<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].
For the fiscal year ended January 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 333-42423
-------------
J. CREW OPERATING CORP.
(Exact name of registrant as specified in its charter)
Delaware 22-3540930
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
770 BROADWAY, NEW YORK, NEW YORK 10003
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (212) 209-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
NONE None
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ______ No X
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The common stock of the registrant is not publicly traded. Therefore, the
aggregate market value is not readily determinable.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes _____ No _____
As of April 15, 1998, 100 shares of Common Stock, par value $.01 per share, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
The Registrant meets the conditions set forth in General Instruction I (1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
<PAGE>
In connection with the recapitalization (the "Recapitalization") of J. Crew
Group, Inc., a New York corporation ("Holdings"), Holdings organized J. Crew
Operating Corp., a Delaware corporation ("Operating Corp"), and immediately
prior to the consummation of the Recapitalization, Holdings transferred
substantially all of its assets and liabilities to Operating Corp. Holdings and
its subsidiaries are collectively referred to herein as the "Company."
References herein to fiscal years are to the fiscal years of Holdings, which end
on the Saturday closest to January 31 in the following calendar year. Effective
January 31, 1998, the Company changed its fiscal year end from the Friday
closet to January 31 to the Saturday closest January 31. Accordingly, fiscal
years 1993, 1994, 1995, 1996 and 1997 ended on January 28, 1994, February 3,
1995, February 2, 1996, January 31, 1997 and January 31, 1998. All fiscal years
for which financial information is included had 52 weeks, except fiscal 1994
which had 53 weeks.
Certain statements in this Annual Report under the captions "Business",
"Selected Financial Data", "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Financial Statements and Supplementary
Data" and elsewhere constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements of the
Company, or industry results, to differ materially from any future results,
performances or achievements expressed or implied by such forward-looking
statements. The Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.
PART I
ITEM 1. BUSINESS
The Company is a leading mail order and store retailer of women's and men's
apparel, shoes and accessories operating primarily under the J. Crew(R) brand
name. The J. Crew merchandising strategy emphasizes timeless styles and a broad
assortment of high-quality products designed to provide customers with one-stop
shopping opportunities at attractive prices. J. Crew catalogs and retail stores
offer a full line of men's and women's basic durables (casual weekend wear),
sport, swimwear, accessories and shoes, as well as the more tailored men's
sportswear and women's "Classics" lines. Approximately 60% of the Company's J.
Crew brand sales are derived from its core offerings of durables and sport
clothing, the demand for which the Company believes is stable and resistant to
changing fashion trends. The Company believes that the J. Crew image and
merchandising strategy appeal to college-educated, professional and affluent
customers who, in the Company's experience, have demonstrated strong brand
loyalty and a tendency to make repeat purchases.
J. Crew products are distributed exclusively through the Company's catalog
and store distribution channels. The Company currently circulates over 76
million J. Crew catalogs per annum and owns and operates 51 J. Crew retail
stores and 42 J. Crew factory outlets. In addition, J. Crew products are
distributed through 67 free-standing and shop-in-shop stores in Japan under a
licensing agreement with Itochu.
In addition to the Company's J. Crew operations, the Company operates
Clifford & Wills ("C&W"), a mail order and factory store women's apparel
business that targets older, more conservative customers, and Popular Club Plan
("PCP"), a direct selling catalog merchandiser of consumer branded goods through
a "club" concept that provides credit sales to lower-income customers.
The Company has five major operating divisions: J. Crew Mail Order, J. Crew
Retail, J. Crew Factory Outlets, PCP and C&W. J. Crew Mail Order, J. Crew
Retail and J. Crew Factory Outlets each operate under the J. Crew brand name. In
1997, products sold under the J. Crew brand contributed $577.6 million in
revenues (including licensing revenues) or 69.3% of the Company's total
revenues. J. Crew brand revenues in 1997 were comprised primarily of $264.8
million (45.8%) from J. Crew Mail Order, $209.6 million (36.3%) from J. Crew
Retail and $100.3 million (17.4%) from J. Crew Factory Outlets. In fiscal 1997,
PCP and C&W contributed revenues of $184.4 million and
1
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$72.0 million, respectively, representing approximately 22.1% and 8.6%,
respectively, of the Company's total revenues.
ITEM 2. PROPERTIES
The Company is headquartered in New York City, although PCP maintains a
separate main office in Garfield, New Jersey. Both the New York City
headquarters offices and PCP's Garfield office are leased from third parties.
The Company owns two telemarketing and distribution facilities: a 406,500-
square-foot telemarketing and distribution center for J. Crew and C&W mail order
operations in Lynchburg, Virginia and a 192,500-square-foot distribution center
in Asheville, North Carolina servicing the J. Crew Retail and J. Crew and C&W
outlet store operations. The Company also leases from a third party a 369,000-
square-foot distribution facility located in Edison, New Jersey dedicated to
PCP's fulfillment operations.
As of January 31, 1998, the Company operated 102 retail and factory outlet
stores. All of the retail and factory outlet stores are leased from third
parties, and the leases in most cases have terms of 10 to 12 years, not
including renewal options. As a general matter, the leases contain standard
provisions concerning the payment of rent, events of default and the rights and
obligations of each party. Rent due under the leases is comprised of annual base
rent plus a contingent rent payment based on the store's sales in excess of a
specified threshold. Substantially all the leases are guaranteed by Holdings.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in several lawsuits arising in the ordinary
course of business. Although the amount of any liability that could arise with
respect to any such lawsuit cannot be accurately predicted, in the opinion of
management, the resolution of these matters is not expected to have a material
adverse effect on the financial position or results of operations of the
Company.
A 1992 Supreme Court decision confirmed that the Commerce Clause of the
United States Constitution prevents a state from requiring the collection of its
use tax by a mail order company unless the company has a physical presence in
the state. However, there continues to be some uncertainty in this area due to
inconsistent application of the Supreme Court decision by state and federal
courts. The Company attempts to conduct its operations in compliance with its
interpretation of the applicable legal standard, but there can be no assurance
that this compliance will not be challenged. From time to time, various states
have sought to require companies to begin collection of use taxes and/or pay
taxes from previous sales. The Company has not received assessments from any
state in which it is not currently collecting sales taxes since the 1992 Supreme
Court decision.
The Supreme Court decision also established that Congress has the power to
enact legislation that would permit states to require collection of use taxes by
mail order companies. Congress has from time to time considered proposals for
such legislation. The Company anticipates that any legislative change, if
adopted, would be applied only on a prospective basis.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
2
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY SECURITIES AND RELATED
STOCKHOLDER MATTERS
There is no established public market for any class of Operating Corp
capital stock. Holdings owns 100% of the common stock of Operating Corp
("Common Stock").
On October 17, 1997, Operating Corp made a cash distribution of
approximately $69.3 million to permit Holdings to make certain payments in
connection with the Recapitalization. Operating Corp may from time to time pay
cash dividends on the Common Stock to permit Holdings to make required payments
relating to its senior discount debentures.
The indenture relating to the Senior Subordinated Notes and the credit
agreement to which Operating Corp is a party contain covenants which impose
substantial restrictions on Operating Corp's ability to make dividends or
distributions to Holdings.
3
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ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the audited consolidated
financial statements of the Company for the three-year period ended January 31,
1998 and notes thereto included elsewhere in this Annual Report on Form 10-K.
Revenues
Revenues increased 3.1% to $834.0 million in the fiscal year ended January
31, 1998 from $808.8 million in the fiscal year ended January 31, 1997, as a
result of increased revenues of J. Crew Retail stores. The increased revenues of
J. Crew Retail stores were offset by a decrease in J. Crew Mail Order revenues.
J. Crew Retail revenues increased by 24.8% to $209.6 million in the fiscal year
ended January 31, 1998 from $168.0 million in the fiscal year ended January 31,
1997. The increase in J. Crew Retail store revenues was the result of the
opening of 12 new stores in fiscal 1997 , which offset a decline of 6.6% in
comparable store sales.
J. Crew Mail Order revenues decreased by 8.6% to $264.8 million in the
fiscal year ended January 31, 1998 from $289.8 million in the fiscal year ended
January 31, 1997. The percentage of the Company's total revenues derived from
J. Crew Mail Order decreased to 31.8% in the fiscal year ended January 31, 1998
from 35.8% in the fiscal year ended January 31, 1997. The decrease in J. Crew
Mail Order revenues was primarily due to weak performance in menswear sales and
unseasonably warm weather on the east coast during the fall season. The UPS
strike also contributed to the decrease in J. Crew Mail Order revenues. Gross
sales were down 19% from July 18, 1997 to the end of the UPS strike on August
23, 1997 compared to the same period in the prior period. The number of catalogs
mailed was approximately 77 million in fiscal 1997 compared to 76 million in
fiscal 1996.
J. Crew Retail revenues increased by 24.8% to $209.6 million in the fiscal
year ended January 31, 1998 from $168.0 million in the fiscal year ended January
31, 1997. The percentage of the Company's total revenue derived from its J.
Crew Retail stores increased to 25.1% in the fiscal year ended January 31, 1998
from 20.8% in the fiscal year ended January 31, 1997. The increase in J. Crew
Retail revenues is the result of opening 12 new stores in the fiscal year ended
January 31, 1998. Comparable stores sales decreased 6.6% as the result of the
opening of new stores in proximity to existing store locations, weak performance
in menswear sales and unseasonably warm weather in the second half of the year
which contributed to a decrease in the sales of fall and winter clothing.
J. Crew Factory Outlet revenues increased by 6.1% to $100.3 million in the
fiscal year ended January 31, 1998 from $94.5 million in the fiscal year ended
January 31, 1997. The percentage of the Company's total revenue derived from J.
Crew Factory Outlet remained at approximately 12%. J. Crew Factory stores
comparable store sales increased by 2.0% in the fiscal year ended January 31,
1998. The comparable store sales increase was principally due to the overall
improvement in store merchandising under the direction of a new factory outlet
merchandising vice president. J. Crew Factory Outlet opened three new stores
and closed one store in fiscal 1997.
PCP revenues increased by 3.8% to $184.4 million in the fiscal year ended
January 31, 1998 compared to $177.7 million in the fiscal year ended January 31,
1997. The percentage of the Company's total revenues derived from PCP remained
at approximately 22.0%. The number of catalogs mailed remained at the same
approximate level of 7 million and the number of selling agents remained
unchanged at approximately 106,000 during fiscal 1997 and 1996. The increase in
sales in fiscal 1997 over fiscal 1996 was attributable to better performance in
ready-to-wear apparel and specifically in new branded merchandise.
C&W revenues decreased 4.0% to $72.0 million in the fiscal year ended
January 31, 1998 from $75.0 million in the fiscal year ended January 31, 1997.
The percentage of the Company's revenue derived from C&W
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decreased to 8.6% in the fiscal year ended January 31, 1998 from 9.3% in the
fiscal year ended January 31, 1997. The number of catalogs mailed increased to
approximately 40 million in the fiscal year ended January 31, 1998 from
approximately 38 million in the fiscal year ended January 31, 1997. The decrease
in sales was the result of the effect of the UPS strike, the unseasonably warm
weather in the second half of the fiscal year effecting the sales of fall and
winter clothing and a lower response from the Company's sale catalogs compared
to the prior year.
Gross Profit
Gross profit as a percentage of revenues was 44.2% for the fiscal year
ended January 31, 1998 compared to 47.0% in the fiscal year ended January 31,
1997. Half of the decrease in gross profit was primarily the result of
significant promotional discounting in the November and December Holiday
catalogs in J. Crew Mail Order and the other half of the decrease was the result
of an increase in J. Crew Retail buying and occupancy costs, reflecting the
higher costs associated with opening new stores in urban areas such as New York
City.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of revenues
was 43.1% in the fiscal year ended January 31, 1998 and the fiscal year ended
January 31, 1997. As a percentage of revenues general and administrative
expenses increased by 1.2%, primarily as a result of a higher expense ratio due
to the decrease in J. Crew Mail Order revenues and the decline in comparable
store sales in J. Crew Retail. Catalog circulation costs (consisting primarily
of paper, postage and printing) expenses decreased by 1.2% primarily as a result
of decreased paper costs. Absolute dollar amounts of selling, general and
administrative expenses increased to $359.8 million in fiscal 1997 from $348.3
million in fiscal 1996, primarily reflecting volume related costs.
Interest Expense
Interest expense increased to $17.5 million or 2.1% of revenues in the
fiscal year ended January 31, 1998 from $10.5 million or 1.3% of revenues in the
fiscal year ended January 31, 1997. This increase in interest expense was due
to the issuance by Operating Corp of the Senior Subordinated Notes of $150
million which contributed approximately $4.6 million in increased interest and
the borrowings by Operating Corp under its term loan facility of $70 million
which contributed approximately $1.8 million in increased interest. These
borrowings were required to fund the Recapitalization. This increase was
partially offset by a decrease in the interest expense related to the $85.0
million of senior indebtedness which was retired in October 1997. Borrowings by
Operating Corp under its revolving credit facility required to fund inventories
and capital expenditures contributed $1.9 million in increased interest.
Recapitalization Expenses
The recapitalization expenses of $20.7 million consisted of management
bonuses of $12.2 million, a financial advisory fee paid to TPG Partners II,
L.P. of $5.6 million, legal and accounting fees of $1.4 million, a consulting
fee of $1.0 million and other expenses of $0.5 million. The Company's results
of operations were negatively impacted by these recapitalization expenses. The
loss before income taxes and extraordinary item of $29.2 million for the fiscal
year ended January 31, 1998 includes the $20.7 million of non-recurring
recapitalization expenses, the majority of which were paid before January 31,
1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal market risk relates to interest rate sensitivity
which is the risk that future changes in interest rates will reduce net income
or the net assets of the Company. The Company's variable rate debt consists of
borrowings under the Revolving Credit Facility and the $70 million Term Loan
Facility. In order to manage this interest rate risk, the Company entered into
an interest rate swap agreement in October 1997 for $70 million notional
principal amount. This agreement which has a term of three years, converts the
interest rate on $70 million of debt to a fixed rate of 6.23%. If this interest
rate swap agreement was settled on January 31, 1998, the Company would be
required to pay an additional $935,000.
The Company enters into letters of credit to facilitate the
international purchase of merchandise. The letters of credit are primarily
denominated in U.S. dollars. Outstanding letters of credit at January 31, 1998
were approximately $20.1 million.
Furthermore, the Company has a licensing agreement in Japan which
provides for a royalty payment based on sales of J. Crew merchandise as
denominated in yen. The Company has from time to time entered into forward
foreign exchange contracts to minimize this risk. At January 31, 1998, there
were no forward foreign exchange contracts outstanding. A 10% change in the
dollar-yen exchange rate would have an effect on net income of approximately
$200,000, which amount is not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are set forth herein commencing on page F-1 of
this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
5
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
6
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of J. Crew Operating Corp. and
subsidiaries are included in Item 8:
(i) Report of KPMG Peat Marwick LLP, Independent Auditors
(ii) Report of Deloitte & Touche LLP, Independent Auditors
(iii) Consolidated Balance Sheets - January 31, 1998 and 1997
(iv) Consolidated Statements of Operations - Years ended January 31,
1998 and 1997 and February 2, 1996
(v) Consolidated Statements of Cash Flows - Years ended January 31,
1998 and 1997 and February 2, 1996
(vi) Notes to consolidated financial statements
2. Financial Statements Schedules
Schedule II Valuation and Qualifying Accounts is set forth herein
commencing on page F-23 of this Report.
3. Exhibits
The exhibits listed on the accompanying Exhibit Index are incorporated
by reference herein and filed as part of this report.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by registrant during the last
quarter of the period covered by this report.
(c) Exhibits
See Item 14(a)3 above.
(d) Financial Statement Schedules
See Item 14(a)1 and 14(a)2 above.
