<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 30, 1999
Commission File Number 333-424273
---------------
J. CREW OPERATING CORP.
(Exact name of registrant as specified in its charter)
Delaware 22-3540930
- ----------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of or organization)
770 Broadway, New York, New York 10003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 209-2500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
Indicate by check mark 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. [ X]
The common stock of the registrant is not publicly traded. Therefore, the
aggregate market value is not readily determinable.
As of April 1, 1999, there were 100 shares of Common Stock, par value $.01 per
share, 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>
Certain statements in this Annual Report on Form 10K 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
historical results, any future results, performances or achievements expressed
or implied by such forward-looking statements. Such risks and uncertainties
include, but are not limited to, competitive pressures in the apparel industry,
changes in levels of consumer spending or preferences in apparel and acceptance
by customers of the Company's products, overall economic conditions,
governmental regulations and trade restrictions, political or financial
instability in the countries where the Company's goods are manufactured, postal
rate increases, paper and printing costs, Year 2000 issues, the level of the
Company's indebtedness and exposure to interest rate fluctuations, and other
risks and uncertainties described in this report and the Company's other reports
and documents filed or which may be filed, from time to time, with the
Securities and Exchange Commission. 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.
References herein to fiscal years are to the fiscal years of J.Crew Operating
Corp. which end on the Friday closest to January 31 in the following calendar
year for fiscal years 1994, 1995 and 1996 and on the Saturday closest to January
31 in the following calendar year for fiscal years 1997 and 1998. Accordingly,
fiscal years 1994, 1995, 1996, 1997 and 1998 ended on February 3, 1995, February
2, 1996, January 31, 1997, January 31, 1998 and January 30, 1999. All fiscal
years for which financial information is included had 52 weeks, except fiscal
1994 which had 53 weeks.
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.
References in this Report to the "Company" and "J.Crew" mean J.Crew Operating
Corp. and its subsidiaries, unless the context requires otherwise.
Part I
ITEM 1. BUSINESS
General
The Company is a leading retailer of women's and men's apparel, shoes and
accessories operating under the J. Crew (R) brand name. The Company has built a
strong and widely recognized brand name known for its timeless styles at price
points that the Company believes represent exceptional product value. The J.
Crew image has been built and reinforced over its 15-year history through the
circulation of more than one-half billion catalogs that use magazine-quality
photography to portray a classic American perspective and aspirational
lifestyle. Many of the original items introduced by the Company in the early
1980s (such as the rollneck sweater, weathered chino, barn jacket and pocket
tee) were instrumental in establishing the J. Crew brand and continue to be core
product offerings. The Company has capitalized on the strength of the J. Crew
brand to provide customers with clothing to meet more of their lifestyle needs,
including casual, career and sport.
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 retail stores, catalogs and
its Internet site 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 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
1
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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 retail and
factory outlet stores, catalogs and the Company's Internet site, jcrew.com. The
Company currently circulates over 73 million J. Crew catalogs per annum and
operates 65 J. Crew retail stores and 45 J. Crew factory outlet stores. In
addition, J. Crew products are distributed through 67 free-standing and shop-in-
shop stores in Japan under a licensing agreement with Itochu Corporation.
The Company has three major operating divisions: J. Crew Mail Order, J. Crew
Retail, and J. Crew Factory Outlets, each of which operate under the J. Crew
brand name. In 1998, products sold under the J. Crew brand contributed $626.0
million in revenues. J. Crew brand revenues in 1998 were comprised of $274.0
million from J. Crew Retail, $252.8 million from J.Crew Mail Order, $96.5
million from J. Crew Factory Outlet and $2.7 million of licensing revenues.The
Company also markets to its customers through its Internet site (jcrew.com).
Revenues derived from the Internet, which were estimated at $20.0 million for
1998, are included in J.Crew Mail Order revenues.
Effective as of October 30, 1998 the Company sold Popular Club Plan, Inc. and
subsidiaries (PCP) to The Fingerhut Companies, Inc. for $42.0 million and the
assumption of an accounts receivable securitization facility. Revenues for the
nine months ended October 30, 1998 were $124.1 million. A gain on the sale of
$10.0 million was included in the results of operations in fiscal 1998.
In 1998, management of the Company made a decision to exit the operations of its
Clifford & Wills mail order and factory outlet subsidiaries (C&W). Revenues for
the year ended January 30, 1999 were $74.3 million. A charge of $13.3 million
was included in fiscal 1998 operations to write down the assets of C&W to net
realizeable value and to provide for certain additional costs in connection with
the discontinuance of the C&W operations, including severance and lease
termination costs. Additionally, fourth quarter charges of $1.7 million,
included in selling expense, were incurred relating to deferred catalog costs.
2
<PAGE>
ITEM 2.PROPERTIES
The Company is headquartered in New York City. The New York City headquarters'
offices are leased under a lease agreement expiring in 2012 (not including
renewal options). The Company owns two telemarketing and distribution
facilities: a 406,500-square-foot telemarketing and distribution center for J.
Crew Mail Order operations in Lynchburg, Virginia and a 192,500-square-foot
telemarketing and distribution center in Asheville, North Carolina servicing the
J. Crew Retail and Outlet store operations.
As of January 30, 1999, the Company operated 65 J.Crew retail stores and 45
factory outlet stores in 34 states and the District of Columbia. 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.
3
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ITEM 3. LEGAL PROCEEDINGS
The Equal Employment Opportunity Commission ("EEOC") filed suit on August 6,
1998 in the U.S. District Court, District of Connecticut, against the Company
alleging that the Company, through its Popular Club Plan subsidiary (which the
Company sold in fiscal year 1998), engaged in hiring conduct which violated
Title VII of the Civil Rights Act of 1964 and Title I of the Civil Rights Act of
1991 by discriminating against male applicants for
4
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customer service and assistant manager positions at its service centers in New
England. The EEOC seeks unspecified monetary damages and an injunction enjoining
Popular Club from engaging in discriminatory hiring practices based on gender.
The Company is vigorously defending itself against these allegations. Although
it is not possible to predict with certainty the eventual outcome of any
litigation, in the opinion of management, this lawsuit is not expected to have a
material adverse effect on the Company's financial position or results of
operations.
The Company has been named as one of the defendants in two lawsuits relating
to its purchasing of products from independent garment manufacturers in Saipan
(Commonwealth of the Northern Mariana Islands). On January 13, 1999, a complaint
was filed in the U.S. District Court, Central District of California ("Federal
Action"), by a group of unidentified Asian garment workers against 17 U.S.
clothing retailers, including the Company, and 11 Saipan garment manufacturers.
The unidentified worker plaintiffs seek class action status and allege, among
other things, violations of Federal racketeering and other laws in connection
with labor practices and treatment of foreign workers in the defendant
manufacturers' Saipan factories. The plaintiffs seek injunctive relief and
unspecified monetary damages, including treble and punitive damages. A second
complaint was filed on January 13, 1999 in Superior Court in San Francisco,
California ("State Action"), by a labor union and three nonprofit groups against
the same 17 U.S. clothing retailers, including the Company, one additional
retailer and other unnamed defendants alleging violations of California law for
allegedly unlawful and unfair business practices and misleading advertising in
connection with labeling of products and labor practices regarding foreign
workers in Saipan. The plaintiffs seek injunctive relief and unspecified amounts
for restitution, disgorgement of profits and other damages. A third action, in
which the Company is not named as a defendant, was filed on or about January 13,
1999, by a group of unidentified Asian garment workers represented by some of
the same law firms that brought the Federal Action. This action is a purported
class action lawsuit against 22 Saipan garment manufacturers (10 of whom were
named defendants in the Federal Action) alleging violations of Federal labor
statutes and other laws.
All the defendants in the Federal Action, including the Company, jointly
moved to (i) change the venue of the Federal Action to the United States
District Court in the Commonwealth of the Northern Mariana Islands, where the
related action against certain manufacturing defendants is pending, and (ii)
dismiss the Federal Action for failure to state a claim. All the defendants in
the State Action, including the Company, jointly moved to dismiss the State
Action for failure to state a claim. These actions are still at a very
preliminary stage, and, accordingly, it is too early to evaluate the likelihood
of an unfavorable outcome.
Other than the proceedings discussed above, there are no material legal
proceedings presently pending to which the Company is a party or of which any of
its property is the subject.
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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY 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").
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.
5
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ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I 1(a) of Form 10-K.
6
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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 30,
1999 and notes thereto included elsewhere in this Annual Report on Form 10-K.
