<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 29, 2000
Commission File Number 333-42423
J. CREW OPERATING CORP.
(Exact name of registrant as specified in its charter)
Delaware 22-3540930
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation 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, 2000, 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", "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. We may also make written or
oral forward looking statements in our periodic reports to the Securities and
Exchange Commission on Form 10Q, 8K, etc., in press releases and other written
materials and in oral statements made by our officers, directors or employees to
third parties. Statements that are not historical facts, including statements
about our beliefs and expectations, are forward-looking statements. 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, performance 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, 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. These statements are based on current plans, estimates
and projections, and therefore you should not place undue reliance on them.
Forward looking statements speak only as of the date they are made and we
undertake no obligation to update publicly any of them in light of new
information or future events.
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 1995 and 1996 and on the Saturday closest to January 31 in
the following calendar year for fiscal years 1997, 1998 and 1999. Accordingly,
fiscal years 1995, 1996, 1997, 1998 and 1999 ended on February 2, 1996, January
31, 1997, January 31, 1998, January 30, 1999 and January 29, 2000. All fiscal
years for which financial information is included had 52 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 17-year history through the
circulation of more than 700 million 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
1
<PAGE>
J. Crew brand sales are derived from its core offerings of classics, durables
and sport clothing, the demand for which the Company believes is stable and
resistant to changing fashion trends. The Company believes that the J. Crew
image and merchandising strategy appeal to college-educated, professional and
affluent customers who, in the Company's experience, have demonstrated strong
brand loyalty and a tendency to make repeat purchases.
J. Crew products are distributed exclusively through the Company's retail and
factory outlet stores, catalogs and the Company's Internet site, jcrew.com. The
Company currently circulates over 75 million J. Crew catalogs per annum and
operates 81 J. Crew retail stores and 42 J. Crew factory outlet stores. In
addition, J. Crew products are distributed through 70 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 Direct, J. Crew Retail,
and J. Crew Factory Outlets, each of which operate under the J. Crew brand name.
In 1999, products sold under the J. Crew brand contributed $716.6 million in
revenues. J. Crew brand revenues in 1999 were comprised of $333.6 million from
J. Crew Retail, $278.5 million from J. Crew Direct, $102.0 million from J. Crew
Factory Outlet and $2.5 million of licensing revenues. The Company also markets
to its customers through its Internet site (jcrew.com). Revenues derived from
the Internet, which were $65.2 million for 1999, are included in J. Crew Direct
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. An
additional gain of $1.0 million was recognized in fiscal 1999 from the reversal
of certain estimated liabilities recorded at the date of sale.
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
realizable 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.
In February 2000 the Company sold certain intellectual property assets to
Spiegel Catalog Inc. for $3.9 million. In connection with this sale the Company
agreed to cease the fulfillment of catalog orders but retained the right to
operate its outlet stores and conduct other liquidation sales of inventories
through December 31, 2000. After consideration of the proceeds of the sale and
other terms of the agreement the Company provided an additional $4,000,000 to
write down inventories to net realizable value as of January 29, 2000.
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 Direct operations in Lynchburg, Virginia and a 192,500-square-foot
telemarketing and distribution center in Asheville, North Carolina servicing the
J. Crew Retail and Factory Outlet store operations.
As of January 29, 2000, the Company operated 81 J. Crew retail stores and 42
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.
2
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Routine litigation is pending against the Company with respect to matters
incidental to its business. Although the outcome of litigation cannot be
predicted with certainty, in the opinion of the Company, none of those actions
should have a material adverse effect on the financial condition of the Company.
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 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.
ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
3
<PAGE>
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 29,
2000 and notes thereto included elsewhere in this Annual Report on Form 10-K.
Fiscal 1999 Compared to Fiscal 1998
Revenues
- --------
Revenues decreased 13.1% to $716.6 million in the fiscal year ended January 29,
2000 from $824.3 million in the fiscal year ended January 30, 1999. The decrease
in revenues was attributable to the sale of Popular Club Plan, effective as of
October 30, 1998 and the discontinuance of Clifford & Wills operations which
resulted in a decrease of $198.4 million. This decrease was offset by increases
of $59.6 million in J. Crew Retail and $25.8 million in J.Crew Direct. Excluding
Popular Club Plan and Clifford & Wills, revenues increased 14.5% from $625.9
million in fiscal 1998 to $716.6 million in fiscal 1999.
J. Crew Retail revenues increased by 21.8% from $274.0 million in fiscal 1998 to
$333.6 million in fiscal 1999. The percentage of the Company's total revenues
derived from J. Crew Retail increased to 46.6% in fiscal 1999 compared to 33.2%
in fiscal 1998. This increase was attributed to $54.6 million from the opening
of new stores and $5.0 million from an increase in comparable store sales of
1.8%. The number of stores opened at January 29, 2000 increased to 81 from 65 at
January 30, 1999.
J. Crew Direct revenues (which includes revenues from catalog and internet
operations) increased by 10.2% from $252.8 million in fiscal 1998 to $278.5
million in fiscal 1999. The percentage of the Company's total revenues derived
from J. Crew Direct increased to 38.9% in fiscal 1999 from 30.7% in fiscal 1998.
This increase was primarily due to an increase in net sales from j.crew.com
which increased to $65.2 million fiscal 1999 from $21.6 million in fiscal
1998.Catalog sales decreased to $213.3 million in fiscal 1999 from $231.2
million in fiscal 1998 as the Company adopted initiatives to migrate catalog
customers to the Internet.
J. Crew Factory Outlet revenues increased by 5.7% from $96.5 million in fiscal
1998 to $102.0 million in fiscal 1999. The percentage of the Company's total
revenues derived from J. Crew Factory Outlet increased to 14.2% in fiscal 1999
from 11.7% in fiscal 1998. Comparable store sales for J. Crew Factory Outlet
increased by 3.8% in fiscal 1999. J. Crew Factory Outlet closed three stores in
fiscal 1999 and 42 stores were open at January 29, 2000.
Cost of sales, including buying and occupancy costs
- ---------------------------------------------------
Cost of sales, including buying and occupancy costs as a percentage of revenues
decreased to 55.1% in fiscal 1999 compared to 55.9% in fiscal 1998. Excluding
the operations of PCP and C&W, cost of sales including buying and occupancy
costs decreased to 55.1% in fiscal 1999 from 56.2% in fiscal 1998. This decrease
was caused primarily by an increase in initial mark up caused by a decrease in
the cost of merchandise.
4
<PAGE>
Selling, general and administrative expenses
- --------------------------------------------
Selling, general and administrative expenses decreased to $281.0 million in
fiscal 1999 (39.2% of revenues) from $335.7 million in fiscal 1998 (40.7% of
revenues). Approximately $94.4 million of selling, general, and administrative
expenses in fiscal 1998 resulted from the operations of PCP and C&W.
Selling, general and administrative expenses of the J.Crew brand increased to
$281.0 million in fiscal 1999 (39.2% of revenues) from $241.3 million in fiscal
1998 (38.6% of revenues). This increase resulted primarily from an increase in
general and administrative expenses of $31.8 million due to (a) an increase in
the number of retail stores in operation during fiscal 1999 compared to fiscal
1998; (b) an increase in consulting fees and other expenses attributable to
information technology initiatives; and (c) an increase in marketing expenses of
approximately $8 million, primarily direct advertising, devoted to increasing
customer awareness of the Company's Internet site.
Selling expenses were $75.7 million in fiscal 1999 (10.6% of revenues) compared
to $67.8 million in fiscal 1998 (10.8% of revenues). This increase was due to
$6.0 million of direct advertising related to the Internet and an increase in
pages circulated from 8.8 billion pages in fiscal 1998 to 9.3 billion pages in
fiscal year 1999, an increase of 5.7%. These increases in selling expenses were
partially offset by decreases related to efficiencies in the catalog production
process.
Write-down of assets and other charges in connection with the discontinuance of
- -------------------------------------------------------------------------------
Clifford & Wills
- ----------------
An additional charge of $4.0 million was incurred in fiscal 1999 to write down
the carrying value of inventories to net realizable value. (See note 2 to the
consolidated financial statements).
Other charges
- -------------
Other charges in fiscal 1999 include $7.0 million relating to the write off of
certain software development costs which were impaired by the decision of the
Company to adopt an enterprise resource planning system for its future
information technology requirements.
Gain on sale of subsidiary
- --------------------------
An additional gain of $1.0 million was recognized in fiscal 1999 from a
reduction in certain estimated liabilities established at the time of sale.(See
note 2 to the consolidated financial statements).
Interest expense
- ----------------
Interest expense, net decreased to $26.6 million in fiscal 1999 from $28.6
million in fiscal 1998. This decrease resulted primarily from lower average
borrowings during fiscal 1999 under the Revolving Credit Facility and the
reduced term loan balances which was offset by interest related to the
settlement of a sales and use tax assessment. Average borrowings under a
Revolving Credit Facility required to fund inventories and capital expenditures
were $30.8 million in fiscal 1999 and $47.5 million in fiscal 1998.
Income Taxes
- ------------
The effective tax rate was 54.7% in fiscal 1999 compared to (35.5)% in fiscal
1998. The increase in the effective tax rate in 1999 was primarily due to
pre-tax earnings in fiscal 1999 compared to pre-tax losses in fiscal 1998. The
excess of the effective rate in fiscal 1999 over the normal statutory rates
resulted from the inability of certain subsidiaries to deduct net operating
losses for state tax purposes.
