J. Crew Group, Inc.
Annual Report 2000

Plain-text annual report

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 February 3, 2001 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: NoneIndicate by check mark whether the registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.Yes X No - Indicate by check mark if disclosure of delinquent filers pursuant to Item 405of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. [X] The common stock of the registrant is not publicly traded. Therefore, theaggregate market value is not readily determinable.As of April 1, 2001, there were 11,743,265 shares of Common Stock, par value$.01 per share, outstanding.Documents incorporated by reference: None FORWARD LOOKING STATEMENTSCertain statements in this Annual Report on Form 10-K under the captions"Business", "Selected Financial Data", "Management's Discussion and Analysis ofFinancial Condition and Results of Operations", "Financial Statements andSupplementary Data" and elsewhere constitute "forward-looking statements" withinthe meaning of the Private Securities Litigation Reform Act of 1995. We may alsomake written or oral forward looking statements in our periodic reports to theSecurities and Exchange Commission on Forms 10-Q, 8-K, etc., in press releasesand other written materials and in oral statements made by our officers,directors or employees to third parties. Statements that are not historicalfacts, including statements about our beliefs and expectations, are forward-looking statements. Such forward-looking statements involve known and unknownrisks, uncertainties and other important factors that could cause the actualresults, performance or achievements of the Company, or industry results, todiffer materially from historical results, any future results, performance orachievements expressed or implied by such forward-looking statements. Such risksand uncertainties include, but are not limited to, competitive pressures in theapparel industry, changes in levels of consumer spending or preferences inapparel and acceptance by customers of the Company's products, overall economicconditions, governmental regulations and trade restrictions, political orfinancial instability in the countries where the Company's goods aremanufactured, postal rate increases, paper and printing costs, the level of theCompany's indebtedness and exposure to interest rate fluctuations, and otherrisks and uncertainties described in this report and the Company's other reportsand documents filed or which may be filed, from time to time, with theSecurities and Exchange Commission. These statements are based on current plans,estimates and projections, and therefore you should not place undue reliance onthem. Forward looking statements speak only as of the date they are made and weundertake no obligation to update publicly any of them in light of newinformation 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 calendaryear for fiscal year 1996 and on the Saturday closest to January 31 in thefollowing calendar year for fiscal years 1997, 1998, 1999 and 2000. Accordingly,fiscal years 1996, 1997, 1998, 1999 and 2000 ended on January 31, 1997, January31, 1998, January 30, 1999, January 29, 2000 and February 3, 2001. All fiscalyears for which financial information is included had 52 weeks, except fiscalyear 2000 which had 53 weeks.References in this Report to the "Company", "J. Crew" and "Holdings" mean J.Crew Group, Inc. and its subsidiaries, unless the context requires otherwise. Part IITEM 1. BUSINESSGeneralThe Company is a leading retailer of women's and men's apparel, shoes andaccessories operating under the J. Crew (R) brand name. The Company has built astrong and widely recognized brand name known for its timeless styles at pricepoints that the Company believes represent exceptional product value. The J.Crew image has been built and reinforced over its 18-year history through thecirculation of more than 800 million catalogs that use magazine-qualityphotography to portray a classic American perspective and aspirationallifestyle. Many of the original items introduced by the Company in the early1980s (such as the rollneck sweater, weathered chino, barn jacket and pockettee) were instrumental in establishing the J. Crew brand and continue to be coreproduct offerings. The Company has capitalized on the strength of the J. Crewbrand 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 broadassortment of high-quality products designed to provide customers with one-stopshopping opportunities at attractive prices. J. Crew retail stores, catalogs andits Internet site offer a full line of men's and women's basic durables (casualweekend wear), workwear (casual weekday wear) sport, swimwear, accessories andshoes, 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 coreofferings of classics, durables and sport clothing, the demand for which theCompany believes is stable and resistant to changing fashion trends. The Companybelieves that the J. Crew image and merchandising strategy appeal to college-educated, professional and 1 affluent customers who, in the Company's experience, have demonstrated strongbrand loyalty and a tendency to make repeat purchases.J. Crew products are distributed exclusively through the Company's retail andfactory outlet stores, catalogs and the Company's Internet site, jcrew.com. TheCompany currently circulates over 70 million J. Crew catalogs per annum andoperates 105 J. Crew retail stores and 41 J. Crew factory outlet stores. Inaddition, 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 Retail, J. Crew Direct,and J. Crew Factory Outlets, each of which operate under the J. Crew brand name.In 2000, products sold under the J. Crew brand contributed $787.7 million in netsales. J. Crew brand net sales in 2000 were comprised of $406.8 million from J.Crew Retail, $284.8 million from J. Crew Direct and $96.1 million from J. CrewFactory Outlet. The Company also markets to its customers through its Internetsite (jcrew.com). Net sales derived from the Internet, which were $107.3 millionfor 2000, are included in J. Crew Direct net sales. The Company also generatedlicensing revenues of $3.0 million and shipping and handling fees of $35.3million.Effective as of October 30, 1998 the Company sold Popular Club Plan, Inc. andsubsidiaries (PCP) to The Fingerhut Companies, Inc. for $42.0 million and theassumption of an accounts receivable securitization facility. Revenues for PCPfor the nine months ended October 30, 1998 were $130.6 million. A gain on thesale 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 thereversal of certain estimated liabilities recorded at the date of sale.In 1998, management of the Company made a decision to exit the operations of itsClifford & Wills catalog and factory outlet subsidiaries (C&W). Revenues for C&Wfor the year ended January 30, 1999 were $83.8 million. A charge of $13.3million was included in fiscal 1998 operations to write down the assets of C&Wto net realizable value and to provide for certain additional costs inconnection with the discontinuance of the C&W operations, including severanceand lease termination costs. Additionally, fourth quarter charges of $1.7million, included in selling expense, were incurred relating to deferred catalogcosts. In February 2000 the Company sold certain intellectual property assets ofC&W to Spiegel Catalog Inc. for $3.9 million. In connection with this sale theCompany agreed to cease the fulfillment of catalog orders but retained the rightto operate its outlet stores and conduct other liquidation sales of inventoriesthrough December 31, 2000. After consideration of the proceeds from this saleand other terms of the agreement, the Company provided an additional $4.0million to write down inventories to net realizable value as of January 29,2000. During the year ended February 3, 2001 the remaining balance of net assetsapplicable to C&W of $4.1 million was written off.J. Crew BrandMerchandising and Design StrategyOver time, the J. Crew merchandising strategy has evolved from providing unisexproducts to creating full lines of men's and women's clothing, shoes andaccessories. This strategy had the effect of increasing overall J. Crew brandsales volume, and significantly increasing revenues from sales of women'sapparel as a percentage of total J. Crew brand sales from 50% in 1996 to 65% in2000.Every J. Crew product is designed by an in-house design staff, to reflect aclassic, clean aesthetic that is consistent with the brand's American lifestyleimage. Design teams are formed around J. Crew product lines and categories todevelop concepts, themes and products for each of the Company's J. Crewbusinesses. Members of the J. Crew technical design team develop constructionand fit specifications for every product to ensure quality workmanship andconsistency across product lines. These teams work in close collaboration withthe product development, merchandising and production staffs in order to gainmarket and other input. Product merchandisers provide designers with markettrend and other information at initial stages of the design process. J. Crewdesigners and merchants source globally for fabrics, yarns and finished productsto ensure quality and value, while manufacturing teams research and develop keyvendors worldwide to identify and maintain the essential characteristics forevery style. 2 Sourcing, Production and QualityThe Company maintains separate merchandising, design, manufacturing and qualityassurance teams for the production of J. Crew brand merchandise. The Company'sproducts are designed exclusively by in-house design and product developmentteams which support each line and class of product. These teams provideindividual attention and expertise to every style, ensuring that these stylesfit the J. Crew brand image.The Company's merchandise is produced for the Company by a variety ofmanufacturers, both domestically and outside the United States. The Company doesnot own or operate any manufacturing facilities, instead contracting with thirdparty vendors in over 22 countries for the production of its products. In 2000,approximately 80% of the Company's J. Crew brand products were sourced in theFar East, 10% were sourced domestically and 10% were sourced in Europe and otherregions. Rarely does the Company represent the majority of any one vendor'sbusiness and no one vendor supplies more than 10% of the Company's merchandise.The Company retains independent buying agents to conduct in-line and finalquality inspections at each manufacturing site. Random inspections of allincoming merchandise at the Lynchburg and Asheville distribution facilitiesfurther 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 hasestablished through the use of domestic vendors and strategic partnerships, acore group of long-term suppliers to provide quick response programs atsignificantly shorter lead times for certain product categories.DistributionThe Company operates two major telemarketing and distribution facilities for itsoperations. Order fulfillment for J. Crew Direct takes place at the 406,500square foot telemarketing and distribution center located in Lynchburg,Virginia. The Lynchburg facility processes approximately 3.8 million orders peryear and employs approximately 900 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 outletstore operations and also houses a J. Crew Direct telemarketing center. Thisfacility employs approximately 300 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 andFedEx. To enhance efficiency, each facility is fully equipped with a highlyadvanced telephone system, an automated warehouse locator system and aninventory bar coding system and the Lynchburg facility has an automated packingand shipping sorter.Management Information SystemsThe Company's management information systems are designed to provide, amongother things, comprehensive order processing, production, accounting andmanagement information for the marketing, manufacturing, importing anddistribution functions of the Company's business. The Company has point-of-saleregisters in its J. Crew Retail and Factory Outlet stores that enable it totrack inventory from store receipt to final sale on a real-time basis. TheCompany believes its merchandising and financial systems, coupled with its point-of-sale registers and software programs, allow for rapid stockreplenishment, concise merchandise planning and real-time inventory accountingpractices. The Company's telephone and telemarketing systems, warehouse packagesorting systems, automated warehouse locator and inventory bar coding systemsutilize advanced technology. These systems have provided the Company with anumber of benefits in the form of enhanced customer service, improvedoperational efficiency and increased management control and reporting. Inaddition, the Company's real-time inventory systems provide inventory managementon a per SKU basis and allow for an efficient fulfillment process. 3 The Company is in the process of installing a SAP enterprise resource planningsystem for its future information technology requirements. This system isscheduled for a phased-in implementation over a period of three years. In fiscal2000 the Company's accounting systems were implemented. A corporate widepurchasing system and retail sales (including new point of sale registers) andinventory systems are scheduled for implementation in fiscal 2001. In February2001, the Company outsourced it data center, desktop, network andtelecommunications services management and operations support.J. Crew RetailDuring fiscal 2000, J. Crew Retail generated net sales of $406.8 million,representing 51.6% of the Company's total net sales.The principal aspect of the Company's business strategy is an expansion programdesigned to reach new and existing customers through the opening of J. CrewRetail stores. In addition to generating sales of J. Crew products, J. CrewRetail stores help set and reinforce the J. Crew brand image. The stores aredesigned in-house and fixtured to create a distinctive J. Crew environment andstore associates are trained to maintain high standards of visual presentationand customer service. The result is a complete statement of J. Crew's timelessAmerican style, classic design and attractive product value.The Company believes that J. Crew Retail derives significant benefits from theconcurrent operation of J. Crew Direct. The broad circulation of J. Crewcatalogs and distribution of e-mails performs an advertising function, enhancingthe visibility and exposure of the brand, aiding the expansion of the retailconcept and increasing the profitability of the stores.The Company believes that its J. Crew Retail stores are among the mostproductive in its industry segment. All of the Company's J. Crew Retail storesare profitable and have generated positive store contribution within the first12 months of opening. J. Crew Retail stores that were open during all of fiscal2000 averaged $4.6 million per store in sales, produced sales per gross squarefoot of $567 and generated store contribution margins of approximately 24.0%.The Company believes that these results compare favorably to the average amongretailers that the Company believes to be its primary competitors. J. CrewRetail stores have an average size of 7,933 total square feet.As of February 3, 2001 J. Crew Retail operated 105 retail stores nationwide,having expanded from 31 stores in 1996. The Company opened 24 stores in fiscal2000 and intends to open approximately 30 stores in fiscal 2001. The stores arelocated in upscale shopping malls and in retail areas within major metropolitanmarkets that have an established higher-end retail business.The table below highlights certain information regarding J. Crew Retail storesopened through fiscal 2000. 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 -------------- ------ ------ ----------- -------- ----------- 1996 31 8 -- 39 338 8,6671997 39 12 -- 51 428 8,3921998 51 14 -- 65 530 8,1501999 65 16 -- 81 668 8,2432000 81 24 -- 105 833 7,933 4 J. Crew DirectSince its inception in 1983, J. Crew Direct has distinguished itself from othercatalog retailers by its award-winning catalog, which utilizes magazine-quality"real moment" pictures to depict an aspirational lifestyle image. During fiscal2000, J. Crew Direct distributed 33 catalog editions with a combined circulationof approximately 73 million. J. Crew Direct generated $284.8 million in netsales (including $107.3 million from its Internet site) representing 36.2% ofthe Company's total J. Crew brand net sales in fiscal 2000.Circulation StrategyJ. Crew Direct circulation strategy focuses on continually improving thesegmentation of customer files and the acquisition of additional customer names.In 2000, approximately 60% of J. Crew Direct revenues were from customers in the12-month buyer file (buyers who have made a purchase from any J. Crew catalog oron the Internet in the prior 12 months).The Company segments its customer file and tailors its catalog offerings toaddress the different product needs of its customer segments. To increase corecatalog productivity and improve the effectiveness of marginal and prospectingcirculation, each customer segment is offered appropriate catalog editions. TheCompany currently circulates Base, Women's, Version, Prospect and Sale catalogsto targeted customer segments.Descriptions of the Company's current catalogs follow:Base Books. These catalogs contain the entire mail order product offering andare sent primarily to 12-month buyers.Women's Books. The Women's books feature women's merchandise and are sent tobuyers who purchase primarily women's merchandise. These books represent anadditional customer contact potentially generating incremental revenue fromwomen customers.Version Books. These editions are abridged versions (in page count) of the BaseBooks and are sent to less active and prospective customers in order to costeffectively reactivate old customers and acquire new customers.Prospect Books. These editions are abridged versions (in size and page count) ofthe Version Books and are sent to prospective customers to cost effectivelyacquire new customers.Sale Books. These catalogs contain overstock merchandise to be sold at reducedprices without adversely affecting the J. Crew brand image.In 2000, total circulation decreased to approximately 73 million from 75 millionin 1999, and pages circulated were approximately 8.7 billion in 2000 compared to9.3 billion in 1999.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 andcredit card companies, "friends' name" card inserts, and through J. Crew Retailstores which represent an increasingly significant resource in prospecting fornew names. In addition, the Company is in the process of placing telephones inits J. Crew Retail stores with direct access to the J. Crew Direct telemarketingcenter to allow customers in the stores to order catalog-specific or out-of-stock items.Catalog Creation and ProductionThe Company is distinguished from other catalog retailers by its award-winningcatalog, which utilizes magazine-quality "real moment" pictures to depict anaspirational lifestyle image. All creative work on the catalogs is coordinatedby J. Crew personnel to maintain and reinforce the J. Crew brand image.Photography is executed both on location and in studios, and creative design andcopy writing are executed on a desk-top publishing system. Digital images aretransmitted directly to outside printers, thereby reducing lead times andimproving reproduction quality. The Company believes that appropriate pagepresentation of its merchandise stimulates demand and therefore places greatemphasis on page layout. 