7
<PAGE>
Results of Operations
Fiscal 1998 Compared to Fiscal 1997
Revenues
- --------
Revenues decreased 1.2% to $824.3 million in the fiscal year ended January 30,
1999 from $834.0 million in the fiscal year ended January 31, 1998. The decrease
in revenues was due primarily to (a) the sale of Popular Club Plan, effective as
of October 30, 1998, which resulted in a decrease of $60.3 million and (b) a
decrease in J.Crew Mail Order revenues of $12.0 million. These decreases were
offset by an increase of $64.4 million in the revenues of J.Crew Retail.
Excluding Popular Club Plan, revenues increased 7.8% from $649.6 in fiscal 1997
to $700.3 in fiscal 1998.
J.Crew Retail revenues increased by 30.7% from $209.6 million in fiscal 1997 to
$274.0 million in fiscal 1998. The percentage of the Company's total revenues
derived from J.Crew Retail increased to 33.2% in fiscal 1998 from 25.1% in
fiscal 1997. This increase was attributed to $45.5 million from the opening of
new stores and $18.9 million from an increase in comparable store sales of 9.0%.
The number of stores opened at January 30, 1999 increased to 65 from 51 at
January 31, 1998.
J.Crew Mail Order revenues decreased by 4.5% from $264.8 million in fiscal 1997
to $252.8 million in fiscal 1998. The percentage of the Company's total revenues
derived from J.Crew Mail Order decreased to 30.7% in fiscal 1998 from 31.8% in
fiscal 1997. This decrease was primarily due to a decrease in catalog
circulation from 9.8 billion pages circulated in fiscal 1997 to 8.8 billion
pages circulated in fiscal 1998 and a continuing weak performance in menswear
sales. J.Crew Mail Order revenues in fiscal 1998 include approximately $20.0
million from jcrew.com compared to approximately $4.0 million in fiscal 1997.
J.Crew Factory Outlet revenues decreased by 3.8% from $100.3 million in fiscal
1997 to $96.5 million in fiscal 1998. The percentage of the Company's total
revenues derived from J.Crew Factory Outlet decreased to 11.7% in fiscal 1998
from 12.0% in fiscal 1997. Comparable store sales for J.Crew Factory Outlet
decreased by 11.5% in fiscal 1998. The decrease in comparable store sales
resulted from additional markdowns required to sell through overstock
merchandise, primarily in the Spring of 1998. J.Crew Factory Outlet opened three
new stores in fiscal 1998 and 45 stores were open at January 30, 1999.
8
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C&W revenues increased by 3.2% to $74.3 million in fiscal 1998 from $72.0
million in fiscal 1997. The percentage of the Company's revenues derived from
C&W increased to 9.0% in fiscal 1998 from 8.6% in fiscal 1997. The increase in
revenues resulted from an increase in the number of catalogs mailed from
approximately 40 million in fiscal 1997, to 42 million in fiscal 1998 and the
introduction of a deferred payment program in the fall of 1998. During 1998 the
Company made a decision to exit the operations of C&W and incurred a charge of
$13.3 million to write-down C&W assets to estimated realizable value and to
provide for other costs to be incurred in the discontinuance of operations, such
as severance and lease termination costs. Additionally fourth quarter charges of
$1.7 million were incurred relating to deferred catalog costs.
Cost of sales, including buying and occupancy costs
- ---------------------------------------------------
Cost of sales, including buying and occupancy costs as a percentage of revenues
was 55.9% for fiscal 1998 compared to 55.8% for fiscal 1997. This increase was
caused primarily by higher markdowns in fiscal 1998 to liquidate overstocks.
Selling, general and administrative expenses
- --------------------------------------------
Selling, general and administrative expenses as a percentage of revenues was
40.7% in fiscal year 1998 and 43.1% in fiscal year 1997.
As a percentage of revenues, selling expenses decreased to 13.1% in fiscal 1998
from 14.7% in 1997 and general and administrative expenses decreased to 27.6% in
fiscal 1998 from 28.4% in fiscal 1997. The decrease in selling expense resulted
primarily from the reduction in catalog circulation from 9.8 billion pages
circulated in 1997 to 8.8 billion pages circulated in 1998 and the
implementation of cost reduction initiatives relating primarily to printing
costs at J.Crew Mail Order.
The decrease in general and administrative expenses in fiscal 1998 as a
percentage of revenues was due to a decrease in expenses at J.Crew Mail Order
and J.Crew Retail from the implementation of cost reduction initiatives.
The absolute dollar amount of selling, general and administrative expenses
decreased to $335.7 million in fiscal 1998 from $359.8 million in fiscal 1997
primarily as a result of the sale of Popular Club Plan as of October 30, 1998
which accounted for $20.0 million of the decrease.
Write-down of assets and other charges in connection with the discontinuance of
- -------------------------------------------------------------------------------
Clifford & Wills
- ----------------
A charge of $13.3 million was included in fiscal 1998 operations to write-down
the assets of C&W to net realizable value and to provide for certain additional
costs in connection with the discontinuance
Additionally fourth quarter charges of $1.7 million were included in selling
expense relating to deferred catalog costs. (See note 2 to the consolidated
financial statements).
Other charges
- -------------
Other charges in fiscal 1998 include $2.9 million of costs incurred in
connection with the termination of the employment contracts of two senior
executives, including the former Chief Executive Officer, and $5.1 million of
tax gross-up payments made on behalf of senior executives relating to grants of
Holdings' restricted stock (See note 16 to the consolidated financial
statements).
Gain on Sale of Subsidiary
- --------------------------
During 1998, the Company sold the capital stock of Popular Club Plan, Inc. and
subsidiaries to The Fingerhut Companies, Inc. for gross proceeds of $42.0
million and realized a gain of $10.0 million. (See Note 2 to the consolidated
financial statements)
Interest Expense
- ----------------
Interest expense, net increased to $28.6 million in fiscal 1998 from $17.5
million in fiscal 1997. This increase resulted primarily from the issuance of
$220.0 million of debt in October 1997 to fund the Recapitalization including
$85.0 million to retire senior indebtedness outstanding at the time of the
Recapitalization. Average borrowings under a Revolving Credit Facility required
to fund inventories and capital expenditures were $54.3 million in fiscal 1997
and $47.5 million in fiscal 1998.
9
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Income Taxes
- ------------
The effective tax rate was (35.5)% in fiscal 1998 compared to (20.1)% in fiscal
1997. The effective tax rate in fiscal 1997 was effected by the non-
deductibility of certain expenses related to the Recapitalization.
10
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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 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
which was reduced to $50 million in October 1998. This agreement which has a
term of three years, converts the interest rate to a fixed rate of 6.23%. If
this interest rate swap agreement was settled on January 30, 1999, the Company
would be required to pay an additional $1,047,000.
11
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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 30, 1999 were approximately
$41.6 million.
Furthermore, the Company has a licensing agreement in Japan which provides for
royalty payments 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 30, 1999, there were two forward foreign exchange
contracts outstanding to sell 130 million Yen each at different rates of
exchange which expired on March 31, 1999. In February 1999 the Company entered
into forward foreign exchange contracts to sell 100 million Yen which expires on
August 15, 1999 and 130 million Yen which expires on March 31, 2000.
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 DISCLOSURE
Not applicable.
12
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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.
13
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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 LLP, Independent Auditors
(ii) Report of Deloitte & Touche LLP, Independent Auditors
(iii) Consolidated Balance Sheets January 30, 1999 and January 31,
1998
(iv) Consolidated Statements of Operations - Years ended January 30,
1999, January 31, 1998 and 1997
year-ended January 30, 1999, January 31, 1998 and 1997
(v) Consolidated Statements of Cash Flows - Years ended January 30,
1999, January 31, 1998 and 1997
(vi) Notes to consolidated financial statements
2. Financial Statements Schedules
Schedule II Valuation and Qualifying Accounts.
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
The Company filed a report on Form 8-K dated January 4, 1999, and the item
reported was Item 5. Other Events.
(c) Exhibits
See Item 14(a)3 above.
(d) Financial Statement Schedules
See Item 14(a)1 and 14(a)2 above.
14
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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.
Date: April 26, 1999
By: /s/ Richard W. Boyce
------------------------
Richard W. Boyce
Chief Executive Officer
Pursuant to the requirements of the Securities 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 Director; Chairman of the Board April 26, 1999
- -------------------------------------------------------------
Emily Woods
/s/ Richard W. Boyce Director; Chief Executive Officer April 26, 1999
- ------------------------------------------------------------- (Principal Executive Officer)
Richard W. Boyce
/s/ Scott Rosen Senior Vice President, Chief Financial April 26, 1999
- ------------------------------------------------------------- Officer
Scott Rosen (Principal Financial Officer)
/s/ Nicholas Lamberti Vice President, Corporate Controller April 26, 1999
- ------------------------------------------------------------- (Principal Accounting Officer)
Nicholas Lamberti
/s/ David Bonderman Director April 26, 1999
- -------------------------------------------------------------
David Bonderman
/s/ James G. Coulter Director April 26, 1999
- -------------------------------------------------------------
James G. Coulter
</TABLE>
S-1
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Financial Statements
January 30, 1999 and January 31, 1998
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholder
J. Crew Operating Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of J. Crew
Operating Corp. and subsidiaries (the "Company") as of January 30, 1999 and
January 31, 1998 and the related consolidated statements of operations and cash
flows for the years then ended. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule for the years ended January 30, 1999 and January 31, 1998 listed in the
acccompanying 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 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of J. Crew Operating
Corp. and subsidiaries as of January 30, 1999 and January 31, 1998 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule for the years ended January 30, 1999
and 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 LLP
April 29, 1999
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Stockholder of J. Crew Operating Corp., Inc.
