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 333-42427
---------
J. CREW GROUP, INC.
(Exact name of registrant as specified in its charter)
New York 22-2894486
-------- ----------
(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 11,726,865 shares of Common Stock, par value
$.01 per share, outstanding.
Documents incorporated by reference: None
Certain statements in this Annual Report on Form 10K under the captions
"Business", "Selected Financial Data", "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Financial Statements and
Supplementary Data" and elsewhere constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. 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 Group,
Inc., 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.
References in this Report to the "Company" and "J. Crew" mean J. Crew Group,
Inc. 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
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.
1
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 from this 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.
J. Crew Brand
Merchandising and Design Strategy
Over time, the J. Crew merchandising strategy has evolved from providing unisex
products to creating full lines of men's and women's clothing, shoes and
accessories. This strategy had the effect of increasing overall J. Crew brand
sales volume, and significantly increasing revenues from sales of women's
apparel as a percentage of total J. Crew brand sales from 47% in 1995 to 65% in
1999.
Every J. Crew product is designed by an in-house design staff, to reflect a
classic, clean aesthetic that is consistent with the brand's American lifestyle
image. Design teams are formed around J. Crew product lines and categories to
develop concepts, themes and products for each of the Company's J. Crew
businesses. Members of the J. Crew technical design team develop construction
and fit specifications for every product to ensure quality workmanship and
consistency across product lines. These teams work in close collaboration with
the merchandising and production staff in order to gain market and other input.
Product merchandisers provide designers with market trend and other information
at initial stages of the design process. J. Crew designers and merchants source
globally for fabrics, yarns and finished products to ensure quality and value,
while manufacturing teams research and develop key vendors worldwide to identify
and maintain the essential characteristics for every style.
2
Sourcing, Production and Quality
The Company maintains separate merchandising, design, manufacturing and quality
assurance teams for the production of J. Crew brand merchandise. The Company's
products are designed exclusively by in-house design and product development
teams which support each line and class of product. These teams provide
individual attention and expertise to every style, ensuring that these styles
fit the J. Crew brand image.
The Company's merchandise is produced for the Company by a variety of
manufacturers, both domestically and outside the United States. The Company does
not own or operate any manufacturing facilities, instead contracting with third
party vendors in over 20 countries for the production of its products. In 1999,
approximately 70% of the Company's J. Crew brand products were sourced in the
Far East, 15% were sourced domestically and 15% were sourced in Europe and other
regions. Rarely does the Company represent the majority of any one vendor's
business and no one vendor supplies more than 10% of the Company's merchandise.
The Company retains independent buying agents to conduct in-line and final
quality inspections at each manufacturing site. Random inspections of all
incoming merchandise at the Lynchburg and Asheville distribution facilities
further assure that the Company's products are of a consistently high quality.
Due to the high concentration of foreign suppliers of J. Crew brand merchandise,
the Company estimates seven month lead times for its products. The Company has
established through the use of domestic vendors and strategic partnerships, a
core group of long-term suppliers to provide quick response programs at
significantly shorter lead times for certain product categories.
Distribution
The Company operates two major telemarketing and distribution facilities for its
operations. Order fulfillment for J. Crew Direct takes place at the 406,500
square foot telemarketing and distribution center located in Lynchburg,
Virginia. The Lynchburg facility processes approximately 3.8 million orders per
year and employs approximately 1,000 full and part-time employees during its
non-peak season and an additional 500 employees during its peak season.
A 192,500 square foot telemarketing and distribution facility in Asheville,
North Carolina serves as the main distribution center for the retail and outlet
store operations and also houses a J. Crew Direct telemarketing center. This
facility employs approximately 550 full- and part-time employees during its non-
peak season and an additional 200 employees during the peak holiday season.
The Company ships merchandise via UPS, the United States Postal Service and
FedEx. To enhance efficiency, each facility is fully equipped with a highly
advanced telephone system, an automated warehouse locator system and an
inventory bar coding system.
Management Information Systems
The Company's management information systems are designed to provide, among
other things, comprehensive order processing, production, accounting and
management information for the marketing, manufacturing, importing and
distribution functions of the Company's business. The Company has sophisticated
point-of-sale registers in its J. Crew Retail and Factory Outlet stores that
enable it to track inventory from store receipt to final sale on a real-time
basis. The Company believes its merchandising and financial systems, coupled
with its point-of-sale registers and software programs, allow for rapid stock
replenishment, concise merchandise planning and real-time inventory accounting
practices. The Company's telephone and telemarketing systems, warehouse package
sorting systems, automated warehouse locator and inventory bar coding systems
utilize advanced technology. These systems have provided the Company with a
number of benefits in the form of enhanced customer service, improved
operational efficiency and increased management control and reporting. In
addition, the Company's real-time inventory systems provide inventory management
on a per SKU basis and allow for a more efficient fulfillment process.
3
The Company is in the process of installing an enterprise resource planning
system for its future information technology requirements. This system is
scheduled for a phased-in implementation over a period of three years.
J. Crew Retail
During fiscal 1999, J. Crew Retail generated revenues of $333.6 million,
representing 46.5% of the Company's total J. Crew brand revenues.
The principal aspect of the Company's business strategy is an expansion program
designed to reach new and existing customers through the opening of J. Crew
Retail stores. In addition to generating sales of J. Crew products, J. Crew
Retail stores help set and reinforce the J. Crew brand image. The stores are
designed in-house and fixtured to create a distinctive J. Crew environment and
store associates are trained to maintain high standards of visual presentation
and customer service. The result is a complete statement of J. Crew's timeless
American style, classic design and attractive product value.
The Company believes that J. Crew Retail derives significant benefits from the
concurrent operation of J. Crew Direct. The broad circulation of J. Crew
catalogs performs an advertising function, enhancing the visibility and exposure
of the brand, aiding the expansion of the retail concept and increasing the
profitability of the stores.
The Company believes that its J. Crew Retail stores are among the most
productive in its industry segment. All of the Company's J. Crew Retail stores
are profitable and have generated positive store contribution within the first
12 months of opening. J. Crew Retail stores that were open during all of fiscal
1999 averaged $4.7 million per store in sales, produced sales per gross square
foot of approximately $571 and generated store contribution margins of
approximately 26.0%. The Company believes that these results compare favorably
to the average among retailers that the Company believes to be its primary
competitors. J. Crew Retail stores have an average size of 8,243 total square
feet.
As of January 29, 2000 J. Crew Retail operated 81 retail stores nationwide,
having expanded from 29 stores in 1995. The Company opened 16 stores in fiscal
1999 and intends to open approximately 20 stores in fiscal 2000. The stores are
located in upscale shopping malls and in retail areas within major metropolitan
markets that have an established higher-end retail business.
The table below highlights certain information regarding J. Crew Retail stores
opened through fiscal 1999.
Stores Stores Average
------ ------ -----------
Opened Closed Stores Total Store Total
------ ------ ----------- -------- -----------
Stores Open During During Open at Square Square
-------------- ------ ------ ----------- -------- -----------
At Beginning Fiscal Fiscal End of Footage Footage at
-------------- ------ ------ ----------- -------- -----------
Of Fiscal Year Year Year Fiscal Year (000's) End of Year
-------------- ---- ---- ----------- -------- -----------
1995 29 2 -- 31 266 8,581
1996 31 8 -- 39 338 8,667
1997 39 12 -- 51 428 8,392
1998 51 14 -- 65 530 8,150
1999 65 16 -- 81 668 8,243
J. Crew Retail plans to increase the number of stores in operation by 20 to 30
stores annually, resulting in approximately 100 stores in operation by the end
of fiscal 2000. The retail expansion plan focuses on markets in which J. Crew
Direct has been successful and, more generally, in areas within major
metropolitan markets with affluent and well educated populations.
4
J. Crew Direct
Since its inception in 1983, J. Crew Direct has distinguished itself from other
catalog retailers by its award-winning catalog, which utilizes magazine-quality
"real moment" pictures to depict an aspirational lifestyle image. During fiscal
1999, J. Crew Direct distributed 31 catalog editions with a combined circulation
of more than 75 million, and expanded its direct marketing concept to e-commerce
via its Internet site (jcrew.com). J. Crew Direct generated $278.6 million in
revenues (including $65.2 million from its Internet site) or 38.9% of the
Company's total J. Crew brand revenues in fiscal 1999.
Circulation Strategy
J. Crew Direct circulation strategy focuses on continually improving the
segmentation of customer files and the acquisition of additional customer names.
In 1999, approximately 60% of J. Crew Direct revenues were from customers in the
12-month buyer file (buyers who have made a purchase from any J. Crew catalog in
the prior 12 months).
The Company segments its customer file and tailors its catalog offerings to
address the different product needs of its customer segments. To increase core
catalog productivity and improve the effectiveness of marginal and prospecting
circulation, each customer segment is offered appropriate catalog editions. The
Company currently circulates Base, Women's, Prospect and Sale catalogs to
targeted customer segments.
Descriptions of the Company's current catalogs follow:
Base Books. These catalogs contain the entire mail order product offering and
are sent primarily to 12-month buyers.
Women's Books. The Women's books feature women's merchandise and are sent to
buyers who purchase primarily women's merchandise. These books represent an
additional customer contact potentially generating incremental revenue from
women customers.
Prospect Books. These editions are abridged versions of the Base Books and
are sent to less active and prospective customers in order to cost-effectively
reactivate old customers and acquire new customers.
Sale Books. These catalogs contain overstock merchandise to be sold at reduced
prices without adversely affecting the J. Crew brand image.
In 1999, total circulation increased to approximately 75 million from 73 million
in 1998, while pages circulated were approximately 9.3 billion in 1999 and 8.8
billion in 1998.
J. Crew Direct name acquisition programs are designed to attract new customers
in a cost-effective manner. The Company acquires new names from various sources,
including its Internet site, list rentals, exchanges with other catalog and
credit card companies, "friends' name" card inserts, and through J. Crew Retail
stores which represent an increasingly significant resource in prospecting for
new names. Names and addresses of 25% to 30% of the customers making credit card
purchases at J. Crew Retail stores are automatically captured at the point of
sale. Customers are also asked to fill out cards at the cash register when they
make purchases. In addition, the Company is in the process of placing telephones
in its J. Crew Retail stores with direct access to the J. Crew Direct
telemarketing center to allow customers in the stores to order catalog-specific
or out-of-stock items.