5 J. Crew Direct does not have long-term contracts with paper mills. Projectedpaper requirements are communicated on an annual basis to paper mills to ensurethe availability of an adequate supply. Management believes that the Company'slong-standing relationships with a number of the largest coated paper mills inthe United States allow it to purchase paper at favorable prices commensuratewith the Company's size.Telemarketing and Customer ServiceJ. Crew Direct's primary telemarketing and fulfillment facilities are located inLynchburg, Virginia. An additional telemarketing facility is located inAsheville, North Carolina. Telemarketing operations are open 24 hours a day,seven days a week and handled over 5.0 million calls in fiscal 2000. Orders formerchandise may be received by telephone, facsimile, mail and on the Company'sInternet site. The telemarketing centers are staffed by a total of 650 full-timeand part time telemarketing associates, and up to 300 additional associatesduring peak periods, who are trained to assist customers in determining thecustomer's correct size and to describe merchandise fabric, texture andfunction. Each telemarketing associate utilizes a terminal with access to an IBMmainframe computer which houses complete and up-to-date product and orderinformation. The fulfillment operations are designed to process and shipcustomer orders in a quick and cost-effective manner. Orders placed before 9:00p.m. are shipped the following day. Same-day shipping is available for ordersplaced before noon.J. Crew Factory OutletsThe Company extends its reach to additional consumers through its 41 J. CrewFactory Outlets. Offering J. Crew products at an average of 30% below fullretail prices, J. Crew Factory Outlets target value-oriented consumers. Thefactory outlet stores also serve to liquidate excess, irregular or out-of-seasonJ. Crew products outside of the Company's three primary distribution channels.During fiscal 2000, J. Crew Factory Outlets generated net sales of $96.1million, representing 12.2% of the Company's total J. Crew brand net sales.J. Crew Factory Outlets offer selections of J. Crew menswear and womenswear.Ranging in size from 3,500 to 10,000 square feet with an average of 6,500 squarefeet, the stores are generally located in major outlet centers in 25 statesacross the United States. The Company believes that the outlet stores, which aredesigned in-house, maintain fixturing, visual presentation and service standardssuperior 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 thatthe Company holds throughout the world, as well as its international licensingcontracts with third parties.The Company derives revenues from the international licensing of its trademarksin the J. Crew name and the know-how it has developed. The Company has alicensing agreement with Itochu Corporation in Japan which gives the Company theright to receive payments of percentage royalty fees in exchange for theexclusive right to use the Company's trademarks in Japan. Under the licenseagreement the Company retains a high degree of control over the manufacture,design, marketing and sale of merchandise under the J. Crew trademarks. Thisagreement expires in January, 2003. In 2000, licensing revenues totaled $3.0million.EmployeesThe Company focuses significant resources on the selection and training of salesassociates in both its mail order, retail and factory operations. Salesassociates are required to be familiar with the full range of merchandise of thebusiness in which they are working and have the ability to assist customers withmerchandise selection. Both retail and factory store management are compensatedin a combination of annual salary plus performance-based bonuses. Retail,telemarketing and factory associates are compensated on an hourly basis and mayearn team-based performance incentives. 6 At February 3, 2001 the Company had approximately 5,600 associates, of whomapproximately 3,500 were full-time associates and 2,100 were part-timeassociates. In addition, approximately 2,000 associates are hired on a seasonalbasis to meet demand during the peak holiday buying season. None of theassociates employed by J. Crew are represented by a union. The Company believesthat its relationship with its associates is good.CompetitionAll aspects of the Company's businesses are highly competitive. The Companycompetes primarily with specialty brand retailers, other catalog operations,department stores, and mass merchandisers engaged in the retail sale of men'sand women's apparel, accessories, footwear and general merchandise. The Companybelieves that the principal bases upon which it competes are quality, design,efficient service, selection and price. 7 ITEM 2. PROPERTIESThe Company is headquartered in New York City. The New York City headquarters'offices are leased under a lease agreement expiring in 2012 (not includingrenewal options). The Company owns two telemarketing and distributionfacilities: a 406,500-square-foot telemarketing and distribution center for J.Crew Direct operations in Lynchburg, Virginia and a 192,500-square-foottelemarketing and distribution center in Asheville, North Carolina servicing theJ. Crew Retail operations.As of February 3, 2001, the Company operated 105 J. Crew retail stores and 41factory outlet stores in 36 states and the District of Columbia. All of theretail and factory outlet stores are leased from third parties, and the leasesin most cases have terms of 10 to 12 years, not including renewal options. As ageneral matter, the leases contain standard provisions concerning the payment ofrent, events of default and the rights and obligations of each party. Rent dueunder the leases is comprised of annual base rent plus a contingent rent paymentbased on the store's sales in excess of a specified threshold. Substantially allthe leases are guaranteed by the Company.The table below sets forth the number of stores by state operated by the Companyin the United States as of February 3, 2001. Total ----- Retail Outlet Number ------ ------ ------ Stores Stores Of Stores ------ ------ --------- Alabama 1 1 2Arizona 2 -- 2California 17 3 20Colorado 3 2 5Connecticut 4 1 5Delaware 1 1 2Florida 4 3 7Georgia 3 2 5Illinois 6 -- 6Indiana 1 2 3Kansas 1 -- 1Kentucky 1 -- 1Louisiana 1 -- 1Maine -- 2 2Maryland 2 1 3Massachusetts 6 1 7Michigan 3 1 4Minnesota 2 -- 2Missouri 1 1 2Nevada 1 1 2New Hampshire -- 2 2New Jersey 4 1 5New Mexico 1 -- 1New York 11 4 15North Carolina 2 -- 2Ohio 4 -- 4Oregon 2 -- 2Pennsylvania 3 3 6Rhode Island 1 - 1South Carolina 1 2 3Tennessee 2 1 3Texas 6 2 8Vermont -- 1 1Virginia 4 1 5Washington 2 1 3Wisconsin 1 1 2District of Columbia 1 -- 1 --- -- --- Total. 105 41 146 === == === 8 ITEM 3. LEGAL PROCEEDINGS Routine litigation is pending against the Company with respect tomatters incidental to its business. Although the outcome of litigation cannot bepredicted with certainty, in the opinion of the Company none of those actionsshould have a material adverse effect on the consolidated financial position orresults of operations of the Company.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNo matters were submitted to a vote of security holders during the quarter endedFebruary 3, 2001. 9 PART IIITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSThere is no established public trading market for Holdings Common Stock. As ofMarch 7, 2001, there were 38 shareholders of record of the Common Stock. See"Item 12. Security Ownership of Certain Beneficial Owners and Management" for adiscussion of the ownership of Holdings.Holdings has not paid cash dividends on its Common Stock and does not anticipatepaying any such dividends in the foreseeable future.The credit agreement (the "Credit Agreement") and the Indenture relating to theSenior Discount Debentures (the "Holdings Indenture") prohibit the payment ofdividends by Holdings on shares of Common Stock (other than dividends payablesolely in shares of capital stock of Holdings). Additionally, because Holdingsis a holding company, its ability to pay dividends is dependent upon the receiptof dividends from its direct and indirect subsidiaries. Each of the CreditAgreement, the Holdings Indenture and the Indenture relating to the SeniorSubordinated Notes of J. Crew Operating Corp., a wholly owned subsidiary ofHoldings ("Operating Corp."), contains covenants which impose substantialrestrictions on Operating Corp's ability to pay dividends or make distributionsto Holdings.The Directors of Holdings have the right to receive all or a portion of the feesfor their services as a Director in Common Stock. In fiscal year 2000, certainDirectors elected to receive a total of 16,400 shares of Common Stock in paymentof their fees, at a purchase price of $10.00 per share. Holdings issued theCommon Stock to the Directors in transactions which did not involve any publicoffering in reliance upon Section 4(2) of the Securities Act of 1933, as amended(the "Securities Act").ITEM 6. SELECTED FINANCIAL DATAThe following table sets forth selected consolidated historical financial,operating, balance sheet and other data of the Company. The selected incomestatement and balance sheet data for the fiscal year ended January 31, 1997 arederived from the Consolidated Financial Statements of the Company, which havebeen audited by Deloitte & Touche LLP, independent auditors. The selected incomestatement and balance sheet data for each of the four fiscal years endedFebruary 3, 2001 are derived from the Consolidated Financial Statements of theCompany, which have been audited by KPMG LLP, independent auditors. The datapresented below should be read in conjunction with the Consolidated FinancialStatements, including the related Notes thereto, included herein, the otherfinancial information included herein, and "Management's Discussion and Analysisof Financial Condition and Results of Operations." Fiscal Year Ended January 31, January 31, January 30, January 29, February 3, ---------- ---------- ---------- ---------- ---------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (dollars in thousands, except per square foot data) Income Statement Data: Revenues $854,728 $ 881,044 $ 870,842 $ 750,696 $ 825,975 Cost of goods sold(a) 480,539 517,378 511,716 431,193 463,909 Selling, general and administrative 342,370 354,614 332,050 279,302 301,865 expenses Other charges -- -- 7,995 7,018 -- Charges incurred in connection with discontinuance of Clifford &Wills -- -- 13,300 4,000 4,130 Income from operations 31,819 9,052 5,781 29,183 56,071 Interest expense-net 10,470 20,494 39,323 38,861 36,642 Gain on sale of Popular Club Plan --- --- (10,000) (1,000) -- Expenses incurred-Recapitalization -- 20,707 -- --- -- Provision (benefit) for income taxes 8,800 (5,262) (8,162) (2,050) 7,500 Extraordinary items and cumulative effect of accounting changes, net of taxes -- (4,500) -- -- -- -------- --------- --------- --------- --------- Net income (loss) $ 12,549 $ (31,387) $ (15,380) $ (6,628) $ 11,929 ======== ========= ========= ========= ========= 10 Fiscal Year Ended January 31, January 31, January 30, January 29, February 3, 1997 1998 1999 2000 2001 Balance Sheet Data (at period end): Cash and cash equivalents $ 7,132 $ 12,166 $ 9,643 $ 38,693 $ 32,930 Working capital 132,222 142,677 95,710 75,929 49,482 Total assets 410,821 421,878 376,330 373,604 389,861 Total long term debt and redeemable preferred stock 87,092 428,457 433,243 458,218 464,310 Stockholders' equity (deficit) 102,006 (201,642) (235,773) (264,593) (278,347) Operating Data:Revenues:J. Crew retail $167,957 $ 209,559 $ 273,972 $ 333,575 $ 406,784J. Crew direct Catalog 289,773 260,853 230,752 213,308 177,535 Internet -- 4,000 22,000 65,249 107,225 -------- --------- --------- --------- --------- 289,773 264,853 252,752 278,557 284,760 -------- --------- --------- --------- --------- J. Crew factory outlet 94,579 100,285 96,461 101,987 96,114J. Crew licensing 3,817 2,897 2,712 2,505 3,020J. Crew shipping & handling fees 27,592 28,936 30,575 34,072 35,297 -------- --------- --------- --------- --------- Total J. Crew brand 583,718 606,530 656,472 750,696 825,975Other divisions(b) 271,010 274,514 214,370 -- --- -------- --------- --------- --------- --------- Total $854,728 $ 881,044 $ 870,842 $ 750,696 $ 825,975 ======== ========= ========= ========= ========= J. Crew Direct: Number of catalogs circulated (in 76,087 76,994 73,440 75,479 72,522thousands)Number of pages circulated (in millions) 9,827 9,830 8,819 9,319 8,677 J. Crew Retail: Sales per gross square foot(c) $ 551 $ 542 $ 558 $ 571 $ 567Store contribution margin(c) 25.4% 23.4% 25.0% 26.0% 23.9%Number of stores open at end of period 39 51 65 81 105Comparable store sales change(c) 4.5% (6.6)% 9.0% 1.8% 1.7% Depreciation and amortization $ 10,541 $ 15,255 $ 15,972 $ 19,241 $ 22,600 Net capital expenditures(d)New store openings $ 10,894 $ 19,802 $ 14,749 $ 13,300 $ 16,700Other 11,587 11,565 21,605 27,953 25,475 -------- --------- --------- --------- --------- Total net capital expenditures $ 22,481 $ 31,367 $ 36,354 $ 41,253 $ 42,175 ======== ========= ========= ========= =========(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 OPERATIONSThis discussion summarizes the significant factors affecting the consolidatedoperating results, financial condition and liquidity of the Company during thethree-year period ended February 3, 2001. This discussion should be read inconjunction with the audited consolidated financial statements of the Companyfor the three-year period ended February 3, 2001 and notes thereto includedelsewhere in this Annual Report on Form 10-K.Results of OperationsConsolidated statements of operations presented as a percentage of revenues areas follows: Fiscal year ended February 3, January 29, January 30, 2001 2000 1999 Revenues 100.0% 100.0% 100.0%Cost of goods sold, including buying and occupancy costs 56.2 57.4 58.8Selling, general and administrative expenses 36.5 37.2 38.1Other charges -- .9 .9Charges incurred in connection with discontinuance of C&W .5 .5 1.5Income from operations 6.8 3.9 .7Interest expense, net (4.4) (5.2) (4.5)Gain on the sale of Popular Club Plan -- .1 1.1Income/(loss) before income taxes 2.4 (1.2) (2.7)Income taxes (.9) .3 .9 ----- ----- -----Net income/(loss) 1.5% (.9)% (1.8)% ===== ===== =====Fiscal 2000 Compared to Fiscal 1999Revenues--------Revenues increased 10.0% to $826.0 million in the fiscal year ended February 3,2001 from $750.7 million in the fiscal year ended January 29, 2000. The fiscalyear ended February 3, 2001 consisted of 53 weeks compared to 52 weeks in theprior year. Net sales for the fifty-third week were $10.8 million. The increasein revenues was due primarily to the increase of $73.2 million in the net salesfor J.Crew Retail.J. Crew Retail net sales increased by 21.9% from $333.6 million in fiscal 1999to $406.8 million in fiscal 2000. The percentage of the Company's total netsales derived from J. Crew Retail increased to 51.6% in fiscal year 2000compared to 46.7% in fiscal 1999. This increase was attributed primarily to netsales from stores not opened for a full fiscal year. Comparable store salesincreased by 1.7% in fiscal 2000. The number of stores opened at February 3,2001 increased to 105 from 81 at January 29, 2000.J. Crew Direct net sales (which includes net sales from catalog and internetoperations) increased by 2.2% from $278.6 million in fiscal 1999 to $284.8million in fiscal 2000. The percentage of the Company's total net sales derivedfrom J. Crew Direct decreased to 36.2% in fiscal 2000 from 39.0% in fiscal 1999.Catalog net sales decreased to $177.5 million in fiscal 2000 from $213.3 millionin fiscal 1999. Internet net sales increased to $107.3 million in fiscal 2000from $65.3 million in fiscal 1999 as the Company continued to migrate catalogcustomers to the Internet. 12 J.Crew Factory Outlet net sales decreased by 5.8% from $102.0 million in fiscal1999 to $96.1 million in fiscal 2000. The percentage of the Company's total netsales derived from J. Crew Factory Outlet decreased to 12.2% in fiscal 2000 from14.3% in fiscal 1999. Comparable store sales for J. Crew Factory Outletdecreased by 2.9% in fiscal 2000. J. Crew Factory Outlet closed one store infiscal 2000 and 41 stores were open at February 3, 2001.Other revenues which consist of shipping and handling fees and royaltiesincreased from $36.6 million to $38.3 million, primarily as a result of anincrease in shipping and handling fees.Cost of sales, including buying and occupancy costs---------------------------------------------------Cost of sales, including buying and occupancy costs as a percentage of revenuesdecreased to 56.2% in fiscal 2000 from 57.4% in fiscal 1999. This decrease wascaused primarily by an increase in initial mark up due to a decrease in the costof merchandise and an improvement in inventory mix in our factory division.Selling, general and administrative expenses--------------------------------------------Selling, general and administrative expenses increased to $301.9 million infiscal 2000 (36.6% of revenues) from $279.3 million in fiscal 1999 (37.2% ofrevenues).General and administrative expenses of the J.Crew brand increased to $239.2million in fiscal 2000 (29.0% of revenues) from $203.6 million in fiscal 1999(27.1% of revenues). This increase resulted primarily from (a) an increase inthe expenses attributable to the increased number of retail stores in operationduring fiscal 2000 compared to fiscal 1999 and (b) an increase in bonusprovision in fiscal 2000 as a result of the increase in operating income.Selling expenses were $62.7 million in fiscal 2000 (7.6% of revenues) comparedto $75.7 million in fiscal 1999 (10.1% of revenues). This decrease was dueprimarily to $6.0 million of direct advertising related to the Internet that wasincurred in fiscal 1999, a decrease in pages circulated from 9.3 billion pagesin fiscal 1999 to 8.7 billion pages in fiscal year 2000 and catalog productionefficiencies.Write-down of assets and other charges in connection with the discontinuance of-------------------------------------------------------------------------------Clifford & Wills----------------An additional charge of $4.1 million was incurred in fiscal 2000 to write offthe remaining balance of the net assets of Clifford & Wills, primarilyinventories.Interest expense----------------Interest expense, net decreased to $ 36.6 million in fiscal 2000 from $38.9million in fiscal 1999. This decrease resulted from lower average borrowingsduring fiscal 2000 under the Revolving Credit Facility and the reduced term loanbalance offset by higher non-cash interest. Average borrowings under theRevolving Credit Facility required to fund inventories and capital expenditureswere $9.8 million in fiscal 2000 compared to $30.8 million in fiscal 1999.Interest expense included non-cash interest and amortization of deferredfinancing costs of $16.4 million in fiscal 2000 compared to $14.2 million infiscal 1999.Income Taxes------------The effective tax rate was 38.6% in fiscal 2000 compared to (23.6%) in fiscal1999. The effective tax rate in 1999 was less than the normal rate due primarilyto the inability of certain subsidiaries to deduct net operating losses forstate tax purposes. 