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 2, 2002Commission Registrant, State of Incorporation I.R.S. EmployerFile Number Address and Telephone Number Identification No. 333-42427 J. CREW GROUP, INC. 22-2894486--------- ---------- (Incorporated in New York) 770 Broadway New York, New York 10003 Telephone: (212) 209-2500333-42423 J. CREW OPERATING CORP. 22-3540930--------- ---------- (Incorporated in Delaware) 770 Broadway New York, New York Telephone: (212) 209-2500 Securities Registered Pursuant to section 12(b) of the Act:J. Crew Group, Inc. NoneJ. Crew Operating Corp. None Securities Registered Pursuant to section 12(g) of the Act:J. Crew Group, Inc. NoneJ. Crew Operating Corp. NoneIndicate by check mark whether each registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements 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 each registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. [X]The common stock of each registrant is not publicly traded. Therefore, theaggregate market value is not readily determinable.As of March 15, 2002, there were 11,748,789 shares of Common Stock, par value$.01 per share, of J. Crew Group, Inc. outstanding and 100 shares of CommonStock, par value $.01 per share, of J. Crew Operating Corp. outstanding (all ofwhich are owned beneficially and of record by J. Crew Group, Inc.).Documents incorporated by reference: NoneJ. Crew Operating Corp. meets the conditions set forth in General Instruction(I)(1)(a) and (b) of the Form 10-K and is therefore filing this Form 10-K withthe reduced disclosure format. FILING FORMATThis Annual Report on Form 10-K is a combined report being filed by twodifferent registrants: J. Crew Group, Inc. ("Holdings") and J. Crew OperatingCorp., a wholly-owned subsidiary of Holdings ("Operating Corp."). Except wherethe content clearly indicates otherwise, any references in this report to the"Company", "J. Crew" or "Holdings" include all subsidiaries of Holdings,including Operating Corp. Operating Corp. makes no representation as to theinformation contained in this report in relation to Holdings and itssubsidiaries other than Operating Corp.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, areforward-looking statements. Such forward-looking statements involve known andunknown risks, uncertainties and other important factors that could cause theactual results, performance or achievements of the Company, or industry results,to differ 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, acts of war orterrorism in the United States or worldwide, political or financial instabilityin the countries where the Company's goods are manufactured, postal rateincreases, paper and printing costs, availability of suitable store locations atappropriate terms, the level of the Company's indebtedness and exposure tointerest rate fluctuations, and other risks and uncertainties described in thisreport and the Company's other reports and documents filed or which may befiled, from time to time, with the Securities and Exchange Commission. Thesestatements are based on current plans, estimates and projections, and thereforeyou should not place undue reliance on them. Forward looking statements speakonly as of the date they are made and we undertake no obligation to updatepublicly any of them in light of new information or future events.References herein to fiscal years are to the fiscal years of J. Crew Group, Inc.and J. Crew Operating Corp., which end on the Saturday closest to January 31 inthe following calendar year for fiscal years 1997, 1998, 1999, 2000 and 2001.Accordingly, fiscal years 1997, 1998, 1999, 2000 and 2001 ended on January 31,1998, January 30, 1999, January 29, 2000, February 3, 2001 and February 2, 2002.All fiscal years for which financial information is included had 52 weeks,except fiscal year 2000 which had 53 weeks. 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 19-year history through the circulation of approximately 900 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. 1The 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 70% 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 tocollege-educated, professional and affluent customers who, in the Company'sexperience, have demonstrated strong brand loyalty and a tendency to make repeatpurchases.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 136 J. Crew retail stores and 41 J. Crew factory outlet stores. Inaddition, J. Crew products are distributed through 61 free-standing andshop-in-shop stores in Japan under a licensing agreement with ItochuCorporation.The Company has three major operating divisions: J. Crew Retail, J. Crew Direct,and J. Crew Factory, each of which operate under the J. Crew brand name. In2001, products sold under the J. Crew brand contributed $741.3 million in netsales. J. Crew brand net sales in 2001 were comprised of $398.0 million from J.Crew Retail, $258.2 million from J. Crew Direct and $85.1 million from J. CrewFactory. The Company also markets to its customers through its Internet site(jcrew.com). Net sales derived from the Internet, which were $122.9 million for2001, are included in J. Crew Direct net sales. The Company also generatedlicensing revenues of $2.6 million and shipping and handling fees of $34.1million.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 to 75% of J.Crew brand sales in 2001.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 productsto ensure quality and value, while manufacturing teams research and develop key vendors worldwide to identify and maintain the essential characteristics forevery style.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 2001,approximately 80% of the Company's J. Crew brand products were sourced in theFar East, 5% were sourced domestically and 15% were sourced in Europe and otherregions. One vendor supplies approximately 16% of the Company's merchandise. 2The 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 3.6 million orders peryear and employs approximately 900 full and part-time employees during itsnon-peak season and an additional 400 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 itsnon-peak season and an additional 200 employees during the peak holiday season.The Company ships merchandise via UPS, the United States Postal Service,Airborne and FedEx. To enhance efficiency, each facility is fully equipped witha highly advanced 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 itspoint-of-sale registers and software programs, allow for rapid stockreplenishment, concise merchandise planning and real-time inventory accountingpractices. The Company's telephone and telemarketing systems, warehouse package sorting 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 SKU basis and allow for an efficient fulfillment process.The Company has installed a SAP enterprise resource planning system for itsinformation technology requirements. This system was implemented in 2000 and2001. In fiscal 2000, the Company's accounting systems were implemented. Acorporate wide purchasing system, a retail sales and inventory system (includingnew point of sale registers) and a human resource / payroll system werecompleted in fiscal 2001. In November 2000, the Company outsourced its datacenter, desktop, network and telecommunication services management andoperations support. In February 2001, the Company outsourced the hosting andsupport of its Internet website to a third party vendor. 3J. Crew RetailDuring fiscal 2001, J. Crew Retail generated net sales of $398.0 million,representing 53.7% 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.J. Crew Retail stores that were open during all of fiscal 2001 averaged $3.5million per store in sales, produced sales per gross square foot of $439 andgenerated store contribution margins of approximately 18.0%. The Companybelieves that these results are in line with the average among retailers thatthe Company believes to be its primary competitors. J. Crew Retail stores havean average size of 7,752 total square feet.As of February 2, 2002, J. Crew Retail operated 136 retail stores nationwide,having expanded from 39 stores in 1997. The Company opened 34 stores in fiscal2001 and intends to open approximately 15 stores in fiscal 2002. 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 2001. 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 -------------- ---- ---- ----------- ------- ----------- 1997 39 12 -- 51 428 8,3921998 51 14 -- 65 530 8,1501999 65 16 -- 81 668 8,2432000 81 24 -- 105 833 7,9332001 105 34 3 136 1,054 7,752J. 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 fiscal2001, J. Crew Direct distributed 36 catalog editions with a total circulation ofapproximately 71 million. J. Crew Direct generated $258.2 million in net sales(including $122.9 million from its Internet site) representing 34.8% of theCompany's total J. Crew brand net sales in fiscal 2001.Circulation StrategyJ. Crew Direct's circulation strategy focuses on continually improving thesegmentation of customer files and the acquisition of additional customer names.In 2001, approximately 65% 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). 4The 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 2001, total circulation decreased to approximately 71 million from 73 millionin 2000, and pages circulated were approximately 8.2 billion in 2001 compared to8.7 billion in 2000.J. Crew Direct name acquisition programs are designed to attract new customersin 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. The Company is also in the process of placing telephones in its J.Crew Retail stores with direct access to the J. Crew Direct telemarketing centerto 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.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 4.0 million calls in fiscal 2001. Orders formerchandise may be received by telephone, facsimile, mail and on the Company'sInternet site. The telemarketing centers are staffed by a total of 550 full-timeand part-time telemarketing associates, and up to 300 additional associatesduring peak periods, who are trained to assist 5customers in determining the customer's correct size and to describe merchandisefabric, texture and function. Each telemarketing associate utilizes a terminalwith access to an IBM mainframe computer which houses complete and up-to-dateproduct and order information. The fulfillment operations are designed toprocess and ship customer orders in a quick and cost-effective manner. Ordersplaced before 9:00 p.m. are shipped the following day. Same-day shipping isavailable for orders placed before noon.J. Crew FactoryThe Company extends its reach to additional consumers through its 41 J. CrewFactory outlet stores. Offering J. Crew products at an average of 30% below fullretail prices, J. Crew Factory targets value-oriented consumers. The factoryoutlet stores also serve to liquidate excess, irregular or out-of-season J. Crewproducts outside of the Company's three primary distribution channels. Duringfiscal 2001, J. Crew Factory generated net sales of $85.1 million, representing11.5% of the Company's total J. Crew brand net sales.J. Crew Factory offers selections of J. Crew menswear and womenswear. Ranging insize from 3,500 to 10,000 square feet with an average of 6,500 square feet, thestores are generally located in major outlet centers in 25 states across theUnited States. The Company believes that the outlet stores, which are designedin-house, maintain fixturing, visual presentation and service standards superiorto those typically associated with outlet stores.Trademarks and International LicensingJ. 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 2001, licensing revenues totaled $2.6million.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.At February 2, 2002, the Company had approximately 5,800 associates, of whomapproximately 2,700 were full-time associates and 3,100 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. 6ITEM 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 2, 2002, the Company operated 136 J. Crew retail stores and 41factory outlet stores in 38 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 generally comprised of annual base rent plus a contingentrent payment based on the store's sales in excess of a specified threshold.Substantially all the leases are guaranteed by Holdings.The table below sets forth the number of stores by state operated by the Companyin the United States as of February 2, 2002. Total ----- Retail Outlet Number ------ ------ ------ Stores Stores Of Stores ------ ------ --------- Alabama 1 1 2Arizona 4 -- 4California 18 3 21Colorado 4 2 6Connecticut 5 1 6Delaware 1 1 2Florida 4 3 7Georgia 3 2 5Illinois 7 -- 7Indiana 2 2 4Kansas 1 -- 1Kentucky 1 -- 1Louisiana 1 -- 1Maine -- 2 2Maryland 3 1 4Massachusetts 6 1 7Michigan 4 1 5Minnesota 3 -- 3Missouri 2 1 3Nevada 1 1 2New Hampshire 1 2 3New Jersey 7 1 8New Mexico 1 -- 1New York 14 4 18North Carolina 3 -- 3Ohio 7 -- 7Oklahoma 1 -- 1Oregon 2 -- 2Pennsylvania 6 3 9Rhode Island 1 - 1South Carolina 2 2 4Tennessee 3 1 4Texas 6 2 8Utah 2 -- 2Vermont -- 1 1Virginia 5 1 6Washington 2 1 3Wisconsin 1 1 2District of Columbia 1 -- 1 - -- -Total. 136 41 177 === == === 7ITEM 3. LEGAL PROCEEDINGSRoutine litigation is pending against Holdings and Operating Corp. with respectto matters incidental to their business. Although the outcome of litigationcannot be predicted with certainty, in the opinion of Holdings and OperatingCorp. none of those actions should have a material adverse effect on theconsolidated financial position or results of operations of Holdings andOperating Corp.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNo matters were submitted to a vote of security holders during the quarter endedFebruary 2, 2002. 8 PART IIITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSThere is no established public trading market for Holdings or Operating Corp.Common Stock. As of March 15, 2002, there were 39 shareholders of record of theHoldings Common Stock. See "Item 12. Security Ownership of Certain BeneficialOwners and Management" for a discussion of the ownership of Holdings. Holdingsowns 100% of the Common Stock of Operating Corp.Holdings has not paid cash dividends on its Common Stock and does not anticipatepaying any such dividends in the foreseeable future. Operating Corp. may fromtime to time pay cash dividends on its Common Stock to permit Holdings to makerequired payments relating to its Senior Discount Debentures.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 its Common Stock (other than dividendspayable solely in shares of capital stock of Holdings). Additionally, becauseHoldings is a holding company, its ability to pay dividends is dependent uponthe receipt of dividends from its direct and indirect subsidiaries. Each of theCredit Agreement, the Holdings Indenture and the Indenture relating to theSenior Subordinated Notes of Operating Corp., contains covenants which imposesubstantial restrictions on Operating Corp.'s ability to pay dividends or makedistributions to Holdings.The Directors of Holdings have the right to receive all or a portion of the feesfor their services as a Director in Holdings Common Stock. In fiscal year 2001,certain Directors elected to receive a total of 5,524 shares of Holdings CommonStock in payment of their fees, at purchase price per share equal to the fairmarket value thereof. Holdings issued the Common Stock to the Directors intransactions which did not involve any public offering in reliance upon Section4(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 each of the five fiscal years endedFebruary 2, 2002 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 30, January 29, February 3, February 2, ----------- ----------- ----------- ----------- ----------- 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- (dollars in thousands, except per square foot data) Income Statement Data: Revenues $ 881,044 $ 870,842 $ 750,696 $ 825,975 $ 777,940 Cost of goods sold(a) 517,378 511,716 431,193 463,909 462,371 Selling, general and administrative 354,614 332,050 279,302 301,865 295,568 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 9,052 5,781 29,183 56,071 20,001 Interest expense-net 20,494 39,323 38,861 36,642 36,512 Gain on sale of Popular Club Plan ---- (10,000) (1,000) --- -- Expenses incurred-Recapitalization 20,707 -- -- ---- -- Provision (benefit) for income taxes (5,262) (8,162) (2,050) 7,500 (5,500) Extraordinary items and cumulative effect of accounting changes, net of taxes (4,500) -- -- -- -- ---------- ---------- --------- ---------- ---------- Net income (loss) $ (31,387) $ (15,380) $ (6,628) $ 11,929 $ (11,011) ========== ========== ========= ========== ========== 9 Fiscal Year Ended January 31, January 30, January 29, February 3, February 2, 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- Balance Sheet Data (at period end): Cash and cash equivalents $ 12,166 $ 9,643 $ 38,693 $ 32,930 $ 16,201 Working capital 142,677 95,710 75,929 49,482 39,164 Total assets 421,878 376,330 373,604 389,861 401,320 Total long term debt and redeemable preferred stock 428,457 433,243 458,218 464,310 510,147 Stockholders' deficit (201,642) (235,773) (264,593) (278,347) (319,043)Operating Data:Revenues:J. Crew retail $ 209,559 $273,972 $ 333,575 $ 406,784 $ 397,998J. Crew direct Catalog 260,853 230,752 213,308 177,535 135,353 Internet 4,000 22,000 65,249 107,225 122,844 --------- -------- ---------- --------- ---------- 264,853 252,752 278,557 284,760 258,197 --------- -------- ---------- --------- ----------J. Crew factory 100,285 96,461 101,987 96,114 85,085J. Crew licensing 2,897 2,712 2,505 3,020 2,560J. Crew shipping & handling fees 28,936 30,575 34,072 35,297 34,100 --------- -------- ---------- --------- ----------Total J. Crew brand 606,530 656,472 750,696 825,975 777,940Other divisions(b) 274,514 214,370 -- --- --- ------- ------- ---------- --------- ----------Total $ 881,044 $870,842 $ 750,696 $ 825,975 $ 777,940 ========= ======== ========== ========= ==========J. Crew Direct:Number of catalogs circulated (in 76,994 73,440 75,479 72,522 70,762thousands)Number of pages circulated (in millions) 9,830 8,819 9,319 8,677 8,242J. Crew Retail:Sales per gross square foot(c) $ 542 $ 558 $ 571 $ 567 $ 439Store contribution margin(c) 23.4% 25.0% 26.0% 23.9% 18.0%Number of stores open at end of period 51 65 81 105 136Comparable store sales change(c) (6.6)% 9.0% 1.8% 1.7% (15.5)%Depreciation and amortization $ 15,255 $ 15,972 $ 19,241 $ 22,600 $ 31,718Net capital expenditures(d)New store openings $ 19,802 $ 14,749 $ 13,300 $ 16,700 $ 17,572Other 11,565 21,605 27,953 25,475 25,003 --------- -------- ---------- --------- ----------Total net capital expenditures $ 31,367 $ 36,354 $ 41,253 $ 42,175 $ 42,575 ========= ======== ========== ========= ==========(a) Includes buying and occupancy costs.(b) Includes revenues from the Company's Popular Club Plan, Inc. ("PCP") and Clifford & Wills, Inc. ("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. 10ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - J.CREW GROUP, INC.This discussion summarizes the significant factors affecting the consolidatedoperating results, financial condition and liquidity of J. Crew Group, Inc. andsubsidiaries during the three-year period ended February 2, 2002. Thisdiscussion should be read in conjunction with the audited consolidated financialstatements of J. Crew Group, Inc. and subsidiaries for the three-year period ended February 2, 2002 and notes thereto included elsewhere in this AnnualReport on Form 10-K.Critical Accounting PoliciesManagement's discussion and analysis of financial condition and results ofoperations is based upon the consolidated financial statements which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires estimatesand judgements that effect the reported amounts of assets, liabilities, revenuesand expenses. The Company bases its estimates on historical experience and otherassumptions that are believed to be reasonable under the circumstances andevaluates these estimates on an on-going basis. Actual results may differ fromthese estimates under different assumptions or conditions.The following critical accounting policies reflect the more significantestimates and judgements used in the preparation of the consolidated financialstatements. (a) Inventory Valuation Merchandise inventories are carried at the lower of cost or market. Cost is determined on a first-in first-out basis. We evaluate all of our inventories to determine excess inventories based on estimated future sales. Excess inventories may be disposed of through outlet stores, clearance catalogs, Internet clearance sales and other liquidations. Based on the historical results experienced by the Company through the various methods of disposition the Company writes down the carrying value of inventories which are not expected to be sold at or above costs. (b) Deferred catalog costs The costs associated with direct response advertising, which consist primarily of catalog production and mailing costs, are capitalized and amortized over the expected future revenue stream of the catalog mailings, which approximates four months. The expected future revenue stream is determined based on historical revenue trends developed over an extended period of time. If the current revenue streams were to diverge from the expected trend, the future revenue streams would be adjusted accordingly. (c) Asset impairment The Company is exposed to potential impairment if the book value of its assets exceeds their future cash flows. The major component of our long lived assets represents store fixtures, equipment and leasehold improvements. The impairment of unamortized costs is measured at the store level and the unamortized cost is reduced to fair value if it is determined that the sum of expected future net cash flows is less than net book value. (d) Sales Returns The Company must make estimates of future sales returns related to current period sales. Management analyzes historical returns, current economic trends and changes in customer acceptance of its products when evaluating the adequacy of the reserve for sales returns. 11 (e) Income taxes Deferred tax assets are carried at the amount that the Company believes is more likely than not to be realized. The Company has considered future taxable income and prudent and feasible tax strategies in assessing the need for a valuation allowance. If the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future an adjustment to the deferred tax assets would be charged to income in the period such determination was made.Results of OperationsConsolidated statements of operations presented as a percentage of revenues areas follows: Fiscal year ended February 2, February 3, January 29, 2002 2001 2000 ---- ---- ---- Revenues 100.0% 100.0% 100.0%Cost of goods sold, including buying and occupancy costs 59.4 56.2 57.4Selling, general and administrative expenses 38.0 36.5 37.2Other charges -- -- .9Charges incurred in connection with discontinuance of C&W -- .5 .5Income from operations 2.6 6.8 3.9Interest expense, net (4.7) (4.4) (5.2)Gain on the sale of Popular Club Plan -- .1 .1Income/(loss) before income taxes (2.1) 2.4 (2.2)Income taxes .7 (.9) .3 -------- -------- ---------Net income/(loss) (1.4)% 1.5% (.9)% ======== ======== =========Fiscal 2001 Compared to Fiscal 2000Revenues--------Revenues in the fiscal year ended February 2, 2002 decreased 5.8% to $778.0million from $826.0 million in the fiscal year ended February 3, 2001. Thefiscal year ended February 2, 2002 consisted of 52 weeks compared to 53 weeks infiscal year 2000. Net sales for the fifty-third week were $10.8 million.J. Crew Retail net sales decreased by 2.2% from $406.8 million in fiscal 2000 to$398.0 million in fiscal 2001. The percentage of the Company's total net salesderived from J. Crew Retail increased to 53.7% in fiscal year 2001 compared to51.6% in fiscal 2000. The decrease in net sales was due to a decrease of 15.5%in comparable store sales. This decrease offset a 30% increase in the number ofstores from 105 at February 3, 2001 to 136 at February 2, 2002.J. Crew Direct net sales (which includes net sales from catalog and internetoperations) decreased by 9.3% from $284.8 million in fiscal 2000 to $258.2million in fiscal 2001. The percentage of the Company's total net sales derivedfrom J. Crew Direct decreased to 34.8% in fiscal 2001 from 36.2% in fiscal 2000.Catalog net sales decreased to $135.3 million in fiscal 2001 from $177.5 millionin fiscal 2000. Pages circulated decreased from 8.7 million in fiscal 2000 to8.2 billion in fiscal 2001. Internet net sales increased to $122.9 million infiscal 2001 from $107.3 million in fiscal 2000 as the Company continued tomigrate catalog customers to the Internet.J. Crew Factory net sales decreased from $96.1 million in fiscal 2000 to $85.1million in fiscal 2001. The percentage of the Company's total net sales derivedfrom J. Crew Factory decreased to 11.5% in fiscal 2001 from 12.2% in fiscal2000. Comparable store sales for J. Crew Factory decreased by 10.5% in fiscal2001. There were 41 J. Crew Factory outlet stores at February 2, 2002 andFebruary 3, 2001. 