a preliminary basis and changesto this preliminary allocation are expected no later than July 18, 2006,as additional information concerning asset and liability valuations arefinalized. The preliminary allocation resulted in goodwill and indefinite livedintangible assets of $26.2 million. The following table sets forth proformafinancial data for the three months ended October 30, 2004 and the ninemonths ended October 29, 2005 and October 30, 2004 to giveeffect to the acquisition as if it had been consummated as of February 1,2004:

| ** **                            | ** ** | ** Three Months   Ended  October 30,  2004  Proforma**         | ** ** | ** Nine Months   Ended  October 29,  2005   Proforma** | ** ** | ** Nine Months   Ended  October 30,  2004  Proforma** | ** ** |
|---------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **(Amounts in thousands, except per share amounts)** | ** ** |
| Net sales                             |       |                                                                               | $          | 247,264                                                                    |       |                                                                      |       | $ | 790,698 |   |   |   | $ | 750,703 |   |   |
| Net income (loss)                     |       |                                                                               | $          | (4,487                                                                     | )          |                                                                      |       | $ | 38,673 |   |   |   | $ | 34 |   |   |
| Basic earnings (loss)  per share:     |       |                                                                               | $          | (0.09                                                                      | )          |                                                                      |       | $ | 0.72 |   |   |   | $ | — |   |   |
| Diluted earnings (loss)  per share:   |       |                                                                               | $          | (0.09                                                                      | )          |                                                                      |       | $ | 0.67 |   |   |   | $ | — |   |   |
| Weighted average shares  outstanding: |       |                                                                               |       |                                                                       |       |                                                                      |       |   |   |   |   |   |   |
| Basic                                 |       |                                                                               | 47,838     |                                                                       |       |                                                                      | 53,983     |   |   |   | 45,855 |   |   |
| Diluted                               |       |                                                                               | 47,838     |                                                                       |       |                                                                      | 57,401     |   |   |   | 51,761 |   |   |

 

The calculation of dilutedearnings per share for the nine months ended October 29,2005 excludes options to purchase 144,279 shares due to their antidilutiveeffect as the options’ exercise price exceeded the average market price of thecommon stock. The calculation of diluted loss per share for the three monthsended October 30, 2004 excludes 4,195,494 shares due to theirantidilutive effect.

**3.**   EarningsPer Share

Basic earnings pershare are computed by dividing net income by the weighted average number ofshares of common stock outstanding for the period. Diluted earnings per shareare calculated based on the weighted average number of shares of common stock outstandingplus the dilutive effect of stock options and the common stock warrant as ifthey were exercised. A reconciliation between basic and diluted earnings pershare is as follows:

| ** **                           | ** ** | **Three Months  Ended  October 29,  2005**                               | ** ** | **Three Months  Ended  October 30,  2004** | ** ** | **Nine Months  Ended  October 29,  2005** | ** ** | **Nine Months  Ended  October 30,  2004** | ** ** |
|--------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **(Amounts in thousands, except per share amounts)** | ** ** |
| Net income (loss)                    |       |                                                                               | $          | 4,154                                                |       |                                                |       | $                                                   | (4,630     | ) |   |   | $ | 37,884 |   |   |   | $ | (573 | ) |   |
| *Basic Earnings (Loss) Per Share*    |       |                                                                               |       |                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Weighted-average shares outstanding: |       |                                                                               |       |                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Basic shares of common stock         |       |                                                                               | 54,297     |                                                 |       |                                                | 47,488     |                                                |       |   | 53,764 |   |   |   | 45,505 |   |   |
| Basic earnings (loss) per share      |       |                                                                               | $          | 0.08                                                 |       |                                                |       | $                                                   | (0.10      | ) |   |   | $ | 0.70 |   |   |   | $ | (0.01 | ) |   |
| *Diluted Earnings (Loss) Per Share*  |       |                                                                               |       |                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Weighted-average shares outstanding: |       |                                                                               |       |                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Basic shares of common stock         |       |                                                                               | 54,297     |                                                 |       |                                                | 47,488     |                                                |       |   | 53,764 |   |   |   | 45,505 |   |   |
| Plus impact of stock options         |       |                                                                               | 3,378      |                                                 |       |                                                | —     |                                                |       |   | 3,418 |   |   |   | — |   |   |
| Diluted shares of common stock       |       |                                                                               | 57,675     |                                                 |       |                                                | 47,488     |                                                |       |   | 57,182 |   |   |   | 45,505 |   |   |
| Diluted earnings (loss) per share    |       |                                                                               | $          | 0.07                                                 |       |                                                |       | $                                                   | (0.10      | ) |   |   | $ | 0.66 |   |   |   | $ | (0.01 | ) |   |

 

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The calculation of dilutedearnings per share for the three and nine months ended October 29,2005 excludes options to purchase 395,336 and 144,279 shares,respectively, due to their antidilutive effect as the options’ exercise priceexceeded the average market price of the common stock. The calculation ofdiluted loss per share for the three and nine months ended October 30,2004 excludes 4,195,494 and 5,906,277 shares, respectively, dueto their antidilutive effect.

**4.**   Share-BasedCompensation

In December 2004, theFinancial Accounting Standards Board (“FASB”) published SFAS No. 123 (Revised2004), “Share-Based Payment” (“SFAS 123-R”). SFAS 123-R retainscertain requirements of the original SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”), and requires all forms ofshare-based payment to employees to be treated as compensation expenserecognized in the consolidated statement of operations. The Company adoptedSFAS 123-R in December 2004, utilizing the modified prospectivemethod. Prior to the Company’s adoption of SFAS 123-R, the Companyfollowed SFAS 123 and treated all forms of share-based payment ascompensation expense recognized in the consolidated statement of operations.Therefore, the adoption of SFAS 123-R did not have a material impacton the Company’s consolidated financial statements.

The Company recordedshare-based compensation expense in the amount of $0.3 million and$0.8 million for the three months ended October 29, 2005 and October 30,2004, respectively, and $0.8 million and $5.7 million for the ninemonths ended October 29, 2005 and October 30, 2004,respectively.

Included in share-basedcompensation expense for the nine months ended October 30, 2004 arethe following:

Concurrently upon enteringinto a new credit facility on May 19, 2004, the vesting of stock optionsto purchase 1,854,267 shares issued pursuant to grants under the Company’sstock option plan was accelerated. As a result, the Company recorded$0.4 million of compensation expense related to the accelerated vestingduring the nine months ended October 30, 2004.

On May 19, 2004,certain of the Company’s executive officers were granted stock options topurchase 630,663 shares of the Company’s common stock at an exercise priceof $3.23 per share. Such options were immediately exercisable upon grant.In connection with these grants, the Company recorded $4.3 million ofcompensation expense during the nine months ended October 30, 2004.