7
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J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Financial Statements
January 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
F-1
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
J. Crew Operating Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of J. Crew Operating
Corp. and subsidiaries (the "Company") as of January 31, 1998 and the related
consolidated statements of operations and cash flows for the fiscal year then
ended. In connection with our audit of the consolidated financial statements, we
also have audited the financial statement schedule for the fiscal year ended
January 31, 1998 as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 31, 1998
and the results of its operations and cash flows for the fiscal year then ended
in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule for the fiscal year ended
January 31, 1998, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
April 13, 1998
New York, New York
F-2
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
J. Crew Group, Inc.
We have audited the accompanying consolidated balance sheet of J. Crew
Group, Inc. and subsidiaries as of January 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two fiscal years in the period ended January 31, 1997. Our audits
also included the financial statement schedule listed in the Index at Item
14(a)2. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of J. Crew Group, Inc. and
subsidiaries as of January 31, 1997, and the results of their operations and
their cash flows for each of the two fiscal years in the period ended January
31, 1997 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As discussed in Note 14 to the consolidated financial statements, in
1995, the Company changed its method of accounting for catalog costs to conform
with the provisions of Statement of Position 93-7, "Reporting on Advertising
Costs," and changed its method of accounting for merchandise inventories.
Deloitte & Touche LLP
New York, New York
March 31, 1997
F-3
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J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 31
-------------------
ASSETS 1998 1997
--------- --------
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,166 7,132
Accounts receivable (net of allowance for doubtful
accounts of $5,438 and $4,357) 16,834 58,079
Merchandise inventories 202,763 197,657
Prepaid expenses and other current assets 62,399 58,318
--------- -------
Total current assets 294,162 321,186
--------- -------
Property and equipment - at cost:
Land 1,460 1,405
Buildings and improvements 11,167 11,167
Furniture, fixtures and equipment 47,673 43,537
Leasehold improvements 101,407 75,378
Construction in progress 4,569 4,063
--------- -------
166,276 135,550
Less accumulated depreciation and amortization 55,613 49,121
--------- -------
110,663 86,429
--------- -------
Other assets 14,619 3,206
--------- -------
Total assets $ 419,444 410,821
========= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable 65,553 103,279
Other current liabilities 77,850 62,938
Deferred income taxes 8,986 12,555
Federal and state income taxes payable 251 9,955
Current portion of long-term debt -- 237
--------- -------
Total current liabilities 152,640 188,964
--------- -------
Long-term debt 220,000 86,855
--------- -------
Deferred credits and other long-term liabilities 43,578 32,996
--------- -------
Stockholder's equity 3,226 102,006
--------- -------
Total liabilities and stockholder's equity $ 419,444 410,821
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended
-------------------------------
January 31 February 2
------------------ -----------
1998 1997 1996
-------- -------- -----------
(in thousands)
<S> <C> <C> <C>
Net sales $ 822,840 795,931 732,580
Other revenues 11,191 12,912 13,329
------- ------- -------
Revenues 834,031 808,843 745,909
Cost of goods sold, including buying and occupancy
costs 465,168 428,719 399,668
------- ------- -------
Gross profit 368,863 380,124 346,241
Selling, general and administrative expenses 359,811 348,305 327,672
------- ------- -------
Income from operations 9,052 31,819 18,569
Interest expense - net 17,524 10,470 9,350
Expenses incurred in connection with the recapitalization 20,707 -- --
------- ------- -------
(Loss) income before income taxes,
extraordinary item and cumulative effect
of accounting changes (29,179) 21,349 9,219
(Benefit) provision for income taxes (4,257) 8,800 3,700
------- ------- ----------
(Loss) income before extraordinary
item and cumulative effect
of accounting changes (24,922) 12,549 5,519
Extraordinary item - loss on early retirement of debt
(net of income tax benefit of $3,127 and $1,200) (4,500) -- (1,679)
Cumulative effect of accounting changes (net of
income taxes of $1,800) -- -- 2,610
------- ------- -------
Net (loss) income $ (29,422) 12,549 6,450
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended
---------------------------------
January 31 February 2
-------------------- -----------
1998 1997 1996
----- ----- -----
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss)/income $ (29,422) 12,549 6,450
Adjustments to reconcile net (loss) income to net cash
provided by (used in)operating activities:
Loss on early retirement of debt 7,627 -- --
Depreciation and amortization 15,255 10,541 10,272
Amortization of deferred financing costs 892 401 1,186
Deferred income taxes (4,005) (1,184) 10,131
Provision for losses on accounts receivable 7,343 6,945 7,277
Noncash compensation expense -- -- 1,142
Changes in operating assets and liabilities:
Accounts receivable (12,098) (6,744) (7,708)
Sale of accounts receivable 46,000 -- --
Merchandise inventories (5,106) (49,602) (10,417)
Prepaid expenses and other current assets (4,081) (4,007) (12,444)
Other assets (587) (375) (2,031)
Accounts payable (37,726) 31,864 6,318
Other liabilities 17,727 3,439 (5,351)
Federal and state income taxes payable (9,268) 12,670 (12,674)
--------- ------- -------
Net cash (used in) provided by operating activities (7,449) 16,497 (7,849)
--------- ------- -------
Cash flows from investing activities:
Capital expenditures (43,134) (27,462) (18,466)
Proceeds from construction allowances 11,767 4,981 3,826
--------- ------- -------
Net cash used in investing activities (31,367) (22,481) (14,640)
--------- ------- -------
Cash flows from financing activities:
Issuance of long-term debt 220,000 -- 85,000
Repayment of long-term debt (92,863) (237) (67,237)
Costs incurred in connection with the issuance of debt (13,929) -- --
Dividends paid (69,358) (176) --
--------- ------- -------
Net cash provided by (used in) financing activities 43,850 (413) 17,763
--------- ------- -------
Increase (decrease) in cash and cash equivalents 5,034 (6,397) (4,726)
Cash and cash equivalents at beginning of year 7,132 13,529 18,255
--------- ------- -------
Cash and cash equivalents at end of year $ 12,166 7,132 13,529
======= ======= ======
Supplementary cash flow information:
Income taxes paid (refunded) $ 5,180 (3,600) 7,000
======= ======= ======
Interest paid $ 12,655 9,880 9,601
======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 31, 1998 and 1997 and
February 2, 1996
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of J. Crew Operating Corp. ("Operating Corp.") and its wholly-owned
subsidiaries (collectively, the "Company"). Operating Corp. is a wholly-
owned subsidiary of J. Crew Group, Inc. ("Holdings"). The consolidated
balance sheet as of January 31, 1997 and the consolidated statements of
operations and cash flows for the period February 1, 1997 through October
17, 1997 and for the years ended January 31, 1997 and February 2, 1996
are those of Holdings, as predecessor to Operating Corp. All
significant intercompany balances and transactions have been eliminated
in consolidation.
Prior to the Recapitalization (see Note 2), Holdings owned all of the
stock, directly or indirectly, of its various operating subisidiaries. In
connection with the Recapitalization, Holdings formed Operating Corp. and
immediately prior to the consummation of the Recapitalization, Holdings
transferred substantially all of its assets and liabilities to Operating
Corp. On October 17, 1997, Operating Corp. made a cash distribution of
$69,358,000 to permit Holdings to make certain payments in connection
with the Recapitalization.
(B) BUSINESS
The Company, which operates in one business segment, designs, contracts
for the manufacture of, markets and distributes men's, women's and
children's apparel, accessories and home furnishings. The Company's
products are marketed through catalogs and retail stores primarily in the
United States. The Company is also party to a licensing agreement which
grants the licensee exclusive rights to use the Company's trademarks in
connection with the manufacture and sale of products in Japan. The
license agreement provides for payments based on a specified percentage
of net sales.
The Company is subject to seasonal fluctuations in its merchandise sales
and results of operations. The Company expects its sales and operating
results generally to be lower in the first and second quarters than in
the third and fourth quarters (which include the back-to-school and
holiday seasons) of each fiscal year.
A significant amount of the Company's products are produced in the Far
East through arrangements with independent contractors. As a result, the
Company's operations could be adversely affected by political instability
resulting in the disruption of trade from the countries in which these
contractors are located or by the imposition of additional duties or
regulations relating to imports or by the contractor's inability to meet
the Company's production requirements.
(C) FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to January 31.
The fiscal years 1997, 1996 and 1995 ended on January 31, 1998 (52
weeks), January 31, 1997 (52 weeks) and February 2, 1996 (52 weeks).
Effective January 31, 1998 the Company changed its fiscal year-end from
the Friday closest to January 31, to the Saturday closest to January 31.
The effect of this change on the results of operations was not material.
(D) CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments, with maturities of 90 days
or less when purchased, to be cash equivalents. Cash equivalents, which
were $1,902,000 and $1,968,000 at January 31, 1998 and 1997, are stated
at cost, which approximates market value.
F-7
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(E) ACCOUNTS RECEIVABLE
Accounts receivable consists of installment receivables resulting from
the sale of merchandise of Popular Club Plan, Inc., a subsidiary of the
Company. Concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of customers comprising
the accounts receivable base. Finance charge income (including the gain
on sale of receivables (see Note 4)), which is included in other
revenues, for the fiscal years 1997, 1996 and 1995 was $8,294,000,
$9,095,000 and $9,354,000.
(F) MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost (determined on a
first-in, first-out basis) or market. The Company capitalizes certain
design, purchasing and warehousing costs into inventory. (See Note 14).
(G) CATALOG COSTS
Catalog costs, which primarily consist of catalog production and mailing
costs, are capitalized and amortized over the expected future revenue
stream, which extends up to five months from the date catalogs are
mailed. The Company accounts for catalog costs in accordance with the
AICPA Statement of Position ("SOP") 93-7, "Reporting on Advertising
Costs." SOP 93-7 requires that the amortization of capitalized
advertising costs be the amount computed using the ratio that current
period revenues for the catalog cost pool bear to the total of current
and estimated future period revenues for that catalog cost pool.
Deferred catalog costs, included in prepaid expenses and other current
assets, as of January 31, 1998 and 1997 were $39,227,000 and
$41,191,000. Catalog costs, which are reflected in selling and
administrative expenses, for the fiscal years 1997, 1996 and 1995 were
$131,103,000, $135,633,000 and $132,566,000 (See Note 14).
(H) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Buildings and improvements
are depreciated by the straight-line method over the estimated useful
lives of the respective assets of twenty years. Furniture, fixtures and
equipment are depreciated by the straight-line method over the estimated
useful lives of the respective assets, ranging from three to ten years.
Leasehold improvements are amortized over the shorter of their useful
lives or related lease terms.
The Company receives construction allowances upon entering into certain
store leases. These construction allowances are recorded as deferred
credits and are amortized over the term of the related lease.
F-8
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(I) OTHER ASSETS
Other assets consist primarily of debt issuance costs of $12,431,000 and
$1,250,000 at January 31, 1998 and 1997, which are amortized over the
term of the related debt agreements.
(J) INCOME TAXES
The provision for income taxes includes taxes currently payable and
deferred taxes resulting from the tax effects of temporary differences
between the financial statement and tax bases of assets and liabilities,
in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes."
(K) REVENUE RECOGNITION
Revenue is recognized when merchandise is shipped to customers. The
Company accrues a sales return allowance in accordance with its return
policy for estimated returns of merchandise subsequent to the balance
sheet date that relate to sales prior to the balance sheet date.
(L) STORE PREOPENING COST
Costs associated with the opening of new retail and outlet stores are
expensed as incurred.
(M) DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company to manage its
interest rate and foreign currency exposures. The Company does not hold
derivative financial instruments for trading or speculative purposes. For
interest rate swap agreements, the net interest paid is recorded as
interest expense on a current basis. Gains or losses resulting from
market fluctuations are not recognized. The Company from time to time
enters into forward foreign exchange contracts as hedges relating to
indentifiable currency positions to reduce the risk from exchange rate
fluctuations. Gains and losses on these contracts are deferred and
recognized as adjustments to the bases of those assets. Such gains and
losses were not material for the fiscal years ended January 31, 1998 and
1997.
F-9
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(N) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(O) IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF
In March 1995, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable, and is effective for fiscal years beginning after December
15, 1995. The adoption of SFAS No. 121 did not have an effect on the
Company's financial position or results of operations.
F-10
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) RECAPITALIZATION TRANSACTION
During 1997 Holdings entered into a recapitalization transaction (the
"Recapitalization"). In October 1997, Holdings purchased from the existing
shareholders for an aggregate purchase price of approximately $316,688,000
all of the outstanding shares of Holdings' capital stock, other than a
certain number of shares of Holdings' common stock held by existing
shareholders which represented 14.8% of the outstanding shares of Holdings'
common stock immediately following consummation of the Recapitalization. The
purchase of such outstanding shares of capital stock was financed in part
by (a) issuing to TPG Partners II, L.P. ("TPG"), its affiliates and other
investors shares of common stock of Holdings for approximately $63,891,000
and shares of preferred stock of Holdings for $125,000,000 and (b)
consummating the debt and securitization transactions described in Notes 4, 5
and 6. In connection with the Recapitalization, the Company repaid
substantially all of its preexisting debt obligations immediately before the
consummation of the Recapitalization.
Expenses incurred in connection with the recapitalization consisted of:
Management bonuses $ 12,163,000
TPG financial advisory fee 5,550,000
Legal and accounting fees 1,454,000
Consulting fee 1,000,000
Other 540,000
----------
Total $ 20,707,000
==========
(3) OTHER CURRENT LIABILITIES
Other current liabilities consist of:
January 31,
-------------------------
1998 1997
---------- ----------
Customer liabilities $ 18,572,000 22,968,000
Accrued catalog and marketing costs 12,504,000 10,734,000
Taxes, other than income taxes 9,067,000 9,093,000
Accrued interest 4,998,000 889,000
Reserve for sales returns 3,529,000 2,406,000
Other 29,180,000 16,848,000
----------- ----------
$ 77,850,000 62,938,000
=========== ==========
F-11
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) SALE OF ACCOUNTS RECEIVABLE
In October 1997, the Company entered into an agreement to securitize certain
customer installment receivables of Popular Club Plan, Inc. on a revolving
basis. This securitization involves the transfer of receivables through a
special purpose, bankruptcy remote subsidiary to a trust in exchange for cash
and subordinated certificates representing undivided interests in the pool of
installment accounts receivable and the subsequent sale by the trust of
certificates of beneficial interest to third party investors. The Company has
no obligation to reimburse the trust or the purchasers of beneficial
interests for credit losses. The transactions have been accounted for as a
sale in accordance with the provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities."
At January 31, 1998, $46,000,000 of accounts receivable had been sold.
The sale of receivables resulted in a gain on sale of $1,472,000
during the year ended January 31, 1998, which is included in other
revenues.
Included in the gain on sale is the discount on sale of accounts
receivable which is comprised of the interest, discount and administrative
and other fees paid or accrued to the purchasers of the accounts receivables
sold. The discount approximates the prevailing short-term London Inter Bank
Offered Rate (LIBOR) plus a credit spread and administrative fees. The
interest rate (including administrative fees) applicable to receivables sold
as of January 31, 1998 was 7.125%.
Under SFAS No. 125, no servicing asset or liability is recorded as fees
charged are expected to cover related expenses.
(5) LONG-TERM DEBT
January 31,
----------------------
1998 1997
----------- ----------
Senior notes due December 15, 2004, (Note 2) $ -- 85,000,000
Industrial Development Revenue Bond,
bearing interest at 73.33% of prime
rate (8.25% at January 31, 1997) (Note 2) -- 2,092,000
Term loan (a) 70,000,000 --
10-3/8% senior subordinated notes (b) 150,000,000
----------- ----------
220,000,000 87,092,000
Less payments due within one year __ (237,000)
----------- ----------
Total $220,000,000 86,855,000
=========== ==========
(a) The $70.0 million term loan is subject to the same interest rates and
security terms as the Revolving Credit Agreement (see Note 6). The term
loan is repayable in quarterly installments of $4.0 million from February
2001 through November 2001 and $6.75 million from February 2002 through
November 2003.