5
<PAGE>
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 for a notional principal amount of $50 million which expires
in October 2000. This agreement converts the interest rate to a fixed rate of
6.23%. If this interest rate swap agreement was settled on January 29, 2000 the
Company would have received $62,000.
The Company enters into letters of credit to facilitate the international
purchase of merchandise. The letters of credit are primarily denominated in U.S.
dollars. Outstanding letters of credit at January 29, 2000 were approximately
$38.3 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 29, 2000, there was a forward
foreign exchange contract outstanding to sell 120 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
ITEM 11 EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
6
<PAGE>
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) Consolidated Balance Sheets - as of January 29, 2000 and
January 30, 1999
(iii) Consolidated Statements of Operations - Years ended January
29, 2000, January 30, 1999 and January 31, 1998
(iv) Consolidated Statements of Cash Flows - Years ended January
29, 2000, January 30, 1999 and January 31, 1998
(v) 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 has not filed any reports on Form 8-K during the fiscal
quarter ended January 29, 2000.
(c) Exhibits
See Item 14(a)3 above.
(d) Financial Statement Schedules
See Item 14(a)1 and 14(a)2 above.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
J. CREW OPERATING CORP.
Date: April 17, 2000
By: /s/ Mark A. Sarvary
----------------------
Mark A. Sarvary
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/ Mark A. Sarvary Chief Executive Officer April 17, 2000
------------------------------ (Principal Executive Officer)
Mark A. Sarvary
/s/ Scott M. Rosen Executive Vice President, Chief Financial April 17, 2000
------------------------------ Officer (Principal Financial Officer)
Scott M. Rosen
/s/ Nicholas Lamberti Vice President, Corporate Controller April 17, 2000
------------------------------ (Principal Accounting Officer)
Nicholas Lamberti
/s/ David Bonderman Director April 17, 2000
------------------------------
David Bonderman
/s/ Richard W. Boyce Director April 17, 2000
------------------------------
Richard W. Boyce
/s/ James G. Coulter Director April 17, 2000
------------------------------
James G. Coulter
/s/ Emily Woods Director April 17, 2000
------------------------------
Emily Woods
</TABLE>
S-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
J. Crew Operating Corp. and Subsidiaries:
We have audited the consolidated financial statements of J. Crew Operating Corp.
and subsidiaries (the "Company") as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our 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 29, 2000 and January 30, 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 29, 2000, in conformity with generally accepted
accounting principles. Also, in our opinion, the related 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.
KPMG LLP
March 31, 2000
F-1
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 29, January 30,
Assets 2000 1999
------ ---- ----
(in thousands)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 38,693 $ 9,643
Merchandise inventories 129,928 156,022
Prepaid expenses and other current assets 30,083 46,729
Net assets held for disposal 8,927 17,377
----------- ----------
Total current assets 207,631 229,771
=========== ==========
Property and equipment - at cost:
Land 1,460 1,460
Buildings and improvements 11,363 11,167
Furniture, fixtures and equipment 60,355 53,344
Leasehold improvements 130,054 114,424
Construction in progress 12,851 3,932
----------- ----------
216,083 184,327
Less accumulated depreciation and amortization 77,683 64,577
----------- ----------
138,400 119,750
----------- ----------
Deferred income tax assets 6,817 7,954
Other assets 10,758 12,961
----------- ----------
Total assets $ 363,606 $ 370,436
=========== ==========
Liabilities and Stockholder's Deficit
-------------------------------------
Current liabilities:
Notes payable - bank $ -- $14,000
Accounts payable 40,951 40,130
Other current liabilities 70,222 59,175
Federal and state income taxes payable 15,956 12,550
Deferred income tax liabilities 5,842 9,476
----------- ----------
Total current liabilities 132,971 135,331
----------- ----------
Long-term debt 184,000 194,000
----------- ----------
Deferred credits and other long-term liabilities 48,277 44,799
----------- ----------
Due to J.Crew Group, Inc. 903 751
----------- ----------
Stockholder's deficit (2,545) (4,445)
----------- ----------
Total liabilities and stockholder's deficit $ 363,606 $ 370,436
=========== ==========
</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 29, January 30, January 31,
----------- ---------- -----------
2000 1999 1998
---- ---- ----
(in thousands)
Revenues:
<S> <C> <C> <C>
Net sales $714,119 $816,221 $822,840
Other 2,505 8,037 11,191
----- ----- ------
716,624 824,258 834,031
Operating costs and expenses:
Cost of goods sold, including buying and occupancy
costs 394,813 460,592 465,168
Selling, general and administrative expenses 280,974 335,709 359,811
Write off of software development costs 7,018 --
Write down of assets and other charges in
connection with discontinuance of Clifford & Wills 4,000 13,300 --
Termination costs and other non-recurring employment
contract charges - 7,995 --
------------- ----- --
686,805 817,596 824,979
------- ------- -------
Income from operations 29,819 6,662 9,052
Interest expense - net 26,626 28,560 17,524
Gain on sale of Popular Club Plan (1,000) (10,000) --
Expenses incurred in connection with the Recapitalization -- -- 20,707
------------ ------------- ------
Income (loss) before income taxes and extraordinary item 4,193 (11,898) (29,179)
(Provision) benefit for income taxes (2,293) 4,227 4,257
------- ----- -----
Income/(loss) before extraordinary item 1,900 (7,671) (24,922)
----- ------- --------
Extraordinary item - loss on early retirement of debt
(net of income tax benefit of $3,127) -- -- (4,500)
-- -- -------
Net income (loss) $1,900 $(7,671) $(29,422)
====== ======== ========
</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 29, January 30, January 31,
----------- ----------- -----------
2000 1999 1998
---- ---- ----
(in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 1,900 $ (7,671) $ (29,422)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 19,241 15,972 15,255
Write off of software development costs 7,018 -- --
Amortization of deferred financing costs 1,950 1,891 892
Deferred income taxes (2,497) (7,464) (4,005)
Gain on sale of subsidiary (1,000) (10,000)
Write down of assets and other charges
in connection with discontinued catalog 4,000 15,000 --
Loss on early retirement of debt --- -- 7,627
Provision for losses on accounts receivable -- 5,627 7,343
Changes in operating assets and liabilities:
Accounts receivable -- (8,242) 33,902
Merchandise inventories 26,094 (15,608) (5,106)
Prepaid expenses and other current assets 16,646 (536) (4,081)
Net assets held for disposal 4,450 -- --
Other assets (770) (2,559) (587)
Accounts payable 821 7,415 (37,726)
Other liabilities 13,044 2,550 17,727
Federal and state income taxes payable 3,406 12,299 (9,268)
----------- ---------- -----------
Net cash (used in) provided by operating activities 94,303 8,674 (7,449)
----------- ---------- -----------
Cash flows from investing activities:
Capital expenditures (48,684) (41,177) (43,134)
Proceeds from construction allowances 7,431 4,823 11,767
Proceeds from sale of subsidiary, net of related expenses - 37,157 -
----------- ---------- -----------
Net cash provided by (used in) investing activities (41,253) 803 (31,367)
----------- ---------- -----------
Cash flows from financing activities:
(Decrease)/increase in notes payable, bank (14,000) 14,000 --
Issuance of long-term debt -- -- 220,000
Repayment of long-term debt (10,000) (26,000) (92,863)
Costs incurred in connection with the issuance of debt -- -- (13,929)
Dividends paid -- -- (69,358)
----------- ---------- -----------
Net cash provided by (used in) financing activities (24,000) (12,000) 43,850
----------- ---------- -----------
Increase (decrease) in cash and cash equivalents 29,050 (2,523) 5,034
Cash and cash equivalents at beginning of year 9,643 12,166 7,132
----------- ---------- -----------
Cash and cash equivalents at end of year $38,693 $9,643 $12,166
=========== ========== ===========
Supplementary cash flow information:
Income taxes paid (refunded) $(7,570) $(515) $ 5,180
=========== ========== ===========
Interest paid $ 24,792 $ 27,763 $12,655
=========== ========== ===========
</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 29, 2000, January 30, 1999, and January 31, 1998
(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 it's
wholly-owned subsidiaries (collectively, the "Company"). Operating
Corp. is a wholly-owned subsidiary of J.Crew Group, Inc. ("Holdings").
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.
The fiscal years 1999, 1998 and 1997 ended on January 29, 2000 (52
weeks), January 30, 1999 (52 weeks) and January 31, 1998 (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 $23,896,000 and $755,000 at January 29, 2000 and January
30, 1999, 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 29, 2000, January 30, 1999 and January 31, 1998
(e) 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.
(f) Advertising and Catalog Costs
Direct response advertising which consists primarily of catalog
production and mailing costs, are capitalized and amortized over the
expected future revenue stream. 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 29, 2000
and January 30, 1999 were $14,300,000 and $21,130,000. Catalog costs,
which are reflected in selling and administrative expenses, for the
fiscal years 1999, 1998 and 1997 were $84,077,000, $116,515,000, and
$131,103,000.
All other advertising costs are expensed as incurred. Advertising
expenses were $6,671,000 for fiscal year 1999. Prior year amounts
were not significant.
