As filed with the Securities and Exchange Commission on December 16, 1997
                                             Registration No.  333-
=================================================================



                SECURITIES AND EXCHANGE COMMISSION
                      WASHINGTON, D.C. 20549
                    ________________________

                             FORM S-4

                      REGISTRATION STATEMENT
                               UNDER
                    THE SECURITIES ACT OF 1933


                        J. Crew Group, Inc.

      (Exact name of registrant as specified in its charter)

  New York                            6719                       22-2894486
(State or other jurisdiction       (Primary standard          (I.R.S. employer 
incorporation or organization)  industrial classification      identification 
                                     code number)                   number)


                           770 Broadway
                     New York, New York 10003
                          (212) 209-2500
 (Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
                    ________________________

                         Michael P. McHugh
                          Vice President
                        J. Crew Group, Inc.
                           770 Broadway
                     New York, New York 10003
                          (212) 209-2500
                    ________________________

(Name, address, including zip code, and telephone number, 
including area code, of agent for service)

                   Copies of correspondence to:

                      Paul J. Shim, Esq.
              Cleary, Gottlieb, Steen & Hamilton
                       One Liberty Plaza
                   New York, New York 10006
                    ________________________

   Approximate date of commencement of proposed sale to the
public: As soon as practicable after the Registration Statement
becomes effective.

   If the securities being registered on this Form are being
offered in connection with the formation of a holding company and
there is compliance with General Instruction G, check the
following box: |_|
                    ________________________
                  CALCULATION OF REGISTRATION FEE

=============================================================================== 
                      Aggregate                                                 
                      principal        Proposed       Proposed                  
Title of each class   amount at        maximum         maximum     Amount of    
   of securities    maturity to be   offering price    aggregate   registration 
   to be registered  registered        per unit    offering price(1)  fee       
- ------------------------------------------------------------------------------- 
Series B 13 1/8%                                                                
Senior Discount                                                                 
Debentures                                                                      
 due 2008           $142,000,000       100%        $142,000,000      $41,890    
- ------------------------------------------------------------------------------- 
(1)  Estimated solely for the purposes of calculating the registration          
     fee pursuant to Rule 457 under the Securities Act of 1933, as amended.     
=============================================================================== 
   The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.





                            J. CREW GROUP, INC.

                     Registration Statement on Form S-4
(Cross Reference Sheet Furnished Pursuant to Item 501(b) of Regulation S-K )

         Item                           Location in Prospectus
         ----                           ----------------------

 1. Forepart of the 
      Registration Statement
      and Outside Front Cover
      Page of Prospectus .............  Facing Page of the Registration 
                                        Statement; Cross Reference Sheet;
                                        Outside Front Cover Page of Prospectus
 2. Inside Front and Outside
      Back Cover Pages of 
      Prospectus .....................  Available Information; Incorporation
                                        of Certain Documents by
                                        Reference; Outside Back Cover 
                                        Page of Prospectus
 3. Risk Factors, Ratio of 
      Earnings to Fixed
      Charges and Other
      Information ....................  Prospectus Summary; Risk Factors;
                                        Selected Financial Data

 4. Terms of the Transaction .........  Prospectus Summary; Risk Factors;
                                        The Exchange Offer; Description of
                                        the New Debentures; Plan of 
                                        Distribution; Certain U.S. Federal 
                                        Considerations Tax
 5. Pro Forma Financial
     Information .....................  Pro Forma Capitalization; Unaudited
                                        Pro Forma Consolidated Financial
                                        Data
 6. Material Contracts With 
      the Company Being Acquired .....  Not Applicable

 7. Additional Information 
      Required for  Reoffering by
      Persons and Parties
      Deemed to be Underwriters ......  Not Applicable

 8. Interests of Named Experts
      and Counsel ....................  Not Applicable

 9. Disclosure of Commission
      Position on Indemnification
      for Securities Act
      Liabilities ....................  Not Applicable

