**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

**(Mark One)**

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

**FORTHE QUARTER ENDED SEPTEMBER 24, 2005**

**OR**

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

**Commissionfile number 0-22480**

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**The J. Jill Group, Inc.**

(Exact Name of Registrantas Specified in its Charter)

| **Delaware**                                                     | **04-2973769**                         |
|------------------------------------------------------------------|----------------------------------------|
| (State or  Other Jurisdiction of  Incorporation or Organization) | (I.R.S.  Employer  Identification No.) |
| **4 Batterymarch Park, Quincy, MA**                         | **02169**                              |
| (Address of  Principal Executive Offices)                        | (Zip Code)                             |

 

**Registrant’s telephone number,including area code:**(617) 376-4300

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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 the filing requirements for atleast the past 90 days. Yes x  No o

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

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

Shares outstanding of theregistrant’s common stock (par value $0.01) at October 27, 2005:20,324,589

 

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**THE J. JILL GROUP,INC.INDEX TO QUARTERLY REPORT ON FORM 10-QFOR THE QUARTER ENDED SEPTEMBER 24, 2005**
|                                             | ** ** | ** **                                                                                                                                           | ** ** | **Page** |
|---------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I—FINANCIAL  INFORMATION** |       |                                                                                                                                                 |       |
| Item 1.                                     |       | Condensed  Consolidated Financial Statements (unaudited)                                                                                             |       |     |   |
|                                        |       | Condensed  Consolidated Balance Sheets at September 24, 2005, September 25,  2004 and December 25, 2004                          |       | 3        |   |
|                                        |       | Condensed  Consolidated Statements of Operations for the three months and the nine  months ended September 24, 2005 and September 25, 2004 |       | 4        |   |
|                                        |       | Condensed  Consolidated Statements of Cash Flows for the nine months ended  September 24, 2005 and September 25, 2004                      |       | 5        |   |
|                                        |       | Notes to Condensed Consolidated  Financial Statements                                                                                                |       | 6        |   |
| Item 2.                                     |       | Management’s  Discussion and Analysis of Financial Condition and Results of  Operations                                                         |       | 18       |   |
| Item 3.                                     |       | Quantitative  and Qualitative Disclosures about Market Risk                                                                                          |       | 28       |   |
| Item 4.                                     |       | Controls  and Procedures                                                                                                                             |       | 28       |   |
| **PART II—OTHER INFORMATION**     | ** ** | ** **                                                                                                                                           | ** ** |
| Item 1.                                     |       | Legal  Proceedings                                                                                                                                   |       | 29       |   |
| Item 6.                                     |       | Exhibits  and Reports on Form 8-K                                                                                                               |       | 29       |   |
| **SIGNATURES**                              |       | 30                                                                                                                                                   |       |

 

2

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**PART I—FINANCIAL INFORMATION**

**Item 1.**                        CondensedConsolidated Financial Statements (unaudited)

**THE J. JILL GROUP, INC.CONDENSED CONSOLIDATEDBALANCE SHEETS(in thousands, except share and per share amounts)(unaudited)**

| ** **                                                                                                                                                                                                                          | ** ** | **September 24,** | ** ** | **September 25,** | ** ** | **December 25,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                          | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2004**              | ** ** |
| ** **                                                                                                                                                                                                                          | ** ** | ** **             | ** ** | **(Restated)**         | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                                          |       |                   |       |                   |       |                  |       |   |   |   |   |   |   |
| Current assets:                                                                                                                                                                                                                     |       |                   |       |                   |       |                  |       |   |   |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                          |       |                   | $          | 17,648                 |       |                  |       | $ | 51,085 |   |   |   | $ | 31,966 |   |   |
| Cash held in escrow                                                                                                                                                                                                                 |       |                   | 1,092      |                   |       |                  | 1,051      |   |   |   | 872 |   |   |
| Marketable securities                                                                                                                                                                                                               |       |                   | 38,354     |                   |       |                  | 13,306     |   |   |   | 34,062 |   |   |
| Accounts receivable, net                                                                                                                                                                                                            |       |                   | 10,120     |                   |       |                  | 11,410     |   |   |   | 18,579 |   |   |
| Inventory                                                                                                                                                                                                                           |       |                   | 43,221     |                   |       |                  | 37,627     |   |   |   | 36,212 |   |   |
| Prepaid catalog expenses                                                                                                                                                                                                            |       |                   | 5,016      |                   |       |                  | 4,637      |   |   |   | 3,894 |   |   |
| Deferred income taxes                                                                                                                                                                                                               |       |                   | 10,892     |                   |       |                  | 6,753      |   |   |   | 9,761 |   |   |
| Other current assets                                                                                                                                                                                                                |       |                   | 9,216      |                   |       |                  | 10,692     |   |   |   | 8,237 |   |   |
| Total current assets                                                                                                                                                                                                                |       |                   | 135,559    |                   |       |                  | 136,561    |   |   |   | 143,583 |   |   |
| Property and equipment,  net                                                                                                                                                                                                        |       |                   | 145,519    |                   |       |                  | 131,145    |   |   |   | 133,972 |   |   |
| Other non-current assets                                                                                                                                                                                                            |       |                   | 6,492      |                   |       |                  | 4,761      |   |   |   | 5,141 |   |   |
| Total assets                                                                                                                                                                                                                        |       |                   | $          | 287,570                |       |                  |       | $ | 272,467 |   |   |   | $ | 282,696 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                      |       |                   |       |                   |       |                  |       |   |   |   |   |   |   |
| Current liabilities:                                                                                                                                                                                                                |       |                   |       |                   |       |                  |       |   |   |   |   |   |   |
| Accounts payable                                                                                                                                                                                                                    |       |                   | $          | 18,030                 |       |                  |       | $ | 19,152 |   |   |   | $ | 17,523 |   |   |
| Accrued expenses                                                                                                                                                                                                                    |       |                   | 30,803     |                   |       |                  | 24,744     |   |   |   | 27,158 |   |   |
| Accrued customer returns                                                                                                                                                                                                            |       |                   | 6,011      |                   |       |                  | 6,103      |   |   |   | 7,494 |   |   |
| Current portion of  long-term debt                                                                                                                                                                                                  |       |                   | 1,386      |                   |       |                  | 1,780      |   |   |   | 1,805 |   |   |
| Total current  liabilities                                                                                                                                                                                                          |       |                   | 56,230     |                   |       |                  | 51,779     |   |   |   | 53,980 |   |   |
| Long-term debt, less  current portion                                                                                                                                                                                               |       |                   | 9,506      |                   |       |                  | 10,892     |   |   |   | 10,431 |   |   |
| Deferred credits from  landlords and other                                                                                                                                                                                          |       |                   | 51,546     |                   |       |                  | 44,162     |   |   |   | 47,387 |   |   |
| Deferred income taxes                                                                                                                                                                                                               |       |                   | 5,577      |                   |       |                  | 4,234      |   |   |   | 6,841 |   |   |
| Commitments and contingencies                                                                                                                                                                                                       |       |                   |       |                   |       |                  |       |   |   |   |   |   |   |
| Stockholders’ equity:                                                                                                                                                                                                          |       |                   |       |                   |       |                  |       |   |   |   |   |   |   |
| Special preferred stock  (par value $0.01) 1,000,000 shares authorized                                                                                                                                                              |       |                   | —     |                   |       |                  | —     |   |   |   | — |   |   |
| Common stock (par value  $0.01) 30,000,000 shares authorized, 20,324,589, 20,103,123 and 20,109,789  shares issued and outstanding as of September 24, 2005,  September 25, 2004 and December 25, 2004, respectively |       |                   | 203        |                   |       |                  | 201        |   |   |   | 201 |   |   |
| Additional paid-in  capital                                                                                                                                                                                                         |       |                   | 114,699    |                   |       |                  | 112,387    |   |   |   | 112,508 |   |   |
| Accumulated other  comprehensive loss                                                                                                                                                                                               |       |                   | (102       | )                      |       |                  | (25        | ) |   |   | (89 | ) |   |
| Retained earnings                                                                                                                                                                                                                   |       |                   | 49,911     |                   |       |                  | 48,837     |   |   |   | 51,437 |   |   |
| Total stockholders’  equity                                                                                                                                                                                                    |       |                   | 164,711    |                   |       |                  | 161,400    |   |   |   | 164,057 |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                     |       |                   | $          | 287,570                |       |                  |       | $ | 272,467 |   |   |   | $ | 282,696 |   |   |

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

3

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**THEJ. JILL GROUP, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data)(unaudited)**

| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **September 24,**           | ** ** | **September 25,**          | ** ** | **September 24,** | ** ** | **September 25,** | ** ** |
| ** **                                    | ** ** | **2005**                         | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | ** **                       | ** ** | **(Restated)**                  | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Net sales                                     |       |                             | $          | 102,969                         |       |   |   | $ | 94,933 |   |   |   | $ | 318,755 |   |   |   | $ | 315,423 |   |   |
| Cost of products  and merchandising           |       |                             | 71,155     |                            |       |   | 64,830 |   |   |   | 216,384 |   |   |   | 203,090 |   |   |
| Gross margin                                  |       |                             | 31,814     |                            |       |   | 30,103 |   |   |   | 102,371 |   |   |   | 112,333 |   |   |
| Selling, general  and administrative expenses |       |                             | 36,735     |                            |       |   | 34,529 |   |   |   | 105,133 |   |   |   | 101,476 |   |   |
| Operating income (loss)                       |       |                             | (4,921     | )                               |       |   | (4,426 | ) |   |   | (2,762 | ) |   |   | 10,857 |   |   |
| Interest income                               |       |                             | 339        |                            |       |   | 152 |   |   |   | 812 |   |   |   | 461 |   |   |
| Interest expense                              |       |                             | 225        |                            |       |   | 249 |   |   |   | 707 |   |   |   | 796 |   |   |
| Interest (income) expense, net                |       |                             | (114       | )                               |       |   | 97 |   |   |   | (105 | ) |   |   | 335 |   |   |
| Income (loss)  before taxes                   |       |                             | (4,807     | )                               |       |   | (4,523 | ) |   |   | (2,657 | ) |   |   | 10,522 |   |   |
| Income tax  provision (benefit)               |       |                             | (2,119     | )                               |       |   | (1,863 | ) |   |   | (1,131 | ) |   |   | 4,416 |   |   |
| Net income (loss)                             |       |                             | $          | (2,688                          | )          |   |   | $ | (2,660 | ) |   |   | $ | (1,526 | ) |   |   | $ | 6,106 |   |   |
| **Earnings  (loss) per share:**               |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Basic*                                       |       |                             | $          | (0.13                           | )          |   |   | $ | (0.13 | ) |   |   | $ | (0.08 | ) |   |   | $ | 0.31 |   |   |
| *Diluted*                                     |       |                             | $          | (0.13                           | )          |   |   | $ | (0.13 | ) |   |   | $ | (0.08 | ) |   |   | $ | 0.30 |   |   |
| **Weighted  average shares outstanding:**     |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Basic*                                       |       |                             | 20,318     |                            |       |   | 20,103 |   |   |   | 20,211 |   |   |   | 19,990 |   |   |
| *Diluted*                                     |       |                             | 20,318     |                            |       |   | 20,103 |   |   |   | 20,211 |   |   |   | 20,550 |   |   |