Catalog Creation and Production
The Company is distinguished from other catalog retailers by its award-winning
catalog, which utilizes magazine-quality "real moment" pictures to depict an
aspirational lifestyle image. All creative work on the catalogs is coordinated
by J. Crew personnel to maintain and reinforce the J. Crew brand image.
Photography is executed both on location and in studios, and creative design and
copy writing are executed on a desk-top publishing system. Digital images are
transmitted directly to outside printers, thereby reducing lead times and
improving reproduction quality. The Company believes that appropriate page
presentation of its merchandise stimulates demand and therefore places great
emphasis on page layout.
5
J. Crew Direct does not have long-term contracts with paper mills. Projected
paper requirements are communicated on an annual basis to paper mills to ensure
the availability of an adequate supply. Management believes that the Company's
long-standing relationships with a number of the largest coated paper mills in
the United States allow it to purchase paper at favorable prices commensurate
with the Company's size and payment terms.
Telemarketing and Customer Service
J. Crew Direct's primary telemarketing and fulfillment facilities are located in
Lynchburg, Virginia. An additional telemarketing facility is located in
Asheville, North Carolina. Telemarketing operations are open 24 hours a day,
seven days a week and handled over 5.9 million calls in fiscal 1999. Orders for
merchandise may be received by telephone, facsimile, mail and on the Company's
Internet site. The telemarketing centers are staffed by a total of 850 full-time
and part time telemarketing associates, and up to 600 additional associates
during peak periods, who are trained to assist customers in determining the
customer's correct size and to describe merchandise fabric, texture and
function. Each telemarketing associate utilizes a terminal with access to an IBM
mainframe computer which houses complete and up-to-date product and order
information. The fulfillment operations are designed to process and ship
customer orders in a quick and cost-effective manner. Orders placed before 9:00
p.m. are shipped the following day. Same-day shipping is available for orders
placed before noon.
J. Crew Factory Outlets
The Company extends its reach to additional consumers through its 42 J. Crew
Factory Outlets. Offering J. Crew products at an average of 30% below full
retail prices, J. Crew Factory Outlets target value-oriented consumers. The
factory outlet stores also serve to liquidate excess, irregular or out-of-season
J. Crew products outside of the Company's three primary distribution channels.
During fiscal 1999, J. Crew Factory Outlets generated revenues of $102.0
million, representing 14.2% of the Company's total J. Crew brand revenues.
J. Crew Factory Outlets offer selections of J. Crew menswear and womenswear.
Ranging in size from 3,800 to 10,000 square feet with an average of 6,500 square
feet, the stores are generally located in major outlet centers in 25 states
across the United States. The Company believes that the outlet stores, which are
designed in-house, maintain fixturing, visual presentation and service standards
superior to those typically associated with outlet stores.
Trademarks and International Licensing
J. Crew International, Inc., an indirect subsidiary of J. Crew Group, Inc.,
currently owns all of the trademarks and domain names for the J. Crew name that
the Company holds throughout the world, as well as its international licensing
contracts with third parties. Trademarks related to the J. Crew name are
registered in the United States Patent and Trademark Office.
The Company derives revenues from the international licensing of its trademarks
in the J. Crew name and the know-how it has developed. The Company has entered
into a licensing agreement with Itochu Corporation in Japan which gives the
Company the right to receive payments of percentage royalty fees in exchange for
the exclusive right to use the Company's trademarks in Japan. Under the license
agreement the Company retains a high degree of control over the manufacture,
design, marketing and sale of merchandise under the J. Crew trademarks. This
agreement expires in January, 2003. In 1999, licensing revenues totaled $2.5
million.
Employees
The Company focuses significant resources on the selection and training of sales
associates in both its mail order, retail and factory operations. Sales
associates are required to be familiar with the full range of merchandise of the
business in which they are working and have the ability to assist customers with
merchandise selection. Both retail and factory store management are compensated
in a combination of annual salary plus performance-based bonuses. Retail,
telemarketing and factory associates are compensated on an hourly basis and may
earn team-based performance incentives.
6
At January 29, 2000, the Company had approximately 5,400 associates, of whom
approximately 1,900 were full-time associates and 3,500 were part-time
associates. In addition, approximately 3,000 associates are hired on a seasonal
basis to meet demand during the peak holiday buying season. None of the
associates employed by J. Crew are represented by a union. The Company believes
that its relationship with its associates is good.
Competition
All aspects of the Company's businesses are highly competitive. The Company
competes primarily with specialty brand retailers, other catalog operations,
department stores, and mass merchandisers engaged in the retail sale of men's
and women's apparel, accessories, footwear and general merchandise. The Company
believes that the principal bases upon which it competes are quality, design,
efficient service, selection and price.
The Recapitalization
On October 17, 1997, the recapitalization of J. Crew Group, Inc. ("Holdings")
(the "Recapitalization") was consummated pursuant to a Recapitalization
Agreement, dated as of July 22, 1997, as amended as of October 17, 1997 (the
"Recapitalization Agreement"), among Holdings, its shareholders and TPG Partners
II, L.P. ("TPG"). Pursuant to the Recapitalization Agreement, Holdings purchased
from its shareholders all outstanding shares of Holdings' capital stock, other
than shares having an implied value of $11.1 million, almost all of which
continue to be held by Emily Woods, and which represented approximately 14.8% of
the outstanding shares of common stock of Holdings ("Common Stock") immediately
following the transaction.
In connection with the Recapitalization, Holdings organized J. Crew Operating
Corp. ("Operating Corp.") and immediately prior to the consummation of the
Recapitalization, Holdings transferred substantially all of its assets and
liabilities to Operating Corp. Holdings' current operations are, and future
operations are expected to continue to be, limited to owning the stock of
Operating Corp. Operating Corp. repaid substantially all of the Company's funded
debt obligations existing immediately before the consummation of the
Recapitalization.
Cash funding requirements for the Recapitalization totaled $559.8 million
(including $99.0 million in seasonal borrowings) and were satisfied through the
purchase by TPG, certain of its affiliates and other investors of an aggregate
$188.9 million in Holdings' equity securities together with an aggregate $330.9
million in borrowings and $40.0 million in proceeds from the securitization of
certain of the Company's accounts receivable.
7
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 the Company.
The table below sets forth the number of stores by state operated by the Company
(excludes 7 C&W Outlet stores) in the United States as of January 29, 2000:
Total
-----
Retail Outlet Number
------ ------ ------
Stores Stores Of Stores
------ ------ ---------
Alabama 1 1 2
Arizona 1 -- 1
California 14 3 17
Colorado 2 2 4
Connecticut 3 1 4
Delaware 1 1 2
Florida 4 3 7
Georgia 3 2 5
Illinois 4 -- 4
Indiana 1 2 3
Kansas 1 -- 1
Maine -- 2 2
Maryland 2 1 3
Massachusetts 5 1 6
Michigan 2 1 3
Minnesota 1 -- 1
Missouri 1 1 2
Nevada -- 1 1
New Hampshire -- 2 2
New Jersey 4 1 5
New Mexico 1 -- 1
New York 9 4 13
North Carolina 2 -- 2
Ohio 4 -- 4
Oregon 2 -- 2
Pennsylvania 2 3 5
Rhode Island 1 - 1
South Carolina -- 2 2
Tennessee 1 1 2
Texas 3 3 6
Vermont -- 1 1
Virginia 3 1 4
Washington 2 1 3
Wisconsin -- 1 1
District of Columbia 1 -- 1
-- -- ---
Total. 81 42 123
== == ===
8
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
No matters were submitted to a vote of security holders during the quarter ended
January 29, 2000.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public market for Holdings Common Stock. As of April 1,
2000, there were 37 shareholders of record of the Common Stock. See "Item 12.
Security Ownership of Certain Beneficial Owners and Management" for a discussion
of the ownership of Holdings.
Holdings has not paid cash dividends on its Common Stock and does not anticipate
paying any such dividends in the foreseeable future.
The Credit Agreement entered into a connection with the Recapitalization (the
"Credit Agreement") and the Indenture relating to the Senior Discount Debentures
(the "Holdings Indenture") prohibits the payment of dividends by Holdings on
shares of Common Stock (other than dividends payable solely in shares of capital
stock of Holdings). Additionally, because Holdings is a holding company, its
ability to pay dividends is dependent upon the receipt of dividends from its
direct and indirect subsidiaries. Each of the Credit Agreement, the Holdings
Indenture and the Indenture relating to the Senior Subordinated Notes contains
covenants which impose substantial restrictions on Operating Corp's ability to
make dividends or distributions to Holdings.
The Directors of Holdings have the right to receive all or a portion of the fees
for their services as a Director in Common Stock at a purchase price of $6.82
per share for meetings prior to April 13, 1999 and $10 per share for meetings
held thereafter. In fiscal 1999, certain Directors elected to receive a total of
17,665 shares of Common Stock in payment of their fees. Holdings issued the
Common Stock to the Directors in transactions which did not involve any public
offering in reliance upon Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act").