We have audited the accompanying consolidated statements of operations, and cash
flows of J. Crew Operating Corp. and subsidiaries for the fiscal year ended
January 31, 1997. Our audit also included the financial statement schedule
listed in the accompanying index. 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 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 results of operations and cash flows of J. Crew Operating
Corp. and subsidiaries for the fiscal year 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.
Deloitte & Touche LLP
New York, New York
March 31, 1997
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 30, January 31,
Assets 1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,643 12,166
Accounts receivable (net of allowance for doubtful
accounts of $5,438) -- 16,834
Merchandise inventories 156,022 202,763
Prepaid expenses and other current assets 38,026 62,399
Net assets held for disposal 17,377 --
--------- --------
Total current assets 221,068 294,162
Property and equipment - at cost:
Land 1,460 1,460
Buildings and improvements 11,167 11,167
Furniture, fixtures and equipment 53,344 47,673
Leasehold improvements 114,424 101,407
Construction in progress 3,932 4,569
--------- --------
184,327 166,276
Less accumulated depreciation and amortization 64,577 55,613
--------- --------
119,750 110,663
--------- --------
Other assets 12,961 14,619
--------- --------
Total assets $ 353,779 419,444
========= ========
Liabilities and Stockholder's Equity (Deficit)
Current liabilities:
Notes payable - bank $ 14,000 --
Accounts payable 40,130 65,553
Other current liabilities 59,175 77,700
Deferred income taxes 1,522 8,986
Federal and state income taxes payable 3,847 251
--------- --------
Total current liabilities 118,674 152,490
Long-term debt 194,000 220,000
Deferred credits and other long-term liabilities 44,799 43,578
Due to J. Crew Group, Inc. 751 150
Stockholder's equity (deficit) (4,445) 3,226
--------- --------
Total liabilities and stockholder's
equity (deficit) $ 353,779 419,444
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended
---------------------------------------
January 30, January 31,
----------- -----------------------
1999 1998 1997
----------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Revenues:
Net sales $ 816,221 $ 822,840 $ 795,931
Other 8,037 11,191 12,912
--------- -------- --------
824,258 834,031 808,843
--------- -------- --------
Operating costs and expenses:
Cost of goods sold, including buying and occupancy
costs 460,592 465,168 428,719
Selling, general and administrative expenses 335,709 359,811 348,305
Write down of assets and other charges in
connection with discontinuance of Clifford & Wills 13,300 -- --
Termination costs and other non-recurring employment
contract charges 7,995 -- --
--------- -------- --------
817,596 824,979 777,024
Income from operations 6,662 9,052 31,819
Interest expense - net 28,560 17,524 10,470
Gain on sale of Popular Club Plan (10,000) -- --
Expenses incurred in connection with the Recapitalization -- 20,707 --
--------- -------- --------
(Loss) income before income taxes and
extraordinary item (11,898) (29,179) 21,349
Benefit (provision) for income taxes 4,227 4,257 (8,800)
--------- -------- --------
(Loss) income before extraordinary item (7,671) (24,922) 12,549
Extraordinary item - loss on early retirement of debt
(net of income tax benefit of $3,127) -- (4,500) --
--------- -------- --------
Net (loss) income $ (7,671) $ (29,422) $ 12,549
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended
---------------------------------------
January 30, January 31,
----------- ------------------------
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (7,671) $(29,422) $ 12,549
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Gain on sale of subsidiary (10,000) -- --
Write down of assets and other charges
in connection with discontinued catalog 15,000 -- --
Loss on early retirement of debt -- 7,627 --
Depreciation and amortization 15,972 15,255 10,541
Amortization of deferred financing costs 1,891 892 401
Deferred income taxes (7,464) (4,005) (1,184)
Provision for losses on accounts receivable 5,627 7,343 6,945
Changes in operating assets and liabilities:
Accounts receivable (8,242) 33,902 (6,744)
Merchandise inventories (15,608) (5,106) (49,602)
Prepaid expenses and other current assets 8,167 (4,081) (4,007)
Other assets (2,559) (587) (375)
Accounts payable 7,415 (37,726) 31,864
Other liabilities 2,550 17,727 3,439
Federal and state income taxes payable 3,596 (9,268) 12,670
------- -------- -------
Net cash (used in) provided by operating activities 8,674 (7,449) 16,497
------- -------- -------
Cash flows from investing activities:
Capital expenditures (41,177) (43,134) (27,462)
Proceeds from construction allowances 4,823 11,767 4,981
Proceeds from sale of subsidiary, net of related expenses 37,157 -- --
------- -------- -------
Net cash provided by (used in) investing activities 803 (31,367) (22,481)
------- -------- -------
Cash flows from financing activities:
Increase in notes payable, bank 14,000 -- --
Issuance of long-term debt -- 220,000 --
Repayment of long-term debt (26,000) (92,863) (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 (12,000) 43,850 (413)
------- -------- -------
Increase (decrease) in cash and cash equivalents (2,523) 5,034 (6,397)
Cash and cash equivalents at beginning of year 12,166 7,132 13,529
------- -------- -------
Cash and cash equivalents at end of year 9,643 12,166 7,132
======= ======== =======
Supplementary cash flow information:
Income taxes paid (refunded) (515) 5,180 (3,600)
======= ======== =======
Interest paid 27,763 12,655 9,880
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
(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 statements of operations and cash
flows for the period February 1, 1997 through October 17, 1997 and
for the year ended January 31, 1997 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 3), Holdings owned all of
the stock, directly or indirectly, of its various operating
subsidiaries. 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 designs, contracts for the manufacture of, markets and
distributes men's and women's apparel and accessories. The
Company's products are marketed, primarily in the United States,
through retail stores, catalogs, and the Internet. 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. 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.
The fiscal years 1998, 1997 and 1996 ended on January 30, 1999 (52
weeks), January 31, 1998 (52 weeks) and January 31, 1997 (52
weeks).
(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 $755,000 and $1,902,000
at January 30, 1999 and January 31, 1998, are stated at cost,
which approximates market value.
F-5
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
(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 (see note 2). 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 5)), which is included in other revenues,
for the fiscal years 1998, 1997 and 1996 was $5,325,000,
$8,294,000 and $9,095,000.
(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.
(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 30, 1999 and January 31, 1998 were
$21,130,000 and $39,227,000. Catalog costs, which are reflected in
selling and administrative expenses, for the fiscal years 1998,
1997 and 1996 were $116,515,000, $131,103,000 and $135,633,000
(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-6
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
(i) Other Assets
Other assets consist primarily of debt issuance costs of
$10,633,000 and $12,431,000 at January 30, 1999 and January 31,
1998, 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 for catalog sales when merchandise is
shipped to customers, and at the time of sale for retail sales.
The Company accrues a sales return allowance for estimated returns
of merchandise subsequent to the balance sheet date that relate to
sales prior to the balance sheet date.
(l) Store Preopening Costs
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. 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 identifiable currency positions to reduce the risk
from exchange rate fluctuations. Gains and losses on contracts
accounted for as hedges are deferred and recognized as
adjustments to the bases of those assets. Contracts accounted for
as speculative are marked to market and gains and losses are
recorded currently. Such gains and losses were not material for
the fiscal years ended January 30, 1999 and January 31, 1998.
(n) Use of Estimates 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.
F-7
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
(o) Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company assesses the recoverability of
such assets based upon estimated cash flow forecasts.
(p) Stock Based Compensation
The Company accounts for stock-based compensation using the
intrinsic value method of accounting for employee stock options as
permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation". Accordingly compensation expense is not recorded
for options granted if the option price is equal to the fair
market price at the date of grant.
(2) Disposal of Businesses
(a) Popular Club Plan
In accordance with a sale agreement dated November 24, 1998, the
Company sold all of the capital stock of Popular Club Plan, Inc.
and subsidiaries ("PCP") to The Fingerhut Companies, Inc.
effective as of October 30, 1998 for gross proceeds of $42.0
million in cash.