**5.**   PensionPlan

The Company sponsors a single-employer defined benefitpension plan covering substantially all union employees, which represent lessthan 15% of the Company’s workforce. The plan provides retirement benefits forunion employees who have attained the age of 18 and completed425 hours of service in the twelve-month period following the date ofemployment. The plan provides benefits based on length of service. The Company’sfunding policy for the plan is to contribute annually the amount necessary toprovide for benefits based on accrued service. The Company does not anticipatethe need to contribute to the plan for the remainder of the current fiscalyear. Net periodic benefit cost includes the following components:

| ** **                      | ** ** | **Three Months  Ended  October 29,  2005** | ** ** | **Three Months  Ended  October 30,  2004** | ** ** | **Nine Months  Ended  October 29,  2005** | ** ** | **Nine Months  Ended  October 30,  2004** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **(Amounts in thousands)**                 | ** ** |
| Service cost                    |       |                                                 | $          | 73                                                   |       |                                                |       | $                                                   | 79         |   |   |   | $ | 219 |   |   |   | $ | 237 |   |   |
| Interest cost                   |       |                                                 | 137        |                                                 |       |                                                | 144        |                                                |       |   | 410 |   |   |   | 434 |   |   |
| Expected return on  plan assets |       |                                                 | (188       | )                                                    |       |                                                | (200       | )                                                   |       |   | (563 | ) |   |   | (600 | ) |   |
| Net periodic benefit cost       |       |                                                 | $          | 22                                                   |       |                                                |       | $                                                   | 23         |   |   |   | $ | 66 |   |   |   | $ | 71 |   |   |

 

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**6.**   Income TaxProvision

The income tax provisionfor interim periods are based upon management’s estimate of the Company’sannualized effective tax rate. The Company’s effective tax rates were 40.5% and550.0% for the three months ended October 29, 2005 and October 30,2004, respectively, and 40.2% and 102.7% for the nine months endedOctober 29, 2005 and October 30, 2004, respectively. Effective taxrates differ from statutory federal income tax rates primarily due toprovisions for state and local taxes and permanent tax differences, includingaccrued dividends—redeemable preferred stock and the loss on derivativeinstrument which impacted the three and nine months ended October 30,2004.

**7.**   Long-TermDebt and Credit Facilities

On March 16, 2004, certain terms of the Company’srevolving credit facility were amended. The Amended and Restated Loan andSecurity Agreement, dated March 16, 2004, currently consists of athree-year $90.0 million revolving credit facility (containing asub-facility available for the issuance of letters of credit of up to$75.0 million), and a three-year $75.0 million term loan facility. On December 17,2004, the Loan and Security Agreement was further amended to reduce certaininterest rates by as much as 50 basis points (“amended and restated creditfacilities”), depending upon the Company’s financial performance.

The lenders have been granted a pledge of the commonstock of Lerner Holding and certain of its subsidiaries, and a first prioritysecurity interest in substantially all other tangible and intangible assets ofNew York & Company, Inc. and certain of its subsidiaries ascollateral for the Company’s obligations under the amended and restated creditfacilities. In addition, New York & Company, Inc. and certain ofits subsidiaries have fully and unconditionally guaranteed the creditfacilities, and such guarantees are joint and several.

On March 16, 2004, the $75.0 million termloan proceeds along with $32.2 million of cash were used to: (i) repurchasefrom Limited Brands, Inc. the 10% subordinated note for$85.0 million, which included $75.0 million of principal and allaccrued and unpaid interest; (ii) repurchase from LFAS, Inc., anaffiliate of Limited Brands, Inc., a common stock warrant to acquire8,050,671 shares of the Company’s common stock at $0.11 per share (the “commonstock warrant”) for $20.0 million, plus a contingent payment (see below);and (iii) pay $2.2 million of fees and expenses associated with thetransactions. Such fees represent financing fees paid primarily to the lendersand were capitalized as deferred financing costs included in other assets onthe consolidated balance sheet to be amortized over the life of the loan.

Unamortized deferred financing costs related to the10% subordinated note in the amount of $0.4 million were written off andreported as a loss on modification and extinguishment of debt in theconsolidated statement of operations for the nine months ended October 30,2004.

In connection with the common stock warrant repurchaseon March 16, 2004, the Company entered into an agreement with LFAS, Inc.,which provided, among other things, if a) on or before December 31,2004, (i) the Company consummated a public offering of its common stock,or (ii) the Company was acquired and b) the related transaction valueexceeded $156.8 million, the Company would be obligated to pay to LFAS, Inc.an amount in cash equal to approximately 6.38% of the implied equity value ofthe transaction over $156.8 million minus $4.5 million. The Companymeasured the fair value of this obligation on March 16, 2004 and reported$16.3 million as a reduction in stockholders’ equity and as an obligationon the consolidated balance sheet. Subsequent changes in fair value of theobligation resulted in a $29.4 million charge to earnings during the ninemonths ended October 30, 2004, which was reported on the consolidatedstatement of operations as a loss on derivative instrument. In connection with theconsummation of the Company’s initial public offering on October 13, 2004,the Company paid LFAS, Inc. the obligation in the amount of$45.7 million.

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On May 19, 2004, Lerner New York, Inc.entered into a new credit facility consisting of a $75.0 million termloan. The term loan proceeds were used to repurchase all but one share of theCompany’s $0.01 par value, non-voting, Series A redeemable preferredstock for $62.5 million, plus $12.5 million of accrued and unpaiddividends. The Company incurred $1.9 million of fees and expenses relatedto the transaction, which were capitalized as deferred financing costs includedin other assets on the consolidated balance sheet to be amortized over the lifeof the loan.

On October 13, 2004, the Company used approximately$75.2 million of the proceeds received from its initial public offering torepay the $75.0 million outstanding principal amount plus accrued andunpaid interest under the term loan facility entered into on May 19, 2004.In connection with the repayment of the term loan, $1.7 million ofunamortized deferred financing costs were written off and reported as a loss onmodification and extinguishment of debt in the consolidated statement ofoperations for the three and nine months ended October 30, 2004.

On July 19, 2005,JasmineSola executed and delivered a Guaranty for itself and the ratablebenefit of the syndicate of lenders under the Amended and Restated Loan andSecurity Agreement, guaranteeing payment of the obligations under suchagreement. Immediately subsequent to the execution of the Stock PurchaseAgreement with JasmineSola, the Company repaid $1.3 million of debt owedby JasmineSola under its credit facility and terminated such facility.

**8.**   PreferredStock

On May 19, 2004, theCompany repurchased all but one share of the Company’s Series A redeemablepreferred stock. All outstanding promissory notes were repaid to the Company inconjunction with the closing of the credit facility on May 19,2004 and the repurchase of the Series A preferred stock. Theremaining one share of Series A preferred stock was cancelled immediatelyprior to the effectiveness of the initial public offering. Subsequently, theCompany revised its Certificate of Incorporation to authorize 5,000,000** **shares of preferred stock, $0.001 par value.