13 Fiscal 1999 Compared to Fiscal 1998Revenues--------Revenues decreased 13.8% to $750.7 million in the fiscal year ended January 29,2000 from $870.8 million in the fiscal year ended January 30, 1999. The decreasein revenues was attributable to the sale of Popular Club Plan, effective as ofOctober 30, 1998, and the discontinuance of Clifford & Wills operations whichresulted in a decrease of $214.4 million. This decrease was offset by increasesof $59.6 million in J. Crew Retail and $25.8 million in J.Crew Direct. ExcludingPopular Club Plan and Clifford & Wills, revenues increased 14.3% from $656.5million in fiscal 1998 to $750.7 million in fiscal 1999.J. Crew Retail net sales increased by 21.8% from $274.0 million in fiscal 1998to $333.6 million in fiscal 1999. The percentage of the Company's total netsales derived from J. Crew Retail increased to 46.6% in fiscal year 1999compared to 33.2% in fiscal 1998. This increase was attributed to $54.6 millionfrom the opening of new stores and $5.0 million from an increase in comparablestore sales of 1.8%. The number of stores open at January 29, 2000 increased to81 from 65 at January 30, 1999.J. Crew Direct net sales (which includes net sales from catalog and internetoperations) increased by 10.2% from $252.8 million in fiscal 1998 to $278.6million in fiscal 1999. The percentage of the Company's total net sales derivedfrom 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.comwhich increased to $65.2 million fiscal 1999 from $21.6 million in fiscal1998.Catalog net sales decreased to $213.4 million in fiscal 1999 from $231.2million in fiscal 1998 as the Company adopted initiatives to migrate catalogcustomers to the Internet.J. Crew Factory Outlet net sales increased by 5.7% from $96.5 million in fiscal1998 to $102.0 million in fiscal 1999. The percentage of the Company's total netsales derived from J. Crew Factory Outlet increased to 14.2% in fiscal 1999 from11.7% in fiscal 1998. Comparable store sales for J. Crew Factory Outletincreased by 3.8% in fiscal 1999. J. Crew Factory Outlet closed three stores infiscal 1999 and 42 stores were open at January 29, 2000.Other revenues consist of shipping and handling fees and royalties in fiscal1999 and 1998. Fiscal 1998 also included finance charge income related toPopular Club Plan. The decrease in fiscal 1999 compared to fiscal 1998 was dueto the sale of Popular Club Plan in October 1998.Cost of sales, including buying and occupancy costs---------------------------------------------------Cost of sales, including buying and occupancy costs as a percentage of revenuesdecreased to 57.4% in fiscal 1999 compared to 58.8% in fiscal 1998. Excludingthe operations of PCP and C&W cost of sales including buying and occupancy costsdecreased to 57.4% in fiscal 1999 from 58.6% in fiscal 1998. This decrease wascaused primarily by an increase in initial mark up caused by a decrease in thecost of merchandise.Selling, general and administrative expenses--------------------------------------------Selling, general and administrative expenses decreased to $279.3 million infiscal 1999 (37.2% of revenues) from $332.1 million in fiscal 1998 (38.1% ofrevenues). Approximately $92.1 million of selling, general, and administrativeexpenses in fiscal 1998 resulted from the operations of PCP and C&W.Selling, general and administrative expenses of the J.Crew brand increased to$279.3 million in fiscal 1999 (37.2% of revenues) from $239.9 million in fiscal1998 (36.5% of revenues). This increase resulted primarily from an increase ingeneral and administrative expenses of $31.5 million due to (a) an increase inthe number of retail stores in operation during fiscal 1999 compared to fiscal1998; (b) an increase in consulting fees and other expenses attributable toinformation technology initiatives; and (c) an increase in marketing expenses ofapproximately $8 million, primarily direct advertising, devoted to increasingcustomer awareness of the Company's Internet site. 14 Selling expenses were $75.7 million in fiscal 1999 (10.1% of revenues) comparedto $67.8 million in fiscal 1998 (10.3% of revenues). This increase was due to$6.0 million of direct advertising related to the Internet and an increase inpages circulated from 8.8 billion pages in fiscal 1998 to 9.3 billion pages infiscal year 1999, an increase of 5.7%. These increases in selling expenses werepartially offset by decreases related to efficiencies in the catalog productionprocess.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 downthe carrying value of inventories to net realizable value. (See note 3 to theconsolidated financial statements).Other charges-------------Other charges in fiscal 1999 include $7.0 million relating to the write off ofcertain software development costs which were impaired by the decision of theCompany to adopt an enterprise resource planning system for its futureinformation technology requirements.Gain on sale of subsidiary--------------------------An additional gain of $1.0 million was recognized in fiscal 1999 from areduction in certain estimated liabilities established at the time of sale.(Seenote 3 to the consolidated financial statements).Interest expense----------------Interest expense, net decreased to $38.9 million in fiscal 1999 from $39.3million in fiscal 1998. This decrease resulted primarily from lower averageborrowings during fiscal 1999 under the Revolving Credit Facility and thereduced term loan balances which was offset by higher non-cash interest andinterest related to the settlement of a sales and use tax assessment. Averageborrowings under a Revolving Credit Facility required to fund inventories andcapital expenditures were $30.8 million in fiscal 1999 and $47.5 million infiscal 1998.Interest expense included non-cash interest and amortization of deferredfinancing costs of $14.2 million in fiscal 1999 compared to $12.7 million fiscal1998.Income Taxes------------The effective tax rate was (23.6%) in fiscal 1999 compared to (34.7)% in fiscal1998. The decrease in the effective tax rate in 1999 was primarily due to theinability of certain subsidiaries to deduct net operating losses for state taxpurposes.Liquidity and Capital ResourcesThe Company's primary cash needs have been for capital expenditures incurredprimarily for opening new stores and system enhancements, debt servicerequirements and working capital. The Company's sources of liquidity have beenprimarily cash flows from operations and borrowings under the revolving creditfacility.Cash provided by operating activities was $70.3 million in fiscal 2000 comparedto $94.1 million in fiscal 1999. The decrease in cash provided by operationsresulted from (a) an increase in the change in inventories of $36.8 million and(b) a decrease in the change in prepaid expenses and other current assets of$10.3 million offset by an increase in net income of $18.6 million.Capital expenditures, net of construction allowances, were $42.2 million infiscal 2000 which consisted primarily of the opening of 24 new J. Crew retailstores and for systems enhancements, primarily the SAP enterprise resourceplanning system. Capital expenditures in fiscal 1999 were $41.3 million andconsisted primarily from the opening of 16 new J.Crew Retail Stores and forsystem enhancements. 15 Capital expenditures are expected to be approximately $50.0 million in fiscal2001, primarily for the opening of at least 30 J. Crew retail stores and systemenhancements. The expected capital expenditures will be funded from internallygenerated cash flows and by borrowings from available financing sources.The Company repaid the $34.0 million outstanding balance of its term loan duringfiscal 2000. There are no scheduled principal payments of the Company's longterm debt during the next five years. There were no borrowings under theRevolving Credit Facility at February 3, 2001 and January 29, 2000. Averageborrowings under the Revolving Credit Facility were $9.8 million for the fiscalyear ended February 3, 2001 and $30.8 million for the fiscal year ended January29, 2000.Management believes that cash flow from operations and availability under theRevolving Credit Facility will provide adequate funds for the Company'sforeseeable working capital needs, planned capital expenditures and debt serviceobligations. The Company's ability to fund its operations and make plannedcapital expenditures, to make scheduled debt payments, to refinance indebtednessand to remain in compliance with all of the financial covenants under its debtagreements depends on its future operating performance and cash flow, which inturn, are subject to prevailing economic conditions and to financial, businessand other factors, some of which are beyond its control.Impact of InflationThe Company's results of operations and financial condition are presented basedupon historical cost. While it is difficult to accurately measure the impact ofinflation due to the imprecise nature of the estimates required, the Companybelieves that the effects of inflation, if any, on its results of operations andfinancial condition have been minor. However, there can be no assurance thatduring a period of significant inflation, the Company's results of operationswould not be adversely affected.SeasonalityThe Company's retail and direct businesses experience two distinct sellingseasons, spring and fall. The spring season is comprised of the first and secondquarters and the fall season is comprised of the third and fourth quarters. Netsales are usually substantially higher in the fall season and selling, generaland administrative expenses as a percentage of net sales are usually higher inthe spring season. Approximately 35% of annual net sales in fiscal 2000 occurredin the fourth quarter. The Company's working capital requirements also fluctuatethroughout the year, increasing substantially in September and October inanticipation of the holiday season inventory requirements.Recent Accounting PronouncementsThe Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 133, "Accounting for Derivative Instruments and HedgingActivities" and No. 138 "Accounting for Certain Derivative Instruments andCertain Hedging Activities" which require entities to recognize all derivativesas either assets or liabilities in the statement of financial position andmeasure those instruments at fair value. SFAS No. 133, as amended and SFAS No.138 are effective for all fiscal years beginning after June 15, 2000. TheCompany will adopt these standards in fiscal year 2001. Due to its limited useof derivative instruments, the Company does not expect the adoption of thesestandards to have a material effect on its consolidated financial positions orresults of operations.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe Company's principal market risk relates to interest rate sensitivity, whichis the risk the future changes in interest rates will reduce net income or thenet assets of the Company. The Company's variable rate debt consists ofborrowings under the Revolving Credit Facility and the Term Loan Facility. Inorder to manage this interest rate risk, the Company entered into an interestrate swap agreement in October 1997, which converted the variable interest ratefor $50 million of debt to a fixed rate of 6.23%. The swap agreement expired inOctober 2000 and was not renewed because the Company's exposure under theRevolving Credit Facility and Term Loan Facility have been substantiallyreduced. 16 The Company enters into letters of credit to facilitate the internationalpurchase of merchandise. The letters of credit are primarily denominated in U.S.dollars. Outstanding letters of credit at February 3, 2001 were approximately$50.9 million.The Company has a licensing agreement in Japan which provides for royaltypayments based on sales of J. Crew merchandise as denominated in yen. TheCompany has from time to time entered into forward foreign exchange contracts tominimize this risk. At February 3, 2001, there were no forward foreign exchangecontracts outstanding. 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe Financial Statements are set forth herein commencing on page F-1 of thisReport.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENot applicable. PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTThe following table sets forth the name, age and position of individuals who areserving as directors of Holdings and executive officers of Holdings andOperating Corp. Each Director of Holdings will hold office until the next annualmeeting of shareholders or until his or her successor has been elected andqualified. Officers are elected by the respective Boards of Directors and serveat the discretion of such Board. Name Age Position---- --- -------- Emily Woods............................39 Director, Chairman of the BoardMark A. Sarvary........................41 Director, Chief Executive OfficerCharlotte L. Beers.....................65 DirectorDavid Bonderman........................58 DirectorRichard W. Boyce.......................46 DirectorGregory D. Brenneman...................39 DirectorJohn W. Burden, III....................64 DirectorJames G. Coulter.......................41 DirectorBarbara K. Eisenberg...................55 Senior Vice President, General Counsel and Corporate SecretaryScott Formby...........................39 Executive Vice President, DesignScott D. Hyatt.........................43 Senior Vice President, ManufacturingWalter Killough........................46 Chief Operating OfficerDavid F. Kozel.........................45 Senior Vice President, Human ResourcesNicholas Lamberti......................58 Vice President, Corporate ControllerScott M. Rosen.........................42 Executive Vice President, Chief Financial OfficerCarol Sharpe...........................46 Executive Vice President, Merchandising - BrandTrudy Sullivan.........................51 PresidentBrian T. Swette........................47 DirectorJosh S. Weston.........................72 Director 18 Emily Woods Ms. Woods became Chairman of the Board of Directors of Holdings in 1997.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 ChiefExecutive Officer and Vice-Chairman of Holdings and as Chief Executive Officerof Operating Corp. She is also a director of Yankee Candle Company, Inc.Mark A. Sarvary Mr. Sarvary has been Chief Executive Officer and a Director of the Companysince May 1999. He was President/General Manager of the Nestle Frozen FoodDivision of Nestle USA from 1996 to 1999.Charlotte L. Beers Ms. Beers became a director of Holdings in 1998. Ms. Beers was Chairman ofJ. Walter Thompson (advertising agency) from 1999 until February 2001. She wasChairman and Chief Executive Officer of Ogilvy & Mather (advertising agency)from 1992 until 1997 and Chairman Emeritus from 1997 until March 1999. She alsoserves as a director of Martha Stewart Living Omnimedia, Inc. and IBeauty.com.David Bonderman Mr. Bonderman became a director of Holdings in 1997. Mr. Bonderman is afounding partner of Texas Pacific Group and has been Managing General Partner ofTPG for more than eight years. Mr. Bonderman serves on the Boards of Directorsof Bell & Howell, Inc., Continental Airlines, Inc., Co-Star Realty Information,Inc., Denbury Resources Inc., Ducati Motor Holdings S.p.A., Magellan HealthServices, Inc., Oxford Health Plans, Inc., Paradyne Networks, Inc., RyanAirHoldings PLC., ON Semiconductor Corporation, Washington Mutual, Inc.,Urogenesys, Inc. and Seagate Technology, Inc.Richard W. Boyce Mr. Boyce became a director of Holdings in 1997 and served as ChiefExecutive Officer of the Company during portions of 1997 and 1999 while alsoproviding operating oversight to the remainder of the TPG portfolio. Mr. Boyceis the senior operating partner of Texas Pacific Group. Prior to joining TexasPacific Group in 1997, Mr. Boyce was employed by PepsiCo for more than fiveyears prior thereto, most recently as Senior Vice President of Operations forPepsi-Cola, North America. He was Chairman of Favorite Brands InternationalHolding Corp., which filed for protection under Chapter 11 of the BankruptcyCode in 1999. Mr. Boyce also serves on the Boards of Directors of ConvergentCommunications, Del Monte Foods Corp. and ON Semiconductor Corporation.Gregory D. Brenneman Mr. Brenneman became a director of Holdings in 1998. He has been Presidentof Continental Airlines Inc. ("Continental") since 1996 and Chief OperatingOfficer of Continental since 1995. He is a director of Continental and HomeDepot, Inc.John W. Burden, III Mr. Burden became a director of Holdings in 1998. Mr. Burden has been aretail consultant for more than five years. He also serves as a director of SaksIncorporated and Chicos Fas Inc.James G. Coulter Mr. Coulter became a director of Holdings in 1997. Mr. Coulter is afounding partner of Texas Pacific Group and has been Managing General Partner ofTPG for more than eight years. Mr. Coulter serves on the Boards of Directors ofGenesis Health Ventures, Inc., Northwest Airlines, Inc., Oxford Health Plans,Inc., ON Semiconductor Corporation, Globespan, Inc. and Seagate Technology, Inc. 19 Barbara K. Eisenberg Ms. Eisenberg has been Senior Vice President, General Counsel and CorporateSecretary of the Company since 1999 and was Vice President, General Counsel andCorporate Secretary from 1998 until then. Prior thereto, she was VicePresident, Associate General Counsel and Corporate Secretary of BurlingtonIndustries, Inc. (textile manufacturer) for more than five years.Scott Formby Mr. Formby has been Executive Vice President, Design of the Company since1999. Prior thereto, he was Vice President, Design for more than five years.Scott D. Hyatt Mr. Hyatt has been Senior Vice President, Manufacturing of the Companysince 1998. He was with Express Inc. as Vice President, Production and Sourcingfrom 1996 to 1998.Walter Killough Mr. Killough has been Chief Operating Officer of the Company since 1999.He was Senior Vice President, General Manager, Mail Order from 1997 to 1999 andprior thereto, he was Senior Vice President of Clifford & Wills, a subsidiary ofthe Company, for more than five years.David F. Kozel Mr. Kozel has been Senior Vice President, Human Resources of the Companysince 1999. Prior thereto, he was with Grey Advertising Inc. as Vice President,Human Resources from 1998, Vice President, Human Resources of Deluxe Corporationfrom 1997 to 1998 and Vice President, Human Resources of Citibank from 1995 to1996.Nicholas Lamberti Mr. Lamberti has been Vice President - Corporate Controller of the Companyfor more than five years.Scott M. Rosen Mr. Rosen has been Executive Vice President and Chief Financial Officer ofthe Company since 1999, Senior Vice President and Chief Financial Officer from1998 until then and Chief Financial Officer of Mail Order for more than fiveyears prior thereto.Carol Sharpe Ms. Sharpe has been Executive Vice President, Merchandising - Brand of theCompany since 1999 and was Senior Vice President, General Merchandising Manager,Retail prior thereto. She was Senior Vice President and General MerchandisingManager-Women's from 1998 until then and Vice President, Women's for more than 5years prior to 1998.Trudy Sullivan Ms. Sullivan has been President since rejoining the Company in 2000. Shewas President of Kids "R" Us, a division of Toys "R" Us, Inc., from October 1999to February 2000. Ms. Sullivan was President, Mail Order of the Company from1998 to 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 ChiefOperating Officer of eBay Inc. (person-to-person trading community on theInternet), since 1999 and from 1998 until then was Senior Vice President ofMarketing and International of eBay. He was Executive Vice President and ChiefMarketing Officer-Global Beverages of Pepsi-Cola Beverages from 1996 untiljoining eBay Inc. and Executive Vice President Marketing-North America of Pepsi-Cola Beverages from 1994 to 1996. He is also a director of eBay Inc. 20 Josh S. Weston Mr. Weston became a director of Holdings in 1998. He has been HonoraryChairman of the Board of Directors of Automatic Data Processing (computingservices business) since 1998. He was Chairman of the Board of Automatic DataProcessing from 1996 until 1998 and Chairman and Chief Executive Officer formore than five years prior thereto. Mr. Weston is also a director of GentivaHealth Services, Inc., Aegis Communications Group, Inc. and Russ Berrie &Company, Inc. 21 ITEM 11. EXECUTIVE COMPENSATIONThe following table sets forth compensation paid for fiscal years 2000, 1999,and 1998 to each individual serving as its chief executive officer during fiscal2000 and to each of the four other most highly compensated executive officers ofthe Company as of the end of fiscal 2000. Long-Term Compensation Annual Compensation Awards Payouts ----------------------------------------------------------------------- Securities Name Other Annual Restricted Underlying LTIP All OtherAnd Fiscal Salary Bonus Compensation Stock Options/ Payouts CompensationPrincipal Position Year ($) ($) ($) Award(s)($)(1) SARS (#)(1) ($) ($)------------------------------------------------------------------------------------------------------------------------------------ Emily Woods 2000 $1,000,000 $1,000,000 $ -- -- -- -- $ 5,250 (5)Chairman 1999 1,000,000 1,000,000 -- -- -- -- 5,000 (5) 1998 1,000,000 1,000,000 -- (2) -- -- 2,907,590 (3)(5) Mark Sarvary 2000 729,811 502,500 -- -- -- -- 5,250 (5)Chief Executive Officer 1999 560,190 335,000 1,000,000(4) -- 272,000 -- -- 1998 -- -- -- -- -- -- -- Trudy Sullivan 2000 420,315 375,000 275,000(4) -- 70,000 -- 5,250 (5)President 1999 329,231 -- -- -- -- 5,000 (5) 1998 310,000 230,000 -- -- 25,000(6) -- 5,000 (5) Scott Formby 2000 450,000 337,500 -- -- 10,000 -- 4,558 (5)Executive Vice President, Design 1999 422,115 106,800 -- -- 8,800 -- 5,000 (5) 1998 392,158 107,000 -- -- -- -- 5,000 (5) Carol Sharpe 2000 400,000 360,000 -- -- -- -- 5,250 (5)Executive Vice President, Merchandising - Brand 1999 400,000 240,000 360,000(4) -- 12,000 -- 5,000 (5) 1998 362,500 100,300 -- -- 12,400 -- 5,000 (5) __________(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.