F-12
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5), CONTINUED
(b) The senior subordinated notes are unsecured general obligations of the
Company and are subordinated in right of payment to all senior debt.
Interest on the notes accrues at the rate of 10-3/8% per annum and is
payable semi-annually in arrears on April 15 and October 15. The notes
mature on October 15, 2007 and may be redeemed at the option of the
issuer subsequent to October 15, 2002 at prices ranging from 105.188% in
2002 to 100% in 2005 and thereafter.
(c) The maturities of long-term debt required during the next five years are:
Fiscal year Amount
----------- ------
1998 $ --
1999 --
2000 --
2001 16,000,000
2002 27,000,000
(6) LINES OF CREDIT
On October 17, 1997, in connection with the Recapitalization, the Company
entered into a syndicated revolving credit agreement of up to $200.0 million
(the "Revolving Credit Agreement") with a group of banks, with The Chase
Manhattan Bank as administrative and collateral agent (the "Administrative
Agent"), and Donaldson, Lufkin & Jenrette Securities Corporation as
syndication agent. Borrowings may be utilized to fund the working capital
requirements of the Company's subsidiaries, including issuance of stand-by
and trade letters of credit and bankers' acceptances.
F-13
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6), CONTINUED
Borrowings are secured by a perfected first priority security interest in all
assets (except for the accounts receivable of Popular Club Plan, Inc.) of the
Company's direct and indirect, domestic, and to the extent no adverse tax
consequences would result, foreign subsidiaries and bear interest, at the
Company's option, at a base rate equal to the Administrative Agent's
Eurodollar rate plus an applicable margin or an alternate base rate equal to
the highest of the Administrative Agent's prime rate, a certificate of
deposit rate plus 1% or the Federal Funds effective rate plus one-half of 1%
plus, in each case, an applicable margin. The Revolving Credit Agreement
matures on October 17, 2003.
The Revolving Credit Agreement replaced the Company's previous revolving
credit agreement which provided for commitments in an aggregate amount of up
to $200.0 million, of which up to $120.0 million was available for direct
borrowings.
During fiscal 1997, 1996 and 1995, maximum borrowings under revolving credit
agreements were $104,000,000, $55,000,000 and $49,000,000 and average
borrowings were $54,300,000, $31,200,000 and $25,500,000. There were no
borrowings outstanding under the Company's revolving credit agreements at
January 31, 1998 and 1997.
Outstanding letters of credit established to facilitate international
merchandise purchases at January 31, 1998 and 1997 amounted to $20,143,000
and $37,800,000.
The provisions of the Revolving Credit Agreement require that the Company
maintain certain levels of (i) consolidated net worth, (ii), leverage ratio,
(iii) interest coverage ratio and (iv) inventory coverage ratio and provide
for limitations on capital expenditures, sale and leaseback transactions,
liens, investments, sales of assets and indebtedness.
F-14
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES
As of January 31, 1998, the Company was obligated under various long-term
operating leases for retail and outlet stores, warehouses, office space
and equipment requiring minimum annual rentals. These operating leases
expire on varying dates to 2012. At January 31, 1998 aggregate minimum
rentals in future periods are as follows:
Fiscal Year Amount
----------- -----------
1998 $ 33,578,000
1999 33,504,000
2000 30,656,000
2001 27,924,000
2002 26,375,000
Thereafter 130,935,000
Certain of these leases include renewal options and escalation clauses
and provide for contingent rentals based upon sales and require the
lessee to pay taxes, insurance and other occupancy costs.
Rent expense for fiscal 1997, 1996 and 1995 was $35,753,000, $29,852,000
and $27,366,000, including contingent rent based on store sales of
$2,877,000, $2,850,000 and $2,197,000.
(B) EMPLOYMENT AGREEMENTS
The Company is party to employment agreements with certain executives
which provide for compensation and certain other benefits. The
agreements also provide for severance payments under certain
circumstances.
(C) LITIGATION
The Company is involved in various legal proceedings, both as plaintiff
and as defendant, which are routine litigations incidental to the conduct
of its business. The Company believes that the ultimate resolution of
these matters will not have a material effect on its financial position.
(8) EMPLOYEE BENEFIT PLAN
The Company has a thrift/savings plan pursuant to Section 401 of the Internal
Revenue Code whereby all eligible employees may contribute up to 15% of their
annual base salaries subject to certain limitations. The Company's
contribution is based on a percentage formula set forth in the plan
agreement. Company contributions to the thrift/savings plan for fiscal 1997,
1996 and 1995 were $1,780,000, $1,680,000 and $1,478,000.
F-15
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) LICENSE AGREEMENT
The Company has a licensing agreement through January 2003 with Itochu, a
Japanese trading company. The agreement permits Itochu to distribute J. Crew
merchandise in Japan. The Company earns royalty payments under the agreement
based on the sales of its merchandise. Royalty income, which is included in
other revenues, for fiscal 1997, 1996 and 1995 was $2,897,000, $3,817,000 and
$3,975,000.
(10) INTEREST EXPENSE - NET
Interest expense, net consists of the following:
Fiscal Year
------------------------------------
1997 1996 1995
----------- ----------- ----------
Interest expense $ 17,666,000 10,613,000 9,548,000
Interest income (142,000) (143,000) (198,000)
---------- ---------- ---------
Interest expense, net $ 17,524,000 10,470,000 9,350,000
========== ========== =========
(11) FINANCIAL INSTRUMENTS
The following disclosure about the fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments." The fair value of the Company's long-
term debt, including current portion, is estimated to be approximately
$208,550,000 and $89,100,000 at January 31, 1998 and 1997, respectively, and
is based on dealer quotes or quoted market prices of the same or similar
instruments or management's estimate of the present value of future cash
flows discounted at the current market rate for financial instruments with
similar characteristics and maturity. The carrying amounts of long-term debt
were $220,000,000 and $87,092,000 at January 31, 1998 and 1997. The carrying
amounts reported in the consolidated balance sheets for cash and cash
equivalents, accounts receivable, accounts payable and other current
liabilities approximate fair value because of the short-term maturity of
those financial instruments. The estimates presented herein are not
necessarily indicative of amounts the Company could realize in a current
market exchange.
In October 1997 the Company entered into an interest rate swap agreement for
$70 million notional amount, which effectively converted the interest rate on
its $70 million term loan from a variable rate to a fixed rate of 6.23%
through October 2000. If this agreement was settled on January 31, 1998, the
Company would be required to pay $935,000.
F-16
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11), CONTINUED
At January 31, 1997, the Company had a forward foreign exchange contract
outstanding with J. P. Morgan to deliver 235 million yen on March 31, 1997.
This contract was a hedge relating to foreign licensing revenues. The fair
value of this contract approximated fair value due to its short-term
maturity. There were no outstanding foreign exchange contracts at January 31,
1998.
The Company is exposed to credit losses in the event of nonperformance by the
counterparties to these contracts, but it does not expect any counterparties
to fail to meet their obligation given their high-credit rating.
(12) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This statement requires the use of the
liability method of accounting for income taxes. Under the liability method,
deferred taxes are determined based on the difference between the financial
reporting and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
The (benefit) provision for income taxes consists of:
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- -----------
<S> <C> <C> <C>
Current:
Foreign $ 309,000 400,000 --
Federal (866,000) 8,984,000 (5,131,000)
State and local 305,000 600,000 500,000
---------- --------- ----------
(252,000) 9,984,000 (4,631,000)
Deferred - Federal and state and local (4,005,000) (1,184,000) 8,331,000
----------- ---------- ---------
Income taxes before tax effect of
extraordinary items and cumulative
effect of accounting changes (4,257,000) 8,800,000 3,700,000
Extraordinary item - current - Federal and
state and local (3,127,000) -- (1,200,000)
Cumulative effect of accounting
changes - deferred -- -- 1,800,000
----------- ---------- ---------
Total (benefit) provision
for income taxes $ (7,384,000) 8,800,000 4,300,000
========== ========= ==========
</TABLE>
F-17
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12), CONTINUED
A reconciliation between the provision for income taxes based on the U.S.
Federal statutory rate and the Company's effective rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ----------- ------------
<S> <C> <C> <C>
Federal income tax rate (35.0)% 35.0% 35.0%
Foreign 0.8 0.9 --
State and local income taxes, net
of Federal benefit (2.0) 5.3 5.1
Nondeductible expenses 16.1 -- --
-------- ---------- -----------
Effective tax rate (20.1) % 41.2% 40.1%
======== ========== ===========
</TABLE>
The tax effect of temporary differences which give rise to deferred tax
assets and liabilities are:
<TABLE>
<CAPTION>
January 31
1998 1997
---------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 2,118,000 1,769,000
Net operating loss carryforwards 4,074,000 1,300,000
Difference in book and tax basis
for property and equipment 2,277,000 2,212,000
Other 1,596,000 943,000
---------- -----------
10,065,000 6,224,000
Deferred tax liabilities:
Prepaid catalog expenses and other
prepaid expenses (19,051,000) (18,779,000)
---------- -----------
Net deferred income taxes $ (8,986,000) (12,555,000)
========== ===========
</TABLE>
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
deferred tax assets. At January 31, 1998, the Company had Federal income tax
loss carryforwards of approximately $2,860,000 which expire in 2012. The
Company also had state and local income tax loss carryforwards of varying
amounts.
F-18
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) EXTRAORDINARY ITEMS
In June 1995, the Company prepaid $58 million principal amount of senior
notes and recorded an extraordinary loss of $1,679,000 (net of an income tax
benefit of $1,200,000), consisting of the write-off of deferred financing
costs and redemption premiums related to the early retirement of debt.
In October 1997, the Company prepaid $85 million principal amount of senior
notes and recorded an extraordinary loss of $4,500,000 (net of an income tax
benefit of $3,127,000) consisting of the write-off of deferred financing
costs and redemption premiums related to the early retirement of debt.
(14) ACCOUNTING CHANGES
Effective February 4, 1995, the Company changed its method of accounting for
catalog costs to conform with the provisions of the SOP 93-7. SOP 93-7
requires that the amortization of capitalized advertising costs should be the
amount computed using the ratio that current period revenues for the catalog
cost pool bear to the total of current and estimated future period revenues
for that catalog cost pool. Prior to fiscal 1995, such costs were amortized
on a straight-line basis over the estimated productive life of the catalog.
The cumulative effect of applying this change in accounting on prior periods
was a decrease in net income of $1,600,000 (net of an income tax benefit of $
1,000,000).
Effective February 4, 1995, the Company modified its inventory accounting
practices to include the capitalization of certain design, purchasing and
warehousing costs. Prior to this change, these costs were charged to expense
in the period incurred rather than in the period in which the inventories
were sold. The Company believes this change is preferable because it
provides a better matching of revenues and costs and improves the
comparability of operating results and financial position with those of other
companies. The cumulative effect of applying this change in accounting on
prior periods was an increase in net income of $4,210,000 (net of income
taxes of $2,800,000).
(15) STOCKHOLDER'S EQUITY
The Company has authorized 100 shares of common stock, par value $.01 per
share, all of which was issued and outstanding at January 31, 1998.
Stockholder's equity decreased by $98,780,000 from $102,006,000 at January
31, 1997 to $3,226,000 at January 31, 1998. A reconciliation of this decrease
is as follows:
Balance as of January 31, 1997 $ 102,006,000
Net loss (29,422,000)
Dividend to parent company (69,358,000)
--------------
Balance as of January 31, 1998 $ 3,226,000
==============
(16) ISSUER, GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
Operating Corp. has issued the 10 3/8% senior subordinated notes, which are
fully and unconditionally guaranteed on a senior subordinated basis by
Operating Corp. and its guarantor subsidiaries. Separate financial statements
of the guarantor subsidiaries and other disclosures are not presented because
management has determined that they are not material to investors. Condensed,
consolidating financial information is presented in lieu of the separate
guarantor financial statements. The financial information has been segregated
between (a) the issuer, (b) the guarantor subsidiaries and (c) PCP
Receivables Corp., Inc., the only non-guarantor subsidiary. PCP Receivables
Corp., Inc. was formed on October 17, 1997 and accordingly, its results of
operations and cash flows for the period from October 17, 1997 through
January 31, 1998 are included in the accompanying financial information
presented.