**9.**   Common Stock

On October 6, 2004, the Company completed theinitial public offering of 11,500,000 shares of common stock, of which6,666,667 shares were offered by the Company and 4,833,333 shareswere offered by certain selling stockholders at a price to the public of$17.00 per share. Upon consummation of the initial public offering, netproceeds of $105.4 million and $76.4 million were distributed to theCompany and selling stockholders, respectively.

In connection with the acquisition of JasmineSola on July 19,2005, the Company issued 350,000 shares of common stock, $0.001 parvalue, to the previous owner of JasmineSola.

During the nine monthsended October 29, 2005, the Company issued 690,641 shares of commonstock upon exercise of stock options.

**10.**   Legal Proceedings

A case has been filed by the Center for EnvironmentalHealth against Lerner New York, Inc. and several other retailers ofjewelry products in California. It alleges that lead in one of Lerner New York, Inc.’sjewelry products (a metal charm necklace suspended on a flexible cord) sold inCalifornia violates the state’s Proposition 65 statute, which precludes thesale of products in California that results in exposure to listed chemicalsabsent a specified warning label. The case is a companion case to two similarcases filed by the California Attorney General and an organization called AsYou Sow against several retail outlets selling such jewelry.

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The Company was not named as a party in either of thecompanion cases, but the matters have been consolidated for pre-trial purposes.Violation of the statute exposes the seller to fines as well as injunctiverelief. The complaint does not include a request for a specific fine amount.The case against Lerner New York, Inc. is in the process of mediationthat is intended to resolve the case without substantial additional litigation.

There are other variousclaims, lawsuits and pending actions against the Company arising in the normalcourse of the Company’s business. It is the opinion of management that theultimate resolution of these matters will not have a material effect on theCompany’s financial condition, results of operations or cash flows.

**11.**   RecentAccounting Pronouncements

In October 2005, the FASB issued FSP No. FAS13-1, “Accounting for Rental Costs Incurred during a Construction Period.”The FSP concluded that rental costs associated with ground or buildingoperating leases that are incurred during a construction period should berecognized as rental expense. The rental costs should be included in incomefrom continuing operations. The guidance does not change application of themaximum guarantee test in EITF Issue No. 97-10, “The Effect of LesseeInvolvement in Asset Construction.” The guidance in this FSP shall be appliedto the first reporting period beginning after December 15, 2005. Earlyadoption is permitted for financial statements or interim financial statementsthat have not yet been issued. Retrospective application in accordance withFASB Statement No. 154, “Accounting Changes and Error Corrections,” ispermitted but not required; as such, the Company will adopt the provisions ofthe FSP and apply them going forward. The Company does not believe that theadoption of this pronouncement will have a material impact on the Company’sconsolidated financial statements.

In December 2004, theFASB published SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS123-R”). SFAS 123-R retains certain requirements of the originalSFAS 123 and requires all forms of share-based payment to employees to betreated as compensation expense recognized in the consolidated statement ofoperations. The Company adopted SFAS 123-R in December 2004,utilizing the modified prospective method. Prior to the Company’s adoption ofSFAS 123-R, the Company followed SFAS 123 and treated all formsof share-based payment as compensation expense recognized in the consolidatedstatement of operations. Therefore, the adoption of SFAS 123-R didnot have a material impact on the Company’s consolidated financial statements.

**12.**   Other

As a result of Hurricane Katrina and Hurricane Rita inAugust and September 2005, one store is closed indefinitely and twostores are closed permanently. The remaining stores impacted by the hurricaneshave since reopened. The Company incurred losses of approximately$0.6 million related to the write-off of inventory and property andequipment in the related stores. Although the Company is insured, subject todeductibles, against damages for all of the stores impacted by the hurricanes, noinsurance recoveries have been recorded at the present time due to theuncertainty regarding such amounts. The Company does not anticipate that thesestore closures will have a significant impact on its financial condition andresults of operations.

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**ITEM 2.**   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**Overview**

The Company views the retail apparel market as havingtwo principal selling seasons: spring (first and second quarter) and fall(third and fourth quarter). The Company’s business experiences seasonalfluctuations in net sales and operating income, with a significant portion ofits operating income typically realized during its fourth quarter. Any decreasein sales or margins during the fourth quarter could have a disproportionateeffect on the Company’s financial condition and results of operations in anygiven year. Seasonal fluctuations also affect inventory levels: the Companymust carry a significant amount of inventory before the holiday season sellingperiod.

Net sales for the three months ended October 29,2005 increased 5.0% to $254.4 million, as compared to$242.3 million for the same period last year. Net sales for the ninemonths ended October 29, 2005 increased 5.7% to $778.9 million, ascompared to $737.2 million for the same period last year. Comparable storesales decreased 3.1% for the three months ended October 29, 2005, ascompared to a comparable store sales increase of 7.0% for the same period lastyear. Comparable store sales increased 0.5% for the nine months ended October 29,2005, as compared to a comparable store sales increase of 11.7% for the sameperiod last year. Net sales per average selling square foot for the threemonths ended October 29, 2005 increased 5.4% to $78, as compared to$74 for the same period last year. Net sales per average selling squarefoot for the nine months ended October 29, 2005 increased 7.6% to$240, as compared to $223 for the same period last year.

Capital spending for the nine months ended October 29,2005 was $68.6 million, as compared to $42.8 million for the same periodlast year. The $68.6 million of capital spending represents$62.8 million related to the construction of new stores and the remodelingof existing stores and $5.8 million related to non-store capital projects,which principally represent information technology enhancements. During thenine months ended October 29, 2005, the Company successfully opened 40 newstores, including two JasmineSola stores, acquired 14 stores in the JasmineSolaacquisition, closed seven stores, and completed 40 remodels, ending the periodoperating 523 stores in 45 states, as compared to 486 stores at October 30,2004. Total selling square footage at October 29, 2005 was 3.306million, compared to 3.294 million at October 30, 2004.

The Company’s balance sheet at October 29, 2005included $30.0 million in cash and working capital of $68.6 million, ascompared to $33.3 million in cash and working capital of$65.4 million at October 30, 2004. At October 29, 2005, inventorywas $136.8 million, including $4.5 million of inventory attributable to theJasmineSola business, as compared to $108.3 million of inventory at October 30,2004. The increase in inventory compared to last year is primarily due toplanned changes for in-transit inventory lead times, which contributed $11.3million to the increase in inventory, and inventory attributable to new stores.

At October 29, 2005, non-current assets totaled$198.2 million, as compared to $115.3 million at October 30, 2004. Theincrease was in large part due to capital spending during the nine months endedOctober 29, 2005 to support the Company’s store expansion and remodelstrategy. In addition, the Company recorded $26.2 million of goodwill andintangible assets in connection with the acquisition of JasmineSola. At October 29,2005, non-current liabilities amounted to $111.9 million, as compared to$96.0 million at October 30, 2004. The increase is primarily due to a$14.3 million increase in unamortized construction allowances.