(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 October 17, 2000 and 2001 and 194,200 shares will vest on October 17, 2002.(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) This amount is a signing bonus.(5) Represents Company matching contributions to 401(k) plan.(6) These options were forfeited when Ms. Sullivan left the Company in 1999. 22 The following Table shows information concerning stock options granted to any ofthe named executive officers during fiscal year 2000. Option Grants In Fiscal Year 2000 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 ExpirationName Granted(#) (1)(2) Fiscal Year Price($/Sh) Date 5%($) 10% ($)---------------------------------------------------------------------------------------------------------- Scott Formby 10,000 2.7% $10.00 3/13/10 $62,900 $159,400 Trudy Sullivan 37,600 10.0% $ 6.82 1/31/10 $161,300 $408,700 32,400 8.6% $10.00 1/31/10 $203,800 $516,400__________(1) The Company has not granted any SARs.(2) The options have 10-year terms. Ms. Sullivan's option grant of 37,600 shares is exercisable 15,040 shares on the grant date and 20% on January 31st in each of 2001 through 2003. Ms. Sullivan's option grant of 32,400 shares is exercisable 20% on January 31st in each of 2001 through 2005. Mr. Formby's options are exercisable 20% on January 31st in each of 2001 through 2005. All unvested options become exercisable in the event of a change in control of Holdings. The following Table shows the number of stock options held by the namedexecutive officers at the end of fiscal year 2000. The named executive officersdid not exercise any stock options in fiscal year 2000. Aggregated Option Exercises in Fiscal Year 2001 and Fiscal Year-End Option Values Number Of Securities Underlying Unexercised Options At Fiscal Year End (1) (#)Name Exercisable/Unexercisable---- -------------------------Scott Formby........................................ 24,240 / 25,760Mark Sarvary........................................ 54,400 / 217,600Carol Sharpe........................................ 17,400 / 19,600Trudy Sullivan...................................... 29,040 / 40,960Emily Woods......................................... 98,400 / 393,800__________(1) There is no established public market for shares of the Company's Common Stock. 23 Employment Agreements and Other Compensation ArrangementsMs. Woods has an employment agreement with Holdings and Operating Corp. (the"Employers") which provides that, for a period of five years beginning onOctober 17, 1997, she will serve as Chairman of the Board of Directors ofHoldings. The employment agreement provides for an annual base salary of $1.0million, and an annual target bonus of up to $1.0 million based on achievementof earnings objectives to be determined each year. The employment agreement alsoprovided for the grant of 661,600 shares of Common Stock (the "Woods RestrictedShares"). (See footnotes 2 and 3 to the Executive Compensation Table forinformation on the vesting of the Woods Restricted Shares and the reimbursementof income taxes incurred by Ms. Woods in connection with such grant.) Ms. Woodsis also entitled to various executive benefits and perquisites under theemployment agreement.Under the terms of stock options awarded to Ms. Woods under the Company's StockOption Plan, all unvested options shall become exercisable (i) if Ms. Woods'employment is terminated by Holdings without cause, by Ms. Woods for good reasonor by reason of death or disability, or (ii) in the event of a change in controlof Holdings. Because of a change in Ms. Woods' duties and responsibilities, uponthe termination of Ms. Woods' employment, she will be entitled to severancebenefits and other benefits as described in the February 4, 2000 amendment toher agreement.Mr. Sarvary has an Employment Agreement with Operating Corp., which providesthat, for a period of five years commencing on May 10, 1999, he will serve asChief Executive Officer of Operating Corp. The Employers also agreed to causeMr. Sarvary to be elected to the Board of Directors of Holdings. The EmploymentAgreement provides for an annual base salary of $670,000 and an annual targetbonus of 50% of his annual base salary based on achievement of earningsobjectives to be determined each year. The Employment Agreement also providesfor the payment of a signing bonus of $1,000,000 and the grant of options topurchase 272,000 shares of Common Stock as well as the grant of additional stockoptions to purchase 68,000 shares on the earlier of the date of an initialpublic offering of Holdings' Common Stock or May 10, 2004. Mr. Sarvary is alsoentitled to various executive benefits and perquisites under the EmploymentAgreement. Mr. Sarvary's Employment Agreement also provides that in the event ofhis termination by Operating Corp. without Cause or termination by Mr. Sarvaryfor Good Reason (as those terms are defined in the Employment Agreement), hewill receive an amount equal to two times his base salary.Ms. Sullivan has an Employment Agreement with Operating Corp. which providesthat, for a period of three years commencing on February 27, 2000, she willserve as President of Operating Corp. at an annual base salary of $500,000 andan annual target bonus of 50% of her annual base salary based on achievement ofearnings objectives to be determined for each year. The Employment Agreementalso provides for a signing bonus of $275,000 and the grant of options topurchase 70,000 shares of Common Stock. Ms. Sullivan is also entitled to variousexecutive benefits and perquisites under the Employment Agreement. Ms.Sullivan's Employment Agreement also provides for continuation of her salary fora period of one year if her employment is terminated by Operating Corp. withoutCause or if she terminates her employment for Good Reason (as those terms aredefined in the Employment Agreement).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 asExecutive Vice President-Merchandising of Operating Corp. The EmploymentAgreement provides for an annual base salary of $400,000 and an annual targetbonus of 60% of her annual base salary based on achievement of earningsobjectives to be determined for each year. The Employment Agreement alsoprovides for a signing bonus of $360,000 and the grant of options to purchase12,000 shares of Common Stock. The Employment Agreement provides forcontinuation of salary for a period of one year if Ms. Sharpe's employment isterminated without Cause (as defined in the Agreement). Ms. Sharpe's EmploymentAgreement also provides that if, on April 30, 2003, the aggregate spread betweenthe fair market value per share and the exercise price per share of her optionsto 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 suchshortfall, subject to adjustment in the event she has disposed of any of theshares underlying such options. 24 The Woods Restricted Shares and any shares of Common Stock acquired by Ms.Woods, Mr. Sarvary and Ms. Sullivan and Sharpe pursuant to the exercise ofoptions are subject to a shareholders' agreement providing for certain transferrestrictions, registration rights and customary tag-along and drag-along rights.Compensation Committee Interlocks and Insider ParticipationMs. Woods, Chairman, and Mr. Boyce, a director and former Chief ExecutiveOfficer of the Company, are members of the Compensation Committee of Holdings.Compensation of DirectorsAn attendance fee of $10,000 for each Board of Directors meeting (up to a totalof $40,000 per year) is paid to each Director who is neither an employee of theCompany nor a representative of TPG. Directors have the option to receive all ora portion of that fee paid in cash or in shares of Common Stock at a per sharepurchase price equal to the fair market value thereof.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTThe following table sets forth information regarding the beneficial ownership ofthe Common Stock of Holdings as of March 7, 2001 for each person who is known toHoldings to be the beneficial owner of 5% or more of Holdings Common Stock. Theholders listed have sole voting power and investment power over the shares heldby them, except as indicated by the notes following the table. Name and Address Amount and Nature of Percent ofTitle of Class of Beneficial Owner Beneficial Ownership Class------------------------------------------------------------------------------------ Common Stock TPG Partners II, L.P. 7,313,797.6 shares (1) 59% 301 Commerce Street, Suite 3300 Fort Worth, TX 76102 Common Stock Emily Woods 2,363,576.6 shares (2) 19% 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., TPG Partners II L.P. and TPG Investors II, L.P.(2) Includes (a) 98,400 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) 388,600 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 beneficialownership of each class of equity securities of Holdings as of March 7, 2001 for(i) each director, (ii) each of the executive officers identified in the tableset forth under Item 11. "Executive Compensation", and (iii) all directors andexecutive officers as a group. The holders listed have sole voting power andinvestment power over the shares held by them, except as indicated by the notesfollowing the table. Number of Shares and Nature of Percent ofTitle of Class Name of Beneficial Owner Beneficial Ownership Class---------------------------------------------------------------------------------------------------------- Common Stock Charlotte L. Beers 16,466.276 *Common Stock David Bonderman 7,313,797.6 (1) 59%Common Stock Richard W. Boyce 55,200 (2) *Common Stock Gregory D. Brenneman 13,000 *Common Stock John W. Burden, III 4,466.276 *Common Stock James G. Coulter 7,313,797.6 (1) 59%Common Stock Scott Formby 24,240 (2) *Common Stock Mark A. Sarvary 108,800 (2) *Common Stock Carol Sharpe 19,800 (2) *Common Stock Trudy Sullivan 29,040 (2)Common Stock Brian T. Swette 17,866.276 * Common Stock Josh S. Weston 17,466.276 *Common Stock Emily Woods 2,363,576.6 (3) 19%Common Stock All Directors and executive 10,079,439.3 (1) (2) (3) 81% officers as a groupSeries A Preferred Stock Charlotte L. Beers 60 *Series A Preferred Stock David Bonderman 73,474.58 (1) 79%Series A Preferred Stock Gregory D. Brenneman 60 * Series A Preferred Stock James G. Coulter 73,474.58 (1) 79% 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% Series A Preferred Stock All Directors and executive 76,753.085 83% 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) 98,400 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) 388,600 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 topurchase a residence. The largest amount outstanding in fiscal year 2000 was$950,000. The loan is secured by a mortgage on that residence and $900,000 isstill outstanding. Holdings and its subsidiaries entered into a tax sharing agreementproviding (among other things) that each of the subsidiaries will reimburseHoldings for its share of income taxes determined as if such subsidiary hadfiled its tax returns separately from Holdings. . 27 PART IVITEM 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 February 3, 2001 and January 29, 2000 (iii) Consolidated Statements of Operations - Years ended February 3, 2001, January 29, 2000 and January 30, 1999 (iv) Consolidated Statements of changes in Stockholders' Deficit - Years ended February 3, 2001, January 29, 2000 and January 30, 1999 (v) Consolidated Statements of Cash Flows - Years ended February 3, 2001, January 29, 2000 and January 30, 1999 (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 February 3, 2001.(c) Exhibits See Item 14(a)3 above.(d) Financial Statements 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 SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. J. CREW GROUP, INC.Date: April 20, 2001 By: /s/ Mark A. Sarvary -------------------- Mark A. Sarvary Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities indicated, on April 20, 2001. Signature Title --------- ----- /s/ Emily Woods Director; Chairman of the Board --------------- Emily Woods /s/ Mark A. Sarvary Director; Chief Executive Officer ------------------- (Principal Executive Officer) Mark A. Sarvary /s/ Scott M. Rosen Executive Vice President, Chief Financial ------------------ Officer (Principal Financial Officer) Scott M. Rosen /s/ Nicholas Lamberti Vice President, Corporate Controller --------------------- (Principal Accounting Officer) Nicholas Lamberti /s/ Charlotte L. Beers Director ---------------------- Charlotte L. Beers /s/ David Bonderman Director ------------------- David Bonderman /s/ Richard W. Boyce Director -------------------- Richard W. Boyce /s/ Gregory D. Brenneman Director ------------------------ Gregory D. Brenneman /s/ John W. Burden, III Director ----------------------- John W. Burden, III /s/ James G. Coulter Director -------------------- James G. Coulter /s/ Brian T. Swette Director -------------------- Brian T. Swette /s/ Josh S. Weston Director ------------------ Josh S. Weston S-1 Independent Auditors' ReportThe Board of Directors and StockholdersJ. Crew Group, Inc. and Subsidiaries:We have audited the consolidated financial statements of J. Crew Group, Inc. andsubsidiaries (the "Company") as listed in the accompanying Index. In connectionwith our audits of the consolidated financial statements, we also have auditedthe financial statement schedule listed in the accompanying index. Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company's management. Our responsibility is to express anopinion on these consolidated financial statements and financial statementschedule based on our audits.We conducted our audits in accordance with auditing standards generally acceptedin the United States of America. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of J. Crew Group, Inc.and subsidiaries as of February 3, 2001 and January 29, 2000 and the results oftheir operations and their cash flows for each of the years in the three-yearperiod ended February 3, 2001, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, therelated financial statement schedule when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects the information set forth therein. KPMG LLPMarch 30, 2001 F-1 J. CREW GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets February 3, January 29, Assets 2001 2000 ------ ---- ---- (in thousands) Current assets: Cash and cash equivalents $ 32,930 $ 38,693 Merchandise inventories 140,667 129,928 Prepaid expenses and other current assets 23,740 30,083 Net assets held for disposal -- 8,927 --------- --------- Total current assets 197,337 207,631 --------- ---------Property and equipment - at cost: Land 1,460 1,460 Buildings and improvements 11,432 11,363 Furniture, fixtures and equipment 70,541 60,355 Leasehold improvements 144,906 130,054 Construction in progress 22,983 12,851 --------- --------- 251,322 216,083 Less accumulated depreciation and amortization 85,746 77,683 --------- --------- 165,576 138,400 --------- ---------Deferred income tax assets 14,362 14,830Other assets 12,586 12,743 --------- --------- Total assets $ 389,861 $ 373,604 ========= ========= Liabilities and Stockholders' Deficit -------------------------------------Current liabilities: Accounts payable $ 49,705 $ 40,951 Other current liabilities 75,168 70,222 Federal and state income taxes payable 17,581 14,687 Deferred income tax liabilities 5,401 5,842 --------- --------- Total current liabilities 147,855 131,702 --------- ---------Long-term debt 264,292 284,684 --------- ---------Deferred credits and other long-term liabilities 56,043 48,277 --------- ---------Redeemable preferred stock 200,018 173,534 --------- ---------Stockholders' deficit (278,347) (264,593) --------- --------- Total liabilities and stockholders' deficit $ 389,861 $ 373,604 ========= =========See accompanying notes to consolidated financial statements. F-2 J. CREW GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended ----------- February 3, January 29, January 30, ----------- -------------- ------------ 2001 2000 1999 ---- ---- ---- (in thousands) Revenues: Net sales $787,658 $714,119 $816,221 Other 38,317 36,577 54,621 -------- -------- -------- 825,975 750,696 870,842 Operating costs and expenses: Cost of goods sold, including buying and occupancy costs 463,909 431,193 511,716 Selling, general and administrative expenses 301,865 279,302 332,050 Write off of software development costs -- 7,018 -- Write down of assets and other charges in connection with discontinuance of Clifford & Wills 4,130 4,000 13,300 Termination costs and other nonrecurring employment contract charges -- - 7,995 -------- -------- -------- 769,904 721,513 865,061 -------- -------- -------- Income from operations 56,071 29,183 5,781 Interest expense - net 36,642 38,861 39,323 Gain on sale of Popular Club Plan -- (1,000) (10,000) -------- -------- -------- Income/(loss) before income taxes 19,429 (8,678) (23,542)(Provision) benefit for income taxes (7,500) 2,050 8,162 --------- -------- -------- Net income/(loss) $ 11,929 $ (6,628) $(15,380) ======== ======== ======== See accompanying notes to consolidated financial statements. F-3 J. CREW GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended ----------- February 3, January 29, January 30, ------------ -------------- ------------ 2001 2000 1999 -------- -------- -------- (in thousands) Cash flows from operating activities:Net income/(loss) $ 11,929 $ (6,628) $(15,380)Adjustments to reconcile net income/(loss) to net cashprovided by operating activities: Depreciation and amortization 22,600 19,241 15,972 Write off of software development costs -- 7,018 -- Amortization of deferred financing costs 2,793 2,196 2,119 Noncash interest expense 13,608 11,989 10,534 Deferred income taxes 27 (6,840) (10,129) Provision for losses on accounts receivable -- -- 5,627 Noncash compensation expense 649 636 881 Gain on sale of subsidiary -- (1,000) (10,000) Write down of assets and other charges in connection with discontinued catalog 4,130 4,000 15,000Changes in operating assets and liabilities:Accounts receivable -- -- (8,242)Merchandise inventories (10,739) 26,094 (15,608)Net assets held for disposal 4,797 4,450 --Prepaid expenses and other current assets 6,343 16,646 (536)Other assets (2,788) (777) (2,559)Accounts payable 8,754 821 7,415Other liabilities 5,263 12,892 1,931Federal and state income taxes payable 2,894 3,407 11,029 -------- -------- -------- Net cash provided by operating activities 70,260 94,145 8,054 -------- -------- --------Cash flows from investing activities:Capital expenditures (55,694) (48,684) (41,177)Proceeds from construction allowances 13,519 7,431 4,823Proceeds from sale of subsidiary, net of related expenses - -- 37,157 -------- -------- -------- Net cash provided by (used in) investing activities (42,175) (41,253) 803 -------- -------- --------Cash flows from financing activities:(Decrease)/increase in notes payable, bank -- (14,000) 14,000Repayment of long-term debt (34,000) (10,000) (26,000)Proceeds from the issuance of common stock 178 158 320Proceeds from the issuance of redeemable