J. Crew Group, Inc.
Annual Report 2003

Plain-text annual report

QuickLinks -- Click here to rapidly navigate through this documentUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-K(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934For the fiscal year ended January 31, 2004oroTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 CommissionFile Number Registrant, State of IncorporationAddress and Telephone Number I.R.S. EmployerIdentification No. 333-42427 J. CREW GROUP, INC. 22-2894486 (Incorporated in New York)770 BroadwayNew York, New York 10003Telephone: (212) 209-2500 333-42423 J. CREW OPERATING CORP. 22-3540930 (Incorporated in Delaware)770 BroadwayNew York, New York 10003Telephone: (212) 209-2500 333-107211 J.CREW INTERMEDIATE LLC N/A (Formed in Delaware)770 BroadwayNew York, New York 10003Telephone: (212) 209-2500 Securities Registered Pursuant to Section 12(b) of the Act: NoneSecurities Registered Pursuant to Section 12(g) of the Act: NoneIndicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes  No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of each registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. Indicate by a check mark whether any of the registrants is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No The common stock of each registrant is not publicly traded. Therefore, the aggregate market value is not readily determinable.As of April 15, 2004, there were 12,197,978 shares of common stock, par value $.01 per share, of J. Crew Group, Inc. outstanding and 100shares of common stock, par value $.01 per share, of J. Crew Operating Corp. outstanding (all of which are owned beneficially and of recordby J. Crew Intermediate LLC). J. Crew Group, Inc. is the sole member of J. Crew Intermediate LLC.Documents incorporated by reference: NoneJ. Crew Operating Corp. and J.Crew Intermediate LLC meet the conditions set forth in General Instruction (I)(1)(a) and (b) of the Form 10-Kand are therefore filing this Form 10-K with the reduced disclosure format.FILING FORMAT This Annual Report on Form 10-K is a combined report being filed by three different registrants: J. Crew Group, Inc. ("Holdings"), J.Crew Intermediate LLC, a wholly owned subsidiary of Holdings ("Intermediate"), and J. Crew Operating Corp., a wholly-owned subsidiaryof Intermediate ("Operating Corp."). Except where the content clearly indicates otherwise, any references in this report to the "Company," "J.Crew" or "Holdings" include all subsidiaries of Holdings, including Intermediate and Operating Corp. Neither Intermediate nor OperatingCorp. make any representation as to the information contained in this report in relation to Holdings and its subsidiaries other thanIntermediate and Operating Corp., as the case may be. References herein to fiscal years are to the fiscal years of J. Crew Group, Inc., J. Crew Intermediate LLC and J. Crew Operating Corp.,which end on the Saturday closest to January 31 in the following calendar year for fiscal years 1999, 2000, 2001, 2002 and 2003.Accordingly, fiscal years 1999, 2000, 2001, 2002 and 2003 ended on January 29, 2000, February 3, 2001, February 2, 2002, February 1,2003 and January 31, 2004. All fiscal years for which financial information is included had 52 weeks, except fiscal year 2000 which had53 weeks.PART IBUSINESS In this section, "we," "us" and "our" refer to Holdings and our wholly owned subsidiaries, including Operating Corp. andIntermediate.General We are a nationally recognized retailer of women's and men's apparel, shoes, and accessories sold under the "J. Crew" brand name.Started in 1983, we have built and reinforced our brand name and image through the circulation of catalogs that use magazine-qualityphotography to portray a classic American perspective and aspirational lifestyle and the operation of our stores and internet website. Webelieve that the "J. Crew" brand name is widely recognized for its timeless styles at price points that represent exceptional product value. Weoffer a full line of men's and women's clothing, including basic durables (casual weekend), workwear (casual weekday), swimwear, sport,accessories and shoes to meet our customers lifestyle needs. Many of the original items introduced by us in the early 1980s (such as therollneck sweater, weathered chino, barn jacket and pocket tee) were instrumental in establishing the J. Crew brand and continue to be ourcore product offerings. J. Crew products are distributed exclusively through our retail and factory stores, our catalog and our internet website located atwww.jcrew.com. As of January 31, 2004, we operated 154 retail stores and 42 factory outlet stores in the United States. We believe that ourcustomer base consists primarily of college-educated, professional and upscale customers who in our experience have demonstrated strongbrand loyalty and a tendency to make repeated purchases. In addition, J. Crew products are distributed through 45 freestanding and shop-in-shop stores in Japan under a licensing agreement with Itochu Corporation. We have three major operating divisions: J. Crew Retail, J. Crew Direct, and J. Crew Factory, each of which operate under the J. Crewbrand name. In fiscal 2003, products sold under the J. Crew brand contributed $660.6 million in revenues, comprised of:•$408.1 million from J. Crew Retail; •$173.5 million from J. Crew Direct; and •$79.0 million from J. Crew Factory. In addition, in fiscal 2003, we generated licensing revenues of $2.5 million and shipping and handling revenues of $25.2 million.Merchandising and Design Over time, the J. Crew merchandising strategy has evolved from providing unisex products to creating full lines of men's and women'sclothing, shoes and accessories. This strategy had the effect of increasing overall J. Crew brand sales volume and significantly increasingrevenues from sales of women's apparel to 75% of J. Crew brand sales in fiscal 2003. All of our products are designed by an in-house design staff to reflect a classic, clean aesthetic that is consistent with our Americanlifestyle brand image. Design teams are formed around J. Crew product lines and categories to develop concepts, themes and products foreach of our J. Crew businesses. Our technical design teams develop construction and fit specifications for every product to ensure qualityworkmanship and consistency across product lines. These teams work in close collaboration with the merchandising, production and qualityassurance staffs in order to gain market and other input and ensure quality of the J. Crew products.1Sourcing and Production Our merchandise is produced for us by a variety of manufacturers in 23 countries. We do not own or operate any manufacturingfacilities and instead contract with third-party vendors for production of our merchandise. In fiscal 2003, approximately 80% of ourmerchandise was sourced in Asia, 5% was sourced in the United States and 15% was sourced in Europe and other regions. Any eventcausing a sudden disruption of manufacturing or imports from China, including the imposition of additional import restrictions, could have amaterial adverse impact on our operations. In addition, one vendor supplies approximately 20% of our merchandise, but we believe that theloss of this vendor would not have a material adverse impact on our ability to source our products. Substantially all of our foreign purchasesare negotiated and paid for in U.S. dollars. We cannot predict whether any of the countries in which our merchandise is currently produced or may be produced in the future will besubject to additional trade restrictions imposed by the United States and other foreign governments, nor can we predict the likelihood, type oreffect of any such restrictions. Trade restrictions, including increased tariffs or quotas, against apparel and other items sold by us couldincrease the cost or reduce the supply of merchandise available to us and adversely affect our business, financial condition and results ofoperations. Our sourcing operations may also be adversely affected by political and financial instability in any country in which our goods areproduced or by acts of war or terrorism in the United States or worldwide to the extent these acts impact the production, shipment or receipt ofmerchandise. Sourcing operations may also be adversely affected by significant fluctuation in the value of the U.S. dollar against foreigncurrencies or restrictions on the transfer of funds.Distribution We operate two major customer contact and distribution facilities for our operations. Order fulfillment for J. Crew Direct takes placeprimarily at a 406,500 square foot facility located in Lynchburg, Virginia. The Lynchburg facility processes catalog and internet website ordersand serves as the distribution center for our factory store operations. This facility employs approximately 500 full and part-time employeesduring our non-peak season and additional employees during our peak season. The main distribution center for our retail store operations islocated in a 192,500 square foot facility in Asheville, North Carolina. This facility employs approximately 150 full- and part-time employeesduring our non-peak season and additional employees during our peak season. Orders for merchandise may be received by telephone,facsimile, mail and through our internet website. Each customer contact associate is trained to assist customers in determining thecustomer's correct size and describing merchandise fabric, texture and function. We believe that our fulfillment and distribution operations aredesigned to process and ship customer orders in a customer-friendly, quick, and cost-effective manner. We ship merchandise via the United States Postal Service and FedEx. To enhance efficiency, each facility is fully equipped with anadvanced telephone system, automated warehouse locator system and inventory bar coding system. In addition, our Lynchburg facility hasautomated packing and shipping sorters.Information Systems Our management information systems are designed to provide, among other things, comprehensive order processing, production,accounting and management information for the marketing, manufacturing, importing and distribution functions of our business. We havepoint-of-sale registers in our retail and factory outlet stores that enable us to track inventory from store receipt to final sale on a real-time basis.We believe our merchandising and financial systems, coupled with our point-of-sale registers and software programs, allow for rapid stockreplenishment, concise merchandise planning and real-time inventory accounting practices. Our telephone and telemarketing systems,warehouse package2sorting systems, automated warehouse locator and inventory bar coding systems utilize advanced technology. These systems have providedus with a number of benefits in the form of enhanced customer service, improved operational efficiency and increased management controland reporting. In addition, our real-time inventory systems provide inventory management on a stock keeping unit basis and allow for anefficient fulfillment process. We have installed a SAP enterprise resource planning system for our information technology requirements. This system wasimplemented in fiscal years 2000 and 2001. In fiscal 2000, our accounting systems were implemented. A corporate-wide purchasing system,a retail sales and inventory system (including new point-of-sale registers) and a human resource and payroll system were completed in fiscal2001. In November 2000, we outsourced our data center, desktop, network and telecommunication services management and operationssupport. In February 2001, we outsourced the hosting and support of our internet website to a third-party vendor.Trademarks and Licensing The "J. Crew" trademark and variations thereon, and certain other trademarks, are registered or are subject to pending trademarkapplications with the United States Patent and Trademark Office and with the registries of many foreign countries. In addition, we license our "J. Crew" trademark to Itochu Corporation in Japan for which we receive percentage royalty fees. Under thelicense agreement, we retain a high degree of control over the manufacture, design, marketing and sale of merchandise by ItochuCorporation under the J. Crew trademark. This agreement expires in January 2007. In fiscal 2003, licensing revenues totaled $2.5 million.Employees As of January 31, 2004, we had approximately 5,500 associates, of whom approximately 1,700 were full-time associates and 3,800were part-time associates. In addition, approximately 1,900 associates are hired on a seasonal basis to meet demand during the peakseason. None of our associates are represented by a union. We believe that our relationship with our associates is good.Competition All aspects of our business are highly competitive. We compete primarily with specialty brand retailers, other catalog and internetoperations, department stores and mass merchandisers that offer similar merchandise. We believe that the principal bases upon which wecompete are quality, design, efficient service, selection and price. Many of our competitors are substantially larger, have a more establishedretail store presence and experience and have greater financial, marketing and other resources than us. There is no assurance that we will beable to successfully compete with our competitors in the future. In addition, our business is sensitive to a number of factors that could affectthe level of consumer spending, including the following:•adverse economic conditions; •the levels of disposable consumer income; •consumer confidence; and •interest rates.3Our BusinessJ. Crew Retail As of January 31, 2004, we operated 154 retail stores throughout the United States, of which 4 stores were opened during fiscal 2003.These stores are located in upscale regional malls, lifestyle centers, shopping centers and street locations. During fiscal 2003, J. Crew Retailgenerated revenues of $408.1 million, representing 59.3% of our total revenues. An important aspect of our business strategy has been an expansion program designed to reach new and existing customers throughthe opening of J. Crew Retail stores. As a result of the slowdown in the overall economic environment and our declining comparable storesales trends for the last three years, we have decided to curtail the number of new store openings. We opened 4 stores in fiscal 2003 andplan to open 5 stores in fiscal 2004. In addition to generating sales of J. Crew products, J. Crew Retail stores help set and reinforce the J.Crew brand image. The stores are designed in-house and fixtured to create a distinctive J. Crew environment and store associates are trainedto maintain high standards of visual presentation and customer service. Store locations are determined based on several factors, includingthe following:•geographic location; •demographic information; •anchor tenants in mall locations; and •proximity to other specialty retail stores in mall and street locations. J. Crew Retail stores that were open during all of fiscal 2003 averaged $2.7 million per store in sales and produced sales per grosssquare foot of $345. J. Crew Retail stores have an average size of 7,680 total square feet. The table below highlights certain information regarding J. Crew Retail stores opened through fiscal 2003.Fiscal Year Stores OpenAt Beginningof Fiscal Year StoresOpenedDuringFiscal Year StoresClosedDuringFiscal Year StoresOpen atEnd ofFiscal Year Total SquareFootage (inthousands) AverageStoreSquareFootage1999 65 16 — 81 668 8,2432000 81 24 — 105 833 7,9332001 105 34 3 136 1,054 7,7522002 136 16 — 152 1,172 7,7122003 152 4 2 154 1,183 7,680J. Crew Direct J. Crew Direct consists of our catalog and internet website operations. During fiscal 2003, J. Crew Direct generated $173.5 million inrevenues, including $61.9 million from the catalog and $111.6 million from the internet website, representing 25.2% of our total J. Crewrevenues. We believe we have distinguished ourselves from other catalog retailers by our award-winning catalog which utilizes magazine-quality,"real moment" pictures to depict an aspirational lifestyle image. In fiscal 2003, we distributed 28 catalog editions with a total circulation ofapproximately 53 million and pages circulated of approximately 5.8 billion. This represented a decrease from fiscal 2002 in which we hadtotal circulation of approximately 66 million and pages circulated of approximately 7.8 billion.4 J. Crew Direct's circulation strategy focuses on continually improving the segmentation of customer files and the acquisition ofadditional customer names. In fiscal 2003, approximately 65% of J. Crew Direct revenues were from customers who had made a purchasefrom any J. Crew catalog or on the internet in the prior 12 months. We segment our customer file and tailor our catalog offerings to addressthe different product needs of our customer segments. To increase core catalog productivity and improve the effectiveness of marginal andprospecting circulation, each customer segment is offered appropriate catalog editions. We also acquire new names from various sources,including the following:•our retail stores; •our internet website; •list rentals; and •exchanges with other catalog companies. We have installed telephones in all of our J. Crew Retail stores with direct access to the J. Crew Direct telemarketing center to allowcustomers in the stores to order catalog-specific or out-of-stock items. All creative work on the catalogs is coordinated by J. Crew personnel to maintain and reinforce the J. Crew brand image. Photography isexecuted both on location and in studios, and creative design and copy writing are executed on a desktop publishing system. Digital imagesare transmitted directly to outside printers, thereby reducing lead times and improving reproduction quality. We believe that appropriate pagepresentation of our merchandise stimulates demand, and therefore we place great emphasis on page layout. J. Crew Direct does not have long-term contracts with paper mills. Projected paper requirements are communicated on an annual basisto paper mills to ensure the availability of an adequate supply. Management believes that our long-standing relationships with a number ofthe largest coated paper mills in the United States allow us to purchase paper at favorable prices commensurate with the volume of ourpurchases. In 1996, we launched our internet website located at www.jcrew.com, making J. Crew merchandise available to our customers over theinternet. In fiscal 2003, the website logged over 38 million unique visitors and represents 65% of the J. Crew Direct business. We designand operate our website using an in-house technical staff and our website emphasizes simplicity and ease of customer use while integratingthe J. Crew brand's aspirational lifestyle imagery used in the catalog.J. Crew Factory As of January 31, 2004, we operated 42 factory stores in the United States. The factory stores target value-oriented customers and alsoserve to liquidate excess, irregular and out-of-season J. Crew merchandise. In the 2003 Fall season, our Factory division began creating andselling its own merchandise. During fiscal 2003, J. Crew Factory generated revenues of $79.0 million, representing 11.5% of our totalrevenues. J. Crew Factory stores have an average size of 6,500 total square feet and are generally located in major regional outlet centers in 24states across the United States. We believe that the factory stores, which are designed in-house, maintain fixturing, visual presentation andservice standards comparable to those typically associated with outlet stores.5Forward Looking Statements Certain statements in this Annual Report on Form 10-K under the captions "Business," "Selected Financial Data," "Management'sDiscussion and Analysis of Financial Condition and Results of Operations," "Financial Statements and Supplementary Data" andelsewhere constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. We may alsomake written or oral forward looking statements in our periodic reports to the Securities and Exchange Commission on Forms 10-Q, 8-K,etc., in press releases and other written materials and in oral statements made by our officers, directors or employees to third parties.Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Suchforward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results,performance or achievements of the Company, or industry results, to differ materially from historical results, any future results, performanceor achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to,competitive pressures in the apparel industry, changes in levels of consumer spending or preferences in apparel and acceptance bycustomers of the Company's products, overall economic conditions, governmental regulations and trade restrictions, acts of war or terrorismin the United States or worldwide, political or financial instability in the countries where the Company's goods are manufactured, postal rateincreases, paper and printing costs, availability of suitable store locations at appropriate terms, the level of the Company's indebtedness andexposure to interest rate fluctuations, and other risks and uncertainties described in this report and the Company's other reports anddocuments filed or which may be filed, from time to time, with the Securities and Exchange Commission. These statements are based oncurrent plans, estimates and projections, and therefore you should not place undue reliance on them. Forward looking statements speak onlyas of the date they are made and we undertake no obligation to update publicly any of them in light of new information or future events.Available Information We are subject to the informational requirements of the Securities Exchange Act of 1934 (Exchange Act). We therefore file periodicreports and other information with the Securities and Exchange Commission (SEC). Such reports may be obtained by visiting the PublicReference Room of the SEC at 450 Fifth Street NW, Washington, D.C. 20549, or by calling the SEC at (800) SEC-0330. In addition, theSEC maintains an internet site (www.sec.gov) that contains reports, proxy information statements and other information regarding issuersthat file electronically. Our filings under the Exchange Act (including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports) are also available free of charge on our internet website at www.jcrew.com. These reports areavailable as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The reference to theCompany's website address does not constitute incorporation by reference of the information contained on the website, and the informationcontained on the website is not part of this document.ITEM 2. PROPERTIES We are headquartered in New York City. The New York City headquarter offices are leased under a lease agreement expiring in 2012,with an option to renew thereafter. We own two customer contact and distribution facilities: a 406,500-square-foot customer contact anddistribution center for J. Crew Direct operations in Lynchburg, Virginia and a 192,500-square-foot distribution center in Asheville, NorthCarolina servicing the J. Crew Retail operations. As of January 31, 2004, we operated 154 J. Crew retail stores and 42 factory stores in 38 states and the District of Columbia. All of theretail and factory stores are leased from third parties, and the6leases in most cases have terms of 10 to 12 years, with options to renew for periods typically ranging from five to ten years. As a generalmatter, the leases contain standard provisions concerning the payment of rent, events of default and the rights and obligations of each party.Rent due under the leases is generally comprised of annual base rent plus a contingent rent payment based on the store's sales in excess ofa specified threshold. Some of the leases also contain early termination options, which can be exercised by us or in some cases the landlordunder certain conditions. The leases also generally require us to pay real estate taxes, insurance and certain common area costs.Substantially all of the leases are guaranteed by us. The table below sets forth the number of stores by state operated by us in the United States as of January 31, 2004. RetailStores FactoryStores TotalNumberOf StoresAlabama 2 1 3Arizona 4 — 4California 20 3 23Colorado 4 2 6Connecticut 5 1 6Delaware 1 1 2Florida 4 3 7Georgia 4 2 6Illinois 9 — 9Indiana 2 2 4Kansas 1 — 1Kentucky 2 — 2Louisiana 1 — 1Maine — 2 2Maryland 3 1 4Massachusetts 6 2 8Michigan 6 1 7Minnesota 3 — 3Missouri 2 1 3Nevada 1 — 1New Hampshire 1 2 3New Jersey 9 1 10New Mexico 1 — 1New York 15 4 19North Carolina 4 — 4Ohio 7 — 7Oklahoma 2 — 2Oregon 2 — 2Pennsylvania 8 3 11Rhode Island 1 — 1South Carolina 2 2 4Tennessee 3 1 4Texas 6 2 8Utah 2 — 2Vermont 1 1 2Virginia 5 2 7Washington 2 1 3Wisconsin 1 1 2District of Columbia 2 — 2 Total 154 42 196 7ITEM 3. LEGAL PROCEEDINGS Charles E. Hill & Associates, Inc., or Hill, filed a lawsuit on August 16, 2002 in the U. S. District Court for the Eastern District of Texasagainst us and seventeen other defendants, primarily large retailers, alleging infringement of three patents registered to Hill relating toelectronic catalog systems and methods for processing data at a remote location and updating and displaying that data. The suit seeks aninjunction against continuing infringement, unspecified damages, including treble damages for willful infringement, and interest, costs,expenses and fees. We believe that we have meritorious defenses and intend to defend ourselves vigorously. In addition, we are subject to various legal proceedings and claims that arise in the ordinary conduct of our business. Although theoutcome of these other claims cannot be predicted with certainty, management does not believe that the ultimate resolution of these matterswill have a material adverse effect on our financial condition or results of operations.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended January 31, 2004.PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for Holdings or Operating Corp. common stock or for Intermediate's equity. As of April 15,2004, there were 44 shareholders of record of the Holdings common stock. See "Item 12. Security Ownership of Certain Beneficial Ownersand Management" for a discussion of the ownership of Holdings. Holdings is the sole member of Intermediate, and Intermediate owns 100%of the common stock of Operating Corp. Holdings has not paid cash dividends on its common stock and does not anticipate paying any such dividends in the foreseeable future.Operating Corp. may from time to time pay cash dividends on its common stock to permit Holdings to make required payments relating to its131/8% senior discount debentures. Our credit facility with Wachovia Bank, N.A., as arranger, Congress Financial Corporation, as administrative and collateral agent, and asyndicate of lenders (the "Congress Credit Facility") and the Indenture relating to the 131/8% senior discount debentures of Holdings (the"Holdings Indenture") prohibit the payment of dividends by Holdings on shares of common stock (other than dividends payable solely inshares of capital stock of Holdings). Additionally, because Holdings is a holding company, its ability to pay dividends is dependent upon thereceipt of dividends from its direct and indirect subsidiaries. Each of the Congress Credit Facility, the Holdings Indenture and the Indenturerelating to the 103/8% senior subordinated notes of Operating Corp., contains covenants which impose substantial restrictions on OperatingCorp.'s ability to pay dividends or make distributions to Holdings.8Equity Compensation Plan Information The following table summarizes information about the Amended and Restated J. Crew Group, Inc. 1997 Stock Option Plan and the J.Crew Group, Inc. 2003 Equity Incentive Plan (the "2003 Plan"), as of January 31, 2004. Our shareholders have approved both of theseplans. (a) (b) (c)Plan Category Number of Securitiesto be Issued UponExercise ofOutstanding OptionsWarrants and Rights Weighted AverageExercise Price ofOutstanding Options,Warrants and Rights Number of SecuritiesRemaining Available forFuture Issuance UnderEquity Compensation Plans(Excluding SecuritiesReflected in Column (a))Equity Compensation Plans Approvedby Shareholders 2,410,606 $8.37 2,840,830Equity Compensation Plans NotApproved by Shareholders 0 N/A 0 TOTAL 2,410,606 $8.37 2,840,830 In addition to options, the 2003 Plan authorizes the issuance of restricted stock of Holdings. The 2003 Plan contains a sub-limit of1,450,724 shares on the aggregate number of shares of restricted Holdings common stock which may be issued, of which 1,144,979shares are outstanding and 305,745 shares are available.9ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated historical financial, operating, balance sheet and other data of the Company. Theselected income statement and balance sheet data for each of the five fiscal years ended January 31, 2004 are derived from the ConsolidatedFinancial Statements of the Company, which have been audited by KPMG LLP, independent auditors. The data presented below should beread in conjunction with the Consolidated Financial Statements, including the related Notes thereto, included herein, the other financialinformation included herein, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Fiscal Year Ended January 29,2000 February 3,2001(a) February 2,2002 February 1,2003 January 31,2004 (dollars in thousands, except per square foot data) Income Statement Data: Revenues $750,696 $825,975 $777,940 $766,382 $688,289 Cost of goods sold(b)(c) 426,464 458,205 454,491 470,300 435,700 Selling, general and administrative expenses(c) 284,031 307,569 303,448 301,718 280,464 Other charges 7,018 — — — — Charges incurred in connection withdiscontinuance of Clifford & Wills 4,000 4,130 — — — Income/(loss) from operations 29,183 56,071 20,001 (5,636) (27,875) Interest expense-net (38,861) (36,642) (36,512) (40,954) (63,844) Gain on exchange of debt — — — — 41,085 Insurance proceeds — — — 1,800 3,850 Gain on sale of Popular Club Plan 1,000 — — — — (Provision) benefit for income taxes 2,050 (7,500) 5,500 4,200 (500) Net income (loss) $(6,628)$11,929 $(11,011)$(40,590) (47,284) Balance Sheet Data (at period end): Cash and cash equivalents $38,693 $32,930 $16,201 $18,895 49,650 Working capital 75,929 49,482 39,164 38,015 49,117 Total assets 373,604 389,861 401,320 348,878 300,511 Total long term debt and preferred stock 458,218 464,310 510,147 556,038 609,440 Stockholders' deficit $(264,593)$(278,347)$(319,043)$(391,663) (465,166)Operating Data: Revenues: J. Crew retail $333,575 $406,784 $397,998 $408,028 $408,119 J. Crew direct Catalog 213,308 177,535 135,353 108,531 61,883 Internet 65,249 107,225 122,844 139,456 111,653 278,557 284,760 258,197 247,987 173,536 J. Crew factory 101,987 96,114 85,085 76,264 78,973 J. Crew licensing 2,505 3,020 2,560 2,280 2,456 J. Crew shipping & handling fees 34,072 35,297 34,100 31,823 25,205 Total 750,696 825,975 777,940 766,382 688,289 J. Crew Direct: Number of catalogs circulated (in thousands) 75,479 72,522 71,000 66,000 53,000 Number of pages circulated (in millions) 9,319 8,677 8,300 7,800 5,800 J. Crew Retail: Sales per gross square foot(d) $571 $567 $439 $365 $345 Number of stores open at end of period 81 105 136 152 154 Comparable store sales change(e) 1.8% 1.7% (15.5)% (10.4)% (3.4)%Depreciation and amortization(c) $23,970 $28,670 $39,963 $43,197 43,075 Net capital expenditures(f) New store openings $13,300 $16,700 $17,572 $11,400 $3,500 Other 27,953 25,475 25,003 9,018 4,386 Total net capital expenditures $41,253 $42,175 $42,575 $20,418 $7,886 (a)The fiscal year 2000 consisted of 53 weeks compared to 52 weeks in all other fiscal years. Net sales for the fifty-third week increased fiscal 2000 sales by$10.8 million. (b)Includes buying and occupancy costs. (c)Amounts reported in prior periods for amortization of deferred landlord contributions have been reclassified from depreciation and amortization to rent expense toconform to current presentation. (d)Includes stores that have been opened for a full twelve month period. (e)Comparable store sales excludes the sales of stores that were not open during the same period in the prior year. (f)Capital expenditures are net of proceeds from construction allowances.10ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion summarizes the significant factors affecting our consolidated operating results, financial condition and liquidity duringthe three-year period ended January 31, 2004. You should read the following discussion and analysis in conjunction with our auditedconsolidated financial statements for the three-year period ended January 31, 2004 and the related notes thereto included herein. Management's discussion and analysis of the results of operations are provided solely with respect to J.Crew Operating Corp. and itssubsidiaries since substantially all of the Company's operations are conducted by J.Crew Operating Corp. However, J.Crew IntermediateLLC and J.Crew Group, Inc. have outstanding additional debt securities. Accordingly, information with respect to interest income andexpense of each of those entities is also provided herein. The discussion of liquidity and capital resources pertains to J.Crew Group, Inc. andits consolidated subsidiaries, including J.Crew Intermediate LLC and J.Crew Operating Corp.Management Overview The fashion and apparel industry is highly competitive. We compete primarily with specialty brand retailers, department stores, massmerchandisers, other catalog operations, and internet businesses that engage in the retail sale of men's and women's apparel, accessories,footwear and general merchandise. We believe that the principal bases upon which we compete are quality, design, efficient service,selection and price. We believe that our success depends in substantial part on our ability to originate and define product and fashion trendsas well as to anticipate, gauge and react to changing consumer demands in a timely manner. The industry in which we operate is cyclical. Purchases of apparel and related merchandise is sensitive to a number of factors thatinfluence the levels of consumer spending including economic conditions and the level of disposable consumer income, consumer debt,interest rates and consumer confidence. The recent economic environment had a negative impact on our sales and contributed to a higherlevel of promotional sales activities which adversely affected our profitability. We believe our comparable store sales results in fiscal 2001 and2002 also resulted from customer dissatisfaction with our product offerings. When our new management took over in January 2003, theyinitiated a program to upgrade the quality and style of our merchandise assortments. These changes were not implemented until our Fall andHoliday 2003 product offerings. As part of our growth strategy, we intend to expand our base of J.Crew retail stores. This expansion has been curtailed recently as thenumber of new stores opened decreased to four in fiscal 2003 and the anticipated openings in fiscal 2004 is five. We have decided toconcentrate our efforts on increasing the sales productivity (as measured by sales per square foot) of our current stores before we resume ourstore opening program.Results of Operations Our consolidated statements of operations presented as a percentage of revenues are as follows: Fiscal Year Ended January31, 2004 February 1,2003 February 2,2002 Revenues(1) 100.0%100.0%100.0%Cost of goods sold, including buying and occupancy costs(2)(3) 63.3 61.4 58.4 Selling, general and administrative expenses(2)(3) 40.7 39.3 39.0 Income/(loss) from operations (4.0)(0.7)2.6 Interest expense, net (9.3)(5.3)(4.7)Gain on exchange of debt 6.0 — — Insurance proceeds .5 .2 — Loss before income taxes (6.8)(5.8)(2.1)Income taxes (.1)0.5 0.7 Net loss (6.9)%(5.3)%(1.4)% (1)Includes licensing, shipping and handling fees. (2)Our gross margins may not be comparable to others as some companies include all of the costs related to their distribution network inthe cost of goods sold while others, like us, exclude all or a portion of them from gross margins and, instead, include them in selling,general and administrative expenses. (3)Amounts reported in prior periods for amortization of deferred landlord contributions have been reclassified from depreciation andamortization to rent expense to conform to current year presentation.11Revenues Consolidated revenues for fiscal years 2003, 2002 and 2001 by channel of distribution were, as follows: 2003 2002 2001 (in millions)Retail $408.1 $408.0 $398.0Direct 173.5 248.0 258.2Factory 79.0 76.3 85.0Other 27.7 34.1 36.7 $688.3 $766.4 $777.9 Revenues of J. Crew Retail for fiscal years 2003, 2002 and 2001 were, as follows: 2003 2002 2001 ($ in millions) Comparable store sales $390.5 $352.0 $331.0 Noncomparable store sales 17.6 56.0 67.0 $408.1 $408.0 $398.0 Number of stores open 154 152 136 Sales per gross square foot $345 $365 $439 Comparable stores sales change (3.4)% (10.4)% (15.5)% Net sales in 2003 were $408.1 million flat with fiscal 2002. A decline of 3.4% in comparable store sales was offset by sales from fourstores opened in fiscal 2003 and 16 stores opened in 2002 that were open for a full year in fiscal 2003. The improvement in comparable storesales results in 2003 is the result of an improving economy and an upgrade in the quality and style of our merchandise assortments in thesecond