12Other revenues which consist of shipping and handling fees and royaltiesdecreased to $36.7 million in fiscal 2001 from $38.3 million in fiscal 2000,primarily as a result of a decrease in shipping and handling fees which is primarily as a result of a decrease in shipping and handling fees which isattributable to the decrease in net sales of J.Crew Direct.Cost of sales, including buying and occupancy costs---------------------------------------------------Cost of sales (including buying and occupancy costs) as a percentage of revenuesincreased to 59.4% in fiscal 2001 from 56.2% in fiscal 2000. This increase wascaused by a significant increase in markdowns as a result of the highlypromotional retail environment and an increase in buying and occupancy costscaused by a decrease in leverage related to the decline in comp store sales.Selling, general and administrative expenses--------------------------------------------Selling, general and administrative expenses decreased to $295.6 million infiscal 2001 (38.0% of revenues) from $301.9 million in fiscal 2000 (36.6% ofrevenues).General and administrative expenses of the J.Crew brand decreased to $234.8million in fiscal 2001 (30.2% of revenues) from $239.2 million in fiscal 2000(29.0% of revenues). This decrease resulted from a decrease in bonus provisionin fiscal 2001 and the cost cutting initiatives instituted in the first quarterof 2001 which were offset by the additional retail stores in operation duringfiscal 2001 and a $10.1 million increase in depreciation and amortization.Selling expenses were $60.8 million in fiscal 2001 (7.8% of revenues) comparedto $62.7 million in fiscal 2000 (7.6% of revenues). This decrease was dueprimarily to a decrease in pages circulated from 8.7 billion pages in fiscalyear 2000 to 8.2 billion pages in fiscal 2001.Interest expense----------------Interest expense, net was $36.5 million in fiscal year 2001 compared to $36.6million in fiscal 2000. The increase resulting from higher average borrowings infiscal 2001 under the Revolving Credit Facility and higher non-cash interest wasoffset by the pay off of the term loan in January 2001 and a decrease ininterest rates. Average borrowings under the Revolving Credit Facility requiredto fund inventories and capital expenditures were $43.1 million in fiscal 2001compared to $9.8 million in fiscal 2000.Interest expense included non-cash interest and amortization of deferredfinancing costs of $17.4 million in fiscal 2001 compared to $16.4 million infiscal 2000.Income Taxes------------The effective tax rate was a benefit of 33.3% in fiscal 2001 compared to aprovision of 38.6% in fiscal 2000. The effective rate in 2001 was less than thenormal rate due primarily to the inability of subsidiaries to carry back netoperating losses for state tax purposes, resulting in a lower tax benefit.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 2000 compared to 46.7% in fiscal 1999. This increase was attributed primarily to netsales from stores not opened for a full fiscal year. 13Comparable store sales increased by 1.7% in fiscal 2000. The number of storesopened 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 $65.2 million in fiscal 1999 as the Company continued to migrate catalogcustomers to the Internet.J.Crew Factory net sales decreased by 5.8% from $102.0 million in fiscal 1999 to$96.1 million in fiscal 2000. The percentage of the Company's total net salesderived from J. Crew Factory decreased to 12.2% in fiscal 2000 from 14.3% infiscal 1999. Comparable store sales for J. Crew Factory decreased by 2.9% infiscal 2000. J. Crew Factory closed one store in fiscal 2000 and 41 stores wereopen at February 3, 2001.Other revenues which consist of shipping and handling fees and royaltiesincreased 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 the Company's Clifford & Willscatalog and factory outlet subsidiaries, primarily inventories. 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. 14Income Taxes------------The effective tax rate was a provision of 38.6% in fiscal 2000 compared to abenefit of (23.6%) in fiscal 1999. The effective tax rate in 1999 was less thanthe normal rate due primarily to the inability of certain subsidiaries to deductnet operating losses for state tax purposes.Liquidity and Capital ResourcesThe Company's sources of liquidity have been primarily cash flows fromoperations and borrowings under the Revolving Credit Facility. The Company'sprimary cash needs have been for capital expenditures incurred primarily foropening new stores and system enhancements, debt service requirements andworking capital.Cash provided by operating activities was $25.6 million in fiscal 2001 comparedto $70.3 million in fiscal 2000. The decrease in cash provided by operationsresulted from a decrease in earnings before interest, taxes and depreciation andamortization of $30.1 million and a change in working capital items of $14.6million.Capital expenditures, net of construction allowances, were approximately $42.6million in fiscal 2001. These expenditures consisted primarily of the opening of34 new J. Crew retail stores and for systems enhancements, primarily the SAPenterprise resource planning system.Capital expenditures are expected to be approximately $25.0 million in fiscal2002, primarily for the opening of at least 15 J. Crew retail stores. Theexpected capital expenditures will be funded from internally generated cashflows and by borrowings from available financing sources.There were no borrowings under the Revolving Credit Facility at February 2, 2002and February 3, 2001. Average borrowings under the Revolving Credit Facilitywere $43.1 for fiscal 2001 and $9.8 million for fiscal 2000. There are noscheduled principal payments of the Company's long term debt during the nextfive years.Effective October 15, 2002, the interest payments accruing on the 13 1/8% SeniorDiscount Debentures will become payable in cash on April 15 and October 15 ofeach year subsequent thereto. The annual cash payments will be approximately$18.6 million.Management believes that cash flow from operations and availability under theRevolving Credit Facility will provide adequate funds for the Company'sforeseeable working capital needs, planned capital expenditures and debt serviceobligations. The Company's ability to fund its operations and make plannedcapital expenditures, to make scheduled debt payments, to refinance indebtednessand to remain in compliance with all of the financial covenants under its debtagreements depends on its future operating performance and cash flow, which in turn, are subject to prevailing economic conditions and to financial, businessand other factors, some of which are beyond its control.The following summarizes the Company's contractual and other commercialobligations as of February 2, 2002 and the effect such obligations are expectedto have on its liquidity and cash flows in future periods.Contractual Obligations Within 1 year 2 - 3 years 4 - 5 years after 5 years Total----------------------- ------------- ----------- ----------- ------------- ----- ($ in millions) Long term debt $ -- $ -- $ -- $279.7 $279.7Operating lease obligations 46.4 88.6 76.8 139.3 351.1 ----- ----- ----- ------ ------ 46.4 88.6 76.8 419.0 630.8 ===== ===== ===== ====== ====== 15Other Commerical commitments Within 1 year 2 - 3 years 4 - 5 years after 5 years Total---------------------------- ------------- ----------- ----------- ------------- ----- Letters of Credit ($ in millions) Standby $ -- $ -- $ -- $ 1.8 $ 1.8 Import 44.5 -- -- -- 44.5 ----- ----- ------ ------ ------ 44.5 -- -- 1.8 46.3 ===== ===== ====== ====== ======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 2001 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 PronouncementsIn July 2001, the FASB issued Statement of Financial Standards No. 141,"Business Combinations" and Statement of Financial Accounting Standards No. 142,"Goodwill and Other Intangible Assets". SFAS 141 eliminates thepooling-of-interests method of accounting for business combinations initiatedafter June 30, 2001 and modifies the application of the purchase accountingmethod effective for transactions that are completed after June 30, 2001. SFAS142 eliminates the requirement to amortize goodwill and intangible assets havingindefinite useful lives but requires testing at least annually for impairment.Intangible assets that have finite lives will continue to be amortized overtheir useful lives. SFAS 142 will apply to goodwill and intangible assetsarising from transactions completed before and after the Statement's effectivedate of January 1, 2002. These statements had no effect on the Company'sfinancial statements in fiscal 2001 and are not anticipated to have any effect in fiscal 2002.In June 2001, the FASB issued SFAS No. 143, Accounting for Asset RetirementObligations. SFAS No. 143 requires the Company to record the fair value of anasset retirement obligation as a liability in the period in which it incurs alegal obligation associated with the retirement of tangible long-lived assets.The Company also records a corresponding asset which is depreciated over thelife of the asset. Subsequent to the initial measurement of the asset retirementobligation, the obligation will be adjusted at the end of each period toreflect the passage of time and changes in the estimated future cash flowsunderlying the obligation. SFAS No. 143 is effective for fiscal years beginningafter June 15, 2002. Management does not believe that the adoption of SFAS No.143 will have a significant impact on the Company's financial statements.In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment orDisposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting andreporting for the impairment or disposal of long-lived assets and requirescompanies to separately report discontinued operations and extends thatreporting to a component of an entity that either has been disposed of or isclassified as held for sale. This Statement requires that long-lived assets bereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. SFAS No. 144 iseffective for fiscal years beginning after December 15, 2001. The adoption ofSFAS No. 144 will not have any impact on the Company's financial statements. 16EITF Issue No. 00-14 "Accounting for Certain Sales Incentives" will be effectivein the first quarter of fiscal 2002. This EITF addresses the accounting for andclassification of various sales incentives. The adoption of the provisions ofthis EITF will not have a material effect on the Company's financial statementsin fiscal 2002.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS - J. CREW OPERATING CORP.This discussion should be read in conjunction with the audited consolidatedfinancial statements of J. Crew Operating Corp. and subsidiaries for thetwo-year period ended February 2, 2002 and notes thereto included elsewhere inthis Annual Report on Form 10-K.Results of Operations---------------------Fiscal 2001 Compared to Fiscal 2000Revenues--------Revenues in the fiscal year ended February 2, 2002 decreased 5.8% to $778.0million from $826.0 million in the fiscal year ended February 3, 2001. Thefiscal year ended February 2, 2002 consisted of 52 weeks compared to 53 weeks infiscal year 2000. Net sales for the fifty-third week were $10.8 million.J. Crew Retail net sales decreased by 2.2% from $406.8 million in fiscal 2000 to$398.0 million in fiscal 2001. The percentage of the Company's total net salesderived from J. Crew Retail increased to 53.7% in fiscal year 2001 compared to51.6% in fiscal 2000. The decrease in net sales was due to a decrease of 15.5%in comparable store sales. This decrease offset a 30% increase in the number ofstores from 105 at February 3, 2001 to 136 at February 2, 2002.J. Crew Direct net sales (which includes net sales from catalog and Internetoperations) decreased by 9.3% from $284.8 million in fiscal 2000 to $258.2million in fiscal 2001. The percentage of the Company's total net sales derivedfrom J. Crew Direct decreased to 34.8% in fiscal 2001 from 36.2% in fiscal 2000. Catalog net sales decreased to $135.3 million in fiscal 2001 from $177.5 millionin fiscal 2000 pages circulated decreased from 8.7 million in fiscal 2000 to 8.2billion in fiscal 2001. Internet net sales increased to $122.9 million in fiscal2001 from $107.3 million in fiscal 2000 as the Company continued to migratecatalog customers to the Internet.J.Crew Factory net sales decreased from $96.1 million in fiscal 2000 to $85.1million in fiscal 2001. The percentage of the Company's total net sales derivedfrom J. Crew Factory decreased to 11.5% in fiscal 2001 from 12.2% in fiscal2000. Comparable store sales for J. Crew Factory decreased by 10.5% in fiscal2001. There were 41 J. Crew Factory stores at February 2, 2002 and February 3,2001.Other revenues which consist of shipping and handling fees and royaltiesdecreased to $36.7 million in fiscal 2001 from $38.3 million in fiscal 2000,primarily as a result of a decrease in shipping and handling fees which isattributable to the decrease in net sales of J.Crew Direct.Cost of sales, including buying and occupancy costs----------------------------------------------------Cost of sales (including buying and occupancy costs) as a percentage of revenuesincreased to 59.4% in fiscal 2001 from 56.2% in fiscal 2000. This increase wascaused by a significant increase in markdowns as a result of the highlypromotional retail environment and an increase in buying and occupancy costscaused by a decrease in leverage related to the decline in comp store sales.Selling, general and administrative expenses--------------------------------------------Selling, general and administrative expenses decreased to $294.9 million infiscal 2001 (37.9% of revenues) from $301.2 million in fiscal 2000 (36.5% ofrevenues). 17General and administrative expenses of the J.Crew brand decreased to $234.1million in fiscal 2001 (30.1% of revenues) from $238.5 million in fiscal 2000(28.9% of revenues). This decrease resulted from a decrease in bonus provisionin fiscal 2001 and the cost cutting initiatives instituted in the first quarterof 2001 which were offset by the additional retail stores in operation and a$10.1 million increase in depreciation and amortization during fiscal 2001.Selling expenses were $60.8 million in fiscal 2001 (7.8% of revenues) comparedto $62.7 million in fiscal 2000 (7.6% of revenues). This decrease was dueprimarily to a decrease in pages circulated from 8.7 billion pages in fiscalyear 2000 to 8.2 billions pages in fiscal 2001.Interest expense----------------Interest expense, net was $20.9 million in fiscal 2001 compared to $22.8 millionin fiscal 2000. The decrease resulted from the pay off of the term loan inJanuary 2001 and a decrease in interest rates offset by higher averageborrowings in fiscal 2001. Average borrowings under the Revolving CreditFacility required to fund inventories and capital expenditures were $43.1million in fiscal 2001 compared $9.8 million in fiscal 2000.Income Taxes------------The effective tax rate was a benefit of 46.7% in fiscal 2001 compared to aprovision of 35.9% in fiscal 2000. The state tax provision in 2000 was reducedby the utilization of net operating loss carryovers.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's principal market risk relates to interest rate sensitivity, whichis the risk that 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. The interest rates are afunction of the bank prime rate or LIBOR. A one percentage point change in thebase interest rate would result in approximately $500,000 change in incomebefore income taxes.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 2, 2002 were approximately$46.3 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. There were no forward foreign exchange contracts outstandingduring fiscal year 2001.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. 18 PART IIIInformation required by Items 10-14 with respect to Operating Corp. has beenomitted pursuant to General Instruction I of Form 10-K. Information required byItems 10-14 with respect to Holdings is described below.ITEM 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............................ 40 Director, Chairman of the BoardMark A. Sarvary........................ 42 Director, Chief Executive OfficerDavid Bonderman........................ 59 DirectorRichard W. Boyce....................... 47 DirectorGregory D. Brenneman................... 40 DirectorJohn W. Burden, III.................... 65 DirectorBasha Cohen............................ 41 Senior Vice President, Womens Product DevelopmentJames G. Coulter....................... 42 DirectorDonald Fleming......................... 54 Executive Vice President, StoresScott Formby........................... 40 Executive Vice President, DesignBlair Gordon........................... 39 Executive Vice President, Creative DirectorArlene S. Hong......................... 33 Senior Vice President, General Counsel and Corporate SecretaryScott D. Hyatt......................... 44 Senior Vice President, ManufacturingWalter Killough........................ 47 Chief Operating OfficerDavid F. Kozel......................... 46 Executive Vice President, Human ResourcesNicholas Lamberti...................... 59 Vice President, Corporate ControllerScott M. Rosen......................... 43 Executive Vice President, Chief Financial OfficerMichael J. Scandiffio.................. 53 Executive Vice President, MensDavid M. Schwarz....................... 51 DirectorThomas W. Scott........................ 36 DirectorCarol Sharpe........................... 47 Executive Vice President, WomensBrian T. Swette........................ 48 DirectorJosh S. Weston......................... 73 Director Josh S. Weston......................... 73 Director 19Emily Woods Ms. Woods became Chairman of the Board of Directors of Holdings in1997. 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 asChief Executive Officer and Vice-Chairman of Holdings and as Chief ExecutiveOfficer of Operating Corp. She is also a director of Yankee Candle Company, Inc.Mark A. Sarvary Mr. Sarvary has been Chief Executive Officer of the Company and adirector of Holdings since May 1999. He was President/General Manager of theNestle Frozen Food Division of Nestle USA from 1996 to 1999.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 since 1992. Mr. Bonderman serves on the Boards of Directors of ProquestCompany, Continental Airlines, Inc., Co-Star Group, Inc., Denbury ResourcesInc., Ducati Motor Holdings S.p.A., Magellan Health Services, Inc., OxfordHealth Plans, Inc., Paradyne Networks, Inc., RyanAir Holdings PLC., ONSemiconductor Corporation, Washington Mutual, Inc., Agenesys, Inc. and SeagateTechnology, 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 from 1992 to 1997, mostrecently as Senior Vice President of Operations for Pepsi-Cola, North America.He was Chairman of Favorite Brands International Holding Corp., which filed forprotection under Chapter 11 of the Bankruptcy Code in 1999. He also serves onthe Boards of Directors of Del Monte Foods Corp., MEMC Electronic Materials,Inc., Punch Group Ltd., and ON Semiconductor Corporation.Gregory D. Brenneman Mr. Brenneman became a director of Holdings in 1998. Mr. Brenneman hasbeen Chairman and Chief Executive Officer of Turnworks, Inc. (private equityfirm) since 1994. He was President and Chief Operating Officer of ContinentalAirlines, Inc. from 1995 to 2001. He also serves as director of Automatic DataProcessing and Home Depot, Inc.John W. Burden, III Mr. Burden became a director of Holdings in 1998. Mr. Burden has beena retail consultant for more than five years. He also serves as a director ofSaks Incorporated and Chicos Fas Inc.Basha Cohen Ms. Cohen has been Senior Vice President, Womens Product Development ofthe Company since 2000. Prior thereto, she was Senior Vice President, GeneralMerchandising Manager, Womens Mail Order and Retail since 1999 and Senior VicePresident, General Merchandising Manager, Womens Mail Order from 1998 to 1999.Prior to joining the Company, Ms. Cohen was Senior Vice President, Design andBuying of Laura Ashley PLC (retail apparel company) for three years.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 ofTPG for more than eight years. Mr. Coulter serves on the Boards of Directors ofGenesis Health Ventures, Inc., Globespan, Inc., Seagate Technology, Inc., MEMCElectronic Materials, Inc., Evolution Global Partners and Zhone Technologies.Donald Fleming Mr. Fleming has been Executive Vice President, Stores of the Companysince May 2001 and prior thereto he was Senior Vice President, Factory since1999. Before joining the Company, he was Northeast Regional Director ofVictoria's Secret (retail apparel company) since 1996. 20Scott Formby Mr. Formby has been Executive Vice President, Design of the Companysince 1999. His employment with the Company terminated on April 18, 2002.Prior thereto, he was Vice President, Design for more than five years.Blair Gordon Mr. Gordon has been Executive Vice President, Creative Director of theCompany since January 2002. Prior thereto, he was Executive Vice President,Specialty Retail of Nautica Enterprises, Inc. (retail apparel company) since2000 and Vice President, Creative Services of Polo Ralph Lauren Corporation(retail apparel company) from 1997 to 2000.Arlene S. Hong Ms. Hong has been Senior Vice President, General Counsel and CorporateSecretary of the Company since February 2002 and Vice President and AssociateGeneral Counsel since 2000. Prior to joining the Company, she practiced law atthe New York offices of the international law firm of Proskauer Rose LLP formore than three years.Scott D. Hyatt Mr. Hyatt has been Senior Vice President, Manufacturing of the Companysince 1998. Prior thereto, he was with Express, a division of the Limited, Inc.(retail apparel company), as Vice President, Production and Sourcing from 1996to 1998Walter Killough Mr. Killough has been Chief Operating Officer of the Company since1999. He was Senior Vice President, General Manager, Mail Order from 1997 to1999 and prior thereto, he was Senior Vice President of Clifford & Wills, asubsidiary of the Company, for more than five years.David F. Kozel Mr. Kozel has been Executive Vice-President, Human Resources of theCompany since February 2002 and Senior Vice President, Human Resources since1999. Prior thereto, he was with Grey Advertising Inc. (advertising servicescompany) as Vice President, Human Resources since 1998, and Vice President,Human Resources of Deluxe Corporation (check printing and electronic paymentprocessing services company) from 1997 to 1998.Nicholas Lamberti Mr. Lamberti has been Vice President - Corporate Controller of theCompany for more than five years.Scott M. Rosen Mr. Rosen has been Executive Vice President and Chief Financial Officerof the Company since 1999, Senior Vice President and Chief Financial Officerfrom 1998 until then and Chief Financial Officer of the Mail Order division ofthe Company for four years prior thereto.Michael J. Scandiffio Mr. Scandiffio has been Executive Vice President, Mens since June 2001.Prior thereto, he was Executive Vice President, Merchandising and Design ofPacific Sunwear of California, Inc. (retail apparel company) since 1999 andPresident of the retail division of Brooks Brothers (retail apparel company)from 1997 to 1999.David M. Schwarz Mr. Schwarz became a director of Holdings in October 2001. Mr. Schwarzhas been President and Chief Executive Officer of David M. Schwarz / Architectural Services, Inc. (architectural services firm) for more than fiveyears.Thomas W. Scott Mr. Scott became a director of Holdings in January 2002. Mr. Scott isa founding partner of Nantucket Allserve Inc. (beverage supplier) and has beenCo-Chairman since 1989 and Co-Chairman and Co-Chief Executive Officer from 1989to 2000. Mr. Scott has also been Co-Chairman of Shelflink (supply chain softwarecompany) since 2000. 21 Ms. Sharpe has been Executive Vice President, Womens of the Company sinceJune 2001 and prior thereto was in the positions of Executive Vice President -Merchandising - Brand, Senior Vice President, General Merchandising Manager,Retail and Senior Vice President and General Merchandising Manager-Women's since1998. She was Vice President, Women's for more than 5 years prior to 1998.Brian T. Swette Mr. Swette became a director of Holdings in 1998. He has beenVice-President of Corporate Development of eBay Inc. (person-to-person tradingcommunity on the Internet), since 2001 and prior thereto he was Chief OperatingOfficer since 1999 and Senior Vice President of Marketing and International from1998 to 1999. Prior to joining eBay, he was Executive Vice President and ChiefMarketing Officer-Global Beverages of Pepsi-Cola Beverages from 1996 andExecutive Vice President Marketing-North America of Pepsi-Cola Beverages from1994 to 1996. He is also a director of eBay.