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

4

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**THEJ. JILL GROUP, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)**

| ** **                                                                                | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **September 24,  2005**    | ** ** | **September 25,  2004** | ** ** |
| ** **                                                                                | ** ** | ** **                      | ** ** | **(Restated)** | ** ** |
| Cash flows provided by  operating activities:                                             |       |                            |       |   |   |   |   |   |   |
| Net (loss) income                                                                         |       |                            | $          | (1,526 | ) |   |   | $ | 6,106 |   |   |
| Adjustments to  reconcile net (loss) income to net cash provided by operating activities: |       |                            |       |   |   |   |   |   |   |
| Depreciation and amortization                                                             |       |                            | 16,555     |   |   |   | 13,575 |   |   |
| (Gain) loss on trust assets                                                               |       |                            | (174       | ) |   |   | 11 |   |   |
| Loss on disposal of property and equipment                                                |       |                            | 534        |   |   |   | — |   |   |
| Deferred income taxes                                                                     |       |                            | (2,329     | ) |   |   | 1,797 |   |   |
| Changes in assets  and liabilities:                                                       |       |                            |       |   |   |   |   |   |   |
| Decrease in accounts receivable, net                                                      |       |                            | 8,459      |   |   |   | 7,224 |   |   |
| Increase in inventory                                                                     |       |                            | (7,009     | ) |   |   | (9,496 | ) |   |
| Increase in prepaid catalog expenses                                                      |       |                            | (1,122     | ) |   |   | (531 | ) |   |
| Increase in other assets                                                                  |       |                            | (934       | ) |   |   | (3,795 | ) |   |
| Increase in accounts payable                                                              |       |                            | 760        |   |   |   | 3,765 |   |   |
| (Decrease) increase in accrued expenses                                                   |       |                            | (164       | ) |   |   | 1,093 |   |   |
| Decrease in accrued customer returns                                                      |       |                            | (1,483     | ) |   |   | (1,186 | ) |   |
| Increase in deferred credits from landlords and  other                                    |       |                            | 4,159      |   |   |   | 3,040 |   |   |
| Net cash provided  by operating activities                                                |       |                            | 15,726     |   |   |   | 21,603 |   |   |
| Cash flows used  in investing activities:                                                 |       |                            |       |   |   |   |   |   |   |
| Additions to property and equipment                                                       |       |                            | (24,312    | ) |   |   | (17,007 | ) |   |
| Purchases of marketable securities                                                        |       |                            | (31,875    | ) |   |   | (13,343 | ) |   |
| Maturities of marketable securities                                                       |       |                            | 18,441     |   |   |   | — |   |   |
| Sales of marketable securities                                                            |       |                            | 8,701      |   |   |   | — |   |   |
| Investments in trust assets                                                               |       |                            | (1,224     | ) |   |   | (997 | ) |   |
| Increase in cash held in escrow                                                           |       |                            | (220       | ) |   |   | (268 | ) |   |
| Net cash used in  investing activities                                                    |       |                            | (30,489    | ) |   |   | (31,615 | ) |   |
| Cash flows  provided by financing activities:                                             |       |                            |       |   |   |   |   |   |   |
| Proceeds from stock transactions                                                          |       |                            | 1,789      |   |   |   | 3,080 |   |   |
| Payments of debt borrowings                                                               |       |                            | (1,344     | ) |   |   | (1,270 | ) |   |
| Net cash provided  by financing activities                                                |       |                            | 445        |   |   |   | 1,810 |   |   |
| Net decrease in cash and cash equivalents                                                 |       |                            | (14,318    | ) |   |   | (8,202 | ) |   |
| Cash and cash  equivalents at:                                                            |       |                            |       |   |   |   |   |   |   |
| Beginning of period                                                                       |       |                            | 31,966     |   |   |   | 59,287 |   |   |
| End of period                                                                             |       |                            | $          | 17,648 |   |   |   | $ | 51,085 |   |   |
| **Supplemental information:**                                                             |       |                            |       |   |   |   |   |   |   |
| Non-cash investing  activities:                                                           |       |                            |       |   |   |   |   |   |   |
| Property and  equipment costs accrued, not paid                                           |       |                            | $          | 4,877 |   |   |   | $ | 3,417 |   |   |

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

5

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**THE J. JILL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)**

The condensed consolidated financial statementsincluded herein have been prepared by The J. Jill Group, Inc. (togetherwith its wholly owned consolidated subsidiaries, the “Company”), without audit,pursuant to the rules and regulations of the Securities and ExchangeCommission (the “SEC”), and in the opinion of management contain alladjustments (consisting of normal recurring adjustments) necessary to presentfairly the financial position, results of operations and cash flows for theinterim periods presented. Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles (“GAAP”) have been omitted pursuant to such rules andregulations. Accordingly, although the Company believes that the disclosuresare adequate to make the information presented not misleading, these condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and the notes thereto included in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 25,2004 (“fiscal 2004”). As a retailer, the Company is subject to seasonalfluctuations in net sales. The results of operations for interim periods arenot necessarily indicative of the results to be expected for the fiscal year.

**A.   Nature of business:**

TheCompany is a multi-channel specialty retailer of women’s apparel, includingaccessories and footwear, that markets its products through its retail stores,catalogs and website *jjill.com*.

**B.   Restatement of prior financial information:**

The Company restated its condensed consolidatedbalance sheet at September 25, 2004, its condensed consolidated statementsof operations for the three and nine months ended September 25, 2004 andits condensed consolidated statement of cash flows for the nine months ended September 25,2004. The restatement also affects periods prior to fiscal 2004. Therestatement corrects the Company’s historical accounting for operating leases.For information with respect to the restatement, see “Note B” to the consolidatedfinancial statements contained in the Company’s Annual Report on Form 10-Kfor fiscal 2004. The Company did not amend its Quarterly Reports on Form 10-Qfor the periods before the end of fiscal 2004 to reflect the restatement andtherefore, the financial statements and related financial information containedin such reports should no longer be relied upon. Throughout this Form 10-Q,all referenced amounts for affected prior periods and prior period comparisonsreflect the balances and amounts on a restated basis.

As aresult of this restatement, the Company’s financial results have been adjustedas follows (in thousands, except per share data):

|                                            | ** ** | **As Previously**       | ** ** | ** **      | ** ** | ** **                   | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-----------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **Reported**                 | ** ** | ** **      | ** ** | **As Restated**         | ** ** |
| ** **                                 | ** ** | **September 25,  2004** | ** ** | **Adjustments** | ** ** | **September 25,  2004** | ** ** |
| Deferred credits  from landlords and other |       |                         | $          | 40,518          |       |                         |       | $ | 3,644 |   |   |   | $ | 44,162 |   |   |
| Deferred income  taxes                     |       |                         | 5,703      |            |       |                         | (1,469     | ) |   |   | 4,234 |   |   |
| Retained earnings                          |       |                         | 51,012     |            |       |                         | (2,175     | ) |   |   | 48,837 |   |   |
| Total stockholders’  equity           |       |                         | $          | 163,575         |       |                         |       | $ | (2,175 | ) |   |   | $ | 161,400 |   |   |

 

6

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**THE J. JILL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)**

 

| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **As Previously**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Reported**                     | ** ** | ** ** | ** ** | **As Restated** | ** ** |
| ** **                                    | ** ** | **September 25,  2004**     | ** ** | **Adjustments** | ** ** | **September 25,  2004** | ** ** |
| Net sales                                     |       |                             | $          | 94,933 |   |   |   | $ | — |   |   |   | $ | 94,933 |   |   |
| Cost of products and  merchandising           |       |                             | 64,718     |   |   |   | 112 |   |   |   | 64,830 |   |   |
| Gross margin                                  |       |                             | 30,215     |   |   |   | (112 | ) |   |   | 30,103 |   |   |
| Selling, general and  administrative expenses |       |                             | 34,552     |   |   |   | (23 | ) |   |   | 34,529 |   |   |
| Operating loss                                |       |                             | (4,337     | ) |   |   | (89 | ) |   |   | (4,426 | ) |   |
| Interest income                               |       |                             | 152        |   |   |   | — |   |   |   | 152 |   |   |
| Interest expense                              |       |                             | 249        |   |   |   | — |   |   |   | 249 |   |   |
| Interest expense, net                         |       |                             | 97         |   |   |   | — |   |   |   | 97 |   |   |
| Loss before taxes                             |       |                             | (4,434     | ) |   |   | (89 | ) |   |   | (4,523 | ) |   |
| Income tax benefit                            |       |                             | (1,826     | ) |   |   | (37 | ) |   |   | (1,863 | ) |   |
| Net loss                                      |       |                             | $          | (2,608 | ) |   |   | $ | (52 | ) |   |   | $ | (2,660 | ) |   |
| **Loss  per share:**                          |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| *Basic*                                       |       |                             | $          | (0.13 | ) |   |   | $ | (0.00 | ) |   |   | $ | (0.13 | ) |   |
| *Diluted*                                     |       |                             | $          | (0.13 | ) |   |   | $ | (0.00 | ) |   |   | $ | (0.13 | ) |   |

 

| ** **                                    | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **As Previously**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Reported**                    | ** ** | ** ** | ** ** | **As Restated** | ** ** |
| ** **                                    | ** ** | **September 25,  2004**    | ** ** | **Adjustments** | ** ** | **September 25,  2004** | ** ** |
| Net sales                                     |       |                            | $          | 315,423 |   |   |   | $ | — |   |   |   | $ | 315,423 |   |   |
| Cost of products and  merchandising           |       |                            | 202,959    |   |   |   | 131 |   |   |   | 203,090 |   |   |
| Gross margin                                  |       |                            | 112,464    |   |   |   | (131 | ) |   |   | 112,333 |   |   |
| Selling, general and  administrative expenses |       |                            | 101,545    |   |   |   | (69 | ) |   |   | 101,476 |   |   |
| Operating income                              |       |                            | 10,919     |   |   |   | (62 | ) |   |   | 10,857 |   |   |
| Interest income                               |       |                            | 461        |   |   |   | — |   |   |   | 461 |   |   |
| Interest expense                              |       |                            | 796        |   |   |   | — |   |   |   | 796 |   |   |
| Interest expense, net                         |       |                            | 335        |   |   |   | — |   |   |   | 335 |   |   |
| Income before taxes                           |       |                            | 10,584     |   |   |   | (62 | ) |   |   | 10,522 |   |   |
| Income tax provision                          |       |                            | 4,442      |   |   |   | (26 | ) |   |   | 4,416 |   |   |
| Net income                                    |       |                            | $          | 6,142 |   |   |   | $ | (36 | ) |   |   | $ | 6,106 |   |   |
| **Earnings  per share:**                      |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| *Basic*                                       |       |                            | $          | 0.31 |   |   |   | $ | (0.00 | ) |   |   | $ | 0.31 |   |   |
| *Diluted*                                     |       |                            | $          | 0.30 |   |   |   | $ | (0.00 | ) |   |   | $ | 0.30 |  |   |

 

**C.   Accounting for stock-based compensation:**

At September 24, 2005, the Company had threestock-based plans, which are described in “Note B” and “Note G” to theconsolidated financial statements contained in the Company’s Annual Report on Form 10-Kfor fiscal 2004. The Company discloses stock-based compensation information inaccordance with Financial Accounting Standards Board (“FASB”) issued Statement No. 148(“SFAS 148”), *“Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of*

7

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**THE J. JILL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)**

*FASB Statement No. 123”*and FASB issued Statement No. 123 (“SFAS 123”), *“Accounting for Stock-Based Compensation.”* The Company haselected to continue to account for its stock-based plans under AccountingPrinciples Board (“APB”) Opinion No. 25, *“Accountingfor Stock Issued to Employees,”* as well as to provide disclosure ofstock-based compensation as outlined in SFAS 123, as amended by SFAS 148. Nocompensation expense has been recognized related to the Company’s stock-basedplans.