The Company’s business is impacted by economicconditions that affect the level of consumer spending as well as the cost ofmerchandise the Company offers. These economic factors include interest rates,economic growth, unemployment levels, energy prices, consumer confidence andconsumer spending, among others. Consumer preferences and economic conditionsmay change from time to time in 

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the markets in which theCompany operates and may negatively impact its net sales and profitability. As economicconditions change, there can be no assurance that future trends andfluctuations in economic factors will not have a material adverse effect on theCompany’s financial condition and results of operations. The Company’s strategyis to focus on its customers, current fashion trends, merchandise testing,value pricing and responsive inventory management to enable the Company toreact quickly to changes as they occur.

Quotas on textiles and clothing, under the World TradeOrganization Agreement on Textiles and Clothing as implemented on January 1,1995, were phased out over a period of ten years, ending January 1, 2005.This phase-out eliminated existing restrictions on the Company’s ability toimport clothing. Since the phase-out period ended in January 2005, Chinesetextile imports into the United States have increased significantly. In thepast, the U.S. federal interagency committee, CITA (Committee forImplementation of Textile Agreements), has imposed safeguard limitations onChina. In November 2005, the United States and China agreed to certainquota limits extending through 2008 on 34 U.S. product categories, essentiallyeliminating the threat of CITA safeguard limitations on these categories. TheCompany believes that the quotas established under this agreement comparefavorably to quotas that would have been imposed if the CITA safeguards wereinvoked. Over the three-year life of the agreement, China can export approximately3.2% more of the covered products to the United States than if the CITAsafeguards were invoked on all the covered products for all three years. Theagreement’s broad product coverage and three-year lifespan will allow theCompany to plan in a more stable and predictable environment. In addition,quotas on imports from China were eliminated for two categories, addingstability to the supply chain of fine gauge sweaters.

The Company has beenadjusting its inventory receipt planning and supply chain accordingly andcontinues to rely on its diversified manufacturing base to mitigate risksassociated with these expected restrictions on Chinese textile imports into theUnited States. At this time, the Company cannot assess how potential futurerestrictions will impact its operations.

**General**

*Net Sales.  *Netsales consist of sales from comparable and non-comparable stores. A store isincluded in the comparable store sales calculation after it has completed13 full fiscal months of operation from its original opening date or onceit has been reopened after remodeling. Non-comparable store sales includestores which have not completed 13 full fiscal months of operations, salesfrom closed stores and stores closed during periods of remodeling. Net salesare recorded when the customer takes possession of the merchandise and thepurchases are paid for, primarily with either cash or credit cards. Revenuesfor gift certificate sales and store credits are recognized at redemption.Prior to redemption, gift certificate sales and store credits are recorded as aliability. A reserve is provided for projected merchandise returns based onprior experience.

*Cost of Goods Sold, Buying andOccupancy Costs.  *Cost of goods sold, buying andoccupancy costs is comprised of direct inventory costs for merchandise sold,distribution, payroll and related costs for design, sourcing, production,merchandising, planning and allocation personnel, and store occupancy andrelated costs.

*Gross Profit.  *Grossprofit represents net sales less cost of goods sold, buying and occupancycosts.

*Selling,General and Administrative Expenses.  *Selling, generaland administrative expenses include selling, store management and corporateexpenses, including payroll and employee benefits, employment taxes, managementinformation systems, marketing, insurance, legal, store pre-opening and othercorporate-level expenses. Store pre-opening expenses include store levelpayroll, grand opening event marketing, travel, supplies and other storeopening expenses.

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**Results of Operations**

Thefollowing tables summarize the Company’s results of operations as a percentageof net sales and selected store operating data, including store count andselling square feet, for the three and nine months ended October 29, 2005and October 30, 2004:

| ** **                                            | ** ** | **Three months  ended  October 29,   2005** | ** ** | **Three months  ended  October 30,   2004** | ** ** | **Nine months  ended  October 29,   2005** | ** ** | **Nine months  ended  October 30,   2004** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Net sales                                             |       |                                                       | 100.0      | %                                                          |       |                                                      | 100.0      | %                                                         |       |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of goods  sold, buying and occupancy costs       |       |                                                       | 70.7       | %                                                          |       |                                                      | 64.7       | %                                                         |       |   | 67.3 | % |   |   | 65.1 | % |   |
| Gross profit                                          |       |                                                       | 29.3       | %                                                          |       |                                                      | 35.3       | %                                                         |       |   | 32.7 | % |   |   | 34.9 | % |   |
| Selling, general  and administrative expenses         |       |                                                       | 25.9       | %                                                          |       |                                                      | 27.7       | %                                                         |       |   | 24.0 | % |   |   | 26.3 | % |   |
| Operating income                                      |       |                                                       | 3.4        | %                                                          |       |                                                      | 7.6        | %                                                         |       |   | 8.7 | % |   |   | 8.6 | % |   |
| Interest expense,  net                                |       |                                                       | 0.7        | %                                                          |       |                                                      | 1.3        | %                                                         |       |   | 0.6 | % |   |   | 1.0 | % |   |
| Accrued dividends—redeemable  preferred stock    |       |                                                       | —     |                                                       |       |                                                      | —     |                                                      |       |   | — |   |   |   | 0.4 | % |   |
| Loss on  modification and extinguishment of debt |       |                                                       | —     |                                                       |       |                                                      | 0.7        | %                                                         |       |   | — |   |   |   | 0.3 | % |   |
| Loss on derivative  instrument                        |       |                                                       | —     |                                                       |       |                                                      | 5.2        | %                                                         |       |   | — |   |   |   | 4.0 | % |   |
| Income before income taxes                            |       |                                                       | 2.7        | %                                                          |       |                                                      | 0.4        | %                                                         |       |   | 8.1 | % |   |   | 2.9 | % |   |
| Provision for  income taxes                           |       |                                                       | 1.1        | %                                                          |       |                                                      | 2.3        | %                                                         |       |   | 3.2 | % |   |   | 3.0 | % |   |
| Net income (loss)                                     |       |                                                       | 1.6        | %                                                          |       |                                                      | (1.9       | )%                                                        |       |   | 4.9 | % |   |   | (0.1 | )% |   |

 

| ** **                                   | ** ** | **Three months  ended  October 29,  2005**                              | ** ** | **Three months  ended  October 30,  2004** | ** ** | **Nine months  ended  October 29,  2005** | ** ** | **Nine months  ended  October 30,  2004** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                   | ** ** | **(Dollars in thousands, except square foot data)** | ** ** |
| **Selected  operating data:**                |       |                                                                              |       |                                                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Total net sales growth                       |       |                                                                              | 5.0        | %                                                    |       |                                                | 8.5        | %                                                   |       |   | 5.7 | % |   |   | 11.7 | % |   |
| Comparable store sales increase (decrease)   |       |                                                                              | (3.1       | )%                                                   |       |                                                | 7.0        | %                                                   |       |   | 0.5 | % |   |   | 11.7 | % |   |
| Net sales per average selling square foot(1) |       |                                                                              | $          | 78                                                   |       |                                                |       | $                                                   | 74         |   |   |   | $ | 240 |   |   |   | $ | 223 |   |   |
| Net sales per average store(2)               |       |                                                                              | $          | 494                                                  |       |                                                |       | $                                                   | 505        |   |   |   | $ | 1,558 |   |   |   | $ | 1,545 |   |   |
| Average selling  square footage per store(3) |       |                                                                              | 6,322      |                                                 |       |                                                | 6,778      |                                                |       |   | 6,322 |   |   |   | 6,778 |   |   |

 

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(1)    Netsales per average selling square foot is defined as net sales divided by theaverage of beginning and end of period selling square feet.