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. 22ITEM 11. EXECUTIVE COMPENSATIONThe following table sets forth compensation paid by the Company for fiscal years2001, 2000, and 1999 to each individual serving as its chief executive officerduring fiscal 2001 and to each of the four other most highly compensatedexecutive officers of the Company as of the end of fiscal 2001. Long-Term Compensation Annual Compensation Awards Payouts ------------------------------------------------------------------------ SecuritiesName Other Annual Restricted Underlying LTIP All OtherAnd Fiscal Salary Bonus Compensation Stock Options/ Payouts CompensationPrincipal Position Year ($) ($) ($) Award(s)($)(1) SARS (#)(1) ($) ($)----------------------------------------------------------------------------------------------------------------------------------- Emily Woods 2001 $1,000,000 -- $ -- -- -- -- $ 5,250(4) Chairman (2) 2000 1,000,000 1,000,000 -- -- -- -- 5,250(4) 1999 1,000,000 1,000,000 -- -- -- -- 5,000(4) Mark Sarvary 2001 675,000 -- -- -- -- -- 5,250(4) Chief Executive Officer 5,250(4) 2000 675,000 502,500 -- -- -- -- 60,000(5) 1999 425,000 335,000 1,000,000(3) -- 272,000 -- 135,000(5) Basha Cohen 2001 400,000 -- -- -- -- -- 5,250(4) Senior Vice President, Womens Product Development 2000 400,000 210,000 -- -- -- -- 5,250(4) 1999 400,000 100,000 -- -- -- -- -- Scott Formby Executive Vice President, 2001 450,000 -- -- -- -- -- 4,558(4) Design (6) 2000 450,000 337,500 -- -- 10,000 -- 4,558(4) 1999 422,000 106,800 -- -- 8,800 -- 5,000(4) Carol Sharpe Executive Vice President, 2001 400,000 -- -- -- -- -- 5,250(4) Women's 2000 400,000 360,000 -- -- -- -- 5,250(4) 1999 362,500 240,000 360,000(3) -- 12,000 -- 5,000(4)____________(1) There is no established public market for shares of Holdings Common Stock. Holders of restricted stock have the same right to receive dividends as other holders of Holdings Common Stock. Holdings has not paid any cash dividends on its Common Stock.(2) Ms. Woods was granted 661,600 shares of Holdings Common Stock ("Woods Restricted Shares"), on October 17, 1997 of which 78,600 shares vested immediately upon grant, 194,400 shares vested on each of October 17, 2000 and 2001 and 194,200 shares will vest on October 17, 2002.(3) This amount is a signing bonus.(4) Represents Company matching contributions to 401(k) plan.(5) Relocation.(6) Mr. Formby's employment with the Company terminated on April 18, 2002. 23The following Table shows information concerning stock options to purchaseshares of Holdings Common Stock granted to any of the named executive officersduring fiscal year 2001. Option Grants In Fiscal Year 2001 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) Fiscal Year Price($/Sh) Date 5%($) 10% ($)------------------------------------------------------------------------------------------------------------------------- None___________(1) The Company has not granted any SARs. The following Table shows the number of stock options held to purchaseshares of Holdings Common Stock by the named executive officers at the end offiscal year 2001. The named executive officers did not exercise any stockoptions in fiscal year 2001. 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---- ------------------------- Basha Cohen................................................................. 20,000/ 5,000Scott Formby (2)............................................................ 34,240/ 15,760Mark Sarvary ............................................................... 108,800/163,200Carol Sharpe ............................................................... 24,800/ 12,200Emily Woods ................................................................ 131,200/361,000__________(1) There is no established public market for shares of Holdings Common Stock.(2) Mr. Formby's employment with the Company terminated on April 18, 2002. 24 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 a minimum annual base salary of$1.0 million, and an annual target bonus of up to $1.0 million based onachievement of earnings objectives to be determined each year. The employmentagreement also provided for the grant of 661,600 shares of Holdings Common Stock(the "Woods Restricted Shares") and the reimbursement of income taxes incurredby Ms. Woods in connection with such grant. (See footnote 2 to the ExecutiveCompensation Table for information on the vesting of the Woods RestrictedShares). Ms. Woods is also entitled to various executive benefits andperquisites under the employment 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 employment 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 a minimum annual base salary of $670,000 and an annualtarget bonus 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 Holdings Common Stock as well as the grant ofadditional stock options to purchase 68,000 shares on the earlier of the date ofan initial public offering of Holdings Common Stock or May 10, 2004. Mr. Sarvaryis also entitled to various executive benefits and perquisites under theemployment agreement.In the event of a change in Mr. Sarvary's duties and responsibilities, upon thetermination of Mr. Sarvary's employment, he will be entitled to receiveseverance and other benefits described in the January 15, 2002 amendment to hisemployment agreement. These include the payment of an amount equal to two timeshis base salary and the continuation of medical and life insurance benefits fora period of time after the termination date. In addition, the portion of hisstock options that are vested as of the termination of his employment willremain exercisable for three years.Ms. Cohen has a letter agreement with Operating Corp. which provides that, inthe event of her termination by Operating Corp. without Cause (as that term isdefined in the letter agreement), she will receive a continuation of her basesalary and medical benefits for a period of one year after the termination dateand the payment of any bonus that she would otherwise have received for thefiscal year ending before the termination date.Mr. Formby has a letter agreement with Operating Corp. which provides that, inthe event of the termination of his employment with Operating Corp. withoutCause (as that term is defined in the letter agreement), he will receive acontinuation of his base salary and medical benefits for a period of one yearafter the termination date. Mr. Formby's employment with the Company terminatedon April 18, 2002 as a result of which he is entitled to receive theaforementioned benefits. 25 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 a minimum annual base salary of $400,000 and an annualtarget bonus 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 Holdings 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.The Woods Restricted Shares and any shares of Holdings Common Stock acquired byMs. Woods, Mr. Sarvary, Mr. Formby, Ms. Sharpe and Ms. Cohen pursuant to theexercise of options are subject to a shareholders' agreement providing forcertain transfer restrictions, registration rights and customary tag-along anddrag-along rights.Compensation Committee Interlocks and Insider ParticipationMs. 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 amaximum of $40,000 per year) is paid to each Director who is neither an employeeof the Company nor a representative of TPG. Directors have the option to receiveall or a portion of that fee paid in cash or in shares of Holdings Common Stockat a per share purchase 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 15, 2002 for each person who is knownto Holdings to be the beneficial owner of 5% or more of Holdings Common Stock.The holders listed have sole voting power and investment power over the sharesheld by 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 76102Common Stock Emily Woods 2,396,376.6 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) 131,200 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) 194,200 shares of Common Stock that have not vested and are held in custody by the Company until vesting thereof. 26 The following table sets forth information regarding the beneficialownership of each class of equity securities of Holdings as of March 15, 2002for (i) each director, (ii) each of the executive officers identified in thetable set forth under Item 11. "Executive Compensation", and (iii) all directorsand executive 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 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 Basha Cohen 20,000(2)Common Stock James G. Coulter 7,313,797.6(1) 59%Common Stock Scott Formby 34,240(2)(4) *Common Stock Mark A. Sarvary 163,200(2) *Common Stock David M. Schwarz 1,232 *Common Stock Thomas W. Scott 0 *Common Stock Carol Sharpe 27,200(2) *Common Stock Brian T. Swette 20,012.276 *Common Stock Josh S. Weston 19,612.276 *Common Stock Emily Woods 2,396,376.6(3) 19%Common Stock All Directors and executive 10,156,617(1)(2)(3) 81% officers as a groupSeries 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 76,633.085 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) 131,200 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) 194,200 shares of Common Stock that have not vested and are held in custody by the Company until vesting thereof.(4) Mr. Formby's employment with the Company terminated on April 18, 2002. 27ITEM 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 2001 was$950,000. The loan is secured by a mortgage on that residence and $850,000 isstill outstanding. Holdings and its subsidiaries entered into a tax sharing agreement providing (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. 28 PART IVITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KJ. Crew Group, Inc.-------------------(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 2, 2002 and February 3, 2001 (iii) Consolidated Statements of Operations - Years ended February 2, 2002, February 3, 2001 and January 29, 2000 (iv) Consolidated Statements of changes in Stockholders' Deficit -Years ended February 2, 2002, February 3, 2001 and January 29, 2000 (v) Consolidated Statements of Cash Flows - Years ended February 2, 2002, February 3, 2001 and January 29, 2000 (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 J. Crew Group, Inc., has not filed any reports on Form 8-K during the fiscal quarter ended February 2, 2002.(c) Exhibits See Item 14(a)3 above(d) Financial Statement Schedules See Item 14(a)1 and 14(a)2 above 29J. Crew Operating Corp.----------------------(a) 1. Financial Statements The following financial statements of J. Crew Operating Corp. and subsidiaries are included in Item 8: (i) Report of KPMG LLP, Independent Auditors (ii) Consolidated Balance Sheets - as of February 2, 2002 and February 3, 2001 (iii) Consolidated Statements of Operations - Years ended February 2, 2002, February 3, 2001and January 31, 2000 (iv) Consolidated Statements of Cash Flows - Years ended February 2, 2002, February 3, 2001 and January 29, 2000 (v) Notes to consolidated financial statements 2. Financial Statement Schedules Schedule II Valuation and Qualifying Accounts 3. Exhibits The exhibits listed in the accompanying Exhibit Index are incorporated by reference herein and filed as part of this report.(b) Reports on Form 8-K J. Crew Operating Corp., has not filed any reports on Form 8-K during the fiscal quarter ended February 2, 2002.(c) Exhibits See Item 14(a)3 above(d) Financial Statement Schedules See Item 14(a) 1 and 14(a) 2 above 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, each registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized. J. CREW GROUP, INC.Date: April 17, 2002 J. CREW OPERATING CORP. By: /s/ Mark A. Sarvary ------------------- Mark A. Sarvary Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of eachregistrant and in the capacities indicated, on April 17, 2002. 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/ 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/ David M. Schwarz Director --------------------------- David M. Schwarz /s/ Thomas W. Scott Director --------------------------- Thomas W. Scott /s/ Brian T. Swette Director --------------------------- Brian T. Swette /s/ Josh S. Weston Director --------------------------- Josh S. Weston S-1Independent 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 2, 2002 and February 3, 2001 and the results oftheir operations and their cash flows for each of the years in the three-yearperiod ended February 2, 2002, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, therelated 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 25, 2002, except as to note 6,which is as of April 17, 2002New York, NY F-1 J. CREW GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets February 2, February 3, Assets 2002 2001 ------ ---- ---- (in thousands) Current assets: Cash and cash equivalents $ 16,201 $ 32,930 Merchandise inventories 138,918 140,667 Prepaid expenses and other current assets 27,026 23,740 --------- --------- Total current assets $ 182,145 $ 197,337 --------- ---------Property and equipment - at cost: Land 1,610 1,460 Buildings and improvements 11,700 11,432 Furniture, fixtures and equipment 105,292 70,541 Leasehold improvements 170,195 144,906 Construction in progress 4,903 22,983 --------- --------- 293,700 251,322 Less accumulated depreciation and amortization 106,427 85,746 --------- --------- 187,273 165,576 --------- ---------Deferred income tax assets 18,071 14,362Other assets 13,831 12,586 --------- --------- Total assets $ 401,320 $ 389,861 ========= ========= Liabilities and Stockholders' Deficit -------------------------------------Current liabilities: Accounts payable $ 66,703 $ 49,705 Other current liabilities 61,788 75,168 Income taxes payable 8,840 17,581 Deferred income tax liabilities 5,650 5,401 --------- --------- Total current liabilities 142,981 147,855 --------- ---------Deferred credits and other long-term liabilities 67,235 56,043 --------- ---------Long-term debt 279,687 264,292 --------- ---------Redeemable preferred stock 230,460 200,018 --------- ---------Stockholders' deficit (319,043) (278,347) --------- --------- Total liabilities and stockholders' deficit $ 401,320 $ 389,861 ========= =========See accompanying notes to consolidated financial statements. F-2 J. CREW GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended ----------- February 2, February 3, January 29, ----------- ---------- ----------- 2002 2001 2000 ---- ---- ---- (in thousands) Revenues: Net sales $ 741,280 $ 787,658 $ 714,119 Other 36,660 38,317 36,577 --------- --------- --------- 777,940 825,975 750,696Operating costs and expenses: Cost of goods sold, including buying and occupancy costs 462,371 463,909 431,193 Selling, general and administrative expenses 295,568 301,865 279,302 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 --------- --------- --------- 757,939 769,904 721,513 --------- --------- --------- Income from operations 20,001 56,071 29,183Interest expense - net (36,512) (36,642) (38,861)Gain on sale of Popular Club Plan -- -- 1,000 --------- --------- --------- Income/(loss) before income taxes (16,511) 19,429 (8,678)(Provision) benefit for income taxes 5,500 (7,500) 2,050 --------- --------- --------- Net income/(loss) $ (11,011) $ 11,929 $ (6,628) ========= ========= =========See accompanying notes to consolidated financial statements. F-3 J. CREW GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended ----------- February 2, February 3, January 29, ----------- ----------- ----------- 2002 2001 2000 ---- ---- ---- (in thousands) Cash flows from operating activities:Net income/(loss) $(11,011) $ 11,929 $ (6,628)Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization 31,718 22,600 19,241 Write off of software development costs -- -- 7,018 Amortization of deferred financing costs 1,997 2,793 2,196 Non-cash interest expense 15,395 13,608 11,989 Deferred income taxes (3,460) 27 (6,840) Non-cash compensation expense 1,574 649 636 Gain on sale of subsidiary -- -- (1,000) Write down of assets and other charges in connection with discontinued catalog -- 4,130 4,000Changes in operating assets and liabilities: Merchandise inventories 1,749 (10,739) 26,094 Net assets held for disposal -- 4,797 4,450 Prepaid expenses and other current assets (3,286) 6,343 16,646 Other assets (3,416) (2,788) (777) Accounts payable 16,998 8,754 821 Other liabilities (13,767) 5,263 12,892 Income taxes payable (8,741) 2,894 3,407 -------- -------- -------- Net cash provided by operating activities 25,750 70,260 94,145 -------- -------- -------- Cash flows from investing activities: Capital expenditures (61,862) (55,694) (48,684) Proceeds from construction allowances 19,287 13,519 7,431 -------- -------- -------- Net cash used in investing activities (42,575) (42,175) (41,253) -------- -------- --------Cash flows from financing activities: Decrease in notes payable, bank -- -- (14,000) Repayment of long-term debt -- (34,000) (10,000) Proceeds from the issuance of common stock 96 178 158 Repurchase of common stock -- (26) -- -------- -------- -------- Net cash provided by/(used in) financing activities 96 (33,848) (23,842) -------- -------- -------- Increase (decrease) in cash and cash equivalents (16,729) (5,763) 29,050 Cash and cash equivalents at beginning of year 32,930 38,693 9,643 -------- -------- -------- Cash and cash equivalents at end of year $ 16,201 $ 32,930 $ 38,693 ======== ======== ======== Supplementary cash flow information: Income taxes paid (refunded) $ 6,442 $ 4,279 $ (7,570) ======== ======== ======== Interest paid $ 19,389 $ 20,513 $ 24,792 ======== ======== ======== Noncash financing activities: Dividends on redeemable preferred stock $ 30,442 $ 26,484 $ 22,986 ======== ======== ========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) Common stock Additional Retained Deferred Stock- ------------ paid-in earnings Treasury compen- holders' Shares Amount capital (Deficit) stock sation deficit ------ ------ ------- --------- ----- ------ ------- 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)Preferred stock dividends -- -- -- (22,986) -- -- (22,986)Issuance of common stock 17,665 -- 158 -- -- -- 158Amortization 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 loss -- -- -- 11,929 -- -- 11,929Preferred stock dividends -- -- -- (26,484) -- -- (26,484)Issuance of common stock 18,400 -- 178 -- -- -- 178Amortization of restricted stock -- -- -- -- -- 649 649Repurchase of common stock -- -- -- -- (26) -- (26) ---------- ---------- ---------- ---------- ---------- ---------- ----------Balance at February 3, 2001 12,232,665 $ 1 $ 70,715 $ (345,733) $ (2,351) $ (979) $ (278,347) ========== ========== ========== ========== ========== ========== ==========Net loss -- -- -- (11,011) -- -- (11,011)Preferred stock dividends -- -- -- (30,442) -- -- (30,442)Issuance of common stock 5,524 -- 96 -- -- -- 96Amortization of restricted stock -- -- -- -- -- 661 661 ---------- ---------- ---------- ---------- ---------- ---------- ----------Balance at February 2, 2002 12,238,189 $ 1 $ 70,811 $ (387,186) $ (2,351) $ (318) $ (319,043) ========== ========== ========== ========== ========== ========== ==========See accompanying notes to consolidated financial statements. F-5 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000(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 2001, 2000, and 1999 ended on February 2, 2002 (52 weeks), February 3, 2001 (53 weeks) and January 29, 2000 (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 $7,895,000 and $18,331,000 at February 2, 2002 and February 3, 2001, are stated at cost, which approximates market value. F-6 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000 (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 2, 2002 and February 3, 2001 were $7,959,000 and $10,600,000. Catalog costs, which are reflected in selling and administrative expenses, for the fiscal years 2001, 2000, and 1999 were $65,477,000, $69,000,000, and $84,077,000. 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 $8.5 million and $15.0 million of system development costs were capitalized in fiscal years 2001 and 2000. 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) Debt Issuance Costs Debt issuance costs (included in other assets) of $6,906,000 and $8,703,000 at February 2, 2002 and February 3, 2001 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 2, 2002, February 3, 2001 and January 29, 2000 (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. Expenses associated with shipping and handling functions are included in cost of goods sold. (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 from time to time to manage its interest rate and foreign currency exposures. The Company may enter into (a) interest rate swaps to convert fixed rate debt to variable rates or (b) forward foreign exchange contracts as hedges relating to identifiable currency positions to reduce the risk from exchange rate fluctuations. Effective in the first quarter of 2001 the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded either as assets or liabilities on the balance sheet at their respective fair values. SFAS No. 133 also establishes criteria for a derivative to qualify as a hedge for accounting purposes. Changes in the fair value of derivative financial instruments are either recognized periodically in income or stockholders' equity, depending on whether the derivative is being used to hedge changes in fair value or cash flows. The adoption of SFAS 133 did not have a material effect on the Company's financial statements; therefore a transition adjustment was not necessary. There were no derivative financial instruments outstanding at February 2, 2002. (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 undiscounted 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. F-8 (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 or in excess of 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. (q) Recent Accounting Pronouncements In July 2001, the FASB issued Statement of Financial Standards No. 141, "Business Combinations" and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001 and modifies the application of the purchase accounting method effective for transactions that are completed after June 30, 2001. SFAS 142 eliminates the requirement to amortize goodwill and intangible assets having indefinite useful lives but requires testing at least annually for impairment. Intangible assets that have finite lives will continue to be amortized over their useful lives. SFAS 142 will apply to goodwill and intangible assets arising from transactions completed before and after the Statement's effective date of January 1, 2002. These statements had no effect on the Company's financial statements in fiscal 2001 and are not anticipated to have any effect in fiscal 2002. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets. The Company also records a corresponding asset which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management does not believe that the adoption of SFAS No. 143 will have a significant impact on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 will not have any impact on the Company's financial statements. EITF Issue No. 00-14 "Accounting for Certain Sales Incentives" will be effective in the first quarter of fiscal 2002. This EITF addresses the accounting for and classification of various sales incentives. The adoption of the provisions of this EITF will not have a material effect on the Company's financial Statements in fiscal 2002. F-9 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000(2) Events of September 11, 2001 The terrorist events of September 11, 2001 resulted in the destruction of the Company's retail store located at the World Trade Center in New York City, resulting in the loss of inventories and store fixtures, equipment and leasehold improvements. These losses and the resulting business interruption are covered by insurance policies maintained by the Company. The statement of operations for the year ended February 2, 2002 includes losses of $1.9 million relating to inventories and stores fixtures, equipment and leasehold improvements. Insurance recoveries have been recorded to the extent of the losses recognized. Additional insurance recoveries will be recorded at the time of settlement including recoveries for business interruption which were not determinable as of February 2, 2002. (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 was 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. (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 and expenses of C&W for fiscal 1999 and 2000 were not material and as a result have been netted in the accompanying consolidated statements of operations. 