(g) 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 twenty years. Furniture, fixtures and equipment are
depreciated by the straight-line method over the estimated useful
lives, ranging from three to ten years. Leasehold improvements are
amortized over the shorter of their useful lives or related lease
terms.
Significant systems development costs are capitalized and amortized
on a straight-line basis over periods ranging from three to five
years. Approximately $6.0 million of systems development costs were
capitalized in fiscal 1999.
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.
(h) Other Assets
Other assets consist primarily of debt issuance costs of $9,297,000
and $10,633,000 at January 29, 2000 and January 30, 1999, which are
amortized over the term of the related debt agreements.
(i) 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."
F-6
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31, 1998
(j) Revenue Recognition
Revenue is recognized for catalog and Internet 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.
(k) Store Preopening Costs
Costs associated with the opening of new retail and outlet stores are
expensed as incurred.
(l) 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 29, 2000, January 30, 1999 and January
31, 1998.
(m) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(n) 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.
During fiscal 1999 the Company wrote off $7,018,000 of capitalized
computer software costs which were impaired by the Company's decision
to adopt an enterprise resource planning system for its future
information technology requirements.
(o) 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, as
determined by management.
(p) Reclassifications
Certain amounts in the prior year have been reclassified to conform
with the current year presentation.
F-7
<PAGE>
J. CREW OPERATING CORP AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31, 1998
(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. An additional gain of $1.0
million was recognized in fiscal 1999 from the reversal of certain
estimated liabilities recorded at the date of sale. 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"). Revenues of
C&W included in the statement of operations for the year ended January
30, 1999 were $74.3 million. Revenues and expenses for fiscal 1999
were not material and as a result have been netted in the accompanying
consolidated statement of operations.
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 write down of $9,400,000 was required due to lower than
anticipated recovery rates on the liquidation of these inventories.
Additionally fourth quarter charges of $1,700,000 included in selling
expense were incurred relating to deferred catalog costs.
In February 2000 the Company sold certain intellectual property assets
to Spiegel Catalog Inc. for $3.9 million. In connection with this sale
the Company agreed to cease the fulfillment of catalog orders but
retained the right to operate its outlet stores and conduct other
liquidation sales of inventories through December 31, 2000. After
consideration of the proceeds from the sale and other terms of the
agreement the Company provided an additional $4,000,000 to write down
inventories to net realizable value as of January 29, 2000.
F-8
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31, 1998
(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
-----------
(4) Other Current Liabilities
Other current liabilities consist of:
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
---- ----
<S> <C> <C>
Customer liabilities $8,855,000 $6,861,000
Accrued catalog and marketing costs 11,503,000 5,155,000
Taxes, other than income taxes 2,372,000 3,834,000
Accrued interest 4,926,000 5,042,000
Accrued occupancy 6,957,000 4,059,000
Reserve for sales returns 5,011,000 3,473,000
Accrued compensation (including employment
contract termination costs of $2,850,000 at
January 30, 1999) 7,411,000 11,984,000
Other 23,187,000 18,767,000
----------- -----------
$70,222,000 $59,175,000
----------- -----------
</TABLE>
F-9
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31, 1998
(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
pursuant to this agreement. The sale of receivables resulted in a gain of
$1,472,000 during the year ended January 31, 1998. Finance charge income,
including the gain on sale, was $5,325,000 and $8,294,000 for fiscal years
1998 and 1997.
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).
(6) Long-Term Debt
January 29, January 30,
2000 1999
---- ----
Term loan (a) $34,000,000 $44,000,000
10-3/8% senior subordinated notes (b) 150,000,000 150,000,000
----------- -----------
Total $184,000,000 $194,000,000
============ ===========
(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 29, 2000 and January 30, 1999 (see Note
7). The term loan is repayable in quarterly installments of
$1,925,000 from February 2001 through November 2001 and $3,287,500
from February 2002 through November 2003. Proceeds of $26.0 million
from the sale of PCP were used to prepay the term loan in 1998 and
proceeds of $10.0 million from the sale of assets of its discontinued
C&W subsidiary were used to prepay the term loan in 1999.
(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.
F-10
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31, 1998
The maturities of long-term debt required during the next five years are:
Fiscal year Amount
----------- ------
2000 $--
2001 7,700,000
2002 13,150,000
2003 13,150,000
2004 --
(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 $58,000,000
during fiscal year 1999 and $104,000,000 during fiscal years 1998 and
1997; and average borrowings were $30,800,000, $47,500,000, and
$54,300,000. Borrowings outstanding under the Company's revolving
credit agreement were $14,000,000 at January 30, 1999. There were no
borrowings outstanding at January 29, 2000.
Outstanding letters of credit established to facilitate international
merchandise purchases at January 29, 2000 and January 30, 1999
amounted to $38,315,000 and $41,628,000.
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 prohibit the payment of cash dividends on shares of common stock.
F-11
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31,1998
(8) Commitments and Contingencies
(a) Operating Leases
As of January 29, 2000, 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 29, 2000 aggregate minimum rentals in future periods
are as follows:
Fiscal year Amount
----------- ------
2000 $36,900,000
2001 34,720,000
2002 33,611,000
2003 33,317,000
2004 29,609,000
Thereafter 132,817,000
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 1999, 1998 and 1997 was $ 39,474,000,
$42,347,000 and $35,753,000, including contingent rent based on
store sales of $2,600,000, $3,270,000, and $2,877,000.
(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.
(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 $1,320,000 for fiscal 1999 and $1,780,000
for fiscal 1998 and 1997.
(10) License Agreement
The Company has a licensing agreement through January 2003 with
Itochu Corporation, 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 1999, 1998 and 1997 was $2,505,000, $2,712,000 and $2,897,000.
F-12
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31,1998
(11) Interest Expense - Net
Interest expense, net consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest expense $26,864,000 $29,616,000 $17,666,000
Interest income (238,000) (1,056,000) (142,000)
--------- ----------- ---------
Interest expense, net $26,626,000 $28,560,000 $17,524,000
----------- ---------- ----------
</TABLE>
Interest expense in fiscal 1999 includes $1,029,000 incurred in
connection with the settlement of a sales and use tax assessment.
Interest income in fiscal 1998 includes $979,000 related to a federal
income tax refund.
(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 $160,310,000 and $178,520,000 at January 29, 2000 and
January 30, 1999, and is based on dealer quotes or quoted market
prices of the same or similar instruments The carrying amounts of
long-term debt were $184,000,000 and $194,000,000 at January 29, 2000
and January 30, 1999. The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents, 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.
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. This agreement 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 had been settled on January 29, 2000,
the Company would have received $62,000.
At January 29, 2000, the Company had a forward foreign exchange
contract outstanding to sell 120 million yen on March 31, 2000. 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. 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.
(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.
F-13
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31, 1998
The income tax provision (benefit) consists of:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Current:
<S> <C> <C> <C>
Foreign $250,000 $270,000 $309,000
Federal 3,100,000 1,870,000 (866,000)
State and local 1,440,000 1,097,000 305,000
------------ ------------- ------------
4,790,000 3,237,000 (252,000)
------------ ------------- ------------
Deferred - Federal, state and local (2,497,000) (7,464,000) (4,005,0000
------------ ------------- ------------
Income taxes before tax effect of extraordinary items 2,293,000 (4,227,000) (4,257,000)
Tax effect of extraordinary items - -- (3,127,000)
------------ ------------- ------------
Total $2,293,000 $(4,227,000) $(7,384,000)
============ ============= ============
</TABLE>
A reconciliation between the provision (benefit) for income taxes based on the
U.S. Federal statutory rate and the Company's effective rate is as follows.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate 35.0% (35.0)% (35.0)%
State and local income taxes, net
of federal benefit 14.4 (2.1) (2.0)
Nondeductible expenses and other 5.3 1.6 16.9
----- ------- -------
Effective tax rate 54.7% (35.5)% (20.1)%
===== ======= =======
</TABLE>
The tax effect of temporary differences which give rise to deferred tax assets
and liabilities are:
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
---- ----
Deferred tax assets:
<S> <C> <C>
State and local net operating loss carryforwards $3,034,000 $4,132,000
Difference in book and tax basis
for property and equipment 1,885,000 2,302,000
Reserve for sales returns 2,012,000 1,396,000
Other 2,914,000 1,922,000
--------------- -------------
9,845,000 9,752,000
--------------- -------------
Deferred tax liabilities:
Prepaid catalog expenses and other
prepaid expenses (8,870,000) (11,274,000)
--------------- -------------
Net deferred income tax assets/(liabilities) $ 975,000 $ (1,522,000)
=============== =============
</TABLE>
F-14
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31, 1998
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 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 deficit is as follows:
<TABLE>
<CAPTION>
Year Ended
January 29, 2000 January 30, 1999
---------------- ----------------
<S> <C> <C>
Balance-beginning of year.................... $(4,445,000) $3,226,000
Net income/(loss)............................ 1,900,000 (7,671,000)
--------- -----------
Balance-end of year.......................... $(2,545,000) $(4,445,000)
============ ============
</TABLE>
(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
fiscal 1998, tax gross-up payments of $5,145,000 were made on behalf
of senior executives relating to restricted stock grants.
(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. Management evaluates the results of
operations of its segments based on income from operations.
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-15
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31,1998
Income from operations relating to Clifford & Wills 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. Fiscal 1999 includes an additional charge of $4,000,000 to write
down inventories to net realizable value. (See note 2 to the consolidated
financial statements).