F-19
<PAGE>
J. CREW OPERATING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 31, 1998
($ IN THOUSANDS)
<TABLE>
<CAPTION>
J. CREW OPERATING GUARANTOR PCP RECEIVABLES CONSOLIDATION
CORP. SUBSIDIARIES CORP. ADJUSTMENTS CONSOLIDATED
----------------- ------------ --------------- ------------- ------------
Assets
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............... $ 4,588 $ 7,578 $ -- $ -- $ 12,166
Accounts receivable..................... -- -- 16,834 -- 16,834
Merchandise inventories................. -- 202,763 -- -- 202,763
Prepaid expenses and other current
assets................................. 1,692 60,707 -- -- 62,399
Intercompany receivables................ 149,649 -- -- (149,649) --
-------- -------- ------- --------- --------
Total current assets............... 155,929 271,048 16,834 (149,649) 294,162
Property and equipment, net............. 334 110,329 -- -- 110,663
Investment in subsidiaries.............. 71,556 14,150 -- (85,706) --
Other assets............................ 11,754 2,865 -- -- 14,619
-------- -------- ------- --------- --------
Total assets....................... $239,573 $398,392 $16,834 $(235,355) $419,444
======== ======== ======= ========= ========
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable....................... $ 2,357 $ 63,196 $ -- $ -- $ 65,553
Other current liabilities.............. 14,706 63,144 -- -- 77,850
Deferred income taxes.................. -- 8,986 -- -- 8,986
Federal and state income taxes payable. (2,051) 1,702 600 -- 251
Intercompany liabilities............... -- 147,565 2,084 (149,649) --
-------- -------- ------- --------- --------
Total current liabilities.......... 15,012 284,593 2,684 (149,649) 152,640
Long term debt.......................... 220,000 -- -- -- 220,000
Deferred credits and other long-term
liabilities............................ 1,335 42,243 -- -- 43,578
Stockholder's equity .................... 3,226 71,556 14,150 (85,706) 3,226
-------- -------- ------- --------- --------
Total liabilities and
stockholder's equity ............. $239,573 $398,392 $16,834 $(235,355) $419,444
======== ======== ======= ========= ========
</TABLE>
F-20
<PAGE>
J. CREW OPERATING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1998
($ IN THOUSANDS)
<TABLE>
<CAPTION>
J. CREW OPERATING GUARANTOR PCP RECEIVABLES CONSOLIDATION
CORP. SUBSIDIARIES CORP. ADJUSTMENTS CONSOLIDATED
----------------- ------------ --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales................................ $ -- $822,840 $ -- $ -- $822,840
Other revenues........................... 23,570 9,719 1,472 (23,570) 11,191
------- -------- ------- -------- --------
Revenues........................... 23,570 832,559 1,472 (23,570) 834,031
Cost of goods sold....................... -- 465,168 -- -- 465,168
------- -------- ------- -------- --------
Gross Profit....................... 23,570 367,391 1,472 (23,570) 368,863
Selling, general and administrative
expenses................................ -- 367,438 -- (7,627) 359,811
------- -------- ------- -------- --------
Income (loss) from operations...... 23,570 (47) 1,472 (15,943) 9,052
Interest expense - net................... 15,943 17,524 -- (15,943) 17,524
Expenses incurred in connection with the
recapitalization........................ -- 20,707 -- -- 20,707
------- -------- ------- -------- --------
Income (loss) before income taxes
and extraordinary item............ 7,627 (38,278) 1,472 -- (29,179)
Income tax expense (benefit)............. 3,127 (7,984) 600 -- (4,257)
------- -------- ------- -------- --------
Net income (loss) before
extraordinary item................ 4,500 (30,294) 872 -- (24,922)
Extraordinary item....................... (4,500) -- -- -- (4,500)
------- -------- ------- -------- --------
Net income (loss).................. $ -- $(30,294) $ 872 $ -- $(29,422)
======= ======== ======= ======== ========
</TABLE>
F-21
<PAGE>
J. CREW OPERATING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JANUARY 31, 1998
($ IN THOUSANDS)
<TABLE>
<CAPTION>
J. CREW OPERATING GUARANTOR PCP RECEIVABLES
CORP. SUBSIDIARIES CORP. CONSOLIDATED
----------------- ------------ --------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income (loss)............................ $ -- $(30,294) $ 872 $(29,422)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Loss on early retirement of debt............. 7,627 -- -- 7,627
Depreciation and amortization................ 134 15,121 -- 15,255
Amortization of deferred financing costs..... 819 73 -- 892
Provision for losses on accounts receivable.. -- 7,343 -- 7,343
Deferred income taxes........................ -- (4,005) -- (4,005)
Changes in operating assets and liabilities:
Accounts receivable.......................... -- (12,098) 46,000 33,902
Merchandise inventories...................... -- (5,106) -- (5,106)
Prepaid expenses and other current assets.... 99 (4,180) -- (4,081)
Other assets................................. 122 (709) -- (587)
Increase (decrease) in intercompany, net..... (51,051) 98,523 (47,472) --
Accounts payable............................. (3,657) (34,069) -- (37,726)
Other liabilities............................ 10,976 6,751 -- 17,727
Income taxes payable......................... (10,046) 178 600 (9,268)
-------- -------- -------- --------
Net cash (used in) provided by operating
activities.................................. (44,977) 37,528 -- (7,449)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures......................... (25) (43,109) -- (43,134)
Proceeds from construction allowances........ -- 11,767 -- 11,767
-------- -------- -------- --------
Net cash used in investing activities........ (25) (31,342) -- (31,367)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt................... 220,000 -- -- 220,000
Costs incurred in connection with issuance
of debt..................................... (13,179) (750) -- (13,929)
Repayment of long-term debt.................. (90,892) (1,971) -- (92,863)
Dividend to parent company................... (69,358) -- -- (69,358)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities.................................. 46,571 (2,721) -- 43,850
-------- -------- -------- --------
Increase in cash and cash equivalents......... 1,569 3,465 -- 5,034
-------- -------- -------- --------
Cash and cash equivalents at beginning of year 3,019 4,113 -- 7,132
-------- -------- -------- --------
Cash and cash equivalents at end of year $ 4,588 $ 7,578 $ -- $ 12,166
======== ======== ======== ========
</TABLE>
F-22
<PAGE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
additions
beginning charged to cost charged to other
balance and expenses accounts
------------- --------------- ----------------
<S> <C> <C> <C>
Allowance for doubtful accounts
- -------------------------------
(deducted from accounts receivable)
fiscal year ended:
January 31, 1998 $4,357 $7,343 ___
January 31, 1997 4,824 6,945 ___
February 2, 1996 6,518 7,277 ___
(a) accounts deemed to be uncollectible
Inventory impairment reserve
- ----------------------------
(deducted from inventories)
fiscal year ended:
January 31, 1998 $3,289 $1,111(b) ___
January 31, 1997 5,226 (1,937)(b) ___
February 2, 1996 9,074 (3,848)(b) ___
Allowance for sales returns
- ---------------------------
(included in other current liabilities)
- ---------------------------------------
fiscal year ended:
January 31, 1998 $2,406 $1,123(b) ___
January 31, 1997 2,384 22(b) ___
February 2, 1996 1,935 449(b) ___
<CAPTION>
deductions ending balance
---------- --------------
<C> <C>
Allowance for doubtful accounts
- -------------------------------
(deducted from accounts receivable)
fiscal year ended:
January 31, 1998 $ (6,262)(a) $5,438
January 31, 1997 (7,412)(a) 4,357
February 2, 1996 (8,971)(a) 4,824
(a) accounts deemed to be uncollectible
Inventory impairment reserve
- ----------------------------
(deducted from inventories)
fiscal year ended:
January 31, 1998 ___ $4,400
January 31, 1997 ___ 3,289
February 2, 1996 ___ 5,226
Allowance for sales returns
- ---------------------------
(included in other current liabilities)
- ---------------------------------------
fiscal year ended:
January 31, 1998 ___ $3,529
January 31, 1997 ___ 2,406
February 2, 1996 ___ 2,384
</TABLE>
(b) The inventory impairment reserve and allowance for sales returns are
evaluated at the end of each fiscal quarter and adjusted (plus or minus)
based on the quarterly evaluation. During each period inventory write-downs
and sales returns are charged to the statement of operations as incurred.
F-23
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
J. CREW OPERATING CORP.
By: /s/ Emily Woods Date: May 1, 1998
-------------------------
Emily Woods
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Emily Woods
- --------------------------------------------------- Chairman of the Board May 1, 1998
Emily Woods
/s/ Nicholas Lamberti
- --------------------------------------------------- Vice President - Corporate May 1, 1998
Nicholas Lamberti Controller
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
No. Description
--- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of J. Crew Operating Corp. (incorporated by
reference to Exhibit 3.1 to Registrant's Form S-4 Registration Statement, File No.
333-42423, filed December 16, 1997 (the "Registration Statement"))
3.2 By-laws of J. Crew Operating Corp. (incorporated by reference to Exhibit 3.14 to the
Registration Statement)
4.1 Indenture, dated as of October 17, 1997, between J. Crew Operating Corp, as issuer, the
subsidiary guarantors of J. Crew Operating Corp. that are signatories thereto and State
Street Bank and Trust Company, as trustee, relating to the Debentures (the "Indenture")
(incorporated by reference to Exhibit 4.1 to the Registration Statement)
4.2 Credit Agreement, dated as of October 17, 1997, among J. Crew Group, Inc., J. Crew
Operating Corp., the Lenders Party thereto, the Chase Manhattan Bank, as Administrative
Agent, and Donaldson, Lufkin & Jenrette Securities Corporation, as Syndication Agent
(incorporated by reference to Exhibit 4.3 to Amendment No. 1 to the Registration
Statement, filed February 6, 1998 (the "Amendment No. 1"))
4.3 Guarantee Agreement dated as of October 17, among J. Crew Group, Inc., the subsidiary
guarantors of J. Crew Operating Corp. that are signatories thereto and The Chase
Manhattan Bank (incorporated by reference to Exhibit 4.4 to the Registration Statement)
4.4 Indemnity, Subrogation and Contribution Agreement dated as of October 17, 1997, among J.
Crew Operating Corp., the subsidiary guarantors of J. Crew Operating Corp. that are
signatories thereto and The Chase Manhattan Bank (incorporated by reference to Exhibit
4.5 to the Registration Statement)
4.5 Pledge Agreement, dated as of October 17, among J. Crew Operating Corp., J. Crew Group,
Inc., the subsidiary guarantors of J. Crew Operating Corp. that are signatories thereto
and The Chase Manhattan Bank (incorporated by reference to Exhibit 4.6 to the
Registration Statement)
4.6 Security Agreement, dated as of October 17, among J. Crew Operating Corp., J. Crew
Group, Inc., the subsidiary guarantors of J. Crew Operating Corp. that are signatories
thereto and The Chase Manhattan Bank (incorporated by reference to Exhibit 4.7 to the
Registration Statement)
</TABLE>
X-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
No. Description
--- -----------
<S> <C>
4.7 Registration Rights Agreement, dated as of October 17, 1997 by and among J. Crew
Operating Corp., the subsidiary guarantors of J. Crew Operating Corp. that are
signatories thereto Donaldson, Lufkin & Jenrette Securities Corporation and Chase
Securities Inc. (incorporated by reference to Exhibit 4.8 to the Registration Statement)
NOTE: Pursuant to the provisions of paragraph (b)(4)(iii) of Item 601 of Regulation
S-K, the Registrant hereby undertakes to furnish to the Commission upon request copies
of the instruments pursuant to which various entities hold long-term debt of the Company
or its parent or subsidiaries, none of which instruments govern indebtedness exceeding
10 percent of the total assets of the Company and its subsidiaries on a consolidated
basis.
10.1 Employment Agreement, dated October 17, 1997, among J. Crew Group, Inc., J. Crew
Operating Corp., TPG Partners II, L.P. (only with respect to Section 2(c) therein) and
Emily Woods (the "Woods Employement Agreement") (incorporated by reference to Exhibit
10.1 to the Registration Statement)
10.2 J. Crew Operating Corp. Senior Executive Bonus Plan (included as Exhibit A to the Woods
Employment Agreement filed as Exhibit 10.1)
10.3 Letter Agreement between Matthew Rubel and J. Crew Group, Inc. (incorporated by
reference to Exhibit 10.11 to Amendment No. 2 to the Registration Statement, filed
February 26, 1998)
10.4 Employment Agreement, dated February 24, 1998, among J. Crew Group, Inc., J. Crew
Operating Corp., TPG Partners II, L.P. (only with respect to Section 7 therein) and
Howard Socol
10.5 Contract Carrier Agreement, between J. Crew Group, Inc. and United Parcel Service, Inc.
(incorporated by reference to Exhibit 10.5 to the Registration Statement)
10.6 Custom Pricing Agreement, made November 15, 1996 between Federal Express Corporation and
J Crew Group, Inc. (incorporated by reference to Exhibit 10.6 to the Registration
Statement)
10.7 Lease dated as of October 21, 1981 between Vornado, Inc. and Popular Services, Inc.
(incorporated by reference to Exhibit 10.7 to the Registration Statement)
10.8 Agreement of Sublease dated November 4, 1993 between Revlon Holdings Inc., as Sublessor,
and Popular Club Plan, Inc., as Sublessee (incorporated by reference to Exhibit 10.8 to
the Registration Statement)
10.9 Letter Agreement dated July 29, 1996 between World Color and Clifford & Wills, Inc.
(incorporated by reference to Exhibit 10.9 to the Registration Statement)
</TABLE>
X-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
No. Description
--- -----------
<S> <C>
10.10 Agreement dated August 14, 1997 between R.R. Donnelley & Sons Company and J. Crew Inc.
(incorporated by reference to Exhibit 10.10 to the Registration Statement)
10.11 Letter Agreement, dated April 17, 1998, between J. Crew Operating Corp. and Barry Erdos
27.1 Financial Data Schedule
</TABLE>
X-3
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT, dated this 24th day of February, 1998 (the "Agreement"),
among J. Crew Group, Inc., a New York Corporation (the "Parent") and its
operating subsidiary J. Crew Operating Corp. (the "Subsidiary" and collectively
with the Parent, the "Employer"), with offices at 770 Broadway, New York, New
York, TPG Partners II, L.P. ("TPG II") (only with respect to Section 7 herein)
and Howard Socol (the "Employee").
1. Employment, Duties, Authority and Agreements.
--------------------------------------------
(a) The Employer hereby agrees to cause the Employee to be elected as
a member of the Board of Directors of the Parent and to employ the Employee as
Chief Executive Officer of the Parent and the Subsidiary and the Employee hereby
accepts such positions and agrees to serve the Parent and the Subsidiary in such
capacities during the employment period fixed by Section 3 hereof (the
"Employment Period"). The Employee shall report solely and directly to the
Board of Directors of the Parent (the "Board") and to the Executive Committee of
the Board. The Employee will have such duties, responsibilities and authority
as are customary for chief executive officers of catalogue and specialty
retailing, including direct authority over those divisions as shown on the
organizational chart attached hereto as Exhibit C. During the Employment
Period, the Employee shall be subject to, and shall act in substantial
accordance with, all reasonable instructions and directions of the Board and all
applicable reasonable policies and rules thereof as are consistent with the
above title, duties, responsibilities and authority.
(b) During the Employment Period and as long as the Employer shall
not be in default of a material obligation hereunder, excluding any periods of
vacation and sick leave to which the Employee is entitled, the Employee shall
devote his full working time, energy and attention to the performance of his
duties and responsibilities hereunder and shall faithfully and diligently
endeavor to promote the business and best interests of the Employer.
(c) During the Employment Period and so long as the Employer shall
not be in default of a material obligation hereunder, the Employee may not,
without the prior written consent of the Board, operate, participate in the
management, operations or control of, or act as an employee, officer,
consultant, agent or representative of, any type of business or service (other
than as an employee of the Employer), provided that it shall not be a violation
of the foregoing for the Employee to (i) act or serve as a director, trustee or
committee member of any civic or charitable organization and (ii) manage his
personal, financial and legal affairs, so long as such activities (described in
clauses (i) and (ii)) do not interfere with the performance of his duties and
responsibilities to the Employer as provided hereunder.
<PAGE>
2. Compensation.
------------
(a) As compensation for the agreements made by the Employee herein
and the performance by the Employee of his obligations hereunder, during the
Employment Period, the Employer shall pay the Employee, not less than once a
month pursuant to the Employer's normal and customary payroll procedures, a base
salary at the rate of $1,000,000 per annum (the "Base Salary"), provided that
such base salary shall increase to $1,200,000 per annum in any fiscal year
following a fiscal year in which the Employer's EBITDA (as reflected on the
Employer's audited financial statements) equals or exceeds $75 million. The
Base Salary may also be increased further in the absolute discretion of the
Board.
(b) In addition to the Base Salary, during the Employment Period the
Employee shall have an opportunity to earn an annual bonus (the "Bonus") in
accordance with the terms of the J. Crew Operating Corp. Senior Executive Bonus
Plan for Howard Socol attached hereto as Exhibit A (the "Bonus Plan"), provided
that, with respect to the fiscal year beginning in 1998, the Employee's Bonus
under the Bonus Plan shall be at least $500,000, regardless of whether the
performance objectives under the Bonus Plan are achieved.
(c) As soon as practicable after the Effective Date (as defined in
Section 3 below) but in no event later than ten (10) days after the Effective
Date, the Employer will pay the Employee $1,500,000 (the "Signing Bonus"),
provided that the Employee will be required to pay back the entire Signing Bonus
in the event he voluntarily terminates his employment hereunder prior to the
first anniversary of the Effective Date, and to the extent the Employee fails to
pay back any portion of the Signing Bonus as provided herein, the Employer shall
have the right to offset any other payments provided hereunder by such amount.
(d) On the Effective Date (as defined in Section 3 below), the
Employer shall grant the Employee restricted shares of common stock of the
Parent representing, as of the Effective Date, 3.75% of the total outstanding
common stock of the Parent including all issued or awarded options to purchase,
or other equity securities convertible to, shares of common stock of the Parent
(the "Restricted Shares"). Twenty-five percent of the Restricted Shares shall
vest and become non-forfeitable on each of the first through the fourth
anniversaries of the Effective Date, provided that the Employee is still
employed by the Employer on such anniversary. Notwithstanding the foregoing, in
the event that the Employee's employment hereunder is terminated by the Employer
without Cause, any portion of the Restricted Shares not previously forfeited
which would have vested within two years of the date of such termination shall
immediately vest and become non-forfeitable on such date of termination and, in
the event of a Change in Control (as defined below), all or any portion of the
Restricted Shares not previously forfeited shall immediately vest and become
non-forfeitable on the date such Change in Control occurs. If the Employment
Period terminates for any other reason, the Restricted Shares which have not
vested and become non-forfeitable on such date of termination shall be forfeited
by the Employee and returned to the Employer. Notwithstanding anything to the
contrary in the Stockholders' Agreement, the certificates representing the
Restricted Shares shall be held in
2
<PAGE>
custody by the Employer until the vesting thereof and shall not be transferred
until such shares become vested as provided herein. All cash, securities and
other property paid or otherwise distributed with respect to the Restricted
Shares which have not vested shall be held in custody by the Employer and shall
be subject to the same vesting, forfeiture and distribution rules described
above with respect to the Restricted Shares related thereto. In addition, the
Employee shall be entitled to direct the Employer as to the manner in which the
Restricted Shares held in custody by the Employer shall be voted.