half of the year. The increase in net sales of 2.5% in fiscal 2002 compared to fiscal 2001 was derived from the sales of 16 new storesopened during 2002 and the 34 stores opened in 2001 that were open for a full year in fiscal 2002, which offset a decline of 10.4% incomparable store sales. We believe this decrease in comparable store sales was attributable to the effect of the continuing slow economy onconsumer spending and customer dissatisfaction with our product offerings. Revenues of J. Crew Direct for fiscal years 2003, 2002 and 2001 were, as follows: 2003 2002 2001 (in millions)Internet $111.7 $139.4 $122.9Catalog 61.8 108.6 135.3 $173.5 $248.0 $258.2 Net sales in the Direct business decreased from $248.0 million in 2002 to $173.5 million in 2003, a decrease of 30%. This decreaseresulted from (a) a 25% decrease in catalog circulation from 7.8 billion pages in 2002 to 5.8 billion pages in 2003 including the elimination ofwomen's only and clearance catalogs in the second half of the year (b) a decrease in density (items per page) resulting from a 30% reductionin style counts and (c) the reduction in promotional practices, including promotional e-mails. The decrease in net sales of 4% from $258.2 million in 2001 to $248.0 million in 2002 resulted from a decrease in catalog sales notoffset by the increase in Internet sales. Pages circulated decreased by 6% from 8.3 billion pages in 2001 to 7.8 billion pages in 2002 whileinternet sales increased from the efforts to migrate customers to the Internet through promotional e-mails and other activities.12 Revenues of J. Crew Factory for fiscal years 2003, 2002 and 2001 were, as follows: 2003 2002 2001 ($ in millions) Comparable store sales $77.7 $72.3 $85.0 Noncomparable store sales 1.3 4.0 — $79.0 $76.3 $85.0 Number of stores open 42 42 41 Comparable stores sales change 2.9% (14.1)% (10.5)% The increase in factory store sales in 2003 resulted from the increase in comparable store sales. We strengthened our factory businessin fiscal 2003 by moving away from deep discounting of prior season's merchandise carried over from our Retail and Direct channels tohaving our factory channel create and sell its own merchandise. This change was effective in the 2003 Fall season and contributed to a 9%increase in comparable store sales in the Fall season. The decline in factory store sales in 2002 from 2001 resulted from higher markdownsto clear excess prior season inventories. Other revenues for fiscal years 2003, 2002 and 2001 were, as follows: 2003 2002 2001 ($ in millions)Royalties $2.5 $2.3 $2.6Shipping and handling fees 25.2 31.8 34.1 $27.7 $34.1 $36.7 The decline in other revenues during the three year period resulted from a decrease in shipping and handling fees which is directlyattributable to the downward trend in net sales of the Direct business.Cost of sales including buying and occupancy costs 2003 2002 2001 Cost of sales including buying and occupancy costs 63.3%61.4%58.4%Gross margin 36.7%38.6%41.6% The decrease in gross margin from 2002 to 2003 resulted primarily from a 140 basis point increase in buying and occupancy costs as apercentage of revenues because of the decrease in revenues not offset by a decrease in buying and occupancy costs which are primarily fixedexpenses and a decrease of 50 basis points in merchandise margins primarily from the liquidation of prior season's inventories in the firsthalf of 2003. The decrease in gross margin from 2002 to 2001 was caused by an increase of 120 basis points in buying and occupancy costs as apercentage of revenues because of the decrease in revenues not offset by a decrease in buying and occupancy costs which are primarily fixedexpenses and a 180 basis point decrease in merchandise margins from the markdowns taken to clear inventories in the fourth quarter of2002. The fourth quarter of 2002 also included a $9 million charge as result of the decision to modify our disposition strategy to accelerateinventory clearing at the end of each selling season.13Selling, general and administrative expenses 2003 2002 2001 ($ in millions) Selling $40.0 $53.2 $60.8 General and administrative 240.4 248.5 242.6 $280.4 $301.7 $303.4 % of revenues 40.7% 39.3% 39.0% Selling expenses consist of catalog production and mailing costs. Pages circulated were 5.8 billion, 7.8 billion and 8.3 billion in fiscal2003, 2002 and 2001. The decreases in selling expenses during the period were related primarily to the reduction in pages circulated and theelimination of women's only editions and clearance catalogs in the second half of 2003. A decrease in the cost of paper also contributed to thedecrease from 2001 to 2002. The decrease in general and administrative expenses in 2003 compared to 2002 resulted primarily from a decrease in severance andother one time employment related charges of $10 million partially offset by store expenses from additional stores in operation in 2003. The increase in general and administrative expenses in 2002 compared to 2001 resulted from (a) severance and other one timeemployment related charges of $13.7 million and (b) store expenses related to the additional stores in operation in 2002 partially offset by thecost reduction initiatives instituted in the first quarter of 2002.14Interest Expense 2003 2002 2001 ($ in millions) Operating Corp.: Working capital credit facility $2.4 $3.4 $3.8 5% notes payable 1.0 — — 103/8% senior subordinated notes 15.6 15.6 15.6 Amortization of deferred financing costs 1.7 4.2 1.8 Interest income (.2) — (.3) Total Operating Corp. 20.5 23.2 20.9 Intermediate: 16% senior discount contingent principal notes 16.0 — — Amortization of debt issuance discount 5.4 — — Amortization of deferred financing costs .4 — — Total Intermediate 42.3 Holdings: 131/8% senior discount debentures 7.2 17.6 15.4 Dividends on redeemable preferred stock 14.2 — — Amortization of deferred financing costs .1 .2 .2 Total Holdings $63.8 $41.0 $36.5 A significant amount of interest expense during the three year period was non-cash interest as indicated below: Cash interest $20.5 $24.3 $19.1 Non cash interest 43.3 16.7 17.4 $63.8 $41.0 $36.5 The change in interest expense for Operating Corp. during the three year period related primarily to the increase in amortization ofdeferred financing costs in fiscal 2002, which resulted primarily from a write off of $1.8 million related to the refinancing of our working capitalcredit facility. Intermediate was formed in March 2003 in connection with an offer to exchange 16% senior discount contingent principal notes ofIntermediate for the outstanding 131/8% senior discount debentures of Holdings, which was completed on May 6, 2003. The interestexpense for Intermediate for fiscal 2003 relates to interest expense and amortization of debt issuance costs for the 16% senior discount notesissued by Intermediate in exchange for the 131/8% senior discount debentures of Holdings. The interest expense for Holdings in 2001 and 2002 relates to the amount of 131/8% senior discount debentures outstanding during theperiods while the amount of interest expense in 2003 includes interest on $142.0 million of the outstanding 131/8% senior discountdebentures prior to the exchange offer and on $21.6 million subsequent to the exchange offer. Holdings interest expense also includesdividends related to mandatorily redeemable preferred stock for the third and fourth quarters of fiscal 2003.Gain on exchange of debt The net consolidated gain on exchange of debt of $41.1 million reflects the difference between the fair value of the 16% senior discountnotes at date of issuance and the carrying value of the 131/8% senior discount debentures of $44.1 million recorded by Intermediate lessHoldings related expenses which consist of (a) the additional expense of 27/8% from October 15, 2002 to May 6, 2003 paid to the15note holders who accepted the exchange offer $(1.9 million) and (b) the write off of unamortized deferred financing costs related to thedebentures exchanged ($1.1 million).Income Taxes Holdings files a consolidated federal tax return which includes all of its wholly owned subsidiaries. Accordingly, the following discussionpertains to Holdings. The effective tax rate was a benefit of 9.4% in fiscal 2002 compared to a benefit of 33.3% in fiscal 2001. The lower effective rate in 2002resulted from the establishment of a valuation allowance of $21.0 million to reduce the net deferred tax assets to estimated recoverableamount at February 1, 2003, offset by a benefit of $9.0 million from the reversal of prior years' tax accruals. The valuation allowance wasrecorded in fiscal 2002 as a result of the significance of our net loss in fiscal 2002 and management's projection of taxable income/loss in thenear future. Management had previously concluded that considering all factors, including available tax planning strategies and projections offuture taxable income, it was more likely than not that the net deferred income tax assets would be realized. However, considering oursubstantially increased losses and declining trends and projections of operating losses in the near future, the fact that our operating results forfiscal 2002 were significantly worse than originally forecasted and the downward revision of the outlook for fiscal year 2003 and forward, wereassessed the need for a valuation allowance. We believed in fiscal 2002 that the "positive evidence" no longer outweighed the "negativeevidence" and a valuation allowance was, therefore, necessary. The tax accruals were reversed in 2002 based on a proposed IRS settlementof open years and results of state audits at amounts less than the accrued amounts. We do not expect to recognize any tax benefits in futureresults of operations until an appropriate level of profitability is sustained. In fiscal 2003 there was a tax provision of $500,000 for state and foreign taxes. We established an additional valuation allowance of$5.0 million to fully reserve the net deferred tax assets at January 31, 2004. This increase was offset by additional tax refunds and areduction in prior year tax accruals as a result of the finalization of certain tax audits.Insurance Proceeds Insurance proceeds in fiscal 2002 and 2003 represent recoveries for claims related to the destruction of our World Trade Center store onSeptember 11, 2001. The recovery in fiscal 2003 is the final settlement of this claim.Liquidity and Capital Resources Our sources of liquidity are primarily cash flows from operations and borrowings under our working capital credit facility. Our primarycash needs are for capital expenditures incurred primarily for opening new stores and system enhancements, debt service requirements andworking capital. On December 23, 2002, Operating Corp. entered into a Loan and Security Agreement with Wachovia Bank, N.A., as arranger,Congress Financial Corporation, as administrative and collateral agent, and a syndicate of lenders which provides for maximum creditavailability of up to $180.0 million. The Congress Credit Facility provides for revolving loans of up to $160.0 million; supplemental loans ofup to $20.0 million each year during the period from April 15 to September 15; and letter of credit accommodations. The Congress CreditFacility expires in December 2005. The total amount of availability is limited to the sum of 85% of eligible receivables, 90% of the netrecovery percentage of inventories (as determined by inventory appraisal) for the period of August 1 through November 30, 85% of the netrecovery percentage of inventories for the period December 1 through July 31 and the real estate availability of $5.8 million.16 The Congress Credit Facility includes restrictions, including the incurrence of additional indebtedness, the payment of dividends andother distributions, the making of investments, the granting of loans and the making of capital expenditures. We are required to maintainminimum levels of earnings before interest, taxes, depreciation, amortization and certain non-cash items ("EBITDA") if excess availability isless than $15.0 million for any 30 consecutive day period. We have at all times been in compliance with all financial covenants under theCongress Credit Facility. The Congress Credit Facility permits restricted payments (by way of dividends or other distributions) with respect to, among otherthings, our capital stock payable solely in additional shares of our capital stock, our tax sharing agreement, the Series A Preferred Stock ofHoldings, the Series B Preferred Stock of Holdings and the 131/8% senior discount debentures due 2008 of Holdings. Our ability to declaredividends on our capital stock is also limited by Delaware law, which permits a company to pay dividends on its capital stock only out of itssurplus or, in the event that it has no surplus, out of its net profits for the year in which a dividend is declared or for the immediatelypreceding fiscal year. Under the Congress Credit Facility, the assets of Intermediate and its subsidiaries are restricted. Cash provided by operating activities was $16.2 million in fiscal 2003, $25.3 million in fiscal 2002 and $25.8 million in fiscal 2001. Theincreases in net losses in 2003 and 2002 were offset by improvements in working capital, primarily reductions in inventories of$41.3 million in 2003 and $31.6 million in 2002. Capital expenditures, net of construction allowances were $7.9 million in fiscal 2003, $20.4 million in fiscal 2002 and $42.6 million in2001. Capital expenditures related to new stores were $3.5 million, $11.4 million and $17.6 million during the three years. Furthermore,fiscal 2001 included software development costs of $8.5 million. Anticipated capital expenditures in fiscal 2004 are approximately $9 million,which includes 5 new stores. There were no borrowings under the Congress Credit Facility at January 31, 2004 and February 1, 2003. Average borrowings under theCongress Credit Facility were $1.0 million for fiscal 2003, $40.4 million for fiscal 2002 and $43.1 million for fiscal 2001. Long-termindebtedness increased by $25.8 million in fiscal 2003 consisting of $20.0 million of TPG-MD Investment notes payable due in 2008 and$5.8 million under the Congress Credit Facility repayable over a period of 60 months, commencing June 1, 2003. As of January 31, 2004,there was $18.9 million in availability under the Congress Credit Facility. On May 6, 2003, we (through our wholly-owned subsidiary, Intermediate) completed an offer to exchange 16% senior discountcontingent principal notes for the outstanding 131/8% senior discount debentures of Holdings. Approximately 85% of the outstanding seniordiscount debentures of Holdings were tendered for exchange. Effective October 15, 2002, the interest payments accruing on the seniordiscount debentures of Holdings became payable in cash on April 15 and October 15 of each year subsequent thereto. We did not pay theaccrued and unpaid interest on the senior discount debentures of Holdings on the scheduled interest payment date of April 15, 2003. Rather,we paid such interest on May 6, 2003, the settlement date of the exchange offer, together with interest thereon at a rate of 131/8% per annumfrom April 15, 2003 to May 5, 2003, to the holders of the senior discount debentures of Holdings who did not tender their debentures for theinitial notes in the exchange offer. Interest on the 16% notes becomes payable in cash commencing on November 15, 2005 and is payable oneach May 15 and November 15 thereafter through May 15, 2008. Management believes that invested cash, cash flow from operations and availability under the Congress Credit Facility will provideadequate funds for our foreseeable working capital needs, planned capital expenditures and debt service obligations. Our ability to fund ouroperations and make planned capital expenditures, to make scheduled debt payments, to refinance indebtedness and to remain incompliance with the financial covenants under our debt agreements depends on our future operating performance and cash flow, which inturn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.17Off Balance Sheet Arrangements We enter into letters of credit to facilitate the international purchase of merchandise. Standby letters of credit are required to secure certainobligations.Letters of Credit Standby $.7 $— $— $2.8 $3.5 Import 36.0 — — — 36.0 $36.7 $— $— $2.8 $39.5 Contractual Obligations The following summarizes our contractual obligations as of January 31, 2004 and the effect such obligations are expected to have on ourliquidity and cash flows in future periods. Within 1year 2-3 years 4-5 years After 5years Total (dollars in millions)Long term debt obligations(1) $1.2 $2.4 $341.2 $— $344.8Redeemable preferred stock — — — 211.7 211.7Operating lease obligations(2) 52.4 96.4 84.3 116.2 349.3Purchase obligations Inventory commitments 144.0 — — — 144.0 Other $4.8 $9.1 $8.1 $— $22.0 Employment agreements 1.5 $1.5 $1.5 $1.5 $6.0 150.3 10.6 9.6 1.5 172.0 203.9 109.4 435.1 329.4 1,077.8(1)Excludes unamortized debt issuance discount. (2)Operating lease obligations represent obligations under various long-term operating leases entered in the normal course of businessfor retail and factory stores, warehouses, office space and equipment requiring minimum annual rentals. Operating lease expense isa significant component of our operating expenses. The lease terms range for various periods of time in various rental markets andare entered into at different times, which mitigates exposure to market changes which could have a material effect on the company'sresults of operations within any given year.Impact of Inflation Our results of operations and financial condition are presented based upon historical cost. While it is difficult to accurately measure theimpact of inflation due to the imprecise nature of the estimates required, we believe that the effects of inflation, if any, on our results ofoperations and financial condition have been minor. However, there can be no assurance that during a period of significant inflation, ourresults of operations would not be adversely affected.Seasonality We experience two distinct selling seasons, spring and fall. The spring season is comprised of the first and second quarters and the fallseason is comprised of the third and fourth quarters. Net sales are usually substantially higher in the fall season and selling, general andadministrative expenses as a percentage of net sales are usually higher in the spring season. Approximately 31% of annual net sales infiscal 2003 occurred in the fourth quarter. Our working capital requirements also fluctuate throughout the year, increasing substantially inSeptember and October in anticipation of the holiday season inventory requirements.Recent Accounting Pronouncements In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and HedgingActivities." This statement amends and clarifies financial accounting and18reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities underFASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The provisions of this statement are effective forcontracts entered into or modified after June 30, 2003 and hedging relationships designated after June 30, 2003. The provisions of thestatement related to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003should continue to be applied in accordance with their respective effective dates. The adoption of SFAS No. 149 did not have a significanteffect on our financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instrumentswith characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability(or an asset in some circumstances). Many of those instruments were previously classified as equity. The provisions of this statement wereeffective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 resulted in a reclassificationof the liquidation value and accumulated and unpaid dividends of the Series B preferred stock and the accumulated and unpaid dividendsrelated to the Series A preferred stock to liabilities, which totaled $211.7 million as of January 31, 2004. After such reclassification, thedividends related to the Series B preferred stock and the accreted dividends of the Series A Preferred Stock will be treated as interest expense. In December 2003, the FASB revised and reissued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." FINNo. 46 requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectivelydispense the risks and rewards of ownership among their owners and other parties involved. The provisions of FIN No. 46 must be appliedno later than as of the end of the first reporting period ending after March 15, 2004. The adoption of FASB Interpretation No. 46 will not have asignificant effect on our financial statements.Critical Accounting Policies Management's discussion and analysis of financial condition and results of operations is based upon the consolidated financialstatements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation ofthese financial statements requires estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.We base our estimates on historical experience and other assumptions that are believed to be reasonable under the circumstances andevaluate these estimates on an on-going basis. Actual results may differ from these estimates under different assumptions or conditions. The following critical accounting policies, which we have discussed with our audit committee, reflect the more significant estimates andjudgments used in the preparation of our consolidated financial statements. We do not believe that changes in these assumptions andestimates are likely to have a material impact on our consolidated financial statements.Inventory Valuation Merchandise inventories are carried at the lower of cost or market. We evaluate all of our inventories to determine excess inventoriesbased on estimated future sales. Excess inventories may be disposed of through factory, clearance catalogs, internet clearance sales andother liquidations. Based on historical results experienced through various methods of disposition, we write down the carrying value ofinventories that are not expected to be sold at or above costs.Deferred Catalog Costs The costs associated with direct response advertising, which consist primarily of catalog production and mailing costs, are capitalizedand amortized over the expected future revenue stream of the catalog19mailings, which approximates four months. The expected future revenue stream is determined based on historical revenue trends developedover an extended period of time. If the current revenue streams were to diverge from the expected trend, our future revenue streams would beadjusted accordingly.Asset Impairment We are exposed to potential impairment if the book value of our assets exceeds their future cash flows. The major components of ourlong-lived assets are store fixtures, equipment and leasehold improvements. The impairment of unamortized costs is measured at the storelevel 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 bookvalue.Sales Returns We must make estimates of future sales returns related to current period sales. Management analyzes historical returns, currenteconomic trends and changes in customer acceptance of our products when evaluating the adequacy of the reserve for sales returns.Income Taxes We have significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, which willreduce taxable income in future periods. Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"states that a valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Areview of all available positive and negative evidence needs to be considered, including a company's current and past performance, themarket environment in which a company operates, length of carryback and carryforward periods, existing contracts or sales backlog that willresult in future profits, etc. Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such ascumulative losses in recent years. Cumulative losses weigh heavily in the overall assessment. As a result of our assessments, weestablished a valuation allowance to reduce our net deferred tax assets to their estimated realizable value of $5.0 million at February 1, 2003and we provided an additional allowance at January 31, 2004 to fully reserve our net deferred tax assets. We do not expect to recognize anytax benefit in future results of operations until an appropriate level of profitability is sustained.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our principal market risk relates to interest rate sensitivity, which is the risk that future changes in interest rates will reduce our netincome or net assets. Our variable rate debt consists of borrowings under the Congress Credit Facility. The interest rates are a function of thebank prime rate or LIBOR. A one percentage point increase in the base interest rate would result in approximately $100,000 change inincome before taxes for each $10 million of borrowings. We have a licensing agreement in Japan which provides for royalty payments based on sales of J. Crew merchandise as denominatedin yen. We have entered into forward foreign exchange contracts from time to time in order to minimize this risk. At January 31, 2004, therewere no forward foreign exchange contracts outstanding. We enter into letters of credit to facilitate the international purchase of merchandise. The letters of credit are primarily denominated inU.S. dollars. Outstanding letters of credit at January 31, 2004 were $39.5 million, including $3.5 million of standby letters of credit.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements are set forth herein commencing on page F-1 of this Report.20ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.ITEM 9A. CONTROLS AND PROCEDURES With the participation of the company's management, including the Chief Executive Officer and the Acting Chief Financial Officer, thecompany has conducted an evaluation of its disclosure controls and procedures as of the end of the period covered by this report. Based onsuch evaluation, the company's Chief Executive Officer and the Acting Chief Financial Officer have concluded that the company's disclosurecontrols and procedures were effective as of the end of the period covered by this report. Such officers also confirm that there were no significant changes in the company's internal controls over financial reporting during theperiod covered by this report that have materially affected, or are reasonably likely to materially affect, the company's internal controls overfinancial reporting.21PART III Information required by items 10 - 14 with respect to Operating Corp. and Intermediate have been omitted pursuant to GeneralInstruction I of Form 10-K. Information required by items 10 -14 with respect to Holdings is described below.ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the name, age and position of individuals who are serving as directors and executive officers of Holdings asof April 1, 2004.Name Age PositionMillard Drexler 59 Chief Executive Officer, Chairman of the Board and DirectorJeffrey Pfeifle 45 PresidentRoxane Al-Fayez 47 Executive Vice President, Catalog & e-CommerceMichael Dadario 45 Executive Vice President, StoresTracy Gardner 39 Executive Vice President, Merchandising, Planning &ProductionPaul Fusco 55 Senior Vice President, Chief Information OfficerScott Hyatt 46 Senior Vice President, ManufacturingNicholas Lamberti 61 Vice President, Corporate ControllerRichard Boyce 49 DirectorJonathan Coslet 39 DirectorJames Coulter 44 DirectorSteven Grand-Jean 61 DirectorThomas Scott 38 DirectorStuart Sloan 60 DirectorJosh Weston 75 DirectorEmily Woods 42 Director(1)Amanda Bokman was also recently hired as Executive Vice President and Chief Financial Officer, effective on May 10, 2004. Millard Drexler. Mr. Drexler became Chief Executive Officer in January 2003 and Chairman of the Board and Director in March 2003.Before joining Holdings, Mr. Drexler was Chief Executive Officer of The Gap, Inc. from 1995 until September 2002, and prior thereto he wasPresident of The Gap, Inc. since 1987. Mr. Drexler also serves on the Board of Directors of Apple Computer Inc. Jeffrey Pfeifle. Mr. Pfeifle became President in February 2003. Before joining Holdings, Mr. Pfeifle was Executive Vice President,Product and Design of the Old Navy division of The Gap, Inc. from 1995. Roxane Al-Fayez. Ms. Al-Fayez became Executive Vice President, Catalog & e-Commerce in October 2003. Before joining Holdings,she was Vice President of Operations, Gap, Inc. Direct for six years. Michael Dadario. Mr. Dadario became Executive Vice President, Stores in January 2003. Before joining Holdings, Mr. Dadario was aretail consultant with Sense Consulting from February 2000 until the end of 2002 and Executive Vice President (retail store operations) of theBanana Republic division of The Gap, Inc. for more than five years. Tracy Gardner. Ms. Gardner became Executive Vice President, Merchandise, Planning & Production in March 2004. Prior to joiningHoldings, Ms. Gardner held various positions at The Gap, Inc., including Senior Vice President of Adult Merchandising for GAP brand from2002 to March 2004, Vice-President of Womens' Merchandising for the Banana Republic division from 2001 to 2002, Vice-President ofMens' Merchandising for the Banana Republic division from 1999 to 2001, and Divisional Merchandising Manager of Mens' Wovens for theBanana Republic division prior to 1999.22 Paul Fusco. Mr. Fusco has been Senior Vice President, Chief Information Officer since 2000 and prior to that he was Vice President—Application Development from 1999. Before joining Holdings, Mr. Fusco was Vice President—Client Relationship Executive for EnterpriseApplications of Metropolitan Life Insurance Company from 1996. Scott Hyatt. Mr. Hyatt has been Senior Vice President, Manufacturing since 1998. Before joining Holdings, Mr. Hyatt was VicePresident, Production and Sourcing of the Express division of Limited Brands, a retail apparel company, from 1996 to 1998. Nicholas Lamberti. Mr. Lamberti has been Vice President, Corporate Controller for more than five years. Effective August 22, 2003,Mr. Lamberti became acting Chief Financial Officer and will continue to serve in such role until Ms. Bokman commences employment onMay 10, 2004. Richard Boyce. Mr. Boyce has been a Director since 1997 and has periodically served as Chief Executive Officer between 1997 and1999 while also providing operating oversight to the remainder of the Texas Pacific Group portfolio. Mr. Boyce is a Senior Operating Partnerof Texas Pacific Group and joined Texas Pacific Group in 1997. He served as Chairman of Favorite Brands International Holding Corp.,which filed for protection under Chapter 11 of the Bankruptcy Code in 1999. Mr. Boyce is also the Chairman of the Board of Directors ofBurger King Corporation and a Director of ON Semiconductor Corporation, Spirit Group Holdings, Ltd. and Kraton Polymers. Jonathan Coslet. Mr. Coslet became a Director in 2003. Mr. Coslet is a senior Partner of Texas Pacific Group and is responsible forthe investment firm's generalist and healthcare investment activities. Prior to joining Texas Pacific Group, Mr. Coslet worked in theinvestment banking department of Donaldson, Lufkin & Jenrette, specializing in leveraged acquisitions and high yield finance from 1991 to1993. Mr. Coslet also serves on the Board of Directors of Burger King Corporation, Endurance Specialty Holdings Ltd., Oxford HealthPlans, Inc., Petco Animal Supplies, Inc. and Quintiles Transnational Corp. James Coulter. Mr. Coulter has been a Director since 1997. Mr. Coulter is a founding Partner of Texas Pacific Group, and has beenManaging General Partner of Texas Pacific Group for more than eight years. Mr. Coulter also serves on the Board of Directors of ConexantSystems, Inc., Seagate Technology, Inc. and Zhone Technologies. Steven Grand-Jean. Mr. Grand-Jean became a Director in 2003. Mr. Grand-Jean has been President of Grand-Jean CapitalManagement for more than five years. Thomas Scott. Mr. Scott has been a Director since 2002. Mr. Scott is a founding partner of Plum TV, a television station network inselect resort markets, and served as its Chief Executive Officer and Executive Co-Chairman since September 2003. He is also a foundingpartner of Nantucket Allserve Inc., a beverage supplier, and has served as Co-Chairman thereof since 1989 and Co-Chairman and Co-ChiefExecutive Officer from 1989 to 2000. Mr. Scott has also served as Co-Chairman of Shelflink, a supply chain software company, since 2000.Mr. Scott is married to Emily Woods, a Director of Holdings. Stuart Sloan. Mr. Sloan has been a Director since September 2003. Mr. Sloan is the founder of Sloan Capital Companies, a privateinvestment company, and has been a Principal thereof since 1984. Mr. Sloan also serves on the Board of Directors of AnixterInternational, Inc. and Rite Aid Corp. Josh Weston. Mr. Weston has been a Director since 1998. Mr. Weston has also served as Honorary Chairman of the Board ofDirectors of Automatic Data Processing, a computing services business, since 1998. Mr. Weston was Chairman of the Board of AutomaticData Processing from 1996 until 1998, and Chairman and Chief Executive Officer for more than five years prior thereto. Mr. Weston alsoserves on the Board of Directors of Gentiva Health Services, Inc., Aegis Communications Group, Inc. and Russ Berrie & Company, Inc.23 Emily Woods. Ms. Woods has served as Chairman of the Board of Directors of Holdings since 1997 and resigned from this position inMarch 2003, although she continues to serve as a Director. Ms. Woods started work at J. Crew the year that it was founded in 1983 and hasserved as Chief Executive Officer from 1997 to 2000 and Vice Chairman of Holdings prior thereto. Ms. Woods is married to Thomas Scott, aDirector of Holdings.Our Board of Directors Our Board of Directors currently has 9 members. Directors serve until the next annual meeting of shareholders or until his or hersuccessor has been elected and qualified. Directors may be removed at any time, with or without cause, by vote of our shareholders. Ourboard of directors currently has two standing committees—an Audit Committee and a Compensation Committee. Audit Committee. The primary duties of the Audit Committee include assisting the Board of Directors in its oversight of (i) theintegrity of the Company's financial statements and financial reporting process; (ii) the integrity of the company's internal controls regardingfinance, accounting and legal compliance; and (iii) the independence and performance of the company's independent auditors and internalaudit function. The Committee also reviews our critical accounting policies, our annual and quarterly reports on Form 10-K and Form 10-Q,and our earnings releases before they are published. The Committee has sole authority to engage, evaluate and replace the independentauditor. The Committee also has the authority to retain special legal, accounting and other consultants it deems necessary in theperformance of its duties. The Committee meets regularly with our management, independent auditors and internal auditors to discuss ourinternal controls and financial reporting process and also meets regularly with the independent auditors and internal auditors in private. The current members of the Audit Committee are Messrs. Boyce, Grand-Jean and Weston (Chairperson). The Board of Directors hasdetermined that Josh Weston qualifies as an "audit committee financial expert" and is independent under the applicable rules of theSecurities and Exchange Commission. Compensation Committee. The primary duty of the Compensation Committee is to discharge the responsibilities of the Board ofDirectors relating to compensation practices for the company's executive officers and other key employees, as the Committee maydetermine, to ensure that management's interests are aligned with the interests of company's equity holders. The Committee also reviewand makes recommendations to the Board of Directors with respect to the company's employee benefits plans, compensation and equitybased plans and compensation of Directors. The current members of the Compensation Committee are Messrs. Coulter (Chairperson) andSloan and Ms. Woods. Compensation of Directors. Directors who are employees or representatives of Texas Pacific Group do not receive anycompensation for their services. In fiscal 2003, all other Directors received a non-qualified stock option to purchase 5,000 shares of Holdingscommon stock as compensation for their services. These options have an exercise price equal to $6.82 per share, have a term of 10 yearsand become exercisable and vest in equal annual installments over a four year period. If a Director ceases to serve as a Director for anyreason, other than removal for cause, any options vested at the time of the termination of his or her services will remain exercisable for90 days (but not longer than the 10 year term of the options).24Code of Ethics and Business Practices We have a Code of Ethics and Business Practices that applies to all of our directors and employees, including to our chief executiveofficer, chief financial officer, controller and our other senior financial officers. A copy of the Code is filed as an exhibit to this Annual Report onForm 10-K and is available free of charge upon written request to the Corporate Secretary, J.Crew Group, Inc., 770 Broadway, New York, NY10003.ITEM 11. EXECUTIVE COMPENSATION The following table sets forth compensation paid by Holdings for fiscal 2003, 2002 and 2001:•to our chief executive officer during fiscal 2003; •to each of the four other most highly compensated executive officers as of the end of fiscal 2003; and •to two additional executive officers who were not employed as of the end of fiscal 2003. Long-Term Compensation Annual Compensation Awards Payouts Numbers ofSecuritiesUnderlyingOptions/SARS(1) Name And Principal Position FiscalYear Salary($) Bonus($) Other($) RestrictedStockAward(s)(1) LTIPPayouts($) All OtherCompensation($)(2)Millard DrexlerChief Executive Officer andChairman 20032002 200,000— —— 500,000—(3)(4(5))—2,231,704(11)—— ——Jeffrey PfeiflePresident 20032002 760,000— 2,400,000—(6)—— (7—)—390,548(11)400,000— ——Kathy Boyer(8)Former Executive Vice-President, Merchandising 20032002 370,308218,700 —— —— —— —35,000 —— 223,70042,600Michael DadarioExecutive Vice-President,Stores 20032002 425,00096,400 25,00025,000 —— —— —50,000 —— 37,900—Paul FuscoSenior Vice President,Chief Information Officer 200320022001 265,000265,000245,800 ——126,000 ——— ——— 15,000—15,000 ——— 9,3009,1005,250Scott HyattSenior Vice President,Manufacturing 200320022001 364,000364,000353,200 ——183,800 ——— ——— ——10,000 ——— 10,5009,7005,250Scott Gilbertson(9)Former Chief OperatingOfficer 20032002 450,000— 250,000— —— —(10)—245,487 —— 717,400—(1)There is no established public market for shares of Holdings common stock. Holders of restricted stock have the same right to receivedividends as other holders of Holdings common stock. Holdings has not paid any cash dividends on its common stock.As of January 31, 2004, the named executive officers held the following aggregate number of restricted shares of Holdings commonstock: Mr. Drexler—262,523 vested shares (of which 55,793 shares are held by a corporation of which Mr. Drexler is a principal) and602,262 unvested shares; Mr. Pfeifle—40,449 vested shares and 121,349 unvested shares; Mr. Gilbertson—27,896 vested sharesand no unvested shares.25(2)For Ms. Boyer, this includes $207,500 in severance compensation payable pursuant to her separation agreement and $16,200 and$42,600 in relocation compensation in fiscal 2003 and fiscal 2002, respectively.For Mr. Dadario, this includes $36,900 in relocation compensation in fiscal 2003.For Mr. Gilbertson, this includes (i) $675,000 in severance compensation payable pursuant to his separation agreement and(ii) $42,400 in relocation compensation in fiscal 2003.We refer you to "Employment Agreements and Other Compensation Arrangements—Separation Agreements" for a description ofMs. Boyer's and Mr. Gilbertson's separation agreements.All other amounts represent contributions made by Holdings on behalf of the named executive officers to its 401(k) plan.