A gain on the sale of PCP of $10.0 million is included in the
statement of operations for fiscal 1998. For the nine months ended
October 30, 1998 revenues of $124.1 million were included in the
statement of operations.
(b) Clifford & Wills
In 1998, management of the Company made a decision to exit the
catalog and outlet store operations of Clifford & Wills ("C&W").
F-8
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
The statement of operations for fiscal year 1998 includes a
charge of $13,300,000 to write down assets to net realizable value
and provide for other costs to be incurred in the discontinuance
of operations including lease termination and severance costs.
This loss includes the write-down of inventories of $9,400,000;
the estimated loss on cancellation of leases of $1,000,000,
severance costs of $1,100,000, write down of property and
equipment of $600,000, and other related costs of $1,200,000.
The inventory writedown of $9,400,000 was required due to lower
than anticipated recovery rates on the liquidation of these
inventories. The Company will use various methods to dispose of
the inventories related to the discontinued catalog including
special clearance catalogs, off-price merchants, and its outlet
stores. Additionally fourth quarter charges of $1,700,000 included
in selling expense were incurred relating to deferred catalog
costs.
Net assets held for disposal of $17,377,000 are included in the
balance sheet as of January 30, 1999.
Revenues of C&W included in the statement of operations for the
year ended January 30, 1999 were $74.3 million.
(3) Recapitalization Transaction
In October 1997, the Company entered into a recapitalization transaction
(the "Recapitalization"). 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., 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 5, 6 and 7. 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
=============
F-9
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
(4) Other Current Liabilities
Other current liabilities consist of:
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
-------------- --------------
<S> <C> <C>
Customer liabilities $ 6,861,000 $ 18,572,000
Accrued catalog and marketing costs 5,155,000 12,504,000
Taxes, other than income taxes 3,834,000 9,067,000
Accrued interest 5,042,000 4,998,000
Accrued occupancy 4,059,000 2,592,000
Reserve for sales returns 3,473,000 3,529,000
Accrued compensation (including employment contract
termination costs of $2,850,000 at January 30, 1999) 11,984,000 5,638,000
Other 18,767,000 20,800,000
---------------- -------------
$59,175,000 $ 77,700,000
================ =============
</TABLE>
(5) 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. The Company had no obligation to reimburse the trust or
the purchasers of beneficial interests for credit losses. The
transactions were 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." Under SFAS No. 125,
no servicing asset or liability was recorded as fees charged were
expected to cover related expenses.
At January 31, 1998, $46,000,000 of accounts receivable had been sold.
The sale of the receivables resulted in a gain on sale of $1,472,000
during the year ended January 31, 1998, which was included in other
revenues.
Obligations under the securitization agreement were assumed by the
acquiror under the terms of the sale agreement with The Fingerhut
Companies, Inc. (see Note 2).
F-10
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
(6) Long-Term Debt
January 30, January 31,
1999 1998
--------------- -----------
Term loan (a) $ 44,000,000 $ 70,000,000
10-3/8% senior subordinated notes (b) 150,000,000 150,000,000
--------------- -------------
Total $ 194,000,000 $220,000,000
(a) The term loan is subject to the same interest rates and
security terms as the Revolving Credit Agreement. Weighted
average interest rates were 8.5% at January 30, 1999 and
January 31, 1998 (see Note 7). The term loan is repayable in
quarterly installments of $2.5 million from February 2001
through November 2001 and $4.25 million from February 2002
through November 2003. Proceeds of $26.0 million from the
sale of PCP were used to repay the term loan in 1998.
(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.
The maturities of long-term debt required during the next five
years are:
Fiscal year Amount
----------- ---------------
1999 $ --
2000 --
2001 10,000,000
2002 17,000,000
2003 17,000,000
F-11
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
(7) 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. This
agreement was amended on March 18, 1998, November 23, 1998 and April 20,
1999. Borrowings may be utilized to fund the working capital requirements
of the Company including issuance of stand-by and trade letters of credit
and bankers' acceptances.
Borrowings are secured by a perfected first priority security interest in
all assets of the Company's 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.
Maximum borrowings under revolving credit agreements were $104,000,000
during fiscal 1998 and 1997, and $55,000,000 during fiscal 1996 and
average borrowings were $47,500,000, $54,300,000 and $31,200,000.
Borrowings outstanding under the Company's revolving credit agreement
were $14,000,000 at January 30, 1999. There were no borrowings
outstanding at January 31, 1998.
Outstanding letters of credit established to facilitate international
merchandise purchases at January 30, 1999 and January 31, 1998 amounted
to $41,628,000 and $20,143,000.
The provisions of the Revolving Credit Agreement, as amended, require
that the Company maintain certain levels of (i) leverage ratio, (ii)
interest coverage ratio and (iii) inventory coverage ratio; provide
for limitations on capital expenditures, sale and leaseback transactions,
liens, investments, sales of assets and indebtedness and restricts
the payment of dividends or distributions to Holdings.
F-12
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
(8) Commitments and Contingencies
(a) Operating Leases
As of January 30, 1999, 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 30, 1999 aggregate minimum rentals in future periods
are as follows:
Fiscal year Amount
----------- --------------
1999 $ 32,660,000
2000 30,633,000
2001 28,442,000
2002 27,541,000
2003 27,447,000
Thereafter 122,102,000
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 1998, 1997 and 1996 was $42,347,000,
$35,753,000 and $29,852,000, including contingent rent based on
store sales of $3,270,000, $2,877,000 and $2,850,000.
(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 subject to various legal proceedings and claims
that arise in the ordinary conduct of its business. Although the
outcome of these claims cannot be predicted with certainty,
management does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's
financial condition or results of operations.
The Company has been named as one of the defendants in two
lawsuits relating to its purchasing of products from independent
garment manufacturers in Saipan (Commonwealth of the Northern
Mariana Islands). On January 13, 1999 a complaint was filed in the
U.S. District Court, Central District of California, ("Federal
Action"), by a group of unidentified Asian garment workers against
17 U.S. clothing retailers, including the Company, and 11 Saipan
garment manufacturers. The unidentified worker plaintiffs seek
class action status and allege, among other things, violations of
Federal racketeering and other laws in connection with labor
practices and treatment of foreign workers in the defendant
manufacturers' Saipan factories. The plaintiffs seek injunctive
relief and unspecified monetary damages, including treble and
punitive damages. A second complaint was filed on January 13, 1999
in Superior Court in San Francisco, California ("State Action"),
by a labor union and three nonprofit groups against the same 17
U.S. clothing retailers, including the Company, one additional
retailer and other unnamed defendants alleging violations of
California law for allegedly unlawful and unfair business
practices and misleading advertising in connection with labeling
of products and labor practices regarding foreign workers in
Saipan. The plaintiffs seek injunctive relief and unspecified
damages.
All the defendants in the Federal Action, including the Company,
jointly moved to (i) change the venue of the Federal Action to the
United States District Court in the Commonwealth of the Northern
Mariana Islands, where the related action against certain
manufacturing defendants is pending, and (ii) dismiss the Federal
Action for failure to state a claim. All the defendants in the
State Action, including the Company, jointly moved to dismiss the
State Action for failure to state a claim. These actions are still
at a very preliminary stage, and, accordingly, management of the
Company believes it is too early to evaluate the likelihood of an
unfavorable outcome.
F-13
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
(9) 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 were
$1,780,000 for fiscal 1998 and 1997 and $1,680,000 for fiscal 1996.
(10) 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 1998, 1997 and 1996 was
$2,712,000, $2,897,000, and $3,817,000.
(11) Interest Expense - Net
Interest expense, net consists of the following:
<TABLE>
1998 1997 1996
-------------- ---------- -----------
<S> <C> <C> <C>
Interest expense $ 29,616,000 $17,666,000 $10,613,000
Interest income (1,056,000) (142,000) (143,000)
-------------- ----------- -----------
Interest expense, net $ 28,560,000 $17,524,000 $10,470,000
============== =========== ===========
</TABLE>
(12) 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 is estimated to be approximately $178,520,000
and $208,550,000 at January 30, 1999 and January 31, 1998, respectively,
and is based on dealer quotes or quoted market prices of the same or
similar instruments. The carrying amounts of long-term debt were
$194,000,000 and $220,000,000 at January 30, 1999 and January 31, 1998.
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, notes payable-bank, 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.
F-14
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
In October 1997 the Company entered into an interest rate swap agreement
for $70 million notional amount, which was reduced to $50 million in
October 1998, which effectively converted the interest rate on its term
loan and borrowings on the Revolving Credit Agreement from a variable
rate to a fixed rate of 6.23% through October 2000. If this agreement was
settled on January 30, 1999, the Company would be required to pay
$1,047,000.