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 C&W 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. 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. F-10 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000(4) Other Current Liabilities Other current liabilities consist of: February 2, February 3, 2002 2001 ---- ---- Customer liabilities $ 11,381,000 $ 12,251,000 Accrued catalog and marketing costs 3,655,000 4,515,000 Taxes, other than income taxes 2,930,000 3,686,000 Accrued interest 4,690,000 4,746,000 Accrued occupancy 1,036,000 2,339,000 Reserve for sales returns 6,475,000 6,530,000 Accrued compensation 1,697,000 11,051,000 Other 29,924,000 30,050,000 ------------ ------------ $ 61,788,000 $ 75,168,000 ------------ ------------ (5) Long-Term Debt Long term debt consists of: February 2, February 3, 2002 2001 ---- ---- 10-3/8% senior subordinated notes (a) 150,000,000 150,000,000 13-1/8% senior discount debentures (b) 129,687,000 114,292,000 ------------ ------------ Total $279,687,000 $264,292,000 ============ ============ (a) 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. (b) 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. F-11 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000 (6) Lines of Credit On October 17, 1997, the Company entered into a syndicated revolving credit agreement (the "Revolving Credit Agreement") with a group of banks. This agreement was amended on March 18, 1998, November 23, 1998, April 20, 1999 and April 17, 2002. 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. The maximum amount available under this agreement is $175.0 million. 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 $95,000,000, $34,000,000, and $58,000,000 during fiscal years 2001, 2000 and 1999 and average borrowings were $ 43,100,000, $9,800,000, and $30,800,000. There were no borrowings outstanding at February 2, 2002 and February 3, 2001. Outstanding letters of credit established to facilitate international merchandise purchases at February 2, 2002 and February 3, 2001 amounted to $46,300,000 and $50,948,000. 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. (7) 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 2, 2002, shares issued were 12,238,189 and shares outstanding were 11,748,789. In April 1999 the Board of Directors approved a 200 for 1 stock split of Holdings common stock in the form of a stock dividend. During 1999, 2000 and 2001 directors converted fees into 17,665, 18,400 and 5,524 shares of Holdings common stock. (8) 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. At February 2, 2002, 92,800 shares of Series A Preferred Stock and 32,500 shares of Series B Preferred Stock were outstanding. F-12 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000 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 $105,460,000 at February 2, 2002. Dividends are recorded as an increase to redeemable preferred stock and a reduction of retained earnings. (9) Commitments and Contingencies (a) Operating Leases As of February 2, 2002, 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 2014. At February 2, 2002 aggregate minimum rentals in future periods are, as follows: Fiscal year Amount ----------- ------ 2002 $ 46,354,000 2003 45,979,000 2004 42,585,000 2005 40,051,000 2006 36,785,000 Thereafter 139,305,000 Certain of these leases include renewal options and escalation clauses and provide for contingent rentals based upon sales and require the lessee to pay taxes, insurance and other occupancy costs. Rent expense for fiscal 2001, 2000, and 1999 was $46,573,000, $45,138,000, and $39,474,000, including contingent rent based on store sales of $1,023,000, $1,974,000, and $2,600,000. (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. F-13 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000(10) 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 $1,334,000, $1,241,000, and $1,320,000 for fiscal 2001, 2000 and 1999.(11) 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 2001, 2000, and 1999 was $2,560,000, $3,020,000, and $2,505,000(12) Interest Expense - Net Interest expense, net consists of the following: 2001 2000 1999 ---- ---- ----Interest expense $34,810,000 $34,390,000 $36,903,000Amortization of deferred financing costs 1,997,000 2,793,000 2,196,000Interest income (295,000) (541,000) (238,000) ----------- ----------- -----------Interest expense, net $36,512,000 $36,642,000 $38,861,000 ----------- ----------- ----------- Interest expense in fiscal 1999 includes $1,029,000 incurred in connection with the settlement of a sales and use tax assessment.(13) Other Revenues Other revenue consists of the following: 2001 2000 1999 ---- ---- ----Shipping and handling fees $34,100,000 $35,297,000 $34,072,000Royalties 2,560,000 3,020,000 2,505,000 ----------- ----------- ----------- $36,660,000 $38,317,000 $36,577,000 =========== =========== ===========(14) Financial Instruments The following disclosure about the fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." The fair value of the Company's long-term debt is estimated to be approximately $187,191,000 and $202,793,000 at February 2, 2002 and February 3, 2001, and is based on dealer quotes or quoted market prices of the same or similar instruments The carrying amounts of long-term debt were $279,687,000 and $264,292,000 at February 2, 2002 and February 3, 2001. 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. F-14 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000(15) Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". This statement requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.The income tax provision/(benefit) consists of: 2001 2000 1999 ---- ---- ---- Current: Foreign $ 260,000 $ 300,000 $ 250,000 Federal (2,400,000) 6,253,000 3,100,000 State and local 100,000 920,000 1,440,000 ------------- ----------- ------------ (2,040,000) 7,473,000 4,790,000 ------------- ----------- ------------ Deferred - Federal, state and local (3,460,000) 27,000 (6,840,000) ------------- ----------- ------------ Total $ (5,500,000) $ 7,500,000 $ (2,050,000) ============= =========== ============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. 2001 2000 1999 ---- ---- ---- Federal income tax rate (35.0)% 35.0 % (35.0)% State and local income taxes, net of federal benefit (2.3) 7.6 7.0 Nondeductible expenses and other 4.0 (4.0) 4.4 ------- ------ ------ Effective tax rate (33.3)% 38.6 % (23.6)% ======= ====== ====== F-15 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000The tax effect of temporary differences which give rise to deferred tax assetsand liabilities are: February 2, February 3, 2002 2001 ---- ---- Deferred tax assets: Original issue discount $ 20,836,000 $ 15,007,000 State and local NOL carryforwards 1,900,000 1,900,000 Reserve for sales returns 2,603,000 2,625,000 Other 3,766,000 3,412,000 ------------- ------------ 29,105,000 22,944,000 ------------- ------------ Deferred tax liabilities: Prepaid catalog and other prepaid expenses (8,841,000) (8,026,000) Difference in book and tax basis for property and equipment (7,903,000) (5,957,000) ------------- ------------ (16,744,000) (13,983,000) ------------- ------------- Net deferred income tax asset $ 12,421,000 $ 8,961,000 ============== ============ Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. The Company has state and local income tax net operating loss carryforwards of varying amounts. F-16 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000(16) 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: 2001 2000 1999 ---- ---- ---- Weighted Weighted Weighted -------- -------- -------- average average average ------- ------- ------- Shares exercise price Shares exercise price Shares exercise price ------- -------------- ------ -------------- ------ -------------- Outstanding, beginning of year 1,788,750 $ 9.15 1,532,800 $ 8.87 997,200 $ 8.00 Granted 283,000 14.53 374,700 10.17 772,800 9.47 Exercised -- -- (2,000) 6.82 - - Cancelled (262,960) 9.31 (116,750) 8.72 (237,200) 7.14 ---------- ------ --------- ------ --------- ------Outstanding, end of year 1,808,790 $ 9.97 1,788,750 $ 9.15 1,532,800 $ 8.87 ---------- ------ ========= ====== ========= ======Options exercisable at end of year 728,950 $ 9.21 583,000 $ 9.24 318,040 $ 7.97 ========== ====== ========= ====== ========= ======(17) Employee Restricted Stock Under the terms of an employment agreement with a key executive 661,600 shares of restricted stock were awarded in fiscal 1997. These shares vest through October 2002. Deferred compensation is charged to expense over the vesting period.(18) Segment Information The Company operates in one business segment. The Company designs, contracts to manufacture and markets men's, women's, and children's apparel, shoes and accessories under the J. Crew brand name. The brand is marketed through various channels of distribution including retail and factory outlet stores, catalogs, the Internet and licensing arrangements with third parties. During 1998, the Company decided to discontinue the operations of its C&W brand. Fiscal 1999 and 2000 include charges of $4,000,000 and $4,130,000 primarily to write down inventories to net realizable value. (See note 3 to the consolidated financial statements). All of the Company's identifiable assets are located in the United States. Export sales are not significant. F-17 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000Corporate and other expenses include expenses incurred by the corporate officeand certain non-recurring expenses that are not allocated to specific businessunits. Corporate and other expenses in fiscal 1999 include the write off ofimpaired software development costs.Segment assets represent the assets used directly in the operations of eachbusiness unit such as inventories and property and equipment. Corporate assetsconsist principally of investments, deferred financing costs deferred income taxassets and certain capitalized software.The accounting policies used for segment reporting are consistent with thosedescribed in the summary of significant accounting policies. [$ in thousands]Revenues 2001 2000 1999 ---- ---- ---- J. Crew $ 777,940 $ 825,975 $ 750,696 --------- --------- ---------Income from operations J. Crew 21,575 61,094 41,052Clifford & Wills -- (4,130) (4,000)Corporate and other expenses (1,574) (893) (7,869) --------- --------- ---------Income from operations 20,001 56,071 29,183 --------- --------- ---------Interest expense, net 36,512 (36,642) (38,861)Gain on sale of PCP -- -- 1,000 --------- --------- ---------Income/(loss) before income taxes $ (16,511) $ 19,429 $ (8,678) ========= ========= =========Depreciation and amortizationJ. Crew $ 31,568 $ 22,448 $ 19,051Corporate 150 152 190 --------- --------- --------- $ 31,718 $ 22,600 $ 19,241 ========= ========= =========Identifiable assets J. Crew $ 360,882 $ 342,541 $ 305,552Clifford & Wills -- -- 8,927Corporate 40,438 47,320 59,125 --------- --------- --------- $ 401,320 $ 389,861 $ 373,604 ========= ========= =========Capital expendituresJ. Crew $ 59,846 $ 55,394 $ 39,435Corporate 2,016 300 9,249 --------- --------- --------- $ 61,862 $ 55,694 $ 48,684 ========= ========= ========= F-18 J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000(19) Quarterly Financial Information (Unaudited) ------------------------------- ($ in millions) 13 weeks 13 weeks 13 weeks 13 weeks 52 weeks ended ended ended ended ended 5/5/01 8/4/01 11/3/01 2/2/02 2/2/02 ------ ------ ------- ------ ------ Net sales $158.9 $160.5 $187.1 $234.8 $741.3Gross profit 68.2 60.5 82.8 104.1 315.6Net income (loss) $ (9.3) $ (8.6) $ .3 $ 6.6 $(11.0) 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) 2/03/01 ------- ------- -------- --------- ------- Net sales $158.0 $162.2 $194.0 $273.5 $787.7Gross profit 72.8 71.0 90.2 128.1 362.1Net income (loss) $ (5.2) $ (5.1) $ 4.5 $ 17.7 $ 11.9(a) includes $4.1 million writedown of net assets of C&W. F-19SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS beginning charged to cost charged to other ending balance and expenses accounts deductions balance ($ in thousands) Inventory reserve----------------- (deducted from inventories)fiscal year ended:February 2, 2002 $ 7,360 $ 1,007(a) $ -- $ -- $ 8,367February 3, 2001 4,447 2,913(a) -- -- 7,360January 29, 2000 6,122 (1,675)(a) -- -- 4,447Allowance for sales returns--------------------------- (included in other current liabilities)fiscal year ended:February 2, 2002 $ 6,530 $ (55)(a) $ -- $ -- $ 6,475February 3, 2001 5,011 1,519(a) -- 6,530January 29, 2000 3,473 1,538(a) -- -- 5,011(a) 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. F-20Independent Auditors' ReportThe Board of Directors and StockholdersJ. Crew Operating Corp. and Subsidiaries:We have audited the consolidated financial statements of J. Crew Operating Corp.and subsidiaries (the "Company") as listed in the accompanying Index. Inconnection with our audits of the consolidated financial statements, we alsohave audited the financial statement schedule listed in the accompanying index.These consolidated 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 OperatingCorp. and subsidiaries as of February 2, 2002 and February 3, 2001 and theresults of their operations and their cash flows for each of the years in thethree-year period ended February 2, 2002, in conformity with accountingprinciples generally accepted in the United States of America. Also, in ouropinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein. KPMG LLPMarch 25, 2002, except as to note 6,which is as of April 17, 2002New York, NY F-21 J. CREW OPERATING CORP. AND SUBSIDIARIES Consolidated Balance Sheets February 2, February 3, Assets 2002 2001 ------ ---- ---- (in thousands) Current assets: Cash and cash equivalents $ 16,201 $ 32,930 Merchandise inventories 138,918 140,667 Prepaid expenses and other current assets 27,026 23,740 -------- -------- Total current assets 182,145 197,337 -------- --------Property and equipment - at cost: Land 1,610 1,460 Buildings and improvements 11,700 11,432 Furniture, fixtures and equipment 105,292 70,541 Leasehold improvements 170,195 144,906 Construction in progress 4,903 22,983 -------- -------- 293,700 251,322 Less accumulated depreciation and amortization 106,427 85,746 -------- -------- 187,273 165,576 -------- --------Other assets 12,310 10,839 -------- -------- Total assets $381,728 $373,752 ======== ======== Liabilities and Stockholder's Equity ------------------------------------Current liabilities: Accounts payable $ 66,703 $ 49,705 Other current liabilities 61,788 75,168 Federal and state income taxes payable 10,109 18,850 Deferred income taxes 5,604 3,731 -------- -------- Total current liabilities 144,204 147,454 -------- --------Long-term debt 150,000 150,000 -------- --------Deferred credits and other long-term liabilities 67,235 56,043 -------- --------Due to J.Crew Group, Inc. 1,142 1,047 -------- --------Stockholder's equity 19,147 19,208 -------- -------- Total liabilities and stockholder's equity $381,728 $373,752 ======== ========See accompanying notes to consolidated financial statements. F-22 J. CREW OPERATING CORP. AND SUBSIDIARIES Consolidated Statements of Operations Years ended ----------- February 2, February 3, January 29, ----------- ---------- ----------- 2002 2001 2000 ---- ---- ---- (in thousands) Revenues: Net sales $ 741,280 $ 787,658 $ 714,119 Other 36,660 38,317 36,577 --------- --------- --------- 777,940 825,975 750,696Operating costs and expenses: Cost of goods sold, including buying and occupancy costs 462,371 463,909 431,193 Selling, general and administrative expenses 294,907 301,216 278,666 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 --------- --------- --------- 757,278 769,255 720,877 --------- --------- --------- Income from operations 20,662 56,720 29,819Interest expense - net (20,890) (22,787) (26,626)Gain on sale of Popular Club Plan -- -- 1,000 --------- --------- --------- Income/(loss) before income taxes (228) 33,933 4,193(Provision) benefit for income taxes 167 (12,180) (2,293) --------- --------- --------- Net income/(loss) $ (61) $ 21,753 $ 1,900 ========= ========= =========See accompanying notes to consolidated financial statements. F-23 J. CREW OPERATING CORP. 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) $ (61) $ 21,753 $ 1,900Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization 31,718 22,600 19,241 Write off of software development costs -- -- 7,018 Amortization of deferred financing costs 1,770 2,548 1,950 Non-cash compensation expense 913 -- -- Deferred income taxes 1,873 4,706 (2,497) Gain on sale of subsidiary -- -- (1,000) Write down of assets and other charges in connection with discontinued catalog -- 4,130 4,000Changes in operating assets and liabilities: Merchandise inventories 1,749 (10,739) 26,094 Net assets held for disposal -- 4,797 4,450 Prepaid expenses and other current assets (3,286) 6,343 16,646 Other assets (3,416) (2,781) (770) Accounts payable 16,998 8,754 821 Other liabilities (13,671) 5,407 13,044 Federal and state income taxes payable (8,741) 2,894 3,406 -------- -------- -------- Net cash provided by operating activities 25,846 70,412 94,303 -------- -------- --------Cash flows from investing activities: Capital expenditures (61,862) (55,694) (48,684) Proceeds from construction allowances 19,287 13,519 7,431 -------- -------- -------- Net cash provided by (used in) investing activities (42,575) (42,175) (41,253) -------- -------- --------Cash flows from financing activities: (Decrease)/increase in notes payable, bank -- -- (14,000) Repayment of long-term debt -- (34,000) (10,000) -------- -------- -------- Net cash used in financing activities -- (34,000) (24,000) -------- -------- -------- Increase (decrease) in cash and cash equivalents (16,729) (5,763) 29,050 Cash and cash equivalents at beginning of year 32,930 38,693 9,643 -------- -------- -------- Cash and cash equivalents at end of year $ 16,201 $ 32,930 $ 38,693 ======== ======== ========See accompanying notes to consolidated financial statements. F-24 J. CREW OPERATING CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000(1) Nature Of Business And Summary Of Significant Accounting Policies (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of J. Crew Operating Corp ("Operating Corp") and its wholly-owned subsidiaries (collectively, the "Company"). Operating Corp. is a wholly owned subsidiary of J.Crew Group, Inc. ("Holdings"). 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 2001, 2000, and 1999 ended on February 2, 2002 (52 weeks), February 3, 2001 (53 weeks) and January 29, 2000 (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 $7,895,000 and $18,331,000 at February 2, 2002 and February 3, 2001 are stated at cost, which approximates market value. (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 F-25 J. CREW OPERATING CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000 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 2, 2002 and February 3, 2001 were $7,959,000 and $10,600,000. Catalog costs, which are reflected in selling and administrative expenses, for the fiscal years 2001, 2000, and 1999 were $ 65,477,000, $69,000,000, and $84,077,000. 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 $8.5 million and $15.0 million of systems development costs were capitalized in fiscal years 2001 and 2000. 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) Debt Issuance Costs Debt issuance costs (included in other assets) of $5,195,000 and $6,965,000 at February 2, 2002 and February 3, 2001 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." (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. Expenses associated with shipping and handling functions are included in cost of goods sold. (k) Store Preopening Costs Costs associated with the opening of new retail and outlet stores are expensed as incurred. F-26 J. CREW OPERATING CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000 (l) Derivative Financial Instruments Derivative financial instruments are used by the Company from time to time to manage its interest rate and foreign currency exposures. The Company may enter into (a) interest rate swaps to convert fixed rate debt to variable rates or (b) forward foreign exchange contracts as hedges relating to identifiable currency positions to reduce the risk from exchange rate fluctuations. Effective in the first quarter of 2001 the Company adopted SFAS No, 133, "Accounting for Derivative Instruments and Certain Hedging Activities." as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded either as assets or liabilities on the balance sheet at their respective fair values. SFAS No. 133 also establishes criteria for a derivative to qualify as a hedge for accounting purposes. Changes in the fair value of derivative financial instruments are either recognized periodically in income or stockholders' equity, depending on whether the derivative is being used to hedge changes in fair value or cash flows. The adoption of SFAS 133 did not have a material effect on the Company's financial statements, therefore a transition adjustment was not necessary. There were no derivative financial instruments outstanding at February 2, 2002. (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 undiscounted 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 or in excess of 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-27 (q) Recent Accounting Pronouncements In July 2001, the FASB issued Statement of Financial Standards No. 141, "Business Combinations" and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001 and modifies the application of the purchase accounting method effective for transactions that are completed after June 30, 2001. SFAS 142 eliminates the requirement to amortize goodwill and intangible assets having indefinite useful lives but requires testing at least annually for impairment. Intangible assets that have finite lives will continue to be amortized over their useful lives. SFAS 142 will apply to goodwill and intangible assets arising from transactions completed before and after the Statement's effective date of January 1, 2002. These statements had no effect on the Company's financial statements in fiscal 2001 and are not anticipated to have any effect in fiscal 2002. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets. The Company also records a corresponding asset which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management does not believe that the adoption of SFAS No. 143 will have a significant impact on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 will not have any impact on the Company's financial statements. EITF Issue No. 00-14 "Accounting for Certain Sales Incentives" will be effective in the first quarter of fiscal 2002. This EITF addresses the accounting for and classification of various sales incentives. The adoption of the provisions of this EITF will not have a material effect on the Company's financial Statements in fiscal 2002. F-28 J. CREW OPERATING CORP AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000(2) Events of September 11, 2001 The terrorist actions of September 11, 2001 resulted in the destruction of our retail store located at the World Trade Center, resulting in the loss of inventories and store fixtures, equipment and leasehold improvements. These losses and the resulting business interruption are covered by insurance policies maintained by the Company. The statement of operations for the year ended February 2, 2002 includes losses of $1.9 million relating to inventories and stores fixtures, equipment and leasehold improvements. Insurance recoveries have been recorded to the extent of the losses recognized. Additional insurance recoveries will be recorded at the time of settlement including recoveries for business interruption which were not determinable as of February 2, 2002. (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 was 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. (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 and expenses (C&W) for fiscal 1999 and 2000 were not material and as a result have been netted in the accompanying consolidated statement of operations. 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 C&W 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. 