(3)This amount represents the reimbursement of certain business expenses to Mr. Drexler in fiscal 2003 in accordance with the terms ofhis services agreement. (4)Mr. Drexler was granted 83,689 shares of Holdings common stock in September 2003, of which 5,976 shares vested immediatelyupon grant, 19,428 shares vested on January 27, 2004 and the remainder will vest in equal annual installments on January 27,2005, 2006 and 2007. (5)Mr. Drexler was granted 725,303 shares of Holdings common stock in February 2003, of which 181,326 shares vested onJanuary 27, 2004 and the remainder will vest in equal annual installments on January 27, 2005, 2006 and 2007. Mr. Drexler paid$800,000 to Holdings for these shares, which was in excess of their fair market value at the time of grant. A corporation of whichMr. Drexler is a principal was also granted 55,793 shares of Holdings common stock, all of which vested immediately upon grant. (6)This amount represents a $2,000,000 sign-on bonus and a $400,000 guaranteed annual bonus for fiscal 2003. (7)Mr. Pfeifle was granted 111,585 shares of Holdings common stock in February 2003, of which 27,896 shares vested on February 1,2004 and the remainder will vest in equal annual installments on February 1, 2005, 2006 and 2007. Mr. Pfeifle was also granted50,213 shares of Holdings common stock in September 2003, of which 12,553 shares vested on February 1, 2004 and the remainderwill vest in equal annual installments on February 1, 2005, 2006 and 2007. (8)Ms. Boyer's employment terminated in January 2004. We refer you to "Employment Agreements and Other CompensationArrangements—Separation Agreements" for a description of Ms. Boyer's separation agreement. (9)Mr. Gilbertson's employment began in January 2003 and terminated in January 2004. We refer you to "Employment Agreementsand Other Compensation Arrangements—Separation Agreements" for a description of Mr. Gilbertson's separation agreement. (10)Mr. Gilbertson was granted 111,585 shares of Holdings common stock in January 2003, which were to vest in equal annualinstallments on January 27, 2004, 2005, 2006 and 2007. As a result of the termination of Mr. Gilbertson's employment, 27,896 ofthese restricted shares vested and the remainder of them were forfeited immediately in accordance with the terms of his separationagreement. (11)Messrs. Drexler and Pfeifle surrendered a portion of these options to Holdings in September 2003. In consideration of the surrender,we agreed to grant replacement options to Messrs. Drexler and Pfeifle following a six month period at exercise prices not less than fairmarket value on the date of grant. We refer you to "Employment Agreements and Other Compensation Arrangements—EmploymentAgreements" for information on this agreement.26Option Grants in Last Fiscal Year The following table shows information concerning stock options to purchase shares of Holdings common stock granted to any of thenamed executive officers during fiscal 2003. Potential RealizableValue at AssumedAnnual Rates of StockPrice Appreciation forOption Term(2) Individual Grants Number ofSecuritiesUnderlyingOptionsGranted(1) Percent ofTotal OptionsGranted toEmployees inFiscal Year Name ExercisePrice($/Sh) ExpirationDate 5%($) 10%($)Millard Drexler 557,926836,889836,889(3)(3)478282%%%$$$6.8225.0035.00 201320132013 0(2)0(2)0(2) 0(2)0(2)0(2)Scott Gilbertson(4) 111,58566,95166,951 977%%%$$$6.8225.0035.00 201320132013 0(2)0(2)0(2) 0(2)0(2)0(2)Jeffrey Pfeifle(3) 167,378111,585111,585(3)(3)141111%%%$$$6.8225.0035.00 201320132013 0(2)0(2)0(2) 0(2)0(2)0(2)Paul Fusco 15,000 1%$6.82 2013 0(2) 0(2)(1)Holdings has not granted any SARs. (2)There is no established public market for shares of Holdings' common stock. Based on customary corporate valuation techniques,including an analysis of the discounted value of Holdings' potential earnings and cash flow, the valuation of comparable companiesand current book value per share, the value of a share of Holdings' common stock was estimated to be less than $1 as of January 1,2003. The Company believes that this value is still appropriate as of January 31, 2004. As such, all outstanding options had exerciseprices that exceeded the value of the stock as of such date, and the potential realizable value and value of unexercised in-the-moneyoptions is shown as zero. (3)We refer you to footnote 11 to the Executive Compensation Table for information on Messrs. Drexler and Pfeifle's surrender of theseoptions in September 2003. (4)Mr. Gilbertson's employment terminated in January 2004, as a result of which a portion of these options vested and the remainderwere forfeited automatically. We refer you to "Employment Agreements and Other Compensation Arrangements—SeparationAgreements" for information on Mr. Gilbertson's separation agreement.27Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values The following table shows the number of stock options held to purchase shares of Holdings common stock by the named executiveofficers of Holdings at the end of fiscal 2003. The named executive officers did not exercise any stock options in fiscal 2003.Name Shares Acquiredon Exercise(#) Value Realized(#) Number of Securities UnderlyingUnexercised Options at Fiscal YearEndExercisable/Unexercisable Value of Unexercised In-the-MoneyOptions at Fiscal Year End($)(1)Exercisable/UnexercisableMillard Drexler(2) 0 0/557,926 0/0Jeffrey Pfeifle(2) 0 0/167,378 0/0Kathy Boyer(3) 0 7,000/0 0/0Michael Dadario 0 10,000/40,000 0/0Paul Fusco 0 16,600/28,400 0/0Scott Gilbertson(4) 0 114,372/0 0/0Scott Hyatt 0 29,000/6,000 0/0(1)There is no established public market for shares of Holdings common stock. Based on customary corporate valuation techniques,including an analysis of the discounted value of Holdings' potential earnings and cash flow, the valuation of comparable companiesand current book value per share, the value of a share of Holdings' common stock was estimated to be less than $1 as of January 1,2003. The Company believes that this value is still appropriate as of January 31, 2004. As such, all outstanding options had exerciseprices that exceeded the value of the stock as of such date, and the potential realizable value and value of unexercised in-the-moneyoptions is shown as zero. (2)We refer you to footnote 11 to the Executive Compensation Table for information on the surrender by Messrs. Drexler and Pfeifle of aportion of their options in September 2003. (3)Ms. Boyer's employment terminated in January 2004, as a result of which these options have been forfeited in accordance with theterms of our stock option plan. (4)Mr. Gilbertson's employment terminated in January 2004, as a result of which all of his unvested options have been forfeited inaccordance with the terms of our stock option plan.Long Term Incentive Plan The following table shows the eligibility of our President to receive long-term incentive compensation pursuant to our employmentagreement with him. At the end of fiscal 2003, Mr. Pfeifle received a payment equal to $400,000 under this arrangement. We refer you to"Employment Agreements and Other Compensation Arrangements—Employment Agreements" for information on the payout schedule.Long Term Incentive Plan/Awards in Last Fiscal Year Estimated Future Payouts underNon-Stock-Price-Based Plans Numberof Shares,Units orOtherRights(#) Performanceor OtherPeriod UntilMaturation orPayoutName Threshold ($ or #) Target($ or #) Maximum ($ or #)Jeffrey Pfeifle $400,000 1/31/03-4/30/05 $800,000 $1,000,000 $1,200,00028Employment Agreements and Other Compensation ArrangementsEmployment Agreements Millard Drexler. Mr. Drexler has a services agreement with the Company pursuant to which he will serve as Chief Executive Officerfor five years beginning on January 27, 2003, provided that Mr. Drexler can step down as Chief Executive Officer after January 2006 andserve only as Executive Chairman. The agreement provides for a minimum annual base salary of $200,000, an annual bonus based on theachievement of earnings objectives to be determined each year, and reimbursement of business expenses, provided that such totalcompensation not exceed $700,000 per year. The agreement also provides for (i) the grant of options to purchase 557,926 shares of Holdingscommon stock at an exercise price equal to $6.82 per share, which we refer to as initial options, and (ii) the grant of premium options topurchase an additional 836,889 shares at an exercise price equal to $25.00 per share and 836,889 shares at an exercise price equal to$35.00 per share, which we refer to as premium options. The initial options and the premium options vest in equal annual installments overfour years commencing on the second anniversary of the grant date. The agreement also provides for the grant of 55,793 immediately vestedshares of Holdings common stock and the grant of 725,303 shares of Holdings common stock, which we refer to as the "Drexler RestrictedShares." Mr. Drexler paid Holdings $200,000 for the initial options and $800,000 for the Drexler Restricted Shares. Pursuant to the agreement, if Mr. Drexler's employment is terminated without "cause" or for "good reason" (each as defined in theservices agreement), Mr. Drexler will be entitled to receive his base salary for one year, the immediate vesting of any unvested DrexlerRestricted Shares and the immediate vesting of that portion of the initial options and the premium options that would have become vestedand exercisable on the anniversary of the grant date immediately following the termination date. If such termination occurs after a "change incontrol" (as defined in the services agreement), all of the unvested initial options and premium options will immediately vest and becomeexercisable. In September 2003, Mr. Drexler received an additional grant of 83,689 Drexler Restricted Shares, of which 5,976 shares vestedimmediately and the remainder vest over time. Mr. Drexler also surrendered all of his premium options to Holdings in September 2003. Inconsideration of the surrender, we agreed to grant to Mr. Drexler replacement premium options following a six month period at exercise pricesnot less than fair market value on the date of grant with the same vesting schedule and other terms and conditions as the surrenderedpremium options. This agreement was approved by a majority of the Board of Directors. We refer you to footnotes 4 and 5 to the Executive Compensation Table for information on the vesting of the Drexler Restricted Shares. Jeffrey Pfeifle. Mr. Pfeifle has an employment agreement with the Company pursuant to which he will serve as President for fiveyears beginning on February 1, 2003, subject to automatic one-year renewals. The agreement provides for a minimum annual base salary of$760,000; one-time bonuses in the total amount of $2,000,000 payable after his commencement date; an annual bonus based on theachievement of earnings objectives to be determined each year provided that the minimum bonus payable for fiscal year 2003 would be$400,000; a long-term cash incentive payment between $800,000 and $1,200,000 based on the achievement of performance objectives to bedetermined each year payable in installments at the end of fiscal years 2003 and 2004; and reimbursement of business expenses. Theagreement also provides for (i) the grant of options to purchase 167,378 shares of Holdings common stock at an exercise price equal to$6.82 per share, which we refer to as initial options, and (ii) the grant of premium options to purchase an additional 111,585 shares at anexercise price equal to $25.00 per share and 111,585 shares at an exercise price equal to $35.00 per share, which we refer to as premiumoptions. The initial options and the premium options vest in equal annual installments over four years commencing on the secondanniversary of the grant date. The agreement29also provides for the grant of 111,585 shares of Holdings common stock, which we refer to as the "Pfeifle Restricted Shares." Pursuant to the agreement, if Mr. Pfeifle's employment is terminated without "cause" or for "good reason" (each as defined in theemployment agreement), Mr. Pfeifle will be entitled to receive his base salary for two years, a pro-rated amount of any bonus that he wouldhave otherwise received for the fiscal year ending before the termination date, and the immediate vesting of that portion of the initial options,premium options and Pfeifle Restricted Shares that would have become vested and exercisable on the anniversary of the grant dateimmediately following the termination date. If such termination occurs after a "change in control" (as defined in the services agreement) orwithin six months before a "change in control" if in contemplation thereof, all of the unvested initial options, premium options and PfeifleRestricted Shares will immediately vest and become exercisable. If such termination occurs before February 1, 2006, Mr. Pfeifle is entitled toreceive a minimum of $2,000,000 in the form of cash severance compensation. In September 2003, Mr. Pfeifle received an additional grant of 50,213 Pfeifle Restricted Shares to vest over time. He also surrendered allof his premium options to Holdings in September 2003. In consideration of the surrender, we agreed to grant to Mr. Pfeifle replacementpremium options following a six month period at exercise prices not less than fair market value on the date of grant with the same vestingschedule and other terms and conditions as the surrendered premium options. This agreement was approved by a majority of the Board ofDirectors. We refer you to footnote 7 to the Executive Compensation Table for information on the vesting of the Pfeifle Restricted Shares.Separation Agreements Kathy Boyer. Ms. Boyer's employment terminated effective January 5, 2004. Pursuant to her separation agreement, she received alump sum amount of $103,750 and the continuation of her base salary and medical benefits for three months after her termination date. Scott Gilbertson. Mr. Gilbertson had an employment agreement with the Company pursuant to which he would serve as ChiefOperating Officer for five years commencing January 27, 2003, subject to automatic one-year renewals. The agreement provided for aminimum annual base salary of $450,000 and an annual bonus based on achievement of earnings objectives to be determined each yearprovided that the minimum bonus payable for fiscal year 2003 would be $250,000. The agreement also provided for (i) the grant of options topurchase 111,585 shares of Holdings common stock at an exercise price equal to $6.82 per share, which we refer to as initial options, and(ii) the grant of premium options to purchase an additional 66,951 shares at an exercise price equal to $25.00 per share and 66,951 shares atan exercise price equal to $35.00 per share, which we refer to as premium options. The initial options and the premium options were to vestover a four year period in equal annual installments commencing on the second anniversary of the grant date. The agreement also providedfor the grant of 111,585 shares of Holdings common stock, which we refer to as the "Gilbertson Restricted Shares." We refer you to footnote10 to the Executive Compensation Table for information on the scheduled vesting of the Gilbertson Restricted Shares. Pursuant to the agreement, if Mr. Gilbertson's employment was terminated without "cause" or for "good reason" (each as defined in theemployment agreement), Mr. Gilbertson would be entitled to receive his base salary for eighteen months, a pro-rated amount of any bonusthat he would have otherwise received for the fiscal year ending before the termination date, and the immediate vesting of that portion of theinitial options, premium options and restricted stock that would have become vested and exercisable on the anniversary of the grant dateimmediately following the termination date. If such termination occurs after a "change in control" (as defined in employment agreement), allof the30unvested initial options, premium options and restricted stock would immediately vest and become exercisable. Mr. Gilberton's employment terminated in January 2004. Pursuant to his separation agreement, he is entitled to the continuation of hisbase salary for eighteen months and he received the payment of his guaranteed minimum bonus payable for fiscal year 2003. In addition, aninitial option to purchase 27,896 shares, premium options to purchase 33,476 shares and 27,896 Gilbertson Restricted Shares vestedupon his termination and the remainder of his initial options, premium options and Gilbertson Restricted Shares were forfeited immediately.These vested options will terminate on January 31, 2006. At the time of his termination, Mr. Gilbertson also had vested options to purchase25,000 shares at an exercise price equal to $6.82 per share and 28,000 shares at an exercise price equal to $10.00 per share from priorgrants.Executive Severance Arrangements Messrs. Fusco and Hyatt each have an agreement with the Company which provides that, in the event of a termination without "cause"(as defined in the agreement), he will receive a continuation of his base salary and medical benefits for a period of one year after thetermination date and the payment of any bonus that he would otherwise have received for the fiscal year ending before the termination date.Shareholders Agreements The Drexler Restricted Shares, the Pfeifle Restricted Shares, the Gilbertson Restricted Shares and any shares of Holdings commonstock acquired by any of the named executive officers described above pursuant to the exercise of options are subject to a shareholders'agreement providing for certain transfer restrictions, registration rights and customary tag-along and drag-along rights. In addition, Mr. Drexler's shareholders' agreement provides him with certain rights to appoint three directors by himself and threeadditional directors by mutual agreement with Texas Pacific Group, consent to our operating/capital budgets, and antidilution and co-investment rights. Pursuant to this right, Mr. Drexler appointed Steven Grand-Jean as a director in March 2003 and Stuart Sloan as a directorin September 2003. The agreement also requires Mr. Drexler to pay $1.0 million to us if Jeffrey Pfeifle, current President of the Company isterminated for cause or resigns without good reason, or if Mr. Pfeifle is terminated without cause with Mr. Drexler's consent or for goodreason as a result of actions approved by Mr. Drexler before February 1, 2005. Mr. Drexler is also required to pay the excess of $480,000 overMr. Pfeifle's pro-rata bonus if such termination is without cause or for good reason. If such termination occurs between February 1, 2004 andFebruary 1, 2005, Mr. Drexler is also required to pay us the amount of any long-term incentive paid to Mr. Pfeifle, not to exceed $400,000.Compensation Committee Interlocks and Insider Participation In fiscal 2003, the members of our Compensation Committee were Messrs. Coulter (Chairman) and Sloan and Ms. Woods. Prior toAugust 2003, Mr. Boyce was Chairman of the Compensation Committee. Ms. Woods is a former Chairman, former Chief Executive Officerand former Vice-Chairman of the company. Mr. Boyce is also a former Chief Executive Officer of the company.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding the beneficial ownership of the common stock of Holdings as of April 1, 2004 foreach person who is known to Holdings to be the beneficial owner of315% or more of Holdings common stock. The holders listed have sole voting power and investment power over the shares held by them,except as indicated by the notes following the table.Title of Class Name and Addressof Beneficial Owner Amount and Nature ofBeneficial Ownership Percent ofClass Common stock TPG Partners II, L.P.301 Commerce Street,Suite 3300Fort Worth, TX 76102 8,853,386shares(1)(4) 58%Common stock Emily WoodsJ. Crew Group, Inc.770 BroadwayNew York, NY 10003 2,429,177 shares(2) 16%Common stock Millard S. DrexlerJ. Crew Group, Inc.770 BroadwayNew York, NY 10003 1,802,112 shares(3) 11%(1)These shares of common stock are beneficially owned by Texas Pacific Group and the following affiliates of Texas Pacific Group(collectively, "TPG Affiliates"): TPG Parallel II L.P., TPG Partners II L.P., TPG Investors II, L.P., and TPG Bacchus II, LLC. (2)Includes 164,000 shares not currently owned but which are issuable upon the exercise of stock options awarded under our stockoption plan that are currently exercisable. (3)Includes (i) 206,730 restricted shares owned by Mr. Drexler; (ii) 55,793 restricted shares beneficially owned by a company of whichMr. Drexler is a principal and (iii) 1,539,589 shares not currently owned but which are issuable to Mr. Drexler's company upon hisexercise of an exchange right. We refer you to "Certain Relationships and Related Transactions" for more information. (4)Includes 1,539,589 shares not currently owned but which are issuable to TPG Bacchus II, LLC upon its exercise of an exchangeright. We refer you to "Certain Relationships and Related Transactions" for more information. The following table sets forth information regarding the beneficial ownership of each class of equity securities of Holdings as of April 1,2004 for (a) each director, (b) each of the named executive officers and (c) all directors and executive officers as a group. The holders listedhave sole voting32power and investment power over the shares held by them, except as indicated by the notes following the table.Title of Class Name of Beneficial Owner Amount and Nature ofBeneficial Ownership Percent ofClass Common stock Richard Boyce 55,200(1)* Common stock Jonathan Coslet 8,853,386(2)58%Common stock James Coulter 8,853,386(2)58%Common stock Steven Grand-Jean 1,250(1)* Common stock Thomas Scott 1,250(1)* Common stock Stuart Sloan 1,250(1)* Common stock Josh Weston 26,728(3)* Common stock Emily Woods 2,429,177(4)15%Common stock Kathy Boyer(5) 0 * Common stock Michael Dadario 10,000(1)* Common stock Millard Drexler 1,802,112(6)11%Common stock Paul Fusco 21,350(1)* Common stock Scott Gilbertson(7) 108,792 * Common stock Scott Hyatt 29,000(1)* Common stock Jeffrey Pfeifle 40,449 * Common stock All directors and executive officersas a group 13,379,944 87%Series A preferred stock Jonathan Coslet 73,475(2)79%Series A preferred stock James Coulter 73,475(2)79%Series A preferred stock Josh Weston 60 * Series A preferred stock Emily Woods 2,979 3%Series A preferred stock All directors and executive officersas a group 76,514(2)83%*Represents less than 1% of the class. (1)These are shares not currently owned but which are issuable upon the exercise of stock options awarded under our stock option planthat are currently exercisable or become exercisable within 60 days. (2)Attributes ownership of the shares beneficially owned by TPG Affiliates to Messrs. Coslet and Coulter, who are partners of TexasPacific Group. Includes 1,539,589 shares not currently owned but which are issuable to TPG Bacchus II, LLC upon the exercise ofan exchange right. We refer you to "Certain Relationships and Related Transactions" for more information. Messrs. Coslet andCoulter disclaim beneficial ownership of the shares owned by TPG Affiliates. (3)Includes 1,250 shares not currently owned but which are issuable upon the exercise of stock options awarded under our stock optionplan that are currently exercisable or become exercisable within 60 days. (4)Includes 164,000 shares not currently owned but which are issuable upon the exercise of stock options awarded under our stockoption plan that are currently exercisable or become exercisable within 60 days. (5)Ms. Boyer's employment terminated in January 2004. (6)Attributes ownership of the shares beneficially owned by Mr. Drexler's company to Mr. Drexler. Includes 1,539,589 shares notcurrently owned but which are issuable to Mr. Drexler's company upon the exercise of an exchange right. We refer you to "CertainRelationships and Related Transactions" for more information. (7)Mr. Gilbertson's employment terminated in January 2004. Includes 80,896 shares not currently owned but which are issuable uponthe exercise of stock options awarded under our stock option plan that are currently exercisable or become exercisable within 60 days.33 We know of no arrangements, including any pledge by any person of our securities, the operation of which may at a subsequent dateresult in a change in control of the company.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Tax Sharing Arrangement Holdings and its subsidiaries entered into a tax sharing agreement providing (among other things) that each of the subsidiaries willreimburse Holdings for its share of income taxes determined as if such subsidiary had filed its tax returns on a "separate return" basis.TPG-MD Investment Notes Payable On February 4, 2003, Operating Corp. entered into a credit agreement with TPG-MD Investment, LLC, an entity controlled by TexasPacific Group and Millard Drexler, which provides for:•Tranche A loan in an aggregate principal amount of $10.0 million; and •Tranche B loan in an aggregate principal amount of $10.0 million. The loans are due in February 2008 and bear interest at 5.0% per annum payable semi-annually in arrears on January 31 and July 31,commencing on July 31, 2003. Interest will compound and be capitalized and added to the principal amount on each interest payment date.Payment of the loans is subordinated in right of payment to the prior payment of all senior debt and on the same terms as Operating Corp.'ssenior subordinated notes. The loans are guaranteed by certain subsidiaries of Operating Corp. The lender has the right, exercisable at anytime prior to the maturity date, to exchange the principal amount of and accrued and unpaidinterest on the loans into shares of common stock of Holdings at an exercise price of $6.82 per share. The lender also has the right to requireOperating Corp. to prepay the Tranche B loan without premium or penalty under certain circumstances. Under the terms of TPG-MD Investment, LLC's operating agreement, the distributions payable to Mr. Drexler under this creditagreement go directly to MDJC LLC, an entity whose sole members are Mr. Drexler and Grand-Jean Capital Management, which is turn isowned by Steven Grand-Jean, a director of the company. As payment for certain financial advisory services that Mr. Grand-Jean rendered toMr. Drexler and pursuant to MDJC LLC's operating agreement, Mr. Grand-Jean is entitled to distributions under certain circumstances fromhis equity interest in MDJC LLC.University Village Lease Stuart Sloan is the President of UV, Inc., which is the general partner of University Village Limited Partnership, the owner and operatorof University Village Shopping Center in Seattle, Washington. On October 14, 2003, we entered into a lease agreement with UniversityVillage Limited Partnership with respect to the lease of 7,400 square feet at the University Village Shopping Center for the operation of one ofour retail stores. The term of the lease is 10 years. We expect to receive an allowance for tenant's improvements in the amount of $450,000from University Village Limited Partnership. Annual rent due under the lease is comprised of (i) base rent payment of $296,000 for yearsone through five and $320,000 for years six through ten and (ii) contingent rent payment based on the store's sales in excess of a specifiedthreshold. The lease also requires us to pay real estate taxes, insurance and certain common area costs. Mr. Sloan's sons are thebeneficiaries of trusts that are limited partners of University Village Limited Partnership.34ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Audit Fees. The aggregate fees billed to us by the independent auditors, KPMG LLP for professional services rendered in connectionwith the audit of our financial statements included in this Annual Report on Form 10-K for fiscal 2003, and for review of our statementsincluded in our Quarterly Reports on Form 10-Q during fiscal 2003, totaled approximately $668,350. The aggregate fees billed to us byKPMG for professional services rendered in connection with the audit of our financial statements included in our Annual Report on Form 10-K for fiscal 2002, and for the review of our financial statements included in our Quarterly Reports on Form 10-Q during fiscal 2002, totaledapproximately $546,200. Audit-Related Fees. The aggregate fees billed to us by KPMG for assurance and related services that are reasonably related to theperformance of the audit and review of our financial statements that are not already reported in the paragraph immediately above totaledapproximately $279,300 and $18,000 for fiscal 2003 and 2002, respectively. These costs primarily related to services provided in connectionwith our exchange offer of outstanding senior discount debentures of Holdings for senior discount contingent principal notes of Intermediatein 2003 and for review of executive compensation agreements in 2002. Pre-Approval Policy. The Audit Committee has established policies on the pre-approval of audit and other services that theindependent auditor may perform for the company. The Committee must pre-approve the annual audit fees payable to the independentauditor on an annual basis. The Committee must also approve on a case-by-case basis their engagement for any other work to be performedfor the company that is not an integral component of the audit services as well as the compensation payable to the independent auditortherefore.35PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1. Financial StatementsThe following financial statements are included in Item 8:(i)Report of KPMG LLP, Independent AuditorsJ. Crew Group, Inc. and subsidiaries(ii)Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003 (iii)Consolidated Statements of Operations—Years ended January 31, 2004, February 1, 2003 and February 2, 2002 (iv)Consolidated Statements of Changes in Stockholders' Deficit—Years ended January 31, 2004, February 1, 2003 andFebruary 2, 2002 (v)Consolidated Statements of Cash Flows—Years ended January 31, 2004, February 1, 2003 and February 2, 2002J. Crew Intermediate, LLC and subsidiaries(vi)Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003 (vii)Consolidated Statements of Operations—Years ended January 31, 2004, February 1, 2003 and February 2, 2002 (viii)Consolidated Statements of Changes in Membership Interests—Year ended January 31, 2004, February 1, 2003 andFebruary 2, 2002 (ix)Consolidated Statements of Cash Flows—Years ended January 31, 2004, February 1, 2003 and February 2, 2002J. Crew Operating Corp. and subsidiaries(x)Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003 (xi)Consolidated Statements of Operations—Years ended January 31, 2004, February 1, 2003 and February 2, 2002 (xii)Consolidated Statements of Changes in Stockholder's Deficit/Equity—Years ended January 31, 2004, February 1,2003 and February 2, 2002 (xiii)Consolidated Statements of Cash Flows—Years ended January 31, 2004, February 1, 2003 and February 2, 2002Notes to consolidated financial statements2.Financial Statement SchedulesSchedule II Valuation and Qualifying Accounts.3.ExhibitsThe exhibits listed on the accompanying Exhibit Index are incorporated by reference herein and filed as part of this report.(b)Reports on Form 8-KThe Company filed the following reports on Form 8-K during the quarter ended January 31, 2004:Current Report on Form 8-K was filed on December 5, 2003 relating to the Company's financial results for the period endedNovember 1, 2003.Current Report on Form 8-K was filed on January 27, 2004 relating to the appointment of Tracy Gardner as Executive Vice-Presidentof Merchandising, Planning and Production and the resignation of Scott Gilbertson as Chief Operating Officer.(c)Exhibit Index36EXHIBIT INDEXArticles of Incorporation and By-Laws3.1 Restated Certificate of Incorporation of J. Crew Group, Inc. Incorporated by reference to Exhibit 3.1 to the RegistrationStatement on Form S-4, File No. 333-42427, filed December 16, 1997 (the "Holdings Registration Statement").3.2 By-laws of J. Crew Group, Inc., as amended. Incorporated by reference to Exhibit 3.2 to the Form 10-K for the fiscal yearended February 3, 2001.3.3 Certificate of Incorporation of J.Crew Operating Corp., as amended. Incorporated by reference to Exhibits 3.1 and 3.2 tothe Registration Statement on Form S-4, File No. 333-4243, filed December 16, 1997 (the "Operating RegistrationStatement").3.4 By-laws of J.Crew Operating Corp., as amended. Incorporated by reference to Exhibit 3 to the Form 10-Q for the periodended October 31, 1998 and Exhibit 3.14 to the Operating Registration Statement.3.5 Certificate of Formation of J.Crew Intermediate LLC. Incorporated by reference to Exhibit 3.1 to the RegistrationStatement on Form S-4, File No. 333-107211, filed July 21, 2003 (the "Intermediate Registration Statement").3.6 Limited Liability Company Agreement of J.Crew Intermediate LLC. Incorporated by reference to Exhibit 3.2 to theIntermediate Registration Statement.Instruments Defining the Rights of Security Holders, Including Indentures4.1 Indenture, dated as of October 17, 1997, between J.Crew Group, Inc. and State Street Bank and Trust Company.Incorporated by reference to Exhibit 4.3 to the Holdings Registration Statement.4.2 Indenture, dated as of October 17, 1997, between J.Crew Operating Corp. and State Street Bank and Trust Company.Incorporated by reference to Exhibit 4.1 to the Operating Registration Statement.4.3 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 HoldingsRegistration Statement.4.4 Stockholders' Agreement, dated as of October 17, 1997, between J. Crew Group, Inc. and the Stockholder signatoriesthereto. Incorporated by reference to Exhibit 4.1 to the Holdings Registration Statement.4.5(a) Stockholders' Agreement, dated as of October 17, 1997, among J. Crew Group, Inc., TPG Partners II, L.P. and EmilyWoods. Incorporated by reference to Exhibit 10.1 to the Group Registration Statement.4.5(b) Amendment to Stockholders' Agreement, dated as of February 3, 2003, among J. Crew Group, Inc., TPG Partners II,L.P. and Emily Woods. Incorporated by reference to Exhibit 4.1 of the Form 8-K filed on February 7, 2003.4.6 Stockholders' Agreement, dated as of September 9, 2002, between J. Crew Group, Inc., TPG Partners II, L.P. andKenneth Pilot. Incorporated by reference to Exhibit 4.6 to the Form 10-K for fiscal year ended February 1, 2003. 