At January 30, 1999, the Company had two forward foreign exchange
contracts outstanding to sell 130 million yen each on March 31, 1999 at
different rates of exchange. These contracts are entered into to manage
the foreign exchange rate exposure relating to foreign licensing
revenues. The fair value of the contracts approximate carrying value.
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.
F-15
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
(13) 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>
1998 1997 1996
---- ---- ----
Current:
<S> <C> <C> <C>
Foreign 270,000 309,000 400,000
Federal 1,870,000 (866,000) 8,984,000
State and local 1,097,000 305,000 600,000
----------- ---------- -----------
3,237,000 (252,000) 9,984,000
Deferred - Federal, state and local (7,464,000) (4,005,000) (1,184,000)
Income taxes before tax effect of extraordinary
items (4,227,000) (4,257,000) 8,800,000
Extraordinary item - current -
Federal, state and local -- (3,127,000) --
----------- ---------- -----------
Total (benefit) provision for income
taxes (4,227,000) (7,384,000) 8,800,000
========== ========== =========
</TABLE>
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>
1998 1997 1996
---- ----
<S> <C> <C> <C>
Federal income tax rate (35.0)% (35.0)% 35.0%
State and local income taxes, net
of Federal benefit (2.1) (2.0) 5.3
Nondeductible expenses and other 1.6 15.9 0.9
----- ----- -----
Effective tax rate (35.5)% (20.1)% 41.2%
===== ===== ====
</TABLE>
F-16
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
The tax effect of temporary differences which give rise to deferred tax
assets and liabilities are:
January 30, January 31,
1999 1998
Deferred tax assets:
Allowance for doubtful accounts $ -- 2,118,000
State and local net operating loss
carryforwards 4,132,000 4,074,000
Difference in book and tax basis
for property and equipment 2,302,000 2,277,000
Other 3,318,000 1,596,000
------------ ----------
9,752,000 10,065,000
------------ ----------
Deferred tax liabilities:
Deferred catalog expenses and other
prepaid expenses (11,274,000) (19,051,000)
------------ ----------
Net deferred income tax liabilities $ (1,522,000) (8,986,000)
============ ==========
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. The Company has state and local income tax net
operating loss carryforwards of varying amounts.
(14) Extraordinary Item
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.
(15) Stockholder's Equity (Deficit)
The Company has authorized 100 shares of common stock, par value $.01
per share, all of which was issued and outstanding at January 30, 1999
and January 31, 1998.
A reconciliation of stockholder's equity (deficit) is as follows:
Year Ended
January 30, 1999 January 31, 1998
---------------- ----------------
Balance beginning of year ..... $ 3,226,000 $ 102,006,000
Net loss....................... (7,671,000) (29,422,000)
Dividend to parent company..... --- (69,358,000)
------------ -------------
Balance end of year............ $ (4,445,000) $ 3,226,000
F-17
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
(16) Termination Costs and Other Non-recurring Employment Contract Charges
Charges of $2,850,000 were incurred in fiscal 1998 in connection with
the termination of the employment contracts of two senior executives
including the former Chief Executive Officer. Additionally, during 1998,
tax gross-up payments of $5,145,000 were made on behalf of senior
executives relating to grants of Holdings' restricted stock.
(17) Segment Information
On January 1, 1998, the Company adopted SFAS 131, "Disclosure About
Segments of An Enterprise and Related Information". This statement does
not affect the Company's financial position or results of operations.
The Company designs, contracts to manufacture and markets men's, women's,
and children's apparel, accessories and home furnishings primarily under
Company owned brand names. The brands are marketed through various
channels of distribution including retail and factory outlet stores,
catalogs, the Internet and licensing arrangements with third parties.
These operations have been aggregated into three reportable segments
based on brand identification: J. Crew, Clifford & Wills and Popular Club
Plan.
All of the Company's identifiable assets are located in the United
States. Export sales are not significant.
During 1998, the Company sold PCP to The Fingerhut Companies, Inc. and
decided to discontinue the operations of its C&W brand. The revenues and
operating income of PCP are included through October 30, 1998 and through
January 30, 1999 for C&W.
F-18
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
Income from operations relating to C&W for fiscal 1998 includes a noncash
write-down of $13,300,000 relating to the discontinuance of C&W
operations and $1,700,000 of fourth quarter charges to write off deferred
catalog costs (See note 2).
F-19
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
Management evaluates the results of operations of its segments based on
income from operations. Corporate and other expenses include expenses
incurred by the corporate office and certain non-recurring expenses that
are not allocated to specific business units. Corporate and other
expenses in fiscal 1998 include tax gross-up payments to senior
executives related to grants of Holdings' restricted stock and employee
contract termination costs.
Corporate and other expenses in fiscal 1997 include a one-time bonus
expense related to the employment of a senior executive and non-recurring
consulting fees incurred as a result of the Recapitalization.
Segment assets represent the assets used directly in the operations of
each business unit such as inventories and property and equipment.
Corporate assets consist principally of investments and deferred
financing costs.
The accounting policies used for segment reporting are consistent with
those described in the summary of significant accounting policies.
Revenues 1998 1997 1996
------------------ ----------- ---------- --------
J. Crew $ 625,897 $ 577,594 $ 556,126
Clifford & Wills 74,303 72,063 75,046
PCP 124,058 184,374 177,671
----------- ---------- ---------
$ 824,258 $ 834,031 $ 808,843
=========== ========== =========
=
F-20
<PAGE>
J.CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 30, 1999, January 31, 1998 and 1997
<TABLE>
<CAPTION>
Income from Operations 1998 1997 1996
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
J. Crew $ 34,736 $ 8,393 $ 30,803
Clifford & Wills (16,694) (1,186) (2,596)
PCP (2,701) 7,550 3,612
Corporate and other (8,679) (5,705) --
-------- -------- --------
Income from operations $ 6,662 $ 9,052 $ 31,819
-------- -------- --------
Interest expense, net (28,560) (17,524) $(10,470)
Gain on sale of PCP 10,000 -- --
Expense incurred in
connection with the
Recapitalization -- (20,707) --
-------- -------- --------
Income (loss) before income taxes $(11,898) $(29,179) $ 21,349
======== ======== ========
Depreciation and amortization 1998 1997 1996
- ----------------------------- ---- ---- ----
J. Crew $ 14,455 $ 13,645 $ 8,911
Clifford & Wills 327 199 548
PCP 1,015 1,279 1,082
Corporate 175 132 --
-------- -------- --------
$ 15,972 $ 15,255 $ 10,541
======== ======== ========
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
Identifiable Assets 1998 1997 1996
---------------------------- -------- ------- -------
<S> <C> <C> <C>
J. Crew $311,120 $314,186 $287,030
Clifford & Wills 17,377 29,078 26,408
PCP -- 57,811 91,783
Corporate 25,282 18,369 5,600
-------- -------- --------
$353,779 $419,444 $410,821
======== ======== ========
Capital Expenditures,
net of disposals 1998 1997 1996
---------------------------- -------- ------- -------
J. Crew $ 34,084 $ 41,149 $ 25,115
Clifford & Wills (59) (98) 37
PCP 5,264 2,058 2,190
Corporate 1,888 25 120
-------- -------- --------
$ 41,177 $ 43,134 $ 27,462
======== ======== ========
</TABLE>
F-22
<PAGE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
($ in thousands)
<TABLE>
<CAPTION>
beginning charged to cost charged to other ending
balance and expenses accounts deductions balance
($ in thousands)
Allowance for doubtful accounts
- -------------------------------
(deducted from accounts receivable)
<S> <C> <C> <C> <C> <C>
fiscal year ended:
January 30, 1999 $5,438 5,627 ---- (5,579)(c) $----
(5,486)(a)
January 31, 1998 4,357 7,343 ---- (6,262)(a) 5,438
January 31, 1997 4,824 6,945 ---- (7,412)(a) 4,357
<CAPTION>
Inventory impairment reserve
- ----------------------------
(deducted from inventories)
<S> <C> <C> <C> <C> <C>
fiscal year ended:
January 30, 1999 $4,400 4,929 ---- 2,200(c) $6,122
1,007(d)
January 31, 1998 3,289 1,111(b) ---- ---- 4,400
January 31, 1997 5,226 (1,937)(b) ---- ---- 3,289
<CAPTION>
Allowance for sales returns
- ---------------------------
(included in other current liabilities)
<S> <C> <C> <C> <C> <C>
fiscal year ended:
January 30, 1999 $3,529 844(b) ---- 500(c) $3,473
400(d)
January 31, 1998 2,406 1,123(b) ---- ---- 3,529
January 31, 1997 2,384 22(b) ---- ---- 2,406
</TABLE>
(a) accounts deemed to be uncollectible
(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.