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated historical financial,
operating, balance sheet and other data of the Company. The selected income
statement and balance sheet data for each of the two fiscal years ended January
31, 1997 are derived from the Consolidated Financial Statements of the Company,
which have been audited by Deloitte & Touche LLP, independent auditors. The
selected income statement and balance sheet data for each of the three fiscal
years ended January 29, 2000 are derived from the Consolidated Financial
Statements of the Company, which have been audited by KPMG LLP, independent
auditors. The data presented below should be read in conjunction with the
Consolidated Financial Statements, including the related Notes thereto, included
herein, the other financial information included herein, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Fiscal Year Ended
February 2, January 31, January 31, January 30, January 29,
----------- ----------- ----------- ----------- -----------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(dollars in thousands, except per square foot data)
Income Statement Data:
Revenues $745,909 $808,843 $ 834,031 $ 824,258 $ 716,624
Cost of goods sold(a) 399,668 428,719 465,168 460,592 394,813
Selling, general and administrative 327,672 348,305 359,811 336,590 281,610
expenses
Charges incurred in connection with
discontinuance of Clifford &Wills 13,300 4,000
Other charges -- -- -- 7,995 7,018
Income from operations 18,569 31,819 9,052 5,781 29,183
Interest expense-net 9,350 10,470 20,494 39,323 38,861
Gain on sale of Popular Club Plan -- -- -- (10,000) (1,000)
Expenses incurred-Recapitalization -- -- 20,707 -- --
Provision (benefit) for income taxes 3,700 8,800 (5,262) (8,162) (2,050)
Extraordinary items and cumulative effect
of accounting changes, net of taxes 931 -- (4,500) -- --
-------- -------- --------- --------- ---------
Net income (loss) $ 6,450 $ 12,549 $ (31,387) $ (15,380) $ (6,628)
======== ======== ========= ========= ---------
10
Fiscal Year Ended
February 2, January 31, January 31, January 30, January 29,
1996 1997 1998 1999 2000
Balance Sheet Data (at period end):
Cash and cash equivalents $ 13,529 $ 7,132 $ 12,166 $ 9,643 $ 38,693
Working capital 132,256 132,222 142,677 95,710 75,929
Total assets 355,249 410,821 421,878 376,330 373,604
Total long term debt and redeemable
preferred stock 87,329 87,092 428,457 433,243 458,218
Stockholders' equity (deficit) 89,633 102,006 (201,642) (235,773) (264,593)
Operating Data:
Revenues:
J. Crew retail $134,959 $167,957 $ 209,559 $ 273,972 $ 333,575
J. Crew direct
Catalog 274,653 289,773 260,853 230,752 213,308
Internet -- -- 4,000 22,000 65,249
-------- -------- --------- --------- ---------
274,653 289,773 264,853 252,752 278,557
-------- -------- --------- --------- ---------
J. Crew factory outlet 79,203 94,579 100,285 96,461 101,987
J. Crew licensing 3,975 3,817 2,897 2,712 2,505
-------- -------- --------- --------- ---------
Total J. Crew brand 492,790 556,126 577,594 625,897 716,624
Other divisions(b) 253,119 252,717 256,437 198,361 --
-------- -------- --------- --------- ---------
Total $745,909 $808,843 $ 834,031 $ 824,258 $ 716,624
======== ======== ========= ========= =========
J. Crew Direct:
Number of catalogs circulated (in 67,519 76,087 76,994 73,440 75,479
thousands)
Number of pages circulated (in millions) 10,198 9,827 9,830 8,819 9,319
J. Crew Retail:
Sales per gross square foot(c) $ 533 $ 551 $ 542 $ 558 $ 571
Store contribution margin(c) 25.5% 25.4% 23.4% 25.0% 26.0%
Number of stores open at end of period 31 39 51 65 81
Comparable store sales change(c) (6.0)% 4.5% (6.6)% 9.0% 1.8%
Depreciation and amortization $ 10,272 $ 10,541 $ 15,255 $ 15,972 $ 19,241
Net capital expenditures(d)
New store openings $ 6,009 $ 10,894 $ 19,802 $ 14,749 $ 13,300
Other 8,631 11,587 11,565 21,605 27,953
-------- -------- --------- --------- ---------
Total net capital expenditures $ 14,640 $ 22,481 $ 31,367 $ 36,354 $ 41,253
(a) Includes buying and occupancy costs.
(b) Includes revenues from the Company's PCP and C&W divisions and finance
charge income from PCP installment sales. PCP was sold effective October 30,
1998 and the Company made a decision in 1998 to exit the catalog and outlet
store operations of C&W.
(c) Includes stores that have been opened for a full twelve month period.
(d) Capital expenditures are net of proceeds from construction allowances.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity of the Company during the
three-year period ended January 29, 2000. 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.
Results of Operations
Consolidated statements of operations presented as a percentage of revenues are
as follows:
Fiscal Year ended
January January January
29,2000 30,1999 31,1998
Revenues 100.0% 100.0% 100.0%
Cost of goods sold, including buying and occupancy costs 55.1 55.9 55.8
Selling, general and administrative expenses 39.3 40.8 43.1
Charges incurred in connection with discontinuance of C&W .5 1.6 --
Other charges 1.0 1.0 --
Income from operations 4.1 .7 1.1
Interest expense, net (5.4) (4.8) (2.5)
Gain on the sale of Popular Club Plan .1 1.2 --
Expenses incurred-recapitalization -- -- (2.5)
Loss before income taxes and extraordinary items (1.2) (2.9) (3.9)
Benefit for income taxes .3 1.0 .6
------- ------- -------
Loss before extraordinary items (.9)% (1.9)% (3.3)%
======= ======= =======
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 year 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.
12
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.
Selling, general and administrative expenses
- --------------------------------------------
Selling, general and administrative expenses decreased to $281.6 million in
fiscal 1999 (39.3% of revenues) from $336.6 million in fiscal 1998 (40.8% 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
$281.6 million in fiscal 1999 (39.3% of revenues) from $242.2 million in fiscal
1998 (38.7% of revenues). This increase resulted primarily from an increase in
general and administrative expenses of $31.5 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 $38.9 million in fiscal 1999 from $39.3
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 higher non-cash interest and
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.
13
Interest expense included non-cash interest and amortization of deferred
financing costs of $14.2 million in fiscal 1999 compared to $12.7 million fiscal
1998.
Income Taxes
- ------------
The effective tax rate was (23.6%) in fiscal 1999 compared to (34.7)% in fiscal
1998. The decrease in the effective tax rate in 1999 was primarily due to the
inability of certain subsidiaries to deduct net operating losses for state tax
purposes.
Fiscal 1998 Compared to Fiscal 1997
Revenues
- --------
Revenues decreased 1.2% to $824.3 million in the fiscal year ended January 30,
1999 from $834.0 million in the fiscal year ended January 31, 1998. The decrease
in revenues was due primarily to (a) the sale of Popular Club Plan, effective as
of October 30, 1998, which resulted in a decrease of $60.3 million and (b) a
decrease in J. Crew Direct revenues of $12.0 million. These decreases were
offset by an increase of $64.4 million in the revenues of J. Crew Retail.
Excluding Popular Club Plan, revenues increased 7.8% from $649.6 million in
fiscal 1997 to $700.3 million in fiscal 1998.
J. Crew Retail revenues increased by 30.7% from $209.6 million in fiscal 1997 to
$274.0 million in fiscal 1998. The percentage of the Company's total revenues
derived from J. Crew Retail increased to 33.2% in fiscal 1998 from 25.1% in
fiscal 1997. This increase was attributed to $45.5 million from the opening of
new stores and $18.9 million from an increase in comparable store sales of 9.0%.
The number of stores opened at January 30, 1999 increased to 65 from 51 at
January 31, 1998.
J. Crew Direct revenues decreased by 4.5% from $264.8 million in fiscal 1997 to
$252.8 million in fiscal 1998. The percentage of the Company's total revenues
derived from J. Crew Direct decreased to 30.7% in fiscal 1998 from 31.8% in
fiscal 1997. This decrease was primarily due to a decrease in catalog
circulation from 9.8 billion pages circulated in fiscal 1997 to 8.8 billion
pages circulated in fiscal 1998 and a continuing weak performance in menswear
sales. J. Crew Direct revenues in fiscal 1998 include approximately $22.0
million from jcrew.com compared to approximately $4.0 million in fiscal 1997.
J. Crew Factory Outlet revenues decreased by 3.8% from $100.3 million in fiscal
1997 to $96.5 million in fiscal 1998. The percentage of the Company's total
revenues derived from J. Crew Factory Outlet decreased to 11.7% in fiscal 1998
from 12.0% in fiscal 1997. Comparable store sales for J. Crew Factory Outlet
decreased by 11.5% in fiscal 1998. The decrease in comparable store sales
resulted from additional markdowns required to sell through overstock
merchandise, primarily in the Spring of 1998. J. Crew Factory Outlet opened
three new stores in fiscal 1998 and 45 stores were open at January 30, 1999.
C&W revenues increased by 3.2% to $74.3 million in fiscal 1998 from $72.0
million in fiscal 1997. The percentage of the Company's revenues derived from
C&W increased to 9.0% in fiscal 1998 from 8.6% in fiscal 1997. The increase in
revenues resulted from an increase in the number of catalogs mailed from
approximately 40 million in fiscal 1997, to 42 million in fiscal 1998 and the
introduction of a deferred payment program in the fall of 1998. During 1998 the
Company made a decision to exit the operations of C&W and incurred a charge of
$13.3 million to write-down C&W assets to estimated realizable value and to
provide for other costs to be incurred in the discontinuance of operations, such
as severance and lease termination costs. Additionally fourth quarter charges of
$1.7 million were incurred relating to deferred catalog costs.
Cost of sales, including buying and occupancy costs
- ---------------------------------------------------
Cost of sales, including buying and occupancy costs as a percentage of revenues
was 55.9% for fiscal 1998 compared to 55.8% for fiscal 1997. This increase was
caused primarily by higher markdowns in fiscal 1998 to liquidate overstocks.
14
Selling, general and administrative expenses
- --------------------------------------------
Selling, general and administrative expenses as a percentage of revenues was
40.8% in fiscal year 1998 and 43.1% in fiscal year 1997.
As a percentage of revenues, selling expenses (catalog circulation costs)
decreased to 13.1% in fiscal 1998 from 14.7% in 1997 and general and
administrative expenses decreased to 27.7% in fiscal 1998 from 28.4% in fiscal
1997. The decrease in selling expense resulted primarily from the reduction in
catalog circulation from 9.8 billion pages circulated in 1997 to 8.8 billion
pages circulated in 1998 and the implementation of cost reduction initiatives
relating primarily to printing costs at J. Crew Direct.
The decrease in general and administrative expenses in fiscal 1998 as a
percentage of revenues was due to a decrease in expenses at J. Crew Direct and
J. Crew Retail from the implementation of cost reduction initiatives.
The absolute dollar amount of selling, general and administrative expenses
decreased to $336.6 million in fiscal 1998 from $359.8 million in fiscal 1997
primarily as a result of the sale of Popular Club Plan as of October 30, 1998
which accounted for $20.0 million of the decrease.