374.7 Stockholders' Agreement, dated as of January 24, 2003, among J. Crew Group, Inc., TPG Partners II, L.P. and MillardDrexler. Incorporated by reference to Exhibit 4.1 of the Form 8-K filed on February 3, 2003.4.8 Stockholders' Agreement, dated as of February 20, 2003, among J. Crew Group, Inc., TPG Partners II, L.P. and JeffreyPfeifle. Incorporated by reference to Exhibit 4.1 of the Form 8-K filed on February 26, 2003.4.9 Stockholders' Agreement, dated as of February 12, 2003, among J. Crew Group, Inc., TPG Partners II, L.P. and ScottGilbertson. Incorporated by reference to Exhibit 4.1 of the Form 8-K filed on February 14, 2003.4.10 Credit Agreement, dated as of February 4, 2003, among J. Crew Group, Inc., J. Crew Operating Corp. and certainsubsidiaries thereof, and TPG—MD Investment LLC. Incorporated by reference to Exhibit 10.1 to Form 8-K filed onFebruary 7, 2003.4.11 Indenture, dated as of May 6, 2003, between J. Crew Intermediate LLC and U.S. Bank National Association.Incorporated by reference to Exhibit 4.1 to the Form 8-K filed on May 6, 2003.4.12 Registration Rights Agreement, dated as of May 6, 2003, between J. Crew Intermediate LLC and U.S. Bank NationalAssociation. Incorporated by reference to Exhibit 4.2 to the Form 8-K filed on May 6, 2003.4.13 First Supplemental Indenture, dated as of May 6, 2003, between J. Crew Intermediate LLC and U.S. Bank NationalAssociation, as successor trustee to State Street Bank and Trust Company. Incorporated by reference as Exhibit 4.3 tothe Form 8-K filed on May 6, 2003.Material Contracts10.1(a) Loan and Security Agreement, dated as of December 23, 2002, by and among J. Crew Operating Corp., J. Crew Inc.,Grace Holmes, Inc. and H.F.D. No. 55, Inc. as Borrowers, J. Crew Group, Inc. and J. Crew International, Inc. asGuarantors, Wachovia Bank, National Association as Arranger, Congress Financial Corporation as Administrative andCollateral Agent, and the Lenders. Incorporated by reference to Exhibit 10.1 of the Form 8-K filed on December 27, 2002.10.1(b) Amendment No. 1, dated as of February 7, 2003, to the Loan and Security Agreement. Incorporated by reference toExhibit 10.1 of the Form 8-K filed on February 14, 2003.10.1(c) Amendment No. 2, dated as of April 4, 2003, to the Loan and Security Agreement. Incorporated by reference toExhibit 10.1 of the Form 8-K filed on April 8, 2003.10.2 Credit Agreement, dated as of February 4, 2003, by and between J. Crew Group, Inc., J. Crew Operating Corp., andcertain subsidiaries thereof, and TPG-MD Investment, LLC. Incorporated by reference to Exhibit 10.1 of the Form 8-Kfiled on February 7, 2003.Management Contracts and Compensatory Plans and Arrangements10.3 Amended and Restated J. Crew Group, Inc. 1997 Stock Option Plan. Incorporated by reference to Exhibit 10.1 to theForm 10-Q for the period ended August 3, 2002.10.4(a) J. Crew Group, Inc. 2003 Equity Incentive Plan (the "2003 Plan"). Incorporated by reference to Exhibit 10.4 to theForm 10-K for the fiscal year ended February 1, 2003.10.4(b)* Amendment No. 1 to the 2003 Plan. 3810.5 Separation Agreement, dated April 29, 2002, between the Company and Mark Sarvary. Incorporated by reference toExhibit 10.5(d) to the Form 10-K for the fiscal year ended February 1, 2003.10.6 Separation Agreement, dated October 17, 2002, between the Company and Michael Scandiffio. Incorporated by referenceto Exhibit 10.12 to the Form 10-K for the fiscal year ended February 1, 2003.10.7 Separation Agreement, dated January 30, 2003, between the Company and Blair Gordon. Incorporated by reference toExhibit 10.7(b) to the Form 10-K for the fiscal year ended February 1, 2003.10.8(a) Employment Agreement, dated August 26, 2002, between the Company and Kenneth Pilot. Incorporated by reference toExhibit 10.2 to the Form 10-Q for the period ended August 3, 2002.10.8(b) Separation Agreement, dated January 29, 2003, between the Company and Kenneth Pilot. Incorporated by reference toExhibit 10.8(b) to the Form 10-K for the fiscal year ended February 1, 2003.10.9(a) Services Agreement, dated January 24, 2003, between the Company, Millard S. Drexler, Inc. and Millard Drexler.Incorporated by reference to Exhibit 10.9 to the Form 10-K for the fiscal year ended February 1, 2003.10.9(b)* Option Surrender Agreement, dated September 25, 2003, between the Company and Millard Drexler.10.10(a) Employment Agreement, dated January 24, 2003, between the Company and Jeffrey Pfeifle. Incorporated by referenceto Exhibit 10.10 to the Form 10-K for the fiscal year ended February 1, 2003.10.10(b)* Option Surrender Agreement, dated September 25, 2003, between the Company and Jeffrey Pfeifle.10.11(a) Employment Agreement, dated January 27, 2003, between the Company and Scott Gilbertson. Incorporated byreference to Exhibit 10.11 to the Form 10-K for the fiscal year ended February 1, 2003.10.11(b)* Separation Agreement, dated January 20, 2004, between the Company and Scott Gilbertson.10.12 Separation Agreement, dated March 7, 2003, between the Company and Walter Killough. Incorporated by reference toExhibit 10.12 to the Form 10-K for the fiscal year ended February 1, 2003.10.13 Form of Executive Severance Agreement between the Company and certain executives thereof. Incorporated by referenceto Exhibit 10.14 to Form 10-K for the fiscal year ended February 2, 2002.10.14* Employment Agreement, dated January 23, 2004, between the Company and Tracy Gardner.10.15* Separation Agreement, dated December 23, 2003, and letter agreement dated, January 26, 2004, between theCompany and Kathy Boyer.10.16* Employment Agreement, dated April 10, 2004, between the Company and Amanda Bokman. 39Other Exhibits14* Code of Ethics and Business Practices of the Company.21.1* Subsidiaries of J. Crew Group, Inc.23.1* Consent of KPMG LLP, Independent Auditors.31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes—Oxley Act of 2002.31.2* Certification of Acting Chief Financial Officer pursuant to Section 302 of the Sarbanes—Oxley Act of 2002.32.1* Certification of Chief Executive Officer and Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes—Oxley Act of 2002.*Filed herewith40SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.Date: April 29, 2004 J. CREW GROUP, INC.J. CREW OPERATING CORP.J. CREW INTERMEDIATE LLC By:/s/ MILLARD S. DREXLER Millard S. DrexlerChief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons onbehalf of each registrant and in the capacities indicated, on April 29, 2004.Signature Title /s/ MILLARD DREXLER Millard Drexler Chairman of the Board, Chief Executive Officer and a Director(Principal Executive Officer)/s/ NICHOLAS LAMBERTI Nicholas Lamberti Vice President, Corporate Controller and Acting Chief FinancialOfficer (Principal Financial and Accounting Officer)/s/ RICHARD BOYCE Richard Boyce Director/s/ JONATHAN COSLET Jonathan Coslet Director/s/ JAMES COULTER James Coulter Director/s/ STEVEN GRAND-JEAN Steven Grand-Jean Director/s/ THOMAS SCOTT Thomas Scott Director 41/s/ STUART SLOAN Stuart Sloan Director/s/ JOSH WESTON Josh Weston Director/s/ EMILY WOODS Emily Woods Director42INDEX TO FINANCIAL STATEMENTS Report of KPMG LLP, Independent Auditors F-2J. Crew Group, Inc. and subsidiaries: Consolidated Balance Sheets as of January 31, 2004and February 1, 2003 F-3 Consolidated Statements of Operations—Years EndedJanuary 31, 2004, February 1, 2003 and February 2, 2002 F-4 Consolidated Statements of Changes in Stockholders' Deficit—Years Ended January 31, 2004, February 1, 2003 and February 2, 2002 F-5 Consolidated Statements of Cash Flows—Years Ended January 31,2004, February 1, 2003 and February 2, 2002 F-6J. Crew Intermediate, LLC and subsidiaries: Consolidated Balance Sheets as of January 31, 2004and February 1, 2003 F-7 Consolidated Statements of Operations—Years EndedJanuary 31, 2004, February 1, 2003 and February 2, 2002 F-8 Consolidated Statements of Changes in Membership Interests—Years Ended January 31, 2004, February 1, 2003 and February 2, 2002 F-9 Consolidated Statements of Cash Flows—Years Ended January 31,2004, February 1, 2003 and February 2, 2002 F-10J. Crew Operating Corp. and subsidiaries: Consolidated Balance Sheets as of January 31, 2004and February 1, 2003 F-11 Consolidated Statements of Operations—Years EndedJanuary 31, 2004, February 1, 2003 and February 2, 2002 F-12 Consolidated Statements of Changes in Stockholders' Equity(Deficit)—Years Ended January 31, 2004, February 1, 2003 and February 2, 2002 F-13 Consolidated Statements of Cash Flows—Years Ended January 31,2004, February 1, 2003 and February 2, 2002 F-14Notes to Consolidated Financial Statements F-15Financial Statement Schedules: Schedule II—Valuation and Qualifying Accounts—Years EndedJanuary 31, 2004, February 1, 2003 and February 2, 2002 F-34F-1The Board of Directors and StockholdersJ. Crew Group, Inc, J. Crew Intermediate LLC, and J. Crew Operating Corp.We have audited the consolidated financial statements of J. Crew Group, Inc. ("Holdings"), J. Crew Intermediate LLC, a wholly-ownedsubsidiary of Holdings ("Intermediate"), and J. Crew Operating Corp., a wholly-owned subsidiary of Intermediate ("Operating Corp.") aslisted in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financialstatement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are theresponsibility of the Companies management. Our responsibility is to express an opinion on these consolidated financial statements andfinancial statement schedule based on our audits.We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofHoldings, Intermediate, and Operating Corp. as of January 31, 2004 and February 1, 2003 and the results of their operations and their cashflows for each of the years in the three-year period ended January 31, 2004, in conformity with accounting principles generally accepted in theUnited States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.As discussed in Note 5 to the consolidated financial statements, in the third quarter of fiscal 2003, Holdings adopted Statement of FinancialAccounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity".KPMG LLPMarch 25, 2004New York, NYF-2J. CREW GROUP, INC. ANDSUBSIDIARIES Consolidated Balance Sheets (in thousands) January 31,2004 February 1,2003 Assets Current assets: Cash and cash equivalents $49,650 $18,895 Merchandise inventories 66,028 107,318 Prepaid expenses and other current assets 23,633 24,886 Refundable income taxes 9,320 6,278 Total current assets 148,631 157,377 Property and equipment — at cost: Land 1,710 1,710 Buildings and improvements 11,705 11,705 Furniture, fixtures and equipment 90,898 102,108 Leasehold improvements 176,740 182,226 Construction in progress 3,892 3,161 284,945 300,910 Less accumulated depreciation and amortization 146,565 129,363 138,380 171,547 Deferred income tax assets — 5,000 Other assets 13,500 14,954 Total assets $300,511 $348,878 Liabilities and Stockholders' Deficit Current liabilities: Current portion of long term debt $1,164 $— Accounts payable 49,386 54,921 Other current liabilities 47,789 61,463 Income taxes payable 1,175 2,978 Total current liabilities 99,514 119,362 Deferred credits 56,723 65,141 Long-term debt 516,640 292,000 Preferred stock 92,800 264,038 Stockholders' deficit (465,166) (391,663) Total liabilities and stockholders' deficit $300,511 $348,878 See accompanying notes to consolidated financial statements.F-3J. CREW GROUP, INC. ANDSUBSIDIARIES Consolidated Statements of Operations (in thousands) Years ended January 31, 2004 February 1, 2003 February 2, 2002 Revenues: Net sales $660,628 $732,279 $741,280 Other 27,661 34,103 36,660 688,289 766,382 777,940 Operating costs and expenses: Cost of goods sold, including buying and occupancy costs 435,700 470,300 454,491 Selling, general and administrative expenses 280,464 301,718 303,448 716,164 772,018 757,939 Income/(loss) from operations (27,875) (5,636) 20,001 Interest expense—net (63,844) (40,954) (36,512)Gain on exchange of debt (net of expenses of $2,922) 41,085 — — Insurance proceeds 3,850 1,800 — Loss before income taxes (46,784) (44,790) (16,511)Income taxes (500) 4,200 5,500 Net loss $(47,284)$(40,590)$(11,011) See accompanying notes to consolidated financial statements.F-4J. CREW GROUP, INC. ANDSUBSIDIARIES Consolidated Statements of Changes in Stockholders' Deficit (in thousands, except shares) Common stock Additionalpaid-incapital Retainedearnings(deficit) Treasurystock Deferredcompensation Stockholders'deficit Shares Amount 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 — — — 96 Amortization of restrictedstock — — — — — 661 661 Balance at February 2, 2002 12,238,189 1 70,811 (387,186) (2,351) (318) (319,043) Net loss — — — (40,590) — — (40,590)Preferred stock dividends — — — (33,578) — — (33,578)Issuance of common stock 12,318 — 284 — — — 284 Issuance of restricted stock 1,109,266 — 1,111 — — (311) 800 Amortization of restrictedstock — — — — — 464 464 Balance at February 1, 2003 13,359,773 1 72,206 (461,354) (2,351) (165) (391,663) Net loss — — — (47,284) — — (47,284)Preferred stock dividends — — — (26,260) — — (26,260)Issuance of restricted stock 224,402 — 165 — — (165) — Amortization of restrictedstock — — — — — 41 41 Forfeiture of restricted stock — — — — (62) 62 — Balance at January 31, 2004 13,584,175 1 72,371 (534,898) (2,413) (227) (465,166) See accompanying notes to consolidated financial statements.F-5J. CREW GROUP, INC. ANDSUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) Years ended January 31,2004 February 1,2003 February 22002 Cash flows from operating activities: Net loss $(47,284)$(40,590)$(11,011)Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization 43,075 43,197 39,963 Amortization of deferred financing costs 2,179 4,435 1,997 Non-cash interest expense 26,785 12,313 15,395 Non-cash preferred stock dividends (included in interest expense) 14,206 — — Deferred income taxes 5,000 7,421 (3,460) Non-cash compensation expense 41 (589) 1,574 Gain on exchange of debt (41,085) — — Changes in operating assets and liabilities: Merchandise inventories 41,290 31,600 1,749 Prepaid expenses and other current assets 1,253 2,140 (3,286) Other assets 832 (2,470) (3,416) Accounts payable (5,535) (11,782) 16,998 Other liabilities (19,698) (8,251) (22,012) Income taxes payable (4,845) (12,140) (8,741) Net cash provided by operating activities 16,214 25,284 25,750 Cash flows from investing activities: Capital expenditures (9,908) (26,920) (61,862) Proceeds from construction allowances 2,022 6,502 19,287 Net cash used in investing activities (7,886) (20,418) (42,575) Cash flows from financing activities: Proceeds from long term debt 25,820 — — Costs incurred in refinancing debt (2,617) (3,256) — Repayment of long-term debt (776) — — Proceeds from the issuance of common stock — 1,084 96 Net cash provided by/(used in) financing activities 22,427 (2,172) 96 Increase (decrease) in cash and cash equivalents 30,755 2,694 (16,729)Cash and cash equivalents at beginning of year 18,895 16,201 32,930 Cash and cash equivalents at end of year $49,650 $18,895 $16,201 Supplementary cash flow information: Income taxes paid $345 $453 $6,442 Interest paid $20,400 $19,380 $19,389 Noncash financing activities: Dividends on redeemable preferred stock $26,260 $33,578 $30,442 Interest payable on 131/8% Senior Discount Debentures at February 1, 2003capitalized and added to the principal amount of the debt $4,416 — — Exchange of 16% Senior Discount Contingent Principal Notes of J. CrewIntermediate LLC with a fair value of $87,006,000 for $131,083,000 carrying value of131/8% Senior Discount Debentures of J. Crew Group, Inc. See accompanying notes to consolidated financial statements.F-6J. CREW INTERMEDIATE LLCConsolidated Balance Sheets(in thousands) January 31,2004 February 1,2003Assets Current assets: Cash and cash equivalents $49,650 $18,895 Merchandise inventories 66,028 107,318 Prepaid expenses and other current assets 23,633 24,886 Refundable income taxes 9,320 6,278 Total current assets 148,631 157,377 Property and equipment—at cost: Land 1,710 1,710 Buildings and improvements 11,705 11,705 Furniture, fixtures and equipment 90,898 102,108 Leasehold improvements 176,740 182,226 Construction in progress 3,892 3,161 284,945 300,910 Less accumulated depreciation and amortization 146,565 129,363 138,380 171,547 Investment in 131/8% Senior subordinated debentures of J. Crew Group, Inc. 131,083 — Accrued interest receivable 12,665 — Other assets 13,333 13,646 Total assets $444,092 $342,570 Liabilities and Membership Interests Current liabilities: Current portion of long term debt $1,164 $— Accounts payable 49,386 54,921 Other current liabilities 46,949 56,255 Income taxes payable 1,175 2,978 Deferred income taxes — 910 Total current liabilities 98,674 115,064 Long-term debt 283,269 150,000 Deferred credits 56,723 65,141 Due to J. Crew Group, Inc. 8,506 2,040 Membership interests (3,080) 10,325 Total liabilities and membership interests $444,092 $342,570 See accompanying notes to consolidated financial statements.F-7J. CREW INTERMEDIATE LLCConsolidated Statements of Operations(in thousands) Years Ended January 31 2004 February 1, 2003 February 2, 2002 Revenues: Net sales $660,628 $732,279 $741,280 Other 27,661 34,103 36,660 688,289 766,382 777,940 Operating costs and expenses: Cost of goods sold, including buying and occupancycosts 435,700 470,300 454,491 Selling, general and administrative expenses 280,423 301,254 302,787 716,123 771,554 757,278 Income/(loss) from operations (27,834) (5,172) 20,662 Interest expense—net (42,253) (23,200) (20,890)Insurance proceeds 3,850 1,800 — Gain on exchange of debt 44,077 — — Intercompany interest income 12,665 — — Loss before income taxes (9,495) (26,572) (228)Income taxes 5,410 17,750 167 Net loss $(4,085)$(8,822)$(61) See accompanying notes to consolidated financial statements.F-8J. CREW INTERMEDIATE LLCConsolidated Statement of Changes in Membership Interests($ in thousands)Balance at February 3, 2001 $19,208 Net loss (61) Balance at February 2, 2002 19,147 Net loss (8,822) Balance at February 1, 2003 10,325 Net loss (4,085)Dividends to affiliates (9,320) Balance at January 31, 2004 $(3,080) See accompanying notes to consolidated financial statements.F-9J. CREW INTERMEDIATE LLCConsolidated Statements of Cash Flows(in thousands) Years ended January 31,2004 February 1,2003 February 2,2002 Cash flows from operating activities: Net income/(loss) $(4,085)$(8,822)$(61)Adjustments to reconcile net income/(loss) to net cash provided byoperating activities: Depreciation and amortization 43,075 43,197 39,963 Amortization of deferred financing costs 2,099 4,202 1,770 Deferred income taxes (910) (4,694) 1,873 Non-cash interest expense/interest income 9,717 (1,053) 913 Gain on exchange of debt (44,077) — — Changes in operating assets and liabilities: Merchandise inventories 41,290 31,600 1,749 Prepaid expenses and other current assets 1,253 2,140 (3,286) Other assets 832 (2,470) (3,416) Accounts payable (5,535) (11,782) 16,998 Other liabilities (19,746) (13,439) (21,916) Income taxes payable (4,845) (13,409) (8,741) Net cash provided by operating activities 19,068 25,470 25,846 Cash flows from investing activities: Capital expenditures (9,908) (26,920) (61,862) Proceeds from construction allowances 2,022 6,502 19,287 Net cash used in investing activities (7,886) (20,418) (42,575) Cash flows from financing activities: Proceeds from long term debt 25,820 — — Transfers to affiliate (2,854) 898 — Costs incurred in refinancing debt (2,617) (3,256) — Repayment of long-term debt (776) — — Net cash provided/(used) in financing activities 19,573 (2,358) — Increase (decrease) in cash and cash equivalents 30,755 2,694 (16,729)Cash and cash equivalents at beginning of year 18,895 16,201 32,930 Cash and cash equivalents at end of year $49,650 $18,895 $16,201 Non cash financing activities: Exchange of 16% Senior Discount Contingent Principal Notes ofJ. Crew Intermediate LLC with a face value of $87,006,000 for$131,083,000 carrying value of 131/8% Senior DiscountDebentures of J. Crew Group, Inc. See accompanying notes to consolidated financial statements.F-10J. CREW OPERATING CORP. ANDSUBSIDIARIESConsolidated Balance Sheets(in thousands) January 31,2004 February 1,2003Assets Current assets: Cash and cash equivalents $49,650 $18,895 Merchandise inventories 66,028 107,318 Prepaid expenses and other current assets 23,633 24,886 Refundable income taxes 9,320 6,278 Total current assets 148,631 157,377 Property and equipment—at cost: Land 1,710 1,710 Buildings and improvements 11,705 11,705 Furniture, fixtures and equipment 90,898 102,108 Leasehold improvements 176,740 182,226 Construction in progress 3,892 3,161 284,945 300,910 Less accumulated depreciation and amortization 146,565 129,363 138,380 171,547 Other assets 11,091 13,646 Total assets $298,102 $342,570 Liabilities and Stockholder's Equity (Deficit) Current liabilities: Current portion of long term debt $1,164 $— Accounts payable 49,386 54,921 Other current liabilities 46,942 56,255 Income taxes payable 1,175 2,978 Deferred income taxes — 910 Total current liabilities 98,667 115,064 Long-term debt 174,880 150,000 Deferred credits 56,723 65,141 Due to J. Crew Group, Inc. 5,897 2,040 Stockholder's equity (deficit) (38,065) 10,325 Total liabilities and stockholder's equity $298,102 $342,570 See accompanying notes to consolidated financial statements.F-11J. CREW OPERATING CORP. ANDSUBSIDIARIESConsolidated Statements of Operations(in thousands) Years ended January 31 2004 February 1 2003 February 22002 Revenues: Net sales $660,628 $732,279 $741,280 Other 27,661 34,103 36,660 688,289 766,382 777,940 Operating costs and expenses: Cost of goods sold, including buying and occupancycosts 435,700 470,300 454,491 Selling, general and administrative expenses 280,423 301,254 302,787 716,123 771,554 757,278 Income/(loss) from operations (27,834) (5,172) 20,662 Interest expense—net (20,496) (23,200) (20,890)Insurance proceeds 3,850 1,800 — Loss before income taxes (44,480) (26,572) (228)Income taxes 5,410 17,750 167 Net loss $(39,070)$(8,822)$(61) See accompanying notes to consolidated financial statements.F-12J. CREW OPERATING CORP. ANDSUBSIDIARIESStatement of Changes in Stockholder's Equity (Deficit)($ in thousands) Balance, at February 3, 2001 $19,208 Net loss (61) Balance, at February 2, 2002 19,147 Net loss (8,822) Balance, at February 1, 2003 10,325 Net loss (39,070)Dividends (9,320) Balance, at January 31, 2004 $(38,065) Note: Operating Corp. has authorized 100 shares of common stock, par value $.01 per share, all of which were issued and outstandingduring the three year period ended January 31, 2004.F-13J. CREW OPERATING CORP. ANDSUBSIDIARIESConsolidated Statements of Cash Flows(in thousands) Years ended January 31,2004 February 1,2003 February 2,2002 Cash flows from operating activities: Net income/(loss) $(39,070)$(8,822)$(61)Adjustments to reconcile net income/(loss) to net cash provided byoperating activities: Depreciation and amortization 43,075 43,197 39,963 Amortization of deferred financing costs 1,724 4,202 1,770 Deferred income taxes (910) (4,694) 1,873 Non-cash compensation expense — (1,053) 913 Non-cash interest expense 1,000 — — Changes in operating assets and liabilities: Merchandise inventories 41,290 31,600 1,749 Prepaid expenses and other current assets 1,253 2,140 (3,286) Other assets 832 (2,470) (3,416) Accounts payable (5,535) (11,782) 16,998 Other liabilities (19,754) (13,439) (21,916) Income taxes payable (4,845) (13,409) (8,741) Net cash provided by operating activities 19,060 25,470 25,846 Cash flows from investing activities: Capital expenditures (9,908) (26,920) (61,862) Proceeds from construction allowances 2,022 6,502 19,287 Net cash used in investing activities (7,886) (20,418) (42,575) Cash flows from financing activities: Proceeds from long term debt 25,820 — — Transfers to affiliate (5,463) 898 — Costs incurred in refinancing debt — (3,256) — Repayment of long-term debt (776) — — Net cash provided/(used) in financing activities 19,581 (2,358) — Increase (decrease) in cash and cash equivalents 30,755 2,694 (16,729)Cash and cash equivalents at beginning of year 18,895 16,201 32,930 Cash and cash equivalents at end of year $49,774 $18,895 $16,201 See accompanying notes to consolidated financial statements.F-14J. CREW GROUP, INC. ANDSUBSIDIARIES Notes to Consolidated Financial Statements Years ended January 31, 2004, February 1, 2003 and February 2, 2002 (1) Nature Of Business And Summary Of Significant Accounting Policies(a) Business The Company designs, contracts for the manufacture of, markets and distributes men's and women's apparel, shoes and accessoriesunder the J.Crew brand name. The Company's products are marketed, primarily in the United States, through various channels ofdistribution, including retail and factory stores, catalogs, and the Internet. The Company is also party to a licensing agreement which grantsthe licensee exclusive rights to use the Company's trademarks in connection with the manufacture and sale of products in Japan. Thelicense 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 andoperating results generally to be lower in the first and second quarters than in the third and fourth quarters (which include the back-to-schooland 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 aresult, the Company's operations could be adversely affected by political instability resulting in the disruption of trade from the countries inwhich these contractors are located or by the imposition of additional duties or regulations relating to imports or by the contractor's inability tomeet the Company's production requirements.(b) Basis of Presentation The consolidated financial statements included herein are:a.J. Crew Operating Corp. and its wholly-owned subsidiaries (Operating Corp.) which consist of the accounts of J. CrewOperating Corp and its wholly owned subsidiaries. b.J. Crew Intermediate LLC and its wholly-owned subsidiaries (Intermediate) which consist of the accounts of J. CrewIntermediate LLC and its wholly owned subsidiaries which are Operating Corp. c.J. Crew Group, Inc. and its wholly-owned subsidiaries (Holdings) which consist of the accounts of J. Crew Group, Inc. and itswholly-owned subsidiaries which are Intermediate. All significant intercompany balances and transactions are eliminated in consolidation. Intermediate was formed in Delaware as a limited liability company on March 27, 2003. 100% of the membership interests ofIntermediate are owned by J. Crew Group, Inc.. Effective May 2003, Holdings transferred its investment in J. Crew Operating Corp. andsubsidiaries to Intermediate. This combination of entities under common control was accounted for in a manner similar to a pooling ofinterests. On May 6, 2003, Intermediate issued $193,346,138 aggregate principal amount at maturity of 16% Senior Discount ContingentPrincipal Notes due 2008 in exchange for $131,083,000 in aggregate principal amount (including accrued interest of $10,750,000) ofoutstanding 131/8% Senior Discount Debentures of J. Crew Group, Inc. The 131/8% Senior Discount Debentures of J. Crew Group, Inc. thatwere exchanged are being held as an asset by Intermediate.F-15 The accompanying financial statements of Intermediate include the balance sheet of Intermediate and its subsidiaries at January 31,2004. The statement of operations for the year ended January 31, 2004 includes the operations of J. Crew Operating Corp. and subsidiariesfrom February 2, 2003 (the predecessor business) and the operations of Intermediate from date of formation in March 2003 throughJanuary 31, 2004. The financial statements for all years prior to March 2003 are the financial statements of J. Crew Operating Corp. andsubsidiaries.(c) Segment Information The Company operates in one reportable business segment. All of the Company's identifiable assets are located in the United States.Export sales are not significant.(d) Fiscal Year The Company's fiscal year ends on the Saturday closest to January 31. The fiscal years 2003, 2002 and 2001 ended on January 31,2004, February 1, 2003 and February 2, 2002 and each fiscal year consisted of 52 weeks.(e) Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments, with maturities of90 days or less when purchased, to be cash equivalents. Cash equivalents, which were $43,312,000 and $11,224,000 at January 31, 2004and February 1, 2003, are stated at cost, which approximates market value.(f) Merchandise Inventories Merchandise inventories are stated at the lower of average cost or market. The Company capitalizes certain design, purchasing andwarehousing costs in inventory and these costs are included in cost of goods sold as the inventories are sold.(g) Advertising and Catalog Costs Direct response advertising which consists primarily of catalog production and mailing costs, are capitalized and amortized over theexpected 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 theratio that current period revenues for the catalog cost pool bear to the total of current and estimated future period revenues for that catalog costpool. The capitalized costs of direct response advertising are amortized, commencing with the date catalogs are mailed, over the duration ofthe expected revenue stream, which was four months for the fiscal years 2002, 2003 and 2004. Deferred catalog costs, included in prepaidexpenses and other current assets, as of January 31, 2004 and February 1, 2003 were $6,411,000 and $6,197,000. Catalog costs, whichare reflected in selling and administrative expenses, for the fiscal years 2003, 2002 and 2001were $43,978,000, $56,695,000 and$65,477,000. All other advertising costs, which are not significant, are expensed as incurred.F-16(h) Property and Equipment Property and equipment are stated at cost and are depreciated over the estimated useful lives by the straight-line method. Buildings andimprovements are depreciated over estimated useful lives of twenty years. Furniture, fixtures and equipment are depreciated over estimateduseful lives, ranging from three to ten years. Leasehold improvements are amortized over the shorter of their useful lives or related leaseterms. Systems development costs are capitalized and amortized on a straight-line basis over periods ranging from three to five years.(i) Debt Issuance Costs Debt issuance costs (included in other assets) are amortized over the term of the related debt agreements. Unamortized debt issuancecosts are as follows: January 31, 2004 February 1, 2003Holdings $167,000 $1,308,000Intermediate 2,242,000 —Operating Corp. 3,966,000 5,435,000 $6,375,000 $6,743,000 (j) Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,"Accounting for Income Taxes". This statement requires the use of the asset and liability method of accounting for income taxes. Under theasset and liability method, deferred taxes are determined based on the difference between the financial reporting and tax bases of assets andliabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The provision for income taxesincludes taxes currently payable and deferred taxes resulting from the tax effects of temporary differences between the financial statementand tax bases of assets and liabilities.(k) 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.Shipping terms for catalog and internet sales are FOB shipping point, and title passes to the customer at the time and place of shipment.Prices for all merchandise are listed in the Company's catalogs and website and are confirmed with the customer upon order. The customerhas no cancellation privileges other than customary rights of return that are accounted for in accordance with SFAS No. 48 "RevenueRecognition When Right of Return Exists." The Company accrues a sales return allowance for estimated returns of merchandisesubsequent to the balance sheet date that relate to sales prior to the balance sheet date. Amounts billed to customers for shipping andhandling fees related to catalog and internet sales are included in other revenues at the time of shipment. Royalty revenue is recognized as itis earned based on contractually specified percentages applied toF-17reported sales. Advance royalty payments are deferred and recorded as revenue when the related sales occur.(l) Operating Expenses Cost of goods sold (including buying and occupancy costs) includes the direct cost of purchased merchandise, inbound freight, design,buying and manufacturing costs, occupancy costs related to store operations and all shipping and handling and delivery costs associated withour direct business. Selling, general and administrative expenses include all operating expenses not included in cost of goods sold, primarily catalogproduction and mailing costs, certain warehousing expenses, which aggregated $9,860,000, $10,440,000 and $10,725,000 for fiscal years2003, 2002 and 2001, respectively, administrative payroll, store expenses other than occupancy costs, depreciation and amortization andcredit card fees.(m) Store Preopening Costs Costs associated with the opening of new retail and outlet stores are expensed as incurred.(n) Derivative Financial Instruments Derivative financial instruments are used by the Company from time to time to manage its interest rate and foreign currency exposures.For interest rate swap agreements, the net interest paid is recorded as interest expense on a current basis. Gains or losses resulting frommarket fluctuations are not recognized. The Company from time to time enters into forward foreign exchange contracts as hedges relating toidentifiable currency positions to reduce the risk from exchange rate fluctuations.(o) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differfrom those estimates.(p) Impairment of Long-Lived Assets The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not be recoverable. The Company assesses the recoverability of suchassets based upon estimated cash flow forecasts. A charge of $675,000 was incurred in fiscal 2003 to writedown the carrying value of certainlong-lived assets.(q) Stock Based Compensation The Company accounts for stock-based compensation using the intrinsic value method of accounting for employee stock options aspermitted by SFAS No. 123, "Accounting for Stock-BasedF-18Compensation". Accordingly, compensation expense is not recorded for options granted if the option price is equal to or in excess of the fairmarket price at the date of grant. If the Company had adopted the fair value recognition provisions of SFAS No. 123, the effect on net incomewould not be material. Restricted stock awards result in the recognition of deferred compensation, which is charged to expense over the vesting period of theawards. Deferred compensation is presented as a reduction of stockholders' equity. Total compensation expense recorded with respect tostock-based compensation, all of which related to restricted stock awards, amounted to $41,000, $464,000 and $661,000 in 2003, 2002 and2001, respectively.(r) Deferred rent and lease incentives Rental payments under operating leases are charged to expense on a straight-line basis after consideration of step rent provisions andescalation clauses. Differences between rental expense and actual rental payments are recorded as deferred rent and included in deferredcredits. The Company receives construction allowances upon entering into certain store leases. These construction allowances are recordedas deferred credits and are amortized as a reduction of rent expense over the term of the related lease. Deferred construction allowances were$43,668,000 and $52,061,000 at January 31, 2004 and February 1, 2003, respectively.(s) Reclassification Certain prior year amounts have been reclassified to conform with current year's presentation.