(c) charged to gain on sale of Popular Club Plan, Inc.
(d) reclassified to net assets held for disposal (relating to discontinuance
of Clifford & Wills operations)
F-23
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
-- -----------
<S> <C>
2.1 Recapitalization Agreement, dated as of July 22, 1997 between TPG Partners II, L.P. and J. Crew
Group, Inc. (the "Recapitalization Agreement") (incorporated by reference to Exhibit 2.1 to
J. Crew Group. Inc's. Form S-4 Registration Statement, File No. 333-42427, filed December 16, 1997 (the
"Registration Statement"))
NOTE: Pursuant to the provisions of paragraph (b)(2) of Item 601 of Regulation S-K, the Registrant
hereby undertakes to furnish to the Commission upon request copies of any schedule to the
Recapitalization Agreement.
2.2 Amendment to Recapitalization Agreement, dated as of October 17, 1997 between TPG Partners II, L.P.
and J. Crew Group, Inc. (the "Amendment") (incorporated by reference to Exhibit 2.2 to the
Registration Statement)
NOTE: Pursuant to the provisions of paragraph (b)(2) of Item 601 of Regulation S-K, the Registrant
hereby undertakes to furnish to the Commission upon request copies of any schedule to the Amendment.
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
("Operating Registration Statement")
3.2 By-laws of J. Crew Operating Corp. (incorporated by reference to Exhibit 3.14 to the Operating Registration
Statement)
4.1 Indenture, dated as of October 17, 1997, between J. Crew Group, Inc., as issuer, and State Street
Bank and Trust Company, as trustee, relating to the Debentures (the "Indenture") (incorporated by
reference to Exhibit 4.3 to the Registration Statement)
4.2(a) Credit Agreement, dated as of October 17, 1997 ("Credit Agreement"), 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 4.5 to Amendment No. 1 to the Registration Statement, filed February 6, 1998
(the "Amendment No. 1"))
4.2(b) Amendment dated as of November 23, 1998 to the Credit Agreement
4.2(c) Amendment dated as of March 18, 1998 to the Credit Agreement
4.2(d) Amendment and Restatement Agreement dated as of April 20, 1999 relating to the Credit Agreement
4.3 Guarantee Agreement dated as of October 17, 1997, 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 4.6 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 4.7 to the Registration Statement)
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
No -----------
--
<S> <C>
4.5 Pledge Agreement, dated as of October 17, 1997 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 4.8 to the Registration Statement)
4.6 Security Agreement, dated as of October 17, 1997 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 4.9 to the Registration Statement)
4.7 Registration Rights Agreement, dated as of October 17, 1997 by and among J. Crew Group, Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and Chase Securities Inc. (incorporated by
reference to Exhibit 4.10 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 Employment
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+ Stock Option Grant Agreement, made as of October 17, 1997 between J. Crew Group, Inc. and Emily Woods
(time based) (incorporated by reference to Exhibit 10.3 to the Registration Statement)
10.4+ Stock Option Grant Agreement, made as of October 17, 1997 between J. Crew Group, Inc. and Emily Woods
(performance based) (incorporated by reference to Exhibit 10.4 to the Registration Statement)
10.5+ Letter Agreement between Matthew Rubel and J. Crew Group, Inc. (incorporated by reference to Exhibit
10.5 to Amendment No. 2 to the Registration Statement, filed February 26, 1998)
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
-- -----------
<S> <C>
10.6+ 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 2(c) therein) and Howard Socol (incorporated by
reference to Exhibit 10.6 to the Company's Form 10-K for fiscal year 1997)
10.7 Stockholders' Agreement, dated as of October 17, 1997, among J. Crew Group, Inc. and the Stockholder
signatories thereto (incorporated by reference to Exhibit 4.1 to the Registration Statement)
10.8 Stockholders' Agreement, dated as of October 17, 1997, among J. Crew Group, Inc., TPG Partners II,
L.P. and Emily Woods (included as Exhibit B to the Woods Employment Agreement filed as Exhibit 10.1)
10.9 J. Crew Group, Inc. 1997 Stock Option Plan (incorporated by reference to Exhibit 10.13 to the
Registration Statement)
10.10 Contract Carrier Agreement, between J. Crew Group, Inc. and United Parcel Service, Inc.
(incorporated by reference to Exhibit 10.6 to the Registration Statement)
10.11 Custom Pricing Agreement, made November 15, 1996 between Federal Express Corporation and
J. Crew Group, Inc. (incorporated by reference to Exhibit 10.7 to the Registration Statement)
10.12 Letter Agreement dated July 29, 1996 between World Color and Clifford & Wills, Inc. (incorporated by
reference to Exhibit 10.10 to the Registration Statement)
10.13 Agreement dated August 14, 1997 between R.R. Donnelley & Sons Company and J. Crew Inc. (incorporated
by reference to Exhibit 10.11 to the Registration Statement)
10.14 Letter Agreement, dated April 17, 1998, between J. Crew Operating Corp. and Barry Erdos
(incorporated by reference to Exhibit 10.16 to the Company's Form 10-K for fiscal year 1997)
27.1 Fianancial Data Schedule
</TABLE>
+Management contract or compensatory plan or arrangement.
3
<PAGE>
Exhibit 4.2(b)
--------------
AMENDMENT dated as of November 23, 1998, to the
Credit Agreement dated as of October 17, 1997 (as
previously amended by an amendment dated as of March 18,
1998, the "Credit Agreement"), among J. CREW OPERATING
CORP., a Delaware corporation, as Borrower, J. CREW
GROUP, INC., the Lenders party thereto, THE CHASE
MANHATTAN BANK, as Administrative Agent, and DONALDSON,
LUFKIN & JENRETTE SECURITIES CORPORATION, as Syndication
Agent.
WHEREAS, the Borrower (such term and each other capitalized term used
but not defined herein having the meanings assigned to such terms in the Credit
Agreement) has requested that the Lenders approve amendments to certain
provisions of the Credit Agreement; and
WHEREAS, the undersigned Lenders are willing, on the terms and subject
to the conditions set forth herein, to approve such amendments;
NOW, THEREFORE, in consideration of these premises, the Borrower and
the undersigned Lenders hereby agree as follows:
SECTION 1. Amendment. Effective on and as of the Amendment
----------
Effective Date (as defined in Section 3 hereof), Section 6.17 of the Credit
Agreement is hereby amended by deleting the amount "$40,000,000" therein and
substituting therefor the amount "$35,000,000".
SECTION 2. Representations and Warranties. The Borrower represents
-------------------------------
and warrants to each of the Lenders that, after giving effect to the amendments
contemplated hereby, (a) the representations and warranties of each Loan Party
set forth in the Loan Documents are true and correct in all material respects on
and as of the date of this Amendment, except to the extent such representations
and warranties expressly relate to an earlier date (in which case such
representations and warranties were true and correct in all material respects as
of
<PAGE>
the earlier date) and (b) no Default has occurred and is continuing.
SECTION 3. Effectiveness. This Amendment shall become effective as
--------------
of the date (the "Amendment Effective Date") when each of the following
conditions shall have been met:
(a) The Administrative Agent (or its counsel) shall have received
copies hereof that, when taken together, bear the signatures of the Borrower,
Holdings and the Required Lenders.
(b) The sale, transfer or disposition of substantially all the assets
or capital stock of Popular Club to a Person or Persons other than the Borrower
and its Subsidiaries shall have been consummated.
SECTION 4. Applicable Law. This Amendment shall be construed in
---------------
accordance with and governed by the law of the State of New York.
SECTION 5. No Other Amendments. Except as expressly set forth
--------------------
herein, this Amendment shall not by implication or otherwise limit, impair,
constitute a waiver of, or otherwise affect the rights and remedies of any party
under the Credit Agreement, nor alter, modify, amend or in any way affect any of
the terms, conditions, obligations, covenants or agreements contained in the
Credit Agreement, all of which are ratified and affirmed in all respects and
shall continue in full force and effect. This Amendment shall apply and be
effective only with respect to the provisions of the Credit Agreement
specifically referred to herein.
SECTION 6. Counterparts. This Amendment may be executed in two or
-------------
more counterparts, each of which shall constitute an original, but all of which
when taken together shall constitute but one contract. Delivery of an executed
counterpart of a signature page of this Amendment by facsimile transmission
shall be as effective as delivery of a manually executed counterpart of this
Amendment.
SECTION 7. Headings. Section headings used herein are for
---------
convenience of reference only, are not part of this Amendment and are not to
affect the construction of, or to be taken into consideration in interpreting,
this Amendment.
SECTION 8. Expenses. The Borrower shall reimburse the Administrative
---------
Agent for its reasonable out-of-pocket
<PAGE>
expenses incurred in connection with this Amendment, including the reasonable
fees and expenses of Cravath, Swaine & Moore, counsel for the Administrative
Agent.