Corporate and other expenses include expenses incurred by the corporate office
and certain non-recurring expenses that are not allocated to specific business
units. Corporate and other expenses in fiscal 1999 include the write off of
impaired software development costs. Corporate and other expenses in fiscal 1998
include tax gross-up payments related to restricted stock grants and employee
contract termination costs. Corporate and other expenses in fiscal 1997 include
a one-time bonus expense related to the employment of a senior executive and
non-recurring consulting fees incurred as a result of the Recapitalization.
Segment assets represent the assets used directly in the operations of each
business unit such as inventories and property and equipment. Corporate assets
consist principally of investments, deferred financing costs and certain
capitalized software costs.
The accounting policies used for segment reporting are consistent with those
described in the summary of significant accounting policies.
<TABLE>
<CAPTION>
[$ in thousands]
Revenues 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
J. Crew $ 716,624 $ 625,897 $ 577,594
Clifford & Wills --- 74,303 72,063
PCP --- 124,058 184,374
--- ------- -------
716,624 824,258 834,031
======= ======= =======
Income from operations
J. Crew 41,052 34,736 8,393
Clifford & Wills (4,000) (16,694) (1,186)
PCP -- (2,701) 7,550
Corporate and other expenses (7,233) (8,679) (5,705)
------- ------- -------
Income from operations 29,819 6,662 9,052
------ ----- -----
Interest expense, net (26,626) (28,560) (17,524)
Gain on sale of PCP 1,000 10,000 -
Expenses incurred in connection with the
Recapitalization - ---- (20,707)
- ---- --------
Income/(loss) before income taxes $4,193 $(11,898) $(29,179)
====== ========= =========
Depreciation and amortization
J. Crew $19,051 $14,455 $13,645
Clifford & Wills --- 327 199
PCP --- 1,015 1,279
Corporate 190 175 132
--------- --- ---
$19,241 $15,972 $15,255
======= ======= =======
</TABLE>
F-16
<PAGE>
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31, 1998
<TABLE>
<CAPTION>
[$ in thousands]
Identifiable assets 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
J. Crew $305,552 $324,949 $314,186
Clifford & Wills 8,927 17,377 29,078
PCP --- -- 57,811
Corporate 49,127 28,110 18,369
-------- ------ ------
$363,606 $370,436 $419,444
======== ======== ========
Capital expenditures (net of disposals)
J. Crew $39,435 $34,084 $41,149
Clifford & Wills -- (59) (98)
PCP -- 5,264 2,058
Corporate 9,249 1,888 25
----- ----- --
$48,684 $41,177 $43,134
======= ======= =======
</TABLE>
F-17
<PAGE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
beginning charged to cost charged to other ending
balance and expenses accounts deductions balance
($ in thousands)
Allowance for doubtful accounts
- -------------------------------
(deducted from accounts receivable)
fiscal year ended:
<S> <C> <C> <C> <C> <C>
January 29, 2000 $--------- $--------- $--------- $----------- $--------
(5,486)(a)
January 30, 1999 5,438 5,627 ---- (5,579)(c) ---
January 31, 1998 4,357 7,343 ---- (6,262)(a) 5,438
Inventory reserve
- -----------------
(deducted from inventories)
fiscal year ended:
January 29, 2000 $6,122 $(1,675)(b) $--------- -- $4,447
(2,200)(c)
January 30, 1999 4,400 4,929(b) ---- (1,007)(d) 6,122
January 31, 1998 3,289 1,111(b) ---- ---- 4,400
Allowance for sales returns
- ---------------------------
(included in other current liabilities)
fiscal year ended:
January 29, 2000 $3,473 1,538(b) ---- $5,011
500(c) ---
January 30, 1999 3,529 844(b) ---- 400(d) 3,473
January 31, 1998 2,406 1,123(b) ---- ---- 3,529
</TABLE>
(a) accounts deemed to be uncollectible
(b) The inventory 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 operation)
F-18
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
3.1 Restated Certificate of Incorporation of J. Crew Operating
Corp. (incorporated by reference to Exhibit 3.1 to Registrant's
Form S-4 Registration Statement, File No. 333-42423, filed
December 16, 1997 (the "Registration Statement")
3.2 By-laws of Registrant (incorporated by reference to Exhibit
3.14 to the 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
(incorporated by reference to Exhibit 4.2(b) of Registrant's
Annual Report on Form 10-K for the fiscal year ended January
30, 1999 ("1999 Form 10-K"))
4.2(c) Amendment dated as of March 18, 1998 to the Credit Agreement
(incorporated by reference to Exhibit 4.2(c) of the 1999 Form
10-K)
4.2(d) Amendment and Restatement Agreement dated as of April 20, 1999
relating to the Credit Agreement (incorporated by reference to
Exhibit 4.2(d) of the 1999 Form 10-K)
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)
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)
<PAGE>
Exhibit
No. Description
--- -----------
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(a)+ 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)
10.1(b)+ Letter Agreement, dated February 4, 2000, between J. Crew
Group, Inc. and Emily Woods
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(a)+ Employment Agreement, dated May 3, 1999, between J.Crew Group,
Inc. and Mark Sarvary (incorporated by reference to Exhibit
10.1 to Registrant's Quarterly Report on Form 10-Q for the
period ended May 1, 1999)
10.5(b)+ Letter Agreement, dated August 9, 1999, between Mark Sarvary
and J. Crew Operating Corp.
10.6+ Letter Agreement, dated September 30, 1999, between J. Crew
Operating Corp. and Carol Sharpe
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)
<PAGE>
Exhibit
No. Description
--- -----------
10.11 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)
27.1 Financial Data Schedule
- ----------
+Management contract or compensatory plan or arrangement.
<PAGE>
Exhibit 10.1(b)
---------------
J. Crew Group, Inc.
770 Broadway
New York, NY 10003
February 4, 2000
Emily Woods
227 West 17th Street
8th Floor
New York, NY 10013
Dear Emily:
We are delighted that you have decided to continue your relationship with
J. Crew Group, Inc. (the "Company") and its operating subsidiary, J. Crew
Operating Corp., under the new arrangements described below. This letter shall
constitute an amendment to your Employment Agreement with the Company, dated
October 17, 1997 (the "Employment Agreement"). All defined terms used herein
and not otherwise defined herein shall have the meanings ascribed to such terms
in the Employment Agreement. Except as provided herein, all terms and
conditions of the Employment Agreement shall remain in full force and effect.
I. Employment Duties and Responsibilities.
Effective February 7, 2000, in lieu of your duties, responsibilities and
title provided in Section 1(a) of the Employment Agreement, you will (i)
continue to be the Chairman of the Board of Directors of the Company (the
"Board"), and shall be identified as such in all internal and external
communications in which you are referred to or mentioned, each of which shall be
subject to your prior review and approval, (ii) serve on the Strategic Planning
Committee of the Board (which will consist of yourself and Messrs. Bonderman,
Coulter and Sarvary as long as each of you are serving on the Board), and (iii)
perform certain services for the Company from time to time as you and the
Company may mutually agree and (iv) serve as a spokesperson for the Company at
your and the Company's discretion, and in such connection shall be kept apprised
of all public relations and other similar inquiries and requests concerning
yourself. The provisions of Sections 1(b) and (c) of the Employment Agreement
shall no longer apply, and you shall not be required to devote more than four
days per month to the affairs of the Company, although you shall be free to do
so at your discretion. The foregoing services shall be referred to in this
letter as the "Continuing Services." The Continuing Services and the title
referred to above shall constitute your duties, responsibilities and title under
the Employment Agreement.
II. Effect of Changed Responsibilities.
Notwithstanding the modification effected hereby of your employment duties,
but subject to your option to terminate the Employment Period as set forth in
the following paragraph, the Employment Period shall continue notwithstanding
the changes to the Employment Agreement effected hereby. During the
continuation of the Employment Period, your entitlement to Compensation pursuant
to Section 2 of the Employment Agreement, and all of the other rights and
benefits provided to you under the Employment Agreement shall continue without
any change. Without limiting the generality of the foregoing, during the
continuation of the Employment Period, your current office and its use will
remain as they are currently.
<PAGE>
The Company hereby agrees and acknowledges that the above-described change
in duties and responsibilities shall constitute Good Reason under the Employment
Agreement and you may terminate your employment under the Employment Agreement
at any time after February 7, 2000 pursuant to the procedures provided in
Section 4 of the Employment Agreement and such termination shall be deemed to be
a termination by the Company without Cause. Accordingly, upon such a
termination you shall be entitled to all of the payments and benefits under
Section 5(a) of the Employment Agreement as of the Date of Termination, and all
of the other terms and provisions of the Employment Agreement and of the
Stockholders Agreement and of all other agreements and plans applicable to
Employee relevant to a termination by the Company without Cause shall be
applicable.
III. Emily Woods Name.
The Company shall relinquish any proprietary rights to the use of the names
"Emily Woods," Emily Wood," "EMWoods", "EMWood" and any other similar name,
trademark, registered mark or other similar right or intellectual property, and
shall convey to you all of its right, title and interest in and to each such
name, trademark, registered mark or other similar right or intellectual
property.