(2)    Netsales per average store is defined as net sales divided by the average ofbeginning and end of period number of stores.

(3)    Averageselling square footage per store is defined as end of period selling squarefeet divided by end of period number of stores.

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| ** **                                             | ** ** | **Three months ended  October 29, 2005** | ** ** | **Three months ended  October 30, 2004** | ** ** | **Nine months ended  October 29, 2005** | ** ** | **Nine months ended  October 30, 2004** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Store  Count**                                             | ** ** | **Selling  Square Feet**                                | ** ** | **Store  Count**                                            | ** ** | **Selling  Square Feet**                               | ** ** | **Store  Count** | ** ** | **Selling  Square Feet** | ** ** | **Store  Count** | ** ** | **Selling  Square Feet** | ** ** |
| Stores open, beginning  of period                      |       |                                                         | 506        |                                                         |       |                                                        | 3,237,471  |                                                        |       |   | 474 |   |   |   | 3,292,630 |   |   |   | 476 |   |   |   | 3,189,770 |   |   |   | 468 |   |   |   | 3,318,466 |   |   |
| New stores                                             |       |                                                         | 19         |                                                         |       |                                                        | 83,922     |                                                        |       |   | 13 |   |   |   | 55,507 |   |   |   | 40 |   |   |   | 176,338 |   |   |   | 22 |   |   |   | 95,198 |   |   |
| Acquired stores                                        |       |                                                         | —     |                                                         |       |                                                        | —     |                                                        |       |   | — |   |   |   | — |   |   |   | 14 |   |   |   | 38,760 |   |   |   | — |   |   |   | — |   |   |
| Closed stores                                          |       |                                                         | (2         | )                                                            |       |                                                        | (15,691    | )                                                           |       |   | (1 | ) |   |   | (5,072 | ) |   |   | (7 | ) |   |   | (42,739 | ) |   |   | (4 | ) |   |   | (26,101 | ) |   |
| Net impact of  remodeled stores on selling square feet |       |                                                         | —     |                                                         |       |                                                        | 548        |                                                        |       |   | — |   |   |   | (49,187 | ) |   |   | — |   |   |   | (55,879 | ) |   |   | — |   |   |   | (93,685 | ) |   |
| Stores open, end  of period                            |       |                                                         | 523        |                                                         |       |                                                        | 3,306,250  |                                                        |       |   | 486 |   |   |   | 3,293,878 |   |   |   | 523 |   |   |   | 3,306,250 |   |   |   | 486 |   |   |   | 3,293,878 |   |   |

 

***Three Months Ended October 29, 2005 Comparedto Three Months Ended October 30, 2004***

*Net Sales.  *Netsales for the three months ended October 29, 2005 increased 5.0% to$254.4 million, as compared to $242.3 million for the three monthsended October 30, 2004. The increase is attributable to a$19.2 million, or 185.6%, increase in non-comparable store sales offset bya $7.1 million, or 3.1%, decrease in comparable store sales. The increasein non-comparable store sales for the three months ended October 29,2005 was primarily driven by new stores that had not been open for 13 fullfiscal months as of October 29, 2005, and therefore were not included inthe comparable store base, and sales from the JasmineSola stores acquired on July 19,2005. In the comparable store base, average dollar sales per transactionincreased 2.4%, while transactions per average store declined 5.1%, as comparedto last year.

*Gross Profit.  *Grossprofit decreased $11.0 million to $74.5 million, or 29.3% of net sales,for the three months ended October 29, 2005, as compared to$85.5 million, or 35.3% of net sales, for the three months ended October 30,2004. The decrease in gross profit as a percentage of net sales is primarilydue to lower merchandise margins as a result of increased cancellations andmarkdowns on fall merchandise. In addition, buying and occupancy costsincreased as a percentage of net sales due to increasing rental costs on anaverage square foot basis for new and remodeled stores and negative comparablestore sales.

*Selling, General and AdministrativeExpenses.  *Selling, general and administrative expensesdecreased $1.4 million to $65.8 million, or 25.9% of net sales, forthe three months ended October 29, 2005, as compared to$67.2 million, or 27.7% of net sales, for the three months ended October 30,2004. The three months ended October 30, 2004 included charges of$4.7 million related to the terminated advisory services agreement with BearStearns Merchant Manager II, LLC. Since the termination of the advisoryservices agreement in October 2004, the Company no longer incurs suchfees. The absence of these advisory services charges in the three months ended October 29,2005 was partially offset by a $3.3 million increase in store selling expenses,as compared to last year, which is attributable to new stores.

*Operating Income.  *Operatingincome decreased $9.6 million to $8.7 million, or 3.4% of net sales, for thethree months ended October 29, 2005, as compared to$18.3 million, or 7.6% of net sales, for the three months ended October 30,2004.

*Interest Expense, Net.  *Netinterest expense decreased $1.3 million to $1.7 million for thethree months ended October 29, 2005, as compared to $3.0 millionfor the three months ended October 30, 2004. The decrease in net interestexpense is primarily due to fluctuations in borrowings and reduction in 

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interest rates resultingfrom the Company’s refinancing activities on March 16, 2004 and May 19,2004 and the repayment of a $75.0 million term loan in connection with itsinitial public offering.

*Loss on Modification and Extinguishment of Debt.  *OnOctober 13, 2004, using proceeds from its initial public offering, theCompany repaid a $75.0 million term loan outstanding under the creditfacility entered into on May 19, 2004, which resulted in a$1.7 million charge associated with the write-off of unamortized deferredfinancing costs. The Company had no such charges during the three months ended October 29,2005.