(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 inNew York City, resulting in the loss of inventories and store fixtures, equipment and leasehold improvements. These losses and theresulting business interruption were covered by insurance policies maintained by the Company. The statement of operations for the year ended February 2, 2002 included losses of $1.9 million relating to inventories and storesfixtures, equipment and leasehold improvements. Insurance recoveries in fiscal 2001 were recorded to the extent of the losses recognized.The statement of operations for the years ended January 31, 2004 and February 1, 2003 include gains of $3,850,000 and $1,800,000 as aresult of additional insurance recoveries. No additional insurance recoveries are payable to the Company relating to this loss.F-19(3) Other Current Liabilities Other current liabilities consist of: January 31, 2004 February 1, 2003Customer liabilities $9,089,000 $9,993,000Accrued catalog and marketing costs 2,505,000 2,536,000Taxes, other than income taxes 3,046,000 2,670,000Accrued interest 5,330,000 9,598,000Accrued occupancy 817,000 1,024,000Reserve for sales returns 2,988,000 5,313,000Accrued compensation 3,535,000 7,475,000Other 20,479,000 22,854,000 $47,789,000 $61,463,000 (4) Lines of Credit Operating Corp. entered into a Loan and Security Agreement with Wachovia Bank, N.A., as arranger, Congress Financial Corporation,as administrative and collateral agent, and a syndicate of lenders which provides for a maximum credit availability of up to $180.0 million(the "Congress Credit Facility"). The Congress Credit Facility provides for revolving loans of up to $160.0 million; supplemental loans of up to $20.0 million each yearduring the period from April 15 to September 15; and letter of credit accommodations. The Congress Credit Facility expires inDecember 2005. The total amount of availability is subject to limitations based on specified percentages of eligible receivables, inventoriesand real property. Real property availability is limited to $5.8 million. As of January 31, 2004, there was $18.9 million in availability underthe Congress Credit Facility. Borrowings are secured by a perfected first priority security interest in all the assets of Intermediate and its subsidiaries and bear interest,at the Company's option, at the prime rate plus 0.5% or the Eurodollar rate plus 2.5%. Supplemental loans bear interest at the prime rateplus 3.0%. The Congress Credit Facility includes restrictions, including the incurrence of additional indebtedness, the payment of dividends andother distributions, the making of investments, the granting of loans and the making of capital expenditures. The Congress Credit Facilitypermits restricted payments (by way of dividends or other distributions) with respect to, among other things, the Company's capital stockpayable solely in additional shares of its capital stock, the Company's tax sharing agreement, the Series A Preferred Stock of Holdings, theSeries B Preferred Stock of Holdings and the 131/8% Senior Discount Debentures due 2008 of Holdings. The ability of Operating Corp. todeclare dividends on its capital stock is also limited by Delaware law, which permits a company to pay dividends on its capital stock only outof its surplus or, in the event that it has no surplus, out of its net profits for the year in which a dividend is declared or for the immediatelypreceding fiscal year. Under the Congress Credit Facility, Operating Corp. is required to maintain minimum levels of earnings beforeinterest, taxes, depreciation, amortization and certain non-cash items, ("EBITDA") if excess availability is less than $15.0 million for any 30consecutive day period. Under the Congress Credit Facility, the assets of Operating Corp. and its subsidiaries are restricted. Operating Corp.has at all times been in compliance with all financial covenants.F-20 The Congress Credit Facility was amended (a) on February 7, 2003 to provide for an exclusion from the definition of consolidated netincome for severance and other one-time employment-related charges of up to $6.7 million in the last quarter of fiscal 2002 and $3.0 millionin the first quarter of fiscal 2003 and (b) on April 4, 2003 to (i) consent to the formation of J. Crew Intermediate LLC and the exchange offer;(ii) carve-out from the EBITDA covenant for fiscal 2002 a $9.0 million one-time charge for non-current inventory; (iii) modify required EBITDAcovenant levels and (iv) eliminate the supplemental loan availability in fiscal 2003. Costs incurred in connection with the February 7, 2003amendment were insignificant and were expensed. Costs incurred in connection with the April 4, 2003 amendment of $450,000 are beingamortized over the remaining term of the agreement. Maximum borrowings under revolving credit agreements were $10,000,000, $63,000,000 and $95,000,000 and average borrowingswere $1,020,000, $40,400,000 and $43,100,000 during fiscal years 2003, 2002 and 2001. There were no borrowings outstanding atJanuary 31, 2004 and February 1, 2003. Outstanding letters of credit established primarily to facilitate international merchandise purchases at January 31, 2004 and February 1,2003 amounted to $39,500,000 and $45,900,000.(5) Long-Term Debt and Preferred Stock January 31, 2004 February 1, 2003OPERATING: Congress facility(a) $5,044,000 $—5% notes payable(b) 21,000,000 —103/8% senior subordinated notes(c) 150,000,000 150,000,000Less amount due within one year (1,164,000) — Total Operating 174,880,000 150,000,000INTERMEDIATE: 16% senior discount contingent principal notes (net ofunamortized debt issuance discount of $38,677,000)(d) 108,389,000 — Total Intermediate 283,269,000 150,000,000HOLDINGS: 131/8% senior discount debentures(e) 21,667,000 $142,000,000Mandatorily redeemable preferred stock(f) 211,704,000 — Total Holdings long term debt 516,640,000 292,000,000Holdings preferred stock(f) 92,800,000 264,038,000 Total long term debt and preferred stock $609,440,000 $556,038,000 The scheduled payments of long term debt are $1.2 million in 2004, $1.2 million in 2005, $1.2 million in 2006, $151.2 million in 2007and $190.1 million in 2008 (excluding the debt issuance discount).(a)On April 8, 2003, Operating Corp. borrowed the real estate availability of $5.8 million under the Congress Credit Facility. Thisborrowing is repayable at $97,000 per month commencing June 1, 2003.F-21(b)On February 4, 2003, Holdings and Operating Corp. entered into a credit agreement with TPG-MD Investment, LLC, a related party,which provides for a Tranche A loan to Operating Corp. in an aggregate principal amount of $10.0 million and a Tranche B loan toOperating Corp. in an aggregate principal amount of $10.0 million. The loans are due in February 2008 and bear interest at 5.0% perannum payable semi-annually in arrears on January 31 and July 31, commencing on July 31, 2003. Interest will compound and becapitalized and added to the principal amount on each interest payment date, resulting in an effective interest rate of 5.6%. Theoutstanding amount of these loans is convertible into shares of common stock of Holdings at $6.82 per share. These loans aresubordinated in right of payment to the prior payment of all senior debt and are on the same terms as the 103/8% Senior SubordinatedNotes due 2008 of Operating Corp. (c)The senior subordinated notes are unsecured general obligations of Operating Corp. and are subordinated in right of payment to allsenior debt. Interest on the notes accrues at the rate of 103/8% per annum and is payable semi-annually in arrears on April 15 andOctober 15. The notes mature on October 15, 2007 and may be redeemed at the option of the issuer subsequent to October 15, 2002at prices ranging from 105.188% of principal in 2002 to 100% in 2005 and thereafter. The indenture to the senior subordinated notesrestrict, among other things, the incurrence of additional indebtedness, the payments of dividends and other distributions, the makingof investments, the granting of loans and the making of capital expenditures. Under the indenture to the senior subordinated notes,Operating Corp. may declare cash dividends to Holdings in an amount sufficient to enable Holdings to make the regularly scheduledpayment of interest in respect of the senior discount debentures of Holdings only if (i) such interest payments are made with theproceeds of such dividends, (ii) no default or event of default has occurred and is continuing under the indenture to the seniorsubordinated notes of Operating Corp. and (iii) immediately before and immediately after giving effect to such declaration of dividends,Operating Corp.'s fixed charge coverage ratio would have been at least 2.0 to 1.0 on a pro forma basis for its most recently ended fourfiscal quarters immediately preceding the date of such declaration, as if such declaration had been incurred at the beginning of suchfour-quarter period.The ability of Operating Corp. to declare dividends on its capital stock is also limited by Delaware law, which permits a company to paydividends on its capital stock only out of its surplus or, in the even that it has no surplus, out of its net profits for the year in which adividend is declared or for the immediately preceding fiscal year. In order to pay dividends in cash, Operating Corp. must have surplusor net profits equal to the full amount of the cash dividend at the time such dividend is declared. In determining Operating Corp.'sability to pay dividends, Delaware law permits the board of directors of Operating Corp. to revalue its assets and liabilities from time totime to their fair market values in order to create a surplus. Under the indenture governing the senior subordinated notes, the assetsof the Operating Corp. and its subsidiaries are restricted.(d)On May 6, 2003, Holdings (through its newly-formed, wholly owned subsidiary, J. Crew Intermediate LLC ("Intermediate"))completed an offer to exchange 16% Senior Discount Contingent Principal Notes due 2008 of Intermediate (new notes) for itsoutstanding 131/8% Senior Discount Debentures due 2008 (existing debentures). Approximately 85% of the outstanding debentureswere tendered for exchange. The new notes are the direct, unsecured and unconditional obligations of Intermediate.F-22Intermediate exchanged $87,006,000 fair value of new notes for $131,083,000 face amount (including accrued interest of$10,750,000) of existing debentures. The difference between the fair value of the new notes and the carrying value of the existingdebentures is included as a gain in the statement of operations for the year ended January 31, 2004. The new notes were initiallyrecorded at their fair value and the debt issuance discount of $44,077,000 will be accreted to the principal amount over the life of thenew notes as additional interest expense.Interest from October 15, 2002 through May 5, 2003 was paid on the existing debentures not exchanged at 131/8%. Interest fromOctober 15, 2002 through May 5, 2003 on the existing debentures that were exchanged was added to the principal amount at 16% inaccordance with the terms of the exchange offer. The new notes bear interest at 16% payable in arrears on May 15 and November 15.Interest from date of issuance through November 15, 2005 will be added to the principal amount of the new notes. EffectiveNovember 15, 2005, interest will accrue and become payable on each May 15 and November 15 thereafter through May 15, 2008.Commencing on May 15, 2004 and on each May 15 through May 15, 2008, the accreted value of the new notes will be increased by10% of earnings before interest, taxes and depreciation and amortization [EBITDA] in excess of $50.0 million for the immediatelypreceding fiscal year. Interest at 16% will accrue on such increase in principal.(e)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 did not accrue prior to October 15, 2002.However, Holdings recorded non-cash interest expense as an accretion of the principal amount of the debentures at a rate of 131/8%per annum. Interest is payable in arrears on April 15 and October 15 of each year subsequent to October 15, 2002. The senior discountdebentures may be redeemed at the option of Holdings on or after October 15, 2002 at prices ranging from 106.563% of principal to100% in 2005 and thereafter (see note (d) for description of debt exchange). (f)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 January 31, 2004, 92,800 shares of Series A Preferred Stock and 32,500 shares of Series B Preferred Stock were issued andoutstanding.The Preferred Stock accumulates dividends at the rate of 14.5% per annum (payable quarterly) for periods ending on or prior toOctober 17, 2009. Dividends compound to the extent not paid in cash. A default in the payment of the Series A preferred stockredemption price will trigger dividends accruing and compounding quarterly at a rate of (i) 16.50% per annum with respect to periodsending on or before October 17, 2009 and (ii) 18.50% with respect to periods starting after October 17, 2009. A default in the paymentof the Series B preferred stock redemption price will trigger dividends accruing and compounding quarterly at a rate of 16.50% perannum. On October 17, 2009, Holdings is required to redeem the Series B Preferred Stock and to pay all accumulated but unpaid dividends onthe Series A Preferred Stock. Thereafter, the Series A PreferredF-23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 October 17, 2000 and thereafter at a redemption price equal to 100% of liquidationvalue 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 theCompany, Holdings may be required to repurchase shares of the Preferred Stock at liquidation value plus accumulated and unpaiddividends. If Holdings liquidates, dissolves or winds up, whether voluntary or involuntary, no distribution shall be made either (i) to thoseholders of stock ranking junior to the Preferred Stock, unless prior thereto the holders of the Preferred Stock receive the total value for eachshare of Preferred Stock plus an amount equal to all accrued dividends thereon as of the date of such payment or (ii) to the holders of stockranking pari passu with the Preferred Stock (which we refer to as the "parity stock"), except distributions made ratably on the Preferred Stockand all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon liquidation, dissolution orwinding up of Holdings. Effective at the beginning of the third quarter of 2003, the Company adopted SFAS No. 150 "Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity". This pronouncement required the reclassification to long term debt of theliquidation value of Holdings' Series B Preferred Stock and the related accumulated and unpaid dividends and the accumulated and unpaiddividends related to the Series A Preferred Stock since these amounts are required to be redeemed in October 2009. The preferred dividendsrelated to the liquidation value of the Series B Preferred Stock and to the accumulated and unpaid dividends of the Series A and Series BPreferred stock for the third and fourth quarters of 2003 are included in interest expense. The Series A preferred stock is only redeemable incertain circumstances (including a change of control at Holdings) and does not qualify for reclassification under SFAS No. 150. Accordingly,the dividends related to the Series A Preferred Stock were deducted from stockholders' deficit. Accumulated but unpaid dividends amounted to $179,204,000 at January 31, 2004.(6) Common Stock The restated certificate of incorporation authorizes Holdings to issue up to 100,000,000 shares of common stock; par value $.01per share.At January 31, 2004, shares issued were 13,584,175 and shares outstanding were 13,011,086. During 2001and 2002 directors convertedfees into 5,524 and 12,318 shares of Holdings common stock.(7) Commitments and Contingencies(a) Operating Leases As of January 31, 2004, Operating Corp. was obligated under various long-term operating leases for retail and outlet stores,warehouses, office space and equipment requiring minimum annual rentals.F-24These operating leases expire on varying dates through 2014. At January 31, 2004 aggregate minimum rentals in future periods are, asfollows:Fiscal year Amount2004 $52,351,0002005 49,607,0002006 46,838,0002007 44,970,0002008 39,377,000Thereafter 116,189,000 Certain of these leases include renewal options and escalation clauses and provide for contingent rentals based upon sales and requirethe lessee to pay taxes, insurance and other occupancy costs. Rent expense for fiscal 2003, 2002 and 2001 was $42,997,000, $41,657,000 and $38,326,000 including contingent rent based onstore sales of $814,000, $1,187,000, and $1,023,000.(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 outcomeof these claims cannot be predicted with certainty, management does not believe that it is reasonably possible that resolution of these legalproceedings will result in unaccrued losses that would be material.(8) Employee Benefit Plan The Company has a thrift/savings plan pursuant to Section 401 of the Internal Revenue Code whereby all eligible employees maycontribute up to 15% of their annual base salaries subject to certain limitations. The Company's contribution is based on a percentageformula set forth in the plan agreement. Company contributions to the thrift/savings plan were $1,288,000, $1,834,000 and $1,334,000 forfiscal 2003, 2002 and 2001.(9) License Agreement Operating Corp. has a licensing agreement through January 2007 with Itochu Corporation, a Japanese trading company. Theagreement permits Itochu to distribute J. Crew merchandise in Japan.Operating Corp. earns royalty payments under the agreement based on the sales of its merchandise. Royalty income, which is included inother revenues, for fiscal 2003, 2002, and 2001 was $2,456,000, $2,280,000 and $2,560,000, respectively.F-25(10) Interest Expense—net Interest expense, net consists of the following: 2003 2002 2001 Holdings Interest expense $7,305,000 $17,521,000 $15,395,000 Dividends related to mandatorilyredeemable preferred stock 14,206,000 — — Amortization of deferred financing costs 80,000 233,000 227,000 21,591,000 17,754,000 15,622,000 Intermediate Interest expense 15,982,000 — — Amortization of debt issuance discount 5,400,000 — — Amortization of deferred financing costs 375,000 — — 21,757,000 — — Operating Corp. Interest expense 18,946,000 19,027,000 19,415,000 Amortization 1,712,000 4,202,000 1,770,000 Interest income (162,000) (29,000) (295,000) 20,496,000 23,200,000 20,890,000 Total $63,844,000 $40,954,000 $36,512,000 (a)Deferred financing costs of $1,800,000 were written off in fiscal 2002 in connection with the refinancing of our revolving creditfacility.(11) Other Revenues Other revenues consist of the following: 2003 2002 2001Shipping and handling fees $25,205,000 $31,823,000 $34,100,000Royalties 2,456,000 2,280,000 2,560,000 $27,661,000 $34,103,000 $36,660,000 (12) Financial Instruments The fair value of the Company's long-term debt is estimated to be approximately $293,896,000 and $238,692,000 at January 31, 2004and February 1, 2003 and is based on dealer quotes or quoted market prices of the same or similar instruments. The carrying amounts oflong-term debt were $306,100,000 and $292,000,000 at January 31, 2004 and February 1, 2003. The carrying amounts reported in theconsolidated balance sheets for cash and cash equivalents, accounts payable and other current liabilities approximate fair value because ofthe short-term maturity of those financial instruments. The estimates presented herein are not necessarily indicative of amounts theCompany could realize in a current market exchange.F-26J. CREW GROUP, INC. ANDSUBSIDIARIES Notes to Consolidated Financial Statements Years ended January 31, 2004, February 1, 2003 and February 2, 2002 (13) Income Taxes Holdings files a consolidated federal tax return which includes all its wholly owned subsidiaries. Each subsidiary files separate state taxreturns in the required jurisdictions. Holdings and its subsidiaries have entered into a tax sharing agreement providing (among other things)that each of the subsidiaries will reimburse Holdings for its share of income taxes determined as if such subsidiary had filed its tax returnson a separate return basis.Holdings The income tax provision/benefit of Holdings consists of: 2003 2002 2001 Current: Foreign $250,000 $193,000 $260,000 Federal (3,744,000) (12,014,000) (2,400,000) State and local (1,006,000) 200,000 100,000 (4,500,000) (11,621,000) (2,040,000) Deferred 5,000,000 7,421,000 (3,460,000) Total $500,000 $(4,200,000)$(5,500,000) A reconciliation between the provision/(benefit) for income taxes based on the U.S. Federal statutory rate and the Company's effectiverate is as follows. 2003 2002 2001 Federal income tax rate (35.0)%(35.0)%(35.0)%State and local income taxes, net of federal benefit .9 — (2.3)Valuation allowance 65.8 47.0 — Additional NOL carryback (8.0)— — Reversal of prior tax accruals (2.7)(20.9)— Nondeductible expenses and other 8.9 (0.5)4.0 Non-recognized gain on exchange of debt (28.8)— — Effective tax rate 1.1%(9.4)%(33.3)% F-27 The tax effect of temporary differences which give rise to deferred tax assets and liabilities are: January 31, 2004 February 1, 2003 Deferred tax assets: Original issue discount $33,660,000 $24,896,000 Rent 17,514,000 20,900,000 Federal NOL carryforwards 19,600,000 7,100,000 State and local NOL carryforwards 4,485,000 1,400,000 Reserve for sales returns 1,207,000 2,202,000 Other 5,057,000 3,873,000 81,523,000 60,371,000 Valuation allowance (56,823,000) (21,046,000) 24,700,000 39,325,000 Deferred tax liabilities: Prepaid catalog and other prepaid expenses (9,570,000) (9,872,000) Difference in book and tax basis for property and equipment (15,130,000) (24,453,000) (24,700,000) (34,325,000) Net deferred income tax asset — $5,000,000 Operating Corp. The income tax provision/benefit of Operating Corp. consists of: 2003 2002 2001 Current: Foreign $250,000 $193,000 $260,000 Federal (3,744,000) (13,449,000) (2,400,000) State and local (1,006,000) 200,000 100,000 (4,500,000) (13,056,000) (2,040,000) Deferred (910,000) (4,694,000) 1,873,000 Total $(5,410,000)$(17,750,000)$(167,000) F-28 A reconciliation between the provision/(benefit) for income taxes based on the U.S. Federal statutory rate and the Company's effectiverate as follows: 2003 2002 2001 Federal income tax rate (35.0)%(35.0)%(35.0)%State and local income taxes, net of federal benefit 0.9 — 134.6 Valuation allowance 37.1 — Additional NOL carryback (8.4)— — Reversal of prior tax accruals (2.9)(38.6)— Nondeductible expenses and other (3.9)6.8 (172.8) Effective tax rate (12.2)%(66.8)%(73.2)% The tax effect of temporary differences which give rise to deferred tax assets and liabilities are: January 31,2004 February 1,2003 Deferred tax assets: Federal NOL carryforwards 17,540,000 5,040,000 State and local NOL carryforwards 4,485,000 1,400,000 Reserve for sales returns 1,207,000 2,202,000 Rent 17,514,000 20,995,000 Other 5,459,000 3,873,000 46,205,000 33,510,000 Valuation allowance 21,505,000 — 24,700,000 33,510,000 Deferred tax liabilities: Prepaid catalog and other prepaid expenses (9,570,000) (9,872,000) Difference in book and tax basis for property and equipment (15,130,000) (24,548,000) 24,700,000 (34,420,000) Net deferred income tax liability — $(910,000) The Company has significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences,which will reduce taxable income in future periods. SFAS No. 109 "Accounting for Income Taxes" states that a valuation allowance isrequired when it is more likely than not that all or a portion of a deferred tax asset will not be realized. A review of all available positive andnegative evidence needs to be considered, including a company's current and past performance, the market environment in which acompany operates, length of carryback and carryforward periods, existing contracts or sales backlog that will result in future profits, etc.Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses inrecent years. Cumulative losses weigh heavily in the overall assessment. As a resultF-29of our assessment, we established a valuation allowance for the net deferred tax assets at February 1, 2003. The valuation allowance wasincreased at January 31, 2004 to fully reserve net deferred tax assets at that date. The Company does not expect to recognize any tax benefitsin future results of operations until an appropriate level of profitability is sustained. The Company has state and local income tax net operating loss carryforwards of varying amounts.(14) Stock Compensation Plans1997 Stock Option Plan Under the terms of the 1997 Stock Option Plan, an aggregate of 1,910,000 shares are available for grant to certain key employees orconsultants. The options have terms of seven to ten years and become exercisable over a period of four to five years. Options granted underthe Option Plan are subject to various conditions, including under some circumstances, the achievement of certain performance objectives.2003 Equity Incentive Plan In January 2003, the Board of Directors of Holdings approved the adoption of the 2003 Equity Incentive Plan. Under the terms of the2003 Plan, an aggregate of 4,798,160 shares of common stock are available for award to key employees and consultants in the form of non-qualified stock options and restricted shares, as follows:•1,115,812 shares are reserved for the issuance of stock options at an exercise price of $6.82 or fair market value, whichever isgreater; •1,115,812 shares are reserved for the issuance of stock options at an exercise price of $25.00 or fair market value, whichever isgreater; •1,115,812 shares are reserved for the issuance of stock options at an exercise price of $35.00 or fair market value, whichever isgreater; •1,450,724 shares are reserved for the issuance of restricted shares. The options have terms of ten years and become exercisable over the period provided in each grant agreement.F-30 A summary of stock option activity for the three years ended January 31, 2004, is as follows: 2003 2002 2001 Shares Weightedaverageexercise price Shares Weightedaverageexercise price Shares Weightedaverageexercise priceOutstanding, beginning of year 4,474,469 $18.22 1,808,790 $9.97 1,788,750 $9.15Granted 377,750 6.85 3,263,239 21.35 283,000 14.53Exercised — — — — —Cancelled (2,441,613) 26.19 (597,560)$10.29 (262,960) 9.31 Outstanding, end of year 2,410,606 $8.37 4,474,469 $18.22 1,808,790 $9.97 Options exercisable atend of year 849,302 $10.59 842,340 $9.81 728,950 $9.21 The following table summarizes information about stock options outstanding as of January 31, 2004. Outstanding Weightedaverageremainingcontractual life(in months) ExercisableRange Number ofoptions Weightedaverageoption price Number ofoptions Weightedaverageoption price$6.82—$8.53 1,798,240 $6.85 94 342,736 $6.98$10.00—$35.00 612,366 12.83 70 506,566 13.03 $6.82—$35.00 2,410,606 $8.37 88 849,302 $10.59 Under the 2003 Plan 1,004,266 and 224,402 restricted shares were issued in fiscal 2002 and 2003 and 83,689 restricted shares wereforfeited in fiscal 2003. The fair value of the restricted stock at date of issuance was $0.74 per share.(15) Recent Accounting Pronouncements In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and HedgingActivities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivativeinstruments embedded in other contracts and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instrumentsand Hedging Activities." The provisions of this statement are effective for contracts entered into or modified after June 30, 2003 and hedgingrelationships designated after June 30, 2003. The provisions of the statement related to Statement 133 Implementation Issues that havebeen effective for fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective effectivedates. The adoption of SFAS No. 149 did not have a significant effect on our financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity." This statement establishes standards for how an issuerF-31classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify afinancial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previouslyclassified as equity. The provisions of this statement were effective at the beginning of the first interim period beginning after June 15, 2003.The adoption of SFAS No. 150 resulted in a reclassification of the liquidation value and accumulated and unpaid dividends of the Series Bpreferred stock and the accumulated and unpaid dividends related to the Series A preferred stock to liabilities, which totaled $211.7 million asof January 31, 2004. After such reclassification, the dividends related to the Series B preferred stock and the accreted dividends of theSeries A Preferred Stock will be treated as interest expense. In December 2003, the FASB revised and reissued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." FINNo. 46 requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectivelydispense the risks and rewards of ownership among their owners and other parties involved. The provisions of FIN No. 46 must be appliedno later than as of the end of the first reporting period ending after March 15, 2004. The adoption of FASB Interpretation No. 46 will not have asignificant effect on our financial statements.(16) Quarterly Financial Information (Unaudited) 13 weeksended5/4/02(a) 13 weeksended8/3/02 13 weeksended11/2/02 13 weeksended2/1/03(b) 52 weeksended2/1/03 Net sales $157.9 $160.9 $181.9 $231.6 $732.3 Gross profit(d) 69.2 63.0 77.9 86.0 296.1 Net loss Holdings $(12.1)$(7.1)$(0.7)$(20.7)$(40.6)Net loss Operating Corp (9.2) (4.1) 2.1 2.4 (8.8) 13 weeksended5/3/03 13 weeksended8/2/03(c) 13 weeksended11/1/03 13 weeksended1/31/04 52 weeksended1/31/04 Net sales $152.6 $159.2 $146.4 $202.4 $660.6 Gross profit(d) 48.5 51.5 60.9 91.7 252.6 Net loss Holdings $(19.6)$15.2 $(23.6)$(19.3)$(47.3)Net loss Intermediate (14.9) 24.1 (11.9) (1.4) (4.1)Net loss Operating Corp (14.9) (17.8) (8.3) 1.9 (39.1)(a)Net loss includes a pre-tax charge of $4.6 million related to severance costs for approximately 120 employees and the departure ofMark Sarvary, a former Chief Executive Officer in April 2002. The staff reductions occurred in the first quarter of fiscal 2002 and therelated payments were incurred primarily in the second quarter of fiscal 2002. (b)Net loss includes (a) pre-tax charges of $7.7 million related to severance costs and other one-time employment related expenses,primarily relating to the terminations of several executive employees,F-32the termination of employment of Kenneth Pilot, a former Chief Executive Officer in January 2003 and a non-recoverableemployment bonus for the Company's new President, Jeffrey Pfeifle, (b) $1.8 million to write-off deferred financing charges inconnection with the refinancing of our credit facility (c) a $9 million inventory writedown as a result of the Company's decision tomodify its strategy on the disposition of inventory to accelerate inventory clearing at the end of each selling season and (d) a taxprovision of $6.5 million on a pre-tax loss of $14.2 million as a result of providing a valuation allowance against deferred tax assets atFebruary 1, 2003.(c)Net income includes a pre-tax gain on the exchange of debt of $41.1 million. (d)Gross profit amounts previously reported have been reclassified to conform to current years presentation.F-33SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS beginning balance charged to costand expenses charged to otheraccounts deductions ending balance ($ in thousands)Inventory reserve(deducted from inventories) fiscal year ended: January 31, 2004 $12,420 —(a)—(a)7,380(a) 5,040February 1, 2003 8,367 4,053(a)— — 12,420February 2, 2002 7,360 1,007(a)— — 8,367Allowance for sales returns(included in other current liabilities) fiscal year ended: January 31, 2004 $5,313 —(a)—(a)2,309(a)$3,004February 1, 2003 6,475 (1,162)(a)— — 5,313February 2, 2002 6,530 (55)(a)— — 6,475(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 ofoperations as incurred.F-34QuickLinksPART I BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESINDEX TO FINANCIAL STATEMENTSJ. CREW GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands)J. CREW GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Operations (in thousands)J. CREW GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Deficit (in thousands, except shares)J. CREW GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands)J. CREW INTERMEDIATE LLC Consolidated Balance Sheets (in thousands)J. CREW INTERMEDIATE LLC Consolidated Statements of Operations (in thousands)J. CREW INTERMEDIATE LLC Consolidated Statements of Cash Flows (in thousands)J. CREW OPERATING CORP. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands)J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended January 31, 2004, February 1,2003 and February 2, 2002J. CREW GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended January 31, 2004, February 1,2003 and February 2, 2002QuickLinks -- Click here to rapidly navigate through this documentExhibit 10.4(b)FIRST INSTRUMENT OF AMENDMENT WHEREAS, J. Crew Group, Inc. (the "Corporation") maintains the J. Crew Group, Inc. 2003 Equity Incentive Plan (the "Plan"); WHEREAS, Section 8 of the Plan provides that the Plan may be amended by the Compensation Committee of the Board of Directors ofthe Corporation (the "Committee") at any time, with exceptions not here material; WHEREAS, the Committee wishes to amend the Plan to allow the Committee the authority to determine pursuant to Section 4 thereof(in lieu of the Board of Directors) the (i) maximum number of shares of Common Stock to be reserved for issuance of Options at varyingexercise prices and to be reserved for the issuance of shares of Restricted Stock out of the pool of available Common Stock available forAwards under the Plan and (ii) the Exercise Price of any Award under the Plan. WHEREAS, all defined terms used herein shall have the meaning set forth in the Plan unless specifically defined herein; NOW, THEREFORE, the Plan is hereby amended as follows.1.The reference to "Unless the Board determines otherwise" in Section 4 shall be replaced with a reference to "Unless theCommittee determines otherwise".February 25, 2004QuickLinksFIRST INSTRUMENT OF AMENDMENTQuickLinks -- Click here to rapidly navigate through this documentExhibit 10.9(b)OPTION SURRENDER September 25, 2003TO J.CREW GROUP, INC.: I hereby surrender to J. Crew Group, Inc. (the "Company") the following portions of the option to purchase shares of common stock ofthe Company that were granted to me under the Company's 2003 Equity Incentive Plan (the "Plan") pursuant to the Stock Option GrantAgreement, dated as of February 12, 2003, between the Company and me (the "Stock Option Agreement"): (1) the Premium OptionTranche 1 (as defined in the Stock Option Agreement) to purchase 836,889 shares of common stock and (2) the Premium Option Tranche 2(as defined in the Stock Option Agreement) to purchase 836,889 shares of common stock. This surrender does not affect any other option orrestricted stock award that may have been made to me at any other time. I hereby further acknowledge and agree that I will have no rights toor interest in the surrendered options effective as of the date hereof. In consideration of the surrender of these options, the Company hereby agrees to grant to me on the date six months plus one day fromthe date hereof: (1) an option to purchase 836,889 shares of common stock at an exercise price that is not less than fair market value on thedate of grant and (2) an option to purchase 836,889 shares of common stock at an exercise price that is not less than fair market value on thedate of grant, each to vest in equal annual installments on the second, third, fourth and fifth anniversaries of my commencement date ofemployment, provided that the Service Period (as defined in the Services Agreement, dated as of January 24, 2003, between the Company,J.Crew Operating Corp., me and Millard S. Drexler, Inc. (the "Services Agreement")) has not terminated as of each such applicable vestingdate. Notwithstanding the foregoing, (i) in the event that the Company terminates the Services without Cause (as each term is defined in theServices Agreement) or I terminate the Services for Good Reason (as defined in the Services Agreement) prior to the consummation of aChange in Control (as defined in the Plan), that portion of each option that would have become vested and exercisable on the nextsucceeding vesting date shall vest and become immediately exercisable and any remaining portion of each option that has not becomevested and exercisable shall immediately expire and be forfeited, (ii) in the event that, within the two-year period following the consummationof a Change in Control, the Company terminates the Services without Cause or I terminate the Services for Good Reason, all or any portionof each option that has not yet become exercisable shall vest and become immediately exercisable, or (iii) if the Service Period terminates forany other reason, any portion of each option which has not become exercisable on the date of termination of the Services shall immediatelyexpire and be forfeited. Very truly yours, Millard S. DrexlerAGREED:J.CREW GROUP, INC. QuickLinksOPTION SURRENDERQuickLinks -- Click here to rapidly navigate through this documentExhibit 10.10(b)OPTION SURRENDER September 25, 2003TO J.CREW GROUP, INC.: I hereby surrender to J. Crew Group, Inc. (the "Company") the following portions of the option to purchase shares of common stock ofthe Company that was granted to me under the Company's 2003 Equity Incentive Plan (the "Plan") pursuant to the Stock Option GrantAgreement, dated as of February 20, 2003, between the Company and me (the "Stock Option Agreement"): (1) the Premium OptionTranche 1 (as defined in the Stock Option Agreement) to purchase 111,585 shares of common stock and (2) the Premium Option Tranche 2(as defined in the Stock Option Agreement) to purchase 111,585 shares of common stock. This surrender does not affect any other option orrestricted stock award that may have been made to me at any other time. I hereby further acknowledge and agree that I will have no rights toor interest in the surrendered options effective as of the date hereof. In consideration of the surrender of these options, the Company hereby agrees to grant to me on the date six months plus one day fromthe date hereof: (1) an option to purchase 111,585 shares of common stock at an exercise price that is not less than the fair market value onthe date of grant and (2) an option to purchase 111,585 shares of common stock at an exercise price that is not less than fair market value onthe date of grant, each to vest in equal annual installments on the second, third, fourth and fifth anniversaries of my commencement date ofemployment, provided that I remain continuously employed by the Company through each such applicable vesting date. Notwithstanding theforegoing, (i) in the event that (x) the Company terminates my employment without Cause (as defined in and pursuant to the EmploymentAgreement, dated as of January 24, 2003, between the Company, J.Crew Operating Corp. and me (the "Employment Agreement")), Iterminate my employment for Good Reason (as defined in the Employment Agreement) or my employment terminates as a result of theCompany's providing notice to me of its intent not to renew the Employment Period (as defined in the Employment Agreement) prior to theconsummation of a Change in Control (as defined in the Plan) or (y) or my employment is terminated on account of my death or Disability(as defined in the Employment Agreement) at any time during the Employment Period (as defined in the Employment Agreement), theportion of each of the options that would have become vested and exercisable on the next succeeding vesting date shall vest and becomeimmediately exercisable and any remaining portion of the options that has not become vested and exercisable shall immediately expire andbe forfeited, (ii) in the event that, within the two-year period following the consummation of a Change in Control or within six months prior toa Change in Control if such termination is in contemplation of a Change in Control, the Company terminates my employment withoutCause, I terminate my employment for Good Reason or my employment terminates as a result of the Company's providing notice to me ofits intent not to renew the Employment Period, all shares of common stock underlying the options shall become immediately vested andexercisable, and (iii) if my employment terminates for any other reason, any portion of the options which has not become exercisable onsuch Date of Termination (as defined in the Employment Agreement) shall immediately expire and be forfeited. Very truly yours, Jeffrey PfeifleAGREED: J.CREW GROUP, INC. QuickLinksOPTION SURRENDERExhibit 10.11(b) January 20, 2004Scott GilbertsonDear Scott: This letter agreement ("Letter Agreement") will confirm our understanding of the arrangements under which your employment with J.Crew Group, Inc., J. Crew Operating Corp. and all of their subsidiaries and affiliates (collectively, the "Company") is terminated. Theseterms and conditions are set out below.1.The parties hereby acknowledge and confirm that your employment with the Company is terminated effective as ofJanuary 31, 2004 (the "Termination Date"). 