preferred stock -- -- 300Repurchase of common stock (26) - -- -------- -------- -------- Net cash used in financing activities (33,848) (23,842) (11,380) -------- -------- --------Increase (decrease) in cash and cash equivalents (5,763) 29,050 (2,523)Cash and cash equivalents at beginning of year 38,693 9,643 12,166 -------- -------- --------Cash and cash equivalents at end of year $ 32,930 $ 38,693 $ 9,643 ======== ======== ========Supplementary cash flow information: Income taxes paid (refunded) $ 4,279 $ (7,570) $ (515) ======== ======== ======== Interest paid $ 20,513 $ 24,792 $ 27,763 ======== ======== ========Noncash financing activities: Dividends on redeemable preferred stock $ 26,484 $ 22,986 $ 19,952 ======== ======== ========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) Additional Retained Deferred Stock- Common stock paid-in earnings Treasury compen- holders' ------------ Shares Amount capital (Deficit) stock sation deficit ------ ------ ------- ------- ----- ------ ------- Balance at January 31, 1998 11,661,600 $ 1 $68,939 $(266,232) $ -- $(4,350) $(201,642) Net loss -- -- -- (15,380) -- -- (15,380) Issuance of common stock 47,600 -- 320 -- -- -- 320 Preferred stock dividends -- -- -- (19,952) -- -- (19,952) Issuance of common stock pursuant to grant of restricted stock, net 487,400 -- 1,120 -- -- (1,120) -- Forfeiture of shares of restricted stock -- -- -- -- (2,325) 2,325 -- Amortization of restricted stock -- -- -- -- -- 881 881 ---------- --- ---------- --------- -------- -------- --------- Balance at January 30, 1999 12,196,600 1 70,379 (301,564) (2,325) (2,264) (235,773) Net loss -- -- -- (6,628) -- -- (6,628) Issuance of common stock 17,665 -- 158 -- -- -- 158 Preferred stock dividends -- -- -- (22,986) -- -- (22,986) Amortization of restricted stock -- -- -- -- -- 636 636 ---------- --- ---------- --------- -------- -------- --------- Balance at January 29, 2000 12,214,265 $ 1 $70,537 $(331,178) $(2,325) $(1,628) $(264,593) ========== === ========== ========= ======== ======== ========= Net income -- -- -- 11,929 -- -- 11,929 Preferred stock dividends -- -- -- (26,484) -- -- (26,484) Issuance of common stock 18,400 -- 178 -- -- -- 178 Amortization of restricted stock -- -- -- -- -- 649 649 Repurchase of common stock -- -- -- -- (26) -- (26) Balance at February 3, 2001 12,232,665 $ 1 $70,715 $(345,733) $(2,351) $ (979) $(278,347) ========== === ======= ========= ======= ======= ========= See accompanying notes to consolidated financial statements. F-5 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999(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 2000, 1999, and 1998 ended on February 3, 2001 (53 weeks), January 29, 2000 (52 weeks) and January 30, 1999 (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 $18,331,000 and $23,896,000 at February 3, 2001 and January 29, 2000, are stated at cost, which approximates market value. F-6 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999 (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 in 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 February 3, 2001 and January 29, 2000 were $10,600,000 and $14,300,000. Catalog costs, which are reflected in selling and administrative expenses, for the fiscal years 2000, 1999, and 1998 were $69,000,000, $84,077,000, and $116,515,000. All other advertising costs are expensed as incurred. Advertising expenses were $6,671,000 for fiscal year 1999. Advertising costs were not significant in all other years. (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 $15.0 million and $6.0 million of systems development costs were capitalized in fiscal years 2000 and 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 $8,703,000 and $11,282,000 at February 3, 2001 and January 29, 2000, 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-7 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999 (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. Amounts billed to customers for shipping and handling fees related to catalog and internet sales are included in other revenues at the time of shipment. (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 February 3, 2001, January 29, 2000 and January 30, 1999. (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-8 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999(2) Shipping and Handling Revenues In July 2000 the Emerging Issues Task Force of the Financial Accounting Standards Board issued EITF 00-10 "Accounting for Shipping and Handling Fees and Costs", which requires that amounts billed to a customer in a sale transaction related to shipping and handling should be classified as revenues. The Company adopted EITF 00-10 in its consolidated financial statements during the fourth quarter of fiscal 2000 and has restated all comparative prior period financial statements. Previously, the Company netted shipping and handling fees against third- party shipping costs in cost of sales. Handling costs, including shipping supplies and labor to assemble and ship the product, were included in selling, general and administrative expenses. After the restatement, shipping and handling fees are included in other revenues and shipping and handling costs are included in cost of sales.(3) 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 $130.6 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 $83.8 million. Revenues and expenses for fiscal 1999 and 2000 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-9 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999 At February 3, 2001 the Company determined that the realizable value of the remaining net assets of C&W, primarily inventories, was less than their carrying amounts and an additional charge of $4,130,000 was taken.(4) 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 various debt and securitization transactions. In connection with the Recapitalization, the Company repaid substantially all of its preexisting debt obligations immediately before the consummation of the Recapitalization.(5) Other Current Liabilities Other current liabilities consist of: February 3, January 29, 2001 2000 ----------- ----------- Customer liabilities $12,251,000 $ 8,855,000 Accrued catalog and marketing costs 4,515,000 11,503,000 Taxes, other than income taxes 3,686,000 2,372,000 Accrued interest 4,746,000 4,926,000 Accrued occupancy 2,339,000 6,957,000 Reserve for sales returns 6,530,000 5,011,000 Accrued compensation 11,051,000 7,411,000 Other 30,050,000 23,187,000 ----------- ----------- $75,168,000 $70,222,000 ----------- ----------- F-10 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999 (6) Long-Term Debt February 3, January 29, 2001 2000 ---- ---- Term loan (a) $ -- $ 34,000,000 10-3/8% senior subordinated notes (b) 150,000,000 150,000,000 13-1/8% senior discount debentures (c) 114,292,000 100,684,000 ------------ ------------ Total $264,292,000 $284,684,000 ============ ============ (a) The term loan was subject to the same interest rates and security terms as the Revolving Credit Agreement and was fully repaid in January 2001. Weighted average interest rate was 8.5% at January 29, 2000. (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% of principal in 2002 to 100% in 2005 and thereafter. F-11 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999 (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% of principal to 100% in 2005 and thereafter. There are no maturities of long-term debt required during the next five years. (7) Lines of Credit On October 17, 1997, 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 $34,000,000, $58,000,000 and $104,000,000 during fiscal years 2000, 1999 and 1998 and average borrowings were $9,800,000, $30,800,000, and $47,500,000. There were no borrowings outstanding at February 3, 2001 and January 29, 2000. Outstanding letters of credit established to facilitate international merchandise purchases at February 3, 2001 and January 29, 2000 amounted to $50,948,000 and $38,315,000. 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-12 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999 (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. At February 3, 2001, shares issued were 12,232,665 and shares outstanding were 11,743,265. 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. During 1998 directors acquired 30,000 shares of common stock and converted fees into 17,600 shares of common stock. During 1999 and 2000 directors converted fees into 17,665 shares and 16,400 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 $75,018,000 at February 3, 2001. 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 February 3, 2001, 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 through 2012. At February 3, 2001 aggregate minimum rentals in future periods are, as follows: Fiscal year Amount ----------- ------ 2001 $ 42,131,000 2002 40,095,000 2003 38,917,000 2004 35,864,000 2005 33,212,000 Thereafter 139,432,000 F-13 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999 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 2000, 1999, and 1998 was $45,138,000, $39,474,000, and $42,347,000, including contingent rent based on store sales of $1,974,000, $2,600,000, and $3,270,000. (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 $1,241,000, $1,320,000 and $1,780,000 for fiscal 2000, 1999 and 1998.(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 2000, 1999, and 1998 was $3,020,000, $2,505,000, and $2,712,000.(13) Interest Expense - Net Interest expense, net consists of the following: 2000 1999 1998 ---- ---- ---- Interest expense $34,390,000 $36,903,000 $38,260,000 Amortization of deferred financing costs 2,793,000 2,196,000 2,119,000 Interest income (541,000) (238,000) (1,056,000) ----------- ----------- ----------- Interest expense, net $36,642,000 $38,861,000 $39,323,000 ----------- ----------- ----------- 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-14 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999(14) Other Revenues Other revenues consist of the following: 2000 1999 1998 ---- ---- ---- Shipping and handling fees $35,297,000 $34,072,000 $46,584,000 Royalties 3,020,000 2,505,000 2,712,000 Finance charge income -- -- 5,325,000 ----------- ----------- ----------- $38,317,000 $36,577,000 $54,621,000 =========== =========== ===========(15) 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 $202,793,000 and $235,215,000 at February 3, 2001 and January 29, 2000, and is based on dealer quotes or quoted market prices of the same or similar instruments The carrying amounts of long-term debt were $264,292,000 and $284,684,000 at February 3, 2001 and January 29, 2000. 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.(16) 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-15 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999The income tax provision/benefit consists of: 2000 1999 1998 ---- ---- ---- Current: Foreign $ 300,000 $ 250,000 $ 270,000 Federal 6,253,000 3,100,000 600,000 State and local 920,000 1,440,000 1,097,000 ---------- ----------- ------------ 7,473,000 4,790,000 1,967,000 ---------- ----------- ------------ Deferred - Federal, state and local 27,000 (6,840,000) (10,129,000) ---------- ----------- ------------ Total $7,500,000 $(2,050,000) $ (8,162,000) ========== =========== ============A reconciliation between the provision/(benefit) for income taxes based on theU.S. Federal statutory rate and the Company's effective rate is as follows. 2000 1999 1998 ----- ------ ------- Federal income tax rate 35.0% (35.0)% (35.0)% State and local income taxes, net of federal benefit 7.6 7.0 (1.4) Nondeductible expenses and other (4.0) 4.4 1.7 ----- ------ ------- Effective tax rate 38.6% (23.6)% (34.7)% ===== ====== ======= The tax effect of temporary differences which give rise to deferred tax assetsand liabilities are: February 3, January 29, 2001 2000 ---- ---- Deferred tax assets: Original issue discount $ 15,007,000 $ 8,629,000 State and local net operating loss carryforwards 1,900,000 3,034,000 Reserve for sales returns 2,625,000 2,012,000 Other 3,412,000 2,298,000 ------------ ----------- 22,944,000 15,973,000 ------------ ----------- Deferred tax liabilities: Prepaid catalog and other prepaid expenses (8,026,000) (8,870,000) Difference in book and tax basis for property and equipment (5,957,000) 1,885,000 ------------ ----------- (13,983,000) (6,985,000) ------------ ----------- Net deferred income tax asset $ 8,961,000 $ 8,988,000 ============ =========== F-16 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999 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.(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 1,910,000 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: 2000 1999 1998 ---- ---- ---- Weighted Weighted Weighted -------- -------- -------- average average average ------- ------- ------- Shares exercise price Shares exercise price Shares exercise price ------ -------------- ------ -------------- ------ -------------- Outstanding, beginning of year 1,532,800 $ 8.87 997,200 $8.00 786,800 $8.31 Granted 374,700 10.17 772,800 9.47 431,000 6.82 Exercised (2,000) 6.82 - - - - Cancelled (116,750) 8.72 (237,200) 7.14 (220,600) 6.82 --------- ------ --------- ----- -------- -----Outstanding, end of year 1,788,750 $ 9.15 1,532,800 $8.87 997,200 $8.00 --------- ------ ========= ===== ======== =====Options exercisable at end of year 583,000 $ 9.24 318,040 $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-17 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999(20) Segment Information 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 non cash 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 and 2000 include additional charges of $4,000,000 and $4,130,000 primarily to write down inventories to net realizable value. (See note 3 to the consolidated financial statements). F-18 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999Corporate and other expenses include expenses incurred by the corporate officeand certain non-recurring expenses that are not allocated to specific businessunits. Corporate and other expenses in fiscal 1999 include the write off ofimpaired software development costs. Corporate and other expenses in fiscal 1998include tax gross-up payments related to restricted stock grants and employeecontract termination costs.Segment assets represent the assets used directly in the operations of eachbusiness unit such as inventories and property and equipment. Corporate assetsconsist principally of investments, deferred financing costs and certaincapitalized software.The accounting policies used for segment reporting are consistent with thosedescribed in the summary of significant accounting policies. [$ in thousands]Revenues 2000 1999 1998 ---- ---- ---- J. Crew $825,975 $750,696 $656,472Clifford & Wills -- -- 83,796PCP -- -- 130,574 -------- -------- -------- 825,975 750,696 870,842 ======== ======== ======== Income from operations J. Crew 61,094 41,052 34,736Clifford & Wills (4,130) (4,000) (16,694)PCP -- -- (2,701)Corporate and other expenses (893) (7,869) (9,560) -------- -------- --------Income from operations 56,071 29,183 5,781 -------- -------- Interest expense, net (36,642) (38,861) (39,323)Gain on sale of PCP -- 1,000 10,000 Income/(loss) before income taxes 19,429 $ (8,678) $(23,542) ======== ======== ======== Depreciation and amortization J. Crew $ 22,448 $ 19,051 $ 14,455Clifford & Wills -- -- 327PCP -- -- 1,015Corporate 152 190 175 -------- -------- -------- $ 22,600 $ 19,241 $ 15,972 ======== ======== ======== F-19 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 3, 2001, January 29, 2000 and January 30, 1999Identifiable assets 2000 1999 1998 ---- ---- ---- J. Crew $342,541 $305,552 $324,949Clifford & Wills -- 8,927 17,377Corporate 47,320 59,125 34,004 -------- -------- -------- $389,861 $373,604 $376,330 ======== ======== ======== Capital expenditures (net of disposals) J. Crew $ 55,394 $ 39,435 $ 34,084Clifford & Wills -- -- (59)PCP -- -- 5,264Corporate 300 9,249 1,888 -------- -------- -------- $ 55,694 $ 48,684 $ 41,177 ======== ======== ======== F-20 (21) Quarterly Financial Information (Unaudited) -------------------------------- ($ in millions) 13 weeks 13 weeks 13 weeks 14 weeks 53 weeks ended ended ended ended ended 4/29/00 7/29/00 10/28/00 2/3/01(a) 2/3/01 -------- -------- --------- -------- ------ Net sales $ 158.0 $ 162.2 $ 194.0 $273.5 $ 787.7 Gross profit 72.8 71.0 90.2 128.1 362.1 Net income (loss) $ (5.2) $ (5.1) $ 4.5 $ 17.7 $ 11.9 13 weeks 13 weeks 13 weeks 13 weeks 52 weeks ended ended ended ended ended 5/1/99 7/31/99 10/30/99 1/29/00(b) 1/29/00 -------- -------- --------- ------ --------  Net sales $ 142.3 $ 148.0 $ 173.7 $250.1 $ 714.1 Gross profit 63.6 60.8 77.7 117.4 319.5 Net income (loss) $ (8.0) $ (6.7) $ 1.1 $ 7.0 $ (6.6)(a) includes $4.1 million writedown of net assets of C&W.(b) includes $4.0 million writedown of net assets of C&W and $6.3 million writeoff of software development costs. F-21 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS beginning charged to cost charged to other ending balance and expenses accounts deductions balance ($ in thousands) Allowance for doubtful accounts-------------------------------(deducted from accounts receivable)fiscal year ended: $ (5,486)(a)January 30, 1999 $5,438 $ 5,627 $ -- (5,579)(c) $ -- Inventory reserve----------------- (deducted from inventories) fiscal year ended: February 3, 2001 $4,447 $ 2,913(b) $ -- $ -- $7,360 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 Allowance for sales returns---------------------------(included in other current liabilities) fiscal year ended: February 3, 2001 $5,011 $ 1,519(b) $ -- $ -- $6,530 January 29, 2000 3,473 1,538(b) -- 5,011 January 30, 1999 3,529 844(b) -- 500(c) 3,473 400(d)(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 INDEXExhibit No. Description -- ----------- 3.1 Restated Certificate of Incorporation of J. Crew Group, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-4, File No. 333-42427, filed December 16, 1997 (the "Registration Statement")). 3.2* By-laws of J. Crew Group, Inc., as amended. 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 (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). 4.2(b) Amendment, dated as of November 23, 1998, to the Credit Agreement (incorporated by reference to Exhibit 4.2(b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 30, 1999 (the "1998 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 1998 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 1998 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). 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. 1 Exhibit No. Description -- ----------- 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 (incorporated by reference to Exhibit 10.1 (b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 29, 2000 (the "1999 Form 10-K")). 10.2+ J. Crew Operating Corp. Senior Executive Bonus Plan (included as Exhibit A to the Woods Employment Agreement filed as Exhibit 10.1(a) above). 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 the 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. (incorporated by reference to Exhibit 10.5(b) to the 1999 Form 10-K). 10.6+ Agreement, dated September 30, 1999, between J. Crew Operating Corp. and Carol Sharpe (incorporated by reference to Exhibit 10.6 to the 1999 Form 10-K). 10.7+ * Employment Agreement, dated February 18, 2000, between J. Crew Operating Corp. and Trudy Sullivan. 10.8(a)+ * Employment Agreement, dated April 18, 1999, between J. Crew Group, Inc. and Richard Anders. 10.8(b)+ * Letter Agreement, dated January 29, 2001, between J. Crew Group, Inc. and Richard Anders. 10.9 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). 10.10 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 to the Registration Statement). 10.11(a)+ J. Crew Group, Inc. 1997 Stock Option Plan (the "1997 Plan") (incorporated by reference to Exhibit 10.13 to the Registration Statement). 10.11(b)+* Amendment to the 1997 Plan, dated July 24, 2000. 