*Loss on Derivative Instrument.  *Inconnection with the repurchase of the common stock warrant on March 16,2004 from LFAS, Inc., the Company entered into an agreement with LFAS, Inc.that required it to pay LFAS, Inc. an amount based on the implied equityvalue of the Company upon a sale of the Company or the consummation of a publicoffering. The Company measured the fair value of the contingent payment (“derivativeinstrument”) on March 16, 2004 and reported $16.3 million as areduction to stockholders’ equity and as a current liability on theconsolidated balance sheet. During the three months ended May 1, 2004, July 31, 2004,and October 30, 2004, the Company remeasured the fair value of thederivative instrument, which resulted in charges to earnings of$2.5 million, $14.3 million, and $12.6 million, respectively. Inconnection with the consummation of the initial public offering, the Companypaid off its obligation to LFAS, Inc. in the amount of $45.7 millionand, therefore, will not have incurred any such charges in the current fiscalyear.

*Provision for Income Taxes.  *Theeffective tax rate for the three months ended October 29, 2005 was40.5%, as compared to 550.0% for the three months ended October 30, 2004.The higher rate incurred in the prior year period was a direct result ofnon-deductible amounts primarily relating to the loss on derivative instrumentof $12.6 million. The Company incurred no such non-deductible expensesduring the three months ended October 29, 2005, which resulted in a lowereffective tax rate.

*NetIncome (Loss).  *For the reasons discussed above, netincome increased $8.8 million to $4.2 million, or 1.6% of net sales, for thethree months ended October 29, 2005, from a lossof $(4.6) million, or (1.9)% of net sales, for the three months endedOctober 30, 2004.

***Nine Months Ended October 29, 2005 Comparedto Nine Months Ended October 30, 2004***

*Net Sales.  *Netsales for the nine months ended October 29, 2005 increased 5.7% to$778.9 million, as compared to $737.2 million for the nine monthsended October 30, 2004. The increase is attributable to a$3.8 million, or 0.5%, increase in comparable store sales and a $37.9million, or 150.1%, increase in non-comparable store sales. In thecomparable store base, average dollar sales per transaction increased 3.6%,while transactions per average store declined 2.7%, as compared to last year.The increase in non-comparable store sales for the nine months ended October 29,2005 was primarily driven by new stores that had not been open for 13 fullfiscal months as of October 29, 2005, and therefore were not included inthe comparable store base, and sales from the JasmineSola stores acquired on July 19,2005.

*Gross Profit.  *Grossprofit decreased $2.7 million to $254.8 million, or 32.7% of net sales,for the nine months ended October 29, 2005, as compared to$257.5 million, or 34.9% of net sales, for the nine months ended October 30,2004. The decrease in gross profit as a percentage of net sales is primarilydue to lower merchandise margins in the three months ended October 29,2005 as a result of increased cancellations and markdowns on fall merchandise. Inaddition, buying and occupancy costs increased as a percentage of net sales dueto increasing rental costs on an average square foot basis for new andremodeled stores and negative comparable store sales during the three monthsended October 29, 2005.

*Selling, General and AdministrativeExpenses.  *Selling, general and administrative expensesdecreased $7.0 million to $187.0 million, or 24.0% of net sales, for thenine months ended October 29, 2005, as compared to $194.0 million, or26.3% of net sales, for the nine months ended October 30, 2004. The nine 

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months ended October 30,2004 included charges of $6.1 million related to the terminatedadvisory services agreement with Bear Stearns Merchant Manager II, LLC and$4.3 million related to a one-time grant of stock options to certain keyexecutives. Since the termination of the advisory services agreement in October 2004,the Company no longer incurs such fees. The absence of the advisory servicesand stock option related charges in the nine months ended October 29, 2005was partially offset by a $4.2 million increase in store selling expenses, ascompared to last year, which is attributable to new stores.

*Operating Income.  *Operatingincome increased $4.4 million to $67.8 million, or 8.7% of net sales, forthe nine months ended October 29, 2005, as compared to$63.4 million, or 8.6% of net sales, for the nine months ended October 30,2004.

*Interest Expense, Net.  *Netinterest expense decreased $3.3 million to $4.4 million for the nine monthsended October 29, 2005, as compared to $7.7 million for the ninemonths ended October 30, 2004. The decrease in net interest expense isprimarily due to fluctuations in borrowings and reduction in interest ratesresulting from the Company’s refinancing activities on March 16, 2004 and May 19,2004 and the repayment of a $75.0 million term loan in connection with itsinitial public offering.

*Accrued Dividends—RedeemablePreferred Stock.  *On May 19, 2004, the Companyredeemed substantially all of its Series A redeemable preferred stock.Immediately prior to the effectiveness of the Company’s initial publicoffering, the remaining one outstanding share of the Company’s Series Aredeemable preferred stock was cancelled.

*Loss on Modification andExtinguishment of Debt.  *On March 16, 2004, theCompany repaid its $75.0 million, 10% subordinated note with proceeds fromthe Company’s amended and restated credit facility, which resulted in a$0.4 million charge associated with the write-off of unamortized deferredfinancing costs. On October 13,2004, using proceeds from its initial public offering, the Companyrepaid a $75.0 million term loan outstanding under the credit facilityentered into on May 19, 2004, which resulted in a $1.7 million chargeassociated with the write-off of unamortized deferred financing costs. TheCompany had no such charges during the nine months ended October 29, 2005.

*Loss on Derivative Instrument.  *Inconnection with the repurchase of the common stock warrant on March 16,2004 from LFAS, Inc., the Company entered into an agreement with LFAS, Inc.that required it to pay LFAS, Inc. an amount based on the implied equityvalue of the Company upon a sale of the Company or the consummation of a publicoffering. The Company measured the fair value of the contingent payment on March 16,2004 and reported $16.3 million as a reduction to stockholders’equity and as a current liability. During the nine months ended October 30,2004, the Company remeasured the fair value of the derivative instrument, whichresulted in a charge to earnings of $29.4 million. In connection with theconsummation of the initial public offering, the Company paid off itsobligation to LFAS, Inc. in the amount of $45.7 million and,therefore, will not have incurred any such charges in the current fiscal year.

*Provision for Income Taxes.  *Theeffective tax rate for the nine months ended October 29, 2005 was 40.2%,as compared to 102.7% for the nine months ended October 30, 2004. Thehigher rate incurred in the prior year period was a direct result ofnon-deductible amounts primarily relating to the loss on derivative instrumentof $29.4 million and accrued dividends—redeemable preferred stock of$2.7 million. The Company incurred no such non-deductible expenses duringthe nine months ended October 29, 2005, which resulted in a lowereffective tax rate.

*NetIncome (Loss).  *For the reasons discussed above, netincome increased $38.5 million to $37.9 million, or 4.9% of net sales, for thenine months ended October 29, 2005, from a loss of$(0.6) million, or (0.1)% of net sales, for the nine months ended October 30,2004.