IV. Put Rights.
You and the Company hereby agree and acknowledge that in the event,
following termination of your employment under the Employment Agreement, you
exercise your Put Option (described in Section 3(b) of the Stockholders'
Agreement among you, the Company and TPG Partners II, L.P. (the "Stockholders'
Agreement")), notwithstanding anything to the contrary in the Employment
Agreement or the Stockholders Agreement, (A) if the date you exercise your Put
Option (and therefore the date on which the Appraised Value (as defined under
the Stockholders' Agreement) would otherwise be determined) shall be on or prior
to October 31, 2000, the date as of which the Appraised Value shall be
determined shall be, at your election, either (x) January 31, 2000 or (y) such
date as you shall exercise the Put Option, and (B) if the date you exercise your
Put Option is after October 31, 2000, the date as of which the Appraised Value
shall be determined shall be the date on which you exercise the Put Option. The
remaining terms and conditions of the Stockholders' Agreement, including without
limitation as to the determination of Appraised Value, shall remain in full
force and effect.
This letter may be signed in counterparts and each counterpart shall
constitute a part hereof, and a facsimile of a signature shall be deemed an
original signature for purposes of this letter.
2
<PAGE>
If the terms of this letter meet with your approval, please sign in the
space provided below.
Sincerely,
_____________________
David Bonderman
Member, Board of Directors
Agreed to and Accepted:
_____________________
Emily Woods
3
<PAGE>
Exhibit 10.5(b)
---------------
August 9, 1999
Mr. Mark Sarvary
Chief Executive Officer
J. Crew Group, Inc.
770 Broadway
New York, NY 10003
Dear Mark:
Pursuant to our recent discussions regarding the loan which J. Crew
Operating Corp. (the "Company") will make to you in accordance with Section 2(g)
-------
of the Employment Agreement dated as of May 3, 1999, among the Company, J. Crew
Group, Inc. and you, we thought it would be useful to lay out certain material
terms and conditions of such loan in this letter for both parties to sign.
I. The Company Loan
Immediately prior to the closing of the purchase of your proposed
primary residence (the "Closing"), the Company will lend you one million dollars
-------
($1,000,000) (the "Company Loan") to be used by you for the sole purpose of
------------
purchasing your primary residence, located at 7 Fox Run, Purchase, New York (the
"Property"). It is understood that the funding of the Company Loan will take
--------
place immediately prior to the Closing and will be initially secured by your
pledge to the Company of certain stock options (the "Stock Options") pursuant to
-------------
the Pledge and Security Agreement to be executed by you, a copy of which is
attached heret as Exhibit B. Immediately following the Closing, you will grant
the Company a second mortgage on the Property to secure the Company Loan by
executing a second mortgage agreement substantially in the form attached hereto
as Exhibit C (the "Second Mortgage"), and the Company will release its security
---------------
interest in the Stock Options.
II. Terms and Conditions of the Company Loan
A. The obligation of the Company to make the Company Loan is subject
to your providing evidence satisfactory to the Company on the date of the
Closing that:
(1) the sum of (x) the Company Loan and (y) the loan to be obtained
by you from Citibank, N.A. in connection with the purchase of the Property,
which loan will be secured by a first mortgage on the Property (the "First
-----
Mortgage Loan"), does not exceed ninety percent (90%) of the fair market
-------------
value of the Property as appraised by Citibank, N.A. in connection with the
First Mortgage Loan (a copy of such appraisal to be provided to the Company
at the Closing);
<PAGE>
(2) there are no liens on the Property other than the lien created by
the First Mortgage Loan (or other items acceptable to the Company
identified on the Citibank, N.A. lender's title insurance policy, a copy of
which you will provide to the Company); and
(3) The terms and conditions of the First Mortgage Loan do not
prohibit the Second Mortgage.
B. As consideration for the Company making the Company Loan, you
agree that:
(1) Contemporaneously with the making of the Company Loan, you will
execute the Promissory Note and the Pledge and Security Agreement,
substantially in the forms attached hereto as Exhibit A and Exhibit B,
respectively;
(2) You will execute the Second Mortgage in the form attached hereto
as Exhibit C immediately following the Closing and the Company shall record
the same in the applicable recording office;
(3) You will not grant any liens on the Property without the prior
written consent of the Company (other than the lien securing the First
Mortgage Loan); and
(4) In the event the Closing does not occur on the date the Company
makes the Company Loan to you, you will immediately repay the Company Loan
to the Company.
If the foregoing correctly reflects your understanding, please sign
the enclosed copy of this letter and return it to me.
Sincerely,
Emily Woods
Agreed to and accepted:
___________________________
Mark Sarvary
Date:
<PAGE>
PROMISSORY NOTE
$1,000,000.00 New York, NY
August __, 1999
Mark Sarvary ("Sarvary"), for value received, hereby promises to pay to the
order of J.Crew Operating Corp., a Delaware corporation ("J.Crew"), at its
offices located at 770 Broadway, New York, NY, 10003, or such other place as the
holder hereof may designate by notice to Sarvary, the principal amount of One
Million Dollars ($1,000,000.00), in lawful money of the United States, without
interest, as follows: (i) $50,000.00 on April 15th in each of the years 2000,
2001, 2002 and 2003; and (ii) the remaining balance of $800,000.00 on June 29,
2004. Sarvary hereby grants J.Crew the right to deduct all or a portion of the
principal payments when due from any bonus payable to him. Sarvary acknowledges
and confirms that (i) J.Crew has loaned Sarvary the principal amount of the Note
for the sole purpose of Sarvary purchasing a primary residence located at 7 Fox
Run, Purchase, New York (the "Property") and (ii) he will use the proceeds of
the Note solely for such purpose.
1. Prepayment
----------
This Note may be prepaid at any time, in whole or in part, without penalty
or premium. Each partial prepayment shall be applied to installments of
principal in inverse order of maturity.
2. Events of Acceleration
----------------------
The holder of this Note, by written notice to Sarvary, may declare the
entire principal amount immediately due and payable if any of the following
events ("Accelerated Events") shall have occurred and be continuing, in which
event the maturity of the then unpaid balance of the Note shall be accelerated
and shall become immediately due and payable, without presentment, demand,
protest or notice of any kind, all of which are hereby expressly waived in
accordance with Paragraph 3(f) hereunder.
(a) Sarvary shall not have paid any installment of principal on this Note
as and when it has become due and payable and such default shall continue for a
period of 10 days after notice to Sarvary;
(b) Sarvary's employment with J.Crew is terminated for any reason; or
(c) Sarvary is in default under any other agreement with J.Crew.
3. Miscellaneous
-------------
(a) Sarvary shall pay all costs and expenses incurred by the holder in
connection with the collection of the Note, including reasonable attorneys'
fees.
(b) This Note shall be governed by and construed in accordance with the
laws of New York State applicable to agreements made and to be performed therein
and cannot be changed orally. Sarvary irrevocably consents to the sole and
exclusive jurisdiction of the courts of New
<PAGE>
York State and of any federal court located in New York State in connection with
any action or proceeding arising out of or related to this Note.
(c) No delay or failure on the part of the holder of this Note to exercise
any power or right given under this Notice, including, but not limited to, the
right to accelerate the amounts due, shall operate as a waiver of the power or
right and no right or remedy of the holder shall be deemed abridged or modified
by any course of conduct. All rights and remedies existing hereunder are
cumulative and not exclusive of each other or any rights or remedies otherwise
available.
(d) All notices and other communications hereunder shall be in writing and
shall be deemed given when delivered personally, three days after being mailed
by registered mail, return receipt requested, or the following day if sent by
overnight courier service, to J.Crew at the address set forth at the beginning
of this Note, attn: General Counsel, and to Sarvary at 770 Broadway, New York,
NY 10003, or such other address as either party may specify by notice given
pursuant hereto.
(e) To the extent permitted by applicable law, Sarvary hereby waives all
benefit that might accrue by virtue of any present or future moratorium laws
exempting any of the Property, or any other property, real or personal, or any
part of the proceeds arising from any sale of any such property, from
attachment, levy, or sale under execution, or providing for any stay of
execution to be issued on any judgment recovered on this Note (excepting only
any stay of execution).
(f) SARVARY HEREBY WAIVES PRESENTMENT, DEMAND, DILIGENCE, PROTEST AND
NOTICE OF PROTEST, NOTICE OF INTENT TO ACCELERATE, NOTICE OF ACCELERATION,
DEMAND, DISHONOR AND NON-PAYMENT OF THIS NOTE OR ANY OTHER NOTICE OF ANY KIND
WHATSOEVER.
(g) If any term or provision of this Note or the application thereof to any
circumstance shall, to any extent, be invalid, illegal or unenforceable, such
term or such provisions shall be ineffective to the extent of such invalidity,
illegality or unenforceability without invalidating or rendering unenforceable
any remaining terms and provisions hereof or thereof or the application of such
term or provision to circumstances other than those as to which it is held
invalid, illegal or unenforceable.
(h) This Note shall not be transferable, except that J.Crew may transfer
the Note to any other person or entity without Sarvary's consent.
___________________________
Mark Sarvary
2
<PAGE>
Exhibit "B"
- -----------
PLEDGE AND SECURITY AGREEMENT
This PLEDGE AND SECURITY AGREEMENT (as amended, restated, replaced,
supplemented or otherwise modified from time to time, this "Agreement") is dated
---------
as of August __, 1999 and entered into by and between Mark Sarvary, in his
individual capacity, ("Grantor") and J.Crew Operating Corp., (together with it
-------
successors and assigns, "Secured Party").