In December 2004, the FASB issued Statement No. 123R(“SFAS 123R”), *“Share-Based Payment*,*”* a revision of SFAS 123. As aresult, the pro forma disclosures previously permitted under SFAS 123 willno longer be an alternative to financial statement recognition. See “Note B” tothe consolidated financial statements contained in the Company’s Annual Reporton Form 10-K for fiscal 2004. In April 2005, the SEC announcedthe adoption of a new rule that amended the compliance date for SFAS 123R.The SEC’s rule requires companies to implement SFAS 123R by the beginningof the first fiscal year beginning after June 15, 2005. Accordingly, theCompany intends to adopt SFAS 123R in the first quarter of 2006. The Company iscurrently evaluating the provisions of SFAS 123R. The adoption of this standardis expected to have a material effect on the Company’s consolidated financialstatements; however, based on the Company’s current projections, the Companyexpects the compensation expense to be recognized in 2006 as a result of theadoption of SFAS 123R to be significantly less than the pro forma amountshistorically disclosed in the notes to its consolidated financial statements. Manyof the stock options that will be outstanding as of the first quarter of 2006will be fully vested at that time and accordingly, will not result incompensation expense going forward.

TheCompany currently uses the Black-Scholes option pricing model to estimate thefair value at the date of grant of stock options granted under the Company’sstock option plans and stock purchase rights associated with the Company’semployee stock purchase plan. A summary of the assumptions used for stockoption grants and stock purchase right grants follows:

| ** **                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **September 24,**           | ** ** | **September 25,**          | ** ** | **September 24,** | ** ** | **September 25,** | ** ** |
| ** **                         | ** ** | **2005**                         | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Stock option plans:**            |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividend yield                     |       |                             | 0.0        | %                               |       |   | 0.0 | % |   |   | 0.0 | % |   |   | 0.0 | % |   |
| Expected volatility                |       |                             | 53.8       | %                               |       |   | 70.0 | % |   |   | 51.0 | % |   |   | 70.0 | % |   |
| Risk free interest rate            |       |                             | 4.1        | %                               |       |   | 3.4 | % |   |   | 3.7 | % |   |   | 3.0 | % |   |
| Expected lives                     |       |                             | 4.0 years  |                            |       |   | 4.0 years |   |   |   | 2.6 years | (2) |   |   | 4.0 years |   |   |
| **Employee  stock purchase plan:** |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividend yield                     |       |                             | n/a        | (1)                             |       |   | n/a | (1) |   |   | 0.0 | % |   |   | 0.0 | % |   |
| Expected volatility                |       |                             | n/a        | (1)                             |       |   | n/a | (1) |   |   | 49.0 | % |   |   | 50.0 | % |   |
| Risk free interest rate            |       |                             | n/a        | (1)                             |       |   | n/a | (1) |   |   | 2.8 | % |   |   | 1.0 | % |   |
| Expected lives                     |       |                             | n/a        | (1)                             |       |   | n/a | (1) |   |   | 1.0 year |   |   |   | 1.0 year |  |   |

 

(1)         No stock purchase rightswere granted during the three months ended September 24, 2005 or September 25,2004.

(2)         Certain options grantedduring the nine months ended September 24, 2005 were fully vested whichdecreased the assumption with respect to the expected life of those grants.

8

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**THE J. JILL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)**

Areconciliation of net income (loss), as reported in the condensed consolidatedstatements of operations, to pro forma net income (loss) including compensationexpense, net of tax, for the Company’s stock-based plans as calculated inaccordance with the provisions of SFAS 123, as amended by SFAS 148, and acomparison of as reported and pro forma basic and diluted earnings (loss) pershare (“EPS”) follows (in thousands, except per share data):

| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **September 24,  2005**     | ** ** | **September 25,  2004**    | ** ** | **September 24,  2005** | ** ** | **September 25,  2004** | ** ** |
| ** **                                          | ** ** | ** **                       | ** ** | **(Restated)**                  | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Net income (loss):**                              |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As reported                                         |       |                             | $          | (2,688                          | )          |   |   | $ | (2,660 | ) |   |   | $ | (1,526 | ) |   |   | $ | 6,106 |   |   |
| Compensation expense, net of related tax benefit(1) |       |                             | (460       | )                               |       |   | (1,490 | ) |   |   | (2,940 | ) |   |   | (4,434 | ) |   |
| Pro forma                                           |       |                             | $          | (3,148                          | )          |   |   | $ | (4,150 | ) |   |   | $ | (4,466 | ) |   |   | $ | 1,672 |   |   |
| **Earnings  (loss) per share:**                     |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Basic*                                             |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As reported                                         |       |                             | $          | (0.13                           | )          |   |   | $ | (0.13 | ) |   |   | $ | (0.08 | ) |   |   | $ | 0.31 |   |   |
| Pro forma                                           |       |                             | (0.15      | )                               |       |   | (0.21 | ) |   |   | (0.22 | ) |   |   | 0.08 |   |   |
| *Diluted*                                           |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As reported                                         |       |                             | (0.13      | )                               |       |   | (0.13 | ) |   |   | (0.08 | ) |   |   | 0.30 |   |   |
| Pro forma                                           |       |                             | $          | (0.15                           | )          |   |   | $ | (0.21 | ) |   |   | $ | (0.22 | ) |   |   | $ | 0.08 |  |   |

 

(1)         Compensation expense isnet of a related tax benefit of $99,000 and $827,000 for the three months endedSeptember 24, 2005 and September 25, 2004, respectively, and$1,239,000 and $2,461,000 for the nine months ended September 24, 2005 andSeptember 25, 2004, respectively.

The effects on pro forma net income (loss) and proforma EPS of the estimated stock-based compensation expense, net of tax,calculated using the fair value of stock options and stock purchase rights inaccordance with the Black-Scholes option pricing model for the three and ninemonths ended September 24, 2005 and September 25, 2004 are notnecessarily representative of the effects on the Company’s results ofoperations in the future. In addition, the compensation expense estimatesutilize an option pricing model developed for traded options with relativelyshort lives. The Company’s stock option grants typically have a life of up toten years and are not transferable. Therefore, the actual fair value of a stockoption grant may be different from the Company’s estimates. The Companybelieves that its estimates incorporate all relevant information and representa reasonable approximation in light of the difficulties involved in valuingnon-traded stock options.

9

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**THE J. JILL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)**

**D.   Earnings per share:**

Areconciliation of the numerators and denominators of the basic and diluted EPScomputations follows (in thousands, except per share data):

| ** **                                                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **September 24,  2005**     | ** ** | **September 25,  2004**    | ** ** | **September 24,  2005** | ** ** | **September 25,  2004** | ** ** |
| ** **                                                                                 | ** ** | ** **                       | ** ** | **(Restated)**                  | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Numerator:**                                                                             |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                          |       |                             | $          | (2,688                          | )          |   |   | $ | (2,660 | ) |   |   | $ | (1,526 | ) |   |   | $ | 6,106 |   |   |
| **Denominator (shares):**                                                                  |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic weighted average shares outstanding                                                  |       |                             | 20,318     |                            |       |   | 20,103 |   |   |   | 20,211 |   |   |   | 19,990 |   |   |
| Assumed issuance of shares under stock option plans  and employee stock purchase plan |       |                             | —     |                            |       |   | — |   |   |   | — |   |   |   | 560 |   |   |
| Diluted weighted average shares outstanding                                                |       |                             | 20,318     |                            |       |   | 20,103 |   |   |   | 20,211 |   |   |   | 20,550 |   |   |
| **Earnings  (loss) per share:**                                                            |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Basic*                                                                                    |       |                             | $          | (0.13                           | )          |   |   | $ | (0.13 | ) |   |   | $ | (0.08 | ) |   |   | $ | 0.31 |   |   |
| *Diluted*                                                                                  |       |                             | $          | (0.13                           | )          |   |   | $ | (0.13 | ) |   |   | $ | (0.08 | ) |   |   | $ | 0.30 |   |   |

 

For the three and nine months ended September 24,2005, of the options then outstanding, options to purchase 3,344,787 shares ofcommon stock were excluded from the computation of diluted EPS on the basisthat such options were antidilutive. For the three and nine months ended September 25,2004, of the options then outstanding, options to purchase 3,212,037 and1,220,500 shares of common stock, respectively, were excluded from thecomputation of diluted EPS on the basis that such options were antidilutive.

During the three months ended September 24, 2005,options to purchase 14,500 shares of the Company’s common stock were grantedpursuant to the Company’s stock option plans, options to purchase 12,750 sharesof common stock were exercised and options to purchase 4,500 shares of commonstock were canceled. The Company received $158,000 in cash from the exercise ofstock options and recorded a related tax benefit of $19,000 during the threemonths ended September 24, 2005. During the three months ended September 25,2004, options to purchase 74,000 shares of the Company’s common stock weregranted pursuant to the Company’s stock option plans and options to purchase1,000 shares of common stock were canceled. There were no options exercisedduring the three months ended September 25, 2004.

Duringthe nine months ended September 24, 2005, options to purchase 300,500shares of the Company’s common stock were granted pursuant to the Company’sstock option plans, options to purchase 177,750 shares of common stock wereexercised and options to purchase 277,500 shares of common stock were canceled.The Company received $1,387,000 in cash from the exercise of stock options andrecorded a related tax benefit of $404,000 during the nine months ended September 24,2005. During the nine months ended September 25, 2004, options to purchase429,500 shares of the Company’s common 

10

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**THE J. JILL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)**

stock were granted pursuant to the Company’s stockoption plans, options to purchase 408,558 shares of common stock were exercisedand options to purchase 34,000 shares of common stock were canceled. TheCompany received $2,689,000 in cash from the exercise of stock options andrecorded a related tax benefit of $1,159,000 during the nine months ended September 25,2004.

**E.   Marketable securities:**

The Company’s marketable securities consist primarilyof investments in municipal debt securities. The Company intends to maintain aliquid portfolio and accordingly, all marketable securities are classified asavailable-for-sale and reported at fair value in accordance with FASB issuedStatement No. 115 (“SFAS 115”), *“Accountingfor Certain Investments in Debt and Equity Securities.”*Unrealizedgains and losses are included in accumulated other comprehensive income, aseparate component of stockholders’ equity. Unrealized gains and losses areadded to or deducted from net income, respectively, in arriving atcomprehensive income (loss) for financial reporting purposes. During the threeand nine months ended September 24, 2005, the Company’s comprehensive losswas $2,666,000 and $1,539,000, respectively. During the three months ended September 25,2004, the Company’s comprehensive loss was $2,685,000 and during the ninemonths ended September 25, 2004 the Company’s comprehensive income was$6,081,000. There were no realized gains or losses on marketable securitiesduring the three and nine months ended September 24, 2005 and September 25,2004, respectively.

Asummary of the contractual maturities of available-for-sale securities follows(in thousands):

| ** **                       | ** ** | **Fair Market Value** | ** ** |
|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **September 24,  2005**    | ** ** | **September 25,  2004** | ** ** | **December 25,  2004** | ** ** |
| Due within one  year             |       |                            | $          | 29,206 |   |   |   | $ | 11,164 |   |   |   | $ | 18,259 |   |   |
| Due between one  and three years |       |                            | 9,148      |   |   |   | 2,142 |   |   |   | 13,803 |   |   |
| Due after ten  years(1)          |       |                            | —     |   |   |   | — |   |   |   | 2,000 |   |   |
| Total                            |       |                            | $          | 38,354 |   |   |   | $ | 13,306 |   |   |   | $ | 34,062 |   |   |

 

(1)         Marketablesecurities within this category contained put or call provisions that allowedthe security to be put or called within one year.