10.11(c)+* Amendment to the 1997 Plan, dated February 2, 2001. 2 Exhibit No. Description -- ----------- 10.12 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. (incorporated by reference to Exhibit 21.1 to the 1999 Form 10-K).__________+Management contract or compensatory plan or arrangement.* Filed herewith 3 Exhibit 3.2 J. CREW GROUP, INC. ________________________ BY- LAWS ________________________ ARTICLE I The Corporation --------------- Section 1.01. Name. The legal name of this corporation (hereinafter ---- called the "Corporation") is J. Crew Group, Inc. Section 1.02. Offices. The Corporation shall have its principal ------- office in the City of New York, County of New York, State of New York. TheCorporation may also have offices at such other places within and without theState of New York as the Board of Directors may from time to time appoint or asthe business of the Corporation may require. Section 1.03. Seal. The corporate seal shall have inscribed thereon ---- the name of the Corporation, the year of its organization and the words"Corporate Seal, New York." One or more duplicate dies for impressing such sealmay be kept and used. ARTICLE II Meetings of Shareholders ------------------------ Section 2.01. Place of Meetings. All meetings of the shareholders ------------------ shall be held at the principal office of the Corporation in the State of NewYork, or at such other place, within or without the State of New York, as maybe fixed in the notice of the meeting. Section 2.02. Annual Meeting. An annual meeting of the shareholders -------------- of the Corporation for the election of directors and the transaction of suchother business as may properly come before the meeting shall be held on thesecond Tuesday in May in each year if not a legal holiday, and if a legalholiday, then on the next business day following, at such time as may be fixedin the notice of the meeting. If for any reason any annual meeting shall not beheld at the time herein specified, the same may be held at any time thereafterupon notice, as herein provided, or the business thereof may be transacted at any special meeting called for thepurpose. Section 2.03. Special Meetings. Special meetings of shareholders ---------------- may be called by the Chairman of the Board or the President whenever he deems itnecessary or advisable, and shall be called by the Chairman of the Board or thePresident or the Secretary upon the written request of a majority of the entireBoard of Directors or of the holders of one-third of the number of shares of theCorporation entitled to vote at such meeting. Section 2.04. Notice of Meetings. Written notice of all meetings ------------------ stating the place, date and hour of the meeting shall be given to eachshareholder entitled to vote at such meeting personally or by first class mail,not fewer than ten nor more than fifty days before the date of the meeting.Notice of each special meeting shall state the purpose or purposes for which themeeting is called and shall indicate that it is being called by or at thedirection of the person or persons calling the meeting. If, at any meeting,action is proposed to be taken which would, if taken, entitle shareholdersfulfilling the requirements of Section 623 of the New York Business CorporationLaw to receive payment for their shares, the notice of such meeting shallinclude a statement of that purpose and to that effect. If mailed, a notice ofmeeting shall be deemed given when deposited in the United States mail, withpostage prepaid, directed to the shareholder at his address as it appears on therecord of shareholders, or at such other address for mailing of notices as anyshareholder may in writing file with the Secretary of the Corporation. Notice ofa meeting need not be given to any shareholder who submits a signed waiver ofnotice, in person or by proxy, whether before or after the meeting. Theattendance of a shareholder at a meeting, in person or by proxy, withoutprotesting prior to the conclusion of the meeting the lack of notice of suchmeeting, shall constitute a waiver of notice by him. Section 2.05. Record Date for Shareholders. For the purpose of ---------------------------- determining the shareholders entitled to notice of or to vote at any meeting ofshareholders or any adjournment thereof, or to express consent to or dissentfrom any proposal without a meeting, or for the purpose of determiningshareholders entitled to receive payment of any dividend or the allotment of anyrights or for the purpose of any other action, the Board of Directors may fix,in advance, a record date, which shall not be more than fifty nor less than tendays before the date of such meeting, nor more than fifty days prior to anyother action. If no record date is fixed, the record date for determiningshareholders entitled to notice of or to vote at a meeting of shareholders shallbe at the close of business on the day next 2 preceding the day on which notice is given, or, if no notice is given, the dayon which the meeting is held; the record date for determining shareholdersentitled to express consent to or dissent from any proposal without a meeting,when no prior action by the Board of Directors is necessary, shall be the day onwhich the first written consent or dissent, as the case may be, is expressed;and the record date for determining shareholders for any other purpose shall beat the close of business on the day on which the Board of Directors adopts theresolution relating thereto. A determination of shareholders of record entitledto notice of or to vote at any meeting of shareholders shall apply to anyadjournment of the meeting; provided, however, that the Board of Directors mayfix a new record date for the adjourned meeting. Section 2.06. Proxy Representation. Every shareholder may authorize -------------------- another person or persons to act for him by proxy in all matters in which ashareholder is entitled to participate, whether by waiving notice of anymeeting, voting or participating at a meeting, or expressing consent or dissentwithout a meeting. Every proxy must be signed by the shareholder or by hisattorney-in-fact. No proxy shall be valid after the expiration of eleven monthsfrom the date thereof unless such proxy provides for a longer period. Everyproxy shall be revocable at the pleasure of the shareholder executing it, exceptas may be otherwise provided by law. Section 2.07. Voting at Shareholders' Meetings. Except as otherwise -------------------------------- provided by statute or by the Certificate of Incorporation, each outstandingshare of stock having voting power shall be entitled to one vote on each mattersubmitted to a vote at a meeting of shareholders. Directors shall be elected bythe vote of the holders of a plurality of the shares present at a meeting andentitled to vote in the election. Unless otherwise provided by statute, anyother corporate action shall be authorized by the vote of the holders of amajority of the shares present at a meeting of shareholders and entitled to votethereon. Voting need not be by ballot. Section 2.08. Quorum and Adjournment. Except as otherwise provided ---------------------- by statute or by the Certificate of Incorporation, the holders of a majority ofthe shares of the Corporation shall constitute a quorum for the transaction ofany business. When a quorum is once present to organize a meeting, it shall notbe broken by the subsequent withdrawal of any shareholders. If a quorum is notpresent or represented at any meeting of the shareholders, the shareholderspresent in person or represented by proxy shall have power to adjourn themeeting from time to time, without notice other than announcement at themeeting, until a quorum shall be present or represented. At such 3 adjourned meeting at which a quorum shall be present or represented, anybusiness may be transacted which might have been transacted at the meeting asoriginally notified. Section 2.09. List of Shareholders. The officer who has charge of -------------------- the record of shareholders of the Corporation shall prepare, make and certify,at least ten days before every meeting of shareholders, a complete list of theshareholders, as of the record date fixed for such meeting, arranged inalphabetical order, and showing the address of each shareholder and the numberof shares registered in each shareholder's name. Such list shall be open to theexamination of any shareholder, for any purpose germane to the meeting, duringordinary business hours, for a period of at least ten days prior to the meeting,at the principal office of the Corporation or at a place within the city,municipality or community where the meeting is to be held, and shall beavailable for the examination of any shareholder at the place and during thetime of the meeting. If the right of any shareholder to vote at any meeting ischallenged, the inspectors of election, if any, or the person presiding, shallrequire such list of shareholders to be produced as evidence of the right of thepersons challenged to vote, and all persons who appear from such list to beshareholders entitled to vote thereat may vote at such meeting. Section 2.10. Action of the Shareholders Without a Meeting. Whenever --------------------------------------------shareholders are required or permitted to take any action by vote, such actionmay be taken without a meeting on written consent, setting forth the action sotaken, signed by the holders of all of the outstanding shares entitled to votethereon. ARTICLE III Directors --------- Section 3.01. Number of Directors. The number of directors which ------------------- shall constitute the entire Board of Directors shall not be less than three normore than eleven. Subject to the foregoing limitation, the number of directorsmay be fixed from time to time by action of a majority of the entire Board ofDirectors or of the shareholders at an annual or special meeting, or, if thenumber of directors is not so fixed, the number shall be four. Section 3.02. Election and Term. The initial Board of Directors ----------------- shall be elected by the incorporator and the initial directors so elected shallhold office until the first annual meeting of shareholders and until theirsuccessors have been elected and qualified. Thereafter, each director who iselected at an annual meeting of shareholders, and each director who is 4 elected in the interim to fill a vacancy or a newly created directorship, shallhold office until the next annual meeting of shareholders and until hissuccessor has been elected and qualified. Section 3.03. Filling Vacancies, Resignation and Removal. Any ------------------------------------------director may be removed, with or without cause, by vote of the shareholders. Inthe interim between annual meetings of shareholders or special meetings ofshareholders called for the election or removal of one or more directors, newlycreated directorships and any vacancies in the Board of Directors, includingvacancies resulting from the resignation or removal of directors, may be filledby the vote of a majority of the remaining directors then in office, althoughless than a quorum, or by the sole remaining director. Section 3.04. Qualifications and Powers. Each director shall be at ------------------------- least eighteen years of age. A director need not be a shareholder, a citizen ofthe United States or a resident of the State of New York. The business of theCorporation shall be managed by the Board of Directors, subject to theprovisions of the certificate of incorporation. In addition to the powers andauthorities expressly conferred upon it by these bylaws, the Board may exerciseall such powers of the Corporation and do all such lawful acts and things as arenot by statute or by the certificate of incorporation or by these bylawsdirected or required to be exercised or done exclusively by the shareholders. Section 3.05. Regular and Special Meetings of the Board. The Board -----------------------------------------of Directors may hold its meetings, regular or special, within or without theState of New York. The annual meeting of the Board of Directors shall be heldimmediately after, and at the same place as, the annual meeting of shareholders.No notice shall be required for regular meetings of the Board of Directors forwhich the time and place have been fixed. Special meetings of the Board may becalled by or at the direction of the Chairman of the Board, the President, anyVice President, the Secretary or a majority of the directors in office, uponthree days notice to each director, delivered personally, sent by telegraph ormailed to each director at his residence or usual place of business. Meetings ofthe Board, regular or special, may be held at any time and place, and for anypurpose, without notice, when all the directors are present or when alldirectors not present, before or after such meeting, in writing waive notice ofthe holding of such meeting. Any requirement of furnishing a notice shall bewaived by any director who attends any meeting of the Board without protesting,prior thereto or at its commencement, the lack of notice to him. 5 Section 3.06. Chairman. At the Annual Meeting of Directors, the -------- Board shall elect from its members a Chairman of the Board who shall hold officeuntil the Annual Meeting of Directors next succeeding his election. At all othermeetings of the Board of Directors, the Chairman of the Board, or in his absencethe President, shall preside. At all meetings of the stockholders the Chairmanof the Board, or in his absence the President, shall preside. Section 3.07. Quorum and Action. A majority of the directors shall ----------------- constitute a quorum of the Board of Directors. Except as otherwise provided bythe New York Business Corporation Law, the vote of the majority of thedirectors present at a meeting at which a quorum is present shall be the act ofthe Board. A majority of the directors present at the time and place of anyregular or special meeting, although less than a quorum, may adjourn the samefrom time to time without further notice, until a quorum shall be present. Section 3.08. Telephonic Meetings. Any member or members of the ------------------- Board of Directors, or of any committee designated by the Board, may participatein a meeting of the Board, or any such committee, as the case may be, by meansof conference telephone or similar communications equipment allowing all personsparticipating in the meeting to hear each other at the same time, andparticipation in a meeting by such means shall constitute presence in person atsuch meeting. Section 3.09. Action Without a Meeting. Any action required or ------------------------ permitted to be taken by the Board of Directors, or any committee thereof, maybe taken without a meeting if all members of the Board or committee, as the casemay be, consent in writing to the adoption of a resolution authorizing theaction. The resolution and the written consents thereto by the members of theBoard or committee shall be filed with the minutes of proceedings of the Boardor committee. Section 3.10. Compensation of Directors. By resolution of the Board ------------------------- of Directors, the directors may be paid their expenses, if any, for attendanceat each regular or special meeting of the Board or of any committee designatedby the Board and may be paid a fixed sum for attendance at such meeting, or astated salary as director, or both. Nothing herein contained shall be construedto preclude any director from serving the Corporation in any other capacity andreceiving compensation therefor; provided, however, that directors who are alsosalaried officers shall not receive fees or salaries as directors. 6 ARTICLE IV Committees ---------- Section 4.01. In General. The Board of Directors may, by resolution ---------- or resolutions passed by the affirmative vote of a majority of the entire Board,designate an Executive Committee and such other committees as the Board may fromtime to time determine, each to consist of one or more directors, and each ofwhich, to the extent provided in the resolution or in the certificate ofincorporation or in the bylaws, shall have all the powers of the Board, exceptthat no such committee shall have power to fill vacancies in the Board, or tochange the membership of or to fill vacancies in any committee, or to make,amend, repeal or adopt By-laws of the Corporation, or to submit to theshareholders any action that needs shareholder approval under these By-laws orthe New York Business Corporation Law, or to fix the compensation of thedirectors for serving on the Board or any committee thereof, or to amend orrepeal any resolution of the Board which by its terms shall not be so amendableor repealable. Each committee shall serve at the pleasure of the Board. TheBoard may designate one or more directors as alternate members of any committee,who may replace any absent or disqualified member at any meeting of thecommittee. In the absence or disqualification of a member of a committee, themember or members thereof present at any meeting and not disqualified fromvoting, whether or not he or they constitute a quorum, may unanimously appointanother member of the Board of Directors to act at the meeting in the place ofany such absent or disqualified member. ARTICLE V Officers -------- Section 5.01. Designation, Term and Vacancies. The officers of the ------------------------------- Corporation shall be a Chairman of the Board, a President, one or more VicePresidents (one or more of whom may be designated as Executive Vice President),a Secretary, a Treasurer, and such other officers as the Board of Directors mayfrom time to time deem necessary. Such officers may have and perform the powersand duties usually pertaining to their respective offices, the powers and dutiesrespectively prescribed by law and by these bylaws, and such additional powersand duties as may from time to time be prescribed by the Board. The same personmay hold any two or more offices, except that the offices of President andSecretary may not be held by the same person unless all the issued andoutstanding stock of the Corporation is owned by one person, in which instancesuch person may hold all or any combination of offices. 