10. Information with
      Respect to S-3
      Registrants ....................  Not Applicable

11. Incorporation of Certain 
      Information by
      Reference ......................  Not Applicable

12. Information with Respect
      to S-2 or S-3
      Registrants ....................  Not Applicable

13. Incorporation of Certain
      Information by
      Reference ......................  Not Applicable

14. Information with 
      Respect to Registrants
      Other Than S-3 or S-2 
      Registrants ....................  Outside Front Cover of Prospectus;
                                        Prospectus Summary; Selected
                                        Consolidated Financial Data; 
                                        Management's Discussion and Analysis 
                                        of Financial Condition and Results of 
                                        Operations; Business; Consolidated
                                        Financial Statements

15. Information with Respect
        to S-3 Companies .............  Not Applicable
 
16. Information with Respect
      to S-2 or S-3
      Companies ......................  Not Applicable

17. Information with Respect 
      to Companies Other Than
      S-3 or S-2 Companies ...........  Not Applicable

18. Information if Proxies, 
      Consents or Authorizations        
      Are To Be Solicited ............  Not Applicable
                                         
19. Information if Proxies, 
      Consents or Authorizations
      Are Not To Be
      Solicited or in an 
      Exchange Offer .................  Prospectus Summary; Management;
                                        Capital Stock of Holdings and
                                        Operating Corp; Certain Relationships
                                        and Related Transactions




X-----------------------------------------------------------------  X 
X Information contained herein is subject to completion or          X
X amendment. A registration statement relating to these securities  X
X has been filed with the Securities and Exchange Commission. These X
X securities may not be sold nor may offers to buy be accepted      X
X prior to the time the registration statement becomes effective.   X
X This prospectus shall not constitute an offer to sell or the      X
X solicitation of an offer to buy nor shall there be any sale of    X
X these securities in any State in which such offer, solicitation   X
X or sale would be unlawful prior to registration or qualification  X
X under the securities laws of any such State                       X
X-----------------------------------------------------------------  X


           SUBJECT TO COMPLETION-DATED DECEMBER 16, 1997

PROSPECTUS
                        J. Crew Group, Inc.

Offer to Exchange Series B 13 1/8% Senior Discount Debentures due
   2008, which have been registered under the Securities Act of
  1933, as amended,for any and all outstanding Series A 13 1/8%
               Senior Discount Debentures due 2008

           The Exchange Offer will expire at 5:00 p.m., New York
City time, on __________, 1997, unless extended. J. Crew Group,
Inc., a New York corporation (the "Issuer" or "Holdings"), hereby
offers, upon the terms and subject to the conditions set forth in
this Prospectus and the accompanying letter of transmittal (the
"Letter of Transmittal" and such offer being the "Exchange
Offer"), to exchange Series B 13 1/8% Senior Discount Debentures
due 2008 of the Issuer (the "New Debentures"), which have been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which
this Prospectus is a part, for an equal principal amount of
outstanding Series A 13 1/8% Senior Discount Debentures due 2008
of the Issuer (the "Old Debentures"), of which $142,000,000
aggregate principal amount at maturity is outstanding as of the
date hereof. The New Debentures and the Old Debentures are
collectively referred to herein as the "Debentures."

      Any and all Old Debentures that are validly tendered and
not withdrawn on or prior to 5:00 P.M., New York City time, on
the date the Exchange Offer expires, which will be _________,
1997 (30 calendar days following the commencement of the Exchange
Offer) unless the Exchange Offer is extended (such date,
including as extended, the "Expiration Date"), will be accepted
for exchange. Tenders of Old Debentures may be withdrawn at any
time prior to 5:00 P.M., New York City time on the Expiration
Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Debentures being tendered for exchange.
However, the Exchange Offer is subject to certain customary
conditions, which may be waived by the Issuer, and to the terms
of the Registration Rights Agreement, dated as of October 17,
1997, by and among the Issuer and Donaldson, Lufkin & Jenrette
Securities Corporation and Chase Securities Inc. (the "Initial
Purchasers") (the "Registration Rights Agreement"). Old
Debentures may only be tendered in integral multiples of $1,000
of principal amount at maturity. See "The Exchange Offer."

      The New Debentures will be entitled to the benefits of the
same Indenture (as defined herein) that governs the Old
Debentures and that will govern the New Debentures. The form and
terms of the New Debentures are the same in all material respects
as the form and terms of the Old Debentures, except that the New
Debentures have been registered under the Securities Act and
therefore will not bear legends restricting the transfer thereof.
See "The Exchange Offer" and "Description of the New Debentures."