**F.**   Debt:

The Company’s credit facilities at September 24,2005 consisted of (i) a $60,000,000 revolving credit facility (the “RevolvingCredit Facility”); (ii) a real estate loan (the “Tilton Facility Loan”);and (iii) an equipment loan (the “Equipment Loan”).

11

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**THE J. JILL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)**

Asummary of outstanding long-term debt follows (in thousands):

| ** **                            | ** ** | **September 24,  2005** | ** ** | **September 25,  2004** | ** ** | **December 25,  2004** | ** ** |
|---------------------------------------|------------|------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Tilton Facility  Loan                 |       |                         | $          | 9,928                        |       |                        |       | $ | 10,320 |   |   |   | $ | 10,224 |   |   |
| Equipment Loan                        |       |                         | 964        |                         |       |                        | 2,352      |   |   |   | 2,012 |   |   |
| Total long-term debt                  |       |                         | 10,892     |                         |       |                        | 12,672     |   |   |   | 12,236 |   |   |
| Less current  maturities              |       |                         | (1,386     | )                            |       |                        | (1,780     | ) |   |   | (1,805 | ) |   |
| Long-term debt,  less current portion |       |                         | $          | 9,506                        |       |                        |       | $ | 10,892 |   |   |   | $ | 10,431 |   |   |

 

At September 24, 2005, the Company estimated thefair value of its outstanding borrowings, including current maturities, to be$11,237,000.

The maturity date of the Revolving Credit Facility is June 1,2006. The Company is currently negotiating with its banks to, among otherthings, extend the maturity date of the Revolving Credit Facility to June 1,2007. The total amount available under the Revolving Credit Facility is$60,000,000 and is reduced by outstanding borrowings and outstanding letters ofcredit. Outstanding borrowings may not exceed $20,000,000. Letters of creditare primarily used to procure inventory from foreign vendors. The RevolvingCredit Facility is collateralized by substantially all of the personalproperty, both tangible and intangible, of the Company. Outstanding borrowingsbear interest at an annual rate equal to the prime lending rate announced byone of the participating banks or the LIBOR lending rate plus 1.75% per annum. AtSeptember 24, 2005, the Revolving Credit Facility bore interest at 6.75%per annum. There were no outstanding borrowings on the Revolving Credit Facilityat September 24, 2005, September 25, 2004 or December 25, 2004. Outstandingletters of credit totaled $29,262,000, $33,648,000 and $40,647,000 at September 24,2005, September 25, 2004 and December 25, 2004, respectively. Availabilityunder the Revolving Credit Facility at September 24, 2005, September 25,2004 and December 25, 2004 was $30,738,000, $26,352,000 and $19,353,000,respectively, subject in each case to the borrowing cap. Outstanding letters ofcredit do not bear interest. The Company is required to pay a commitment fee of 1¤4 of1% per annum on the unused portion of the Revolving Credit Facility.

The Tilton Facility Loan is collateralized by amortgage lien on the Company’s operations, fulfillment and distribution centerin Tilton, New Hampshire (the “Tilton facility”). The Tilton facility is ownedby Birch Pond Realty Corporation, a wholly owned subsidiary of The J. JillGroup, Inc., and leased to The J. Jill Group, Inc. Payments ofprincipal and interest on the Tilton Facility Loan, a 10-year loan, aredue monthly, based on a 20-year amortization, with a balloon payment ofthe remaining balance payable on April 1, 2009. The interest rate on theTilton Facility Loan is fixed at 7.30% per annum.

The Equipment Loan is collateralized by substantiallyall of the Company’s materials handling equipment. The maturity date of theEquipment Loan is May 1, 2006 and payments of principal and interest aredue monthly. The interest rate on the Equipment Loan is fixed at 5.00% perannum.

TheCompany’s credit facilities contain various lending conditions and covenantsincluding restrictions on permitted liens. In the case of the Revolving CreditFacility, these conditions and covenants include certain financial coveragecalculations and ratios, including (i) indebtedness and outstanding letterof credit balance to tangible net worth; (ii) hard current assets tocurrent liabilities; (iii) debt service coverage; (iv) indebtedness,outstanding letter of credit balance and net present value of operating leases 

12

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**THE J. JILL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)**

to tangible net worth; and (v) minimum annual netprofit. The manner of making these calculations and computing these ratios isdefined by the provisions of the Fifth Amended and Restated Loan Agreement, asamended, which is part of the Revolving Credit Facility. On June 17, 2005,the Revolving Credit Facility was amended to modify the debt service coveragecovenant to make the covenant less restrictive for the second and thirdquarters of 2005. The Company was in compliance with the covenants associatedwith its credit facilities as of and for the three months ended September 24,2005 and September 25, 2004 and as of and for the twelve months ended December 25,2004.

**G.   Income taxes:**

TheCompany’s effective tax rate is dependent upon, among other things, the levelof the Company’s estimated taxable income for the full fiscal year and thetaxability of that income in certain states given the Company’s organizationalstructure. The Company’s ability to predict its taxable income for the fullfiscal year is subject to a number of uncertainties and the Company’s estimatecan change materially as a result of changing business trends. Should taxableincome levels differ from management’s estimate, the Company’s effective taxrate may be materially affected which may significantly impact the Company’soperating results in future periods.

**H.   Commitments and contingencies:**

***Lease commitments***

The Company leases certain of its facilities undernon-cancelable operating leases having initial or remaining terms of more thanone year. Many of the Company’s leases contain scheduled increases in annualrent payments and the majority of the Company’s leases also require the Companyto pay maintenance, insurance and real estate taxes. Additionally, certain ofthe Company’s leases include provisions for the payment of additional rentbased on a percentage of sales over an established minimum.

Duringthe nine months ended September 24, 2005, the Company increased its leasecommitments by 42****retail storesand four outlet stores, each having initial lease termination dates between2010 and 2017. At September 24, 2005, the future minimum lease payments,excluding maintenance, insurance and real estate taxes, for operating leaseshaving a remaining term in excess of one year at such date, including the 46operating leases added during the nine months ended September 24, 2005,were as follows (in thousands):

| ** **                        | ** ** | **Lease**       | ** ** |
|-----------------------------------|------------|-----------------|------------|
| ** **                        | ** ** | **Commitments** | ** ** |
| For the remainder  of fiscal 2005 |       |            | $          | 5,673 |   |   |
| Fiscal 2006                       |       |            | 33,960     |   |   |
| Fiscal 2007                       |       |            | 34,748     |   |   |
| Fiscal 2008                       |       |            | 35,405     |   |   |
| Fiscal 2009                       |       |            | 35,695     |   |   |
| Thereafter                        |       |            | 111,987    |   |   |
| Total                             |       |            | $          | 257,468 |   |   |

 

Most of the Company’sretail store leases contain provisions that allow for early termination of thelease by either party if certain predetermined annual sales levels are not met.Generally, these provisions 

13

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**THE J. JILL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)**

allowthe lease to be terminated between the third and fifth year of the lease term. Shouldthe lease be terminated under these provisions, the unamortized portion of anylandlord allowances related to that property would be payable to the landlord.The liability for unamortized landlord allowances, including current portion,was $42,768,000, $36,093,000 and $39,507,000 at September 24, 2005, September 25,2004 and December 25, 2004, respectively.

***Legal proceedings and other contingencies***

The following is an update relating to the settlementof a purported class action in California as previously disclosed in “Note H”to the condensed consolidated financial statements contained in the Company’sQuarterly Report on Form 10-Q for the quarter ended June 25,2005. In September 2005, the California Superior Court, Riverside County,approved the settlement agreement and entered an order and final judgment. TheCompany expects to make payment of claims to class members as well as attorney’sfees, costs and class representative enhancements by the end of November 2005.No additional accrual was recorded as a result of the execution of thesettlement agreement or the entry of the order and final judgment. The Companyconsiders the amount accrued to be immaterial to the financial statements takenas a whole.

In March 2004, the Company received a letter froma third party informing the Company of the third party’s ownership of a numberof patents and alleging that various aspects of the Company’s website werecovered by those patents. InSeptember 2005 in connection with the acquisition of a data warehouseproduct from the third party, the Company obtained a perpetual license to usesuch patents and a release from any and all claims relating to such patentsfrom the third party.

From time to time, theCompany is party to various legal proceedings primarily arising in the ordinarycourse of business. Further, additional claims may be asserted in the futurerelative to events currently unknown to management.

**I.**   Segmentinformation:

The Company currently has two reportable businesssegments, retail and direct. Each segment is separately managed and utilizesdistinct distribution, marketing and inventory management strategies. Theretail segment markets merchandise through the Company’s retail stores. Thedirect segment markets merchandise through the Company’s catalogs and website.Segment reporting is intended to give financial statement users a view of theCompany “through the eyes of management.” The Company’s internal managementreporting is the basis for the information disclosed for its business segments.In accordance with GAAP, the Company’s internally defined measure of segmentprofit or loss, segment contribution, is required to be disclosed, but it is nota GAAP measure. Information related to segment contribution should be read inconjunction with the reconciliation to “Operating income” as determined byGAAP.

At the beginning of 2005, the Company changed itssegment reporting as a result of changes in the way management views thebusiness. Inventory control costs, previously included in other, have beenreclassified to the retail and direct segments. Additionally, certain orderfulfillment costs previously recorded in the direct segment have been reclassifiedto inventory distribution costs and allocated to the retail segment. Segmentinformation for the three and nine months ended September 25, 2004 hasbeen reclassified to conform to current period presentation.

14

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**THE J. JILL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)**

The Company evaluates segment profitability based onthe contribution of each segment. Segment contribution represents each segment’snet sales less direct costs related to the segment’s operations. Direct costsfor the retail and direct segments include merchandise acquisition andinventory control costs, and inventory markdowns. Direct costs also includeretail store selling, occupancy, depreciation, inventory distribution andadministrative costs for the retail segment and catalog costs, certain order processingand fulfillment costs and internet selling costs for the direct segment. Segmentcontribution less other and general and administrative expenses is equal tooperating income. Other represents unallocated shared-service costs suchas merchandising, product development, sourcing and distribution facilitycosts, as well as outlet store revenues and expenses. General andadministrative expenses include corporate executive management costs, supportservice costs (e.g., shared information systems, finance and human resources)and corporate headquarters occupancy costs.

Segment assets are those that are directly used in oridentified with segment operations, including certain inventory, fixed assets,primarily related to store construction, accounts receivable and otheroperating assets. Unallocated assets include corporate cash and cashequivalents, marketable securities, inventory segregated from segment inventoryprior to liquidation, the Company’s corporate headquarters and distributionfacility, corporate information systems, deferred tax amounts and othercorporate assets.

The accounting policies of the Company’s segments arethe same as those described in “Note B” to the consolidated financialstatements contained in the Company’s Annual Report on Form 10-K forfiscal 2004. Inter-segment balances and transactions have been eliminated.