-------------
PRELIMINARY STATEMENTS
WHEREAS, Secured Party has agreed to loan Grantor the principal amount
of $1,000,000 (the "Loan") in accordance with that certain Promissory Note made
----
by Grantor, dated as of the date hereof (as the same may be amended, restated,
supplemented or otherwise modified from time to time, the "Note") and in
----
accordance with that certain letter agreement between the parties, dated August
9, 1999 (the "Letter Agreement") in order to finance Grantor's acquisition of a
----------------
certain property located at 7 Fox Run, Purchase, NY 10577 (the "Property");
--------
WHEREAS, Grantor is the legal and beneficial owner of those certain
options to purchase 272,000 shares of the common stock of J.Crew Group, Inc.
awarded to him under the J.Crew Group, Inc. 1997 Stock Option Plan (such options
and such plan, the "Pledged Options" and the "Option Plan", respectively) and
--------------- -----------
evidenced by that certain Stock Option Agreement dated as of June 28, 1999 (the
"Option Agreement");
----------------
WHEREAS, it is a condition precedent to the making of the Loan by
Secured Party that Grantor shall have granted the security interests and
undertaken the obligations contemplated by this Agreement; and
WHEREAS, it is intended that the security interest granted hereunder
secure the Loan until the closing of Grantor's purchase of the Property, at
which time Grantor shall grant to Secured Party a second mortgage on the
Property, substantially in the form agreed to in the Letter Agreement (the
"Second Mortgage"), after which this Agreement shall terminate.
- ----------------
NOW, THEREFORE, in consideration of the premises and in order to
induce Secured Party to make the Loan and for other good and valuable
consideration, the receipt and adequacy of which are hereby conclusively
acknowledged, Grantor hereby agrees with Secured Party as follows:
SECTION 1. Grant and Pledge of Security. Grantor hereby assigns and
----------------------------
pledges to Secured Party, and hereby grants to Secured Party a security interest
in, all of Grantor's right, title and interest in and to the following, whether
now or hereafter acquired (the "Pledged Collateral") the Option Agreement,
------------------
Pledged Options, and any interest of the Grantor in the entries on the books of
J.Crew Group, Inc. or any financial intermediary pertaining to the Pledged
Options, and all dividends, cash, warrants, rights, instruments and other
property or proceeds from time to time received, receivable or otherwise
distributable in respect of or in exchange for any or all of the Pledged
Options. The Grantor shall deliver the original Option
<PAGE>
Agreement to the Secured Party and such Option Agreement shall remain in the
possession of the Secured Party until this Agreement is terminated, at which
time, the Secured Party shall return the Option Agreement to the Grantor.
SECTION 2. Security for Obligations. This Agreement secures, and the
------------------------
Pledged Collateral is collateral security for, all obligations of every nature
of the Grantor now or hereafter existing under the Note and the Letter Agreement
(all such obligations collectively, the "Secured Obligations").
-------------------
SECTION 3. No Assumption. Notwithstanding any of the foregoing, this
-------------
Agreement shall not in any way be deemed to obligate Secured Party to assume any
of Grantor's obligations, duties, expenses or liabilities now existing or
hereafter drafted or executed (collectively, the "Grantor Obligations") unless
------- -----------
Secured Party or any such purchaser otherwise expressly agrees to assume any or
all of such Grantor Obligations in writing.
SECTION 4. Further Assurances and Covenants of Grantor. Grantor
-------------------------------------------
agrees that from time to time, at the expense of Grantor, Grantor will promptly
execute and deliver all further instruments and documents, and take all further
action, that may be necessary or desirable, or that Secured Party may reasonable
request, in order to perfect and protect any security interest granted or
purported to be granted hereby or to enable Secured Party to exercise and
enforce its rights and remedies hereunder with respect to any Pledged
Collateral. Grantor shall not, without the prior written consent of Secured
Party, which may be granted or withheld in Secured Party's sole discretion,
sell, assign (by operation of law or otherwise), pledge or otherwise dispose of
or hypothecate all or any part of the Pledged Collateral.
SECTION 5. Acceleration Event. In the case of an Acceleration Event,
------------------
as defined in the Note, in addition to all of Secured Party's other rights and
remedies, Secured Party shall have the right, upon five days prior notice to
Grantor, to cause J. Crew Group, Inc. to cancel all or any portion of the
Pledged Option and to apply the "Spread" (as defined below) on each of the
------
shares of Common Stock underlying the vested Pledged Option which Secured Party
elects to cancel as follows: (i) first to pay Secured Party's expenses
(including reasonable attorney's fees) in connection with collection of the
Note; (ii) second, to apply so much of the remaining Spread as may be necessary
to pay the unpaid principal of the Note; and (iii) third, to pay any remaining
amount of the spread to Grantor. As used herein, the term "Spread" means the
difference obtained by subtracting the (a) exercise price per share underlying
the Pledged Option, from (b) the Fair Market Value (as defined in the Option
Plan) of a share of J.Crew Group, Inc. Common Stock determined as of the date on
which the Option is cancelled.
SECTION 6. Substitution of Pledged Collateral. In accordance with
----------------------------------
the Letter Agreement, upon Grantor's execution and grant of the Second Mortgage
on the Property and the recordation of such Second Mortgage, the Pledged
Collateral hereunder shall be released to the Grantor and this Agreement shall
terminate.
SECTION 7. Continuing Security Interest; Transfer of Loan. This
----------------------------------------------
Agreement shall create a continuing security interest in the Pledged Collateral
and shall (a) remain in full force and effect until the indefeasible payment in
full of the Secured Obligations or granting and recordation of the Second
Mortgage, (b) be binding upon Grantor, its
2
<PAGE>
successors and assigns, and (c) inure, together with the rights and remedies of
Secured Party hereunder, to the benefit of Secured Party and its successors,
transferees and assigns. Without limiting the generality of the foregoing clause
(c), Secured Party may assign or otherwise transfer the Note to any other
Person, and such other Person shall thereupon become vested with all the
benefits in respect thereof granted to Secured Party herein or otherwise. Upon
the indefeasible payment in full of all Secured Obligations or the granting by
Grantor of the Second Mortgage on the Property (as described above), the
security interest granted hereby shall terminate and all rights to the Pledged
Collateral shall revert to Grantor.
SECTION 8. Amendments; Etc. No amendment, modification, termination
---------------
or waiver of any provision of this Agreement, or consent to any departure by
Grantor herefrom, shall in any event be effective unless the same shall be in
writing and signed by Secured Party, and, in the case of any such amendment or
modification by Grantor, such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which it was given.
SECTION 9. Notices. Any notice or other communication herein
-------
required or permitted to be given hereunder shall be given in accordance with
Section 4(d) of the Note.
SECTION 10. Failure or Indulgence Not Waiver; Remedies Cumulative.
-----------------------------------------------------
No failure or delay on the part of Secured Party in the exercise of any power,
right or privilege hereunder shall impair such power, right, privilege or option
or be construed to be a waiver of any default or acquiescence therein, nor shall
any single or partial exercise of any such power, right, privilege or option
preclude any other or further exercise thereof or of any other power, right,
privilege or option. All rights and remedies existing under this Agreement are
cumulative to, and not exclusive of, any rights or remedies otherwise available.
SECTION 11. Severability. In case any provision in or obligation
------------
under this Agreement shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations, or of such provision or obligation in any other
jurisdiction, shall not in any way be affected or impaired thereby.
SECTION 12. Headings. Section and subsection headings in this
--------
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose or be given any
substantive effect.
SECTION 13. Governing Law; Terms. THIS AGREEMENT AND THE RIGHTS AND
--------------------
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 14. Consent to Jurisdiction and Service of Process. The
----------------------------------------------
provisions of Section 4(b) of the Note are hereby incorporated by reference in
their entirety.
SECTION 15. Waiver of Jury Trial. The provisions of Section 4(f) of
--------------------
the Note are hereby incorporated by reference in their entirety.
SECTION 16. Counterparts. This Agreement may be executed in one or
------------
more counterparts and by different parties hereto in separate counterparts, each
of which when so
3
<PAGE>
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages may
be detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document.
[Remainder of page intentionally left blank]
4
<PAGE>
IN WITNESS WHEREOF, Grantor and Secured Party have caused this
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
GRANTOR: Mark Sarvary, in his individual capacity
By:
----------------------------
Name:
Title:
SECURED PARTY: J.Crew Operating Corp., a Delaware
Corporation
By:
----------------------------
Name:
Title:
5
<PAGE>
Exhibit 10.6
------------
LETTER AGREEMENT
September 24, 1999
Ms. Carol Sharpe
6 Eno Lane
Westport, CT 06880
Dear Carol:
Pursuant to our discussions and our letter dated March 23, 1999
regarding your employment with J. Crew Operating Corp. (the "Company"), we
-------
thought it would be useful to lay out the terms and conditions of our agreement
in this letter agreement ("Agreement") for both parties to sign.