Write-down of assets and other charges in connection with the discontinuance of
- -------------------------------------------------------------------------------
Clifford & Wills
- ----------------
A charge of $13.3 million was included in fiscal 1998 operations to write-down
the assets of C&W to net realizable value and to provide for certain additional
costs in connection with the discontinuance
Additionally fourth quarter charges of $1.7 million were included in selling
expense relating to deferred catalog costs. (See note 2 to the consolidated
financial statements).
Other charges
- -------------
Other charges in fiscal 1998 include $2.9 million of costs incurred in
connection with the termination of the employment contracts of two senior
executives, including the former Chief Executive Officer, and $5.1 million of
tax gross-up payments made on behalf of senior executives relating to restricted
stock grants (See note 19 to the consolidated financial statements).
Gain on sale of subsidiary
- --------------------------
During 1998 the Company sold the capital stock of Popular Club Plan Inc. and
subsidiaries to the Fingerhut Companies, Inc. for gross proceeds of $42.0
million and realized a gain of $10.0 million. (See note 2 to the consolidated
financial statements).
Interest expense
- ----------------
Interest expense, net increased to $39.3 million in fiscal 1998 from $20.5
million in fiscal 1997. This increase resulted primarily from the issuance of
$295.3 million of debt in October 1997 to fund the Recapitalization including
$85.0 million to retire senior indebtedness outstanding at the time of the
Recapitalization. Average borrowings under a Revolving Credit Facility required
to fund inventories and capital expenditures were $54.3 million in fiscal 1997
and $47.5 million in fiscal 1998.
Interest expense included non-cash interest and amortization of deferred
financing costs of $12.7 million in fiscal 1998 compared to $3.9 million fiscal
1997.
Income Taxes
- ------------
The effective tax rate was (34.7)% in fiscal 1998 compared to (21.1)% in fiscal
1997. The effective tax rate in fiscal 1997 was effected by the non-
deductibility of certain expenses related to the Recapitalization.
15
Liquidity and Capital Resources
The Company's primary cash needs have been for capital expenditures incurred
primarily for opening new stores and system enhancements, debt service
requirements and working capital. The Company's sources of liquidity have been
primarily cash flows from operations and borrowings under the revolving credit
facility.
In October 1997 the Company incurred substantial indebtedness in connection with
the Recapitalization. After giving effect to the Recapitalization, the Company
had $298.2 million of indebtedness outstanding and $201.6 million of
stockholders' deficit at January 31, 1998. The Company's significant debt
service obligations following the Recapitalization could, under certain
circumstances, have material consequences to security holders of the Company. In
fiscal 1998 the Company sold its Popular Club Plan subsidiary and used $26.0
million of the proceeds to repay debt. In fiscal 1999 the Company used net
proceeds from the sale of assets of its discontinued Clifford & Wills subsidiary
to prepay an additional $10.0 million of the term loan.
Cash provided by operating activities was $94.1 million in fiscal year 1999
compared to $8.1 million in fiscal 1998. The increase in cash provided by
operations resulted from (a) a decrease in the level of inventories of $26.1
million despite an increase in the number of retail stores from 65 to 81, (b) an
increase in income from operations of $23.4 million, and (c) a federal income
tax refund of $8.7 million.
Capital expenditures, net of construction allowances, were $41.3 million in
fiscal 1999. The 1999 capital expenditures consisted primarily of the opening of
16 new J. Crew retail stores and systems enhancements. Capital expenditures in
fiscal 1998 were $36.4 million (including $5.2 million for Popular Club Plan
which was sold in October 1998). The capital expenditures in 1998 were incurred
primarily from the opening of 14 new J.Crew Retail Stores and system
enhancements.
Capital expenditures are expected to be approximately $45.0 million in fiscal
2000, primarily for the opening of at least 20 J. Crew retail stores and for
system enhancements. The expected capital expenditures will be funded from
internally generated cash flows and by borrowings from available financing
sources.
There were no borrowings under the Revolving Credit Facility at January 29,
2000, compared to $14.0 million of borrowings outstanding at January 30, 1999.
Average borrowings under the Revolving Credit Facility were $30.8 million for
the fiscal year ended January 29, 2000 and $47.5 million for the fiscal year
ended January 30, 1999.
Management believes that cash flow from operations and availability under the
Revolving Credit Facility will provide adequate funds for the Company's
foreseeable working capital needs, planned capital expenditures and debt service
obligations. The Company's ability to fund its operations and make planned
capital expenditures, to make scheduled debt payments, to refinance indebtedness
and to remain in compliance with all of the financial covenants under its debt
agreements depends on its future operating performance and cash flow, which in
turn, are subject to prevailing economic conditions and to financial, business
and other factors, some of which are beyond its control.
Year 2000
The Company completed its Year 2000 software program conversions and compliance
programs during the fourth quarter of 1999. The total external costs for such
programs were approximately $2.6 million. Subsequent to December 31, 1999, the
Company has not experienced any Year 2000 problems either internally or from
outside sources. The Company has no reason to believe that Year 2000 failures
will materially affect it in the future. However, since it may take several
additional months before it is known whether the Company or third party
suppliers, vendors or customers may have undergone Year 2000 problems, no
assurances can be given that the Company will not experience losses or
disruptions due to Year 2000 computer-related problems. The Company will
continue to monitor the operation of its computers and microprocessor-based
devices for any Year 2000 problems.
16
Impact of Inflation
The Company's results of operations and financial condition are presented based
upon historical cost. While it is difficult to accurately measure the impact of
inflation due to the imprecise nature of the estimates required, the Company
believes that the effects of inflation, if any, on its results of operations and
financial condition have been minor. However, there can be no assurance that
during a period of significant inflation, the Company's results of operations
would not be adversely affected.
Seasonality
The Company's retail and direct businesses experience two distinct selling
seasons, spring and fall. The spring season is comprised of the first and second
quarters and the fall season is comprised of the third and fourth quarters. Net
sales are usually substantially higher in the fall season and selling, general
and administrative expenses as a percentage of net sales are usually higher in
the spring season. Approximately 35% of annual net sales in fiscal 1999 occurred
in the fourth quarter. The Company's working capital requirements also fluctuate
throughout the year, increasing substantially in September and October in
anticipation of the holiday season inventory requirements.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" which requires entities to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. In June 1999 the effective date of SFAS No.133
was deferred to all fiscal years beginning after June 15, 2000. The Company is
currently reviewing SFAS No. 133 and is not able to evaluate the impact, if any,
it may have on future operating results or financial statement disclosures.
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.
17
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
The following table sets forth the name, age and position of individuals who are
serving as directors of Holdings and executive officers of Holdings and
Operating Corp. Each Director of Holdings will hold office until the next annual
meeting of shareholders or until his or her successor has been elected and
qualified. Officers are elected by the respective Boards of Directors and serve
at the discretion of such Board.
Name Age Position
- ---- --- --------
Emily Woods........... 38 Director, Chairman of the Board
Mark A. Sarvary....... 40 Director, Chief Executive Officer
Charlotte L. Beers.... 64 Director
David Bonderman....... 57 Director
Richard W. Boyce...... 45 Director
Gregory D. Brenneman.. 38 Director
John W. Burden, III... 63 Director
James G. Coulter...... 40 Director
Richard M. Anders..... 43 President of Retail
Barbara K. Eisenberg.. 54 Senior Vice President, General Counsel and Corporate Secretary
Scott Formby.......... 38 Executive Vice President, Design
Scott D. Hyatt........ 42 Senior Vice President, Manufacturing
Walter Killough....... 45 Chief Operating Officer
David F. Kozel........ 44 Senior Vice President, Human Resources
Nicholas Lamberti..... 57 Vice President-Corporate Controller
Thomas A. Lesica...... 40 Senior Vice President, Chief Information Officer
Michael Ovitz......... 53 Director
Scott M. Rosen........ 41 Executive Vice President, Chief Financial Officer
Carol Sharpe.......... 45 Executive Vice President, Merchandising - Brand
Trudy Sullivan........ 50 President
Brian T. Swette....... 46 Director
Mark T. Walsh......... 38 Executive Vice President, e-commerce and Strategic
Planning
Josh S. Weston........ 71 Director
18
Emily Woods
Ms. Woods became Chairman of the Board of Directors of Holdings upon
consummation of the Recapitalization. Ms. Woods is also a director and Chairman
of the Board of Operating Corp. Ms. Woods co-founded the J. Crew brand in 1983.
Ms. Woods has also served as Chief Executive Officer and Vice-Chairman of
Holdings and as Chief Executive Officer of Operating Corp. She is also a
director of Yankee Candle Company.
Mark A. Sarvary
Mr. Sarvary joined the Company in May 1999 as Chief Executive Officer
and as a Director. He was President/General Manager of the Nestle Frozen Food
Division of Nestle USA from 1996 to May 1999 and Vice President Marketing from
1995 to 1996.
Charlotte L. Beers
Ms. Beers became a director of Holdings in 1998. Ms. Beers has been
Chairman of J. Walter Thompson (advertising agency) since March 1999. She was
Chairman and Chief Executive Officer of Ogilvy & Mather (advertising agency)
from 1992 until 1997 and Chairman Emeritus from 1997 until March 1999. She also
serves as a director of Martha Stewart Living, Omnimedia and IBeauty.com.
David Bonderman
Mr. Bonderman became a director of Holdings upon consummation of the
Recapitalization. Mr. Bonderman is a founding partner of Texas Pacific Group
and has been Managing General Partner of TPG for more than six years. Mr.
Bonderman serves on the Boards of Directors of Bell & Howell, Inc., Beringer
Wine Estates, Inc., Continental Airlines, Inc., Co-Star Realty Information,
Inc., Denbury Resources Inc., Ducati Motor Holdings S.p.A., Magellan Health
Services, Inc., Oxford Health Plans, Inc., Paradyne Networks, Inc. and Ryanair
Ltd.
Richard W. Boyce
Mr. Boyce became a director of Holdings upon consummation of the
Recapitalization and was Chief Executive Officer from January 1999 until May
1999. Mr. Boyce is the President of CAF, Inc. ("CAF"), a management consulting
firm which advises various companies controlled by TPG. Prior to founding CAF in
1997, Mr. Boyce served as Senior Vice President of Operations for Pepsi-Cola
North America ("PCNA") from 1996 to 1997, and Chief Financial Officer of PCNA
from 1994 to 1996. He is also Chairman of Del Monte Foods Company. He is
Chairman of Favorite Brands International Holding Corp., which filed for
protection under Chapter 11 of the Bankruptcy Code on March 30, 1999. Mr. Boyce
is also a director of ON Semiconductor.