Thefollowing tables summarize financial information by segment and provide areconciliation of segment contribution (deficit) to operating income (loss) (inthousands):

| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **September 24,  2005**     | ** ** | **September 25,  2004**    | ** ** | **September 24,  2005** | ** ** | **September 25,  2004** | ** ** |
| ** **                                      | ** ** | ** **                       | ** ** | **(Restated)**                  | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Net sales:**                                  |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Retail                                          |       |                             | $          | 63,796                          |       |   |   | $ | 51,368 |   |   |   | $ | 195,436 |   |   |   | $ | 166,725 |   |   |
| Direct                                          |       |                             | 37,196     |                            |       |   | 42,108 |   |   |   | 118,639 |   |   |   | 145,120 |   |   |
| Other(1)                                        |       |                             | 1,977      |                            |       |   | 1,457 |   |   |   | 4,680 |   |   |   | 3,578 |   |   |
| Total net sales                                 |       |                             | $          | 102,969                         |       |   |   | $ | 94,933 |   |   |   | $ | 318,755 |   |   |   | $ | 315,423 |   |   |
| **Reconciliation  to operating income (loss):** |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Retail segment contribution (deficit)           |       |                             | $          | 144                             |       |   |   | $ | (440 | ) |   |   | $ | 6,163 |   |   |   | $ | 11,293 |   |   |
| Direct segment contribution                     |       |                             | 7,292      |                            |       |   | 7,981 |   |   |   | 27,200 |   |   |   | 35,591 |   |   |
| Other(2)                                        |       |                             | (4,574     | )                               |       |   | (3,882 | ) |   |   | (13,101 | ) |   |   | (12,377 | ) |   |
| General and administrative expenses        |       |                             | (7,783     | )                               |       |   | (8,085 | ) |   |   | (23,024 | ) |   |   | (23,650 | ) |   |
| Operating income  (loss)                        |       |                             | $          | (4,921                          | )          |   |   | $ | (4,426 | ) |   |   | $ | (2,762 | ) |   |   | $ | 10,857 |   |   |

 

(1)         Representsoutlet store net sales.

(2)         Represents unallocatedshared-service costs and outlet store revenues and expenses.

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**THE J. JILL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)**

 

| ** **               | ** ** | **Retail** | ** ** | **Direct** | ** ** | **Unallocated  Assets** | ** ** | **Total** | ** ** |
|--------------------------|------------|------------|------------|------------|------------|-------------------------|------------|-----------|------------|
| **Identifiable assets:** |       |       |       |       |       |                    |       |      |       |   |   |
| September 24, 2005  |       | $          | 146,379    |       | $          | 21,180                  |       |      | $          | 120,011 |   |   | $ | 287,570 |   |
| September 25, 2004  |       | $          | 127,618    |       | $          | 23,977                  |       |      | $          | 120,872 |   |   | $ | 272,467 |   |
| December 25,  2004  |       | $          | 132,539    |       | $          | 26,811                  |       |      | $          | 123,346 |   |   | $ | 282,696 |   |

 

**J.   Reclassifications:**

Certain segmentinformation for the three and nine months ended September 25, 2004 hasbeen reclassified to conform to current period presentation and management’scurrent internal reporting structure. Certain prior year balance sheetinformation has also been reclassified to conform to the current periodpresentation.

**K.**   Recentaccounting pronouncements:

In June 2005, the Emerging Issues Task Force ofthe FASB reached a consensus on Issue No. 05-6 (“EITF 05-6”) “*Determining the Amortization Period for Leasehold ImprovementsPurchased after Lease Inception or Acquired in a Business Combination*.”The guidance requires that leasehold improvements acquired in a businesscombination or purchased subsequent to the inception of a lease be amortizedover the shorter of the useful life of the assets or a term that includesrequired lease periods and renewals that are deemed to be reasonably assured atthe date of the business combination or purchase. The guidance is effective forperiods beginning after June 29, 2005. The adoption of EITF 05-6 didnot have a material impact on the Company’s consolidated financial statements.

In May 2005, the FASB issued Statement No. 154(“SFAS 154”), “*Accounting Changes and ErrorCorrections**,*” areplacement of APB Opinion No. 20 (“APB 20”), “*Accounting Changes,*” and FASB issued Statement No. 3 (“SFAS3”), “*Reporting Accounting Changes inInterim Financial Statements.”* SFAS 154 requires retrospectiveapplication to prior period financial statements of changes in accountingprinciple, unless it is impracticable to determine either the period-specific effectsor the cumulative effect of the change. This statement requires thatretrospective application of a change in accounting principle be limited to thedirect effects of a change. SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005.

In March 2005, the FASB issued Interpretation No. 47(“FIN 47”), *“Accounting for ConditionalAsset Retirement Obligations,”* an interpretation of FASB issuedStatement No. 143 (“SFAS 143”), *“Accountingfor Asset Retirement Obligations.”*FIN 47 states that a conditionalasset retirement obligation is a legal obligation to perform an assetretirement activity in which the timing or method of settlement are conditionalon a future event that may or may not be within the control of the entity. FIN47 is effective no later than the end of fiscal years ending after December 15,2005. Retrospective application for interim financial information is permittedbut is not required. The Company is currently in the process of evaluating FIN47; however the adoption of this interpretation is not expected to have amaterial impact on the Company’s consolidated financial statements.

In December 2004, the FASB issued Statement No. 153(“SFAS 153”), “*Exchanges of NonmonetaryAssets,*” an amendment of APB Opinion No. 29, “*Accounting for Nonmonetary Transactions.”*SFAS 153 is based on the principle that exchanges of nonmonetary assets shouldbe measured based on the fair value of 

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**THE J. JILL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (unaudited)**

the assets exchanged. SFAS153 is effective for nonmonetary asset exchanges occurring in fiscal periodsbeginning after June 15, 2005. The adoption of SFAS 153 did not have amaterial impact on the Company’s consolidated financial statements.

In November 2004, the FASB issued Statement No. 151(“SFAS 151”), “*Inventory Costs*.”SFAS 151 amends the guidance in Accounting Research Bulletin No. 43, “*Inventory Pricing*,” to clarify the accountingfor abnormal amounts of idle facility expense, freight, handling costs, andwasted material (spoilage). SFAS 151 requires that those items be recognized ascurrent-period charges and that the allocation of fixed production overheads tothe cost of converting work in process to finished goods be based on the normalcapacity of the production facilities. This statement is effective forinventory costs incurred during fiscal years beginning after June 15, 2005.The adoption of this statement is not expected to have a material impact on theCompany’s consolidated financial statements.

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**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*This Quarterly Report on Form 10-Q,including the following discussion, contains forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995 thatinvolve substantial risks and uncertainties. For this purpose, any statementscontained herein that are not statements of historical fact may be deemed to beforward-looking statements. Without limiting the generality of the foregoing,the words “projected,” “anticipated,” “planned,” “expected” and similarexpressions are intended to identify forward-looking statements. In particular,statements regarding future financial targets or trends are forward-lookingstatements. Forward-looking statements are not guarantees of our futurefinancial performance, and undue reliance should not be placed on them. Ouractual results, performance or achievements may differ significantly from theresults, performance or achievements discussed in or implied by theforward-looking statements. Factors that could cause such a difference includematerial changes to our business or prospects, in consumer spending, fashiontrends or consumer preferences, or in general political, economic, business orcapital market conditions and other risks and uncertainties, including, but notlimited to, the following:  the successof our product development and merchandising initiatives, including customeracceptance of our merchandising transition, and our ability to tailor ourmerchandise assortment by business segment; our ability to respond to changesin customer demands and fashion trends in a timely manner which could affectboth total sales and the mix of sales between full price and liquidationmerchandise; our success with sourcing merchandise outside of China in responseto the imposition of international or domestic sanctions, embargoes or quotarestrictions; our ability to effectively build brand awareness; our ability tosuccessfully redefine our direct segment business strategy; the success of ourretail segment growth strategy; changes in competition in the apparel industry;the customary risks of purchasing merchandise abroad, including longer leadtimes, higher initial purchase commitments and timeliness of receipts ofinventory; our ability to continue to have access to relevant lists ofprospective customers from third parties and to effectively manage and utilizeour multi-channel customer database; the possible adverse effect of adetermination by us or our registered independent accounting firm that we havea material weakness in our internal controls over financial reporting; changesin, or failure to comply with, federal and state tax and other governmentregulations; our ability to respond to interruptions or delays in the deliveryof products or services provided by our vendors and service providers; thepotential impact of natural disasters and health concerns relating to severeinfectious diseases, particularly on the manufacturing operations of ourvendors; our ability to attract and retain qualified personnel; possible futureincreases in expenses including labor and employee benefit costs; businessabilities and the judgment of management; our ability to respond to a majorfailure of our information systems; and other factors that are detailed in “Item1A. Risk Factors” in our Annual Report on Form 10-K for the fiscalyear ended December 25, 2004 (“fiscal 2004”).  We disclaim any intent or obligation to updateany forward-looking statements.*

***Restatement of Prior Financial Information***

We have restated thecondensed consolidated balance sheet at September 25, 2004, the condensedconsolidated statements of operations for the three and nine months ended September 25,2004 and the condensed consolidated statement of cash flows for the nine monthsended September 25, 2004 in this Quarterly Report on Form 10-Q.The restatement also affects periods prior to fiscal 2004. The restatementcorrects our historical accounting for operating leases. The restatement adjustments were non-cash andhad no impact on revenues, comparable store sales or operating cash flows. Forinformation with respect to the restatement, see “Note B” to the consolidatedfinancial statements contained in our Annual Report on Form 10-K forfiscal 2004. We did not amend our Quarterly Reports on Form 10-Q forthe periods before the end of fiscal 2004 to reflect the restatement andtherefore, the financial statements and related financial information containedin such reports should no longer be relied upon. Throughout “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” allreferenced amounts for affected prior periods and prior period comparisonsreflect the balances and amounts on a restated basis.

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***Overview***

We are a multi-channel specialty retailer of women’sapparel, including accessories and footwear. We market our products through ourretail stores, catalogs and website *jjill.com*.We currently have two reportable business segments, retail and direct. Eachsegment is separately managed and utilizes distinct distribution, marketing andinventory management strategies. The retail segment markets merchandise throughour retail stores. The direct segment markets merchandise through our catalogsand website. For more information about our reportable business segments,please see “Note I” to the accompanying condensed consolidated financialstatements.

Net sales during the three months ended September 24,2005 (“third quarter fiscal 2005”) increased by 8.5% to $103.0 million from$94.9 million during the three months ended September 25, 2004 (“thirdquarter fiscal 2004”). The Company generated an operating loss during thirdquarter fiscal 2005 totaling $4.9 million, compared to an operating loss of$4.4 million during third quarter fiscal 2004. The Company recorded a net lossduring third quarter fiscal 2005 of $2.7 million, or $0.13 per diluted share,substantially equal to the net loss and loss per share during third quarterfiscal 2004.

Net sales during the nine months ended September 24,2005 increased by 1.1% to $318.8 million from $315.4 million during the ninemonths ended September 25, 2004. The Company generated an operating lossduring the nine months ended September 24, 2005 totaling $2.8 million,compared to operating income of $10.9 million during the nine months ended September 25,2004. The Company recorded a net loss during the nine months ended September 24,2005 of $1.5 million, or $0.08 per diluted share, compared to net income of$6.1 million, or $0.30 per diluted share, during the nine months ended September 25,2004.

Our overall business continues to be disappointing. Netsales in our retail segment are growing primarily as a result of opening stores.Our third quarter fiscal 2005 comparable store sales for stores open at leastone full fiscal year are up a modest 4.7% but our year-to-date comparable storesales are substantially flat to last year. Net sales in the direct segmentcontinue to decline driven by significant circulation decreases that are notgenerating the levels of sales productivity that we expected. Our third quarterfiscal 2005 sales productivity per 1,000 square inches circulated is up 11.5%compared to third quarter fiscal 2004 but our year-to-date sales productivityis virtually unchanged from last year despite circulation reductions in excessof 20% in both the three and nine month periods. Our modest top-line growth isinsufficient to support desired levels of profitability—the increases in costsassociated with supporting a larger infrastructure are currently outpacing oursales growth. Our overall profitability is being further affected by the factthat our less profitable retail business is growing while our more profitabledirect business is declining.