---------
1. Employment.
(a) The Company hereby agrees to employ you as Senior Vice President -
Merchandising and you hereby agree to serve the Company in such capacity during
the "Employment Period" (as defined below). As Senior Vice President -
-----------------
Merchandising, you will have merchandising responsibility for both men's and
women's lines in retail. In the event that the Company decides, in its sole
discretion, to reorganize around gender, you will have merchandising
responsibility in all channels for either men's or women's lines, as determined
by the Company. You will report either to the Chief Executive Officer of the
Company or to a person immediately reporting to the Chief Executive Officer (a
"span breaker"), as determined by the Company, provided that you shall have the
- -------------
right to veto any individual candidate proposed by the Company to serve as a
span breaker between the Chief Executive Officer and you by notifying the
Company of your objection within five (5) days after the date you are notified
of the candidate.
(b) During the Employment Period, you shall devote your full business time
and energy, attention, skills and ability to the performance of your duties and
responsibilities as provided hereunder on an exclusive basis and shall
faithfully and diligently endeavor to promote the business and best interests of
the Company. Accordingly, you may not, directly or indirectly, without the
prior written consent of the Company, operate, participate in the management,
operations or control of, or act as an employee, officer, consultant, agent or
representative of, any type of business or service (other than as an employee of
the Company), provided that it shall not be a violation of the foregoing for you
to (i) act or serve as a director, trustee or committee member of any civic or
charitable organization, and (ii) manage your personal, financial and legal
affairs, so long as such activities (described in clauses (i) or (ii)) do not
interfere with the performance of your duties and responsibilities to the
Company as provided hereunder.
2. Employment Period.
(a) The "Employment Period" shall commence as of April 30, 1999 (the
-----------------
"Effective Date") and shall terminate ("Date of Termination") upon the earliest
- --------------- -------------------
to occur of (i) the fifth anniversary of the Effective Date, (ii) your death or
Disability (as defined below), (iii) voluntary
<PAGE>
termination of employment by you, (iv) termination of employment by the Company
without Cause (as defined below) or (v) termination of employment by the Company
for Cause.
(b) Upon termination of the Employment Period for any reason, you shall be
entitled to any earned but unpaid Base Salary (as defined in Section 3(a) below)
as of the Date of Termination. If the Company terminates the Employment Period
without Cause, you will be entitled to continuation of your Base Salary as in
effect immediately prior to such termination for a period of twelve (12) months
after the date of such termination (the "Salary Continuation Payments"),
----------------------------
provided that the Salary Continuation Payments are subject to and conditioned
upon your execution of a valid general release and waiver (reasonably acceptable
to the Company), waiving all claims that you may have against the Company, its
successors, assigns, affiliates, employees, officers and directors and your
compliance with the Restrictive Covenants provided in Section 4 hereof. The
Company shall have no additional obligations under this Agreement.
(c) For purposes of this Agreement, the term "Cause" shall mean (i) the
-----
commission of a felony, (ii) willful misconduct or gross negligence in
connection with the performance of your duties as an employee of the Company,
(iii) a material breach of this Agreement, including without limitation your
failure to perform your duties and responsibilities hereunder, (iv) a fraudulent
act or omission by you adverse to the reputation of the Company or any
affiliate, and (v) the disclosure by you of any Confidential Information (as
defined in Section 4(b) hereof) to persons not authorized to know same. If
subsequent to the termination of your employment, it is discovered that your
employment could have been terminated for Cause, your employment shall, at the
election of the Company, in its sole discretion, be deemed to have been
terminated for Cause. In addition, for purposes of this Agreement, the term
"Disability" shall mean your incapacity due to physical or mental illness or
- -----------
injury, which results in you being unable to perform your duties hereunder for a
period of ninety (90) consecutive working days, and within thirty (30) days
after the Company notifies you that your employment is being terminated for
Disability, you shall not have returned to the performance of your duties on a
full-time basis.
3. Compensation and Benefits.
(a) During the Employment Period, your annual base salary shall be $400,000
("Base Salary") and shall be paid pursuant to regular Company payroll practices
-----------
for the senior executives of the Company. The Base Salary will be reviewed
annually by the Company.
(b) In addition to the Base Salary, in each fiscal year during the
Employment Period, you will have the opportunity to earn an annual bonus
("Annual Bonus") at the following percentages of your Base Salary if the Company
- --------------
achieves certain performance objectives (which will be determined by the Company
for each such fiscal year in accordance with the Company's bonus plan):
Threshold - 25%, Target - 60% and Stretch - 120% of Base Salary. Any Annual
Bonus (including the Guaranteed Bonus described below) will be paid only if you
are actively employed with the Company and not in breach of this Agreement on
the date of payment (as described below). Notwithstanding the foregoing, with
respect to the fiscal year beginning January 31, 1999, your Annual Bonus will be
at least $240,000 (the "Guaranteed Bonus") regardless of whether the performance
----------------
objectives for such fiscal year are achieved. The Annual Bonus will be paid no
later than May 1 following the fiscal year for which it relates.
2
<PAGE>
(c) The Company has paid you $180,000 (the "First-Half Special Bonus") as
------------------------
consideration for entering into this Agreement. In addition, on or before
August 31, 1999, the Company will pay you an additional $180,000 (the "Second-
------
Half Special Bonus" and, together with the First-Half Special Bonus, the
- ------------------
"Special Bonus"), provided that you are actively employed with the Company and
- --------------
not in breach of this Agreement on such date. You will be required to
immediately pay back a "pro-rata portion" as determined below of the Special
Bonus in the event you voluntarily terminate your employment hereunder prior to
August 31, 2000, and to the extent that you fail to pay back any portion of the
Special Bonus as provided herein, the Company shall have the right to offset any
other payments provided hereunder or otherwise owed to you in respect of such
amount. The "pro-rata portion" shall equal the product of (I) the sum of the
First-Half Special Bonus and the Second-Half Special Bonus (if paid), and (ii) a
fraction, the numerator of which is the number of full months from and including
the month in which the employment hereunder terminates through August 31, 2000,
and the denominator of which is sixteen.
(d) As soon as practicable after the Effective Date and subject to approval
of the Compensation Committee of the Board of Directors of J. Crew Group, Inc.,
the Company will cause J. Crew Group, Inc. to grant you an option (the "Option")
------
to purchase twelve thousand (12,000) shares of common stock of J. Crew Group,
Inc. (the "Common Stock") at an exercise price equal to $6.82 per share. Except
------------
as otherwise provided herein, the Option shall be governed by the terms and
subject to the conditions of the 1997 J. Crew Group, Inc. Stock Option Plan (the
"Option Plan"), including the requirements regarding the execution of a Stock
-----------
Option Grant Agreement and a Stockholders' Agreement. Twenty percent (20%) of
the Option will become vested and exercisable on each of April 30, 2000 through
2004, provided you are actively employed with the Company on such date. Subject
to the provisions of the Option Plan, with respect to the Option or any portion
thereof which has not become exercisable, the Option shall expire on the date
your employment with the Company is terminated for any reason, and with respect
to any Option or any portion thereof which has become exercisable, the Option
shall expire on the earlier of: (i) 90 days after your termination of employment
with the Company other than for Cause, death or Disability; (ii) one year after
termination of your employment with the Company by reason of death or
Disability; (iii) the commencement of business on the date your employment with
the Company is, or is deemed to have been, terminated for Cause; or (iv) the
tenth anniversary of the Effective Date.
(e) In addition to the Option granted hereunder, you currently hold options
to purchase 25,000 shares of Common Stock, which were issued at an exercise
price of $6.82 per share. If you are employed by the Company on April 30, 2003
and not in breach of this Agreement, the Company will pay you an amount in cash
equal to the Cash Payment, if any, determined in the manner described in Exhibit
A hereto, not later than May 30, 2003. In general, the calculation described in
Exhibit A is intended to reflect our agreement that, as of April 30, 2003, the
spread, with respect to options to purchase 34,600 shares of Common Stock,
between the value of such shares and the exercise price of the options should be
at least $32.50 per share, subject to adjustment to take into account sales or
other dispositions of the shares by you prior to April 30, 2003. Any such Cash
Payment shall be in full satisfaction of the foregoing agreement.
3
<PAGE>
(f) Given that the Cash Payment relates to the 34,600 shares of Common
Stock (the "Option Shares") that you may acquire pursuant to the options
-------------
described in Subparagraphs (d) and (e) above, if you actually acquired the
Option Shares and then the Company exercised its call rights (the "Call") under
----
the Stockholders' Agreement (as provided under the Option Plan) with respect to
the Option Shares, it is possible that the Company would be required to pay
twice for a portion of such Option Shares. Accordingly, if a Cash Payment is
made and the Fair Market Value per share of Common Stock on the date the Call is
exercised is equal to or greater than the Fair Market Value per share as of
April 30, 2003, notwithstanding anything herein or in Section 3 of such
Stockholders' Agreement to the contrary, you hereby agree that the amount the
Company shall pay per Option Share pursuant to the Call (the "Call Price") shall
----------
equal the amount determined in accordance with Exhibit B hereto.
(g) During the Employment Period, you will be entitled to participate
generally in the Company's benefit plans, except where specifically provided
herein and except for any severance or other termination of employment plans.
Currently, the Company's benefit package includes 3 weeks vacation, 3 personal
days, holidays, life insurance, medical insurance, long term disability, 401(k)
tax deferred savings plan, a health flexible spending account, and the employee
discount. The Company reserves the right to change these benefits at any time
in its sole discretion.
(h) The Company will reimburse you for all reasonable business expenses
upon the presentation of statements of such expenses in accordance with the
Company's policies and procedures now in force or as such policies and
procedures may be modified with respect to the senior executives of the Company.