Gregory D. Brenneman
Mr. Brenneman became a director of Holdings in 1998. He has been President
of Continental Airlines Inc. since 1996 and Chief Operating Officer of
Continental Airlines Inc. since 1995. He has been a director of Continental
since 1995.
John W. Burden, III
Mr. Burden became a director of Holdings in 1998. Mr. Burden has been a
retail consultant for more than five years. He also serves as a director of Saks
Incorporated and Chicos Fas Inc.
James G. Coulter
Mr. Coulter became a director of Holdings upon consummation of the
Recapitalization. Mr. Coulter is a founding partner of Texas Pacific Group and
has been Managing General Partner of TPG for more than six years. Mr. Coulter
serves on the Boards of Directors of Beringer Wine Estates, Inc., Genesis Health
Ventures, Inc., Northwest Airlines, Inc., Oxford Health Plans, Inc. and
Globespan Semiconductor, Inc.
19
Barbara K. Eisenberg
Ms. Eisenberg has been Senior Vice President, General Counsel and Corporate
Secretary since August 1999 and was Vice President, General Counsel and
Corporate Secretary from 1998 until then. Prior thereto, she was Vice
President, Associate General Counsel and Corporate Secretary of Burlington
Industries, Inc. (textile manufacturer) for more than five years.
Richard M. Anders
Mr. Anders joined the Company in May 1999 as President of Retail. He
was Zone Vice President of Old Navy, a division of The Gap, Inc., from 1996 to
May 1999 and Regional Manager, Gap brand prior thereto.
Scott Formby
Mr. Formby became Executive Vice President, Design of J. Crew in 1999.
Prior thereto, he was Vice President, Design for more than five years.
Scott D. Hyatt
Mr. Hyatt joined the Company in 1998 as Senior Vice President,
Manufacturing. He was with Express Inc. as Vice President, Production and
Sourcing from 1996 to 1998 and Vice President, Manufacturing of Bernard Chaus
Inc. for more than five years prior thereto.
Walter Killough
Mr. Killough became Chief Operating Officer of the Company in October 1999.
Prior thereto, he was Senior Vice President, General Manager, Mail Order for
more than five years.
David F. Kozel
Mr. Kozel joined the Company in 1999 as Senior Vice President, Human
Resources. Prior thereto, he was with Grey Advertising as Vice President, Human
Resources from 1998, Vice President, Human Resources of Deluxe Corporation from
1997 to 1998 and Vice President, Human Resources of Citibank from 1995 to 1996.
Nicholas Lamberti
Mr. Lamberti has been Vice President - Corporate Controller for more than
five years.
Thomas A. Lesica
Mr. Lesica joined the Company in 1999 as Senior Vice President and Chief
Information Officer. He was with PepsiCo, Inc. as Vice President and Chief
Information Officer from 1997 until joining the Company and Director of
Information Technology of Pepsi Cola Company prior thereto.
Michael Ovitz
Mr. Ovitz became a director of Holdings in 1998. He is an independent
businessman and investor and co-founded Artists Management Group, LLC, a
management/production multi-media company. He has been a Principal of Artist
Management Group since December 1998. From 1995 to 1996, Mr. Ovitz was President
of the Walt Disney Company. For more than five years prior to 1995, Mr. Ovitz
served as Chairman of Creative Artists Agency, which he co-founded. Mr. Ovitz is
also a director of Gulfstream Aerospace Corp. and Livent, Inc.
Scott M. Rosen
Mr. Rosen has been Executive Vice President and Chief Financial Officer
since August 1999, Senior Vice President and Chief Financial Officer from 1998
until then and Chief Financial Officer of Mail Order for more than five years
prior thereto.
Carol Sharpe
Ms. Sharpe has been Executive Vice President, Merchandising - Brand since
August 1999 and was Senior Vice President, General Merchandising Manager, Retail
prior thereto. She was Senior Vice President and General Merchandising Manager-
Women's from 1998 until then and Vice President, Women's for more than 5 years
prior to 1998.
20
Trudy Sullivan
Ms. Sullivan has been President since rejoining the Company in February
2000. She was President of Kids "R" Us, a division of Toys "R" Us, Inc., from
October 1999 to February 2000. Ms. Sullivan was President, Mail Order of the
Company from 1998 to October 1999 and President of Clifford and Wills from 1995
to 1998.
Brian T. Swette
Mr. Swette became a director of Holdings in 1998. He has been Chief
Operating Officer of eBay Inc. (person-to-person trading community on the
Internet), since November 1999 and from 1998 until then was Senior Vice
President of Marketing and International of eBay. He was Executive Vice
President and Chief Marketing Officer-Global Beverages of Pepsi-Cola Beverages
from 1996 until joining eBay and Executive Vice President Marketing-North
America of Pepsi-Cola Beverages from 1994 to 1996. He is also a director of eBay
Inc.
Mark T. Walsh
Mr. Walsh joined the Company in September 1999 as Senior Vice
President Strategic Planning, Marketing and Internet and was elected Executive
Vice-President e-commerce and Strategic Planning in March 2000. Prior thereto,
he was Director, Global Marketing Strategy of Citibank, N.A., from 1998. He was
Chief Financial Officer, Fountain Beverage Division of Pepsico, Inc. from 1997
to 1998 and Vice President, Mergers and Acquisitions of Pepsico from 1996 to
1997.
Josh S. Weston
Mr. Weston became a director of Holdings in 1998. He has been Honorary
Chairman of the Board of Directors of Automatic Data Processing (computing
services business) since 1998. He was Chairman of the Board of Automatic Data
Processing from 1996 until 1998 and Chairman and Chief Executive Officer for
more than five years prior thereto. Mr. Weston is also a director of Gentiva
Health Services, Shared Medical Systems Corporation and Russ Berrie & Company,
Inc.
21
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid for fiscal years 1999, 1998 and
1997 to each individual serving as its chief executive officer during fiscal
1999 and to each of the four other most highly compensated executive officers of
the Company as of the end of fiscal 1999.
Annual Compensation
--------------------------------------------
Name Other Annual
And Fiscal Salary Bonus Comp.
Principal Position Year ($) ($) ($)
- -------------------------------------------------------------------------------------------------
Emily Woods 1999 $1,000,000 $1,000,000 $--
Chairman 1998 1,000,000 1,000,000 --
1997 700,000 -- --
Mark Sarvary 1999 560,190 335,000 1,000,000(5)
Chief Executive Officer 1998 -- -- --
1997 -- -- --
Richard W. Boyce 1999 250,000 -- --
Former Chief Executive Officer 1998 83,333 -- --
1997 -- -- --
Scott Formby 1999 422,115 106,800 --
Executive Vice President, Design 1998 392,158 107,000 --
1997 358,654 30,000 --
Carol Sharpe 1999 402,500 240,000 360,000(5)
Executive Vice President, Merchandising - 1998 362,500 100,300 --
Brand 1997 315,856 75,000 --
Richard Anders 1999 304,220 75,000 300,000(5)
President, Retail 1998 -- -- --
1997 -- -- --
Long-Term Compensation
Awards Payouts
----------------------------------------
Securities
Restricted Underlying LTIP All Other
Stock Options/ Payouts Comp.
Award(s)($)(1) SARS (#)(1) ($) ($)
------------------------------------------------------------
Emily Woods -- -- -- $5,000(6)
Chairman (2) -- -- 2,907,590(3)(6)
-- 492,200 -- 10,004,750(4)(6)
Mark Sarvary -- 272,000 -- --
Chief Executive Officer -- -- -- --
-- -- -- --
Richard W. Boyce -- -- -- --
Former Chief Executive Officer -- 55,200 -- --
-- -- -- --
Scott Formby -- 8,800 -- 5,000(6)
Executive Vice President, Design -- -- -- 5,000(6)
-- 31,200 -- 64,750(4)(6)
Carol Sharpe -- 12,000 -- 5,000(6)
Executive Vice President, Merchandising - -- 12,400 -- 5,000(6)
Brand -- 12,600 -- 54,750(4)(6)
Richard Anders -- 60,000 --
President, Retail -- -- -- --
-- -- -- --
__________
(1) There is no established public market for shares of Common Stock. Holders
of restricted stock have the same right to receive dividends as other
holders of Common Stock. The Company has not paid any cash dividends on
its Common Stock. All share amounts have been adjusted to reflect a 200
for 1 stock split effective April 1999.
(2) Ms. Woods was granted 661,600 shares of Common Stock ("Woods Restricted
Shares"), of which 78,600 shares vested immediately upon grant, 194,400
shares will vest on each of the 3rd and 4th anniversaries of the
Recapitalization and 194,200 shares will vest on the 5th anniversary of
the Recapitalization.
(3) The amount set forth in this column includes reimbursement for income
taxes in the amount of $ 2,902,590 incurred by Ms. Woods as a result of
the grant of the Woods Restricted Shares.
(4) The amount set forth in this column includes a bonus paid in connection
with the consummation of the Recapitalization.
(5) This amount is a signing bonus.
(6) Includes Company matching contributions to 401(k) plan in the amounts of
$5,000, $5,000 and $4,750 for fiscal years 1999, 1998 and 1997,
respectively.
22
The following Table shows information concerning stock options granted to any
of the named executive officers during fiscal year 1999.
Option Grants In Fiscal Year 1999
Potential Realizable Value At
Assumed Annual Rates Of
Stock Price Appreciation For
Individual Grants Option Term
- ------------------------------------------------------------------------------------------------------------
Number of Percent Of
Securities Total Options
Underlying Granted To
Options Employees In Exercise Expiration
Name Granted(#) (1)(2) Fiscal Year Price($/Sh) Date 5%($) $10% ($)
- ------------------------------------------------------------------------------------------------------------
Richard Anders 60,000 7.9% $6.82 5/3/09 $257,344 $652,319
Scott Formby 8,800 1.2% 10.00 4/13/09 55,344 140,250
Mark Sarvary 272,000 35.7% 10.00 5/10/09 1,710,594 4,334,979
Carol Sharpe 12,000 1.6% 6.82 4/13/09 51,468 131,094
__________
(1) The Company has not granted any SARs.