We remain focused onimproving our profitability by driving better sales productivity in our retailstores while taking steps to stabilize our direct business. Although we areundertaking many initiatives throughout the organization to improve ouroperating results, the single most important factor in attaining our goals isdelivering an improved merchandise assortment tailored to each business segment. Unfortunately, our merchandisingtransition is taking longer than we previously expected.

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***Results ofOperations***

Thefollowing table presents our condensed consolidated statements of operationsexpressed as a percentage of net sales:

| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **September 24,  2005**     | ** ** | **September 25,  2004**    | ** ** | **September 24,  2005** | ** ** | **September 25,  2004** | ** ** |
| ** **                                    | ** ** | ** **                       | ** ** | **(Restated)**                  | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Net sales                                     |       |                             | 100.0      | %                               |       |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of products and  merchandising           |       |                             | 69.1       |                            |       |   | 68.3 |   |   |   | 67.9 |   |   |   | 64.4 |   |   |
| Gross margin                                  |       |                             | 30.9       |                            |       |   | 31.7 |   |   |   | 32.1 |   |   |   | 35.6 |   |   |
| Selling, general and  administrative expenses |       |                             | 35.7       |                            |       |   | 36.4 |   |   |   | 33.0 |   |   |   | 32.2 |   |   |
| Operating income (loss)                       |       |                             | (4.8       | )                               |       |   | (4.7 | ) |   |   | (0.9 | ) |   |   | 3.4 |   |   |
| Interest income                               |       |                             | 0.3        |                            |       |   | 0.2 |   |   |   | 0.3 |   |   |   | 0.1 |   |   |
| Interest expense                              |       |                             | 0.2        |                            |       |   | 0.3 |   |   |   | 0.2 |   |   |   | 0.2 |   |   |
| Interest (income)  expense, net               |       |                             | (0.1       | )                               |       |   | 0.1 |   |   |   | (0.1 | ) |   |   | 0.1 |   |   |
| Income (loss) before  taxes                   |       |                             | (4.7       | )                               |       |   | (4.8 | ) |   |   | (0.8 | ) |   |   | 3.3 |   |   |
| Income tax provision  (benefit)               |       |                             | (2.1       | )                               |       |   | (2.0 | ) |   |   | (0.3 | ) |   |   | 1.4 |   |   |
| Net income (loss)                             |       |                             | (2.6       | )%                              |       |   | (2.8 | )% |   |   | (0.5 | )% |   |   | 1.9 | % |   |

 

Thefollowing table presents certain selected operating data:

| ** **                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **September 24,  2005**     | ** ** | **September 25,  2004**    | ** ** | **September 24,  2005** | ** ** | **September 25,  2004** | ** ** |
| ***Retail:***(1)                   |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Stores open:                       |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Beginning of period                |       |                             | 160        |                            |       |   | 130 |   |   |   | 150 |   |   |   | 122 |   |   |
| End of period                      |       |                             | 170        |                            |       |   | 134 |   |   |   | 170 |   |   |   | 134 |   |   |
| Weighted average stores open(2)    |       |                             | 163        |                            |       |   | 132 |   |   |   | 156 |   |   |   | 127 |   |   |
| Weighted average square footage(3) |       |                             | 704,400    |                            |       |   | 597,100 |   |   |   | 682,200 |   |   |   | 577,800 |   |   |
| Comparable store sales(4)          |       |                             | 4.7        | %                               |       |   | 4.7 | % |   |   | (0.4 | )% |   |   | 15.1 | % |   |
| ***Direct:***                      |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Circulation:(5)                    |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Catalogs (in thousands)            |       |                             | 12,100     |                            |       |   | 17,400 |   |   |   | 40,600 |   |   |   | 52,800 |   |   |
| Square inches (in millions)        |       |                             | 78,900     |                            |       |   | 99,600 |   |   |   | 257,200 |   |   |   | 322,500 |   |   |
| ***Other:***                       |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 12-month buyers(6)                 |       |                             | 1,812,000  |                            |       |   | 1,625,000 |   |   |   | 1,812,000 |   |   |   | 1,625,000 |   |   |
| J. Jill credit card holders        |       |                             | 813,000    |                            |       |   | 676,000 |   |   |   | 813,000 |   |   |   | 676,000 |   |   |
| E-mail addresses                   |       |                             | 1,221,000  |                            |       |   | 1,146,000 |   |   |   | 1,221,000 |   |   |   | 1,146,000 |   |   |

 

(1)          Retail informationrelates to our retail stores only and does not include data for our outletstores.

(2)          Weighted average storesopen refers to the number of retail stores open during the period weighted forthe number of days that each store was open during the period.

(3)          Weighted average squarefootage refers to the square footage of retail stores open during the periodweighted for the number of days that each store was open during the period.

(4)          Comparable store sales,a retail operating statistic, is calculated for retail stores that have beenopen for at least one full fiscal year. Retail stores that have been renovatedor the size of which has been materially increased or decreased are notconsidered in the comparable store sales calculation until 

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they have been inoperation as an expanded, renovated or decreased store for at least one fullfiscal year. The calculation of comparable store sales excludes certain amountsincluded in the calculation of net sales, such as accruals for returnsallowances and certain other items.

(5)          Inorder to more closely match net sales to circulation, we calculate circulationon a percentage of completion basis. Catalog circulation takes into account thetotal number of catalogs mailed during all periods and our estimate of theexpected sales life of each catalog edition. Square inches circulated alsotakes into account the page count and page size of the catalogscirculated during the period. Catalog circulation and square inches circulatedstatistics do not include catalogs mailed to retail-only customers.

(6)          Theterm “Total 12-month buyers” represents customers identified by ourmulti-channel database as having placed a catalog, internet or intranet orderwith us or made a retail store purchase from us within the previous 12 months. Wecurrently capture customer information on roughly 75% of our retail storecustomers and, accordingly, we believe this buyer count is somewhatunderstated.

Thefollowing table summarizes net sales by segment (in thousands):

| ** **      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **      | ** ** | **September 24,  2005**     | ** ** | **September 25,  2004**    | ** ** | **September 24,  2005** | ** ** | **September 25,  2004** | ** ** |
| Retail          |       |                             | $          | 63,796                          |       |   |   | $ | 51,368 |   |   |   | $ | 195,436 |   |   |   | $ | 166,725 |   |   |
| Direct          |       |                             | 37,196     |                            |       |   | 42,108 |   |   |   | 118,639 |   |   |   | 145,120 |   |   |
| Other(1)        |       |                             | 1,977      |                            |       |   | 1,457 |   |   |   | 4,680 |   |   |   | 3,578 |   |   |
| Total net sales |       |                             | $          | 102,969                         |       |   |   | $ | 94,933 |   |   |   | $ | 318,755 |   |   |   | $ | 315,423 |   |   |

 

(1)         Representsoutlet store net sales.

**Comparisonof Third Quarter Fiscal 2005 to Third Quarter Fiscal 2004**

Net sales increased by $8.0 million, or 8.5%, to$103.0 million during third quarter fiscal 2005 from $94.9 million during thirdquarter fiscal 2004. Retail segment net sales increased by $12.4 million, or24.2%, during third quarter fiscal 2005. This increase is attributable to an18.0% increase in the weighted average square footage of retail stores openduring the quarter and a 5.3% increase in retail segment sales productivity, asmeasured by net sales per weighted average square foot. During third quarterfiscal 2005, we opened 10 retail stores and ended the quarter with 170 retailstores compared to 134 at the end of third quarter fiscal 2004. Comparablestore sales for stores open at least one full fiscal year increased by 4.7%during third quarter fiscal 2005. Direct segment net sales decreased by $4.9million, or 11.7%, during third quarter fiscal 2005 as compared to thirdquarter fiscal 2004, as square inches circulated decreased by 20.8% and directsegment sales productivity, as measured by net sales per 1,000 square inchescirculated, increased by 11.5%. Direct segment sales productivity increasedlargely as a result of the significant decrease in circulation. Internet salesrepresented 45.9% of total direct segment net sales during third quarter fiscal2005 compared to 43.2% during third quarter fiscal 2004. We expect internet netsales to represent an increasing portion of our total direct business overtime.

Gross margin represents net sales less cost ofproducts and merchandising. Cost of products and merchandising consistsprimarily of product costs (e.g., product development, sourcing, merchandising,inventory control and inventory acquisition costs and inventory markdowns) andoperating costs (e.g., occupancy and depreciation costs for our retail stores,order processing costs and distribution facility costs). As a percentage of netsales, gross margin decreased to 30.9% during third quarter fiscal 2005 from31.7% during third quarter fiscal 2004. This decrease was attributable to a 0.7percentage point increase in product costs and a 0.1 percentage point increasein operating costs, both as a percentage of net sales. Product costs as apercentage of net sales increased primarily as a result of a shift in the mixof the business toward off price and increased promotional activity that wasonly partially offset by higher initial mark-ups. 

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The increase in operatingcosts as a percentage of net sales was primarily attributable to thede-leveraging effect of higher retail segment operating costs associated withour retail store rollout over a disproportionately smaller increase in totalcompany net sales offset by the leveraging effect of lower direct segmentoperating expenses over increased total company net sales. Additionally, grossmargin as a percentage of net sales was negatively affected by the shift in themix of our business toward retail and the fact that retail segment gross marginis currently lower as a percentage of net sales than direct segment grossmargin.  We expect the differencesbetween our retail and direct segment cost structures to continue until we areable to increase the overall productivity and profitability of our retailstores.

Selling, general andadministrative expenses consist primarily of retail store selling costs, coststo produce, print and distribute catalogs, and website and corporateadministrative costs. As a percentage of net sales, selling, general andadministrative expenses decreased to 35.7% during third quarter fiscal 2005from 36.4% during third quarter fiscal 2004. This decrease in selling, generaland administrative expenses as a percentage of net sales was attributable to a1.0 percentage point decrease in general and administrative expenses, partiallyoffset by a 0.3 percentage point increase in selling expenses, both as apercentage of net sales. General and administrative expenses as a percentage ofnet sales decreased primarily as a result of leveraging slightly lower expensesover increased total company net sales.  The increase in selling expenses as apercentage of net sales was primarily attributable to the de-leveraging effectof higher retail segment selling expenses primarily associated with our retailstore rollout over a disproportionately smaller increase in total company netsales offset by the leveraging effect of lower direct segment selling expensesover increased total company net sales.  Additionally, selling expenses as a percentageof net sales was negatively affected by the shift in the mix of our businesstoward retail and the fact that retail segment selling expenses are currentlyhigher as a percentage of net sales than direct segment selling expenses. Weexpect the differences between our retail and direct segment cost structures tocontinue until we are able to increase the overall productivity andprofitability of our retail stores.