      The New Debentures will be represented by permanent global
debentures in fully registered form and will be deposited with,
or on behalf of, The Depository Trust Company ("DTC") and
registered in the name of a nominee of DTC. Beneficial interests
in the permanent global debentures will be shown on, and
transfers thereof will be effected through, records maintained by
DTC and its participants.

      Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission"), as set forth in no-action
letters issued to third parties, including Exxon Capital Holdings
Corporation, SEC No-Action Letter (available May 13, 1988),
Morgan Stanley & Co. Incorporated, SEC No-Action Letter
(available June 5, 1991) and Shearman & Sterling, SEC No-Action
Letter (available July 2, 1993) (collectively, the "Exchange
Offer No-Action Letters"), the Issuer believes that the New
Debentures issued pursuant to the Exchange Offer may be offered
for resale, resold or otherwise transferred by each holder (other
than a broker-dealer who acquires such New Debentures directly
from the Issuer for resale pursuant to Rule 144A under the
Securities Act or any other available exemption under the
Securities Act and other than any holder that is an "affiliate"
(as defined in Rule 405 under the Securities Act) of the Issuer)
without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New
Debentures are acquired in the ordinary course of such holder's
business and such holder is not engaged in, and does not intend
to engage in, a distribution of such New Debentures and has no
arrangement with any person to participate in a distribution of
such New Debentures. By tendering Old Debentures in exchange for
New Debentures, each holder, other than a broker-dealer, will
represent to the Issuer that: (i) it is not an affiliate (as
defined in Rule 405 under the Securities Act) of the Issuer; (ii)
it is not a broker-dealer tendering Old Debentures acquired for
its own account directly from the Issuer; (iii) any New
Debentures to be received by it will be acquired in the ordinary
course of its business; and (iv) it is not engaged in, and does
not intend to engage in, a distribution of such New Debentures
and has no arrangement or understanding to participate in a
distribution of New Debentures. If a holder of Old Debentures is
engaged in or intends to engage in a distribution of New
Debentures or has any arrangement or understanding with respect
to the distribution of New Debentures to be acquired pursuant to
the Exchange Offer, such holder may not rely on the applicable
interpretations of the staff of the Commission and must comply
with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale
transaction.

      (continued on next page)

                   __________________________

      FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER, SEE "RISK
FACTORS" BEGINNING ON PAGE 16 OF THIS PROSPECTUS.

                    __________________________


      THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

                    __________________________

  [GRAPHIC OMITTED]The date of this Prospectus is _________, 1997

                    __________________________





(continued from cover page)

      Each broker-dealer that receives New Debentures for its own
account pursuant to the Exchange Offer (a "Participating Broker-
Dealer") must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with
any resale of such New Debentures. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in
connection with resales of New Debentures received in exchange
for Old Debentures where such Old Debentures were acquired by
such Participating Broker-Dealer as a result of market-making
activities or other trading activities. Pursuant to the
Registration Rights Agreement, the Issuer has agreed that it will
make this Prospectus available to any Participating Broker-Dealer
for a period of time not to exceed one year after the date on
which the Exchange Offer is consummated for use in connection
with any such resale. See "Plan of Distribution."

      The Issuer will not receive any proceeds from this
offering. The Issuer has agreed to pay the expenses of the
Exchange Offer. No underwriter is being utilized in connection
with the Exchange Offer.

      THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE
ISSUER ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD
DEBENTURES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE
ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES
AND BLUE SKY LAWS OF SUCH JURISDICTION.