7 The initial officers of the Corporation shall be appointed by theinitial Board of Directors. Thereafter, the officers of the Corporation shallbe appointed by the Board as soon as practicable after the election of the Boardat the annual meeting of shareholders, and shall hold office until the regularannual meeting of the Board of Directors following their appointment and untiltheir successors have been appointed and qualified; provided, however, that theBoard of Directors may remove any officer at any time, with or without cause.Vacancies occurring among the officers of the Corporation shall be filled by theBoard of Directors. The salaries of all officers of the Corporation shall befixed by the Board of Directors. Section 5.02. Chairman. The Chairman of the Board, who shall be -------- elected from among the Directors, shall preside at all meetings of thestockholders and the Board of Directors. The Chairman shall have such otherpowers and duties as the Board of Directors may from time to time assign to himor her. Section 5.03. President. The President of the Corporation shall be --------- the administrative officer of the Corporation and, as such, shall manage itsoperations, perform all the duties incident to his office, and shall see thatall orders and resolutions of the Board of Directors are carried into effect. Inthe event of the absence or the disability of the Chairman of the Board, heshall act in his place and assume his duties. Section 5.04. Vice-Presidents. During the absence or disability of --------------- the President, the Vice-President or, if there be more than one, a Vice-President or Executive Vice-President designated by the Board of Directors,shall exercise all the functions of the President and, when so acting, shallhave all the powers of and be subject to all restrictions upon the President.Each Vice-President shall have such powers and discharge such duties as may beassigned to him from time to time by the Board of Directors. Section 5.05. Secretary. The Secretary shall have custody of the --------- seal of the Corporation and when required by the Board of Directors, or when anyinstrument shall have been signed by the President or by any other officer dulyauthorized to sign the same, or when necessary to attest any proceedings of theshareholders or directors, shall affix it to any instrument requiring the sameand shall attest the same with his signature, provided that the seal may beaffixed by the President or any Vice President or other officer of theCorporation to any document executed by either of them respectively on behalf ofthe Corporation which does not require the attestation of the Secretary. Heshall attend to the giving and serving of notices 8 of meetings. He shall have charge of such books and papers as properly belong tohis office or as may be committed to his care by the Board of Directors. Heshall perform such other duties as appertain to his office or as may be requiredby the Board of Directors. Section 5.06. Assistant Secretaries. Whenever requested by or in the --------------------- absence or disability of the Secretary, the Assistant Secretary designated bythe Secretary (or in the absence of such designation, the Assistant-Secretarydesignated by the Board of Directors) shall perform all the duties of theSecretary and when so acting shall have all the powers of, and be subject to allthe restrictions upon, the Secretary. Section 5.07. Treasurer. The Treasurer shall render to the President --------- or the Board of Directors whenever requested a statement of the financialcondition of the Corporation and of all his transactions as Treasurer, andrender a full financial report at the annual meeting of the stockholders ifcalled upon to do so and perform such duties as are given to him by these By-laws or as from time to time may be assigned to him by the Board of Directors orthe President. Section 5.08. Assistant Treasurer. Whenever requested by or in the ------------------- absence or disability of the Treasurer, the Assistant Treasurer designated bythe Treasurer (or in the absence of such designation, the Assistant-Treasurerdesignated by the Board of Directors) shall perform all the duties of thetreasurer, and when so acting, shall have all the powers of, and be subject toall the restrictions upon, the Treasurer. Section 5.09. Subordinate Officers and Agents. The Board of ------------------------------- Directors may from to time appoint such other officers and agents as it may deemnecessary or advisable, to hold office for such period, have such authority andperform such duties as the Board of Directors may from time to time determine.The Board of Directors may delegate to any officer or agent the power to appointany such subordinate officers or agents and to prescribe their respective termsof office, authorities and duties. Section 5.10. Delegation. In case of the absence of any officer of ---------- the Corporation, or for any other reason that the Board of Directors may deemsufficient, the Board may temporarily delegate the powers or duties, or any ofthem, of such officer to any other officer or to any director. Section 5.11. Compensation. The salaries or other compensation of ------------ the officers shall be fixed from time to time by the Board of Directors and noofficer shall be prevented from 9 receiving such salary or any compensation by reason of the fact that he is alsoa director of the Corporation. The Board of Directors, in accordance with theprovisions of Section 5.11 of this Article V, may delegate to any officer oragent the power to fix from time to time the salaries or other compensation ofofficers or agents. ARTICLE VI Shares ------ Section 6.01. Certificates Representing Shares. All certificates -------------------------------- representing shares of the Corporation shall be signed by the Chairman of theBoard, the President or a Vice President and by the Secretary or an AssistantSecretary or the Treasurer or an Assistant Treasurer, shall bear the seal of theCorporation and shall not be valid unless so signed and sealed. Certificatescountersigned by a duly appointed transfer agent or registered by a dulyappointed registrar shall be deemed to be so signed and sealed whether thesignatures be manual or facsimile signatures and whether the seal be a facsimileseal or any other form of seal. All certificates shall be consecutively numberedand the name of the person owning the shares represented thereby, his residence,with the number of such shares and the date of issue, shall be entered on theCorporation's books. All certificates surrendered shall be cancelled and no newcertificates issued until the former certificates for the same number of sharesshall have been surrendered and cancelled, except as provided for herein. In case any officer who signed or whose facsimile signature wasaffixed to any certificate shall have ceased to be such officer before suchcertificate is issued, it nevertheless may be issued by the Corporation as if hewere such officer at the date of its issuance. When the Corporation is authorized to issue shares of more than oneclass there shall be set forth upon the face or back of the certificate, or thecertificate shall have a statement that the Corporation will furnish to anyshareholder upon request and without charge, a full statement of thedesignation, relative rights, preferences, and limitations of the shares of eachclass authorized to be issued and, if the Corporation is authorized to issue anyclass of preferred shares in series, the designation, relative rights,preferences and limitations of each such series so far as the same have beenfixed and the authority of the Board of Directors to designate and fix therelative rights, preferences and limitations of other series. 10 Any restrictions on the transfer or registration of transfer of anyshares of any class or series shall be noted conspicuously on the certificaterepresenting such shares. Section 6.02. Addresses of Shareholders. Every shareholder shall ------------------------- furnish the Corporation with an address to which notices of meetings and allother notices may be served upon or mailed to him, and in default thereofnotices may be addressed to him at his last known post office address. Section 6.03. Stolen, Lost or Destroyed Certificates. The Board of -------------------------------------- Directors may in its sole discretion direct that a new certificate for shares beissued in place of any certificate for shares issued by the Corporation allegedto have been stolen, lost or destroyed. When authorizing such issuance of a newcertificate, the Board of Directors may, in its discretion, and as a conditionprecedent thereto, require the owner of such stolen, lost or destroyedcertificate or his legal representatives to give the Corporation a bond in suchsum as the Corporation may direct not exceeding double the value of the sharesrepresented by the certificate alleged to have been stolen, lost or destroyed. Section 6.04. Transfers of Shares. Upon compliance with all ------------------- provisions restricting the transferability of shares, if any, transfers ofshares shall be made only upon the books of the Corporation by the holder inperson or by his attorney thereunto authorized by power of attorney duly filedwith the Secretary of the Corporation or with a transfer agent or registrar, ifany, and upon the surrender and cancellation of the certificate or certificatesfor such shares properly endorsed and the payment of all taxes due thereon. TheBoard of Directors may appoint one or more suitable banks or trust companies astransfer agents or registrars of transfers, for facilitating transfers of anyclass or series of shares of the Corporation by the holders thereof under suchregulations as the Board of Directors may from time to time prescribe. Upon suchappointment being made, all certificates of shares of such class or seriesthereafter issued shall be countersigned by one of such transfer agents or oneof such registrars of transfers, and shall not be valid unless so countersigned. ARTICLE VII Dividends and Finance --------------------- Section 7.01. Dividends. Subject to the conditions and limitations --------- set forth in the Certificate of Incorporation, the Board of Directors shall havepower to fix and determine and to vary, from time to time, the amount of theworking capital of the Corporation before declaring any dividends among its 11 shareholders, to determine the date or dates for the declaration and payment ofdividends and the amount of any dividend, and the amount of any reservesnecessary in their judgment before declaring any dividends among itsshareholders, and to determine the amount of surplus of the Corporation fromtime to time available for dividends. Section 7.02. Fiscal Year. The fiscal year of the Corporation shall ----------- end on the last Friday of January in each year and shall begin on the nextsucceeding day, or shall be for such other period as the Board of Directors mayfrom time to time designate. ARTICLE VIII Indemnification --------------- Section 8.01 Except to the extent expressly prohibited by the NewYork Business Corporation Law, the Corporation shall indemnify each person madeor threatened to be made a party to or called as a witness in or asked toprovide information in connection with any pending or threatened action,proceeding, hearing or investigation, whether civil or criminal, and whetherjudicial, quasi-judicial, administrative, or legislative, and whether or not foror in the right of the Corporation or any other enterprise, by reason of thefact that such person or such persons testator or intestate is or was a directoror officer of the Corporation, or is or was a director or officer of theCorporation who also serves or served at the request of the Corporation anyother corporation, partnership, joint venture, trust, employee benefit plan orother enterprise in any capacity, against judgments, fines, penalties, amountspaid in settlement and reasonable expenses, including attorneys' fees, incurredin connection with such action or proceeding, or any appeal therein, providedthat no such indemnification shall be made if a judgment or other finaladjudication adverse to such person establishes that his or her acts werecommitted in bad faith or were the result of active and deliberate dishonestyand were material to the cause of action so adjudicated, or that he or shepersonally gained in fact a financial profit or other advantage to which he orshe was not legally entitled, and provided further that no such indemnificationshall be required with respect to any settlement or other nonadjudicateddisposition of any threatened or pending action or proceeding unless theCorporation has given its prior consent to such settlement or other disposition. The Corporation shall advance or promptly reimburse, upon request ofany person entitled to indemnification hereunder, all expenses, includingattorneys' fees, reasonably incurred in defending any action or proceeding inadvance of the final disposition thereof upon receipt of a written undertakingby or 12 on behalf of such person to repay such amount if such person is ultimately foundnot to be entitled to indemnification or, where indemnification is granted, tothe extent the expenses so advanced or reimbursed exceed the amount to whichsuch person is entitled; provided, however, that such person shall cooperate ingood faith with any request by the Corporation that common counsel be utilizedby the parties to an action or proceeding who are similarly situated unless todo so would be inappropriate due to actual or potential differing interestsbetween or among such parties. Nothing herein shall limit or affect any right of any person otherwisethan hereunder to indemnification or expenses, including attorneys' fees, underany statute, rule, regulation, certificate of incorporation, by-law, insurancepolicy, contract or otherwise. No elimination of this by-law, and no amendment of this by-lawadversely affecting the right of any person to indemnification or advancement ofexpenses hereunder shall be effective until the 60th day following notice tosuch person of such action, and no elimination of or amendment to this by-lawshall deprive any person of his or her rights hereunder arising out of allegedor actual occurrences, acts or failures to act prior to such 60th day. Theprovisions of this paragraph shall supersede anything to the contrary in theseby-laws. The Corporation shall not, except by elimination or amendment of thisby-law in a manner consistent with the preceding paragraph, take any corporateaction or enter into any agreement which prohibits, or otherwise limits therights of any person to, indemnification in accordance with the provisions ofthis by-law. The indemnification of any person provided by this by-law shallcontinue after such person has ceased to be a director or officer of theCorporation and shall inure to the benefit of such person's heirs, executors,administrators and legal representatives. The Corporation is authorized to enter into agreements with any of itsdirectors, officers or employees extending rights to indemnification andadvancement of expenses to such person to the fullest extent permitted byapplicable law, but the failure to enter into any such agreement shall notaffect or limit the rights of such person pursuant to this by-law. It is herebyexpressly recognized that all directors and officers of the Corporation, byserving as such after the adoption hereof, are acting in reliance hereon andthat the Corporation is estopped to contend otherwise. Additionally, it ishereby expressly recognized that all persons who serve or served as directors,officers or employees of corporations which are subsidiaries or 13 affiliates of the Corporation (or other entities controlled by the Corporation)and are directors or officers of the Corporation are conclusively presumed toserve or have served as such at the request of the Corporation and, to theextent permitted by law, are entitled to indemnification hereunder, but that nosuch person shall have any rights hereunder or in connection herewith, except tothe extent that indemnification hereunder is permitted by law. In case any provision in this by-law shall be determined at any timeto be unenforceable in any respect, the other provisions shall not in any way beaffected or impaired thereby, and the affected provision shall be given thefullest possible enforcement in the circumstances, it being the intention of theCorporation to afford indemnification and advancement of expenses to itsdirectors and officers, acting in such capacities or in the other capacitiesmentioned herein, to the fullest extent permitted by law. For purposes of this by-law, the Corporation shall be deemed to haverequested a director or officer of the Corporation to serve an employee benefitplan where the performance by such person of his or her duties to theCorporation also imposes duties on, or otherwise involves services by, suchperson to the plan or participants or beneficiaries of the plan, and excisetaxes assessed on a person with respect to an employee benefit plan pursuant toapplicable law shall be considered indemnifiable expenses. For purposes of thisby-law, the term "Corporation" shall include any legal successor to theCorporation, including any corporation which acquires all or substantially allof the assets of the Corporation in one or more transactions. A person who has been successful, on the merits or otherwise, in thedefense of a civil or criminal action or proceeding of the character describedin the first paragraph of this by-law shall be entitled to indemnification asauthorized in such paragraph. Except as provided in the preceding sentence andunless ordered by a court, any indemnification under this by-law shall be madeby the Corporation if, and only if, authorized in the specific case: (1) By the Board of Directors acting by a quorum consisting of directors who are not parties to such action or proceeding upon a finding that the director or officer has met the standard of conduct set forth in the first paragraph of this by-law, or, (2) If such a quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs: 14 (a) By the Board of Directors upon the opinion in writing of independent legal counsel that indemnification is proper in the circumstances because the standard of conduct set forth in the first paragraph of this by-law has been met by such director or officer, or (b) By the shareholders upon a finding that the director or officer has met the applicable standard of conduct set forth in such paragraph. If any action with respect to indemnification of directors andofficers is taken by way of amendment of these by-laws, resolution of directors,or by agreement, the Corporation shall, not later than the next annual meetingof shareholders, unless such meeting is held within three months from the dateof such action and, in any event, within fifteen months from the date of suchaction, mail to its shareholders of record at the time entitled to vote for theelection of directors a statement specifying the action taken. ARTICLE IX Miscellaneous Provisions ------------------------ Section 9.01. Books and Records. Subject to the New York Business ----------------- Corporation Law, the Corporation may keep its books and accounts outside theState of New York. Section 9.02. Notices. Whenever any notice is required by these ------- by-laws to be given, personal notice is required only if it is expressly sostated, and any notice so required shall be deemed to be sufficient if given bydepositing the same in a post office box in a sealed post-paid wrapper,addressed to the person entitled thereto at his last known post office address,and such notice shall be deemed to have been given on the day of such mailing. Any person may waive the right to receive any notice by signing awritten waiver thereof. Section 9.03. Amendments. Except as otherwise provided herein, these ---------- by-laws may be altered, amended, or repealed and by-laws may be adopted by theshareholders or by the Board of Directors. 