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. F-29 J. CREW OPERATING CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000(4) Other Current Liabilities Other current liabilities consist of: February 2, February 3, 2002 2001 ---- ---- Customer liabilities $11,381,000 $12,251,000 Accrued catalog and marketing costs 3,655,000 4,515,000 Taxes, other than income taxes 2,930,000 3,686,000 Accrued interest 4,690,000 4,746,000 Accrued occupancy 1,036,000 2,339,000 Reserve for sales returns 6,475,000 6,530,000 Accrued compensation 1,697,000 11,051,000 Other 29,924,000 30,050,000 ----------- ----------- $61,788,000 $75,168,000 ----------- -----------(5) Long-Term Debt Long term debt consists of $150,000,000 principal amount of senior subordinated notes. The senior subordinated notes are unsecured general obligations of J. Crew Operating Corp., 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. There are no maturities of long-term debt required during the next five years.(6) Lines of Credit On October 17, 1997, the Company entered into a syndicated revolving credit agreement (the "Revolving Credit Agreement") with a group of banks. This agreement was amended on March 18, 1998, November 23, 1998, April 20, 1999 and April 17, 2002. 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. The maximum amount available under this agreement is $175.0 million. 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 $95,000,000, $34,000,000 and $58,000,000 during fiscal years 2001, 2000 and 1999 and average borrowings were $ 43,100,000, $9,800,000 and $30,800,000. There were no borrowings outstanding at February 2, 2002 and January 29, 2000. Outstanding letters of credit established to facilitate international merchandise purchases at February 2, 2002 and February 3, 2001 amounted to $46,300,00 and $50,948,000. F-30 J. CREW OPERATING CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000 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. (7) Commitments and Contingencies (a) Operating Leases As of February 2, 2002, 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 2, 2002 aggregate minimum rentals in future periods are, as follows: Fiscal year Amount ----------- ------ 2002 46,354,000 2003 45,979,000 2004 42,585,000 2005 40,015,000 2006 36,785,000 Thereafter 139,305,000 Certain of these leases include renewal options and escalation clauses and provide for contingent rentals based upon sales and require the lessee to pay taxes, insurance and other occupancy costs Rent expense for fiscal 2001, 2000, and 1999 was $46,573,000, $45,138,000 and $ 39,474,000, including contingent rent based on store sales of $1,023,000, $1,974,000 and $2,600,000. (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.(8) Employee Benefit Plan The Company has a thrift/savings plan pursuant to Section 401 of the Internal Revenue Code whereby all eligible employees may contribute up to 15% of their annual base salaries subject to certain limitations. The Company's contribution is based on a percentage formula set forth in the plan agreement. Company contributions to the thrift/savings plan were $1,334,000, $1,241,000 and $1,320,000 for fiscal 2001, 2000 and 1999. F-31 J. CREW OPERATING CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000(9) 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 2001, 2000, and 1999 was $2,560,000, $3,020,000, and $2,505,000.(10) Interest Expense - Net Interest expense, net consists of the following: 2001 2000 1999 ---- ---- ---- Interest expense $19,415,000 $20,780,000 $24,914,000 Amortization of deferred 1,770,000 2,548,000 1,950,000 financing costs Interest income (295,000) (541,000) (238,000) ----------- ----------- ----------- Interest expense, net $20,890,000 $22,787,000 $26,626,000 ----------- ----------- ----------- Interest expense in fiscal 1999 includes $1,029,000 incurred in connection with the settlement of a sales and use tax assessment.(11) Other Revenues Other revenue consists of the following: 2001 2000 1999 ---- ---- ---- Shipping and handling fees $34,100,000 $35,297,000 $34,072,000 Royalties 2,560,000 3,020,000 2,505,000 ----------- ----------- ----------- $36,660,000 $38,317,000 $36,577,000 =========== ============ ============(12) Financial Instruments The following disclosure about the fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." The fair value of the Company's long-term debt is estimated to be approximately $119,754,000 and $132,504,000 at February 2, 2002 and February 3, 2001, and is based on dealer quotes or quoted market prices of the same or similar instruments The carrying amounts of long-term debt were $150,000,000 at February 2, 2002 and February 3, 2001. 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.(13) Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". This statement requires the use of the asset and liability method of accounting for income taxes. Under the asset and 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-32 J. CREW OPERATING CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000 The income tax provision/(benefit) consists of: 2001 2000 1999 ---- ---- ---- Current: Foreign $ 260,000 $ 300,000 $ 250,000 Federal (2,400,000) 6,253,000 3,100,000 State and local 100,000 920,000 1,440,000 ----------- ------------ ----------- (2,040,000) 7,473,000 4,790,000 ----------- ------------ ----------- Deferred - Federal, state and local 1,873,000 4,707,000 (2,497,000) ----------- ------------ ----------- Total $ (167,000) $ 12,180,000 $ 2,293,000 =========== ============ ===========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. 2001 2000 1999 ---- ---- ---- Federal income tax rate (35.0)% 35.0% 35.0% State and local income taxes, net of federal benefit 134.6 3.2 14.4 Nondeductible expenses and other (172.8) (2.3) 5.4 -------- ------ ----- Effective tax rate (73.2)% 35.9% 54.7% ======== ====== =====The tax effect of temporary differences which give rise to deferred tax assetsand liabilities are: February 2, February 3, 2002 2001 ---- ---- Deferred tax assets: Reserve for sales returns $ 2,603,000 $ 2,625,000 State and local net operating loss carryforwards 1,900,000 1,900,000 Other 6,637,000 5,727,000 -------------- ------------- 11,140,000 10,252,000 -------------- ------------- Prepaid catalog and other prepaid expenses (8,841,000) (8,026,000) Difference in book and tax basis for property and equipment (7,903,000) (5,957,000) -------------- ------------- (16,744,000) (13,983,000) -------------- ------------- Net deferred income taxes $ (5,604,000) $ (3,731,000) ============== ============= Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. The Company has state and local income tax net operating loss carryforwards of varying amounts. F-33 J. CREW OPERATING CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000(14) Stockholder's Equity The Company has authorized 100 shares of common stock par value $1 per share, all of which was issued and outstanding at February 2, 2002 and February 3, 2001. A reconciliation of stockholder's equity is as follows: Year Ended February 2, 2002 February 3, 2001 ---------------- ---------------- Balance, beginning of year $ 19,208,000 $ (2,545,000) Net income/(loss) for year (61,000) 21,753,000 ------------- -------------- Balance, end of year $ 19,147,000 $ 19,208,000 ============= ==============(15) Segment Information The Company operates in one business segment. The Company designs, contracts to manufacture and markets men's, women's, and children's apparel, shoes and accessories primarily under the J.Crew brand name. The brand is marketed through various channels of distribution including retail and factory outlet stores, catalogs, the Internet and licensing arrangements with third parties. During 1998 the Company decided to discontinue the operations of its C&W brand. Fiscal 1999 and 2000 include charges of $4,000,000 and $4,130,000 primarily to write down inventories to net realizable value. (See note 3 to the consolidated financial statements). All of the Company's identifiable assets are located in the United States. Export sales are not significant. Corporate and other expenses include expenses incurred by the corporate office and certain non-recurring expenses that are not allocated to specific business units. Corporate and other expenses in fiscal 1999 include the write off of impaired software development costs. Segment assets represent the assets used directly in the operations of each business unit such as inventories and property and equipment. Corporate assets consist principally of investments, deferred financing costs and certain capitalized software. F-34 J. CREW OPERATING CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended February 2, 2002, February 3, 2001 and January 29, 2000The accounting policies used for segment reporting are consistent with thosedescribed in the summary of significant accounting policies. [$ in thousands]Revenues 2001 2000 1999 ---- ---- ---- J. Crew $777,940 $825,975 $ 750,696 ========= ======== =========Income from operationsJ. Crew 20,650 61094 41,052Clifford & Wills -- (4,130) (4,000)Corporate and other expenses -- (244) (7,869) --------- --------- ----------Income from operations 20,650 56,720 29,819Interest expense, net (20,890) (22,787) (26,626)Gain on sale of PCP --- -- 1,000 --------- --------- ----------Income/(loss) before income taxes $ (240) $ 33,933 $ 4,193 ========= ========= ==========Depreciation and amortizationJ. Crew $ 31,568 $ 22,448 $ 19,051Corporate 150 152 190 --------- --------- ---------- $ 31,718 $ 22,600 $ 19,241 ========= ========= ==========Identifiable assetsJ. Crew $360,882 $342,541 $ 305,552Clifford & Wills -- -- 8,927Corporate 20,846 31,211 49,127 --------- --------- ----------- $381,728 $373,752 $ 363,606 ========= ========= ==========Capital expendituresJ. Crew $ 59,846 $ 55,394 $ 39,435Corporate 2,016 300 9,249 --------- --------- ---------- $ 61,862 $ 55,694 $ 48,684 ========= ========= ========== F-35(16) Quarterly Financial Information (Unaudited) ------------------------------- ($ in millions) 13 weeks 13 weeks 13 weeks 13 weeks 52 weeks ended ended ended ended ended 5/5/01 8/4/01 11/3/01 2/2/02 2/2/02 ------ ------ ------- ------ ------ Net sales $ 158.9 $160.5 $187.1 $234.8 $741.3Gross profit 68.2 60.5 82.8 104.1 315.6Net income (loss) $ (7.1) $ (6.1) $ 2.7 $ 10.4 $ (.1) 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 $787.7Gross profit 72.8 71.0 90.2 128.1 362.1Net income (loss) $ (3.1) $ (2.9) $ 6.7 $ 21.1 $ 21.8(a) includes $4.1 million writedown of net assets of C&W.SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS beginning charged to cost charged to other ending balance and expenses accounts deductions balance ($ in thousands)Inventory reserve----------------- (deducted from inventories) fiscal year ended:February 2, 2002 $ 7,360 $ 1,007(a) $ -- $ -- $ 8,367February 3, 2001 4,447 2,913(a) -- -- 7,360January 29, 2000 6,122 (1,675)(a) --- -- 4,447Allowance for sales returns--------------------------- (included in other current liabilities)fiscal year ended:February 2, 2002 $ 6,530 $ (55)(a) $ -- $ -- $ 6,475February 3, 2001 5,011 1,519(a) -- -- 6,530January 29, 2000 3,473 1,538(a) ---- 5,011(a) 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. F-36 EXHIBIT INDEX Exhibit 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 (incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 3, 2001 (the "2000 Form 10-K")). 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). 4.2(e)* Amendment, dated as of April 17, 2002, to the Credit Agreement. 4.3 Guarantee Agreement, dated as of October 17, 1997, among J. Crew Group, Inc., the subsidiary guarantors of J. Crew Operating Corp. that are signatories thereto and The Chase Manhattan Bank (incorporated by reference to Exhibit 4.6 to the Registration Statement). 4.4 Indemnity, Subrogation and Contribution Agreement, dated as of October 17, 1997, among J. Crew Operating Corp., the subsidiary guarantors of J. Crew Operating Corp. that are signatories thereto and The Chase Manhattan Bank (incorporated by reference to Exhibit 4.7 to the Registration Statement). 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). 1 Exhibit No. Description -- ----------- 4.7 Registration Rights Agreement, dated as of October 17, 1997, by and among J. Crew Group, Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Chase Securities Inc. (incorporated by reference to Exhibit 4.10 to the Registration Statement). NOTE:Pursuant to the provisions of paragraph (b)(4)(iii) of Item 601 of Regulation S-K, the Registrant hereby undertakes to furnish to the Commission upon request copies of the instruments pursuant to which various entities hold long-term debt of the Company or its parent or subsidiaries, none of which instruments govern indebtedness exceeding 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. 10.1(a)+ Employment Agreement, dated October 17, 1997, among J. Crew Group, Inc., J. Crew Operating Corp., TPG Partners II, L.P. (only with respect to Section 2(c) therein) and Emily Woods (the "Woods Employment Agreement") (incorporated by reference to Exhibit 10.1 to the Registration Statement). 10.1(b)+ Letter Agreement, dated February 4, 2000, between J. Crew Group, Inc. and Emily Woods (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). 10.5(c)+* Letter Agreement, dated January 15, 2002, between Mark Sarvary and J. Crew Operating Corp. 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(a)+ Employment Agreement, dated February 18, 2000, between J. Crew Operating Corp. and Trudy Sullivan (incorporated by reference to Exhibit 10.7 to the 2000 Form 10-K). 10.7(b)+* Letter Agreement, dated July 12, 2001, between Trudy Sullivan and J. Crew Operating Corp. 10.8+ Letter Agreement, dated January 29, 2001, between J. Crew Group, Inc. and Richard Anders (incorporated by reference to Exhibit 10.8(b) of the 2000 Form 10-K). 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). 2 Exhibit No. Description -- ------------ 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 (incorporated by reference to Exhibit 10.11(b) to the 2000 Form 10-K). 10.11(c)+ Amendment to the 1997 Plan, dated February 2, 2001 (incorporated by reference to Exhibit 10.11(c) to the 2000 Form 10-K). 10.12+* Employment Agreement, dated May 17, 2001, between J. Crew Operating Corp. and Michael Scandiffio. 10.13+* Employment Agreement, dated December 12, 2001, between J. Crew Operating Corp. and Blair Gordon. 10.14+* Form of Executive Severance Agreement between J. Crew Operating Corp. and certain executives thereof. 10.15+* Letter agreement, dated March 14, 2000, between J. Crew Operating Corp. and Scott Formby. 21.1* Subsidiaries of J. Crew Group, Inc. 23.1* Consent of KPMG LLP, Independent Auditors.___________+ Management contract or compensatory plan or arrangement* Filed herewith 3 Exhibit 4.2(e) AMENDMENT (this "Amendment") dated as of April 17, 2002, relating to the Credit Agreement dated as of October 17, 1997 (as previously amended, the "Credit Agreement"), among J. CREW OPERATING CORP., a Delaware corporation, as Borrower, J. CREW GROUP, INC., the Lenders party thereto, JPMORGAN CHASE BANK, successor to The Chase Manhattan Bank, as Administrative Agent, and DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION, as Syndication Agent. A. The Borrower (such term and each other capitalized term usedbut not defined herein having the meanings assigned to such terms in the CreditAgreement) has requested that the Lenders approve amendments to certainprovisions of the Credit Agreement. B. The undersigned Lenders are willing, on the terms and subjectto the conditions set forth herein, to approve such amendments. In consideration of these premises, the Borrower and theundersigned Lenders hereby agree as follows: SECTION 1. Amendments. Upon the effectiveness of this Amendment -----------as provided in Section 4 below, the Credit Agreement shall be amended as setforth below: (a) The definition of the term "Applicable Rate" set forth inSection 1.01 of the Credit Agreement is hereby amended by deleting the tabletherein in its entirety and replacing it with the following:================================================================================ ABR Eurodollar Acceptance --- ---------- ---------- Leverage Ratio: Spread Spread Spread --------------- ------ ------ --------------------------------------------------------------------------------------Category 1----------greater than 5.00 to 1.00 2.75% 3.75% 3.75%--------------------------------------------------------------------------------Category 2----------greater than 4.50 to 1.00 and lessthan or equal to 5.00 to 1.00 2.50% 3.50% 3.50%--------------------------------------------------------------------------------Category 3----------greater than 4.00 to 1.00 and lessthan or equal to 4.50 to 1.00 2.25% 3.25% 3.25%--------------------------------------------------------------------------------Category 4----------greater than 3.50 to 1.00 and lessthan or equal to 4.00 to 1.00 2.00% 3.00% 3.00%--------------------------------------------------------------------------------Category 5----------greater than 3.00 to 1.00 and lessthan or equal to 3.50 to 1.00 1.75% 2.75% 2.75% --------------------------------------------------------------------------------Category 6----------less than or equal to 3.00 to 1.00 1.50% 2.50% 2.50%================================================================================ (b) The definition of the term "Excluded Charges" set forth in Section1.01 of the Credit Agreement is hereby amended by deleting such definition inits entirety and substituting in lieu thereof the following: "Excluded Charges" means (a) non-recurring charges taken during the ---------------- fiscal year ending January 30, 1998, or the fiscal year ended January 30, 1999, not exceeding $11,000,000 in the aggregate for severance payments, professional advisory fees, management bonuses for 1997, one-time compensation payments made to newly hired executives in 1998 and one-time payments in respect of the employment arrangements of Emily Woods and David DeMattei and (b) non-recurring charges taken during the fiscal year ending February 1, 2003, not exceeding $5,000,000 in the aggregate for one-time payments to salaried employees of the Borrower and its Subsidiaries. (c) Section 1.01 of the Credit Agreement is hereby amended by addingthe following defined term in proper alphabetical order: "Amendment Effective Date" means the date the Amendment to this ------------------------ Agreement dated as of April 17, 2002, shall become effective in accordance with its terms. (d) Section 2.11 of the Credit Agreement is hereby amended by deletingparagraph (e) thereof in its entirety and substituting in lieu thereof thefollowing: (e) The Borrower shall repay or prepay Revolving Borrowings and shall refrain from making additional Revolving Borrowings to the extent necessary in order that there shall be a period of at least 30 consecutive days during the period from December 1, 2002 through January 31, 2003 during which the Revolving Exposure (other than the aggregate undrawn amount of all outstanding Letters of Credit) shall be zero. (e) Section 5.01 of the Credit Agreement is hereby amended by (i)deleting the word "and" appearing at the end of clause (g) thereof, (ii)deleting the period at the end of clause (h) thereof and substituting in lieuthereof the following "; and" and (iii) adding at the end thereof the following: (i) not later than the end of each fiscal quarter, a forecast of projected cash receipts and cash disbursements for the succeeding fiscal quarter. (f) Section 6.01 of the Credit Agreement is hereby amended by deletingthe reference to "Section 6.07(a)" appearing at the end of paragraph (c) thereofand substituting in lieu thereof the following: "Section 6.07(a)(iv); provided --------that this paragraph (c) shall not preclude any Restricted Payment permitted bySection 6.07(a)". (g) Section 6.04 of the Credit Agreement is hereby amended by deletingthe reference to "Section 6.01" appearing in paragraph (e) thereof andsubstituting in lieu thereof the following: "paragraph (a) of Section 6.01". (h) Section 6.07 of the Credit Agreement is hereby amended by deletingthe word "interest" in the first instance it appears in clause (v) of paragraph(a) thereof and substituting in lieu thereof the words "cash dividends". (i) Section 6.12 of the Credit Agreement is hereby amended by(i) deleting the provisos contained therein in their entirety and (ii) changingthe amount opposite the words "February 1, 2003 and thereafter" from"$55,000,000" to "$25,000,000" (j) Section 6.13 of the Credit Agreement is hereby amended by deletingthe table therein in its entirety and replacing it with: ---------------------------------------------------------------- Quarter Ending During the Period Ratio ---------------------------------------------------------------- February 3, 2002 through November 2, 2002 4.50 to 1.00 ---------------------------------------------------------------- November 3, 2002 and thereafter 3.50 to 1.00 ---------------------------------------------------------------- (k) Section 6.14 of the Credit Agreement is hereby amended by deletingthe table therein in its entirety and replacing it with: ---------------------------------------------------------------- Four-Quarter Period Ending Ratio ---------------------------------------------------------------- February 3, 2002 through February 1, 2003 1.30 to 1.00 ---------------------------------------------------------------- February 2, 2003 and thereafter 1.25 to 1.00 ---------------------------------------------------------------- (l) Section 6.16 of the Credit Agreement is hereby amended by deleting"1.50 to 1.00 or, for any fiscal month ending during the third fiscal quarter inany fiscal year, 1.35 to 1.00" and substituting in lieu thereof the following: (A) for the first fiscal month ending during the fourth fiscal quarter of the fiscal year ending on February 1, 2003, 1.50 to 1.00, (B) for each of the second and third fiscal months ending during the fourth fiscal quarter of the fiscal year ending February 1, 2003, 2.00 to 1.00 and (C) for any other fiscal month in any fiscal year, 1.35 to 1.00 SECTION 2. Decrease in Revolving Commitments. The parties hereto agree ----------------------------------that on the Amendment Effective Date the Revolving Commitments shall be reducedby $25,000,000 to $175,000,000, and that such reduction shall be allocated prorata among the Lenders based on their Revolving Commitments. The parties heretoacknowledge that, after giving effect to such reduction, the RevolvingCommitment of each Lender shall be as set forth on Exhibit A hereto. SECTION 3. Representations and Warranties. The Borrower represents and -------------------------------warrants to each of the Lenders that, after giving effect to the amendmentscontemplated hereby, (a) the representations and warranties of each Loan Partyset forth in the Loan Documents are true and correct in all material respects onand as of the date of this Amendment, except to the extent such representationsand warranties expressly relate to an earlier date (in which case suchrepresentations and warranties were true and correct in all material respects asof the earlier date) and (b) no Default has occurred and is continuing. SECTION 4. Effectiveness. This Amendment shall become effective (as of --------------the date first written above) on the date when (a) the Administrative Agent (orits counsel) shall have received copies hereof that, when taken together, bearthe signatures of the Borrower, Holdings and the Required Lenders and (b) theAdministrative Agent shall have received payment of the fees payable underSection 5 below (to the extent due on the Amendment Effective Date) and anyout-of-pocket expenses of the Administrative Agent payable by the Borrower thathave been invoiced before the Amendment Effective Date. SECTION 5. Amendment Fee. The Borrower agrees to pay to each Lender --------------that executes and delivers a copy of this Amendment to the Administrative Agent(or its counsel) on or prior to 5:00 p.m., Eastern Standard time, on April 17,2002, an amendment fee in an amount equal to 0.25% of such Lender's RevolvingCommitment (whether used or unused) as of the Amendment Effective Date and aftergiving effect to this Amendment; provided that the Borrower shall have no --------liability for any such amendment fee if this Amendment does not becomeeffective. Such amendment fee shall be payable (i) on the Amendment EffectiveDate, to each Lender entitled to receive such fee as of the Amendment EffectiveDate and (ii) in the case of any Lender that becomes entitled to such fee afterthe Amendment Effective Date, within two Business Days after such Lender becomesentitled to such fee. SECTION 6. Applicable Law. This Amendment shall be construed in ---------------accordance with and governed by the law of the State of New York. SECTION 7. No Other Amendments. Except as expressly set forth herein, --------------------this Amendment shall not by implication or otherwise limit, impair, constitute awaiver of, or otherwise affect the rights and remedies of any party under theCredit