4. Restrictive Covenants.
(a) As additional consideration for the Company entering into this
Agreement, you agree that for a period of twelve (12) months after the date on
which the Employment Period is terminated for any reason, you shall not,
directly or indirectly, (i) engage (either as owner, investor, partner,
employer, employee, consultant or director) in or otherwise perform services for
any Competitive Business (as defined below) which operates within a 100 mile
radius of the location of any store of the Company or its affiliates or in the
same area as the Company directs its mail order operations or any other area in
which the Company or any of its subsidiaries conducts business or in which the
Company or any of its subsidiaries' customers are located as of the Date of
Termination, provided that the foregoing restriction shall not prohibit you from
owning a passive investment of not more than 5% of the total outstanding
securities of any publicly-traded company and (ii) solicit, hire, or seek to
influence the employment decisions of, any employee of the Company on behalf of
any person or entity other than the Company. The term "Competitive Business"
--------------------
means the retail, mail order and internet apparel and accessories business and
any other business the Employer or its affiliates are engaged in on the Date of
Termination.
(b) You agree that, during the Employment Period and thereafter, you will
hold in strict confidence any proprietary or Confidential Information related to
the Company or its
4
<PAGE>
affiliates. For purposes of this Agreement, the term "Confidential Information"
shall mean all information of the Company and its affiliates in whatever form
which is not generally known to the public, including without limitation,
customer lists, trade practices, marketing techniques, fit specifications,
design, pricing structures and practices, research, trade secrets, processes,
systems, programs, methods, software, merchandising, planning, inventory and
financial control, store design and staffing.
(c) You also agree that breach of the confidentiality, non-competition or
employee non-solicitation provisions provided in paragraphs (a) or (b) of this
Section 4 would cause the Company to suffer irreparable harm for which money
damages would not be an adequate remedy and therefore, if you breach any of the
Restrictive Covenants provided in this Section 4, the Company will be entitled
to an injunction restraining you from violating such restrictive covenant
without the posting of any bond. If the Company shall institute any action or
proceeding to enforce any such restrictive covenant, you hereby waive the claim
or defense that the Company has an adequate remedy at law and you agree not to
assert in any such action or proceeding the claim or defense that the Company
has an adequate remedy at law. The foregoing shall not prejudice the Company's
right to require you to account for and pay over to the Company, and you hereby
agree to account for and pay over, the compensation, profits, monies, accruals
and other benefits derived or received by you as a result of any transaction
constituting a breach of any of the Restrictive Covenants provided in this
Section 4.
(d) You agree that during the Employment Period and thereafter you shall
not disclose any information regarding the existence or substance of this
Agreement to any third party (including employees of the Company) without the
prior written consent of the Chairman of the Company except as may be required
by law, during any legal proceeding brought by you relating to this Agreement or
with your professional advisers for purposes of discussing the subject matter
hereof and, with respect to such professional advisers, you agree to inform them
of your obligations hereunder and take all reasonable steps to ensure that such
professional advisers do not disclose the existence or substance hereof.
Further, you agree not to directly or indirectly disparage or defame the
Company, its affiliates or any of their directors, officers or employees.
5. Miscellaneous.
(a) Any notice or other communication required or permitted under this
Agreement shall be effective only if it is in writing and shall be deemed to be
given when delivered personally or four days after it is mailed by registered or
certified mail, postage prepaid, return receipt requested or one day after it is
sent by a reputable overnight courier service and, in each case, addressed as
follows:
If to the Company:
J. Crew Operating Corp.
770 Broadway
Twelfth Floor
5
<PAGE>
New York, NY 10003
Attention: General Counsel
If to you:
Ms. Carol Sharpe
6 Eno Lane
Westport, CT 06880
or to such other address as any party hereto may designate by notice to the
other, and shall be deemed to have been given upon receipt.
(b) This Agreement constitutes the entire agreement between you and the
Company with respect to your employment by the Company, and supersedes and is in
full substitution for any and all prior understandings or agreements with
respect to your employment, including without limitation the March 23, 1999
letter agreement/term sheet.
(c) This Agreement shall inure to the benefit of and be an obligation of
the Company's assigns and successors; however you may not assign your duties and
obligations hereunder to any other party.
(d) No provision of this Agreement may be amended or waived, unless such
amendment or waiver is specifically agreed to in writing and signed by you and
an officer of the Company duly authorized to execute such amendment. The failure
by either you or the Company at any time to require the performance by the other
of any provision hereof shall in no way affect the full right to require such
performance at any time thereafter, nor shall the waiver by you or the Company
of a breach of any provision hereof be taken or held to be a waiver of any
succeeding breach of such provision or a waiver of the provision itself or a
waiver of any other provision of this Agreement.
(e) You and the Company acknowledge and agree that each of you has reviewed
and negotiated the terms and provisions of this Agreement and has had the
opportunity to contribute to its revision. Accordingly, the rule of
construction to the effect that ambiguities are resolved against the drafting
party shall not be employed in the interpretation of this Agreement. Rather,
the terms of this Agreement shall be construed fairly as to both parties and not
in favor or against either party.
(f) Any provision of this Agreement (or portion thereof) which is deemed
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this Section, be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions thereof in such jurisdiction or rendering that or any other
provisions of this Agreement invalid, illegal, or unenforceable in any other
jurisdiction. If any covenant should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such covenant shall be
modified so that the scope of the covenant is reduced only to the minimum extent
necessary to render the modified covenant valid, legal and
6
<PAGE>
enforceable. No waiver of any provision or violation of this Agreement by the
Company shall be implied by the Company's forbearance or failure to take action.
(g) The Company may withhold from any amounts payable to you hereunder all
federal, state, city or other taxes that the Company may reasonably determine
are required to be withheld pursuant to any applicable law or regulation, (it
being understood, that you shall be responsible for payment of all taxes in
respect of the payments and benefits provided herein).
(h) This Agreement may be executed in several counterparts, each of which
shall be deemed an original, but all of which shall constitute one and the same
instrument.
(i) The headings in this Agreement are inserted for convenience of
reference only and shall not be a part of or control or affect the meaning of
any provision hereof.
(j) This Agreement and all amendments thereof shall, in all respects, be
governed by and construed and enforced in accordance with the internal laws
(without regard to principles of conflicts of law) of the State of NEW YORK.
Each party hereto hereby agrees to and accepts the exclusive jurisdiction of any
court in New York County or the U.S. District Court for the Southern District of
New York in respect of any action or proceeding relating to the subject matter
hereof, expressly waiving any defense relating to jurisdiction or forum non
---------
conveniens, and consents to service of process by U.S. certified or registered
- ----------
mail in any action or proceeding with respect to this Agreement.
If the terms of this letter Agreement meet with your approval, please
sign and return one copy to me.
Sincerely,
_____________________
Emily Woods
Chairman
Agreed to and Accepted:
_____________________________
Carol Sharpe
Date: ________________
7
<PAGE>
EXHIBIT A
- ---------
GUARANTEED OPTION CASH PAYMENT FORMULA
--------------------------------------
The Cash Payment, if any, provided in Section 3(e)
hereof, shall be calculated as follows:
CP = (X - SA) - (FMV x N)
Where:
CP = the Cash Payment, if any, provided under Section 3(e) hereof;
X = $1,360,472;
SA = the greater of (i) any proceeds received upon the actual or constructive
sale or other disposition of any shares of Common Stock of the Company ("Sales
-----
Transactions") and (ii) $39.32 multiplied by the number of shares sold or
- ------------
disposed of in the Sales Transaction;
FMV = the greater of (i) $6.82 and (ii) the Fair Market Value per share of
Common Stock as of April 30, 2003, as determined pursuant to the Option Plan;
N = 34,600 less the number of shares of Common Stock sold in all Sales
Transactions.
In the event of an adjustment in the Options pursuant to Section 4.13 of the
Option Plan, the foregoing amounts shall be equitably adjusted in a similar
manner in order to avoid the dilution or enlargement of rights or payments
hereunder.
8
<PAGE>
EXHIBIT B
- ---------
Call Price Formula
------------------
If the Fair Market Value per share of Common Stock (as determined
under the Option Plan) on the date the Call is exercised is equal to or greater
than the Fair Market Value per share on April 30, 2003, then the Call Price per
share in respect of the Option Shares shall equal:
(the greater of Y or FMV1) - (CP/N)
where,
FMV1 = Fair Market Value per share on April 30, 2003;
Y = $39.32;
CP = The Cash Payment as determined under Exhibit A of this Letter Agreement;
and
N = The number of shares as determined under Exhibit A of this Letter
Agreement.
9
<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 FROM THE TWELVE MONTHS ENDED JANUARY 29, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> JAN-29-2000
<CASH> 38,693
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 129,928
<CURRENT-ASSETS> 207,631
<PP&E> 216,083
<DEPRECIATION> (77,683)
<TOTAL-ASSETS> 363,606
<CURRENT-LIABILITIES> 132,971
<BONDS> 184,000
0
0
<COMMON> 0
<OTHER-SE> (2,545)
<TOTAL-LIABILITY-AND-EQUITY> 363,606
<SALES> 714,119
<TOTAL-REVENUES> 716,624
<CGS> 394,813
<TOTAL-COSTS> 686,805
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,626
<INCOME-PRETAX> 4,193
<INCOME-TAX> 2,293
<INCOME-CONTINUING> 1,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,900
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