15 Exhibit 10.7 J. Crew Operating Corp.l 770 Broadway New York, New York 10003 February 18, 2000Ms. Trudy Sullivan544 East 86th StreetApartment 12WNew York, NY 10028Dear Trudy, We are delighted that you have decided to return to 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. During the Employment Period (as defined below), you will be employed asPresident of the Company and shall report to the Chief Executive Officer of theCompany or to another officer serving in the capacity of Chief ExecutiveOfficer. You will be required to devote your full time and best efforts,attention and energy to the performance of your responsibilities and duties tothe Company, and you may be required to serve as an officer of certain of theCompany's subsidiaries or affiliates as the Company may determine. The"Employment Period" shall commence on February 27, 2000 (the "Effective Date")------------------ and shall terminate on the third anniversary of such Effective Date, unlesssooner terminated as provided in Section 3 hereof.2. Compensation and Benefits. (a) During the Employment Period, your annual base salary (the "Base ----Salary") shall be $500,000 and shall be paid pursuant to regular company payrollpractices. (b) In addition to the Base Salary, in each fiscal year during theEmployment Period, starting with the fiscal year beginning on February 1, 2000,you will have the opportunity to earn an annual bonus ("Annual Bonus") with the ------------ target Annual Bonus set at fifty percent (50%) of Base Salary and the stretchAnnual Bonus set at one hundred percent (100%) of Base Salary, in each case,based upon and subject to the Company achieving certain performance objectives(which will be determined by the Company for each such fiscal year). Theperformance objectives will be determined in a manner that is generallyconsistent with the other executive officers of the Company. The Annual Bonuswill be paid no later than May 1 following the fiscal year for which it relates and such Annual Bonus will be paid only if youare actively employed with the Company and not in breach of this Agreement onsuch date of disbursement. (c) On the payroll date immediately following the Effective Date, theCompany will pay you a one-time signing bonus in the amount of $275,000 (the"Signing Bonus"), provided that you will be required to immediately pay back a-------------- pro-rata portion of such Signing Bonus in the event that you voluntarilyterminate your employment with the Company prior to the second anniversary ofthe Effective Date. (d) You will be eligible to participate in the 1997 J. Crew Stock OptionPlan (the "Option Plan"). As soon as practicable after the Effective Date and ----------- subject to approval of the Compensation Committee of the Board of Directors ofJ. Crew Group, Inc. (the "Parent") and the shareholders of the Parent, the ------ Company will cause the Parent to grant to you two stock options (each an"Option") to purchase a specified number of shares of common stock of the Parent ------ under the Option Plan. The first Option (the "First Option") will provide you ------------ with the opportunity to purchase 37,600 shares of common stock of the Parent atan exercise price of $6.82 per share, and shall become exercisable on the samevesting schedule that applied to the options that were previously granted to youunder the Option Plan during your previous employment with the Company (the"Prior Option Grants"), it being understood that any portion of the First Option-------------------- that would have been exercisable as of the date of grant under the Prior OptionGrants shall become immediately exercisable, and provided that you are activelyemployed by the Company on each subsequent vesting date. The second Option (the"Second Option") will provide you with the opportunity to purchase 32,400 shares ------------- of common stock of the Parent at an exercise price of $10.00 per share, whichshall become exercisable as follows: 6,480 shares on each of January 31, 2001,January 31, 2002, January 31, 2003, January 31, 2004 and January 31, 2005,provided that you are actively employed by the Company on each such date. EachOption shall be subject to the terms and condition set forth in the Stock OptionPlan and shall be evidenced by a separate stock option grant agreement. EachOption shall become exercisable in full upon a Change in Control as defined inthe Stock Option Plan. (e) During the Employment Period, you will be entitled to the benefitpackage made available generally to the employees of the Company. Currently,the Company provides a paid time off plan, which in your case will include fourweeks paid vacation, as well as life insurance, medical insurance, long termdisability, 401(k) tax deferred savings plan, a health flexible spendingaccount, and an employee discount. The Company reserves the right to changethese benefits at any time in its sole discretion. (f) During the Employment Period, you will receive a monthly automobileallowance in the amount of $675.00 per month.3. Termination from Employment. (a) If the Company terminates your employment for other than death,Disability (as defined below) or Cause (as defined below) or if you terminateyour employment for Good Reason (as defined below), you shall be entitled to anyearned but unpaid Base Salary as of the date of termination and the Company willcontinue your base salary and medical benefits for a period of twelve months;provided that (i) you are in compliance with the restrictive covenants 2 provided in this Agreement and (ii) you execute a general release and waiver,waiving all claims you may have against the Company, its affiliates, officers,employees and directors. If, however, you resign (other than for Good Reason asprovided above), become Disabled (as defined below), die, or are terminated forCause, no salary continuation will be paid. Except as provided in this Section3(a), no further compensation shall be due upon your termination of employment. (b) For purposes of this Agreement, "Cause" shall mean (i) the commissionof a felony, (ii) willful misconduct or gross negligence in connection with theperformance of your duties as an employee of the Company, (iii) a materialbreach of this Agreement, (iv) a fraudulent act or omission by you adverse tothe reputation of the Company or any affiliate, and (v) the disclosure by you ofany Confidential Information (as defined in Section 4(b) hereof) to persons notauthorized to know such information. If subsequent to your termination ofemployment, it is discovered that your employment could have been terminated forCause, your employment shall, at the election of the Company, in its solediscretion, be deemed to have been terminated for Cause. In addition, forpurposes of this Agreement, "Disability" shall mean a disability entitling youto benefits under the Company's long-term disability plan., and "Good Reason"shall mean (i) a material adverse change in the terms and conditions of youremployment, (ii) a decrease in your Base Salary or Bonus opportunity, or (iii)the failure of the Parent to grant to you the stock options described in Section2(d) hereof within a reasonable period of time after the Effective Date, ineach case, provided that you serve the Company with notice specifying the eventsor circumstances which you believe give rise to Good Reason within sixty daysafter the occurrence of such events and provide the Company with a reasonableperiod of time (not to exceed thirty days) to cure such adverse change, decreaseor failure.4. Restrictive Covenants. (a) As additional consideration for the Company entering into thisAgreement and agreeing to make the salary continuation payments described inSection 3(a) hereof, you agree that during the Employment Period and for aperiod of one (1) year after your employment with the Company terminates, youshall not: (i) solicit or hire or assist any other person or entity in soliciting orhiring any employee of the Company or of any of its subsidiaries to performservices for any entity (other than the Company or any of its subsidiaries), orattempt to induce any such employee to leave the employ of the Company or any ofits subsidiaries; (ii) (1) engage (either as owner, investor, partner, member, shareholder,employer, employee, consultant or director) in or otherwise perform services forany Competitive Business (as defined below) which operates within a 50 mileradius of the location of any store of the Company or any of its affiliates orin the same area that the Company directs its mail order operations, providedthat such restriction shall not prohibit you from owning a passive investmentof not more than 5% of the total outstanding securities of any publicly-tradedcompany and shall not prohibit you from performing services for an entity thatengages in a Competitive Business as well as other non-competitive businesses ifyour services are solely related to such entity's non-competitive businesses and(2) solicit or cause another to solicit any customers or suppliers of theCompany or any of its subsidiaries to terminate or otherwise 3 adversely modify their relationship with the Company or any such subsidiary. Theterm "Competitive Business" means the retail, mail order and/or internet adult --------------------apparel and/or accessories business and/or any other substantial business of theCompany or its affiliates on the date of termination. (b) During your Employment Period and thereafter, you will hold in strictconfidence any proprietary or Confidential Information (as defined below)related to the Company and its affiliates. For the purposes of this Agreement,the term "Confidential Information" shall mean all information of the Company or ------------------------ any of its affiliates (in whatever form) which is not generally known to thepublic, including without limitation any inventions, designs, store plans,processes, methods of distribution, customer lists or customers' or theCompany's trade secrets; (c) Upon termination from employment, you shall not take, without theprior written consent of the Company, any drawing, specification or otherdocument (in whatever form) of the Company or its affiliates, which is of aconfidential nature relating to the Company or its affiliates, or, withoutlimitation, relating to its or their methods of distribution, or any descriptionof any source or pricing information and will return any such information (inwhatever form) then in your possession; (d) You agree not to defame or disparage the Company, its affiliates andtheir officers, directors, members or employees. You agree to cooperate withthe Company in refuting any defamatory or disparaging remarks by any third partymade in respect of the Company or its affiliates or their directors, members,officers or employees. The Company agrees to use its reasonable efforts toprevent its senior executive officers from making any defamatory or disparagingremarks about you and agrees to cooperate with in refuting any defamatory ordisparaging remarks by any third party made in respect of you. (e) You also agree that breach of the confidentiality or employee non-solicitation, non-competition and non-disparagement provisions provided inparagraphs (a), (b), (c) and (d) of this Section 4 may, depending on thecircumstances, cause the Company to suffer irreparable harm for which moneydamages would not be an adequate remedy and therefore, if you breach any of theRestrictive Covenants provided herein, in addition to all other remedies whichthe Company may have at law or equity, the Company would be entitled totemporary and permanent injunctive relief in any court of competent jurisdiction(without the need to post any bond). (f) You agree not to disclose any information regarding the existence orsubstance of this Agreement to any third party, without the prior writtenconsent of the Company except as may be required by law, during any legalproceeding relating to this Agreement or with your professional advisers forpurposes of discussing the subject matter hereof and, with respect to suchprofessional advisers, you agree to inform them of your obligations hereunderand take all reasonable steps to ensure that such professional advisers do notdisclose the existence or substance hereof. 4 5. Representations. (a) You and the Company represent that they each have the authority toenter into this Agreement, and you hereby represent to the Company that theexecution of, and performance of duties under, this Agreement shall notconstitute a breach of or otherwise violate any other agreement to which you area party other than any notice provisions. (b) You hereby represent to the Company that you will not utilize ordisclose any confidential information obtained by you in connection with yourformer employment with respect of the duties and responsibilities hereunder.6. Miscellaneous. (a) This Agreement shall inure to the benefit of and be an obligation ofthe Company's assigns and successors; however you may not assign your duties andobligations hereunder to any other party. (b) This Agreement and all amendments thereof shall, in all respects, begoverned 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 anycourt in New York County or the U.S. District Court for the Southern District ofNew York in that County in respect of any action or proceeding relating to thesubject matter hereof, expressly waiving any defense relating to jurisdiction orforum non conveniens.-------------------- (c) 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 begiven when delivered personally or three days after it is sent by registered orcertified mail, postage prepaid, or one day after it is sent by a reputableovernight carrier service (next-day service), and, in each case, addressed asfollows: To you, at the address appearing at the beginning of this Agreement,and to the Company at 770 Broadway, New York, NY 10003, Attention GeneralCounsel. (d) This Agreement constitutes the entire agreement among the partieshereto with respect to your services hereunder, and supersedes and is in fullsubstitution for any and all prior understandings or agreements with respect toyour services hereunder. (e) This Agreement may be amended only by an instrument in writing signedby the parties hereto, and any provision hereof may be waived only by aninstrument in writing signed by the party or parties against whom or whichenforcement of such waiver is sought. The failure of any party hereto at anytime to require the performance by any other party hereto of any provisionhereof shall in no way affect the full right to require such performance at anytime thereafter, nor shall the waiver by any party hereto of a breach of anyprovision hereof be taken or held to be a waiver of any succeeding breach ofsuch provision or a waiver of the provision itself or a waiver of any otherprovision of this Agreement. (f) If any provision of this Agreement or portion thereof is so broad, inscope or duration, so as to be unenforceable, such provision or portion thereofshall be interpreted to be only so broad as is enforceable. 5 (g) The Company may withhold from any amounts payable to you hereunder allfederal, state, city or other taxes that the Company may reasonably determineare required to be withheld pursuant to any applicable law or regulation. (h) The parties hereto acknowledge and agree that each party has reviewedand negotiated the terms and provisions of this Agreement and has contributed toits revision. Accordingly, the rule of construction to the effect thatambiguities are resolved against the drafting party shall not be employed in theinterpretation of this Agreement. Rather, the terms of this Agreement shall beconstrued fairly as to both parties hereto and not in favor or against eitherparty. (i) This Agreement may be executed in several counterparts, each of whichshall be deemed an original, but all of which shall constitute one and the sameinstrument. A facsimile of a signature shall be deemed to be and shall betreated as an original signature hereto. (j) The headings in this Agreement are inserted for convenience ofreference only and shall not be a part of or control or affect the meaning ofany provision hereof. If the terms of this letter Agreement meet with your approval, please signand return one to me. Sincerely, _______________________ Mark Sarvary Chief Executive OfficerAgreed to and Accepted:______________________Trudy Sullivan Date 6 Exhibit 10.8(a)April 18, 1999Richard Anders5 Brightwood WayDanville, CA 94506Dear Rich,Congratulations and welcome to J. Crew. Below please find a summary of theoffer.1. Position: President of Retail Stores.2. Reporting Relationship: You will report to Mark Savary, Chief Executive Officer.3. Start Date: As agreed, you will start on or about May 3, 1999.4. Compensation: Your salary will be $300,000 per year. Your fiscal 1999 bonus will be guaranteed to be a minimum of $75,000. Annual target bonus is 25% of base salary stretch is 50%.5. Stock Options: You have been granted 300 options at $1363.64 per share strike price. Your shares become 60,000 options at a strike price of $6.18 post split.6. Protection for Gap Inc. value in unvested stock. Guaranteed floor value of J. Crew stock options at One Million Dollars to be paid as regular income in the event one of the following occurs: a. J. Crew is sold and Richard Anders is terminated within one year. At the time of sale, all options are automatically vested, exercised and sold at the offer price. He is guaranteed one million dollars minimum payout stock options, net value. In addition, he will be granted 18 months base pay as severance ($450,000). b. J.Crew does not successfully complete an Initial Public Offering by January 31, 2001. This payment will be offset by future exercise of J. Crew options. c. My employment is terminated by J. Crew before January 31, 2001. In addition to the One Million Dollars, you will be granted 12 months base pay as severance.7. Relocation: As agreed, all reasonable expenses will be paid.8. Benefits: Cobra reimbursement for 3 to 4 months waiting period. Vacation of 3 weeks.9. Sign on Bonus: You will receive $300,000 sign on bonus, pro rata payback if you resign within two years. ________________________ ______________________________ Dick Boyce Date Richard Anders Date Exhibit 10.8(b) January 29, 2001Mr. Richard AndersJ. Crew Group, Inc.770 BroadwayNew York, New York 10003Dear Rich: In accordance with Paragraph 6 of the letter agreement dated April 18, 1999(the "Agreement"), between J. Crew and yourself and in full satisfactionthereof, J.Crew is paying you $1,000,000, less all applicable taxes. The above-described payment continues to be subject to your agreement toimmediately pay to J. Crew upon exercise of any of your J. Crew stock options anamount equal to the difference between the fair market value per share of J.Crew common stock on the exercise date for each such share acquired uponexercise and the exercise price (up to an aggregate of $1,000,000). Please sign the enclosed copy of this letter to indicate your agreement. Sincerely, _________________________ David Kozel Senior Vice President, Human Resources Accepted and Agreed:________________________Richard AndersDated: _________________ Exhibit 10.11(b) FIFTH INSTRUMENT OF AMENDMENT ----------------------------- WHEREAS, J. Crew Group, Inc. (the "Company") maintains the J. Crew Group,Inc. 1997 Stock Option Plan (the "Plan"); WHEREAS, Section 4.12 of the Plan provides that the Plan may be amended bythe Committee at any time, with exceptions not here material; WHEREAS, the Committee wishes to amend the Plan, subject to shareholderapproval, to increase the number of shares of common stock reserved for issuanceupon exercise of options awarded under the Plan; WHEREAS, all defined terms used herein shall have the meaning set forth inthe Plan unless specifically defined herein; NOW, THEREFORE, the Plan is hereby amended, subject to shareholderapproval, as follows: 1. The reference to "1,810,000 shares of Common Stock" in the firstsentence of Section 4 of the Plan shall be replaced with a reference to"1,910,000 shares of Common Stock".July 24, 2000 Exhibit 10.11(c) SIXTH INSTRUMENT OF AMENDMENT ----------------------------- WHEREAS, J. Crew Group, Inc. (the "Company") maintains the J. Crew Group,Inc. 1997 Stock Option Plan (the "Plan"); WHEREAS, Section 4.12 of the Plan provides that the Plan may be amended bythe Committee at any time, with exceptions not here material; WHEREAS, the Committee wishes to amend the Plan to provide for exercise inthe case of retirement of vested stock options awarded under the Plan; WHEREAS, all defined terms used herein shall have the meanings set forth inthe Plan unless specifically defined herein; NOW, THEREFORE, the Plan is hereby amended as follows: 1. Section 2 of the Plan shall be amended to add the following as new Section 2(cc) and old Section 2(cc) and the ensuing Sections shall be appropriately relettered: ""Retirement" shall mean, when used in connection with the termination of a Participant's Employment, a Participant who is at least age 60 and has been Employed for at least five years at the time of such termination." 2. Clauses (ii) and (iii) of Section 4.5 of the Plan shall be amended to read in their entirety as follows: "(ii) 90 days after the date the Participant's Employment is terminated for any reason other than Cause, Retirement, death or Disability; (iii) one year after the date the Participant's Employment is terminated by reason of death, Retirement or Disability;"February 2, 2001

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