IN WITNESS WHEREOF, Holdings, the Borrower and the undersigned Lenders
have caused this Amendment to be duly executed by their duly authorized
officers, all as of the date first above written.
J. CREW GROUP, INC.,
by
/s/ Scott M. Rosen
----------------------
Name: Scott M. Rosen
Title: Chief Financial
Officer
J. CREW OPERATING CORP.,
by
/s/ Scott M. Rosen
---------------------------
Name: Scott M. Rosen
Title: Chief Financial
Officer
<PAGE>
Exhibit 4.2(c)
--------------
AMENDMENT dated as of March 18, 1998,
to the Credit Agreement dated as of October 17,
1997 (the "Credit Agreement"), among J. CREW
OPERATING CORP., a Delaware corporation, as
Borrower, J. CREW GROUP, INC., the Lenders
party thereto, THE CHASE MANHATTAN BANK, as
Administrative Agent, and DONALDSON, LUFKIN &
JENRETTE SECURITIES CORPORATION, as Syndication
Agent.
WHEREAS, the Borrower (such term and each other capitalized term used
but not defined herein having the meanings assigned to such terms in the Credit
Agreement) has requested that the Lenders approve amendments to certain
provisions of the Credit Agreement; and
WHEREAS, the undersigned Lenders are willing, on the terms and subject
to the conditions set forth herein, to approve such amendments;
NOW, THEREFORE, in consideration of these premises, the Borrower and
the undersigned Lenders hereby agree as follows:
SECTION 1. Amendments. Effective on and as of the Amendment
-----------
Effective Date (as defined in Section 3 hereof), the Credit Agreement is hereby
amended as follows:
(a) The definition of "Consolidated EBITDA" is amended by the
addition of the following sentence at the end of such definition:
If the sale, transfer or disposition of all or substantially all of
the assets or capital stock of C&W is consummated prior to the end of
the Borrower's fiscal year ending January 30, 1999, then Consolidated
EBITDA, calculated as set forth above, shall be increased for each day
during the period from the date of consummation of such transaction
through the last day of such fiscal year (to the extent any days
during such period are included in the period for which Consolidated
EBITDA is being determined) by an amount equal to (i) $5,100,000,
divided by (ii) 365.
<PAGE>
(b) The definition of "Excluded Charges" is amended by (i) deleting
the phrase "not exceeding $8,000,000" therein and substituting the following:
"taken during the fiscal year ending January 30, 1998, or the fiscal year ended
January 30, 1999, not exceeding $11,000,000"; and (ii) inserting, after the
phrase "management bonuses for 1997", the following: ", one-time compensation
payments made to newly hired executives in 1998".
(c) Each of Section 6.13 and Section 6.14 of the Credit Agreement is
hereby amended by the addition of the following proviso at the end of such
Section:
provided that the Borrower shall not be required to comply with the
--------
requirements of this Section as of the end of any of the four fiscal
quarters ending during the fiscal year ending January 30, 1999.
(d) Section 6.15 of the Credit Agreement is hereby amended by
deleting the figure "($17,000,000)" therein and substituting the following:
"($25,000,000)".
(e) Article VI of the Credit Agreement is hereby amended by the
addition of the following new Section at the end of such Article:
SECTION 6.17. Minimum EBITDA. The Borrower will not permit its
---------------
Consolidated EBITDA for any period of four consecutive fiscal quarters
of the Borrower ending during the Borrower's fiscal year ending
January 30, 1999, to be less than (a) $20,000,000, in the case of any
such period ending on the last day of the first or second fiscal
quarter of such fiscal year, (b) $25,000,000, in the case of the
period ending on the last day of the third fiscal quarter of such
fiscal year or (c) $40,000,000, in the case of the period ending on
the last day of such fiscal year.
SECTION 2. Representations and Warranties. The Borrower represents
-------------------------------
and warrants to each of the Lenders that, after giving effect to the amendments
contemplated hereby, (a) the representations and warranties of each Loan Party
set forth in the Loan Documents are true and correct in all material respects on
and as of the date of this Amendment, except to the extent such representations
and warranties expressly relate to an earlier date (in which
<PAGE>
3
case such representations and warranties were true and correct in all material
respects as of the earlier date) and (b) no Default has occurred and is
continuing.
SECTION 3. Effectiveness. This Amendment shall become effective as
--------------
of the date (the "Amendment Effective Date") when the Administrative Agent (or
its counsel) shall have received copies hereof that, when taken together, bear
the signatures of the Borrower, Holdings and the Required Lenders.
SECTION 4. Amendment Fee. The Borrower agrees to pay to each Lender
--------------
that executes and delivers a copy of this Amendment to the Administrative Agent
(or its counsel) on or prior to April 1, 1998, an amendment fee in an amount
equal to 0.25% of the sum of such Lender's Revolving Commitment (whether used or
unused) and outstanding Term Loans, in each case as of the Amendment Effective
Date; provided that the Borrower shall have no liability for any such amendment
--------
fee if this Amendment does not become effective. Such amendment fee shall be
payable (i) on the Amendment Effective Date, to each Lender entitled to receive
such fee as of the Amendment Effective Date and (ii) in the case of any Lender
that becomes entitled to such fee after the Amendment Effective Date, within two
Business Days after such Lender becomes entitled to such fee.
SECTION 5. Applicable Law. This Amendment shall be construed in
---------------
accordance with and governed by the law of the State of New York.
SECTION 6. No Other Amendments. Except as expressly set forth
--------------------
herein, this Amendment shall not by implication or otherwise limit, impair,
constitute a waiver of, or otherwise affect the rights and remedies of any party
under the Credit Agreement, nor alter, modify, amend or in any way affect any of
the terms, conditions, obligations, covenants or agreements contained in the
Credit Agreement, all of which are ratified and affirmed in all respects and
shall continue in full force and effect. This Amendment shall apply and be
effective only with respect to the provisions of the Credit Agreement
specifically referred to herein.
SECTION 7. Counterparts. This Amendment may be executed in two or
-------------
more counterparts, each of which shall
<PAGE>
4
constitute an original, but all of which when taken together shall constitute
but one contract. Delivery of an executed counterpart of a signature page of
this Amendment by facsimile transmission shall be as effective as delivery of a
manually executed counterpart of this Amendment.
<PAGE>
SECTION 8. Headings. Section headings used herein are for
---------
convenience of reference only, are not part of this Amendment and are not to
affect the construction of, or to be taken into consideration in interpreting,
this Amendment.
SECTION 9. Expenses. The Borrower shall reimburse the Administrative
---------
Agent for its reasonable out-of-pocket expenses incurred in connection with this
Amendment, including the reasonable fees and expenses of Cravath, Swaine &
Moore, counsel for the Administrative Agent.
IN WITNESS WHEREOF, Holdings, the Borrower and the undersigned Lenders
have caused this Amendment to be duly executed by their duly authorized
officers, all as of the date first above written.
J. CREW GROUP, INC.,
by
/s/ Michael P. McHugh
-------------------------
Name: Michael P. McHugh
Title: Vice President of
Finance and Chief
Financial Officer
J. CREW OPERATING CORP.,
by
/s/ Michael P. McHugh
-------------------------
Name: Michael P. McHugh
Title: Vice President of
Finance and Chief
Financial Officer
<PAGE>
Exhibit 4.2(d)
--------------
AMENDMENT AND RESTATEMENT AGREEMENT
(this "Amendment and Restatement") dated as of
April 20, 1999, relating to the Credit Agreement
dated as of October 17, 1997 (as previously
amended, the "Credit Agreement"), among J. CREW
OPERATING CORP., a Delaware corporation, as
Borrower, J. CREW GROUP, INC., the Lenders party
thereto, THE CHASE MANHATTAN BANK, as
Administrative Agent, and DONALDSON, LUFKIN &
JENRETTE SECURITIES CORPORATION, as Syndication
Agent.
A. The Borrower (such term and each other capitalized terms used but
not defined herein having the meanings assigned to such terms in the Credit
Agreement) has requested that the Lenders approve amendments to certain
provisions of the Credit Agreement and a restatement of the Credit agreement to
incorporate such amendments.
B. The undersigned Lenders are willing, on the terms and subject to
the conditions set forth herein, to approve such amendments and such
restatement.