(e) The term "Change in Control" shall mean the occurrence of any of
the following events: (i) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all of
the assets of the Parent or Subsidiary to any Person or group of related persons
for purposes of Section 13(d) of the Securities Exchange Act of 1934 (a
"Group"), together with any affiliates thereof other than to TPG II; (ii) the
approval by the holders of capital stock of the Parent or Subsidiary of any plan
or proposal for the liquidation or dissolution of the Parent or Subsidiary, as
the case may be; (iii) (A) any Person or Group (other than TPG II) shall become
the owner, directly or indirectly, beneficially or of record, of shares
representing more than 40% of the aggregate voting power of the issued and
outstanding stock entitled to vote in the election of directors, managers or
trustees (the "Voting Stock") of the Parent or Subsidiary and (B) TPG II
beneficially owns, directly or indirectly, in the aggregate a lesser percentage
of the Voting Stock of the Parent or Subsidiary than such other Person or Group;
(iv) the replacement of a majority of the Board of Directors of the Parent or
Subsidiary over a two-year period from the directors who constituted the Board
of Directors of the Parent or Subsidiary, as the case may be, at the beginning
of such period, and such replacement shall not have been approved by a vote of
at least a majority of the Board of Directors of the Parent or Subsidiary, as
the case may be, then still in office who either were members of such Board of
Directors at the beginning of such period or whose election as a member of such
Board of Directors was previously so approved or who were nominated by, or
designees of, TPG II; (v) any Person or Group other than TPG II shall have
acquired the power to elect a majority of the members of the Board of Directors
of the Parent; or (vi) a merger or consolidation of the Parent with another
entity in which holders of the common stock of the Parent immediately prior to
the consummation of the transaction hold, directly or indirectly, immediately
following the consummation of the transaction, 50% or less of the common equity
interest in the surviving corporation in such transaction. For purposes of the
Agreement, "Person" shall mean an individual, partnership, corporation, limited
liability company, unincorporated organization, trust or joint venture, or a
governmental agency or political subdivision thereof.
(f) In connection with the grant of the Restricted Shares, the
Employee shall make an election within thirty days of the Effective Date, to
include in gross income on the date of the grant the value of the Restricted
Shares on such date pursuant to Section 83(b) (the "Section 83(b) Election") of
the Internal Revenue Code of 1986, as amended. Upon notification from the
Employee that the Section 83(b) Election has been made, the Employer shall pay
the appropriate depository an amount equal to the Employee's federal, state and
local income and payroll tax withholding obligations with respect to (i) the
value of the Restricted Shares (the
3
<PAGE>
"Restricted Share Value"), which value shall be mutually agreed upon by the
parties, and (ii) the income required to be recognized by the Employee as a
result of the payment by the Employer of such withholding obligations, in each
case based on withholding rates determined by the Employer in compliance with
applicable law, provided that with respect to the Employee's federal income tax,
the withholding rate shall be thirty-six percent (36%) (such sum paid by the
Employer hereinafter referred to as the "Withholding Amount"). At least thirty
days before the Employee's due date for 1998 Federal income taxes (without
consideration for any extensions filed thereto), the Employee shall provide a
certificate to the Employer in which the Employee shall represent to the
Employer the Employee's highest marginal income tax rate applicable to his
actual income with respect to each of his federal, state and local income taxes
for 1998. The "Stock Gross-Up Payment" shall be determined by an accounting firm
mutually agreed upon by the parties (whose expenses will be paid by the
Employer) and shall equal an amount such that, after payment of all federal,
state and local income and payroll taxes ("Taxes") on the Stock Gross-Up
Payment, the Employee will retain an amount sufficient to pay all Taxes that he
is required to pay as a result of the grant of the Restricted Shares and the
Section 83(b) Election. The calculation of the amount of the Stock Gross-Up
Payment shall (i) take into account any marginal deduction with respect to the
Employee's Federal income tax liability for state and local income taxes paid
with respect to the grant of Restricted Shares and the Stock Gross-Up Payment to
which the Employee will be entitled, and (ii) notwithstanding the time of year
in which any payments are made hereunder by the Employer, be based on payroll
taxes on income in excess of $100,000. The determination of the accounting firm
shall be final and binding upon the Employee and the Employer. After the
accounting firm notifies the Employer of the amount of the Stock Gross-Up
Payment and no later than fifteen days prior to the Employee's due date for his
1998 Federal income taxes (without consideration for any extensions filed
thereto), the Employer shall pay the Employee the excess, if any, of the Stock
Gross-Up Payment over the Withholding Amount or the Employee shall pay the
Employer the excess, if any, of the Withholding Amount over the Stock Gross-Up
Payment, as applicable.
(g) All shares of common stock of the Parent acquired by the Employee
under this Agreement or otherwise shall be subject to the Stockholders'
Agreement attached hereto as Exhibit B.
(h) During the Employment Period, the Employee shall be entitled to
the following benefits and perquisites:
(i) medical and dental benefits (including for the employee's
spouse) paid 100% by the Employer;
(ii) life insurance equal to two (2) times Base Salary;
(iii) long-term disability plan providing a disability benefit
equal to two-thirds of Base Salary in the event of
permanent disability to the extent such insurance is
reasonably available in the market;
4
<PAGE>
(iv) a car and driver provided by the Employer;
(v) reimbursement of reasonable personal counseling services
not to exceed $12,000 per year;
(vi) the provision of J. Crew Brand clothing (including for the
Employee's spouse and children); and
(i) During the Employment Period: (i) except as specifically
provided herein, the Employee shall be entitled to participate in all savings
and retirement plans, practices, policies and programs of the Employer and which
are made available generally to other executive officers of the Employer and
(ii) except as specifically provided herein, the Employee and/or the Employee's
family, as the case may be, shall be eligible for participation in, and shall
receive all benefits under, all welfare benefit plans, practices, policies and
programs provided by the Employer and its affiliated companies which are made
available generally to other executive officers of the Employer (for the
avoidance of doubt, such plans, practices, policies or programs shall not
include any plan, practice, policy or program which provides benefits in the
nature of severance or continuation pay).
(j) During the Employment Period, the Employee shall be entitled to
paid vacation of at least four weeks per year. The ability to carry forward
vacation time shall be subject to the Employer's vacation policy applicable
generally to executive officers of the Employer as in effect from time to time.
(k) With respect to the Employee's relocation from Florida to the New
York area, the Employer will provide the following payments or reimbursements of
expenses and relocation benefits:
(i) Until the Employee obtains a permanent residence in the New
York area but no longer than six (6) months after the Effective Date,
the Employer will provide the Employee with weekly first class air
travel between New York and Florida for both the Employee and his
spouse and the Employer will provide the Employee with the use of a
furnished apartment reasonably acceptable to the Employee in the New
York area;
(ii) After the Employee's current residence in Florida (the
"Florida Residence") has been listed on a multiple listing service
covering the area in which the Florida Residence is located ("Local
Area") or with a reputable real estate broker in the Local Area for a
four-month period, the Employer will retain three independent third-
party real estate appraisers to appraise the Florida Residence. The
average of the three appraisals obtained by the Employer shall be
referred to herein as the "Appraised Value." If the Florida Residence
has not been sold following such four-month period, the Employer will
either, (A) purchase or cause another entity to purchase the Florida
Residence for the Appraised Value or
5
<PAGE>
(B) if the Employee sells the Florida Residence to an independent
third-party purchaser for less than the Appraised Value in a
transaction approved by the Employer, pay the Employee an amount equal
to the excess of (x) the Appraised Value over (y) the proceeds
received by the Employee as a result of such sale;
(iii) the Employer will reimburse the Employee for the closing
costs including reasonable brokerage fees and expenses incurred by the
Employee with respect to the sale of the Florida Residence and
incurred within six months of the Effective Date by the Employee with
respect to his lease or purchase of a new residence in the New York
area, excluding the purchase price for such residence and any mortgage
points.
(l) The Employer shall promptly reimburse the Employee for all
reasonable business expenses upon the presentation of statements of such
expenses in accordance with the Employer's policies and procedures now in force
or as such policies and procedures may be modified with respect to all senior
executive officers of the Employer.
3. Employment Period.
-----------------
The Employment Period shall commence on the date hereof (the
"Effective Date") and shall terminate on the day preceding the fourth
anniversary of the Effective Date (the "Scheduled Termination Date"); provided,
--------
however, that the Employee's employment hereunder may be terminated during the
- -------
Employment Period prior to the Scheduled Termination Date upon the earliest to
occur of the following events (at which time the Employment Period shall be
terminated):
(a) Death. The Employee's employment hereunder shall terminate upon
his death.
(b) Disability. The Employer shall be entitled to terminate the
Employee's employment hereunder for "Disability" if, as a result of the
Employee's incapacity due to physical or mental illness, the Employee shall have
been unable to perform his duties hereunder for a period of six (6) consecutive
months or for 180 days within any 365-day period, and within 30 days after
Notice of Termination (as defined in Section 4 below) for Disability is given
following such 6-month or 180/365-day period, as the case may be, the Employee
shall not have returned to the performance of his duties on a full-time basis.
(c) Cause. The Employer may terminate the Employee's employment
hereunder for Cause. For purposes of this Agreement, the term "Cause" shall
mean: (i) a willful and material violation by the Employee of either Section
1(c) or 12 of this Agreement; (ii) the willful failure by the Employee to
substantially perform the duties reasonably assigned to him within the scope of
the Employee's duties and authority as stated in Section 1(a) hereunder (other
than as a result of physical or mental illness or injury), after the Board
delivers to the Employee a written demand for substantial performance that
specifically identifies the manner in which the
6
<PAGE>
Employee has not substantially performed the Employee's duties and provides the
Employee ten (10) days to begin to substantially perform, provided that the
Employer shall not have the right to terminate the Employee's employment
hereunder for Cause if the Employee begins to substantially perform within such
ten-day period; (iii) the Employee's willful misconduct, willful waste of
corporate assets or gross negligence which in any such event substantially and
materially injures the Employer; or (iv) the indictment of the Employee for a
felony or other serious crime involving moral turpitude. If, subsequent to the
Employee's termination of employment hereunder for other than Cause, it is
discovered that the Employee's employment could have been terminated for Cause
due to a subsequent conviction of the Employee for a criminal offense against
the Employer, the Employee's employment shall, at the election of the Employer,
be deemed to have been terminated for Cause retroactively to the date the events
giving rise to Cause occurred.
(d) Without Cause. The Employer may terminate the Employee's
employment hereunder without Cause.
(e) Voluntarily. The Employee may voluntarily terminate his
employment hereunder, provided that the Employee provides the Employer with
notice of his intent to terminate his employment at least three months in
advance of the Date of Termination (as defined in Section 4 below). The
Employee and the Employer shall mutually agree on the time, method and content
of any public announcement regarding the Employee's termination of employment
hereunder and neither the Employee nor the Employer shall make any public
statements which are inconsistent with the information mutually agreed upon by
the Employer and the Employee and the parties hereto shall cooperate with each
other in refuting any public statements made by other persons, which are
inconsistent with the information mutually agreed upon between the Employee and
Employer as described above.
4. Termination Procedure.
---------------------
(a) Notice of Termination. Any termination of the Employee's
employment by the Employer or by the Employee during the Employment Period
(other than termination pursuant to Section 3(a)) shall be communicated by
written "Notice of Termination" to the other party hereto in accordance with
Section 13(a). For purposes of this Agreement, a Notice of Termination shall
mean a notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Employee's
employment under the provision so indicated and shall attach any prior notices
required under Section 3.
(b) Date of Termination. "Date of Termination" shall mean (i) if the
Employee's employment is terminated by his death, the date of his death, (ii) if
the Employee's employment is terminated pursuant to Section 3(b), thirty (30)
days after Notice of Termination, (iii) if the Employee voluntarily terminates
his employment, the date specified in the notice given pursuant to Section 3(e)
herein and (iv) if the Employee's employment is terminated for any other reason,
7
<PAGE>
the date on which a Notice of Termination is given or any later date (within
thirty (30) days, or any alternative time period agreed upon by the parties,
after the giving of such notice) set forth in such Notice of Termination.
5. Termination Payments.
--------------------
(a) Without Cause. In the event of the termination of the Employee's
employment during the Employment Period by the Employer without Cause, the
Employee shall be entitled to a payment, within thirty (30) days following the
Date of Termination, of (i) the Employee's Base Salary through the Date of
Termination (to the extent not theretofore paid) and any unreimbursed expenses
pursuant to Section 2(h), (k) and (l) herein (the "Accrued Obligations"), (ii)
any earned but unpaid Bonus in respect of a Bonus Period ending prior to or
coincident with the Date of Termination and (iii) a lump-sum payment equal to
two (2) times Base Salary (as in effect on the Date of Termination). The
Employee shall also be entitled to a payment, as soon as practicable after the
end of the fiscal year in which the Date of Termination occurs, of the Bonus
payable in accordance with the Bonus Plan attached as Exhibit A hereto, if any,
calculated as if the Employee had been employed by the Employer through the end
of such fiscal year. The payments provided in this Section 5(a) are conditioned
upon and subject to the Employee executing a valid general release and waiver,
waiving all claims the Employee may have against the Employer, its affiliates,
directors, officers and employees. The Employer shall have no additional
obligations under this Agreement.
(b) Cause. If the Employee's employment is terminated during the
Employment Period by the Employer for Cause, the Employer shall pay to the
Employee or to his estate in the event of his death, within thirty (30) days of
the Date of Termination, (i) the Accrued Obligations and (ii) any earned but
unpaid Bonus in respect of a Bonus Period ending prior to the Date of
Termination, but only if the event constituting Cause occurs after the
termination of such Bonus Period. The Employer shall have no additional
obligations under this Agreement.
(c) Voluntary, Death or Disability. If the Employee's employment is
terminated by the Employee or as a result of his death or Disability, the
Employer shall pay to the Employee or to his estate in the event of his death,
within thirty (30) days of the Date of Termination, (i) the Accrued Obligations
and (ii) any earned but unpaid Bonus in respect of a Bonus Period ending prior
to or coincident with the Date of Termination. In addition, with respect to a
termination of the Employee's employment hereunder as a result of death or
Disability, the Employer shall pay the Employee a pro-rata bonus in respect of
the year in which such termination occurs determined pursuant to Section 3 of
the Bonus Plan as if the Employee's Date of Termination was the Scheduled
Termination Date. The Employer shall have no additional obligations under this
Agreement.
8
<PAGE>
6. Change in Control.
-----------------
Within the one-year period immediately following a Change in Control
(as defined in Section 2(e) herein), the Employee may voluntarily terminate his
employment hereunder and such termination will be deemed a termination without
Cause by the Employer entitling the Employee to the payments described in
Section 5(a) herein.
7. Bankruptcy Proceeding; TPG II Guarantee.
---------------------------------------
In the event the Employer files a petition for relief under the U.S.
Bankruptcy Code, TPG II will guarantee the Employee's Base Salary for the one-
year period immediately following the date of such filing provided that the
Employee continues to be employed with the Employer unless the Employee's
failure to remain employed is the result of the Employer terminating his
employment hereunder without Cause.
8. Non-exclusivity of Rights.
-------------------------
Any vested benefits and other amounts that the Employee is otherwise
entitled to receive under any employee benefit plan, policy, practice or program
of the Employer or any of its affiliated companies shall be payable in
accordance with such employee benefit plan, policy, practice or program as the
case may be, except as explicitly modified by this Agreement.