Agreement, nor alter, modify, amend or in any way affect any of theterms, conditions, obligations, covenants or agreements contained in the CreditAgreement, all of which are ratified and affirmed in all respects and shallcontinue in full force and effect. SECTION 8. Counterparts. This Amendment may be executed in two or more -------------counterparts, each of which shall constitute an original, but all of which whentaken together shall constitute but one contract. Delivery of an executedcounterpart of a signature page of this Amendment by facsimile transmissionshall be as effective as delivery of a manually executed counterpart of thisAmendment. SECTION 9. Headings. Section headings used herein are for ---------convenience of reference only, are not part of this Amendment and are not toaffect the construction of, or to be taken into consideration in interpreting,this Amendment. SECTION 10. Expenses. The Borrower shall reimburse the Administrative --------Agent for its reasonable out-of-pocket expenses incurred in connection with thisAmendment, including the reasonable fees and expenses of Cravath, Swaine &Moore, counsel for the Administrative Agent. IN WITNESS WHEREOF, Holdings, the Borrower and the undersigned Lendershave caused this Amendment to be duly executed by their duly authorized officersas of the date first above written. J. CREW GROUP, INC., by /s/ Scott M. Rosen -------------------------------- Name: Scott M. Rosen Title: Executive Vice President and Chief Financial Officer J. CREW OPERATING CORP., by /s/ Scott M. Rosen -------------------------------- Name: Scott M. Rosen Title: Executive Vice President and Chief Financial Officer EXHIBIT A COMMITMENTS-----------------------------------------------------------------------Lender Revolving Commitment------ -------------------------------------------------------------------------------------------JPMorgan Chase Bank $19,444,444.47-----------------------------------------------------------------------Bank of America, NT & SA 14,486,111.05-----------------------------------------------------------------------BankBoston, N.A. 9,074,074.12-----------------------------------------------------------------------Bank Leumi Trust Company of New York 6,481,481.41-----------------------------------------------------------------------Bank of Tokyo - Mitsubishi Trust Company 9,074,074.12-----------------------------------------------------------------------CIT Commercial 31,046,296.21-----------------------------------------------------------------------Finova Capital 7,777,777.97-----------------------------------------------------------------------First Union National Bank 9,074,074.12-----------------------------------------------------------------------Foothill Capital 20,254,629.57-----------------------------------------------------------------------General Electric Capital Corp. 9,398,148.24-----------------------------------------------------------------------Provident 9,727,222.12-----------------------------------------------------------------------Summit Bank 12,962,963.08-----------------------------------------------------------------------Wells Fargo Bank, National Association 16,203,703.77 -------------------------------------------------------------------------------------- Total $175,000,000.00 ===============----------------------------------------------------------------------- Exhibit 10.5(c) J. Crew Operating Corp. 770 Broadway New York, New York January 15, 2002Mark Sarvary7 Fox RunPurchase, NY 10577Dear Mark: This letter agreement (this "Letter Agreement") is intended to memorialize ----------------our recent discussions concerning the search for a new chief merchant of J. CrewOperating Corp. (the "Company") and the terms of your employment during and -------after the search. During the period that the Company conducts the search, youagree to continue in your employment with the Company as its CEO and to devoteyour full time and attention to your duties and responsibilities pursuant toyour Employment Agreement with the Company, dated May 3, 1999 (the "Employment ----------Agreement") and to cooperate and assist the Company with the search.--------- The Company acknowledges that any change in your duties andresponsibilities as CEO of the Company following the appointment of a new chiefmerchant will constitute Good Reason (as defined in the Employment Agreement)and you may terminate your employment with the Company for "Good Reason" and beeligible to receive the termination payments set forth in Section 5(a) of theEmployment Agreement, subject to the terms and conditions of the EmploymentAgreement, including without limitation the execution of the general release andwaiver. Subject to your compliance with the obligations described above andprovided in the Employment Agreement, in the event that following theappointment of a new chief merchant either you resign your employment for GoodReason or your employment is terminated by the Company without Cause (each asprovided in the Employment Agreement and collectively referred to herein as a"Qualifying Termination"), you will be entitled to the following modifications ----------------------to the Employment Agreement and to the following benefits, in addition to thetermination payments described above: (a) Regardless of the effective date of any Qualifying Termination, you will become fully vested in the portion of the Option (as defined in Section 2(d) of the Employment Agreement) that is scheduled to vest on May 10, 2002. In addition, notwithstanding any other provision to the contrary, the portion of your Option that has become vested on the date of any Qualifying Termination shall remain exercisable until the earlier of (i) the expiration of the term of the Option (assuming your employment with the Company was not terminated) or (ii) the third anniversary of the effective date of any Qualifying Termination; (b) The Company shall continue to provide medical plan coverage substantially similar to the medical plan coverage that it provides its active employees, as it may be amended from time to time, until the earlier of (i) the two year anniversary of the date of your Qualifying Termination or (ii) the date that you become employed with a new employer, provided that the Company shall provide such coverage by paying your COBRA continuation coverage for the COBRA coverage period and thereafter, the Company shall only provide such coverage to the extent that the monthly cost of such coverage does not exceed the cost of your monthly COBRA premiums as in effect on the last month of your COBRA continuation period. In order to receive the foregoing medical coverage you shall cooperate with the reasonable requests of the Company, including without limitation any request to submit to medical examinations and elect COBRA continuation coverage; (c) The Company shall provide you with life insurance coverage equivalent to the coverage provided immediately prior to your Qusalifying Termination (namely two-times your annual salary as of the date of your Qualifying Termination) under the same terms as it provides such coverage to its active employees under its life insurance plan, as it may be amended from time to time, until the earlier of the twenty-four month anniversary of the date of this Letter Agreement or the date that you become employed with a new employer; (d) Notwithstanding anything to the contrary in the Employment Agreement or the Promissory Note between you and the Company dated August 13, 1999 in respect of the Company's original loan of $1,000,000 (currently $900,000 principal balance still outstanding) (the "Company Loan") for the ------------ sole purpose of your purchase of your primary residence, located at 7 Fox Run, Purchase, New York (the "Property"), you shall repay in full the -------- principal amount of the Company Loan on the earliest of (i) June 1, 2005, (ii) the date that you sell or otherwise dispose of the Property, and (iii) the one year anniversary of the date that you commence full time continuous employment with any subsequent employer. Notwithstanding the foregoing, you agree that any and all proceeds generated from the sale or disposition of all or any portion of your shares of common stock of the Parent (as defined in the Employment Agreement) or from the cancellation of any portion of the Option shall be immediately applied to the payment of the outstanding principal amount of the Company Loan and you authorize the Company to withhold any such payments and apply such proceeds to the repayment of the Company Loan; and (e) For purposes of Section 8 of the Employment Agreement, the restrictive period shall be two years following such resignation for Good Reason and the term "Competitive Business" shall mean American Eagle, Abercrombie & Fitch, and Banana Republic. Except as otherwise specifically provided in this Letter Agreement, allterms and conditions of the Employment Agreement, Promissory Note, Mortgage andthe Stock Option Grant Agreement related to the Option shall remain in fullforce and effect, including without limitation the restrictive covenants andother provisions set forth in Sections 7, 8, 9 and 10 of the EmploymentAgreement. You agree to execute and record any and all documents, mortgages orother filings reasonably requested by the Company to secure any obligationsprovided under or modified by this Letter Agreement to secure the Company'sinterests or otherwise to consummate the transactions provided herein. 2 If you agree with the foregoing provisions, please sign this LetterAgreement in the appropriate space below. Sincerely, /s/ Richard W. Boyce ------------------------------- [NAME] [TITLE] Agreed and Accepted: /s/ Mark Sarvary ---------------------- Mark Sarvary 3 Exhibit 10.7(b) July 12, 2001Ms. Trudy Sullivan544 E. 86th St., Apt. 12WNew York, NY 10028Dear Trudy: This letter will confirm our understanding of the arrangements underwhich the Employment Agreement between you (the "Executive") and J. CrewOperating Corp. (the "Company") dated February 18, 2000 (the "EmploymentAgreement") is terminated. The terms and conditions of the termination of youremployment with the Company are set out below. 1. The Parties hereby acknowledge and confirm that the Executive's employment with the Company has terminated effective as of June 15, 2001 (the "Termination Date"). During the two-month period immediately following the Termination Date (the "Consulting Period"), the Executive shall provide such consulting services to the Company as the Company may, from time to time, request. In full payment for the consulting services provided hereunder, the Company will pay the Executive a fee at the rate of $41,666 per month, payable no less frequently than twice per month. The Company will also reimburse the Executive for reasonable travel expenses incurred by her that are authorized in advance by the Company, upon presentation of appropriate documentation in accordance with the Company's expense report policy. 2. Subject to this Agreement becoming effective (as described in Paragraph 18 hereof), the Company will continue to pay the Executive her base salary of $500,000 per annum for the 12-month period beginning on the day immediately following the end of the Consulting Period (the "Severance Period"), payable in accordance with the Company's regular payroll policies for its employees. The Executive will also continue to have medical coverage during both the Consulting Period and the Severance Period on the same terms and conditions as medical coverage is then made available to employees of the Company. 3. The consulting and severance payments described in Paragraphs 1 and 2 above shall be reduced by any required tax withholdings and shall not be taken into account as compensation and no service credit shall be given after the Termination Date for purposes of determining the benefits payable under any other plan, program, agreement or arrangement of the Company. The Executive acknowledges that, except for the payments described herein, she is not entitled to any payment in the nature of severance or termination pay from the Company. 4. The Executive currently has vested options to purchase 22,560 shares of Common Stock of J. Crew Group, Inc. ("Common Stock") at $6.82 per share and vested options to purchase 6,480 shares of Common Stock at $10.00 per share. The Company hereby agrees that notwithstanding the provisions of the stock option agreements with the Executive (a) options to purchase an additional 7,520 shares of Common Stock at $6.82 per share and options to purchase and additional 6,480 shares of Common Stock at $10.00 per share shall vest and become exercisable on January 31, 2002 (such additional options together with the options vested on the Termination Date are collectively referred to as the "Vested Options"), (b) the expiration date of the Vested Options shall be the tenth anniversary of the grant date of such options, and (c) the Executive shall have the right to exercise the Vested Options in accordance with the provisions of the stock option agreements until such expiration date. All other unvested options (totaling 7,520 options to purchase Common Stock at $6.82 per share and 19,440 options to purchase Common Stock at $10.00 per share) shall terminate effective on the Termination Date. 5. By signing this Agreement, the Executive agrees that in exchange for the additional consideration set forth herein, the Executive hereby voluntarily, fully and unconditionally releases and forever discharges the Company, its present and former parent corporation(s), subsidiaries, divisions, affiliates and otherwise related entities and their respective incumbent and former employees, directors, plan administrators, officers and agents, individually and in their official capacities (collectively, the "Releasees"), from any and all charges, actions, causes of action, demands, debts, dues, bonds, accounts, covenants, contracts, liabilities, or damages of any nature whatsoever, whether now known or claimed, to whomever made, which the Executive has or may have against any or all of the Releasees for or by reason of any cause, nature or thing whatsoever, up to the present time, arising out of or related to her employment with the Company or the termination of such employment, including, by way of examples and without limiting the broadest application of the foregoing, any actions, causes of action, or claims under any contract or federal, state or local decisional law, statues, regulations or constitutions, any claims for notice, pay in lieu of notice, wrongful dismissal, breach of contract, defamation or other tortious conduct, discrimination on the basis of actual or perceived disability, age, sex, race or any other factor (including, without limitation, any claim pursuant to Title VII of the Civil Rights Act of 1964, Americans with Disabilities Act of 1990, the Family Medical Leave Act of 1993, the Age Discrimination in Employment Act of 1967, as amended, or the New York State equal employment laws), any claim pursuant to any other applicable employment standards or human rights legislation or for severance pay, salary, bonus, incentive or additional compensation, vacation pay, insurance, other benefits, interest, and/or attorney's fees. The Executive acknowledges that this general release is not made in connection with an exit incentive or other employment termination program offered to a group or class of employees. If the Executive has made or should hereafter make any complaint, charge, claim, allegation or demand, or commence or threaten to commence any action, complaint, charge, claim or proceeding, against any or all of the Releasees for or by reason of any cause, matter or thing whatsoever existing up to the present time, this Agreement may be raised as and shall constitute a complete bar to any such action, complaint, charge, claim, allegation or proceeding, and, subject to a favorable ruling by a tribunal of final jurisdiction, the Releasees shall recover from the Executive, and the Executive shall pay to the Releasees, all costs incurred by them, including their attorneys' fees, as a consequence of any such action, complaint charge, claim, allegation or proceeding; provided, however, that this shall not limit the Executive from enforcing her rights under this Agreement and in the event any action is commenced to enforce her rights under this Agreement, each party shall bear its own legal fees and expenses. 2 6. The Executive acknowledges that the payments and the additional vesting of options to purchase shares of common stock she is receiving in connection with the foregoing release is in addition to anything of value to which she already is entitled from the company 7. The Executive hereby agrees and acknowledges that she shall be bound by and comply with the restrictive covenants provided in Section 4 of the Employment Agreement other than the non-compete restrictive covenant set forth in Section 4(a)(ii)(1) of the Employment Agreement which the Company hereby waives (the "Restrictive Covenants"), that such Restrictive Covenants are hereby made part of this Agreement as if specifically restated herein and that all payments, medical insurance, additional vesting of stock options and continued extension of the expiration date of the Vested Options are subject to and contingent upon the Executive's compliance with Restrictive Covenants. 8. The Executive acknowledges and agrees that, notwithstanding any other provision of this Agreement, if the Executive breaches any of her obligations under this Agreement or the Restrictive Covenants under the Employment Agreement (a) she will forfeit her right to receive the payments under paragraphs 1 and 2 above and to have the stock options vest on January 31, 2001 (to the extent the payments were not theretofore paid or the options had not vested as of the date of such breach), (b) the Vested Options shall expire as of the date of such breach to the extent not theretofore exercised and, if exercised as of the date of such breach, the Executive shall immediately reimburse the Company for the profit upon exercise (such profit calculated as the difference between the (i) greater of either the fair market value per share of Common Stock on the date of exercise or the amount paid by the Company to the Executive per share of Common Stock for the purchase of the shares acquired upon exercise, and (ii) exercise price, times the number of options exercised). 9. The Executive hereby agrees that a breach of the Restrictive Covenants contained in Section 4 of the Employment Agreement may, depending on the circumstances, cause the Company to suffer irreparable harm for which money damages would not be an adequate remedy and therefore, if the Executive breaches any of the Restrictive Covenants, the Company would be entitled to temporary and permanent injunctive relief in any court of competent jurisdiction (without the need to post any bond) without prejudice to any other remedies under this Agreement or otherwise. 10. This Agreement does not constitute an admission of liability or wrongdoing of any kind by the Executive or the Company or its affiliates. 11. The terms of this Agreement shall be binding on the parties hereto and their respective successors and assigns. 12. This Agreement constitutes the entire understanding of the Company and the Executive with respect to the subject matter hereof and supersedes all prior understandings, written or oral. The terms of this Agreement may be changed, modified or discharged only by an instrument in writing signed by the parties hereto. A failure of the Company or the Executive to insist on strict compliance with any provision of this Agreement shall not be deemed a waiver of such provision or any other provision hereof. If any provision of this Agreement is determined to be so broad as to be unenforceable, such provision shall be interpreted to be only so broad as is enforceable. 3 13. This Agreement shall be construed, enforced and interpreted in accordance with and governed by the laws of the State of New York. 14. The parties hereto acknowledge and agree that each party has reviewed and negotiated the terms and provisions of this Agreement and has contributed to its revision. Accordingly, the rule of construction to the effect that ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement. Rather, the terms of this Agreement shall be construed fairly as to both parties hereto and not in favor or against either party. 15. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which counterpart, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Agreement. 16. The Executive acknowledges that, by the Executive's free and voluntary act of signing below, the Executive agrees to all of the terms of this Agreement and intends to be legally bound thereby. 17. The Executive acknowledges that she has received this Agreement on or before June 20, 2001. The Executive understands that she may consider whether to agree to the terms contained herein for a period of twenty-one days after the date hereof. However, the operation of the provisions of the paragraph 1 (other than the first sentence thereof) and paragraphs 2 through 5 above may be delayed until this Agreement is executed by the Executive, returned to the Company and becomes effective as provided below. The Executive acknowledges that she has consulted with an attorney prior to her execution of this Agreement or has determined by her own free will not to consult with an attorney. 18. This Agreement will become effective, enforceable and irrevocable seven days after the date on which it is executed by the Executive (the "Effective Date"). During the seven-day period prior to the Effective Date, the Executive may revoke her agreement to accept the terms hereof by indicating in writing to the Company her intention to revoke. If the Executive exercises her right to revoke hereunder, she shall forfeit her right to receive any of the benefits provided for herein, and to the extent such payments have already been made, the Executive 4 agrees that she will immediately reimburse the Company for the amounts of such payment. If the foregoing correctly reflects our understanding, please sign the enclosed copy of this letter agreement, whereupon it will become a binding agreement between us. J. CREW OPERATING CORP. By: /s/ MARK SARVARY ------------------- Mark Sarvary Chief Executive OfficerAgreed to and accepted:By: /s/ Trudy Sullivan --------------------- Trudy SullivanDated: July 23, 2001Acknowledgment--------------STATE OF ) ----------------- ss:COUNTY OF ) ----------------On the day of , 2001, before me personally came Trudy Sullivan who, --- ---------being by me duly sworn, did depose and say that she resides at and did acknowledge and represent that she has had-----------------------------an opportunity to consult with attorneys and other advisers of her choosingregarding the Termination Agreement attached hereto, that she has reviewed allof the terms of the Termination Agreement and that she fully understands all ofits provisions, including without limitation, the general release and waiver setforth therein.