***Comparison of the Nine Months Ended September 24,2005 to the Nine Months Ended September 25, 2004***

Net sales increased by $3.3 million, or 1.1%, to$318.8 million during the nine months ended September 24, 2005 from $315.4million during the nine months ended September 25, 2004. Retail segmentnet sales increased by $28.7 million, or 17.2%, during the nine months ended September 24,2005. This increase is attributable to an 18.1% increase in the weightedaverage square footage of retail stores open during the nine-month period,partially offset by a 0.7% decrease in retail segment sales productivity. Duringthe nine months ended September 24, 2005, we opened 20 retail stores. Comparablestore sales for stores opened at least one full fiscal year decreased by 0.4%during the nine months ended September 24, 2005. Direct segment net salesdecreased by $26.5 million, or 18.2%, during the nine months ended September 24,2005 as compared to the nine months ended September 25, 2004, as squareinches circulated decreased by 20.2% and direct segment sales productivityincreased by only 2.5%. Direct segment sales productivity increased largely asa result of the significant decrease in circulation. Internet sales represented51.2% of total direct segment net sales during the nine months ended September 24,2005 compared to 40.9% during the nine months ended September 25, 2004.

As a percentage of net sales, gross margin decreasedto 32.1% during the nine months ended September 24, 2005 from 35.6% duringthe nine months ended September 25, 2004. This decrease was attributableto a 2.3 percentage point increase in product costs and a 1.2 percentage pointincrease in operating costs, both as a percentage of net sales. Product costsas a percentage of net sales increased primarily as a result of higherinventory markdowns, a shift in the mix of the business toward off price andincreased promotional activity that was only partially offset by higher initialmark-ups. The increase in operating costs as a percentage of net sales wasprimarily attributable to the de-leveraging effect of higher retail segmentoperating costs associated with our retail store rollout over relatively flattotal company net sales partially offset by the leveraging effect of lowerdirect segment operating expenses over relatively flat 

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total company net sales. Additionally,gross margin as a percentage of net sales was negatively affected by the shiftin the mix of our business toward retail and the fact that retail segment grossmargin is currently lower as a percentage of net sales than direct segmentgross margin.

As a percentage of net sales,selling, general and administrative expenses increased to 33.0% during the ninemonths ended September 24, 2005 from 32.2% during the nine months ended September 25,2004. This increase was attributable to a 1.1 percentage point increase inselling expenses, partially offset by a 0.3 percentage point decrease ingeneral and administrative expenses, both as a percentage of net sales. Theincrease in selling expenses as a percentage of net sales was primarilyattributable to the de-leveraging effect of higher retail segment sellingexpenses primarily associated with our retail store rollout over relativelyflat total company net sales partially offset by the leveraging effect of lowerdirect segment selling expenses over relatively flat total company net sales. Additionally,selling expenses as a percentage of net sales was negatively affected by theshift in the mix of our business toward retail and the fact that retail segmentselling expenses are currently higher as a percentage of net sales than directsegment selling expenses. General and administrative expenses as a percentageof net sales decreased primarily as a result of decreased spending onperformance bonuses and professional fees, together representing a $2.2 milliondecrease in expenses, partially offset by increased spending on employeerelated expenses and other overhead costs.

***Income Taxes***

We provide for incometaxes at an effective tax rate that includes the full federal and statestatutory tax rates. Our effective tax rate was 44.1% during third quarterfiscal 2005 and 42.6%****during thenine months ended September 24, 2005 compared to 41.2% during thirdquarter fiscal 2004 and 42.0% during the nine months ended September 25,2004.  Our effective tax rate isdependent upon, among other things, the level of our estimated taxable incomefor the full fiscal year and the taxability of that income in certain statesgiven our organizational structure. Our ability to predict our taxable incomefor the full fiscal year is subject to a number of uncertainties and ourestimate can change materially as a result of changing business trends. Shouldtaxable income levels differ from management’s estimate, our effective tax ratemay be materially affected which may significantly impact our operating resultsin future periods.

***Segment Analysis***

For a summary of our business segments and relatedaccounting, see “Note I” to the accompanying condensed consolidated financialstatements.

The accounting policies of our segments are the sameas those described in “Note B” to the consolidated financial statementscontained in our Annual Report on Form 10-K for fiscal 2004. Inter-segmentbalances and transactions have been eliminated.

Thefollowing table provides a reconciliation of segment contribution (deficit) to operatingincome (loss) (in thousands):

| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **September 24,  2005**     | ** ** | **September 25,  2004**    | ** ** | **September 24,  2005** | ** ** | **September 25,  2004** | ** ** |
| ** **                             | ** ** | ** **                       | ** ** | **(Restated)**                  | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Retail segment  contribution (deficit) |       |                             | $          | 144                             |       |   |   | $ | (440 | ) |   |   | $ | 6,163 |   |   |   | $ | 11,293 |   |   |
| Direct segment  contribution           |       |                             | 7,292      |                            |       |   | 7,981 |   |   |   | 27,200 |   |   |   | 35,591 |   |   |
| Other(1)                               |       |                             | (4,574     | )                               |       |   | (3,882 | ) |   |   | (13,101 | ) |   |   | (12,377 | ) |   |
| General and  administrative expenses   |       |                             | (7,783     | )                               |       |   | (8,085 | ) |   |   | (23,024 | ) |   |   | (23,650 | ) |   |
| Operating income (loss)                |       |                             | $          | (4,921                          | )          |   |   | $ | (4,426 | ) |   |   | $ | (2,762 | ) |   |   | $ | 10,857 |   |   |

 

(1)         Represents unallocatedshared-service costs and outlet store revenues and expenses.

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***Segment Comparison of Third Quarter Fiscal 2005 toThird Quarter Fiscal 2004***

*Retail segmentcontribution*

The retail segment’s thirdquarter fiscal 2005 contribution as a percentage of segment net sales increasedby 1.1 percentage points compared to third quarter fiscal 2004. This increasewas attributable to a 1.5 percentage point decrease in segment operating costs,partially offset by a 0.4 percentage point increase in segment product costs,both as a percentage of net sales. Segment selling expenses as a percentage ofnet sales were flat. Segment operating costs as a percentage of net salesdecreased primarily as a result of leveraging occupancy and depreciation costsassociated with our retail store rollout over higher sales productivity. Segmentproduct costs as a percentage of net sales increased primarily as a result of ashift in the mix of the business toward off price and increased promotionalactivity, partially offset by higher initial mark-ups.

*Direct segmentcontribution*

The direct segment’s thirdquarter fiscal 2005 contribution as a percentage of segment net sales increasedby 0.6 percentage points compared to third quarter fiscal 2004. This increasewas attributable to a 1.2 percentage point decrease in segment sellingexpenses, partially offset by a 0.4 percentage point increase in segmentoperating costs and a 0.2 percentage point increase in segment product costs,all as a percentage of net sales. Segment selling expenses as a percentage ofnet sales decreased primarily as a result of increased sales productivity. Segmentoperating costs as a percentage of net sales increased primarily as a result ofinefficiencies in order taking and the resulting de-leveraging of these costsover lower net sales. Segment product costs as a percentage of net salesincreased primarily as a result of a shift in the mix of the business towardoff price and increased promotional activity, partially offset by higherinitial mark-ups.

*Other*

Other net expensesincreased by $0.7 million during third quarter fiscal 2005 compared to thirdquarter fiscal 2004 primarily as a result of higher unallocated depreciation,increased product development and merchandising expenses and higherdistribution facility costs, together representing a $0.7 million increase inexpenses.

*General andadministrative expenses*

Please see our discussionof general and administrative expenses under the heading *“Comparison of Third Quarter Fiscal 2005 to ThirdQuarter Fiscal 2004”* above.

***Segment Comparison of the Nine Months Ended September 24,2005 to the Nine Months Ended September 25, 2004***

*Retail segmentcontribution*

The retail segment’scontribution as a percentage of segment net sales during the nine months ended September 24,2005 decreased by 3.6 percentage points compared to the nine months ended September 25,2004. This decrease was attributable to a 2.1 percentage point increase insegment product costs, a 1.1 percentage point increase in segment sellingexpenses and a 0.4 percentage point increase in segment operating costs, all asa percentage of net sales. Segment product costs as a percentage of net salesincreased primarily as a result of higher inventory markdowns, a shift in themix of the business toward off price and increased promotional activity. Thesefactors were partially offset by higher initial mark-ups. Segment sellingexpenses as a percentage of net sales increased primarily as a result of higheradvertising and in-store visual presentation costs and increased employeerelated expenses, both as a percentage of net 

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sales. Segmentoperating costs as a percentage of net sales increased primarily as a result ofthe de-leveraging effect of occupancy and depreciation costs associatedwith our retail store rollout over lower sales productivity.

*Direct segmentcontribution*

The direct segment’scontribution as a percentage of segment net sales during the nine months ended September 24,2005 decreased by 1.6 percentage points compared to the nine months ended September 25,2004. This decrease was attributable to a 1.0 percentage point increase insegment product costs and a 0.9 percentage point increase in segment operatingcosts, partially offset by a 0.3 percentage point decrease in segment sellingexpenses, all as a percentage of net sales. Segment product costs as apercentage of net sales increased primarily as a result of higher inventorymarkdowns, a shift in the mix of the business toward off price and increasedpromotional activity. These factors were partially offset by higher initialmark-ups. Segment operating costs as a percentage of net sales increasedprimarily as a result of inefficiencies in order processing and the resultingde-leveraging of these costs over lowernet sales. Segment selling expenses as a percentage of net sales decreasedprimarily as a result of increased sales productivity.

*Other*

Other net expensesincreased by $0.7 million during the nine months ended September 24, 2005compared to the nine months ended September 25, 2004, primarily as aresult of increased product development and merchandising expenses, higherunallocated depreciation and distribution facility costs and lower outlet storecontribution, together representing a $1.3 million increase in expenses. Thesefactors were partially offset by a $0.6 million decrease in performance bonusexpense.

*General andadministrative expenses*

Please see our discussionof general and administrative expenses under the heading “*Comparisonof the Nine Months Ended September 24, 2005 to the Nine Months Ended September 25,2004*” above.

***Seasonality and Quarterly Fluctuations***

We expect there to befluctuations in our net sales from quarter to quarter, with the highest netsales generally coming in the second and fourth quarters of our fiscal year andthe lowest in the first and third quarters. As retail becomes a greater portionof our overall business, our business is becoming more seasonal. Our retailstore rollout plan is expected to materially impact year-over-year comparisonsof our net sales. Also, January is included in our first fiscal quarter,but is included in the fourth fiscal quarter for many other retailers. Because January isa month that traditionally involves significant promotional pricing, thisdifference needs to be taken into account when making comparisons of ourfinancial performance for interim periods with that of other retailers.

***Liquidity and Capital Resources***

Our principal working capital needs arise from theneed to support costs incurred in advance of revenue generation, primarilyinventory acquisition, catalog development, production and mailing costs. Wehave two selling seasons that correspond to the fashion seasons. The springseason begins in January and ends in July. The fall season begins in July andends in January. Our capital investment needs arise from initiatives intendedto support our growth, including our retail store rollout and improvements toour physical and operating infrastructure. During the nine months ended September 24,2005, we funded our working capital and capital investment needs with cashgenerated from operations and cash on hand.

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Cash and cash equivalents (“cash”) decreased by $14.3million during the nine months ended September 24, 2005. Approximately$24.3 million was invested in property and equipment, primarily related to ourretail store rollout, $15.7 million was generated from operations and $4.7million was invested in marketable securities. During the nine months ended September 24,2005, net income before depreciation and amortization, lower accountsreceivable and additional deferred credits from landlords were the primarysources of cash from operations. The primary use of cash from operationsrelated to increases in inventory.

Cash decreased by $8.2 million during the nine monthsended September 25, 2004. Approximately $21.6 million was generated from operations,$17.0 million was invested in property and equipment, primarily related to ourretail store rollout, $13.3 million was invested in marketable securities and$3.1 million was received from stock transactions, primarily from the exerciseof stock options. During the nine months ended September 25, 2004, netincome before depreciation and amortization and lower accounts receivable werethe primary sources of cash from operations. The primary use of cash fromoperations related to increases in inventory.