9. Full Settlement.
----------------
The Employer's obligation to make the payments provided for in, and
otherwise to perform its obligations under, this Agreement shall not be affected
by any set off, counterclaim, recoupment, defense or other claim, right or
action that the Employer may have against the Employee or others; provided that
this provision shall not apply (i) with respect to any debt owed by the Employee
to the Employer or any of its affiliates, (ii) with respect to the Employee's
obligations, if applicable, under Section 2(c) hereof or (iii) in the event the
Employee's employment is terminated by the Employer for Cause.
10. Legal Fees.
-----------
(a) The Employer shall reimburse the Employee for reasonable
attorneys' fees and expenses and other reasonable fees incurred in connection
with the preparation of this Agreement not to exceed $20,000.
(b) In the event of any contest or dispute between the Employer and
the Employee with respect to this Agreement or the Employee's employment
hereunder, each of the parties shall be responsible for their respective legal
fees and expenses.
9
<PAGE>
11. Indemnification.
---------------
(a) The Employer agrees to defend, indemnify and hold the Employee
harmless for all claims asserted against and liabilities incurred by the
Employee as a result of any action taken by the Employee's former employer and
directly related to the Employee's employment hereunder, provided that the
Employee fully cooperates with the Employer in defending or participating in any
such action. This Section 11(a) shall survive any termination of the Employee's
employment hereunder including the termination of the Employment Period.
(b) The Employee hereby represents to the Employer that he will not
utilize or disclose any confidential information obtained by the Employee in
connection with his former employment with respect to his duties and
responsibilities hereunder.
12. Non-Solicitation.
----------------
(a) During the Employment Period and so long as the Employer is not
in default of a material obligation hereunder, the Employee agrees not to offer
employment to any employee of the Employer or any of its affiliates for other
than employment by the Employer or attempt to induce any such employee to leave
the employ of the Employer or any subsidiaries of the Employer and the Employee
further agrees not to solicit any clients or suppliers of the Employer to do
business with any competing business of the Employer.
(b) The parties hereto hereby declare that it is impossible to
measure in money the damages which will accrue to the Employer by reason of a
failure by the Employee to perform any of his obligations under this Section 12.
Accordingly, if the Employer institutes any action or proceeding to enforce the
provisions hereof, to the extent permitted by applicable law, the Employee
hereby waives the claim or defense that the Employer has an adequate remedy at
law, and the Employee shall not urge in any such action or proceeding the
defense that any such remedy exists at law.
13. Miscellaneous.
-------------
(a) Any notice or other communication required or permitted under
this Agreement shall be effective only if it is in writing and delivered
personally or sent by registered or certified mail, postage prepaid, addressed
as follows (or if it is sent through any other method agreed upon by the
parties):
If to the Employer:
J. Crew Group, Inc.
770 Broadway
Fourth Floor
New York, NY 10003
10
<PAGE>
Attention: Board of Directors and Secretary
with a copy to:
Paul Shim, Esq.
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006
If to the Employee:
Mr. Howard Socol
11 Tahiti Beach Road
Coral Gables, FL 33143
with a copy to:
Stephen N. Lipton, Esq.
Goldberg, Young & Gravenhorst, P.A.
1630 North Federal Highway
P.O. Box 23800
Fort Lauderdale, Florida 33307
or to such other address as any party hereto may designate by notice to the
others, and shall be deemed to have been given upon receipt.
(b) This Agreement and all Exhibits hereto, including the Bonus Plan
and the Stockholders' Agreement dated as of February 24, 1998 by and between the
Employee and the Parent, constitute the entire agreement among the parties
hereto with respect to the Employee's Employment, and supersedes and is in full
substitution for any and all prior understandings or agreements with respect to
the Employee's Employment.
(c) This Agreement may be amended only by an instrument in writing
signed by the parties hereto, and any provision hereof may be waived only by an
instrument in writing signed by the party or parties against whom or which
enforcement of such waiver is sought. The failure of any party hereto at any
time to require the performance by any other party hereto of any provision
hereof shall in no way affect the full right to require such performance at any
time thereafter, nor shall the waiver by any party hereto of a breach of any
provision hereof be taken or held to be a waiver of any succeeding breach of
such provision or a waiver of the provision itself or a waiver of any other
provision of this Agreement.
(d) (i) This Agreement is binding on and is for the benefit of the
parties hereto and their respective successors, heirs, executors, administrators
and other legal representatives.
11
<PAGE>
Neither this Agreement nor any right or obligation hereunder may be assigned by
the Employer or by the Employee.
(ii) The Employer shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Employer expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Employer would have been required to perform it if no such
succession had taken place. As used in the Agreement, "the Employer" shall mean
both the Employer as defined above and any such successor that assumes and
agrees to perform this Agreement, by operation of law or otherwise.
(e) If any provision of this Agreement or portion thereof is so
broad, in scope or duration, so as to be unenforceable, such provision or
portion thereof shall be interpreted to be only so broad as is enforceable.
(f) The Employer may withhold from any amounts payable to the
Employee hereunder all federal, state, city or other taxes that the Employer may
reasonably determine are required to be withheld pursuant to any applicable law
or regulation.
(g) This Agreement shall be governed by and construed in accordance
with the laws of the State of NEW YORK, without reference to its principles of
conflicts of law.
(h) This Agreement may be executed in several counterparts, each of
which shall be deemed an original, but all of which shall constitute one and the
same instrument.
(i) The headings in this Agreement are inserted for convenience of
reference only and shall not be a part of or control or affect the meaning of
any provision hereof.
(j) Exhibit A hereto shall be subject to the provision of paragraphs
(a), (c), (d), (f), (g) and (i) of this Section 13.
12
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement, except
that TPG II is only a party to this Agreement with respect to its obligations
under Section 7 hereof, as of the date first written above.
J. CREW GROUP, INC.
/s/
---------------------------
Name:
Title:
J. CREW OPERATING CORP.
/s/
---------------------------
Name:
Title:
TPG Partners II, L.P.
/s/
---------------------------
Name:
Title:
/s/
---------------------------
Howard Socol
13
<PAGE>
EXHIBIT A
- ---------
J. CREW OPERATING CORP. SENIOR EXECUTIVE BONUS PLAN
for Howard Socol
1. Definitions; References
-----------------------
As used herein, the following terms shall have the meanings indicated below.
Capitalized terms used in this Plan but not defined herein shall have the
meanings assigned to them in the Employment Agreement.
(a) "Annual EBITDA Performance Objective" shall mean the EBITDA performance
-----------------------------------
objectives determined pursuant to Section 2(a) herein for each Bonus Period.
(b) "Bonus," with respect to any Bonus Period, shall mean the cash bonus
-----
earned pursuant to Section 2(b) hereof with respect to such Bonus Period.
(c) "Bonus Period" shall mean each fiscal year of the Employer during which
------------
this Plan is in effect, provided that the initial Bonus Period shall be the
period commencing on the Effective Date of the Employment Agreement and ending
on the last day of the fiscal year ending in January 1999.
(d) "EBITDA" shall mean, for any period, the consolidated earnings (losses)
------
of the Employer before extraordinary items and the cumulative effect of
accounting changes, as determined by the Employer in accordance with GAAP, and
before interest (expense or income), taxes, depreciation, amortization, non-cash
gains and losses from sales of assets other than in the ordinary course of
business and Valuation Adjustments. For purposes of clarification in
determining EBITDA, consolidated earnings shall not be reduced by compensation
expenses attributable to this Plan but shall be reduced (or with respect to
losses, increased), by compensation expenses attributable to any other
compensation plan, program or arrangement of the Employer or any of its
affiliates, to the extent such expenses are recorded in accordance with GAAP.
(e) "Employer" shall mean J. Crew Operating Corp. and the subsidiaries with
--------
which its financial accounts are required to be consolidated under GAAP.
(f) "Employment Agreement" shall mean the Employment Agreement dated February
--------------------
24, 1998, between Howard Socol, J. Crew Group, Inc., J. Crew Operating Corp.
and, for certain purposes, TPG Partners II, L.P.
(g) "GAAP" shall mean the U.S. generally accepted accounting principles.
----
(h) "Participant" shall mean Howard Socol.
-----------
14
<PAGE>
(i) "Payment Date," with respect to a Bonus Period, shall mean the date on
------------
which a Bonus is paid with respect to such Bonus Period, but shall not be later
than the last date on which a Bonus earned with respect to such Bonus Period may
be paid pursuant to Section 2(c) hereof.
(j) "Plan" shall mean this J. Crew Group, Inc. Senior Executive Bonus Plan
----
for Howard Socol.
(k) "Target Bonus" shall mean 100% of Participant's annual Base Salary,
------------
provided that, with respect to the initial Bonus Period, the Target Bonus shall
be equal to the product of 100% of Participant's annual Base Salary multiplied
by a fraction, the numerator of which is the number of whole days from and
including the Effective Date to and including the last day of such Bonus Period,
and the denominator of which is 365.
(l) "Valuation Adjustments" shall mean that amount of non-cash expense
---------------------
charged against earnings for any period resulting from the application of
accounting for business combinations in accordance with Accounting Principles
Board Opinion #16. These charges may include, but are not limited to, amounts
such as inventory revaluations, property, plant and equipment revaluations,
goodwill amortization and finance fee amortization.
2. Determination and Payment of Bonus Amounts
------------------------------------------
(a) The Board will determine the Annual EBITDA Performance Objectives within
sixty (60) days after the beginning of each Bonus Period and will notify the
Participant thereof. The parties intend that the financial assumptions that
will form the starting point for the determination of the EBITDA Performance
Objectives are the assumptions determined by the Board for executives of the
Employer generally but that the final determination is intended to reflect
changes in capitalization, prior performance of the Employer and any other
relevant business and financial criteria.
(b) The amount of the Bonus earned by the Participant for each Bonus Period
shall be determined pursuant to the table set forth below. In the event that
the EBITDA of the Employer with respect to a Bonus Period is between 90% and
100% of the Annual EBITDA Performance Objective with respect to such Bonus
Period, the amount of the Bonus earned by the Participant for such Bonus Period
shall be determined on the basis of straight line interpolation based on amounts
set forth in such table.
2
<PAGE>
<TABLE>
<CAPTION>
If EBITDA with respect to a then the Bonus earned with respect to
Bonus Period equals: such Bonus Period shall be:
===============================================================================================
<S> <C>
Less than 90% of the Annual EBITDA Zero
Performance Objective with respect to such
Bonus Period
- -----------------------------------------------------------------------------------------------
90% of the Annual EBITDA Performance 50% of the Target Bonus with respect to such
Objective with respect to such Bonus Period Bonus Period
- -----------------------------------------------------------------------------------------------
100% of the Annual EBITDA Performance 100% of the Target Bonus with respect to such
Objective with respect to such Bonus Period Bonus Period
- -----------------------------------------------------------------------------------------------
</TABLE>
(c) As soon as practical after the end of each Bonus Period, the Employer
shall determine the EBITDA for such Bonus Period and cause such determination to
be audited by the Company's independent auditors. The Employer shall pay the
Bonus, if any, to the Participant not later than thirty (30) business days after
the Employer has received an opinion of its independent auditors concerning the
amount of EBITDA, but in no event later than 120 days after the end of such
Bonus Period.
3. Effect of Termination of Employment
-----------------------------------
In the event the Participant's employment with the Employer terminates on the
Scheduled Termination Date, the Participant shall be entitled to a Bonus with
respect to the Bonus Period in which such Scheduled Termination Date occurs,
equal to the product of (A) the amount of Bonus to which the Participant would
have been entitled had he remained employed until the end of such Bonus Period,
multiplied by (B) a fraction, the numerator of which is the number of whole days
from the first day of the Bonus Period up to and including the Scheduled
Termination Date, and the denominator of which is 365. In the event the
Participant's employment with the Employer terminates pursuant to circumstances
entitling the Participant to severance payments under Section 5(a) of the
Employment Agreement, the Participant shall be entitled to a Bonus with respect
to the Bonus Period in which such Date of Termination occurs, equal to the
amount of Bonus to which the Participant would have been entitled had he
remained employed until the end of such Bonus Period, provided that the
Participant executes a valid general release and waiver in connection with such
termination.
3
<PAGE>
EXHIBIT B
- ---------
STOCKHOLDERS' AGREEMENT
STOCKHOLDERS' AGREEMENT (this "Agreement"), dated as of February 24,
---------
1998, between J. Crew Group, Inc. (the "Company"), TPG Partners II, L.P. ("TPG")
------- ---
and Howard Socol (the "Stockholder").
-----------
WHEREAS, the Stockholder is an employee of the Company and in such
capacity was granted restricted shares of common stock ("Common Stock") of the
Company (the "Restricted Shares"), pursuant to the employment agreement, dated
-----------------
February 24, 1998, between Howard Socol, J. Crew Group, Inc., J. Crew Operating
Corp. and, for certain purposes, TPG Partners II, L.P. (the "Employment
----------
Agreement");
- ---------
WHEREAS, as a condition to the issuance of Restricted Shares of Common
Stock, the Stockholder is required under the Employment Agreement to execute
this Agreement; and
WHEREAS, the Stockholder and the Company desire to enter this
Agreement and to have this Agreement apply to the shares to be issued pursuant
to the Employment Agreement and to any shares of Common Stock acquired after the
date hereof by the Stockholder from whatever source, subject to any future
agreement between the Company and the Stockholder to the contrary (in the
aggregate, the "Shares").
------
NOW THEREFORE, in consideration of the premises hereinafter set forth,
and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows.
1. Investment. The Stockholder represents that the Shares are being
----------
acquired for investment and not with a view toward the distribution thereof.
2. Issuance of Shares. The Company hereby represents to the
------------------
Stockholder that there are no agreements or arrangements other than this
Stockholders' Agreement which would prohibit the issuance of, or restrict the
Stockholder's ability to transfer, the Restricted Shares. The Stockholder
acknowledges and agrees that the certificate for the Shares shall bear the
following legends (except that the second paragraph of this legend shall not be
required after the Shares have been registered and except that the first
paragraph of this legend shall not be required after the termination of this
Agreement):
The shares represented by this certificate are subject to the terms and
conditions of a Stockholders' Agreement dated as of February 24, 1998 and
may not be sold, transferred, hypothecated, assigned or encumbered, except
as may be permitted by the aforesaid Agreement. A copy of the
Stockholders' Agreement may be obtained from the Secretary of the Company.
The shares represented by this certificate have not been registered under
the Securities Act of 1933. The shares have been acquired for investment
and may not be sold, transferred, pledged or hypothecated in the absence of
an effective
<PAGE>
registration statement for the shares under the Securities Act of 1933 or
an opinion of counsel for the Company that registration is not required
under said Act.
Upon the termination of this Agreement, or upon registration of the
Shares under the Securities Act of 1933 (the "Securities Act"), the Stockholder
--------------
shall have the right to exchange any Shares containing the above legend (i) in
the case of the registration of the Shares, for Shares legended only with the
first paragraph described above and (ii) in the case of the termination of this
Agreement, for Shares legended only with the second paragraph described above.
3. Transfer of Shares; Call Rights.
-------------------------------
(a) The Stockholder agrees that he will not cause or permit the Shares
or his interest in the Shares to be sold, transferred, hypothecated, assigned or
encumbered except as expressly permitted by this Section 3; provided, however,
-------- -------
that the Shares or any such interest may be transferred (i) on the Stockholder's
death by bequest or inheritance to the Stockholder's executors, administrators,
testamentary trustees, legatees or beneficiaries, (ii) to a trust or
custodianship the beneficiaries of which may include only the Stockholder, the
Stockholder's spouse, or the Stockholder's lineal descendants (by blood or
adoption) and (iii) in accordance with Section 4 of this Agreement, subject in
any such case to the agreement by each transferee (other than the Company) in
writing to be bound by the terms of this Agreement and provided in any such case
that no such transfer that would cause the Company to be required to register
the Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), shall be permitted.