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**Liquidity and Capital Resources**

The Company’s primary uses of cash are to fund workingcapital, operating expenses, debt service and capital expenditures relatedprimarily to the construction of new stores and remodeling of existing stores.Historically, the Company has financed these requirements from internallygenerated cash flow. The Company believes cash flows from operations,supplemented by borrowings under its revolving credit facility, if needed, willbe sufficient to fund its capital and working capital requirements, as well asdebt service obligations, for the next 12 months. The Company is in compliancewith all debt covenants as of October 29, 2005.

Thefollowing tables contain information regarding the Company’s liquidity andcapital resources:

| ** **                | ** ** | **October 29,  2005**           | ** ** | **January 29,  2005** | ** ** | **October 30,  2004** | ** ** |
|---------------------------|------------|--------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                | ** ** | **(Amounts in thousands)** | ** ** |
| Cash and cash equivalents |       |                                 | $          | 30,027                     |       |                       |       | $ | 85,161 |   |   |   | $ | 33,285 |   |   |
| Working capital           |       |                                 | $          | 68,567                     |       |                       |       | $ | 83,105 |   |   |   | $ | 65,381 |   |   |

 

| ** **                                           | ** ** | **Nine months  ended  October 29,  2005** | ** ** | **Nine months  ended  October 30,  2004** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **(Amounts in thousands)**                | ** ** |
| Net cash provided  by (used in) operating activities |       |                                                | $          | 31,187                                              |       |   |   | $ | (7,914 | ) |   |
| Net cash used in  investing activities               |       |                                                | $          | (89,916                                             | )          |   |   | $ | (42,825 | ) |   |
| Net cash provided by  (used in) financing activities |       |                                                | $          | 3,595                                               |       |   |   | $ | (14,774 | ) |   |

 

***Operating Activities***

Net cash provided byoperating activities was $31.2 million for the nine months ended October29, 2005, as compared to net cash used by operating activities of$7.9 million for the nine months ended October 30, 2004. The increasein cash provided by operating activities for the nine months ended October 29,2005, as compared to the same period last year, is primarily related to anincrease in net income and changes in income taxes payable and otherliabilities, partially offset by changes in accounts receivable, inventory andaccounts payable. The increase in cash provided by other assets andliabilities, as compared to last year, is due to an increase in deferred rentprimarily consisting of unamortized construction allowances.

***Investing Activities***

Cash used in investing activities was $89.9 millionfor the nine months ended October 29, 2005, as compared to$42.8 million of cash used in investing activities for the nine monthsended October 30, 2004. These amounts exclude construction allowances,which are reported in operating activities on the consolidated statement ofcash flows. The increase in cash used in investing activities is due to theacquisition of JasmineSola and increased capital expenditures related to theconstruction of 40 new stores and the remodeling of 40 existing stores in thenine months ended October 29, 2005, as compared to 22 new stores and 33remodeled stores in the nine months ended October 30, 2004.

The Company plans to have opened 45 to 50 new storesand remodeled 40 to 45 stores during fiscal year 2005, ending the yearoperating approximately 522 stores, including 16 JasmineSola stores.

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The Company projects totalcapital expenditures to be approximately $80.0 million in fiscal year2005, as compared to $54.3 million in fiscal year 2004. These amountsexclude construction allowances. Historically, the Company has financed such capitalexpenditures with cash from operations and borrowings under its creditfacility, if needed. The Company believes that it will continue to financeongoing capital expenditures in this manner.

***FinancingActivities***

Net cash provided byfinancing activities was $3.6 million for the nine months ended October 29,2005, as compared to net cash used in financing activities of$14.8 million for the nine months ended October 30, 2004. Net cashprovided by financing activities for the nine months ended October 29,2005 resulted primarily from a $4.7 million tax benefit related tothe exercise of stock options offset by a $1.3 million repayment of debtoutstanding under the terminated JasmineSola credit facility. Net cash used infinancing activities for the nine months ended October 30, 2004 consistedof the following: net proceeds of $105.4 million from the Company’s initialpublic offering; proceeds of $75.0 million from the amended and restatedcredit facilities entered into on March 16, 2004; proceeds of$75.0 million from the credit facility entered into on May 19, 2004;the repayment of a $75.0 million, 10% subordinated note, plus accrued andunpaid interest; the payment of $36.3 million to repurchase the commonstock warrant from LFAS, Inc.; the payment of $72.4 million to redeemsubstantially all of the Company’s outstanding Series A preferred stock;the repayment of a $75.0 million term loan outstanding under the creditfacility entered into on May 19, 2004; and the payment of$7.1 million in fees and expenses related to these transactions.

**Long-TermDebt and Credit Facilities**

The Company’s amended andrestated credit facilities currently consist of a three-year $90.0 millionrevolving credit facility (containing a sub-facility available for the issuanceof letters of credit of up to $75.0 million), and a three-year$75.0 million term loan facility. As of October 29, 2005, the Companyhad availability under its revolving credit facility of $63.3 million, netof letter of credit accommodations outstanding of $16.0 million, ascompared to availability of $54.7 million, net of letter of creditaccommodations outstanding of $16.8 million, as of October 30, 2004.

The revolving loans underthe amended and restated credit facilities bear interest, at the Company’soption, either at a floating rate equal to the Eurodollar rate plus a margin ofbetween 1.50% and 2.00% per year, depending upon the Company’s financialperformance, or the Prime rate. The Company pays the lenders under therevolving credit facility a monthly fee on outstanding letters of credit at arate of between 1.00% and 1.50%, depending upon the Company’s financialperformance. The Company pays the lenders under the revolving credit facility amonthly fee on a proportion of the unused commitments under that facility at arate of between 0.25% and 0.50% per annum, depending upon the Company’sfinancial performance. The term loan bears interest at a floating rate equal tothe greater of 6.75% or the Eurodollar rate plus 5.00% per year. For so long asany default under the revolving credit facility continues, at the option of theagent or lenders, interest on the revolving loans may increase to 4.00% peryear above the Eurodollar rate for Eurodollar rate loans and 2.00% per yearabove the Prime rate for all Prime rate loans, and interest on the term loanmay increase to the greater of 8.75% or the Eurodollar rate plus 7.00% peryear. The Company’s amended and restated credit facilities contain certaincovenants, including restrictions on the Company’s ability to pay dividends onits common stock, incur additional indebtedness and to prepay, redeem orrepurchase other debt. Subject to such restrictions, the Company may incur moredebt for working capital, capital expenditures, acquisitions, and for otherpurposes.

**CriticalAccounting Policies**

Thepreparation of financial statements in conformity with generally acceptedaccounting principles in the United States requires management to makeestimates and assumptions that impact the amounts reported on the Company’sconsolidated financial statements and related notes. On an ongoing basis, 

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management evaluates its estimates and judgments,including those related to inventories, long-lived assets and the fair marketvalue of assets acquired. Management bases its estimates and judgments onhistorical experience and various other factors that are believed to bereasonable under the circumstances. Actual results may differ materially fromthese judgments. Management believes the following estimates and assumptionsare most significant to reporting the Company’s financial condition and resultsof operations.