-------------------------Notary PublicDate: -------------------- 5 Exhibit 10.12 May 17, 2001Mr. Michael Scandiffio25481 Lone PineLaguna Hills, CA 92653Dear Michael: Pursuant to our discussions regarding your employment with J. CrewOperating Corp. (the "Company"), we thought it would be useful to lay out the -------terms and conditions of our agreement in this letter agreement ("Agreement") forboth parties to sign. ---------1. Employment. (a) The Company hereby agrees to employ you during the "Employment Period"(as defined below) as Executive Vice President of Mens, and you hereby agree toserve the Company in such capacity. You shall report to the Chief ExecutiveOfficer of the Company or to a person immediately reporting to the ChiefExecutive Officer, as determined by the Company. (b) During the Employment Period, you shall devote your full business timeand energy, attention, skills and ability to the performance of your duties andresponsibilities hereunder and shall faithfully and diligently endeavor topromote the business and best interests of the Company. Accordingly, you maynot, directly or indirectly, without the prior written consent of the Company,operate, participate in the management, operations or control of, or act as anemployee, officer, consultant, agent or representative of, any type of businessor service (other than as an employee of the Company), provided that it shallnot be a violation of the foregoing for you to (i) act or serve as a director,trustee or committee member of any civic or charitable organization, and (ii)manage your personal, financial and legal affairs, so long as such activities(described in clauses (i) or (ii)) do not interfere with the performance of yourduties and responsibilities to the Company as provided hereunder.2. Employment Period. (a) The "Employment Period" shall begin as of June 12, 2001 (the "Effective ----------------- ---------Date") and shall terminate ("Termination Date") upon the earliest to occur of----(i) the third anniversary of the Effective Date, (ii) your death or Disability(as defined below), (iii) voluntary termination of employment by you in advanceof the Termination Date on at least two months prior notice, (iv) termination ofemployment by the Company without Cause (as defined below) or (v) termination ofemployment by the Company for Cause. (b) Upon termination of the Employment Period for any reason, you shall beentitled to any earned but unpaid Base Salary (as defined in Section 3(a) below)as of the Termination Date. If the Company terminates the Employment Periodwithout Cause, you will be entitled to continuation of your Base Salary as ineffect immediately prior to such termination and medical benefits for a periodof twelve (12) months after the date of such termination (the "Salary ------Continuation Payments"), provided that the Salary Continuation Payments are---------------------subject to and conditioned upon your execution of a valid general release andwaiver (reasonably acceptable to the Company), waiving all claims that you mayhave against the Company, its successors, assigns, affiliates, employees,officers and directors and your compliance with the provisions set forth inParagraph 4 hereof. The Company shall have no additional obligations under thisAgreement. (c) For purposes of this Agreement, the term "Cause" shall mean (i) the -----indictment for a felony, (ii) willful misconduct or gross negligence inconnection with the performance of your duties as an employee of the Company,(iii) a material breach of this Agreement, including without limitation, yourfailure to perform your duties and responsibilities hereunder, (iv) a fraudulentact or omission by you adverse to the reputation of the Company or anyaffiliate, and (v) the disclosure by you of any Confidential Information (asdefined in Section 4(c) hereof) to persons not authorized to know same. Ifsubsequent to the termination of your employment, it is discovered that youremployment could have been terminated for Cause, your employment shall, at theelection of the Company, in its sole discretion, be deemed to have beenterminated for Cause. In addition, for purposes of this Agreement, the term"Disability" shall mean your incapacity due to physical or mental illness or ----------injury, which results in your being unable to perform your duties hereunder fora period of ninety (90) consecutive working days, and within thirty (30) daysafter the Company notifies you that your employment is being terminated forDisability, you shall not have returned to the performance of your duties on afull-time basis.3. Compensation and Benefits. (a) During the Employment Period, your annual base salary shall be$480,000 ("Base Salary") and shall be paid pursuant to regular Company payroll -----------practices for the senior executives of the Company. The Base Salary will bereviewed annually by the Company. (b) In addition to the Base Salary, in each fiscal year during theEmployment Period, you will have the opportunity to earn an annual bonus("Annual Bonus") at the following percentages of your Base Salary if both the ------------Company achieves certain performance objectives (which will be determined by theCompany for each such fiscal year in accordance with the Company's bonus plan)and you achieve your performance goals established by the Company: Threshold -25%, Target - 50% and Stretch - 100% of Base Salary. Notwithstanding theforegoing, for the fiscal year beginning February 4, 2001, your Annual Bonuswill be at least $100,000 (the "Guaranteed Bonus") regardless of whether the ----------------performance objectives for such fiscal year are achieved. Any Annual Bonus(including the Guaranteed Bonus) will be paid only if you are actively employedwith the Company and not in breach of this Agreement on the date of payment (asdescribed below).The Annual Bonus will be paid no later than May 1 following thefiscal year for which it relates. 2 (c) As soon as practicable after the Effective Date, the Company will payyou $100,000 (the "Signing Bonus") as consideration for entering into this -------------Agreement provided that you will be required to immediately pay back a "pro-rataportion" as determined below of the Signing Bonus in the event you voluntarilyterminate your employment hereunder prior to June 11, 2003, and to the extentthat you fail to pay back any portion of the Signing Bonus as provided herein, the Company shall have the right to offset any other payments provided hereunderor otherwise owed to you in respect of such amount. (d) As soon as practicable after the Effective Date, and subject toapproval of the Compensation Committee of the Board of Directors of J. CrewGroup, Inc. ("Group") and the stockholders of Group, the Company will causeGroup to grant you an option (the "Option") to purchase 40,000 shares of common ------stock of J. Crew Group, Inc. (the "Common Stock") at an exercise price equal to ------------$19.28 per share. The Option shall be subject to and governed by the terms andconditions of the 1997 J. Crew Group, Inc. Stock Option Plan (the "Option Plan", -----------a copy of which has been provided to you) and shall be evidenced by a stockoption grant agreement as provided under the Option Plan. Twenty percent of theshares underlying the Option shall vest and become exercisable on each of thefirst through the fifth anniversaries of the Effective Date, provided that youare still employed by the Company on such anniversary. (e) During the Employment Period, you will be entitled to participate inthe Company's benefit package made generally available to associates of theCompany, except where specifically provided herein. Currently, the Company'sbenefit package includes 25 PTO days, holidays, life insurance, medicalinsurance, a matching 401(k) tax deferred savings plan, a health flexiblespending account, and the employee discount. The Company reserves the right tochange these benefits at any time in its sole discretion. (f) During the Employment Period, the Company will pay you a monthly automobile allowance of $675.00 per month. (g) With respect to your relocation to the New York area, the Company will provide the following payments or reimbursements of expenses: (i) the Company will reimburse you for temporary living quarters in the New York area for you until September 11, 2001; (ii) the Company will reimburse you for the cost of round-trip airfare between New York and Los Angeles, California no more than once each week until September 11, 2001; and (iii) the Company will reimburse you for the reasonable costs incurred by you with respect to the sale of your primary residence and with respect to moving to the New York metropolitan area in accordance with the Company's relocation policy, including the cost of up to two trips to New York with your family in order to locate a primary residence in the New York area and all reasonable closing costs incurred in respect of the purchase of such primary residence. 34. Additional Agreements; Confidentiality. (a) As additional consideration for the Company entering into thisAgreement, you agree that for a period of twelve months following theTermination Date, you shall not, directly or indirectly, (i) engage (either asowner, investor, partner, employer, employee, consultant or director) in orotherwise perform services for any Competitive Business (as defined below) whichoperates within a 100 mile radius of the location of any store of the Company orits affiliates or in the same area as the Company directs its mail orderoperations or any other area in which the Company or any of its subsidiariesconducts business or in which the Company or any of its subsidiaries' customersare located as of the Termination Date, provided that the foregoing restrictionshall not prohibit you from owning a passive investment of not more than 5% ofthe total outstanding securities of any publicly-traded company, and (ii)solicit or cause another to solicit any customers or suppliers of the Company or any of its subsidiaries to terminate or otherwise adversely modify theirrelationship with the Company or any such subsidiary. The term "Competitive -----------Business" means the retail, mail order and internet apparel and accessories--------business and any other business the Company or its affiliates is engaged in onthe Termination Date. (b) During the Employment Period and for a period of two years followingthe Termination Date, you shall not, directly or indirectly, solicit, hire, orseek to influence the employment decisions of, any employee of the Company orany of its subsidiaries on behalf of any person or entity other than theCompany. (c) You agree that during the Employment Period and thereafter you willhold in strict confidence any proprietary or Confidential Information related tothe Company or its affiliates. For purposes of this Agreement, the term"Confidential Information" shall mean all information of the Company and its ------------------------affiliates in whatever form which is not generally known to the public,including without limitation, customer lists, trade practices, marketingtechniques, fit specifications, design, pricing structures and practices,research, trade secrets, processes, systems, programs, methods, software,merchandising, distribution, planning, inventory and financial control, storedesign and staffing. Upon termination of your employment, you shall not take,without the prior written consent of the Company, any drawing, specification orother document or computer record (in whatever form) of the Company or itsaffiliates embodying any Confidential Information and will return any suchinformation (in whatever form) then in your possession. (d) You agree that during the Employment Period and thereafter you shallnot disclose any information regarding the existence or substance of thisAgreement to any third party (including employees of the Company) without theprior written consent of the Chief Executive Officer of the Company, except asmay be required by law, other than to your spouse or your professional advisersfor purposes 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. Further, during the EmploymentPeriod and thereafter you agree not to directly or indirectly disparage ordefame the Company, its affiliates or any of their directors, officers oremployees. 4 (e) You also agree that breach of the provisions provided in thisParagraph 4 would cause the Company to suffer irreparable harm for which moneydamages would not be an adequate remedy and therefore, if you breach any of theprovisions in this Paragraph 4, the Company will be entitled to an injunctionrestraining you from violating such provision without the posting of any bond.If the Company shall institute any action or proceeding to enforce the terms ofany such provision, you hereby waive the claim or defense that the Company hasan adequate remedy at law and you agree not to assert in any such action orproceeding the claim or defense that the Company has an adequate remedy at law.The foregoing shall not prejudice the Company's right to require you to accountfor and pay over to the Company, and you hereby agree to account for and payover, the compensation, profits, monies, accruals and other benefits derived orreceived by you as a result of any transaction constituting a breach of any ofthe provisions set forth in this Paragraph 4.5. Representations. The parties hereto hereby represent and warrant thatthey have the authority to enter into this Agreement and perform theirrespective obligations hereunder. You hereby represent and warrant to theCompany that (i) the execution and delivery of this Agreement and theperformance of your duties hereunder shall not constitute a breach of or otherwise violate any other agreement to which you are a party or by which youare bound, and (ii) you will not use or disclose any confidential informationobtained by you in connection with your former employment with respect to yourduties and responsibilities hereunder.6. Miscellaneous. (a) Any notice or other communication required or permitted under thisAgreement shall be effective only if it is in writing and shall be deemed to begiven when delivered personally or four days after it is mailed by registered orcertified mail, postage prepaid, return receipt requested or one day after it issent by a reputable overnight courier service and, in each case, addressed asfollows: If to the Company: J. Crew Operating Corp. 770 Broadway Twelfth Floor New York, NY 10003 Attention: General Counsel If to you: Mr. Michael Scandiffio 25481 Lone Pine Road Laguna Hills, CA 92653or to such other address as any party may designate by notice to the other. 5 (b) This Agreement constitutes the entire agreement between you and theCompany with respect to your employment by the Company, and supersedes and is infull substitution for any and all prior understandings or agreements withrespect to your employment. (c) This Agreement shall inure to the benefit of and be an obligation ofthe Company's assigns and successors; however you may not assign any of yourrights or duties hereunder to any other party. (d) No provision of this Agreement may be amended or waived, unless suchamendment or waiver is specifically agreed to in writing and signed by you andan officer of the Company duly authorized to execute such amendment. The failureby either you or the Company at any time to require the performance by the otherof any provision hereof shall in no way affect the full right to require suchperformance at any time thereafter, nor shall the waiver by you or the Companyof a breach of any provision hereof be taken or held to be a waiver of anysucceeding breach of such provision or a waiver of the provision itself or awaiver of any other provision of this Agreement. (e) You and the Company acknowledge and agree that each of you hasreviewed and negotiated the terms and provisions of this Agreement and has hadthe opportunity to contribute to its revision. Accordingly, the rule ofconstruction to the effect that ambiguities are resolved against the draftingparty shall not be employed in the interpretation of this Agreement. Rather, theterms of this Agreement shall be construed fairly as to both parties and not infavor or against either party. (f) Any provision of this Agreement (or portion thereof) which is deemedinvalid, illegal or unenforceable in any jurisdiction shall, as to thatjurisdiction and subject to this Paragraph, be ineffective to the extent of suchinvalidity, illegality or unenforceability, without affecting in any way theremaining provisions thereof in such jurisdiction or rendering that or any otherprovisions of this Agreement invalid, illegal, or unenforceable in any other jurisdiction. If any covenant should be deemed invalid, illegal or unenforceablebecause its scope is considered excessive, such covenant shall be modified sothat the scope of the covenant is reduced only to the minimum extent necessaryto render the modified covenant valid, legal and enforceable. (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 (itbeing understood, that you shall be responsible for payment of all taxes inrespect of the payments and benefits provided herein). (h) 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. (i) 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. 6 (j) 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 respect of any action or proceeding relating to the subject matterhereof, expressly waiving any defense relating to jurisdiction or forum non ---------conveniens, and consents to service of process by U.S. certified or registered----------mail in any action or proceeding with respect to this Agreement. If the terms of this letter Agreement meet with your approval, pleasesign and return one copy to me. Sincerely, /s/ MARK SARVARY ------------------------------- Mark Sarvary Chief Executive OfficerAGREED TO AND ACCEPTED: /s/ MICHAEL SCANDIFFIO------------------------Michael ScandiffioDate: May 18, 2001 ------------------ 7 Exhibit 10.13 December 12, 2001Mr. Blair Gordon359 West 20th Street, #4New York, NY 10011Dear Blair: Pursuant to our discussions regarding your employment with J. CrewOperating Corp. (the "Company"), we thought it would be useful to lay out the -------terms and conditions of our agreement in this letter agreement ("Agreement") for ---------both parties to sign. 1. Employment. (a) The Company hereby agrees to employ you during the "Employment Period" -----------------(as defined below) as Executive Vice President and Creative Director, and youhereby agree to serve the Company in such capacity. You shall report to theChief Executive Officer of the Company. (b) During the Employment Period, you shall devote your full business timeand energy, attention, skills and ability to the performance of your duties andresponsibilities hereunder and shall faithfully and diligently endeavor topromote the business and best interests of the Company. Accordingly, you maynot, directly or indirectly, without the prior written consent of the Company,operate, participate in the management, operations or control of, or act as anemployee, officer, consultant, agent or representative of, any type of businessor service (other than as an employee of the Company), provided that it shallnot be a violation of the foregoing for you to (i) act or serve as a director,trustee or committee member of any civic or charitable organization, and (ii)manage your personal, financial and legal affairs, so long as such activities(described in clauses (i) or (ii)) do not interfere with the performance of yourduties and responsibilities to the Company as provided hereunder.2. Employment Period. (a) The "Employment Period" shall begin as of January 7, 2002 (the -----------------"Effective Date") and shall terminate ("Termination Date") upon the earliest to -------------- ----------------occur of (i) the third anniversary of the Effective Date, (ii) your death orDisability (as defined below), (iii) voluntary termination of employment by youin advance of the Termination Date on at least two months prior notice, (iv)termination of employment by the Company without Cause (as defined below) or (v)termination of employment by the Company for Cause. (b) Upon termination of the Employment Period for any reason, you shall beentitled to any earned but unpaid Base Salary (as defined in Section 3(a) below)as of the TerminationDate. If the Company terminates the Employment Period without Cause, you will be entitled to continuation of your Base Salary as in effect immediately prior tosuch termination and medical benefits for a period of twelve (12) months afterthe date of such termination (the "Salary Continuation Payments"), provided that ----------------------------the Salary Continuation Payments are subject to and conditioned upon yourexecution of a valid general release and waiver (reasonably acceptable to theCompany), waiving all claims that you may have against the Company, itssuccessors, assigns, affiliates, employees, officers and directors and yourcompliance with the provisions set forth in Paragraph 4 hereof. The Companyshall have no additional obligations under this Agreement. (c) For purposes of this Agreement, the term "Cause" shall mean (i) the -----conviction for a felony, (ii) willful misconduct or gross negligence inconnection with the performance of your duties as an employee of the Company,(iii) a material breach of this Agreement, including without limitation, yourfailure to perform your duties and responsibilities hereunder or adhere tocorporate policies, (iv) a fraudulent act or omission by you adverse to thereputation of the Company or any affiliate, and (v) the disclosure by you of anyConfidential Information (as defined in Section 4(c) hereof) to persons notauthorized to know same. If subsequent to the termination of your employment, itis discovered that your employment could have been terminated for Cause, youremployment shall, at the election of the Company, in its sole discretion, bedeemed to have been terminated for Cause. In addition, for purposes of thisAgreement, the term "Disability" shall mean your incapacity due to physical or ----------mental illness or injury, which results in your being unable to perform yourduties hereunder for a period of ninety (90) consecutive working days, andwithin thirty (30) days after the Company notifies you that your employment isbeing terminated for Disability, you shall not have returned to the performanceof your duties on a full-time basis.3. Compensation and Benefits. (a) During the Employment Period, your annual base salary shall be$400,000 ("Base Salary") and shall be paid pursuant to regular Company payroll -----------practices for the senior executives of the Company. The Base Salary will bereviewed annually by the Company. (b) In addition to the Base Salary, in each fiscal year during theEmployment Period beginning with the fiscal year ending February 3, 2003 ("FY2002"), you will have the opportunity to earn an annual bonus ("Annual Bonus") ------------at the following percentages of your Base Salary if both the Company achievescertain performance objectives (which will be determined by the Company for eachsuch fiscal year in accordance with the Company's bonus plan) and you achieveyour performance goals established by the Company: Threshold - 25%, Target - 50%and Stretch - 100% of Base Salary. Notwithstanding the foregoing, for the FY2002, your Annual Bonus will be at least $100,000 (the "Guaranteed Bonus") ----------------regardless of whether the performance objectives for such fiscal year areachieved. Any Annual Bonus (including the Guaranteed Bonus) will be paid only ifyou are actively employed with the Company and not in breach of this Agreementon the date of payment (as described below). The Annual Bonus will be paid nolater than May 1 following the fiscal year for which it relates. 