In consideration of these premises, the Borrower and the undersigned
Lenders hereby agree as follows:
SECTION 1. Amendment and Restatement. Upon the effectiveness of this
--------------------------
Amendment and Restatement as provided in Section 3 below, the Credit Agreement
shall be amended and restated in the form resulting from the following
revisions:
(a) The definition of "Applicable Rate" in Section 1.01 of the Credit
Agreement is hereby amended by (i) deleting the first proviso thereto and
replacing such proviso with:
"; provided that from the Amendment and Restatement of this Credit
--------
Agreement as of April 20, 1999 until the delivery of the Borrower's
financial statements pursuant to Section 5.01 for the second full fiscal
quarter commencing in calendar year 1999, the "Applicable Rate" shall be
the applicable rate per annum set forth below in Category 2:"; and
<PAGE>
(ii) deleting the table therein in its entirety and replacing it with
the following:
<TABLE>
<CAPTION>
===============================================================================================
Leverage Ratio: ABR Eurodollar Acceptance
--------------- --- ---------- ----------
Spread Spread Spread
------ ------ ------
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Category 1 1.75% 2.75% 2.75%
----------
Greater than 5.00 to 1.00
- -----------------------------------------------------------------------------------------------
Category 2 1.50% 2.50% 2.50%
----------
greater than 4.50 to 1.00 and less than or
equal to 5.00 to 1.00
- ---------------------------------------------------------------------------------------------
Category 3 1.25% 2.25% 2.25%
----------
greater than 4.00 to 1.00 and less than or
equal to 4.50 to 1.00
- ---------------------------------------------------------------------------------------------
Category 4 1.00% 2.00% 2.00%
----------
greater than 3.50 to 1.00 and less than or
equal to 4.00 to 1.00
- ---------------------------------------------------------------------------------------------
Category 5 0.75% 1.75% 1.75%
----------
greater than 3.00 to 1.00 and less than or
equal to 3.50 to 1.00
- ----------------------------------------------------------------------------------------------
Category 6 0.50% 1.50% 1.50%
----------
less than or equal to 3.00 to 1.00
=============================================================================================
</TABLE>
(b) Section 2.11(e) of the Credit Agreement is hereby amended by
deleting the table therein in its entirety and replacing it with the following:
<TABLE>
<CAPTION>
Fiscal Year Revolving Exposure
----------- as Reduced
------------------
<S> <C>
1999 $30,000,000
2000 $20,000,000
2001 $15,000,000
2002 and thereafter $ 0
</TABLE>
<PAGE>
(c) Section 6.12 of the Credit Agreement is hereby amended by
deleting the table therein in its entirety and replacing it with:
<TABLE>
<CAPTION>
Fiscal Year Amounts
Ending -------
-----------
<S> <C>
January 30, 1999 $43,000,000
January 29, 2000 $40,000,000
February 3, 2001 $45,000,000
February 2, 2002 $50,000,000
February 1, 2003 $55,000,000
and thereafter
</TABLE>
(d) Section 6.13 of the Credit Agreement is hereby amended by
deleting the table therein in its entirety and replacing it with:
<TABLE>
<CAPTION>
Quarter Ending Ratio
During the Period -----
-------------------------
<S> <C>
May 1, 1999 through 5.75 to 1.00
October 30, 1999
October 31, 1999 5.25 to 1.00
through April 29,2000
April 30, 2000 through 4.75 to 1.00
May 5, 2001
May 6, 2001 through 4.25 to 1.00
November 3, 2001
November 4, 2001 and 4.00 to 1.00
thereafter
</TABLE>
<PAGE>
(e) Section 6.14 of the Credit Agreement is hereby amended by
deleting the table therein in its entirety and replacing it with:
<TABLE>
<CAPTION>
Four-Quarter Ratio
Period Ending -----
-------------
<S> <C>
January 31, 1999 through 1.25 to 1.00
October 30, 1999
October 31, 1999 through 1.30 to 1.00
April 29, 2000
April 30, 2000 through 1.35 to 1.00
May 5, 2001
May 6, 2001 through 1.40 to 1.00
February 1, 2003
February 2, 2003 1.50 to 1.00
And thereafter
</TABLE>
(f) Section 6.15 of the Credit Agreement is hereby deleted in its
entirety and replaced with "INTENTIONALLY OMITTED".
(g) Section 6.16 of the Credit Agreement is hereby amended by
deleting "1.75 to 1.00." and replacing such phrase with the following: "1.50 to
1.00 or, for any fiscal month ending during the third fiscal quarter in any
fiscal year, 1.35 to 1.00".
SECTION 2. Representations and Warranties. The Borrower represents
-------------------------------
and warrants to each of the Lenders that, after giving effect to the amendments
and restatement contemplated hereby, (a) the representations and warranties of
each Loan Party set forth in the Loan Documents are true and correct in all
material respects on and as of the date of this Amendment, except to the extent
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties were true and correct in all
material respects as of the earlier date) and (b) no Default has occurred and is
continuing.
SECTION 3. Effectiveness. This Amendment and Restatement shall
--------------
become effective (as of the date first written above) on the date (the
"Amendment Effective Date") when (a) the Administrative Agent (or its counsel)
shall have received copies hereof that, when taken together, bear the signatures
of the
<PAGE>
Borrower, Holdings and the Required Lenders and (b) the Administrative Agent
shall have received payment of the fees payable under Section 4 below (to the
extent due on the Amendment Effective Date) and any out-of-pocket expenses of
the Administrative Agent payable by the Borrower that have been invoiced before
the Amendment Effective Date. This Amendment and Restatement shall terminate on
April 22, 1999, unless all conditions set forth in this section shall have been
satisfied at or before 5 p.m., New York City time, on that date.
SECTION 4. Amendment and Restatement Fee. The Borrower agrees to pay
------------------------------
to each Lender that executes and delivers a copy of this Amendment and
Restatement to the Administrative Agent (or its counsel) on or prior to April
20, 1999, an amendment and restatement fee in an amount equal to 0.125% of the
sum of such Lender's Revolving Commitment (whether used or unused) and
outstanding Term Loans, in each case as of the Amendment Effective Date;
provided that the Borrower shall have no liability for any such amendment and
- --------
restatement fee if this Amendment and Restatement does not become effective.
Such amendment and restatement fee shall be payable (i) on the Amendment
Effective Date, to each Lender entitled to receive such fee as of the Amendment
Effective Date and (ii) in the case of any Lender that becomes entitled to such
fee after the Amendment Effective Date, within two Business Days after such
Lender becomes entitled to such fee.
SECTION 5. Applicable Law. This Amendment and Restatement shall be
---------------
construed in accordance with and governed by the law of the State of New York.
SECTION 6. No Other Amendments. Except as expressly set forth
--------------------
herein, this Amendment and Restatement shall not by implication or otherwise
limit, impair, constitute a waiver of, or otherwise affect the rights and
remedies of any party under the Credit Agreement, nor alter, modify, amend or in
any way affect any of the terms, conditions, obligations, covenants or
agreements contained in the Credit Agreement, all of which are ratified and
affirmed in all respects and shall continue in full force and effect.
SECTION 7. Counterparts. This Amendment and Restatement may be
-------------
executed in two or more counterparts, each of which shall constitute an
original, but all of which when taken together shall constitute but one
contract. Delivery of an executed counterpart of a signature page of this
Amendment and Restatement by facsimile transmission shall be as effective as
<PAGE>
delivery of a manually executed counterpart of this Amendment and Restatement.
SECTION 8. Headings. Section headings used herein are for
---------
convenience of reference only, are not part of this Amendment and Restatement
and are not to affect the construction of, or to be taken into consideration in
interpreting, this Amendment and Restatement.
SECTION 9. Expenses. The Borrower shall reimburse the Administrative
---------
Agent for its reasonable out-of-pocket expenses incurred in connection with this
Amendment and Restatement, including the reasonable fees and expenses of
Cravath, Swaine & Moore, counsel for the Administrative Agent.
IN WITNESS WHEREOF, Holdings, the Borrower and the undersigned Lenders
have caused this Amendment and Restatement to be duly executed by their duly
authorized officers as of the date first above written.
J. CREW GROUP, INC.,
by
--------------------------
Name:
Title:
J. CREW OPERATING CORP.,
by
--------------------------
Name:
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE J. CREW
OPERATING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF
INCOME FOR THE TWELVE MONTHS ENDED JANUARY 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 9,643
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 156,022
<CURRENT-ASSETS> 221,068
<PP&E> 184,327
<DEPRECIATION> (64,577)
<TOTAL-ASSETS> 353,779
<CURRENT-LIABILITIES> 118,674
<BONDS> 194,000
0
0
<COMMON> 0
<OTHER-SE> (4,445)
<TOTAL-LIABILITY-AND-EQUITY> 353,779
<SALES> 816,221
<TOTAL-REVENUES> 824,258
<CGS> 460,592
<TOTAL-COSTS> 817,596
<OTHER-EXPENSES> (10,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,560
<INCOME-PRETAX> (11,898)
<INCOME-TAX> 4,227
<INCOME-CONTINUING> (7,671)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,671)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