------------
(b) The Company (or its designated assignee) shall have the right,
during the one-hundred-twenty-day period (x) immediately following the
termination of the Employee's employment with the Company for any reason in
respect of Shares acquired by the Stockholder prior to such termination and (y)
immediately following the date of the acquisition of any Shares acquired by the
Stockholder following the termination of the Employee's employment for any
reason, to purchase from the Stockholder, and upon the exercise of such right
the Stockholder shall sell to the Company (or its designated assignee), all or
any portion of the Shares held by the Stockholder as of the date as of which
such right, is exercised at a per Share price equal to the Fair Market Value of
a share of Common Stock determined as of the date as of which such right is
exercised. The Company (or its designated assignee) shall exercise such right by
delivering to the Stockholder a written notice specifying its intent to purchase
Shares held by the Stockholder, the date as of which such right is to be
exercised and the number of Shares to be purchased. Such purchase and sale
shall occur on such date as the Company (or its designated assignee) shall
specify which date shall not be later than ninety (90) days after the fiscal
quarter-end immediately following the date as of which the Company's right is
exercised.
(c) For purposes of this Agreement, "Fair Market Value" shall mean, as
-----------------
of any date:
5
<PAGE>
(1) prior to the existence of a Public Market (as defined in
Section 5 herein) for the Common Stock, the quotient obtained by dividing
(i) the excess of (x) the product of (A) 9 (as such number may be changed
as provided below, the "Multiple") and (B) EBITDA (as defined in Exhibit A
--------
of the Employment Agreement) for the twelve month period ending on the
fiscal quarter-end immediately preceding such date over (y) the sum of (I)
the weighted arithmetic average indebtedness (net of all cash and cash
equivalents) during such period of the Company and its consolidated direct
and indirect wholly-owned subsidiaries and (II) for each less than wholly-
owned direct or indirect subsidiary of the Company the earnings of which
are either consolidated with those of the Company or accounted for on an
equity basis, the weighted arithmetic average indebtedness (net of all cash
and cash equivalents) during such period of such subsidiary multiplied by
the proportion of the total earnings (determined on the same basis as, and
excluding the same items as in the determination of, EBITDA) of such
subsidiary included in EBITDA (excluding earnings attributable to dividends
received from such subsidiary), by (ii) the total number of shares of
Common Stock on the last day of such period, determined on a fully diluted
basis. For purposes of determining the indebtedness of an entity, all
preferred stock of the entity, other than preferred stock convertible into
Common Stock, shall be considered indebtedness in the amount of the
liquidation value thereof plus accumulated but unpaid dividends thereon.
Notwithstanding the foregoing provisions of this paragraph (1), for the ten
(10) day period immediately following the occurrence of a Change in Control
(as defined in the Employment Agreement), Fair Market Value shall not be
less than the price per share, if any, paid to any member of the Initial
Ownership Group or the public tender offer price paid in connection with
such Change in Control. The Committee shall review the Multiple then in
effect following the audit of the Company's financial statements each
fiscal year, and shall make such increases or decreases in the Multiple as
shall be determined by the Committee in good faith to reflect market
conditions and Company performance.
(2) on which a Public Market (as defined in Section 5 herein)
for the Common Stock exists, (i) the average of the high and low sales
prices during the ten (10) trading days immediately preceding such day of a
share of Common Stock as reported on the principal securities exchange on
which shares of Common Stock are then listed or admitted to trading or (ii)
if not so reported, the average of the closing bid and ask prices during
the ten (10) trading days immediately preceding such day as reported on the
National Association of Securities Dealers Automated Quotation System
(which shall include the NASDAQ National Market or the NASDAQ Small Cap
Market) or (iii) if not so reported, as furnished by any member of the
National Association of Securities Dealers, Inc. selected by the Committee.
The Fair Market Value of a share of Common Stock as of any such date on
which the applicable exchange or inter-dealer quotation system through
which trading in the Common Stock regularly occurs is closed shall be the
Fair Market Value determined pursuant to the preceding sentence as of the
immediately preceding date on which the Common Stock is traded, a bid and
ask price is reported or a trading price is reported by any member of NASD
selected by the Committee. In the event that the price of a share of
Common Stock shall not be so
6
<PAGE>
reported or furnished, the Fair Market Value shall be determined by the
Committee in good faith to reflect the fair market value of a share of
Common Stock.
4. Certain Rights.
--------------
(a) Drag Along Rights. If TPG desires to sell all or substantially
-----------------
all of its shares of Common Stock to a good faith independent purchaser (a
"Purchaser") (other than any other investment partnership, limited liability
- ----------
company or other entity established for investment purposes and controlled by
the principals of TPG or any of its affiliates and other than any employees of
TPG or any of its affiliates, hereinafter referred to as a "Permitted
---------
Transferee") and said Purchaser desires to acquire all or substantially all of
- ----------
the issued and outstanding shares of Common Stock (or all or substantially all
of the assets of the Company) upon such terms and conditions as agreed to with
TPG, the Stockholder agrees to sell all of his Shares to said Purchaser (or to
vote all of his Shares in favor of any merger or other transaction which would
effect a sale of such shares of Common Stock or assets of the Company) at the
same price per share of Common Stock and pursuant to the same terms and
conditions with respect to payment for the shares of Common Stock as agreed to
by TPG. In such case, TPG shall give written notice of such sale to the
Stockholder at least 30 days prior to the consummation of such sale, setting
forth (i) the consideration to be received by the holders of shares of Common
Stock, (ii) the identity of the Purchaser, (iii) any other material items and
conditions of the proposed transfer and (iv) the date of the proposed transfer.
(b) Tag Along Rights. (i) Subject to paragraph ( iv) of this Section
----------------
4(b), if TPG or its affiliates proposes to transfer any of its shares of Common
Stock to a Purchaser (other than a Permitted Transferee), then TPG or such
Permitted Transferee (hereinafter referred to as a "Selling Stockholder") shall
-------------------
give written notice of such proposed transfer to the Stockholder (the "Selling
-------
Stockholder's Notice") at least 30 days prior to the consummation of such
- --------------------
proposed transfer, and shall provide notice to all other stockholders of the
Company to whom TPG has granted similar "tag-along" rights (such stockholders
together with the Stockholder, referred to herein as the "Other Stockholders")
------------------
setting forth (A) the number of shares of Common Stock offered, (B) the
consideration to be received by such Selling Stockholder, (C) the identity of
the Purchaser, (D) any other material items and conditions of the proposed
transfer and (E) the date of the proposed transfer.
(ii) Upon delivery of the Selling Stockholder's Notice, the
Stockholder may elect to sell up to the sum of (A) the Pro Rata Portion (as
hereinafter defined) and (B) the Excess Pro Rata Portion (as hereinafter
defined) of his Shares, at the same price per share of Common Stock and pursuant
to the same terms and conditions with respect to payment for the shares of
Common Stock as agreed to by the Selling Stockholder, by sending written notice
to the Selling Stockholder within 15 days of the date of the Selling
Stockholder's Notice, indicating his election to sell up to the sum of the Pro
Rata Portion plus the Excess Pro Rata Portion of his Shares in the same
transaction. Following such 15 day period, the Selling Stockholder and each
Other Stockholder shall be permitted to sell to the Purchaser on the terms and
conditions set forth in the Selling Stockholder's Notice the sum of (X) the Pro
Rata Portion and (Y) the Excess Pro Rata Portion of its Shares.
7
<PAGE>
(iii) For purposes of Section 4(b) and 4(c) hereof, "Pro Rata
--------
Portion" shall mean, with respect to shares of Common Stock held by the
- -------
Stockholder or Selling Stockholder, as the case may be, a number equal to the
product of (x) the total number of such shares then owned by the Stockholder or
the Selling Stockholder, as the case may be, and (y) a fraction, the numerator
of which shall be the total number of such shares proposed to be sold to the
Purchaser as set forth in the Selling Stockholder's Notice or initially proposed
to be registered by the Selling Stockholder, as the case may be, and the
denominator of which shall be the total number of such shares then outstanding
(including such shares proposed to be sold or registered by the Selling
Stockholder); provided, however, that any fraction of a share resulting from
such calculation shall be disregarded for purposes of determining the Pro Rata
Portion. For purposes of Sections 4(b) and 4(c), "Excess Pro Rata Portion" shall
-----------------------
mean, with respect to shares of Common Stock held by the Stockholder or the
Selling Stockholder, as the case may be, a number equal to the product of (x)
the number of Non-Elected Shares (as defined below) and (y) a fraction, the
numerator of which shall be such Stockholder's Pro Rata Portion with respect to
such shares, and the denominator of which shall be the sum of (1) the aggregate
Pro Rata Portions with respect to the shares of Common Stock of all of the Other
Stockholders that have elected to exercise in full their rights to sell their
Pro Rata Portion of shares of Common Stock, and (2) the Selling Stockholder's
Pro Rata Portion of shares of Common Stock (the aggregate amount of such
denominator is hereinafter referred to as the "Elected Shares"). For purposes of
--------------
this Agreement, "Non-Elected Shares" shall mean the excess, if any, of the total
------------------
number of shares of Common Stock, proposed to be sold to a Purchaser as set
forth in a Selling Stockholder's Notice or initially proposed to be registered
by the Selling Stockholder, as the case may be, less the amount of Elected
Shares.
(iv) Notwithstanding anything to the contrary contained herein, the
provisions of this Section 4(b) shall not apply to any sale or transfer by TPG
of shares of Common Stock unless and until TPG, after giving effect to the
proposed sale or transfer, shall have sold or transferred in the aggregate
(other than to Permitted Transferees) shares of Common Stock, representing 7.5%
of shares of Common Stock owned by TPG on the date hereof.
(c) Piggyback Registration Rights.
-----------------------------
(i) Notice to Stockholder. If the Company determines that it will
---------------------
file a registration statement under the Securities Act, other than a
registration statement on Form S-4 or Form S-8 or any successor form, for an
offering which includes shares of Common Stock held by TPG or its affiliates
(hereinafter in this paragraph (c) of Section 4 referred to as a "Selling
-------
Stockholder"), then the Company shall give prompt written notice to the
- -----------
Stockholder that such filing is expected to be made (but in no event less than
30 days nor more than 60 days in advance of filing such registration statement),
the jurisdiction or jurisdictions in which such offering is expected to be made,
and the underwriter or underwriters (if any) that the Company (or the person
requesting such registration) intends to designate for such offering. If the
Company, within 15 days after giving such notice, receives a written request for
registration of any Shares from the Stockholder, then the Company shall include
in the same registration statement the number of Shares to be sold by the
Stockholder as shall have been specified in his request, except that the
Stockholder shall not be permitted to register more than the Pro Rata Portion
plus the
8
<PAGE>
Excess Pro Rata portion of his Shares. The Company shall bear all costs of
preparing and filing the registration statement, and shall indemnify and hold
harmless, to the extent customary and reasonable, pursuant to indemnification
and contribution provisions to be entered into by the Company at the time of
filing of the registration statement, the seller of any shares of Common Stock
covered by such registration statement.
Notwithstanding anything herein to the contrary, the Company, on prior
notice to the participating Stockholder, may abandon its intention to file a
registration statement under this Section 4(c) at any time prior to such filing.
(ii) Allocation. If the managing underwriter shall inform the Company
----------
in writing that the number of shares of Common Stock requested to be included in
such registration exceeds the number which can be sold in (or during the time
of) such offering within a price range acceptable to TPG, then the Company shall
include in such registration such number of shares of Common Stock which the
Company is so advised can be sold in (or during the time of) such offering. All
holders of shares of Common Stock proposing to sell shares of Common Stock shall
share pro rata in the number of shares of Common Stock to be excluded from such
offering, such sharing to be based on the respective numbers of shares of Common
Stock as to which registration has been requested by such holders.
(iii) Permitted Transfer. Notwithstanding anything to the contrary
------------------
contained herein, sales of Shares pursuant to a registration statement filed by
the Company may be made without compliance with any other provision of this
Agreement.
5. Termination. This Agreement shall terminate immediately following
-----------
the existence of a Public Market for the Common Stock except that (i) the
requirements contained in Section 2 hereof shall survive the termination of this
Agreement and (ii) the provisions contained in Section 3 hereof shall continue
with respect to each Share during such period of time, if any, as the
Stockholder is precluded from selling such Shares pursuant to Rule 144 of the
Securities Act. For this purpose, a "Public Market" for the Common Stock shall
-------------
be deemed to exist if the Common Stock is registered under Section 12(b) or
12(g) of the Exchange Act and trading regularly occurs in such Common Stock in,
on or through the facilities of securities exchanges and/or inter-dealer
quotation systems in the United States (within the meaning of Section 902(n) of
the Securities Act) or any designated offshore securities market (within the
meaning of Rule 902(a) of the Securities Act).
6. Distributions With Respect To Shares. As used herein, the term
------------------------------------
"Shares" includes securities of any kind whatsoever distributed with respect to
- -------
the Common Stock acquired by the Stockholder pursuant to the Option Plan or any
such securities resulting from a stock split or consolidation involving such
Common Stock.
7. Amendment; Assignment. This Agreement may be amended, superseded,
---------------------
canceled, renewed or extended, and the terms hereof may be waived, only by a
written instrument signed by authorized representatives of the parties or, in
the case of a waiver, by an authorized representative of the party waiving
compliance. No such written instrument shall be effective unless it expressly
recites that it is intended to amend, supersede, cancel, renew or
9
<PAGE>
extend this Agreement or to waive compliance with one or more of the terms
hereof, as the case may be. Except for the Stockholder's right to assign his or
her rights under Section 3(a) or the Company's right to assign its rights under
Section 3(b), no party to this Agreement may assign any of its rights or
obligations under this Agreement without the prior written consent of the other
parties hereto.
8. Notices. All notices and other communications hereunder shall be
-------
in writing, shall be deemed to have been given if delivered in person or by
certified mail, return receipt requested, and shall be deemed to have been given
when personally delivered or three (3) days after mailing to the following
address:
If to the Stockholder:
Mr. Howard Socol
11 Tahiti Beach Road
Coral Gables FL 33143
If to the Company:
J. Crew Group, Inc.
770 Broadway
Fourth Floor
New York, NY 10003
Attention: Board of Directors and Secretary
If to TPG:
TPG Partners II, L.P.
600 California Street
Suite 1850
San Francisco, CA 94108
Attention: Jonathan Coslet
or to such other address as any party may have furnished to the others
in writing in accordance herewith, except that notices of change of address
shall only be effective upon receipt.
9. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, but each of which
together shall constitute one and the same document.
10. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of NEW YORK, without reference to its
principles of conflicts of law.
10
<PAGE>
11. Binding Effect. This Agreement shall be binding upon, inure to
--------------
the benefit of, and be enforceable by the heirs, personal representatives,
successors and permitted assigns of the parties hereto. Nothing expressed or
referred to in this Agreement is intended or shall be construed to give any
person other than the parties to this Agreement, or their respective heirs,
personal representatives, successors or assigns, any legal or equitable rights,
remedy or claim under or in respect of this Agreement or any provision contained
herein.
12. Entire Agreement. This Agreement along with the Employment
----------------
Agreement constitutes the entire agreement between the parties hereto with
respect to the subject matter hereof.
13. Severability. If any term, provision, covenant or restriction of
------------
this Agreement, is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
14. Miscellaneous. The headings contained in this Agreement are for
-------------
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
* * * * * *
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
___________________________
Howard Socol
J. CREW GROUP, INC.
_____________________________
By:
Title:
TPG PARTNERS II, L.P.
_____________________________
By:
Title:
12
<PAGE>
EXHIBIT 10-11
LETTER AGREEMENT
April 28, 1998
Mr. Barry Erdos
2111 Park Hill Drive
Columbus, OH 43209
Dear Barry:
Pursuant to our recent discussions regarding your employment with J.