*InventoryValuation.  *Inventories are valued at the lower of costor market, on a weighted average cost basis using the retail method. TheCompany calculates inventory costs on an individual item-class level. TheCompany records a charge to cost of goods sold, buying and occupancy costs whena permanent retail price reduction is reflected in the stores. In addition,management makes estimates and judgments regarding initial markups, markdowns,future demand and market conditions. These assumptions can have a significantimpact on financial condition and current and future operating results. TheCompany’s estimates have been historically valid. At the end of each season,goods related specifically to that season are marked down and valued at theestimated current retail value. The use of the retail method and the recordingof markdowns effectively value the inventory at the lower of cost or market. Inaddition, an inventory loss estimate is recorded each period. These estimatesare adjusted based upon physical inventories performed twice per fiscal year.

*Impairmentof Long-Lived Assets.  *The Company evaluates long-livedassets in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (“SFAS 144”). Long-lived assetsare evaluated for recoverability in accordance with SFAS 144 whenever events orchanges in circumstances indicate that an asset may have been impaired. Inevaluating an asset for recoverability, the Company estimates the future cashflow expected to result from the use of the asset and eventual disposition. Ifthe sum of the expected future undiscounted cash flow is less than the carryingamount of the asset, an impairment loss, equal to the excess of the carryingamount over the fair value of the asset, is recognized. An impairment losscould have a material adverse impact on the Company’s financial condition andresults of operations. The Company’s evaluation for the nine months ended October 29,2005 resulted in no material asset impairment charge.

*Goodwilland Other Intangible Assets.  *SFAS No. 142, “Goodwilland Other Intangible Assets,” prohibits the amortization of goodwill andintangible assets with indefinite lives. The Company tests for impairment ofintangible assets annually as required by this Statement. The Company’sintangible assets relate primarily to the *NewYork & Company* trademark, the *JasmineSola*trademark, and goodwill associated with the acquisition of JasmineSola on July 19,2005. The trademarks were initially valued using the “relief from royaltymethod” and were determined to have an indefinite life by an independent appraiser.Management’s estimate of future cash flow is based on historical experience,knowledge, and market data. These estimates can be affected by factors such asthose outlined in “Cautionary Note Regarding Forward-Looking Statements andRisk Factors.” An impairment loss could have a material adverse impact on theCompany’s financial condition and results of operations. The Company’s fiscal year2004 impairment test did not result in any impairment charge and the Companyhas no reason to believe any impairment occurred during the nine months ended October 29,2005. The values assigned to the *JasmineSola*trademark and goodwill associated with the acquisition of JasmineSola arepreliminary and are expected to be adjusted as additional information concerningasset and liability valuations are finalized.

*IncomeTaxes.  *Income taxes are calculated in accordance withSFAS No. 109, “Accounting for Income Taxes,” which requires the use of theliability method. Deferred tax assets and liabilities are recognized based onthe difference between the financial statement carrying amounts of assets andliabilities and their respective tax bases. Inherent in the measurement ofdeferred balances are certain judgments and interpretations of enacted tax lawsand published guidance with respect to applicability to the Company’s operations.Deferred tax assets are believed to be fully realizable as management expectsfuture taxable income will be sufficient to recover the asset values and, assuch, no related valuation allowance has been provided for.

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**ITEM 3.**   QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

*Interest Rates.  *TheCompany’s market risks relate primarily to changes in interest rates. TheCompany’s amended and restated credit facilities carry floating interest ratesthat are tied to the Eurodollar rate and the Prime rate and therefore theconsolidated financial statements are exposed to changes in interest rates. A1.0% interest rate increase would increase interest expenses by approximately$0.8 million annually. The Company historically has not engaged ininterest rate hedging activities.

*CurrencyExchange Rates.  *The Company historically has not beenexposed to currency exchange rate risks with respect to inventory purchases assuch expenditures have been, and continue to be, denominated in U.S. Dollars.The Company purchases some of its inventory from suppliers in China, for whichit pays U.S. Dollars. In July 2005, China announced that it would increasethe value of the Chinese Yuan and abandon its fixed exchange rate against theU.S. Dollar to now link to a basket of world-currencies. Since July 2005,the Chinese Yuan has strengthened by approximately 2% against the U.S. Dollar. Ifthe exchange rate of the Chinese Yuan to the U.S. Dollar continues to increase,the Company may experience fluctuations in the cost of inventory purchased fromChina.

**ITEM 4.**   CONTROLS AND PROCEDURES

(a) *DisclosureControls and Procedures.  *The Company’s management, with theparticipation of the Company’s Principal Executive Officer and PrincipalFinancial Officer, has evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934, as amended) as of the end of theperiod covered by this quarterly report. Based on such evaluation, the Company’sPrincipal Executive Officer and Principal Financial Officer have concludedthat, as of the end of such period, the Company’s disclosure controls andprocedures are effective.

(b) *InternalControls Over Financial Reporting.  *There have not been anychanges in the Company’s internal controls over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934, as amended) during the fiscal quarter towhich this report relates that have materially affected, or are reasonablylikely to materially affect, the Company’s internal controls over financialreporting.

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**PART II.OTHER INFORMATION**

**ITEM 1.**   LEGAL PROCEEDINGS

There have been nomaterial changes in the Company’s legal proceedings from what was reported inits Annual Report on Form 10-K filed with the SEC on April 19, 2005.

**ITEM 1a.   RISK FACTORS**

On July 19, 2005, theCompany acquired JasmineSola. Failure to successfully integrate the newlyacquired business into the Company’s existing business without encounteringsignificant delays, costs or other difficulties may have an adverse effect onthe Company’s financial condition and results of operation.

**ITEM 2.**   UNREGISTERED SALESOF EQUITY SECURITIES AND USE OF PROCEEDS

None.

**ITEM 3.**   DEFAULTS UPONSENIOR SECURITIES

None.

**ITEM 4.**   SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

None.

**ITEM 5.**   OTHER INFORMATION

None.

**ITEM 6.**   EXHIBITS

Thefollowing exhibits are filed with this report and made a part hereof:
| 31.1 |   | Certification of Chief Executive Officer Pursuant to  Rules 13a-14(a) and 15d-14(a) promulgated under the  Securities Exchange Act of 1934, as amended.                               |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Chief  Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a)  promulgated under the Securities Exchange Act of 1934, as amended.                               |
| 32   |   | Certification of Chief  Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|        | NEW YORK & COMPANY, INC. |
|--------|----------------------------------------|
|   | /s/ RONALD W. RISTAU                   |
|   | By:                                    | Ronald W. Ristau |
|   | Its:                                   | *Chief Operating Officer and* |
|   | * *                               | *Chief Financial Officer* |
|   | * *                               | *(Principal Financial Officer)* |
|   | Dated:                                 | December 13, 2005 |

 

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