2.Subject to this Letter Agreement becoming effective (as described in Paragraph 17 hereof), the Company will continue to payyou your base salary of $450,000 per annum for the eighteen (18) month period beginning on the day immediately followingthe Termination Date, payable in accordance with the Company's regular payroll practices for its employees, and will also payyou your full annual Bonus for fiscal year 2003, which will not be less than $175,000 (as described in your EmploymentAgreement between you, J. Crew Group, Inc. and J. Crew Operating Corp., dated January 27, 2003, as amended by letterdated January 9, 2004, the "Employment Agreement"). The foregoing payments shall be reduced by any required taxwithholdings and shall not be taken into account as compensation and no service credit shall be given after the TerminationDate for purposes of determining the benefits payable under any other plan, program, agreement or arrangement of theCompany. You acknowledge that, except for the foregoing payments, you are not entitled to any payment by the Company inthe nature of either severance or termination pay or other compensation of any kind. 3.As of the Termination Date, subject to this Letter Agreement becoming effective (as described in Paragraph 17 hereof), you willvest in the following options: (i) option to purchase 27,896 shares of common stock of J. Crew Group, Inc. ("Common Stock")at $6.82 per share, (ii) option to purchase16,738 shares of Common Stock at $25.00 per share, and (iii) option to purchase16,738 shares of Common Stock at $35.00 per share (collectively, the "Vested Options"). In addition, you had unvestedoptions to purchase (i) 83,689 shares of Common Stock at $6.82 per share, (ii) 50,213 shares of Common Stock at $25.00per share, and (iii) 50,213 shares of Common Stock at $35.00 per share (collectively, the "Unvested Options"). Youacknowledge that all of the Vested Options will terminate on the second anniversary of the Termination Date (i.e. January 31,2006) and that all of the Unvested Options terminated on January 9, 2004.As of the Termination Date, you also have vested options to purchase 25,000 shares of Common Stock at $6.82 per share and28,000 shares of Common Stock at $10.00 per share (collectively, the "Previously Vested Options"). You acknowledge that allof the Previously Vested Options will terminate on the earlier of (i) 90 days after the termination of your Employment for otherthan for cause, death or disability, (ii) one year after termination of your Employment by reason of death or disability, (iii) thecommencement of business on the date your Employment is or is deemed to have been terminated for cause, or (iv) the tenthanniversary of the grant date of the Previously Vested Options. For purposes of the Previously Vested Options only, "yourEmployment" shall mean employment with any of the following: J.Crew Group, Inc., any other portfolio company of the TexasPacific Group or SRB Inc.As of the Termination Date, subject to this Letter Agreement becoming effective (as described in Paragraph 17 hereof), you willalso vest in 27,896 restricted shares of Common Stock. In addition, you had 83,689 unvested restricted shares of CommonStock. You acknowledge that all of the unvested restricted shares were forfeited on January 9, 2004 and have been or willimmediately be returned to the Company.Except as provided herein, the options described above will continue to be governed by the relevant option plan and grantagreements and the restricted shares of Common Stock as well as any shares of Common Stock acquired pursuant to theexercise of any option will continue to be governed by the Stockholders Agreement, dated February 12, 2003.4.By signing this Letter Agreement, you agree that in exchange for the consideration set forth herein, you hereby voluntarily,fully and unconditionally release and forever discharge the Company, Parent, their 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"),jointly and severally 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 you,your heirs or successors have or may have against any or all of the Releasees for or by reason of any cause, nature or thingwhatsoever, up to the present time, including without limitation any claim or cause of action arising out of or related to youremployment with the Company, the termination of such employment and the Employment Agreement, including, by way ofexamples and without limiting the broadest application of the foregoing, any actions, causes of action, or claims under anycontract 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 perceiveddisability, age, sex, race or any other factor (including, without limitation, any claim pursuant to Title VII of the Civil Rights Actof 1964, Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, as amended, the Familyand Medical Act of 1993, the Equal Pay Act of 1963, the Fair Labor Standards Act, the State, City and local laws of New York,and the equal employment law or laws of the state and/or city in which you work), any claim pursuant to any other applicableemployment 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. You acknowledge that this general release is not madein connection with an exit incentive or other employment termination program offered to a group or class of employees.If you have made or should hereafter make any complaint, charge, claim, allegation or demand, or commence or threaten tocommence any action, complaint, charge, claim or proceeding, against any or all of the Releasees for or by reason of anycause, matter or thing whatsoever existing up to the present time, this Letter Agreement may be raised as and shall constitutea complete bar to any such action, complaint, charge, claim, allegation or proceeding, and, subject to a favorable ruling by atribunal of final jurisdiction, the Releasees shall recover from you, and you shall pay to the Releasees, all costs incurred bythem, including their attorneys' fees, as a consequence of any such action, complaint charge, claim, allegation or proceeding;provided, however, that this shall not limit you from enforcing your rights under this Letter Agreement, and in the event anyaction is commenced to enforce your rights under this Letter Agreement, each party shall bear its own legal fees and expenses;and provided further, however, that this is not intended to interfere with your right to file a charge with the Equal EmploymentOpportunity Commission ("EEOC") in connection with any claim you believe you may have against any Releasee. However,by signing this Letter Agreement, you agree to waive any right to recover in any proceeding you may bring before the EEOC(or any state human rights commission) or in any proceeding brought by the EEOC (or any state human rights commission)on your behalf.2You specifically release all claims under the Age Discrimination in Employment Act ("ADEA") relating to your employment andits termination.5.You hereby agree and acknowledge that you shall be bound by and comply with the restrictive covenants provided in Sections8, 9 and 10 of the Employment Agreement (the "Restrictive Covenants"), and that such Restrictive Covenants are herebymade part of this Letter Agreement as if specifically restated herein and that the payments described in Section 2 above thatyou are receiving are subject to and contingent upon your compliance with Restrictive Covenants. 6.You acknowledge and agree that, notwithstanding any other provision of this Letter Agreement, if you breach any of yourobligations under this Letter Agreement or any Restrictive Covenant, (a) you will forfeit your right to receive the payments andbenefits described in Section 2 above (to the extent the payments were not theretofore paid) and the Company shall be entitledto recover any payments already made to you or on your behalf, (b) the Vested Options shall expire as of the date of suchbreach to the extent not theretofore exercised and, if exercised as of the date of such breach, you shall immediately reimbursethe Company for the profit upon exercise (such profit calculated as the difference between the (i) greater of either the FairMarket Value (as defined in the J.Crew Group, Inc. 2003 Equity Incentive Plan) of a share of Common Stock on the date ofexercise or the amount paid by the Company to you per share of Common Stock for the purchase of the shares acquired uponexercise, and (ii) exercise price, times the number of options exercised). 7.You hereby agree that the breach of any Restrictive Covenant may cause the Company to suffer irreparable harm for whichmoney damages would not be an adequate remedy and therefore, if you breach a Restrictive Covenant, the Company wouldbe entitled to temporary and permanent injunctive relief in any court of competent jurisdiction (without the need to post anybond) without prejudice to any other remedies under this Letter Agreement or otherwise. You hereby waive the claim ordefense that the Company has an adequate remedy at law and you shall not argue in any action or proceeding that any suchremedy at law exists. 8.You agree that, in the event that you are served with legal process or other request purporting to require you to testify, plead,respond or defend and/or produce documents at a legal proceeding, threatened proceeding, investigation or inquiry involvingthe Releasees, you will: (1) refuse to provide testimony or documents absent a subpoena, court order or similar process from aregulatory agency; (2) within three (3) business days or as soon thereafter as practical, provide oral notification to theCompany's General Counsel of your receipt of such process or request to testify or produce documents; and (3) provide to theCompany's General Counsel by overnight delivery service a copy of all legal papers and documents served upon you. Youfurther agree that in the event you are served with such process, you will meet and confer with the Company's designee(s) inadvance of giving such testimony or information. You also agree to cooperate fully with the Releasees in connection with anyexisting or future litigation against the Releasees, whether administrative, civil or criminal in nature, in which and to the extentthe Releasees deem your cooperation necessary. The Company agrees to reimburse you for your reasonable out-of-pocketexpenses incurred in connection with the performance of your obligations under this Section 8. 9.This Letter Agreement does not constitute an admission of liability or wrongdoing of any kind by you or the Company or itsaffiliates. 10.The terms of this Letter Agreement shall be binding on the parties hereto and their respective successors, assigns, heirs andrepresentatives.311.This Letter Agreement constitutes the entire understanding of the Company and you with respect to the subject matter hereofand supersedes all prior understandings, written or oral. The terms of this Letter Agreement may be changed, modified ordischarged only by an instrument in writing signed by the parties hereto. A failure of the Company or you to insist on strictcompliance with any provision of this Letter Agreement shall not be deemed a waiver of such provision or any other provisionhereof. If any provision of this Letter Agreement is determined to be so broad as to be unenforceable, such provision shall beinterpreted to be only so broad as is enforceable. 12.This Letter Agreement shall be construed, enforced and interpreted in accordance with and governed by the laws of the State ofNew York. 13.The parties hereto acknowledge and agree that each party has reviewed and negotiated the terms and provisions of this LetterAgreement and has contributed to its revision. Accordingly, the rule of construction to the effect that ambiguities are resolvedagainst the drafting party shall not be employed in the interpretation of this Letter Agreement. Rather, the terms of this LetterAgreement shall be construed fairly as to both parties hereto and not in favor or against either party. 14.This Letter Agreement may be executed in any number of counterparts and by different parties on separate counterparts, eachof which counterpart, when so executed and delivered, shall be deemed to be an original and all of which counterparts, takentogether, shall constitute but one and the same agreement. 15.You acknowledge that, by your free and voluntary act of signing below, you agree to all of the terms of this Letter Agreementand intend to be legally bound thereby. 16.You acknowledge that you have received this Letter Agreement on or before January 20, 2004. You understand that you mayconsider whether to agree to the terms contained herein for a period of twenty-one (21) days after the date hereof. However, theoperation of the provisions of Sections 2 through 4 above may be delayed until you execute this Letter Agreement and return itto the Company and it becomes effective as provided below. You acknowledge that you have consulted with an attorney prior toyour execution of this Letter Agreement or have determined by your own free will not to consult with an attorney. 17.This Letter Agreement will become effective, enforceable and irrevocable seven days after the date on which it is executed byyou (the "Effective Date"). During the seven-day period prior to the Effective Date, you may revoke your agreement to acceptthe terms hereof by indicating in writing to the Company's General Counsel your intention to revoke. If you exercise your rightto revoke hereunder, you shall forfeit your right to receive any of the payments and other benefits provided for herein, and to theextent such payments or benefits have already been made, you agree that you will immediately reimburse the Company forthe value of such payments and benefits.4 If the foregoing correctly reflects our understanding, please sign the enclosed copy of this Letter Agreement, whereupon it will become abinding agreement between us. J. CREW GROUP, INC.J. CREW OPERATING CORP. _________________________________Lynda MarkoeVice-President, Human Resources AGREED TO AND ACCEPTED: _________________________________Scott Gilbertson Dated: _____________________, 2004 Acknowledgment STATE OF ______________________ ) ss: COUNTY OF ____________________ ) On the day of , 2004, before me personally came Scott Gilbertson, who, being by me duly sworn, did depose and saythat he resides at , and did acknowledge and represent that he has had an opportunity to consult with attorneysand other advisers of his choosing regarding the Letter Agreement set forth above, that he has reviewed all of the terms of the LetterAgreement and that he fully understands all of its provisions, including without limitation, the general release and waiver set forth therein. _________________________________Notary Public Dated: _____________________, 2004 5Exhibit 10.14 January 23, 2004Ms. Tracy GardnerDear Tracy: Pursuant to our discussions regarding your employment with J. Crew Group, Inc. (the "Parent") and its operating subsidiary, J. CrewOperating Corp. (collectively with the Parent, the "Company"), we thought it would be useful to lay out the terms and conditions of ouragreement in this letter agreement ("Agreement") for all parties to sign.1. Employment. (a) The Company hereby agrees to employ you during the "Employment Period" (as defined below) as Executive Vice President—Merchandising, Planning and Production, and you hereby agree to serve the Company in such capacity. You shall report to the ChiefExecutive Officer of the Company. (b) During the Employment Period, you shall devote your full business time and energy, attention, skills and ability to the performanceof your duties and responsibilities hereunder and shall faithfully and diligently endeavor to promote the business and best interests of theCompany. Accordingly, you may not, directly or indirectly, without the prior written consent of the Company, operate, participate in themanagement, operations or control of, or act as an employee, officer, consultant, agent or representative of, any type of business or service(other than as an employee of the Company), provided that it shall not be a violation of the foregoing for you to (i) act or serve as a director,trustee or committee member of any civic or charitable organization, and (ii) manage your personal, financial and legal affairs, so long assuch activities (described in clauses (i) or (ii)) do not interfere with the performance of your duties and responsibilities to the Company asprovided hereunder.2. Employment Period. (a) Unless the Employment Period is terminated earlier pursuant to Section 2(b) hereof, the Company shall employ you on the termsand subject to the conditions of this Agreement for a four-year term commencing on a date to be mutually determined (the "CommencementDate") and ending on the day immediately preceding the fourth anniversary of the Commencement Date (the "Employment Period").Effective upon the expiration of the Employment Period, the Employment Period may be renewed upon mutually agreeable terms("Renewal Terms"), unless the Company or you, at least four months prior to the expiration of the Employment Period, shall give writtennotice to the other party of its intention not to renew the Employment Period. Any Renewal Terms shall include a Base Salary not less thanyour annual base salary in effect immediately prior to the expiration of the Employment Period and an Annual Bonus structure with targetand maximum amounts not less than those in effect immediately prior to the expiration of the Employment Period. (b) Your employment with the Company hereunder may be terminated prior to the expiration of the Employment Period upon theearliest to occur of the following events: (i) your death or Disability (as defined below), (ii) voluntary termination of employment by youwithout Good Reason (as defined below) on at least two months prior notice, (iii) voluntary termination of employment by you for GoodReason in accordance with the procedure outlined in Section 2(e) below, (iv) termination of employment by the Company without Cause (asdefined below) or (v) termination of employment by the Company for Cause. The date of which your employment is terminated hereunder forany reason (including upon the expiration of the Employment Period) shall be referred to as the "Termination Date". (c) Upon termination of the Employment Period for any reason, you shall be entitled to any earned but unpaid Base Salary (as definedbelow) as of the Termination Date. If the Company terminates the Employment Period without Cause or you terminate the EmploymentPeriod for Good Reason, you will be entitled to the following severance benefits (the "Severance Benefits") (i) continuation of your BaseSalary as in effect immediately prior to such termination (your "Ending Base Salary", and suchcontinuation of your Ending Base Salary being referred to here in as the "Continuation Severance Payment") and medical benefits("Continuation Medical Benefit") for a period of one (1) year (the "Severance Period") after the Termination Date; and (ii) a lump sumamount equal to the product of (x) the Annual Bonus, if any, that you would have earned in the fiscal year which includes the TerminationDate had your employment not been terminated and (y) a fraction, the numerator of which is the number of days in the fiscal year thatincludes the Termination Date through the Termination Date and the denominator of which is 365, payable when bonuses are generally paidto employees of the Company ("Pro-Rata Bonus"); provided that the Severance Benefits are subject to and conditioned upon your executionof a valid general release and waiver in a form reasonably satisfactory to the Company waiving all claims that you may have against theCompany, its successors, assigns, affiliates, employees, officers and directors and your compliance with the provisions set forth inParagraph 4 hereof. Notwithstanding anything herein to the contrary, your right to receive the Continuation Severance Payment during theSeverance Period shall terminate effective immediately upon the date that you become employed by a new employer or otherwise beginproviding services for an entity as a consultant or otherwise ("New Employment"); provided that if the cash compensation you receivepursuant to such New Employment, including without limitation guaranteed bonus payments relating to the Severance Period whether ornot paid during the Severance Period, ("New Compensation") is less than your Ending Base Salary, the Company will continue to pay youan incremental amount during the remaining Severance Period such that the New Compensation payments you receive together with suchincremental amount will equal your Ending Base Salary on an annualized basis and your right to receive the Continuation Medical Benefitshall cease immediately upon your being eligible for coverage under another group health plan. For purposes of clarification only, any NewEmployment obtained by you during the Severance Period shall not affect your right to receive the Pro-Rata Bonus subject to compliancewith the conditions outlined above for provision of the Severance Benefits. You shall immediately notify the Company upon obtaining NewEmployment and provide all information regarding compensation and benefits reasonably requested by the Company. The Company shallhave no additional obligations under this Agreement. (d) For purposes of this Agreement, the term "Cause" shall mean (i) the indictment for a felony, (ii) willful misconduct or grossnegligence in connection with the performance of your duties as an employee of the Company, (iii) a material breach of this Agreement,including without limitation, your failure to perform your duties and responsibilities hereunder, (iv) a fraudulent act or omission by youadverse to the reputation of the Company or any affiliate, and (v) the disclosure by you of any Confidential Information (as defined below) topersons not authorized to know same. If subsequent to the termination of your employment, it is discovered that your employment couldhave been terminated for Cause and there is a reasonable basis for such determination, your employment shall, at the election of theCompany, in its sole discretion, be deemed to have been terminated for Cause, in which event the Company shall be entitled to immediatelycease providing any Severance Benefits to you or on your behalf and recover any payments previously made to you or on your behalf in theform of Severance Benefits. In addition, for purposes of this Agreement, the term "Disability" shall mean your incapacity due to physical ormental illness or injury, which results in your being unable to perform your duties hereunder for a period of ninety (90) consecutive workingdays, and within thirty (30) days after the Company notifies you that your employment is being terminated for Disability, you shall not havereturned to the performance of your duties on a full-time basis. (e) For purposes of this Agreement, the term "Good Reason" shall mean either (i) any action by the Company that results in amaterial and continuing diminution in your duties or responsibilities or (ii) a relocation of your principal place of employment to more thanfifty (50) miles from your principal place of employment, in each case without your written consent. Termination of your employment for"Good Reason" shall not be effective until you deliver to the Board of Directors of the Company ("Board") a written notice specificallyidentifying the conduct of the Company which you believe2constitutes "Good Reason" in accordance with this Section 2(e) and you provide the Board at least thirty (30) days to remedy such conduct.3. Compensation and Benefits. (a) Base Salary. During the Employment Period, your annual base salary shall not be less than $450,000 ("Base Salary"); providedthat your annual base salary may be reduced to less than the Base Salary if the annual base salaries in effect for all or the majority of othersenior executives of the Company are similarly reduced. The Base Salary shall be paid pursuant to regular Company payroll practices for thesenior executives of the Company. The Base Salary will be reviewed annually by the Company. (b) Annual Bonus. In addition to the Base Salary, in each fiscal year during the Employment Period, you will have the opportunity toearn an annual bonus ("Annual Bonus") at the following percentages of your Base Salary if both the Company achieves certain performanceobjectives (which will be determined by the Company for each such fiscal year in accordance with the Company's bonus plan) and youachieve your performance goals established by the Company: target bonus of 50% up to a maximum bonus of 100% of Base Salary.Notwithstanding the foregoing, for the fiscal year beginning February 1, 2004, your Annual Bonus will be at least $112,500 (the "FY '04Guaranteed Bonus") regardless of whether the performance objectives for such fiscal year are achieved. Any Annual Bonus payable abovethe FY '04 Guaranteed Bonus will be pro-rated based on the Commencement Date. Any Annual Bonus (including the FY '04 GuaranteedBonus) will be paid only if you are actively employed with the Company and not in breach of this Agreement on the date of actual payment,except for any Pro-Rata Bonus payable pursuant to Section 2(c) hereof. (c) Signing Bonus. As soon as practicable after the Commencement Date, the Company will pay you $150,000 (the "SigningBonus") as consideration for entering into this Agreement, provided that you will be required to immediately pay back a pro-rata portion of theSigning Bonus based on your last date of employment in the event you voluntarily terminate your employment hereunder other than forGood Reason within one (1) year after the Commencement Date. To the extent that you fail to pay back any portion of the Signing Bonus asprovided herein, the Company shall have the right to offset any other payments provided hereunder or otherwise owed to you in respect ofsuch amount. (d) Initial Stock Options. As soon as reasonably practicable after the Commencement Date and subject to approval of the Board ofDirectors of Parent (the "Board") or a committee thereof, the Company will cause Parent to grant you an option (the "Initial Option") topurchase 50,000 shares of common stock of Parent (the "Common Stock") at an exercise price equal to $6.82 per share. Twenty-five (25%)percent of the shares underlying the Initial Option shall vest and become exercisable each year on the anniversary of the grant datebeginning with the first anniversary thereof, provided that you continue to be actively employed by the Company on such anniversary. TheInitial Option shall be subject to and governed by the terms and conditions of the Company's 2003 Equity Incentive Plan (the "Equity Plan",a copy of which has been provided to you) and shall be evidenced by a separate stock option grant agreement. (e) Premium Stock Options. As soon as reasonably practicable after the Commencement Date and subject to approval of the Board ora committee thereof, the Company will also cause Parent to grant you (i) an option to purchase 20,000 shares of Common Stock at anexercise price equal to $15.00 per share and (ii) an option to purchase 20,000 shares of Common Stock at an exercise price equal to $25.00per share (collectively, the "Premium Options Grant I"). Twenty-five (25%) percent of the shares underlying the Premium Options I shallvest and become exercisable each year on the anniversary of the grant date beginning on the second anniversary thereof, provided that youcontinue to be actively employed by the Company on such anniversary. In addition, subject to approval of the Board or a committee thereofand provided that you are still employed by the Company on such date, on the first anniversary of the Commencement Date the Companywill cause Parent to grant you (x) an additional option to purchase 20,000 shares of Common Stock at an exercise price equal to $15.00 pershare and (y) an additional option to purchase 20,000 shares of Common Stock at an exercise price equal to $25.00 per share (collectively,the "Premium Options Grant II"). Twenty-five (25%) percent of the shares underlying the Premium Options II shall vest and becomeexercisable each year on the anniversary of the grant date beginning on the second anniversary thereof, provided that you continue to beactively employed by the Company on such anniversary. The Premium Options Grant I and the Premium Options Grant II shall be subjectto and governed by the terms and conditions of the Equity Plan and shall be evidenced by separate stock option grant agreements.3 (f) Restricted Stock. As soon as reasonably practicable after the Commencement Date and subject to approval of the Board or acommittee thereof, the Company will also cause Parent to grant you 50,000 restricted shares of Common Stock (the "Restricted StockGrant"). Twenty-five (25%) percent of the shares underlying the Restricted Stock Grant shall vest on each anniversary of the grant datebeginning on the second anniversary thereof, provided that you continue to be actively employed by the Company on such anniversary. TheRestricted Stock Grant shall be subject to and governed by the terms and conditions of the Equity Plan and shall be evidenced by a separaterestricted stock grant agreement. (g) Employee Benefits. During the Employment Period, you will be entitled to participate in the Company's benefit package madegenerally available to associates of the Company. Currently, the Company's benefit package includes paid time off days, holidays, lifeinsurance, medical insurance, a matching 401(k) tax deferred savings plan, a health flexible spending account, and the employee discount.The Company reserves the right to change these benefits at any time in its sole discretion. In addition, the Company will reimburse you forall Cobra expenses incurred by you during the necessary waiting period needed to join the Company's medical insurance plan, subject toapplicable tax withholdings. (h) Relocation. With respect to your relocation to the New York area, the Company will provide you with relocation assistance inaccordance with the Company's executive homeowner relocation policy, provided that you will be required to immediately pay back a pro-rataportion of all payments, benefits and expense reimbursements that you received in connection with your relocation based on your last date ofemployment in the event you voluntarily terminate your employment hereunder other than for Good Reason within one (1) year after theCommencement Date. To the extent that you fail to pay back any portion of this amount as provided herein, the Company shall have theright to offset any other any other payments provided hereunder or otherwise owed to you in respect of such amount.4. Additional Agreements; Confidentiality. (a) As additional consideration for the Company entering into this Agreement, you agree that for a period of twelve months followingthe Termination Date, you shall not, directly or indirectly, (i) engage (either as owner, investor, partner, employer, employee, consultant ordirector) in or otherwise perform services for any Competitive Business (as defined below) which operates within a 100 mile radius of thelocation of any store of the Company or its affiliates or in the same area as the Company directs its mail order operations, provided that theforegoing restriction shall not prohibit you from owning a passive investment of not more than 5% of the total outstanding securities of anypublicly-traded company, and (ii) solicit or cause another to solicit any customers or suppliers of the Company or any of its subsidiaries toterminate or otherwise adversely modify their relationship 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 engagedin on the Termination Date. Notwithstanding anything herein to the contrary, the provisions of this Section 4(a) shall not apply in any of thefollowing circumstances: (i) the Company terminates the Employment Period without Cause, (ii) you terminate the Employment Period forGood Reason or (iii) or the Company or you elect not to renew the Employment Period following its expiration pursuant to Section 2(a)above.4 (b) During the Employment Period and for a period of one year following the Termination Date, you shall not, directly or indirectly,solicit, hire, or seek to influence the employment decisions of, any employee of the Company or any of its subsidiaries on behalf of anyperson or entity other than the Company. (c) You agree that during the Employment Period and thereafter you will hold in strict confidence any proprietary or ConfidentialInformation related to the Company or its affiliates. For purposes of this Agreement, the term "Confidential Information" shall mean allinformation of the Company and its affiliates in whatever form which is not generally known to the public, including without limitation,customer lists, trade practices, marketing techniques, fit specifications, design, pricing structures and practices, research, trade secrets,processes, systems, programs, methods, software, merchandising, distribution, planning, inventory and financial control, store design andstaffing. Upon termination of your employment, you shall not take, without the prior written consent of the Company, any drawing,specification or other document or computer record (in whatever form) of the Company or its affiliates embodying any ConfidentialInformation and will return any such information (in whatever form) then in your possession. (d) You agree that during the Employment Period and thereafter you shall not disclose any information that has not been otherwisepublicly disclosed by the Company in accordance with securities laws regarding the existence or substance of this Agreement to any thirdparty (including employees of the Company) without the prior written consent of the Chief Executive Officer of the Company, except as maybe required by law, other than to your spouse or your professional advisers for purposes of discussing the subject matter hereof and, withrespect to such professional advisers, you agree to inform them of your obligations hereunder and take all reasonable steps to ensure thatsuch professional advisers do not disclose the existence or substance hereof. Further, during the Employment Period and thereafter youagree not to directly or indirectly disparage or defame the Company, its affiliates or any of their directors, officers or employees. (e) You also agree that breach of the provisions provided in this Paragraph 4 would cause the Company to suffer irreparable harm forwhich money damages would not be an adequate remedy and therefore, if you breach any of the provisions in this Paragraph 4, theCompany will be entitled to an injunction restraining you from violating such provision without the posting of any bond. If the Company shallinstitute any action or proceeding to enforce the terms of any 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 or proceeding the claim or defense that the Company has anadequate remedy at law. The foregoing shall not prejudice the Company's right to require you to account for and pay over to the Company,and you hereby agree to account for and pay over, the compensation, profits, monies, accruals and other benefits derived or received by youas a result of any transaction constituting a breach of any of the provisions set forth in this Paragraph 4. 