At September 24, 2005, September 25, 2004and December 25, 2004, the aggregate fair value of our marketablesecurities was $38.4 million, $13.3 million and $34.1 million, respectively. Ourmarketable securities consist primarily of investments in municipal debtsecurities. We intend to maintain a liquid portfolio consisting primarily offixed-income securities.

Accounts receivable balances at September 24,2005 were 11.3%, or $1.3 million, lower than September 25, 2004 primarilyas a result of a decrease in receivables associated with our deferred billingprogram partially offset by higher amounts due from landlords, increasedinterest receivable due to higher marketable securities balances and highercredit card receivables due to increased store count. Accounts receivablebalances at September 24, 2005 were 45.5%, or $8.5 million, lower than at December 25,2004, primarily as a result of a decrease in receivables associated with ourdeferred billing program and lower amounts due from landlords. At September 24,2005, September 25, 2004 and December 25, 2004, there were $2.0million, $5.1 million and $8.8 million, respectively, of trade receivablesoutstanding related to our deferred billing program.

Inventory at September 24, 2005 was 14.9%, or$5.6 million, higher than at September 25, 2004 primarily as a result ofinventory associated with 36 new retail stores opened since September 25,2004. Retail segment annualized inventory turns decreased by 13.6% to 3.8 timesper year during the nine months ended September 24, 2005 from 4.4 timesper year during the nine months ended September 25, 2004. Retail segmentinventory per square foot at September 24, 2005 was roughly equal to lastSeptember.

Inventory at September 24, 2005 was 19.4%, or$7.0 million, higher than at December 25, 2004 mainly due to higher retailsegment inventory per square foot and inventory associated with 20 new retailstores opened since December 25, 2004. Retail segment inventory per squarefoot was 15.2% higher at September 24, 2005 than at December 25,2004.

A summary of our inventory balances follows (inthousands):

| ** ** | ** ** | **September 24,  2005** | ** ** | **September 25,  2004** | ** ** | **December 25,  2004** | ** ** |
|------------|------------|------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Retail     |       |                         | $          | 27,634                       |       |                        |       | $ | 23,241 |   |   |   | $ | 21,892 |   |   |
| Direct     |       |                         | 13,941     |                         |       |                        | 13,824     |   |   |   | 13,759 |   |   |
| Other(1)   |       |                         | 1,646      |                         |       |                        | 562        |   |   |   | 561 |   |   |
| Total      |       |                         | $          | 43,221                       |       |                        |       | $ | 37,627 |   |   |   | $ | 36,212 |   |   |

 

(1)         Includes inventoryseparated from segment inventory prior to liquidation.

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Accrued expenses at September 24, 2005 were24.5%, or $6.1 million, higher than at September 25, 2004 primarily as a resultof increased amounts accrued for our retail store rollout, deferredcompensation, systems and gift cards. Accrued expenses at September 24,2005 were 13.4%, or $3.6 million, higher than at December 25, 2004primarily as a result of increased amounts accrued for our retail storerollout, systems, salaries and deferred compensation partially offset by loweramounts accrued for gift cards and customer refunds.

Deferred credits from landlords and other at September 24,2005 was 16.7%, or $7.4 million, higher than at September 25, 2004 and8.8%, or $4.2 million, higher than at December 25, 2004 primarily as aresult of opening additional retail stores. See “Note H” to the accompanyingcondensed consolidated financial statements for additional information.

At September 24, 2005, we had 170 retail storesand six outlet stores open. We currently expect to open an additional 22 retailstores during the remainder of 2005 bringing our total 2005 retail storeopenings to 42. The initial net cash requirements related to our retail storerollout are significant and are primarily comprised of leasehold improvements,net of landlord allowances, and initial inventory acquisition costs. Constructioncommitments are typically made one to six months in advance of a new retailstore opening and actual construction typically begins two to three monthsbefore the store opens. The initial net cash requirements for opening a newretail store are currently estimated at an average of approximately $0.4million per store.

Thefollowing table summarizes the cash requirements related to our outstandingfuture minimum lease payments for operating leases having a remaining term inexcess of one year and our outstanding long-term debt at September 24,2005 (in thousands):

| ** **                          | ** ** | **Payments Due By Period(1)** | ** ** |
|-------------------------------------|------------|----------------------------------------------|------------|
| ** **                          | ** ** | ** **                                   | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than** | ** ** |
| ** **                          | ** ** | **Total**                                    | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years** | ** ** |
| Operating lease  obligations(2)     |       | $                                            | 257,468    |   |   | $ | 5,673 |   |   | $ | 68,708 |   | $ | 71,100 |   | $ | 111,987 |   |
| Long-term debt  obligations(3)      |       | 10,892                                       |       |   | 461 |   |   | 1,499 |   | 8,932 |   | — |   |
| Fixed interest  payments on debt(4) |       | 2,441                                        |       |   | 192 |   |   | 1,397 |   | 852 |   | — |   |
| Total                               |       | $                                            | 270,801    |   |   | $ | 6,326 |   |   | $ | 71,604 |   | $ | 80,884 |   | $ | 111,987 |   |

 

(1)         All payment periods aremeasured from the end of our last fiscal year. The amount set forth in the “Lessthan 1 Year” column represents amounts to be paid for the remainder of 2005,the “1-3 Years” column represents amounts to be paid in 2006 and 2007,the “3-5 Years” column represents amounts to be paid in 2008 and 2009 andthe “More than 5 Years” column represents amounts to be paid after 2009.

(2)         See “Note H” to theaccompanying condensed consolidated financial statements.

(3)         Does not include interestpayments. See “Note F” to the accompanying condensed consolidated financialstatements for a summary of our long-term debt at September 24, 2005, September 25,2004 and December 25, 2004. The weighted average interest rate for amountsoutstanding under our credit facilities was 7.07% per annum for third quarterfiscal 2005 and 7.01% per annum for the nine months ended September 24, 2005.Cash paid for interest during the three and nine months ended September 24,2005 was $0.2 million and $0.6 million, respectively.

(4)         Represents future fixedinterest payments under our real estate and equipment loans.

For a summary of our credit facilities at September 24,2005 see “Note F” to the accompanying condensed consolidated financialstatements. The maturity date of the Revolving Credit Facility is June 1,2006. We are currently negotiating with our banks to, among other things,extend the maturity date of the Revolving Credit Facility to June 1, 2007.We were in compliance with the covenants associated with our 

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credit facilities as ofand for the three months ended September 24, 2005 and September 25,2004 and as of and for the twelve months ended December 25, 2004.

We expect to spend approximately $3.0 million on threekey systems initiatives in 2005 including the implementation of a productlife-cycle management system, an inventory management and planning system and acorporate data warehouse. The total cost for these multi-year projects iscurrently estimated at approximately $7.0 million. We believe that thesesystems are necessary to support our planned future growth.

Our sources of cashinclude cash on hand, our investments in marketable securities, availableborrowing capacity under our Revolving Credit Facility of $20.0 million as of September 24,2005 and anticipated cash flow from operations. Our principal uses of cashinclude cash required to support current operations as well as investments ininfrastructure and our retail store rollout. Based on current operatingconditions, we believe we have sufficient sources of cash to execute ouroperating plans and fund our planned operating and systems infrastructureinvestments, capital expenditures and commitments for the foreseeable future. Shouldcurrent operating conditions deteriorate, we believe we have some flexibilityto adjust our mid-to-long-term operating plans, including our retail storerollout and catalog circulation strategies.

***Critical Accounting Policies***

Management has determinedthat our most critical accounting policies relate to inventory markdowns,merchandise returns from customers, catalog costs and the impairment oflong-lived assets. We monitor our accounting policies to ensure properapplication. There have been no material changes in our critical accountingpolicies since they were discussed in our Annual Report on Form 10-Kfor fiscal 2004.

***Recent Accounting Pronouncements***

For a summary of ourrecent accounting pronouncements, see “Note K” to the accompanying condensedconsolidated financial statements.

**Item 3.**                        Quantitativeand Qualitative Disclosures about Market Risk

Our exposure to marketrisk at September 24, 2005 was not materially different than at December 25,2004. Information about our exposure to market risk at December 25, 2004is contained in our Annual Report of Form 10-K for fiscal 2004.

**Item 4.**                        Controlsand Procedures

We carried out anevaluation, with the participation of our principal executive officer andprincipal financial officer, of the effectiveness of our disclosure controlsand procedures as of September 24, 2005. Based on this evaluation, ourprincipal executive officer and principal financial officer concluded that asof September 24, 2005 our disclosure controls and procedures, as definedin Rule 13a-15(e), were effective to ensure that informationrequired to be disclosed by us in the reports we file or submit under theSecurities Exchange Act of 1934 are recorded, processed, summarized and reportedwithin the time periods specified in the Securities Exchange Commission’s rules andforms. No change in our internal control over financial reporting occurredduring third quarter fiscal 2005 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

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**PART II—OTHER INFORMATION**

**Item 1.**                        LegalProceedings

The following is an updaterelating to the settlement of a purported class action in California aspreviously disclosed under Item 1. of Part II contained in the Company’sQuarterly Report on Form 10-Q for the quarter ended June 25,2005. In September 2005, the California Superior Court, Riverside County,approved the settlement agreement and entered an order and final judgment. The Company expects to make payment of claimsto class members as well as attorney’s fees, costs and class representativeenhancements by the end of November 2005.

**Item 6.**                        Exhibitsand Reports on Form 8-K

**(a)****         Exhibits**

**Certifications**
| 31.1 |   | Certification of Principal Executive Officer of  Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)      |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of  Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) or  Rule 15d-14(a)     |
| 32.1 |   | Certification by Chief  Executive Officer and Chief Financial Officer of Periodic Report Pursuant to  18 U.S.C. Section 1350 |

 

**(b)****         Reports on Form 8-K**

On July 28, 2005, we filed a Report on Form 8-Kto report the issuance of a press release commenting on our financial resultsfor the fiscal quarter ended June 25, 2005.

On August 15, 2005, we filed a Report on Form 8-Kto report the resignation of Jonathan Ward from the Board of Directors.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                               | THE J.  JILL GROUP, INC. |
|-------------------------------|--------------------------|
| Dated: November 3,  2005 | By:                      | /s/  OLGA L. CONLEY |   |
|                          |                     | Olga L. Conley |   |
|                          |                     | Authorized  Officer |   |
|                          |                     | Executive Vice  President / |   |
|                          |                     | Chief Financial  Officer and |   |
|                          |                     | Chief  Administrative Officer |   |
|                          |                     | *(Principal  Financial Officer)* |   |
| Dated: November 3, 2005  | By:                      | /s/  LINDA L. TRUDEL |   |
|                          |                     | Linda L. Trudel |   |
|                          |                     | Authorized  Officer |   |
|                          |                     | Senior Vice  President / |   |
|                          |                     | Corporate  Controller and Treasurer |   |
|                          |                     | *(Principal  Accounting Officer)* |   |

 

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**THE J. JILLGROUP, INC.**

**FORM 10-Q**

**FOR THE QUARTERENDED SEPTEMBER 24, 2005**

**EXHIBIT INDEX**

**Exhibits**

**Certifications**

| 31.1 |   | Certification of Principal Executive Officer of  Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)      |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of  Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a)  or Rule 15d-14(a)     |
| 32.1 |   | Certification by Chief  Executive Officer and Chief Financial Officer of Periodic Report Pursuant to  18 U.S.C. Section 1350 |

 

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