2 (c) As soon as practicable after the Effective Date, the Company willcause J. Crew Group, Inc. to grant you an option (the "Option") to purchase ------30,000 shares of common stock of J. Crew Group, Inc. (the "Common Stock") at an ------------exercise price equal to the fair market value of a share of Common Stock calculated in accordance with the provisions of the Option Plan. The Optionshall be subject to and governed by the terms and conditions of the 1997 J. CrewGroup, Inc. Stock Option Plan, as amended from time to time (the "Option Plan", -----------a copy of which has been provided to you), and shall be evidenced by a stockoption grant agreement as provided under the Option Plan. Twenty percent of theshares underlying the Option shall vest and become exercisable on each of thefirst through the fifth anniversaries of the grant date, provided that you arestill employed by the Company on such anniversary. (d) During the Employment Period, you will be entitled to participate inthe Company's benefit package made generally available to associates of theCompany upon the terms and conditions thereof, except where specificallyprovided herein. Currently, the Company's benefit package includes 25 PTO days(beginning February 2002), holidays, life insurance, medical insurance, amatching 401(k) tax deferred savings plan, a health flexible spending account,and the employee discount. The Company reserves the right to change thesebenefits at any time in its sole discretion.4. Additional Agreements; Confidentiality. (a) As additional consideration for the Company entering into thisAgreement, you agree that for a period of twelve months following theTermination Date, you shall not, directly or indirectly, (i) engage (either asowner, investor, partner, employer, employee, consultant or director) in orotherwise perform services for any Competitive Business (as defined below) whichoperates within a 100 mile radius of the location of any store of the Company orits affiliates or in the same area as the Company directs its mail orderoperations or any other area in which the Company or any of its subsidiariesconducts business or in which the Company or any of its subsidiaries' customersare located as of the Termination Date, provided that the foregoing restrictionshall not prohibit you from owning a passive investment of not more than 5% ofthe total outstanding securities of any publicly-traded company, and (ii)solicit or cause another to solicit any customers or suppliers of the Company orany of its affiliates to terminate or otherwise adversely modify theirrelationship with the Company or any such affiliate. The term "Competitive -----------Business" means the retail, mail order and internet apparel and accessories--------business and any other business the Company or any of its affiliates is engagedin on the Termination Date. (b) During the Employment Period and for a period of two years followingthe Termination Date, you shall not, directly or indirectly, solicit, hire, orseek to influence the employment decisions of, any employee of the Company orany of its subsidiaries on behalf of any person or entity other than theCompany. (c) You agree that during the Employment Period and thereafter you willhold in strict confidence any proprietary or Confidential Information related tothe Company or its affiliates. For purposes of this Agreement, the term"Confidential Information" shall mean all information of the Company and its ------------------------affiliates in whatever form which is not generally known to 3the public, including without limitation, customer lists, trade practices,marketing techniques, fit specifications, design, pricing structures andpractices, research, trade secrets, processes, systems, programs, methods,software, merchandising, distribution, planning, inventory and financialcontrol, store design and staffing. Upon termination of your employment, youshall not take, without the prior written consent of the Company, any drawing,specification or other document or computer record (in whatever form) of theCompany or its affiliates embodying any Confidential Information and will return any such information (in whatever form) then in your possession. (d) You agree that during the Employment Period and thereafter you shallnot disclose any information regarding the existence or substance of thisAgreement to any third party (including employees of the Company) without theprior written consent of the Chief Executive Officer of the Company, except asmay be required by law, other than to your spouse or your professional advisersfor purposes 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. Further, during the EmploymentPeriod and thereafter you agree not to directly or indirectly disparage ordefame the Company, its affiliates or any of their directors, officers oremployees. (e) You also agree that breach of the provisions provided in thisParagraph 4 would cause the Company to suffer irreparable harm for which moneydamages would not be an adequate remedy and therefore, if you breach any of theprovisions in this Paragraph 4, the Company will be entitled to an injunctionrestraining you from violating such provision without the posting of any bond.If the Company shall institute any action or proceeding to enforce the terms ofany such provision, you hereby waive the claim or defense that the Company hasan adequate remedy at law and you agree not to assert in any such action orproceeding the claim or defense that the Company has an adequate remedy at law.The foregoing shall not prejudice the Company's right to require you to accountfor and pay over to the Company, and you hereby agree to account for and payover, the compensation, profits, monies, accruals and other benefits derived orreceived by you as a result of any transaction constituting a breach of any ofthe provisions set forth in this Paragraph 4.5. Representations. The parties hereto hereby represent and warrant that theyhave the authority to enter into this Agreement and perform their respectiveobligations hereunder. You hereby represent and warrant to the Company that (i)the execution and delivery of this Agreement and the performance of your dutieshereunder shall not constitute a breach of or otherwise violate any otheragreement or arrangement to which you are a party or by which you are bound, and(ii) you will not use or disclose any confidential information obtained by youin connection with your former employment with respect to your duties andresponsibilities hereunder.6. Miscellaneous. (a) Any notice or other communication required or permitted under thisAgreement shall be effective only if it is in writing and shall be deemed to begiven when delivered 4personally or four days after it is mailed by registered or certified mail,postage prepaid, return receipt requested or one day after it is sent by areputable overnight courier service and, in each case, addressed as follows: If to the Company: J. Crew Operating Corp. 770 Broadway Twelfth Floor New York, NY 10003 Attention: General Counsel If to you: Mr. Blair Gordon 359 West 20th Street, #4 New York, NY 10011 or to such other address as any party may designate by notice to the other. (b) This Agreement constitutes the entire agreement between you and theCompany with respect to your employment by the Company, and supersedes and is infull substitution for any and all prior understandings or agreements withrespect to your employment. (c) This Agreement shall inure to the benefit of and be an obligation ofthe Company's assigns and successors; however you may not assign any of yourrights or duties hereunder to any other party. (d) No provision of this Agreement may be amended or waived, unless suchamendment or waiver is specifically agreed to in writing and signed by you andan officer of the Company duly authorized to execute such amendment. The failureby either you or the Company at any time to require the performance by the otherof any provision hereof shall in no way affect the full right to require suchperformance at any time thereafter, nor shall the waiver by you or the Companyof a breach of any provision hereof be taken or held to be a waiver of anysucceeding breach of such provision or a waiver of the provision itself or awaiver of any other provision of this Agreement. (e) You and the Company acknowledge and agree that each of you hasreviewed and negotiated the terms and provisions of this Agreement and has hadthe opportunity to contribute to its revision. Accordingly, the rule ofconstruction to the effect that ambiguities are resolved against the draftingparty shall not be employed in the interpretation of this Agreement. Rather, theterms of this Agreement shall be construed fairly as to both parties and not infavor or against either party. (f) Any provision of this Agreement (or portion thereof) which is deemedinvalid, illegal or unenforceable in any jurisdiction shall, as to thatjurisdiction and subject to this Paragraph, be ineffective to the extent of suchinvalidity, illegality or unenforceability, without 5affecting in any way the remaining provisions thereof in such jurisdiction orrendering that or any other provisions of this Agreement invalid, illegal, orunenforceable in any other jurisdiction. If any covenant should be deemedinvalid, illegal or unenforceable because its scope is considered excessive,such covenant shall be modified so that the scope of the covenant is reducedonly to the minimum extent necessary to render the modified covenant valid,legal and enforceable. (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 (itbeing understood, that you shall be responsible for payment of all taxes inrespect of the payments and benefits provided herein). (h) This Agreement may be executed in counterparts, each of which shall bedeemed an original, but all of which shall constitute one and the sameinstrument. (i) 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. (j) 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 respect of any action or proceeding relating to the subject matter hereof, expressly waiving any defense relating to jurisdiction or forum non ---------conveniens, and consents to service of process by U.S. certified or registered----------mail in any action or proceeding with respect to this Agreement. 6 If the terms of this letter Agreement meet with your approval, pleasesign and return one copy to me. Sincerely, /s/ MARK SARVARY --------------------- Mark Sarvary Chief Executive OfficerAgreed to and Accepted: /s/ BLAIR GORDON----------------------Blair GordonDate: 12-13-01 7 Exhibit 10.14Dear [Executive]:J.Crew Group, Inc. (together with its subsidiary companies, the "Company") hasdetermined that it is in the best interests of the Company and its shareholdersto agree to pay you the severance benefits described in this letter agreement ifyou leave the Company's employ under the limited circumstances described below.The Company believes that these arrangements will reinforce and encourage yourcontinued attention and dedication to your duties and better align yourinterests with those of the Company's shareholders.Accordingly, the parties hereto agree as follows: 1. Term. The provisions of this Agreement shall become effective ----on the date hereof and shall terminate on the fifth anniversary of that date(the "Employment Period"). 2. Severance Payments. ------------------ (a) If your employment is terminated during the Employment Period for any reason, the Company shall pay you or your estate, as the case may be, within thirty days following the effective date of termination (the "Termination Date"), your Base Salary (as defined in below) through the Termination Date (to the extent not theretofore paid). (b) If the Company terminates your employment during the Employment Period without "Cause" (as defined below), you will be entitled to (i) continuation of your Base Salary and medical benefits for a period of twelve months after the Termination Date, (ii) payment of any bonus that would have been earned by you in respect of the fiscal year ending before the Termination Date occurs if you had been employed on the date such bonus is paid by the Company to associates for such fiscal year, provided that the payments provided in clauses (i) and (ii) hereof (collectively, the "Salary ------ Continuation Payments") are subject to and conditioned upon your --------------------- executing a valid general release and waiver (reasonably acceptable to the Company), waiving all claims that you may have against the Company, its successors, assigns, affiliates, employees, officers and directors and your compliance with the provisions set forth in Paragraph 3 hereof. The Company shall have no additional obligations under this Agreement. (c) For purposes of this Agreement, the following terms shall have the following definitions: (i) "Base Salary" shall mean your base salary in effect on the date hereof or on the Termination Date, whichever is higher. (ii) "Cause" shall mean (i) your conviction for a felony, (ii) ----- willful misconduct or gross negligence in connection with the performance of your duties as an employee of the Company, (iii) a fraudulent act or omission by you adverse to the reputation of the Company or any affiliate, and (iv) the disclosure by you of any Confidential Information (as defined in Section 3(b) hereof) to persons not authorized to know same. If subsequent to the termination of your employment, it is discovered that your employment could have been terminated for Cause, your employment shall, at the election of the Company, in its sole discretion, be deemed to have been terminated for Cause. (iii) "Disability" shall mean your incapacity due to physical or mental illness or injury, which results in your being unable to perform your duties hereunder for a period of ninety (90) consecutive working days, and within thirty (30) days after the Company notifies you that your employment is being terminated for Disability, you shall not have returned to the performance of your duties on a full-time basis.3. Additional Agreements; Confidentiality. (a) As additional consideration for the Company entering into thisAgreement, you agree that during the Employment Period and for a period of oneyear following the Termination Date, you shall not, directly or indirectly,solicit, hire, or seek to influence the employment decisions of any employee ofthe Company on behalf of any person or entity other than the Company. (b) You agree that during the Employment Period and thereafter you willhold in strict confidence any proprietary or Confidential Information related tothe Company or its affiliates. For purposes of this Agreement, the term"Confidential Information" shall mean all information of the Company and its ------------------------affiliates in whatever form which is not generally known to the public,including without limitation, customer lists, trade practices, marketingtechniques, fit specifications, design, pricing structures and practices,research, trade secrets, processes, systems, programs, methods, software,merchandising, distribution, planning, inventory and financial control, storedesign and staffing. Upon termination of your employment, you shall not take,without the prior written consent of the Company, any drawing, specification orother document or computer record (in whatever form) of the Company or itsaffiliates embodying any Confidential Information and will return any suchinformation (in whatever form) then in your possession. (c) You agree that during the Employment Period and thereafter you shallnot disclose any information regarding the existence or substance of thisAgreement to any third party (including employees of the Company) without theprior written consent of the Chief Executive Officer of the Company, except asmay be required by law, other than to your spouse or your professional advisersfor purposes 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. Further, during the EmploymentPeriod and thereafter you agree not to directly or indirectly disparage ordefame the Company, its affiliates or any of their directors, officers oremployees. (d) You also agree that breach of the obligations provided in thisParagraph 3 would cause the Company to suffer irreparable harm for which moneydamages would not be an adequate remedy and therefore, if you breach any of theprovisions in this Paragraph 3, the Company will be entitled to an injunctionrestraining you from violating such provision without the posting of any bond.If the Company shall institute any action or proceeding to enforce the terms ofany such provision, you hereby waive the claim or defense that the Company hasan adequate remedy at law and you agree not to assert in any such action orproceeding the claim or defense that the Company has an adequate remedy at law.The foregoing shall not prejudice 2the Company's right to require you to account for and pay over to the Company,and you hereby agree to account for and pay over, the compensation, profits,monies, accruals and other benefits derived or received by you as a result ofany transaction constituting a breach of any of the provisions set forth inthis Paragraph 3.4. Miscellaneous. (a) Any notice or other communication required or permitted under thisAgreement shall be effective only if it is in writing and shall be deemed to begiven when delivered personally or four days after it is mailed by registered orcertified mail, postage prepaid, return receipt requested or one day after it issent by a reputable overnight courier service and, in each case, addressed asfollows: If to the Company: J. Crew Operating Corp. 770 Broadway Twelfth Floor New York, NY 10003 Attention: General Counsel If to you: ----------------- ----------------- -----------------or to such other address as any party may designate by notice to the other. (b) This Agreement constitutes the entire agreement between you and theCompany with respect to your employment by the Company, and supersedes and is infull substitution for any and all prior understandings or agreements (other thanthe terms set forth in any stock option agreement to which you are a party) withrespect to your employment. (c) This Agreement shall inure to the benefit of and be an obligation ofthe Company's assigns and successors; however you may not assign any of yourrights or duties hereunder to any other party. (d) No provision of this Agreement may be amended or waived, unless suchamendment or waiver is specifically agreed to in writing and signed by you andan officer of the Company duly authorized to execute such amendment. The failureby either you or the Company at any time to require the performance by the otherof any provision hereof shall in no way affect the full right to require suchperformance at any time thereafter, nor shall the waiver by you or the Companyof a breach of any provision hereof be taken or held to be a waiver of anysucceeding breach of such provision or a waiver of the provision itself or awaiver of any other provision of this Agreement. (e) You and the Company acknowledge and agree that each of you hasreviewed and negotiated the terms and provisions of this Agreement and has hadthe opportunity to contribute to its revision. Accordingly, the rule ofconstruction to the effect that ambiguities are resolved against the draftingparty shall not be employed in the interpretation of this Agreement. 3Rather, the terms of this Agreement shall be construed fairly as to both parties and not in favor or against either party. (f) Any provision of this Agreement (or portion thereof) which is deemedinvalid, illegal or unenforceable in any jurisdiction shall, as to thatjurisdiction and subject to this Paragraph, be ineffective to the extent of suchinvalidity, illegality or unenforceability, without affecting in any way theremaining provisions thereof in such jurisdiction or rendering that or any otherprovisions of this Agreement invalid, illegal, or unenforceable in any otherjurisdiction. If any covenant should be deemed invalid, illegal or unenforceablebecause its scope is considered excessive, such covenant shall be modified sothat the scope of the covenant is reduced only to the minimum extent necessaryto render the modified covenant valid, legal and enforceable. (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 (itbeing understood, that you shall be responsible for payment of all taxes inrespect of the payments and benefits provided herein). (h) 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. (i) 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 respect of any action or proceeding relating to the subject matterhereof, expressly waiving any defense relating to jurisdiction or forum non ---------conveniens, and consents to service of process by U.S. certified or registered----------mail in any action or proceeding with respect to this Agreement. If the terms of this letter Agreement meet with your approval, pleasesign and return one copy to me. Sincerely, ---------------------------------- Chief Executive OfficerAGREED TO AND ACCEPTED:-----------------------[Executive]Date: ------------------ 4 Exhibit 10.15March 14, 2000Scott Formby15 Barrow RoadNew York, NY 10014Dear Scott,This letter confirms our severance agreement. We are extending thisconsideration to better align your interests and those of the Company.If the Company terminates your employment for any reason other than deathdisability, or "cause" (cause shall include breach of this agreement,dishonesty, theft, embezzlement, material dereliction in the performance of yourduties, insobriety or drug use while performing duties, and conviction of acrime other than traffic violations or minor misdemeanors), the Company willcontinue your base salary and cover your Cobra expenses for a period of 12months (as per the Company's standard payroll schedule); provided that you arein compliance with the restrictive covenants provided in this letter and thatyou execute a general release and waiver, waiving all claims you may haveagainst the Company. During such period, salary continuation and Cobrareimbursements will be paid provided that you exercise good faith efforts topromptly obtain new employment. The Company shall have the right to terminatesalary continuation payments and Cobra reimbursements when you obtain newemployment and to offset your base pay continuation by the amount ofcompensation that you earn during such twelve-month period from such newemployment. If, however, you resign, become disabled, die or are terminated forcause, no salary and Cobra reimbursement will be paid. Your relationship withthe Company is one of employment at will and the payments described in thisparagraph are the only payments to which you will be entitled as a result of thetermination of your employment.As consideration for the Company entering into this agreement and agreeing tomake the salary continuation payments described above, you agree that during (1)your employment by the Company and for a period of twelve (12) months after thelater of the date on which any employment or consulting relationship isterminated or the date on which the last salary, salary continuation, bonus, orother payment is made, you shall not directly or indirectly solicit, hire, orattempt to solicit or influence any employee of the Company to leave theCompany's employ or otherwise perform services on behalf of any person orentity; and (2) while employed and thereafter, you will hold in strictconfidence any proprietary or confidential information or material related tothe Company. Confidential information includes but is not limited to customerlists, trade practices, marketing techniques, pricing structures and practices,research, trade secrets, processes, systems, programs, methods, software,merchandising, planning, inventory and financial control, store design,staffing, etc. You also agree that breach of the confidentiality or employeenon-solicitation provisions previously noted would cause the Company to sufferirreparable harm for which money damages would not be an adequate remedy andtherefore, the Company would be entitled to temporary and permanent injunctiverelief in any court of competent jurisdiction (without the need to post anybond).This agreement shall inure to the benefit of and be an obligation of theCompany's assigns and successors; however you may not assign your duties andobligations hereunder to any other party.You agree not to disclose any information regarding the existence or substanceof this agreement, except to an attorney with whom you choose to consultregarding your consideration of this agreement or to your spouse or tax advisor;provided that you notify such individuals that they are strictly bound by thenon-disclosure restrictions. Further, you agree not to directly or indirectly,disparage or defame the Company or any director, officer, or employee of the Company.No provisions of this agreement may be amended or waived unless such amendmentor waiver is specifically agreed to in writing and signed by you and an officerof the Company duly authorized to execute such amendment.This agreement and all amendments thereof shall, in all respects, be governed byand construed and enforced in accordance with the internal laws (without regardto principles of conflicts of law) of the state of New York. Each party heretohereby agrees to and accepts the exclusive jurisdiction of any court in New YorkCounty or the U.S. District Court for the Southern District of New York in thatCounty in respect of any action or proceeding relating to the subject matterhereof, expressly waiving any defense relating to jurisdiction or forum non ---------conveniens, and consents to service of process by U.S. certified or registered----------mail in any action or proceeding with respect to this agreement.If the terms of this amended agreement meet with your approval, please sign andreturn one copy to me.Sincerely,/s/ MARK SARVARYMark SarvaryCEOAcknowledged and Accepted:/s/ SCOTT FORMBY 3/20/00-------------------------Scott Formby Date Exhibit 21.1 ------------ SUBSIDIARIES OF THE REGISTRANT J. CREW GROUP, INC. Name Under WhichName of Subsidiary State of Incorporation Subsidiary Does Business------------------ ---------------------- ------------------------ J. Crew Operating Corp. Delaware J. Crew Operating Corp.J. Crew Inc. New Jersey J. Crew Inc.Clifford & Wills, Inc. New Jersey Clifford & Wills, Inc.Grace Holmes, Inc. Delaware (J. Crew Retail Stores)H. F. D. No. 55, Inc. Delaware (J. Crew Factory Stores)C & W Outlet, Inc. New York C & W Outlet, Inc.J. Crew International, Inc. Delaware J. Crew International, Inc.J. Crew Services, Inc. Delaware J. Crew Services, Inc.J. Crew Virginia, Inc. Virginia J. Crew Virginia, Inc. Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTSThe Board of DirectorsJ. Crew Group, Inc.:We consent to incorporation by reference in the previously filed registrationstatement on Form S-8 of J. Crew, Group Inc. 1997 Stock Option Plan of ourreport dated March 25, 2002, except as to note 6, which is as of April 17, 2002,relating to the consolidated balance sheets of J. Crew Group, Inc. andsubsidiaries as of February 2, 2002 and February 3, 2001, and the relatedconsolidated statements of operations, cash flows, and changes in stockholders'deficit for each of the years in the three-year period ended February 2, 2002and the related schedule, which report appears in this February 2, 2002 annualreport on Form 10-K of J. Crew Group, Inc.KPMG LLPNew York, New YorkApril 18, 2002