5. Representations. The parties hereto hereby represent and warrant that they have the authority to enter into this Agreement andperform their respective obligations hereunder. You hereby represent and warrant to the Company that (i) the execution and delivery of thisAgreement and the performance of your duties hereunder shall not constitute a breach of or otherwise violate any other agreements,arrangements or commitments with any other party to which you are a party or by which you are bound, and (ii) you will not use or discloseany confidential and/or proprietary information or trade secrets obtained by you in connection with your former employments with respect toyour duties and responsibilities hereunder.56. Miscellaneous. (a) Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and shall bedeemed to be given when delivered personally or four days after it is mailed by registered or certified mail, postage prepaid, return receiptrequested or one day after it is sent by a reputable overnight courier service and, in each case, addressed as follows: If to the Company:J. Crew Operating Corp.770 BroadwayTwelfth FloorNew York, NY 10003Attention: General Counsel If to you:To the address on file with the Companyor to such other address as any party may designate by notice to the other. (b) This Agreement constitutes the entire agreement between you and the Company with respect to your employment by theCompany, and supersedes and is in full substitution for any and all prior understandings or agreements with respect to your employment. (c) This Agreement shall inure to the benefit of and be an obligation of the Company's assigns and successors; however you may notassign any of your rights or duties hereunder to any other party. (d) No provision of this Agreement may be amended or waived, unless such amendment or waiver is specifically agreed to in writingand signed by you and an officer of the Company duly authorized to execute such amendment. The failure by either you or the Company atany time to require the performance by the other of any provision hereof shall in no way affect the full right to require such performance atany time thereafter, nor shall the waiver by you or the Company of a breach of any provision hereof be taken or held to be a waiver of anysucceeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. (e) You and the Company acknowledge and agree that each of you has reviewed and negotiated the terms and provisions of thisAgreement and has had the opportunity to contribute to its revision. Accordingly, the rule of construction to the effect that ambiguities areresolved against the drafting party shall not be employed in the interpretation of this Agreement. Rather, the terms of this Agreement shall beconstrued fairly as to both parties and not in favor or against either party. (f) Any provision of this Agreement (or portion thereof) which is deemed invalid, illegal or unenforceable in any jurisdiction shall, as tothat jurisdiction and subject to this Paragraph, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting inany way the remaining provisions thereof in such jurisdiction or rendering that or any other provisions of this Agreement invalid, illegal, orunenforceable in any other jurisdiction. If any covenant should be deemed invalid, illegal or unenforceable because its scope is consideredexcessive, such covenant shall be modified so that the scope of the covenant is reduced only to the minimum extent necessary to render themodified covenant valid, legal and enforceable. (g) The Company may withhold from any amounts payable to you hereunder all federal, state, city or other taxes that the Companymay reasonably determine are required to be withheld pursuant to any applicable law or regulation (it being understood, that you shall beresponsible for payment of all taxes in respect of the payments and benefits provided herein).6 (h) This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shallconstitute one and the same instrument. (i) The headings in this Agreement are inserted for convenience of reference only and shall not be a part of or control or affect themeaning of any provision hereof. (j) This Agreement and all amendments thereof shall, in all respects, be governed by and construed and enforced in accordance withthe internal laws (without regard to principles of conflicts of law) of the State of New York. Each party hereto hereby agrees to and accepts theexclusive jurisdiction of any court in New York County or the U.S. District Court for the Southern District of New York in respect of any actionor proceeding relating to the subject matter hereof, expressly waiving any defense relating to jurisdiction or forum non conveniens, andconsents 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 Agreement meet with your approval, please sign and return one copy to me. Sincerely, Millard S. DrexlerChief Executive OfficerAGREED TO AND ACCEPTED: Tracy Gardner Date: , 2004 7Exhibit 10.15 December 23, 2003Kathleen Boyer32 Hitchcock RoadWestport, CT 06880Dear Kathy: This letter will confirm our understanding of the arrangements under which your employment with the Company is terminated. Theseterms and conditions are set out below.1.The parties hereby acknowledge and confirm that your employment with the Company is terminated effective as of January 5,2004 (the "Termination Date"). 2.Subject to this Agreement becoming effective (as described in Paragraph 17 hereof), the Company will continue to pay youyour base salary of $415,000 per annum for the six (6) month period beginning on the day immediately following theTermination Date ("Severance Period"), payable in accordance with the Company's regular payroll practices for itsemployees. You will also continue to have medical coverage during the Severance Period on the same terms and conditions asmedical coverage is then made available to the employees of the Company. Notwithstanding anything herein to the contrary,starting in month four of the Severance Period, your right to receive the foregoing payments and medical coverage shallterminate effective immediately upon the date that you become employed by a new employer; provided that if the base salaryyou receive pursuant to such new employment ("New Salary") is less than $415,000 per annum, the Company will continueto pay you an incremental amount during the remaining Severance Period such that the New Salary payments you receivetogether with such incremental amount will equal $415,000 on an annualized basis. You agree to notify the Vice-President ofHuman Resources in writing prior to the effective date of such new employment. In addition, upon request, outplacementservices will be provided in accordance with the Company's policy.The foregoing payments shall be reduced by any required tax withholdings and shall not be taken into account ascompensation and no service credit shall be given after the Termination Date for purposes of determining the benefits payableunder any other plan, program, agreement or arrangement of the Company. You acknowledge that, except for the foregoingpayments, you are not entitled to any payment by the Company in the nature of either severance or termination pay or othercompensation of any kind.3.As of the Termination Date, you have vested options to purchase 7,000 shares of Common Stock ("Common Stock") of J.Crew Group, Inc. ("Parent") at $6.82 per share (the "Vested Options"). In addition, you have unvested options to purchase28,000 shares of Common Stock at $6.82 per share (the "Unvested Options"). You acknowledge that all of the VestedOptions will terminate 90 days after the Termination Date and that all of the Unvested Options terminate effective immediately,in accordance with the provisions of your stock option agreement with Parent and the J. Crew Group, Inc. 1997 Stock OptionPlan, as amended (the "Option Plan"). 4.By signing this Agreement, you agree that in exchange for the consideration set forth herein, you hereby voluntarily, fully andunconditionally release and forever discharge the Company, Parent, their 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 you have or may haveagainst any or all of the Releasees for or by reason of any cause, nature or thing whatsoever, up to the present time, arisingout of or related to your employment with the Company or the termination of such employment, including, by way ofexamples and without limiting the broadest application of the foregoing, any actions, causes of action, or claims under anycontract 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 perceiveddisability, age, sex, race or any other factor (including, without limitation, any claim pursuant to Title VII of the Civil Rights Actof 1964, Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, as amended, the Familyand Medical Act of 1993, the Equal Pay Act of 1963, the FairLabor Standards Act, the State, City and local laws of New York, and the equal employment law or laws of the state and/or cityin which you work), any claim pursuant to any other applicable employment standards or human rights legislation or forseverance pay, salary, bonus, incentive or additional compensation, vacation pay, insurance, other benefits, interest, and/orattorney's fees. You acknowledge that this general release is not made in connection with an exit incentive or otheremployment termination program offered to a group or class of employees.If you have made or should hereafter make any complaint, charge, claim, allegation or demand, or commence or threaten tocommence any action, complaint, charge, claim or proceeding, against any or all of the Releasees for or by reason of anycause, matter or thing whatsoever existing up to the present time, this Agreement may be raised as and shall constitute acomplete bar to any such action, complaint, charge, claim, allegation or proceeding, and, subject to a favorable ruling by atribunal of final jurisdiction, the Releasees shall recover from you, and you shall pay to the Releasees, all costs incurred bythem, including their attorneys' fees, as a consequence of any such action, complaint charge, claim, allegation or proceeding;provided, however, that this shall not limit you from enforcing your rights under this Agreement, and in the event any action iscommenced to enforce your rights under this Agreement, each party shall bear its own legal fees and expenses; and providedfurther, however, that this is not intended to interfere with your right to file a charge with the Equal Employment OpportunityCommission ("EEOC") in connection with any claim you believe you may have against any Releasee. However, by signingthis Agreement, you agree to waive any right to recover in any proceeding you may bring before the EEOC (or any statehuman rights commission) or in any proceeding brought by the EEOC (or any state human rights commission) on yourbehalf.You specifically release all claims under the Age Discrimination in Employment Act ("ADEA") relating to your employment andits termination.5.You hereby also agree (a) to return all Company property in your possession (regardless of form) and not to retain any copies,duplicates, reproductions or excerpts thereof, (b) to refrain from disclosing or using any confidential information of theCompany, including the terms of this Agreement, for any purpose, and (c) to refrain from making any disparaging orderogatory comments or statements, whether written or oral, about the Company or any of the Releasees (the "RestrictiveCovenants"), and that the payments described in Section 2 above that you are receiving are subject to and contingent uponyour compliance with the Restrictive Covenants. 6.You acknowledge and agree that, notwithstanding any other provision of this Agreement, if you breach any of your obligationsunder this Agreement or any Restrictive Covenant, (a) you will forfeit your right to receive the payments and benefits describedin Section 2 above (to the extent the payments were not theretofore paid) and the Company shall be entitled to recover anypayments already made to you or on your behalf, (b) the Vested Options shall expire as of the date of such breach to the extentnot theretofore exercised and, if exercised as of the date of such breach, you shall immediately reimburse the Company for theprofit upon exercise (such profit calculated as the difference between the (i) greater of either the Fair Market Value (as defined inthe Option Plan) of a share of Common Stock on the date of exercise or the amount paid by the Company to you per share ofCommon Stock for the purchase of the shares acquired upon exercise, and (ii) exercise price, times the number of optionsexercised). 7.You hereby agree that the breach of any Restrictive Covenant may cause the Company to suffer irreparable harm for whichmoney damages would not be an adequate remedy and therefore, if you breach a Restrictive Covenant, the Company wouldbe entitled to temporary and permanent injunctive relief in any court of competent jurisdiction (without the need to post anybond) without prejudice to any other remedies under this Agreement or otherwise. 8.You agree that, in the event that you are served with legal process or other request purporting to require you to testify, plead,respond or defend and/or produce documents at a legal proceeding, threatened proceeding, investigation or inquiry involvingthe Releasees, you will: (1) refuse to provide testimony or documents absent a subpoena, court order or similar process from aregulatory agency: (2) within three (3) business days or as soon thereafter as practical, provide oral notification to theCompany's General Counsel of your receipt of such process or request to testify or produce documents; and (3) provide to theCompany's General Counsel by overnight delivery service a copy of all legal papers and documents served upon you. Youfurther agree that in the event you are served with such process, you will meet and confer with the Company's designee(s) inadvance of giving such testimony or information. You also agree to cooperate fully with the Releasees in connection with anyexisting or future litigation against the Releasees, whether administrative, civil or criminal in nature, in which and to the extentthe Releasees deem your cooperation necessary. The Company agrees to reimburse you for your reasonable out-of-pocketexpenses incurred in connection with the performance of your obligations under this Section 8.29.This Agreement does not constitute an admission of liability or wrongdoing of any kind by you or the Company or its affiliates. 10.The terms of this Agreement shall be binding on the parties hereto and their respective successors, assigns, heirs andrepresentatives. 11.This Agreement constitutes the entire understanding of the Company and you with respect to the subject matter hereof andsupersedes all prior understandings, written or oral. The terms of this Agreement may be changed, modified or dischargedonly by an instrument in writing signed by the parties hereto. A failure of the Company or you to insist on strict compliancewith any provision of this Agreement shall not be deemed a waiver of such provision or any other provision hereof. If anyprovision of this Agreement is determined to be so broad as to be unenforceable, such provision shall be interpreted to be onlyso broad as is enforceable. 12.This Agreement shall be construed, enforced and interpreted in accordance with and governed by the laws of the State of NewYork. 13.The parties hereto acknowledge and agree that each party has reviewed and negotiated the terms and provisions of thisAgreement and has contributed to its revision. Accordingly, the rule of construction to the effect that ambiguities are resolvedagainst the drafting party shall not be employed in the interpretation of this Agreement. Rather, the terms of this Agreementshall be construed fairly as to both parties hereto and not in favor or against either party. 14.This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each ofwhich counterpart, when so executed and delivered, shall be deemed to be an original and all of which counterparts, takentogether, shall constitute but one and the same Agreement. 15.You acknowledge that, by your free and voluntary act of signing below, you agree to all of the terms of this Agreement andintend to be legally bound thereby. 16.You acknowledge that you have received this Agreement on or before December 12, 2003. You understand that you mayconsider whether to agree to the terms contained herein for a period of twenty-one (21) days after the date hereof. However, theoperation of the provisions of Sections 2 through 4 above may be delayed until you execute this Agreement and return it to theCompany and it becomes effective as provided below. You acknowledge that you have consulted with an attorney prior to yourexecution of this Agreement or have determined by your own free will not to consult with an attorney. 17.This Agreement will become effective, enforceable and irrevocable seven days after the date on which it is executed by you (the"Effective Date"). During the seven-day period prior to the Effective Date, you may revoke your agreement to accept the termshereof by indicating in writing to the Company's General Counsel your intention to revoke. If you exercise your right to revokehereunder, you shall forfeit your right to receive any of the payments and other benefits provided for herein, and to the extentsuch payments or benefits have already been made, you agree that you will immediately reimburse the Company for thevalue of such payments and benefits.3 If the foregoing correctly reflects our understanding, please sign the enclosed copy of this letter agreement, whereupon it will become abinding agreement between us. J. CREW OPERATING CORP. By: ____________________________________Lynda MarkoeVice President, HRAGREED TO AND ACCEPTED:By: ________________________Kathleen Boyer Dated:________________________, 2003 Acknowledgment STATE OF ______________________ ) ss: COUNTY OF ____________________ ) On the day of , 2003, before me personally came Kathleen Boyer who, being by me duly sworn, did depose and say thatshe resides at 32 Hitchcock Road, Westport, CT 06880, and did acknowledge and represent that she has had an opportunity to consult withattorneys and other advisers of her choosing regarding the Agreement set forth above, that she has reviewed all of the terms of theAgreement and that she fully understands all of its provisions, including without limitation, the general release and waiver set forth therein. _________________________________Notary Public Date: ___________________________ 4 January 26, 2004Kathleen Boyer32 Hitchcock RoadWestport, CT 06880Dear Kathy: This letter amends the letter agreement ("Agreement"), dated December 23, 2003, between you and J.Crew Operating Corp. (the"Company") regarding the terms of your separation of employment from the Company. The Company and you agree as follows:1.Section 2 of the Agreement shall be amended in its entirety as follows:Subject to this Agreement becoming effective (as described in Paragraph 17 hereof), the Company will pay you a lump sumamount equal to $103,750.00 as soon as practicable and will also continue to pay you your base salary of $415,000 per annumfor a three (3) month period beginning on the day immediately following the Termination Date ("Severance Period"), payablein accordance with the Company's regular payroll practices for its employees. You will also continue to have medical coverageduring the Severance Period on the same terms and conditions as medical coverage is then made available to the employeesof the Company. The foregoing payments shall be reduced by any required tax withholdings and shall not be taken into accountas compensation and no service credit shall be given after the Termination Date for purposes of determining the benefitspayable under any other plan, program, agreement or arrangement of the Company. You acknowledge that, except for theforegoing payments, you are not entitled to any payment by the Company in the nature of either severance or termination payor other compensation of any kind. In addition, upon request, outplacement services will be provided in accordance with theCompany's policy.2.Except as expressly modified herein, all other terms and provisions of the Agreement shall remain in full force and effect. If the foregoing correctly reflects our understanding, please sign the enclosed copy of this letter, whereupon it will become a bindingagreement between us. J. CREW OPERATING CORP. By: ____________________________________Lynda MarkoeVice President, HumanResourcesAGREED TO AND ACCEPTED:By: _________________________Kathleen BoyerDated:______________________, 20045Exhibit 10.16 April 10, 2004Ms. Amanda BokmanDear Amanda: Pursuant to our discussions regarding your employment with J. Crew Group, Inc. (the "Parent") and its operating subsidiaries(collectively with the Parent, the "Company"), we thought it would be useful to lay out the terms and conditions of our agreement in thisletter agreement ("Agreement") for all parties to sign.1. Employment. (a) The Company hereby agrees to employ you during the "Employment Period" (as defined below) as Executive Vice President andChief Financial Officer, and you hereby agree to serve the Company in such capacity. You shall report to the Chief Executive Officer of theCompany. (b) During the Employment Period, you shall devote your full business time and energy, attention, skills and ability to theperformance of your duties and responsibilities hereunder and shall faithfully and diligently endeavor to promote the business and bestinterests of the Company. Accordingly, you may not, directly or indirectly, without the prior written consent of the Company, operate,participate in the management, operations or control of, or act as an employee, officer, consultant, agent or representative of, any type ofbusiness or service (other than as an employee of the Company), provided that it shall not be a violation of the foregoing for you to (i) act orserve as a director, trustee or committee member of any civic or charitable organization, and (ii) manage your personal, financial and legalaffairs, so long as such activities (described in clauses (i) or (ii)) do not interfere with the performance of your duties and responsibilities to theCompany as provided hereunder.2. Employment Period. (a) Unless terminated sooner as provided in the next succeeding sentence of this Section 2(a), the "Employment Period" shall beginon a date to be mutually determined (the "Commencement Date") and shall terminate on the day preceding the fourth anniversary of theCommencement Date; provided that the Employment Period shall be extended automatically for successive one-year periods beginning onthe fourth anniversary of the Commencement Date unless notice of an election not to extend the Employment Period is served by eitherparty on the other party at least 30 days prior to the date this Agreement would otherwise expire absent an extension. Notwithstanding theforegoing, the Employment Period shall terminate upon the earliest to occur of (i) your death or Disability (as defined below), (ii) voluntarytermination of employment by you without Good Reason (as defined below) on at least two months prior notice, (iii) voluntary termination ofemployment by you for Good Reason in accordance with the procedure outlined in Section 2(d) below, (iv) termination of employment by theCompany without Cause (as defined below) or (v) termination of employment by the Company for Cause. The date the Employment Periodterminates as provided above shall be referred to hereafter as the "Termination Date". (b) Upon termination of the Employment Period for any reason, you shall be entitled to any earned but unpaid Base Salary (as definedbelow) as of the Termination Date. If the Company terminates the Employment Period without Cause or you terminate the EmploymentPeriod for Good Reason or the Company terminates this Agreement prior to the commencement of the Employment Period other than undercircumstances that would constitute "Cause" (as defined below), you will be entitled to the following severance benefits (the "SeveranceBenefits"): (i) continuation of your Base Salary as in effect immediately prior to such termination (your "Ending Base Salary", and suchcontinuation of your Ending Base Salary being referred to herein as the "Continuation Severance Payment") and medical benefits, whichmay be provided by the Company reimbursing payment of COBRA premiums ("Continuation Medical Benefit") for a period of twelve (12)months (the "Severance Period") after the Termination Date; (ii) the unpaid Annual Bonus, if any, earned in accordance with Section 3(b)herein, for the fiscal year ending prior to the Termination Date; and(iii) a lump sum amount equal to the product of (x) the Annual Bonus, if any, that you would have earned in the fiscal year which includesthe Termination Date had your employment not been terminated and (y) a fraction, the numerator of which is the number of days in the fiscalyear that includes the Termination Date through the Termination Date and the denominator of which is 365, payable when bonuses aregenerally paid to employees of the Company ("Pro-Rata Bonus"), provided that if the Commencement Date is on or before May 10, 2004and the Termination Date occurs during fiscal year 2004, the Pro-Rata Bonus shall not be less than the FY "04 Guaranteed Bonus that youwould be entitled to under Section 3(b) herein; provided that the Severance Benefits are subject to and conditioned upon your execution of avalid general release and waiver in a form reasonably satisfactory to the Company waiving all claims that you may have against theCompany, its successors, assigns, affiliates, employees, officers and directors and your compliance with the provisions set forth inparagraph 4 hereof. Notwithstanding anything herein to the contrary, your right to receive the Continuation Severance Payment during theSeverance Period shall terminate effective immediately upon the date that you become employed by a new employer or otherwise beginproviding services for an entity as a consultant or otherwise ("New Employment"); provided that if the cash compensation you receivepursuant to such New Employment, including without limitation guaranteed bonus payments relating to the Severance Period whether ornot paid during the Severance Period ("New Compensation"), is less than your Ending Base Salary, the Company will continue to pay youan incremental amount during the remaining Severance Period such that the New Compensation payments you receive together with suchincremental amount will equal your Ending Base Salary on an annualized basis and your right to receive the Continuation Medical Benefitshall cease immediately upon your being eligible for coverage under another group health plan. Notwithstanding the foregoing, you will notbe obligated to seek New Employment. You shall immediately notify the Company upon obtaining New Employment and provide allinformation regarding medical benefits coverage reasonably requested by the Company. The Company shall have no additional obligationsunder this Agreement, including under any severance or termination pay plan, and your rights under any benefit plan of the Company tovested benefits or welfare benefits will be determined pursuant to the terms of the applicable plan. (c) For purposes of this Agreement, the term "Cause" shall mean (i) the indictment for a felony, (ii) willful misconduct or grossnegligence in connection with the performance of your duties as an employee of the Company, (iii) a material breach of this Agreement,including without limitation, your failure to perform your duties and responsibilities hereunder in any material respect, (iv) a fraudulent act oromission by you adverse to the reputation of the Company or any affiliate, (v) the disclosure by you of any Confidential Information (asdefined below) to persons not authorized to know same, (vi) a violation of or failure to comply with any Company policy other than anyviolation or failure that is both minor and unintentional, and (vii) a violation of or failure to comply with any provision of the Company's Codeof Ethics and Business Practices, or any legal or regulatory obligations or requirements, including, without limitation, failure to provide anycertifications as may be required by law. If subsequent to the termination of your employment, it is discovered that your employment couldhave been terminated for Cause, your employment shall, at the election of the Company, in its sole discretion, be deemed to have beenterminated for Cause in which event the Company shall be entitled to immediately cease providing any Severance Benefits to you or on yourbehalf and recover any payments previously made to you or on your behalf in the form of Severance Benefits and any release and waiverthat you may have executed shall be of void and of no force and effect. In addition, for purposes of this Agreement, the term "Disability" shallmean your incapacity due to physical or mental illness or injury, which results in your being unable to perform your duties hereunder for aperiod of ninety (90) consecutive working days, and within thirty (30) days after the Company notifies you that your employment is beingterminated for Disability, you shall not have returned to the performance of your duties on a full-time basis.2 (d) For purposes of this Agreement, the term "Good Reason" shall mean (i) any action by the Company that results in a material andcontinuing diminution in your duties or responsibilities or (ii) a relocation of your principal place of employment to more than thirty-five (35)miles from the Company's principal executive offices in New York, NY, in each case, without your written consent. Termination of youremployment for "Good Reason" shall not be effective until you deliver to the Board of Directors of Parent ("Board") a written noticespecifically identifying the conduct of the Company which you believe constitutes "Good Reason" in accordance with this Section 2(d) andyou provide the Board at least thirty (30) days to remedy such conduct.3. Compensation and Benefits. (a) Base Salary. During the Employment Period, your annual base salary shall be $400,000 ("Base Salary") and shall be paidpursuant to regular Company payroll practices for the senior executives of the Company. (b) Annual Bonus. In addition to the Base Salary, in each fiscal year during the Employment Period, you will have the opportunity toearn an annual bonus ("Annual Bonus") at the following percentages of your Base Salary if both the Company achieves certain performanceobjectives (which will be determined by the Company for each such fiscal year in accordance with the Company's bonus plan) and youachieve your performance goals established by the Company after consultation with you: target bonus of 50% up to a maximum bonus of100% of Base Salary. Notwithstanding the foregoing, if the Commencement Date is on or before May 10, 2004, your Annual Bonus for thefiscal year beginning February 1, 2004 will be at least $150,000 (the "FY '04 Guaranteed Bonus") regardless of whether the performanceobjectives for such fiscal year are achieved. Any Annual Bonus payable above the FY '04 Guaranteed Bonus, if applicable, will be pro-ratedbased on the Commencement Date. Except as specifically provided in Section 2(b) hereof, any Annual Bonus will be paid only if you areactively employed with the Company and not in breach of this Agreement on the date of actual payment. If the Commencement Date is afterMay 10, 2004, you will not be eligible for the FY "04 Guaranteed Bonus and any Annual Bonus payable to you for the fiscal year beginningFebruary 1, 2004 will be prorated based on the Commencement Date. (c) Initial Stock Options. As soon as reasonably practicable after the Commencement Date and subject to the approval of the Boardor a Committee thereof, the Company will cause Parent to grant you a non-qualified stock option (the "Initial Option Grant I") to purchase35,000 shares of common stock of Parent (the "Common Stock") at an exercise price equal to $6.82 per share. Twenty-five (25%) percent ofthe shares underlying the Initial Option Grant I shall vest and become exercisable each year on the anniversary of the grant date beginningwith the first anniversary thereof, provided that you continue to be actively employed by the Company on such anniversary. (d) Premium Stock Options. As soon as reasonably practicable after the Commencement Date and subject to the approval of theBoard or a Committee thereof, the Company will cause Parent to grant you (i) a non-qualified stock option to purchase 10,000 shares ofCommon Stock at an exercise price equal to $15.00 per share and (ii) a non-qualified stock option to purchase 10,000 shares of CommonStock at an exercise price equal to $25.00 per share (collectively, the "Premium Options Grant I"). Twenty-five (25%) percent of the sharesunderlying the Premium Options Grant shall vest and become exercisable each year on the anniversary of the grant date beginning on thesecond anniversary thereof, provided that you continue to be actively employed by the Company on such anniversary. (e) Additional Stock Options. Provided that you are still actively employed by the Company in April 2005 and that you have met orexceeded performance expectations and subject to the approval of the Board or a Committee thereof, the Company intends for you to receivein April 2005: (i) a non-qualified option to purchase 5,000 shares of Common Stock, at a minimum, at an exercise price equal to $6.82 pershare (the "Initial Option Grant II"), (ii) a non-qualified option to purchase 5,000 shares of Common Stock, at a minimum, at an exerciseprice equal to $15.00 per share and3(iii) a non-qualified option to purchase 5,000 shares of Common Stock, at a minimum, at an exercise price equal to $25.00 per share (theoptions referred to in (ii) and (iii) being collectively referred to herein as the "Premium Options Grant II"). Twenty-five (25%) percent of theshares underlying the Initial Option Grant II shall vest and become exercisable each year on the anniversary of the grant date beginning withthe first anniversary thereof, provided that you continue to be actively employed by the Company on such anniversary. Twenty-five (25%)percent of the shares underlying the Premium Options Grant II shall vest and become exercisable each year on the anniversary of the grantdate beginning on the second anniversary thereof, provided that you continue to be actively employed by the Company on such anniversary. (f) Restricted Stock. As soon as reasonably practicable after the Commencement Date and subject to the approval of the Board or aCommittee thereof, the Company will also cause Parent to grant you 25,000 restricted shares of Common Stock (the "Restricted StockGrant"). Twenty-five (25%) percent of the shares underlying the Restricted Stock Grant shall vest on each anniversary of the grant datebeginning on the second anniversary thereof, provided that you continue to be actively employed by the Company on such anniversary. (g) Terms of Options and Restricted Stock. The Initial Option Grant I, the Initial Option Grant II, the Premium Options Grant I andthe Premium Options Grant II (collectively herein referred to as the "Options") and the Restricted Stock Grant shall be subject to andgoverned by the terms and conditions of the Company's 2003 Equity Incentive Plan (the "Equity Plan", a copy of which has been provided toyou) and shall be evidenced by a separate stock option grant agreement or restricted stock grant agreement, as the case may be. All Optionsthat have not become exercisable on or before the Termination Date shall immediately terminate on the Termination Date. The Optionswhich have become exercisable on or before the Termination Date shall expire on the earlier of (i) the commencement of business on thedate your employment is terminated for Cause; (ii) 90 days after the date your employment is terminated for any reason other than Cause,retirement, death or Disability; (iii) one year after the date your employment is terminated by reason of death, retirement or Disability; or (iv)the 10th anniversary of the grant date for such Option(s). (h) Employee Benefits. During the Employment Period, you will be entitled to participate in the Company's benefit package madegenerally available to senior executives of the Company. Currently, the Company's benefit package includes paid time off days, holidays, lifeinsurance, medical and dental insurance, a matching 401(k) tax deferred savings plan, tuition reimbursement, a health flexible spendingaccount, and the employee discount. The Company reserves the right to change these benefits at any time in its sole discretion, butnotwithstanding any such change you shall be entitled to not less than 25 paid time off days consisting of vacation, illness and personal daysper year (prorated for partial years). (i) Business Expenses. The Company shall promptly reimburse you for all reasonable business expenses incurred by you inconnection with the performance of the services for the Company upon the presentation of statements of such expenses in accordance withthe Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all senior executiveofficers of the Company.4. Additional Agreements; Confidentiality. (a) As additional consideration for the Company entering into this Agreement, you agree that for a period of twelve months followingthe Termination Date, you shall not, directly or indirectly, (i) engage (either as owner, investor, partner, employer, employee, consultant ordirector) in or otherwise perform services for any Competitive Business (as defined below) which operates within a 100 mile radius of thelocation of any store of the Company or its affiliates or in the same area as the Company directs its mail order operations or any other area inwhich the Company or any of its subsidiaries conducts business or in which the Company or any of its subsidiaries'4customers