(2) The options have 10-year terms and are exercisable in the case of Messrs.
Anders and Formby, 20% on January 31st in each of 2000 through 2004; in
the case of Mr. Sarvary, 20% on May 10th in each of 2000 through 2004;
and in the case of Ms. Sharpe, 20% on April 30th in each of 2000 through
2004.
The following Table shows the number of stock options held by the named
executive officers at the end of fiscal year 1999. The named executive officers
did not exercise any stock options in fiscal year 1999.
Aggregated Option Exercises in Fiscal Year 1999 and Fiscal Year-End Option
Values
Number Of Securities
Underlying Unexercised
Options At Fiscal Year End (1)
(#)
Name Exercisable/Unexercisable
- ---- -------------------------
Richard Anders.............................................. 12,000 / 48,000
Scott Formby................................................ 14,240 / 25,760
Mark Sarvary................................................ 0 / 272,000
Carol Sharpe................................................ 10,000 / 27,000
Emily Woods................................................. 65,600 / 426,600
__________
(1) There is no established public market for shares of the Company's Common
Stock.
23
Employment Agreements and Other Compensation Arrangements
Ms. Woods has an employment agreement with Holdings and Operating Corp. (the
"Employers") which provides that, for a period of five years beginning on
October 17, 1997, she will serve as Chairman of the Board of Directors of
Holdings. The employment agreement provides for an annual base salary of $1.0
million, and an annual target bonus of up to $1.0 million based on achievement
of earnings objectives to be determined each year. The employment agreement
also provided for the grant of 661,600 shares of Common stock (the "Woods
Restricted Shares"). (See footnotes 2 and 3 to the Executive Compensation Table
for information on the vesting of the Woods Restricted Shares and the
reimbursement of income taxes incurred by Ms. Woods in connection with such
grant.) Ms. Woods is also entitled to various executive benefits and
perquisites under the employment agreement.
Under the terms of stock options awarded to Ms. Woods under the Company's Stock
Option Plan, all unvested options shall become exercisable (i) if Ms. Woods'
employment is terminated by Holdings without cause, by Ms. Woods for good reason
or by reason of death or disability, or (ii) in the event of a change in control
of Holdings. Because of a change in Ms. Woods' duties and responsibilities,
upon the termination of Ms. Woods' employment, she will be entitled to severance
benefits and other benefits as described in the February 4, 2000 amendment to
her agreement.
Mr. Sarvary has an Employment Agreement with Operating Corp., which provides
that, for a period of five years commencing on May 10, 1999, he will serve as
Chief Executive Officer of Operating Corp. The Employers also agreed to cause
Mr. Sarvary to be elected to the Board of Directors of Holdings. The Employment
Agreement provides for an annual base salary $670,000 and an annual target bonus
of 50% of his annual base salary based on achievement of earnings objectives to
be determined each year, provided that with respect to fiscal year 1999, the
bonus would be at least $335,000 regardless of whether the bonus objectives were
achieved. The Employment Agreement also provides for the payment of a signing
bonus of $1,000,000 and the grant of options to purchase 272,000 shares of
Common Stock as well as the grant of additional stock options to purchase 68,000
shares on the earlier of the date of an initial public offering of Holdings'
Common Stock or May 10, 2004. Mr. Sarvary is also entitled to various executive
benefits and perquisites under the Employment Agreement. Mr. Sarvary's
Employment Agreement also provides that in the event of his termination by
Operating Corp. without cause or termination by Mr. Sarvary for Good Reason (as
defined in the Agreement), he will receive an amount equal to two times his base
salary.
Ms. Sharpe has an Employment Agreement with Operating Corp. which provides that,
for a period of five years commencing on April 30, 1999, she will serve as
Executive Vice President-Merchandising of Operating Corp. The Employment
Agreement provides for an annual base salary of $400,000 and an annual target
bonus of 60% of her annual base salary based on achievement of earnings
objectives to be determined for each year, provided that with respect to fiscal
year 1999, the bonus would be at least $240,000 regardless of whether the bonus
objectives were achieved. The Employment Agreement also provides for a signing
bonus of $360,000 and the grant of options to purchase 12,000 shares of Common
Stock. The Agreement provides for continuation of salary for a period of one
year if Ms. Sharpe's employment is terminated without cause (as defined in the
Agreement). Ms. Sharpe's employment agreement also provides that if, on April
30, 2003, the aggregate spread between the fair market value per share and the
exercise price per share of her options to purchase 34,600 shares of Holdings
Common Stock does not equal or exceed $1,124,500, then Operating Corp. will pay
her a cash payment equal to any such shortfall, subject to adjustment in the
event she has disposed of any of the shares underlying such options.
The Woods Restricted Shares and any shares of Common Stock acquired by Ms.
Woods, Mr. Sarvary and Ms. Sharpe pursuant to the exercise of options are
subject to a shareholders' agreement providing for certain transfer
restrictions, registration rights and customary tag-along and drag-along rights.
Compensation Committee Interlocks and Insider Participation
Ms. Woods, Chairman, is a member of the Compensation Committee of Holdings.
24
Compensation of Directors
An attendance fee of $10,000 for each Board of Directors meeting is paid to each
Director who is neither an employee of the Company nor a representative of TPG.
Directors have the option to receive all or a portion of that fee paid in cash
or in shares of Common Stock at a per share purchase price of $6.82 for meetings
prior to April 13, 1999 and $10.00 for meetings held thereafter.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of
the Common Stock of Holdings as of March 9, 2000 for each person who is known to
Holdings to be the beneficial owner of 5% or more of Holdings Common Stock. The
holders listed have sole voting power and investment power over the shares held
by them, except as indicated by the notes following the table.
Name and Address Amount and Nature of Percent of
Title of Class of Beneficial Owner Beneficial Ownership Class
- -------------------------------------------------------------------------------------------
Common Stock TPG Partners II, L.P. 7,313,797.6 shares (1) 60.3%
201 Main Street, Suite 2420
Fort Worth, TX 76102
Common Stock Emily Woods 2,330,776.6 shares (2) 19.2%
J. Crew Group, Inc.
770 Broadway
New York, NY 10003
__________
(1) These shares of Common Stock are held by TPG and the following affiliates of
TPG (collectively, "TPG Affiliates"): TPG Parallel II L.P. and TPG
Investors II, L.P.
(2) Includes (a) 65,600 shares not currently owned but which are issuable upon
the exercise of stock options awarded under the Company's Stock Option Plan
that are currently exercisable, and (b) 583,000 shares of Common Stock that
have not vested and are held in custody by the Company until vesting
thereof.
25
The following table sets forth information regarding the beneficial
ownership of each class of equity securities of Holdings as of March 9, 2000 for
(i) each director, (ii) each of the executive officers identified in the table
set forth under Item 11. "Executive Compensation", and (iii) all directors and
all such executive officers as a group. The holders listed have sole voting
power and investment power over the shares held by them, except as indicated by
the notes following the table.
Number of Shares
and Nature of Percent of
Title of Class Name of Beneficial Owner Beneficial Ownership Class
- -----------------------------------------------------------------------------------------------------------------
Common Stock Richard M. Anders 12,000 (2) *
Common Stock Charlotte L. Beers 13,466.276 *
Common Stock David Bonderman 7,313,797.6 (1) 60.3%
Common Stock Richard W. Boyce 55,200 (2) *
Common Stock Gregory D. Brenneman 10,600 *
Common Stock John W. Burden, III 2,466.276 *
Common Stock James G. Coulter 7,313,797.6 (1) 60.3%
Common Stock Scott Formby 14,240 (2) *
Common Stock Michael Ovitz 11,400 *
Common Stock Mark A. Sarvary 54,400 (2) *
Common Stock Carol Sharpe 12,400 (2) *
Common Stock Brian T. Swette 13,866.276 *
Common Stock Josh S. Weston 13,466.276 *
Common Stock Emily Woods 2,330,776.6 (3) 19.2%
Common Stock All Directors and executive 9,926,239.304 (1) (2) (3) 81.8%
officers as a group
Series A Preferred Stock Charlotte L. Beers 60 *
Series A Preferred Stock David Bonderman 73,474.58 (1) 79.2%
Series A Preferred Stock Gregory D. Brenneman 60 *
Series A Preferred Stock James G. Coulter 73,474.58 (1) 79.2%
Series A Preferred Stock Michael Ovitz 60 *
Series A Preferred Stock Brian T. Swette 60 *
Series A Preferred Stock Josh S. Weston 60 *
Series A Preferred Stock Emily Woods 2,978.505 3.2%
Series A Preferred Stock All Directors and executive 76,753.085 82.7%
officers as a group
__________
*Represents less than 1% of the class.
(1) Attributes ownership of the shares owned by TPG Affiliates to Messrs.
Bonderman and Coulter, who are partners of TPG. Each of Messrs. Bonderman
and Coulter disclaim beneficial ownership of the shares owned by TPG
Affiliates.
(2) These are shares not currently owned but which are issuable upon the
exercise of stock options awarded under the Company's Stock Option Plan that
are currently exercisable or become exercisable within 60 days.
(3) Includes (a) 65,600 shares not currently owned but which are issuable upon
the exercise of stock options awarded under the Company's Stock Option Plan
that are currently exercisable, and (b) 583,000 shares of Common Stock that
have not vested and are held in custody by the Company until vesting
thereof.
26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with Mr. Sarvary's relocation to the Company's
headquarters, the Company loaned Mr. Sarvary $1.0 million on an interest-free
basis to purchase a residence. The loan is secured by a mortgage on that
residence and $950,000 is still outstanding.
The Company loaned Mr. Gilbertson $250,000 in connection with his
purchase of a residence. The loan bears interest at 8% per annum and is secured
by a mortgage on that residence and a life insurance policy of $250,000 naming
the Company as the sole beneficiary. Mr. Gilbertson resigned as President of the
Company's e-commerce business on March 31, 2000, to return to TPG and the loan
is in the process of being repaid in full with accrued interest.
Holdings and its subsidiaries entered into a tax sharing agreement
providing (among other things) that each of the subsidiaries will reimburse
Holdings for its share of income taxes determined as if such subsidiary had
filed its tax returns separately from Holdings.