Crew Operating Corporation (the "Company"), we thought it would be useful to lay
out the terms and conditions of our agreement in this letter agreement
("Agreement") for both parties to sign.
1. EMPLOYMENT.
(A) The Company hereby agrees to employ you as Chief Operating Officer of
the Company and you hereby agree to serve the Company in such capacity during
the "Employment Period" (as defined below). You will report to the Chief
Executive Officer of the Company. Your principal work location will be the New
York metropolitan area, but you will be required to travel to the extent
necessary to perform your duties and responsibilities.
(B) You shall devote your full business time and energy, attention, skills
and ability to the performance of your duties and responsibilities as provided
hereunder on an exclusive basis, shall faithfully and diligently endeavor to
promote the business and best interests of the Company.
2. EMPLOYMENT PERIOD.
(a) The "Employment Period" shall commence on April 13, 1998 (the
"Effective Date") and shall terminate upon the earliest to occur of (i) the
third anniversary of the Effective Date, (ii) your death or Disability (as such
term is defined in the Company's Long-Term Disability Plan), (iii) voluntary
termination of employment by you, (iv) termination of employment by the Company
other than for Cause, death or Disability or (v) termination of employment by
the Company for Cause.
(B) Upon termination of the Employment Period, you shall be entitled to any
earned but unpaid Base Salary (as defined in Section 3(a) below) as of the date
of termination. In addition, you will be entitled to the following payments:
(i) if such termination is pursuant to subsection (ii) of Section 2(a)
hereof, you or your estate, as the case may be, will be entitled to (A)
payment of any Annual Bonus earned but not yet paid with respect to the
fiscal year ended before the date of termination of employment and (B) a
pro-rata portion of your Annual Bonus (the "Pro-Rata Bonus") with respect
to the fiscal year in which such
<PAGE>
termination occurs equal to the product of (x) the Annual Bonus determined
as if you worked through the end of the fiscal year, multiplied by (y) a
-------------
fraction, the numerator of which is the number of full months worked by you
during such fiscal year and the denominator of which is twelve (12); or
(ii) if such termination is pursuant to subsection (iv) of Section
2(a) hereof, you shall be entitled to (A) continuation of Base Salary as in
effect immediately prior to such termination for a period of twelve (12)
months after the date of termination, (B) payment of any Annual Bonus
earned but not yet paid with respect to the fiscal year ended before the
date of termination of employment, (C) payment of the Pro-Rata Bonus with
respect to the fiscal year in which such termination occurs determined in
accordance with subsection (i) of this section 2(b), provided that, in the
event such termination occurs prior to the end of the fiscal year beginning
in 1998, you shall be entitled to the Guaranteed Bonus (described in
Section 3(b) hereof) instead of the Pro-Rata Bonus, and (D) if your
employment is terminated prior to payment of the Second-Half Signing Bonus
(described in Section 3(c) hereof), the Company will pay you such Second-
Half Signing Bonus. All the payments provided herein are conditioned upon
and subject to your compliance with the Restrictive Covenants provided in
Section 4 hereof and your execution of a general release and waiver,
waiving all claims you may have against the Company except for claims which
may arise as a result of the Company's failure to meet its obligations
after the date of such waiver.
Except as provided in this Section 2(b), no further compensation shall be due
upon your termination of employment.
(C) For purposes of this Agreement, "Cause" shall mean (i) the commission
of a felony, (ii) willful misconduct or gross negligence in connection with the
performance of your duties as an employee of the Company, (iii) a material
breach of this Agreement, (iv) a fraudulent act or omission by you adverse to
the reputation of the Company or any affiliate, and (v) the disclosure by you of
any Confidential Information (as defined in Section 4(b) hereof) to persons not
authorized to know same. If subsequent to your termination of employment, it is
discovered that your employment could have been terminated for Cause by reason
of subsection (i) of this Section 2(c), your employment shall, at the election
of the Company, in its sole discretion, be deemed to have been terminated for
Cause.
3. COMPENSATION AND BENEFITS.
(A) During the Employment Period, your annual base salary shall be $600,000
("Base Salary") and shall be paid pursuant to regular Company payroll practices
for the senior executives of the Company. The Base Salary will be reviewed
annually and may be increased but not decreased in the sole discretion of the
Company.
(B) In addition to the Base Salary, in each fiscal year during the
Employment Period, you will have the opportunity to earn an annual bonus
("Annual Bonus") of up to fifty percent (50%) of the Base Salary if the Company
achieves certain performance objectives (which will be
2
<PAGE>
determined by the Company for each such fiscal year), provided that, with
respect to the fiscal year beginning in 1998, your Annual Bonus will be at least
$150,000 (the "Guaranteed Bonus"), regardless of whether the performance
objectives for such fiscal year are achieved. The Annual Bonus will be paid no
later than May 1 following the fiscal year for which it relates and, except as
otherwise provided in Section 2(b) hereof, such Annual Bonus will be paid only
if you are actively employed with the Company and not in breach of this
Agreement on such date of disbursement.
(C) As soon as practicable after the Effective Date, but in no event later
than ten (10) days thereafter, the Company will pay you $250,000 (the "First-
Half Signing Bonus") as consideration for entering into this Agreement. In
addition, on or as soon as practicable after the first anniversary of the
Effective Date, the Company will pay you an additional $250,000 (the "Second-
Half Signing Bonus"), provided that you are actively employed with the Company
and not in breach of this Agreement on such first anniversary.
(D) As soon as practicable after the Effective Date, but in no event later
than ten (10) days thereafter, the Company will provide you with a recourse loan
in the amount of $300,000 (the "Loan"). Prior to receiving the Loan, you will
be required to execute a promissory note in favor of the Company which shall
provide the specific terms and conditions of the Loan. The promissory note
shall provide that (i) the principal amount of the loan will be $300,000, (ii)
the rate of interest shall be 5.5% compounded semi-annually, (iii) you shall
make interest payments on each anniversary of the date such loan is made until
the entire principal amount is paid and (iv) fifty percent of the principal
amount of such loan shall be paid on each of the first and second anniversaries
of the date the loan is made. At your discretion, you make interim interest
payments and may pay the principal amount on any portion thereof before the
dates provided in the preceding sentence. The promissory note also will provide
that the Company shall have the right to withhold all or any portion of any
payments owed to you, including without limitation the Second-Half Signing Bonus
and Guaranteed Bonus as payment of all or any portion of the principal or
interest due under such promissory note.
(E) As soon as practicable after the Effective Date and subject to approval
of the Board of Directors of J. Crew Group, Inc., the Company will grant you an
option (the "Option") to purchase the number of shares equal to approximately
one percent (1%) of the total outstanding shares of common stock of J. Crew
Group, Inc. as of the Effective Date (rounded down to the nearest whole share)
at an exercise price equal to $1,363.64 per share. Except as otherwise provided
herein, the Option shall be governed by the terms and subject to the conditions
of the 1997 J. Crew Group Inc. Stock Option Plan (the "Option Plan"), including
the requirements regarding the execution of a Stock Option Grant Agreement and a
Stockholders' Agreement. Ten percent (10%) of the Option will be immediately
exercisable upon grant, ten percent (10%) of the Option will become exercisable
on January 31, 1999 and twenty percent (20%) of the Option will become
exercisable on each of January 31, 2000 through 2003, provided you are actively
employed with the Company on such date. Any portion of the Option which has not
yet become exercisable, shall become immediately exercisable upon the occurrence
of a Change in Control (as defined in the Option Plan). Subject to the
provisions of the Option Plan, with respect to the Option or any portion thereof
which has not become
3
<PAGE>
exercisable, the Option shall expire on the date your employment with the
Company is terminated for any reason, and with respect to any Option or any
portion thereof which has become exercisable, the Option shall expire on the
earlier of: (i) 90 days after your termination of employment with the Company
other than for Cause, death or disability; (ii) one year after termination of
your employment with the Company by reason of death or disability; (iii) the
commencement of business on the date your employment with the Company is, or is
deemed to have been, terminated for Cause; or (iv) the tenth anniversary of the
Effective Date.
(F) The Company will reimburse you for relocation expenses with respect to
your relocation from Ohio to New York not to exceed $420,000, provided that
relocation expenses shall not include any loss incurred in connection with the
sale of your primary residence located in Ohio. However, in the event that,
after the primary Ohio residence has been listed on a multiple listing service
or with a reputable real estate broker in the area for at least six months, you
receive an offer to purchase such residence from an unrelated third-party
purchaser for less than the amount that you originally paid for such residence
plus the amount of any capital expenditures not to exceed $80,000 which are
supported by documentation reasonably requested by the Company (the "Original
Purchase Price"), and you intend to accept such offer, prior to accepting such
offer you shall notify the Company and provide the Company with all reasonably
requested details and documents regarding the offer, any previous offers
received by you and any other relevant information regarding the residence. At
that time, you agree to cooperate with the Company in determining the various
alternatives related to the disposition of the residence with a view toward
eliminating any loss to you with respect to such disposition, including possibly
reimbursing you for the difference between the Original Purchase Price and the
amount that you would receive in the proposed sale, provided that you do not
agree to sell the residence for less than the Original Purchase Price without
the consent of the Company. It is understood that the term "loss" as used in
this Section 3(f) shall mean the excess, if any, of the Original Purchase Price
over the amount received in any sale of your primary Ohio residence. You agree
that you will use your reasonable best efforts to sell the residence for an
amount in excess of the Original Purchase Price and to minimize all other
relocation costs and will provide the Company with documentation reasonably
requested by the Company with respect to any such reimbursement claims.
(g) During the Employment Period, you will be entitled to participate
generally in the Company's benefit plans, except where specifically provided
herein and except for any severance or other termination of employment plans.
Currently, the Company's benefit package includes 3 weeks vacation, 3 personal
days, holidays, life insurance, medical insurance, long term disability, 401(k)
tax deferred savings plan, a health flexible spending account, and the employee
discount. The Company reserves the right to change these benefits at any time
in its sole discretion.
(H) The Company will reimburse you for all reasonable business expenses
upon the presentation of statements of such expenses in accordance with the
Company's policies and procedures now in force or as such policies and
procedures may be modified with respect to the senior executives of the Company.
4. RESTRICTIVE COVENANTS.
4
<PAGE>
(A) As additional consideration for the Company entering into this
Agreement and agreeing to make the salary continuation payments described in
Section 2(a) hereof, you agree that during the Employment Period and for a
period of twelve (12) months after the date on which the Employment Period is
terminated, you shall not solicit, hire, or seek to influence the employment
decisions of, any employee of the Company on behalf of any person or entity
other than the Company.
(B) You agree that, during the Employment Period and thereafter, you will
hold in strict confidence any proprietary or Confidential Information related to
the Company. For purposes of this Agreement, the term "Confidential
Information" shall mean all information of the Company in whatever form which is
not generally known to the public, including without limitation, customer lists,
trade practices, marketing techniques, pricing structures and practices,
research, trade secrets, processes, systems, programs, methods, software,
merchandising, planning, inventory and financial control, store design and
staffing.
(C) You also agree that breach of the confidentiality or employee non-
solicitation provisions provided in paragraphs (a) or (b) of this Section 4
would cause the Company to suffer irreparable harm for which money damages would
not be an adequate remedy and therefore, if you breach any of the Restrictive
Covenants provided herein, the Company would be entitled to temporary and
permanent injunctive relief in any court of competent jurisdiction (without the
need to post any bond).
(D) You agree not to disclose any information regarding the existence or
substance of this Agreement to any third party, without the prior written
consent of the Company except as may be required by law, during any legal
proceeding brought by you relating to this Agreement or with your professional
advisers for purposes of discussing the subject matter hereof and, with respect
to such professional advisers, you agree to inform them of your obligations
hereunder and take all reasonable steps to ensure that such professional
advisers do not disclose the existence or substance hereof. Further, you agree
not to directly or indirectly disparage or defame the Company or any of its
directors, officers or employees.
5. REPRESENTATIONS.
(a) Each party hereto represents and warrants to the other party hereto
that (i) the execution, delivery and performance of such party of this Agreement
has been duly authorized by all necessary action on its part and does not
contravene or conflict with any provisions of any agreement or other instrument
to which it is party or by which it is bound or any applicable law, judgment,
order, writ, injunction, decree, rule or regulation of any court, governmental
authority, administrative agency or arbitrator, (ii) this Agreement is the
legal, valid and binding obligation of such party, enforceable against it in
accordance with its terms and (iii) there is no pending or threatened action or
proceeding affecting such party before or by any court, governmental authority,
administrative agency or arbitrator, which if adversely determined, would
prevent such party from consummating the transactions contemplated hereby.
6. Miscellaneous.
5
<PAGE>
(A) Any notice or other communication required or permitted under this
Agreement shall be effective only if it is in writing and delivered personally
or sent by registered or certified mail, postage prepaid, return receipt
requested and addressed as follows:
If to the Company:
J. Crew Operating Corp.
770 Broadway
Twelfth Floor
New York, NY
Attention: Chief Executive Officer
If to the Employee:
Mr. Barry Erdos
2111 Park Hill Drive
Columbus, OH 43209
or to such other address as any party hereto may designate by notice to the
other, and shall be deemed to have been given upon receipt.
(B) This Agreement constitutes the entire agreement among you and the
Company with respect to your employment by the Company, and supersedes and is in
full substitution for any and all prior understandings or agreements with
respect to your employment.
(C) This Agreement shall inure to the benefit of and be an obligation of
the Company's assigns and successors; however you may not assign your duties and
obligations hereunder to any other party.
(D) No provision of this Agreement may be amended or waived, unless such
amendment or waiver is specifically agreed to in writing and signed by you and
an officer of the Company duly authorized to execute such amendment.
(E) This Agreement and all amendments thereof shall, in all respects, be
governed by and construed and enforced in accordance with the internal laws
(without regard to principles of conflicts of law) of the State of NEW YORK.
Each party hereto hereby agrees to and accepts the exclusive jurisdiction of any
court in New York County or the U.S. District Court for the Southern District of
New York in that County in respect of any action or proceeding relating to the
subject matter hereof, expressly waiving any defense relating to jurisdiction or
forum non conveniens, and consents to service of process by U.S. certified or
- --------------------
registered mail in any action or proceeding with respect to this Agreement.
(F) The Company shall be responsible for and shall pay the agency fees with
respect to Herbert Mines Associates, Inc. which arranged for and facilitated
your employment with the Company hereunder.
6
<PAGE>
(G) The Company shall reimburse you for reasonable attorneys' fees and
expenses and other reasonable fees incurred in connection with the preparation
of this Agreement not to exceed $20,000.
7
<PAGE>
If the terms of this letter Agreement meet with your approval, please
sign and return one copy to me.
Sincerely,
/s/
Howard Socol
Chief Executive Officer
J. Crew Operating Corporation
Agreed to and Accepted:
/s/
- ---------------------------------
Barry Erdos Date
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JANUARY 31, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 12
<SECURITIES> 0
<RECEIVABLES> 22
<ALLOWANCES> 5
<INVENTORY> 203
<CURRENT-ASSETS> 294
<PP&E> 166
<DEPRECIATION> 56
<TOTAL-ASSETS> 419
<CURRENT-LIABILITIES> 153
<BONDS> 220
<COMMON> 0
0
0
<OTHER-SE> 3
<TOTAL-LIABILITY-AND-EQUITY> 419
<SALES> 823
<TOTAL-REVENUES> 834
<CGS> 465
<TOTAL-COSTS> 825
<OTHER-EXPENSES> 21
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> (29)
<INCOME-TAX> (4)
<INCOME-CONTINUING> (25)
<DISCONTINUED> 0
<EXTRAORDINARY> (5)
<CHANGES> 0
<NET-INCOME> (29)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