are located as of the Termination Date, provided that the foregoing restriction shall not prohibit you from owning a passiveinvestment of not more than 5% of the total outstanding securities of any publicly-traded company, and (ii) solicit or cause another to solicitany customers or suppliers of the Company or any of its subsidiaries to terminate or otherwise adversely modify their relationship with theCompany or any such subsidiary. The term "Competitive Business" means any business in competition with the retail, mail order andinternet apparel and accessories business and any other material business the Company or its affiliates is engaged in on the TerminationDate, but this provision shall not prohibit your employment or other association with any entity where the Competitive Business conductedby such entity is not a material part of such entity and you do not perform services in respect of the part of such entity that is a CompetitiveBusiness other than as Chief Financial Officer or other senior financial or accounting officer of the entire enterprise. (b) During the Employment Period and for a period of two years following the Termination Date, you shall not, directly or indirectly,solicit, hire, or seek to influence the employment decisions of, any employee of the Company or any of its subsidiaries on behalf of anyperson or entity other than the Company. (c) You agree that during the Employment Period and thereafter you will hold in strict confidence any proprietary or ConfidentialInformation related to the Company or its affiliates. For purposes of this Agreement, the term "Confidential Information" shall mean allinformation of the Company and its affiliates in whatever form which is not generally known to the public, including without limitation,customer lists, trade practices, marketing techniques, fit specifications, design, pricing structures and practices, research, trade secrets,processes, systems, programs, methods, software, merchandising, distribution, planning, inventory and financial control, store design andstaffing. Upon termination of your employment, you shall not take, without the prior written consent of the Company, any drawing,specification or other document or computer record (in whatever form) of the Company or its affiliates embodying any ConfidentialInformation and will return any such information (in whatever form) then in your possession. (d) You also agree that breach of the provisions provided in this Paragraph 4 would cause the Company to suffer irreparable harm forwhich money damages would not be an adequate remedy and therefore, if you breach any of the provisions in this Paragraph 4, theCompany will be entitled to an injunction restraining you from violating such provision without the posting of any bond. If the Company shallinstitute any action or proceeding to enforce the terms of any 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 or proceeding the claim or defense that the Company has anadequate remedy at law. The foregoing shall not prejudice the Company's right to require you to account for and pay over to the Company,and you hereby agree to account for and pay over, the compensation, profits, monies, accruals and other benefits derived or received by youas a result of any transaction constituting a breach of any of the provisions set forth in this Paragraph 4.5. Representations. The parties hereto hereby represent and warrant that they have the authority to enter into this Agreement andperform their respective obligations hereunder. You hereby represent and warrant to the Company that (i) the execution and delivery of thisAgreement and the performance of your duties hereunder shall not constitute a breach of or otherwise violate any other agreements,arrangements or commitments with any other party to which you are a party or by which you are bound, and (ii) you will not use or discloseany confidential and/or proprietary information or trade secrets obtained by you in connection with your former employments with respect toyour duties and responsibilities hereunder.56. Miscellaneous. (a) Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and shall bedeemed to be given when delivered personally or four days after it is mailed by registered or certified mail, postage prepaid, return receiptrequested or one day after it is sent by a reputable overnight courier service and, in each case, addressed as follows:If to the Company:J. Crew Group, Inc.770 BroadwayTwelfth FloorNew York, NY 10003Attention: General CounselIf to you:To the address on file with the Companyor to such other address as any party may designate by notice to the other. (b) This Agreement constitutes the entire agreement between you and the Company with respect to your employment by theCompany, and supersedes and is in full substitution for any and all prior understandings or agreements with respect to your employment. (c) This Agreement shall inure to the benefit of and be an obligation of the Company's assigns and successors; however you may notassign any of your rights or duties hereunder to any other party. (d) No provision of this Agreement may be amended or waived, unless such amendment or waiver is specifically agreed to in writingand signed by you and an officer of the Company duly authorized to execute such amendment. The failure by either you or the Company atany time to require the performance by the other of any provision hereof shall in no way affect the full right to require such performance atany time thereafter, nor shall the waiver by you or the Company of a breach of any provision hereof be taken or held to be a waiver of anysucceeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. (e) You and the Company acknowledge and agree that each of you has reviewed and negotiated the terms and provisions of thisAgreement and has had the opportunity to contribute to its revision. Accordingly, the rule of construction to the effect that ambiguities areresolved against the drafting party shall not be employed in the interpretation of this Agreement. Rather, the terms of this Agreement shall beconstrued fairly as to both parties and not in favor or against either party. (f) Any provision of this Agreement (or portion thereof) which is deemed invalid, illegal or unenforceable in any jurisdiction shall, as tothat jurisdiction and subject to this Paragraph, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting inany way the remaining provisions thereof in such jurisdiction or rendering that or any other provisions of this Agreement invalid, illegal, orunenforceable in any other jurisdiction. If any covenant should be deemed invalid, illegal or unenforceable because its scope is consideredexcessive, such covenant shall be modified so that the scope of the covenant is reduced only to the minimum extent necessary to render themodified covenant valid, legal and enforceable. (g) The Company may withhold from any amounts payable to you hereunder all federal, state, city or other taxes that the Companymay reasonably determine are required to be withheld pursuant to any applicable law or regulation (it being understood, that you shall beresponsible for payment of all taxes in respect of the payments and benefits provided herein).6 (h) This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shallconstitute one and the same instrument. (i) The headings in this Agreement are inserted for convenience of reference only and shall not be a part of or control or affect themeaning of any provision hereof. (j) This Agreement and all amendments thereof shall, in all respects, be governed by and construed and enforced in accordance withthe internal laws (without regard to principles of conflicts of law) of the State of New York. Each party hereto hereby agrees to and accepts theexclusive jurisdiction of any court in New York County or the U.S. District Court for the Southern District of New York in respect of any actionor proceeding relating to the subject matter hereof, expressly waiving any defense relating to jurisdiction or forum non conveniens, andconsents to service of process by U.S. certified or registered mail in any action or proceeding with respect to this Agreement. (k) The Company will reimburse you for reasonable legal fees incurred in connection with the negotiation of this Agreement, not toexceed $4,500. If the terms of this Agreement meet with your approval, please sign and return one copy to me. Sincerely, _________________________________Lynda MarkoeVice President, Human ResourcesAGREED TO AND ACCEPTED:_________________________________Amanda BokmanDate: _____________________, 20047QuickLinks -- Click here to rapidly navigate through this documentExhibit 14J. CREWCODE OF ETHICS AND BUSINESS PRACTICES TABLE OF CONTENTS Introduction: 2Reporting Concerns 2Waivers 2Conduct in the Workplace: 3Diversity 3Discrimination and Harassment 3Workplace Violence 3Substance Abuse 3Relationships at Work 4Company Investigations 4Company Information and Assets: 4Accuracy of Company Records and Financial Integrity 4Confidential Information 4Computers, Other Equipment and Network Security 5Electronic Communications 5Limited Personal Use of Corporate Resources 6Bribes & Improper Payments 6Associate Discount 6Product Integrity 7Intellectual Property 7J.Crew Trademarks 7Respecting Intellectual Property Rights 7Conflicts of Interest 7Outside Employment 7Gratuities 8Questions & Clarifications: 8J.CREW CODE OF ETHICS AND BUSINESS PRACTICES Introduction: Our Code of Ethics and Business Practices is intended to facilitate positive and productive interactions in every place we do businessand, in general, it is the responsibility of all associates and Directors to always:•Act professionally •Treat customers, business partners and each other with respect and consideration •Behave in an honest and ethical manner •Ensure the accuracy and integrity of the Company's disclosures •Comply with all applicable laws where we do business •Refrain from disclosing or discussing confidential information •Protect Company property and assets Each of us here at J.Crew is responsible, both to ourselves and to each other, for ensuring that the highest standards of businessconduct are upheld and encouraged. Negative issues typically can be avoided by exercising good judgment. If you are uncertain about what todo in a situation, stop and seek help by referring to the relevant section of this Code or speak with your manager or your Human Resourcesrepresentative. Compliance with the provisions of this Code is a condition of each associate's employment and any failure to follow theseprovisions could lead to corrective action, up to and including separation and possible civil and criminal charges.Reporting Concerns As part of our commitment to ethical and legal conduct, the Company expects associates to report information regarding violations of thisCode, Company policy or any federal, state or local laws or regulations, or any questionable accounting, auditing, financial reporting orinternal controls matter. It is your responsibility to report any known or suspected violation promptly to any of the following:•Your manager •Your Human Resources representative •Legal Department (212.209.8257) •Loss Prevention Department (212.209.2740) or your RLPM (stores) All reports will be treated confidentially to the extent reasonable and possible under the circumstances. Retaliation against associatesreporting concerns in good faith is prohibited. If you feel uncomfortable doing so or believe that your concern has not been adequatelyaddressed, you should report information to the Company's toll-free IMPACT hotline (888.388.8666) where you have the option to remainanonymous. Failure to report knowledge of wrongdoing may result in disciplinary action.Waivers The provisions of this Code may be waived only by the CEO, CFO or Vice President of Human Resources, or, where an executiveofficer or a Director is involved, by the Board of Directors or a Board Committee. The Company will disclose such waiver to the extentrequired by law or regulation.2Conduct in the Workplace: Associates are expected to uphold the highest standards of professionalism and integrity at all times. Conduct should be governed bysound judgment, consideration of others and respect for the Company and its property. We expect a respectful workplace with associates whoare considerate of each other and who always act professionally. We have zero tolerance for any form of workplace violence, harassing,discriminatory or disrespectful behavior. These policies apply to our associates, Directors, applicants, customers, vendors and businesspartners.Diversity The society we live in is rich with the influences of different cultures. This diverse blending of backgrounds, beliefs and lifestyles is seenin our associates and customers. We place a high value on diversity and are committed to affirmatively providing equal opportunity to allassociates and qualified applicants without regard to race, color, ancestry, national origin, religion, sex, marital status, age, sexualorientation, legally protected physical or mental disability or any other basis protected under applicable law. Our policy guides all areas of ouremployment practices, including recruitment, hiring, compensation, training, promotions, transfers and terminations.Discrimination and Harassment Discrimination and harassment based on race, religion, gender, national origin, age, citizenship, sexual preference, marital status,disability or any other characteristic protected by federal, state or local laws are unlawful and will not be tolerated. Harassment includes slursand any other offensive remarks, jokes and other graphic, verbal or physical conduct that could create an intimidating, offensive or hostilework environment or adversely affect employment opportunities. In addition, sexual harassment includes unwelcome sexual advances,requests for sexual favors, physical, verbal, visual or electronic conduct of a sexual nature, and any other behavior that is not welcome andpersonally offensive, or creates an intimidating, offensive or hostile work environment or adversely affect employment opportunities. All associates are responsible for promptly reporting any acts of discrimination or harassment that they become aware of to managementor Human Resources so that appropriate steps can be taken to resolve the issue. We will promptly and expeditiously investigate allallegations of discrimination and harassment and will, where appropriate, take corrective action up to and including separation. We will alsomaintain confidentiality to the extent reasonable and possible under the circumstances. Retaliation against any associate who asserts a goodfaith discrimination or harassment claim or participates in an investigation is prohibited.Workplace Violence One of our primary goals is to provide all associates with a safe, secure workplace with zero tolerance for workplace violence, threats orintimidation against associates by anyone, including customers, vendors or other associates. An act or threat of violence is serious. Anyassociate who physically or verbally threatens, harasses someone at or from the workplace, or otherwise puts any individual's safety orproductivity at risk, will not be tolerated.Substance Abuse We prohibit the possession, use, sale, purchase or transfer of drugs and alcohol on our premises. The use of these substances isinconsistent with associate behavior expectations and undermines the Company's ability to operate effectively.3Relationships at Work We strongly recommend that each associate strive to keep relationships at work professional and business related. While we recognizethat occasionally two associates may become personally involved, we ask you to consider all alternatives, outcomes, and consequencesbefore proceeding. The same caveat applies to relatives (a domestic partner or any one of the following related by blood, marriage, oradoption: spouse, parent, in-law, child, brother, sister, aunt, uncle, nephew, niece, and cousin). Related associates can create situations thatmay cause unnecessary pressures, charges of favoritism, and difficulties with morale. If behavior becomes unprofessional at any time,corrective action up to and including separation will occur. In order to avoid any conflict of interest, associates who are romantically involved orare related as outlined above cannot be in a reporting relationship. It is the associates' responsibility to inform their management and HumanResources. The Company reserves the right to reassign or discharge one or both of the associates.Company Investigations We encourage associates to become actively involved in all aspects of our business. This is one way we can ensure that ourpartnerships are productive and that team members have the information and resources needed to carry out their responsibilities and exceedexpectations. This is particularly true when we conduct investigations. All associates are required to cooperate with members of the HumanResources, Legal and Loss Prevention Departments so that issues can be investigated and resolved expeditiously. We will maintainconfidentiality of the investigation to the extent reasonable and possible under the circumstances. Retaliation against any associate whoparticipates in good faith in an investigation is prohibited. Failure to cooperate in an investigation will result in corrective action up to andincluding separation.Company Information and Assets:Accuracy of Company Records and Financial Integrity Accurate records and financial integrity are essential to our business. All Company records, information and accounts must be accuratelymaintained at all times and fairly reflect the Company's assets, liabilities and transactions. All of the Company's public disclosures andcommunications should also be full, fair and accurate, timely and understandable, including all reports filed with or furnished to securitiesregulators, and accurately reflects our financial performance. Associates are expected to cooperate fully with our independent and internalauditors and management to ensure that the Company fulfills its responsibilities. It is a violation of Company policy to unduly or fraudulentlyinfluence, coerce, manipulate or mislead independent or internal auditors regarding our financial statements, accounting practices or internalcontrols. If you have any concerns relating to the Company's accounting, auditing, financial reporting or internal controls, you must promptlyinform the CFO or Legal Department or call the Company's toll-free IMPACT hotline. All reports will be treated confidentially to the extentreasonable and possible under the circumstances. Retaliation against associates reporting concerns in good faith is prohibited.Confidential Information Associates are entrusted with valuable confidential information and trade secrets relating to our businesses. Examples of confidentialinformation and materials include financial information; business plans and strategies; sales results; marketing plans and strategies;inventory and pricing information; potential new product lines; future product designs, fabrications and fits; company handbooks andmanuals; and personal information regarding associates, vendors and customers. Associates are prohibited from using confidentialinformation other than in the performance of their duties for the Company and are prohibited from disclosing such information tounauthorized individuals in or outside the Company. If you leave the Company for any reason, you must return all confidential informationand materials before your last day of employment. Even after your separation, your confidentiality obligations will continue with respect toany confidential information you may have learned during your employment.4 Maintaining the confidentiality of personal information relating to our associates customers, vendors and suppliers is important. Accessto these records is limited to those associates who need to use the information in performing their job duties and appropriate steps should betaken to safeguard such information against inappropriate use and disclosure both inside and outside the Company. Salary information,performance assessments, disciplinary action and medical and benefits information are examples of personal confidential information andmay be discussed only with management and Human Resources.Computers, Other Equipment and Network Security All computers provided to you or to which you have access are Company property. All communications and information transmitted by,received from, created by or stored in our computers (whether through word processing programs, electronic mail, the Internet or otherwise)are also Company property. In addition, only legitimately purchased "original software", licensed to and/or purchased by us, may be loadedonto our computers. The physical security of our computer network and of our environment is the responsibility of all associates. This includes protecting andsecuring computers and other equipment, and protecting and maintaining the confidentiality and integrity of information used to access ournetworks (including IDs, passwords, hand-held authentication devices, pass codes and building access key cards). The same precautionsmust be taken to protect our electronic data, application software and any reports. You should log off the network or activate a password-protected screensaver whenever you leave you computer terminal or data device unattended or unsecured. Public electronic networks such as the Internet raise the potential for unauthorized access to email and other files transmitted over suchnetworks. Data security over public networks simply cannot be guaranteed. Therefore, all associates are responsible for ensuring thatsensitive information is sufficiently protected before it is routed via the Internet or other public networks. In addition, computer software, emailmessages and files may contain viruses or other destructive programming that could jeopardize computer and network security. You mustuse a virus protection software program supplied by us on all computers used to conduct business. Any use of public domain or sharewaresoftware must be approved in advance by the IT Department.Electronic Communications Whether communicating face-to-face or by means of electronic communication tools, such as the computer, telephone, fax and voicemail, all associates are responsible for meeting the standards of professional behavior and conduct. Consideration must be given to thesensitivity or confidentiality of all communications. Email messages, computer information, fax communications and voice mail areconsidered Company property and associates should not have any expectation of privacy. Company policies concerning discrimination andharassment apply fully to the use of these communication tools, including the prohibited use of our computers to send or receive emailmessages or files that are illegal, sexually explicit, abusive, profane, offensive or inappropriate in any way. Unless prohibited by law, wereserve the right to monitor, access and disclose any of this information as necessary or appropriate for our business purposes. In addition to the general etiquette of electronic communications, the use of these devices is subject to special legal requirements inmost jurisdictions. Sending technical data via the Internet to another country or, in some instances, to a national or citizen of another country,involves export/import laws of the transmitting and receiving countries. Similarly, many nations restrict certain commercial applications ofelectronic communications. If you have any questions about what the proper course of conduct is, you should contact the Legal Department.5 Calls to the (900) area code, 576 exchange or similar caller paid services are prohibited. Personal calls should be minimal and brief.Associates must identify any unusual or excessive calls.Limited Personal Use of Corporate Resources Company assets are intended for use in supporting and conducting our business, but associates are permitted limited and reasonablepersonal use of certain business equipment and systems. When using our corporate resources for personal use, associates are expected toexercise good judgment and keep personal use to a minimum. Personal use of Company resources is limited to basic office services andsystems such as telephones, photocopiers, fax machines and personal computers. Personal use of Company resources must conform to the following guidelines:•It must be in compliance with any governmental laws and regulation and Company policies, standards and guidelines •It must not interfere with work responsibilities •It must not interfere with required business communications •It must not interfere with our ability to compete effectively •It must not be used in the support or operation of any other business •It must not be used in a manner or for a purpose that would reflect unfavorably upon our reputation, such as use in pursuit ofillegal, unethical or otherwise questionable goals Occasional limited use of the Internet and other public networks for personal reasons is also permissible. However, you must not usethese resources in a manner that could bring liability to or damage our reputation or interfere with your work responsibilities or theresponsibilities of others. Additionally, you must also abide by all security procedures and controls to protect the integrity and security of ourdata and networks. If you have any questions about whether something is a permitted personal use, you should contact your HumanResources representative.Bribes & Improper Payments Associates, Directors and our agents may not give our products, services or funds to any U.S. or foreign government officials or agentsfor the purpose of receiving special treatment or personal gain. In addition, all associates outside the U.S. and all of our accounting associatesmust abide by the Foreign Corrupt Practices Act.Associate Discount Associates and their spouses, same sex domestic partners and IRS recognized dependents are entitled to a discount on all J.Crewpurchases. Independent members of an associate's family, such as parents or siblings, are not entitled to the discount. Federal tax lawrequires that the value of any discount extended to a same sex domestic partner be taxed as wages to the associate, and that the Companymust include the value of the discount as wage income to the associate.6Product Integrity Offering our customers a quality product that we are proud of and will stand behind is central to the Company's business strategy. Inaddition to our own standards, each item must be produced, packaged, and labeled in full compliance with applicable legal requirements andour marketing and advertising must be truthful.Intellectual Property The Company owns and retains the sole rights to any business-related, merchandise-related designs, improvements, discoveries, orideas an associate conceives or makes during employment.J.Crew Trademarks Our trademarks are valuable assets. They represent what we are as a brand and we expect all associates to help protect them at alltimes. In some instances, individuals may attempt to sell counterfeit merchandise using our trademarks. If you find any merchandisebearing any portion of our trademarks on the labels, hang tags, price tags, packaging or otherwise, it is your responsibility to promptly informthe Legal or Loss Prevention Department.Respecting Intellectual Property Rights As much as we consider our intellectual property rights to be important, we also respect the legal intellectual property rights of others intheir brands, designs, software and other legally protected materials. Associates are prohibited from making unauthorized copies of materialfrom books, magazines, newspapers, videotapes or software programs. While you may generally make a copy for your own business use,making multiple copies without permission violates copyright laws. For example, copying software may be a copyright violation and must notbe done except where specifically permitted by contract or license. Undocumented software and illegal copies of software will not be used,maintained or supported at the Company. It is each associate's responsibility to become familiar with all the restrictions on the use orduplication of software so that any licensing agreement is not violated or compromised. Other types of intellectual property, such as music,literary works, photographs, film, video and other published material may also have legal protection. Before you distribute or copy suchproperty, check with the Legal Department to be sure that the Company has the legal right to do what you propose.Conflicts of Interest: Associates and Directors should avoid any activity that may create an actual or apparent conflict of interest with the Company. A conflictof interest occurs when personal interests interfere with an associate's or Director's ability to exercise judgment objectively in the bestinterests of the Company. Associates and Directors may not have a financial interest in any organization that does business with thecompany, except for insignificant holdings of public companies.Outside Employment Associates may not be employed by, or engage in, a business or activity that is in competition with the Company (except non-exemptassociates in our distribution centers). Associates who freelance or consult for a company not directly in competition with us may not use ourtime, facilities, resources or supplies for such work.Gratuities Associates are expected to conduct business in the best interest of the Company, regardless of personal preference. Payments, fees,privileges or favors may not be accepted from any person or organization that is a current vendor or seeks to do business with, or is acompetitor of the Company. Goods or services valued above $50 may not be accepted, with the exception of business-related entertainmentvalued at no more than $100 or holiday gift baskets or flowers within reason as long as they are shared with the entire department. Inaddition, certain vendor-paid training may be appropriate but only with the prior approval of management. "At cost" or discounted purchasesfrom vendors are also not permitted.Questions & Clarifications: Please note that the provisions contained in this Code of Ethics and Business Practices are only a summary of the Company's policiesand that they may be described in greater detail in the Associate Handbook. In addition, there may be additional important policies containedin the Associate Handbook that are not reflected in this Code. You should refer to the Associate Handbook for further clarification orinformation and you may also direct questions or requests for clarification or information to your Human Resources representative or theLegal Department.7QuickLinksCODE OF ETHICS AND BUSINESS PRACTICESTABLE OF CONTENTSJ.CREW CODE OF ETHICS AND BUSINESS PRACTICESQuickLinks -- Click here to rapidly navigate through this documentExhibit 21.1Subsidiaries of J. Crew Group, Inc. Name of Subsidiary State of Incorporation Name Under WhichSubsidiary Does BusinessJ. Crew Operating Corp. Delaware J. Crew Operating Corp.J. Crew Inc. New Jersey J. Crew Inc.Grace Holmes, Inc. Delaware J. Crew Retail StoresH.F.D. No. 55, Inc. Delaware J. Crew Factory StoresJ. Crew Virginia, Inc. Virginia J. Crew Virginia, Inc.J. Crew International, Inc. Delaware J. Crew International, Inc.J. Crew Intermediate LLC Delaware J. Crew Intermediate LLCC &W Outlet, Inc.* New York C &W Outlet, Inc.J. Crew Services, Inc.* Delaware J. Crew Services, Inc.ERL, Inc.* New Jersey ERL, Inc.*Inactive subsidiaryQuickLinksSubsidiaries of J. Crew Group, Inc.Exhibit 23.1The Board of DirectorsJ. Crew Group, Inc.: We consent to incorporation by reference in the previously filed registration statement No. 333-60658 on Form S-8 of J. Crew,Group Inc. 1997 Stock Option Plan of our report dated March 25, 2004, relating to the consolidated balance sheets of J. Crew Group, Inc andsubsidiaries as of January 31, 2004 and February 1, 2003, and the related consolidated statements of operations, cash flows, and changesin stockholders' deficit for each of the years in the three-year period ended January 31, 2004, and the related schedule, which report appearsin the Form 10-K for the year ended January 31, 2004 of J. Crew Group, Inc. Our report reflects adoption of Statement of FinancialAccounting Standard No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity".New York, New YorkApril 29, 2004QuickLinks -- Click here to rapidly navigate through this documentEXHIBIT 31.1CERTIFICATION PURSUANT TO SECTION 302OF THE SARBANES-OXLEY ACT OF 2002 I, Millard S. Drexler, certify that:1.I have reviewed this annual report on Form 10-K of J. Crew Group, Inc., J. Crew Intermediate LLC and J. Crew Operating Corp.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which such statements were made, not misleading with respect tothe period covered by this report; 3.Based on my knowledge, the financial statements and other financial information included in this report fairly present in all materialrespects the financial condition, results of operations and cash flows of each registrant as of, and for, the periods presented in thisreport; 4.Each registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for such registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed underour supervision, to ensure that material information relating to such registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period in which this report is being prepared; b)Evaluated the effectiveness of such registrant's disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based onsuch evaluation; and c)Disclosed in this report any change in such registrant's internal control over financial reporting that occurred during theregistrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, such registrant's internal control over financial reporting; and 5.Each registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to such registrant's auditors and the audit committee of such registrant's board of directors (or persons performing theequivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect such registrant's ability to record, process, summarize and report financial information;and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in suchregistrant's internal control over financial reporting.Dated: April 29, 2004/s/ MILLARD S. DREXLER Millard S. DrexlerChief Executive OfficerQuickLinksCERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002QuickLinks -- Click here to rapidly navigate through this documentEXHIBIT 31.2CERTIFICATION PURSUANT TO SECTION 302OF THE SARBANES-OXLEY ACT OF 2002 I, Nicholas Lamberti, certify that:1.I have reviewed this annual report on Form 10-K of J. Crew Group, Inc., J. Crew Intermediate LLC and J. Crew Operating Corp.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which such statements were made, not misleading with respect tothe period covered by this report; 3.Based on my knowledge, the financial statements and other financial information included in this report fairly present in all materialrespects the financial condition, results of operations and cash flows of each registrant as of, and for, the periods presented in thisreport; 4.Each registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for such registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed underour supervision, to ensure that material information relating to such registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period in which this report is being prepared; b)Evaluated the effectiveness of such registrant's disclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based onsuch evaluation; and c)Disclosed in this report any change in such registrant's internal control over financial reporting that occurred during theregistrant's most recent fiscal quarter (the registrant's fourth fiscal year in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, such registrant's internal control over financial reporting; and 5.Each registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to such registrant's auditors and the audit committee of such registrant's board of directors (or persons performing theequivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect such registrant's ability to record, process, summarize and report financial information;and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in suchregistrant's internal control over financial reporting.Dated: April 29, 2004/s/ NICHOLAS LAMBERTI Nicholas LambertiActing Chief Financial OfficerQuickLinksCERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002QuickLinks -- Click here to rapidly navigate through this documentEXHIBIT 32.1CERTIFICATION PURSUANT TO SECTION 906OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of J.Crew Group, Inc., J. Crew Intermediate LLC and J.Crew Operating Corp. (collectively, the"Company") on Form 10-K for the period ended January 31, 2004 (the "Report"), Millard S. Drexler and Nicholas Lamberti, the ChiefExecutive Officer and Acting Chief Financial Officer of the Company, respectively, each certifies, pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Dated: April 29, 2004/s/ MILLARD S. DREXLER Millard S. DrexlerChief Executive Officer/s/ NICHOLAS LAMBERTI Nicholas LambertiActing Chief Financial OfficerQuickLinksCERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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