27
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 Group, Inc. 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 changes in Stockholders' Deficit -
Years ended January 29, 2000, January 30, 1999 and January 31,
1998
(v) Consolidated Statements of Cash Flows - Years ended January 29,
2000, January 30, 1999 and January 31, 1998
(vi) Notes to consolidated financial statements
2. Financial Statements Schedules
Schedule II Valuation and Qualifying Accounts.
3. Exhibits
The exhibits listed on the accompanying Exhibit Index are incorporated
by reference herein and filed as part of this report.
(b) Reports on Form 8-K
The Company 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.
28
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 GROUP, INC.
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.
Signature Title Date
--------- ----- ----
/s/ Emily Woods Director; Chairman of the Board April 17, 2000
- --------------------------
Emily Woods
/s/ Mark A. Sarvary Director; Chief Executive Officer April 17, 2000
- --------------------------
Mark A. Sarvary (Principal Executive Officer)
/s/ Scott M. Rosen Executive Vice President, Chief Financial April 17, 2000
- --------------------------
Scott M. Rosen Officer (Principal Financial Officer)
/s/ Nicholas Lamberti Vice President, Corporate Controller April 17, 2000
- --------------------------
Nicholas Lamberti (Principal Accounting Officer)
/s/ Charlotte L. Beers Director April 17, 2000
- --------------------------
Charlotte Beers
/s/ David Bonderman Director April 17, 2000
- --------------------------
David Bonderman
/s/ Richard W. Boyce Director April 17, 2000
- --------------------------
Richard W. Boyce
/s/ Gregory D. Brenneman Director April 17, 2000
- --------------------------
Gregory D. Brenneman
/s/ John W. Burden, III Director April 17, 2000
- --------------------------
John W. Burden, III
/s/ James G. Coulter Director April 17, 2000
- --------------------------
James G. Coulter
/s/ Michael Ovitz Director April 17, 2000
- --------------------------
Michael Ovitz
/s/ Brian T. Swette Director April 17, 2000
- --------------------------
Brian T. Swette
/s/ Josh S. Weston Director April 17, 2000
- --------------------------
Josh S. Weston
Independent Auditors' Report
The Board of Directors and Stockholders
J. Crew Group, Inc. and Subsidiaries:
We have audited the consolidated financial statements of J. Crew Group, Inc. 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 Group, Inc.
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 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
J. CREW GROUP, INC. AND
SUBSIDIARIES
Consolidated Balance Sheets
January 29, January 30,
Assets 2000 1999
------ ---- ----
(in thousands)
Current assets:
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 14,830 11,624
Other assets 12,743 15,185
------- -------
Total assets $373,604 $376,330
======= =======
Liabilities and Stockholders' 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 14,687 11,280
Deferred income tax liabilities 5,842 9,476
------- -------
Total current liabilities 131,702 134,061
------- -------
Long-term debt 284,684 282,695
------- -------
Deferred credits and other long-term liabilities 48,277 44,799
------- -------
Redeemable preferred stock 173,534 150,548
------- -------
Stockholders' deficit (264,593) (235,773)
------- -------
Total liabilities and stockholders' deficit $373,604 $376,330
======= =======
See accompanying notes to consolidated financial statements.
F-2
J. CREW GROUP, INC. AND
SUBSIDIARIES
Consolidated Statements of Operations
Years ended
-----------
January 29, January 30, January 31,
----------- ----------- -----------
2000 1999 1998
---- ---- ----
(in thousands)
Revenues:
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 281,610 336,590 359,811
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 nonrecurring
employment contract charges - 7,995 --
-------- -------- --------
687,441 818,477 824,979
-------- -------- --------
Income from operations 29,183 5,781 9,052
Interest expense - net 38,861 39,323 20,494
Gain on sale of Popular Club Plan (1,000) (10,000) --
Expenses incurred in connection with the Recapitalization -- -- 20,707
-------- -------- --------
Loss before income taxes and extraordinary item (8,678) (23,542) (32,149)
Benefit for income taxes 2,050 8,162 5,262
-------- ----- -----
Loss before extraordinary item (6,628) (15,380) (26,887)
-------- -------- --------
Extraordinary item - loss on early retirement of debt
(net of income tax benefit of $3,127) -- -- (4,500)
-------- -------- --------
Net loss $(6,628) $(15,380) $(31,387)
======= ======== ========
See accompanying notes to consolidated financial statements.
F-3
J. CREW GROUP, INC. AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended
-----------
January 29, January 30, January 31,
----------- ----------- -----------
2000 1999 1998
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net loss $ (6,628) $(15,380) $ (31,387)
Adjustments to reconcile net 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 2,196 2,119 958
Noncash interest expense 11,989 10,534 2,904
Deferred income taxes (6,840) (10,129) (5,010)
Provision for losses on accounts receivable -- 5,627 7,343
Noncash compensation expense 636 881 150
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
Changes in operating assets and liabilities:
Accounts receivable -- (8,242) 33,902
Merchandise inventories 26,094 (15,608) (5,106)
Net assets held for disposal 4,450 -- --
Prepaid expenses and other current assets 16,646 (536) (4,081)
Other assets (777) (2,559) (587)
Accounts payable 821 7,415 (37,726)
Other liabilities 12,892 1,931 17,577
Federal and state income taxes payable 3,407 11,029 (9,268)
-------- -------- ---------
Net cash provided by (used in) operating activities 94,145 8,054 (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 -- -- 295,257
Repayment of long-term debt (10,000) (26,000) (92,863)
Costs incurred in connection with the issuance of debt -- -- (16,429)
Proceeds from the issuance of common stock 158 320 63,891
Proceeds from the issuance of redeemable preferred stock -- 300 125,000
Repurchase and retirement of capital stock -- -- (316,688)
Costs incurred in connection with the repurchase of
capital stock -- -- (14,318)
-------- -------- ---------
Net cash provided by (used in) financing activities (23,842) (11,380) 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
======== ======== =========
Noncash financing activities:
Dividends on redeemable preferred stock $ 22,986 $ 19,952 $ 5,296
======== ======== =========
See accompanying notes to consolidated financial statements.
F-4
J. CREW GROUP, INC. AND
SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Deficit
(in thousands, except shares)
6% noncumulative 8% cumulative
preferred stock preferred stock
--------------- ----------------
Shares Amount Shares Amount
------ ------ ------ ------
Balance at January 31, 1997 15,794 $ 1,579 5,000 $ 500
Net loss -- -- -- --
Repurchase and retirement of
capital stock (15,794) (1,579) (5,000) (500)
Costs incurred in connection with the
repurchase of capital stock -- -- -- --
Issuance of common stock -- -- -- --
Preferred stock dividends -- -- -- --
Issuance of common stock pursuant
to grant of restricted stock -- -- -- --
Amortization of restricted stock -- -- -- --
-- -- -- --
Balance at January 31, 1998 -- $ -- -- $ --
Net loss
Issuance of common stock
Preferred stock dividends
Issuance of common stock pursuant
to grant of restricted stock, net
Forfeiture of shares of restricted stock
Amortization of restricted stock
Balance at January 30, 1999
Net loss
Issuance of common stock
Preferred stock dividends
Amortization of restricted stock
Balance at January 29, 2000
See accompanying notes to consolidated financial statements.
F-5
Stock-
Additional Retained Deferred holders'
Common stock paid-in earnings Treasury compen- equity
------------
Shares Amount capital (Deficit) stock sation (Deficit)
- ------ ------ ------- --------- ----- ------ ---------
262,912 $ 263 $ 3,710 $ 101,850 $(5,896) $ -- $ 102,006
-- -- -- (31,387) -- -- (31,387)
(262,912) (263) (3,161) (317,081) 5,896 -- (316,688)
-- -- -- (14,318) -- -- (14,318)
11,000,000 1 63,890 -- -- -- 63,891
-- -- -- (5,296) -- -- (5,296)
661,600 -- 4,500 -- -- (4,500) --
----------- ------- ------- -------- -- 150 150
----------- -------- ------- --------- ------- ------- ---------
11,661,600 1 68,939 (266,232) -- (4,350) (201,642)
-- -- -- (15,380) -- -- (15,380)
47,600 -- 320 -- -- -- 320
-- -- -- (19,952) -- -- (19,952)
487,400 -- 1,120 -- -- (1,120) --
-- -- -- -- (2,325) 2,325 --
--- -- -- -- -- 881 881
---------- -------- ------- --------- ------- ------- ---------
12,196,600 1 70,379 (301,564) (2,325) (2,264) (235,773)
(6,628) (6,628)
17,665 158 158
(22,986) (22,986)
636 636
_____ ___ _______ _________ _______ _______ _________
12,214,265 $1 $70,537 $(331,178) $(2,325) $(1,628) $(264,593)
========== === ======= ========= ======= ======= =========
F-6
J. CREW GROUP, INC. 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 Group, Inc. ("Holdings") and its wholly-owned subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
(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-7
J. CREW GROUP, INC. 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 $11,282,000 and
$12,857,000 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-8
J. CREW GROUP, INC. 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-9
J. CREW GROUP, INC. 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-10
J. CREW GROUP, INC. 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:
January 29, January 30,
2000 1999
---- ----
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
----------- -----------
F-11
J. CREW GROUP, INC. 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
13-1/8% senior discount debentures (c) 100,684,000 88,695,000
------------ ------------
Total $284,684,000 $282,695,000
============ ============
(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 J.
Crew Operating Corp., a subsidiary of Holdings, 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-12
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31, 1998
(c) The senior discount debentures were issued in aggregate principal amount
of $142.0 million at maturity and mature on October 15, 2008. These
debentures are senior unsecured obligations of Holdings. Cash interest
will not accrue prior to October 15, 2002. However, the Company records
non-cash interest expense as an accretion of the principal amount of the
debentures at a rate of 13-1/8% per annum. Interest will be payable in
arrears on April 15 and October 15 of each year subsequent to October 15,
2002. The senior discount debentures may be redeemed at the option of
Holdings on or after October 15, 2002 at prices ranging from 106.563%, to
100% in 2005 and thereafter.
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-13
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31,1998
(8) Common Stock
The restated certificate of incorporation authorizes Holdings to issue up
to 100,000,000 shares of common stock; par value $.01 per share. In April
1999 the Board of Directors approved a 200 for 1 stock split of its common
stock in the form of a stock dividend. All references to shares of common
stock have been restated to reflect the stock split. During 1998 directors
acquired 30,000 shares of common stock and converted fees into 17,600
shares of common stock. During 1999 directors converted fees into 17,665
shares of common stock.
(9) Redeemable Preferred Stock
The restated certificate of incorporation authorizes Holdings to issue up
to:
(a) 1,000,000 shares of Series A cumulative preferred stock; par value $.01
per share; and
(b) 1,000,000 shares of Series B cumulative preferred stock; par value $.01
per share.
In connection with the Recapitalization, Holdings issued 92,500 shares of
Series A Preferred Stock and 32,500 shares of Series B Preferred Stock.
During 1998 directors acquired 300 shares of preferred stock at $1,000 per
share.
The Preferred Stock accumulates dividends at the rate of 14.5% per annum
(payable quarterly) for periods ending on or prior to October 17, 2009.
Dividends compound to the extent not paid in cash. On October 17, 2009,
Holdings is required to redeem the Series B Preferred Stock and to pay all
accumulated but unpaid dividends on the Series A Preferred Stock.
Thereafter, the Series A Preferred Stock will accumulate dividends at the
rate of 16.5% per annum. Subject to restrictions imposed by certain
indebtedness of the Company, Holdings may redeem shares of the Preferred
Stock at any time at redemption prices ranging from 103% of liquidation
value plus accumulated and unpaid dividends at October 17, 1998 to 100% of
liquidation value plus accumulated and unpaid dividends at October 17, 2000
and thereafter. In certain circumstances (including a change of control of
Holdings), subject to restrictions imposed by certain indebtedness of the
Company, Holdings may be required to repurchase shares of the Preferred
Stock at liquidation value plus accumulated and unpaid dividends.
Accumulated but unpaid dividends amounted to $48,234,000 at January 29,
2000. Dividends are recorded as an increase to redeemable preferred stock
and a reduction of retained earnings.
(10) 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
F-14
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31, 1998
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.
(11) 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.
(12) 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.
(13) Interest Expense - Net
Interest expense, net consists of the following:
1999 1998 1997
---- ---- ----
Interest expense $39,099,000 $40,379,000 $20,636,000
Interest income (238,000) (1,056,000) (142,000)
----------- ----------- -----------
Interest expense, net $38,861,000 $39,323,000 $20,494,000
----------- ----------- -----------
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.
F-15
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31, 1998
(14) 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 $235,215,000 and
$246,680,000 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 $284,684,000 and $282,695,000
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.
(15) 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-16
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31, 1998
The income tax benefit consists of:
1999 1998 1997
---- ---- ----
Current:
Foreign $ 250,000 $ 270,000 $ 309,000
Federal 3,100,000 600,000 (866,000)
State and local 1,440,000 1,097,000 305,000
----------- ------------ -----------
4,790,000 1,967,000 (252,000)
----------- ------------ -----------
Deferred - Federal, state and local (6,840,000) (10,129,000) (5,010,000)
----------- ------------ -----------
Income taxes before tax effect of extraordinary items (2,050,000) (8,162,000) (5,262,000)
Tax effect of extraordinary items - -- (3,127,000)
----------- ------------ -----------
Total $(2,050,000) $ (8,162,000) $(8,389,000)
=========== ============ ===========
A reconciliation between the benefit for income taxes based on the U.S. Federal
statutory rate and the Company's effective rate is as follows.
1999 1998 1997
---- ---- ----
Federal income tax rate (35.0)% (35.0)% (35.0)%
State and local income taxes, net
of federal benefit 7.0 (1.4) (1.8)
Nondeductible expenses and other 4.4 1.7 15.7
--- --- ----
Effective tax rate (23.6)% (34.7)% (21.1)%
===== ===== =====
The tax effect of temporary differences which give rise to deferred tax assets
and liabilities are:
January 29, January 30,
2000 1999
---- ----
Deferred tax assets:
Original issue discount $ 8,629,000 $ 4,519,000
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 2,298,000 1,073,000
----------- ------------
17,858,000 13,422,000
Deferred tax liabilities:
Prepaid catalog expenses and other
prepaid expenses (8,870,000) (11,274,000)
----------- ------------
Net deferred income tax asset $ 8,988,000 $ 2,148,000
=========== ============
F-17
J. CREW GROUP, INC. 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.
(16) 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.
(17) Stock Options
The J. Crew Group, Inc. Stock Option Plan (the "Option Plan") was adopted
by the Company in 1997. Under the terms of the Option Plan, an aggregate of
1,810,000 shares are available for grant to certain key employees or
consultants. The options have terms of seven to ten years and become
exercisable over a period of five years. Options granted under the Option
Plan are subject to various conditions, including under some circumstances,
the achievement of certain performance objectives.
A summary of stock option activity for the Plan was, as follows:
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
-------- -------- --------
average average average
------- ------- -------
Shares exercise price Shares exercise price Shares exercise price
------ -------------- ------ -------------- ------ --------------
Outstanding,beginning of year 997,200 $8.00 786,800 $8.31 ---- $ ---
Granted 772,800 9.47 431,000 6.82 786,800 8.31
Cancelled (237,200) 7.14 (220,600) 6.82 --
--------- -------- -------
Outstanding, end of year 1,532,800 $8.87 997,200 $8.00 786,800 $8.31
========= ===== ======== ===== ======= ==============
Options exercisable at end of year 318,040 $7.97 189,460 $7.06 -- --
========= ===== ======== ===== ======= ==============
(18) Employee Restricted Stock
Under the terms of employment agreements with several key executives
661,600 shares of restricted stock were awarded in fiscal 1997 and 487,400
shares in fiscal 1998. These shares vest through October 2002. Deferred
compensation of $5,620,000 was credited to additional paid in capital.
Deferred compensation is charged to expense over the vesting period.
In connection with the termination of an executive in 1998, 487,400 shares
were forfeited and deferred compensation of $2,325,000 was reversed and the
shares were reacquired as treasury stock.
(19) 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.
F-18
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31,1998
(20) 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.
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
$4,000,000 to write down inventories to net realizable value. (See note 2
to the consolidated financial statements).
F-19
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31,1998
Corporate and other expenses include expenses incurred by the corporate office
and certain non-recurring expenses that are not allocated to specific business
units. Corporate and other expenses in fiscal 1999 include the write off of
impaired software development costs. Corporate and other expenses in fiscal 1998
include tax gross-up payments related to restricted stock grants and employee
contract termination costs. Corporate and other expenses in fiscal 1997 include
a one-time bonus expense related to the employment of a senior executive and
non-recurring consulting fees incurred as a result of the Recapitalization.
Segment assets represent the assets used directly in the operations of each
business unit such as inventories and property and equipment. Corporate assets
consist principally of investments, deferred financing costs and certain
capitalized software.
The accounting policies used for segment reporting are consistent with those
described in the summary of significant accounting policies.
[$ in thousands]
Revenues 1999 1998 1997
---- ---- ----
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 (7,869) (9,560) (5,705)
-------- -------- --------
Income from operations 29,183 5,781 9,052
-------- -------- --------
Interest expense, net (38,861) (39,323) (20,494)
Gain on sale of PCP 1,000 10,000 -
Expenses incurred in connection with the
Recapitalization - ---- (20,707)
-------- -------- --------
Loss before income taxes $ (8,678) $(23,542) $(32,149)
======== ======== ========
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
======== ======== ========
F-20
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 29, 2000, January 30, 1999 and January 31, 1998
[$ in thousands]
Identifiable assets 1999 1998 1997
---- ---- ----
J. Crew $305,552 $324,949 $314,186
Clifford & Wills 8,927 17,377 29,078
PCP --- -- 57,811
Corporate 59,125 34,004 20,803
-------- -------- --------
$373,604 $376,330 $421,878
======== ======== ========
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
======== ======== ========
F-21
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
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:
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
(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-22
EXHIBIT INDEX
Exhibit
No. Description
-- -----------
3.2(a) By-laws of J. Crew Group, Inc. (incorporated by reference to Exhibit 3.2
to the Registration Statement)
3.2(b) By-laws amendment adopted June 1, 1998 (incorporated by reference to
Exhibit 3.2(b) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 30, 1999 ("1999 Form 10-K"))
3.2(c) By-laws amendment adopted January 27, 2000
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 the 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)
1
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)
2
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)
21.1 Subsidiaries of J. Crew Group, Inc.
27.1 Financial Data Schedule
__________
+Management contract or compensatory plan or arrangement.
3
Exhibit 3.2(c)
--------------
Amendment to Section 5.02 of the ByLaws
---------------------------------------
"Chairman. The Chairman of the Board, who shall be elected from among the
--------
Directors, shall preside at all meetings of the stockholders and the Board of
Directors. The Chairman shall have such other powers and duties as the Board of
Directors may from time to time assign to him or her."
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.
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
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
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);
(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:
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
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
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
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
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
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
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
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
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
(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
(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
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
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
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
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
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
Exhibit 21.1
------------
SUBSIDIARIES OF THE REGISTRANT
J. CREW GROUP, INC.
State of Name Under Which
Name of Subsidiary Incorporation Subsidiary Does Business
- ------------------ ------------- ------------------------
J. Crew Operating Corp. Delaware J. Crew Operating Corp.
J. Crew Inc. New Jersey J. Crew Inc.
ERL, Inc. New Jersey ERL, Inc.
Grace Holmes, Inc. Delaware (J. Crew Retail Stores)
H.F.D. No. 55, Inc. Delaware (J. Crew Factory Outlet Stores)
C & W Outlet, Inc. New York C & W Outlet, Inc.
J. Crew International, Inc. Delaware J. Crew International, Inc.
J. Crew Services, Inc. Delaware J. Crew Services, Inc.
5
YEAR
JAN-29-2000
JAN-29-2000
38,693
0
0
0
129,928
207,631
216,083
(77,683)
373,604
131,702
284,684
173,534
0
70,537
(335,130)
373,604
714,119
716,624
394,813
687,441
0
0
38,861
(8,678)
2,050
(6,628)
0
0
0
(6,628)
0
0