      The Old Debentures have been designated as eligible for
trading in the Private Offerings, Resale and Trading through
Automated Linkages ("PORTAL") market. Prior to this Exchange
Offer, there has been no public market for the New Debentures. If
such a market were to develop, the New Debentures could trade at
prices that may be higher or lower than their principal amount.
The Issuer does not intend to apply for listing of the New
Debentures on any securities exchange or for quotation of the New
Debentures on The Nasdaq Stock Market's National Market or
otherwise. The Initial Purchasers have previously made a market
in the Old Debentures, and the Issuer has been advised that the
Initial Purchasers currently intend to make a market in the New
Debentures, as permitted by applicable laws and regulations,
after consummation of the Exchange Offer. The Initial Purchasers
are not obligated, however, to make a market in the Old
Debentures or the New Debentures and any such market making
activity may be discontinued at any time without notice at the
sole discretion of the Initial Purchasers. There can be no
assurance as to the liquidity of the public market for the New
Debentures or that any active public market for the New
Debentures will develop or continue. If an active public market
does not develop or continue, the market price and liquidity of
the New Debentures may be adversely affected. See "Risk
Factors--Absence of a Public Market."





                       AVAILABLE INFORMATION

      The Issuer is not currently subject to the periodic
reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Issuer
will become subject to such requirements upon the effectiveness
of the Registration Statement (as defined herein). Pursuant to
the indenture by and among the Issuer and State Street Bank and
Trust Company (as trustee), dated as of October 17, 1997 (the
"Indenture"), the Issuer has agreed to file with the Commission
and provide to the holders of the Old Debentures annual reports
and the information, documents and other reports which are
required to be delivered pursuant to Sections 13 and 15(d) of the
Exchange Act.

      This Prospectus constitutes a part of a registration
statement on Form S-4 (together with all amendments and exhibits,
the "Registration Statement") filed by the Issuer with the
Commission, through the Electronic Data Gathering, Analysis and
Retrieval System ("EDGAR"), under the Securities Act, with
respect to the New Debentures offered hereby. This Prospectus
omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration
Statement for further information with respect to the Issuer and
the securities offered hereby. Although statements concerning and
summaries of certain documents are included herein, reference is
made to the copies of such documents filed as exhibits to the
Registration Statement or otherwise filed with the Commission.
These documents may be inspected without charge at the office of
the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies may be obtained at fees and
charges prescribed by the Commission. Copies of such materials
may also be obtained from the Web site that the Commission
maintains at http://www.sec.gov.

          INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

      All reports and any definitive proxy or information
statements filed by the Issuer pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the
New Debentures offered hereby shall be deemed to be incorporated
by reference into this Prospectus and to be a part hereof from
the date of filing of such documents. Any statement contained in
a document incorporated or deemed to be incorporated herein by
reference, or contained in this Prospectus, shall be deemed to be
modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a
part of this Prospectus.

                   -----------------------------


                               i




                        PROSPECTUS SUMMARY

      Prior to the Recapitalization (as defined herein), Holdings
owned all of the stock, directly or indirectly, of the various
subsidiaries that had carried on the businesses described herein.
In connection with the Recapitalization, Holdings organized J.
Crew Operating Corp., a Delaware corporation ("Operating Corp"),
and immediately prior to the consummation of the
Recapitalization, Holdings transferred substantially all of its
assets and liabilities to Operating Corp. Holdings' current
operations are, and future operations are expected to be, limited
to owning the stock of the Operating Corp. Holdings and its
subsidiaries are collectively referred to herein
as the "Company." The following summary is qualified in its
entirety by the more detailed information and financial
statements and the Unaudited Pro Forma Consolidated Financial
Data of the Issuer, including the notes thereto, appearing
elsewhere in this Prospectus. Except as otherwise set forth
herein, references herein to "pro forma" financial data of the
Issuer are to financial data of the Issuer which gives effect to
the Recapitalization, including the issuance of the Debentures,
the issuance of the Holdings Preferred Stock (as defined herein),
the Holdings Common Equity Contribution (as defined herein) and
the Operating Corp Distribution (as defined herein). References
herein to fiscal years are to the fiscal years of Holdings, which
end on the Friday closest to January 31 in the following calendar
year. Accordingly, fiscal years 1992, 1993, 1994, 1995 and 1996
ended on January 29, 1993, January 28, 1994, February 3, 1995,
February 2, 1996 and January 31, 1997. All fiscal years for which
financial information is included in this Prospectus had 52
weeks, except fiscal 1994 which had 53 weeks.

                            The Company

Overview

      The Company is a leading mail order and store retailer of
women's and men's apparel, shoes and accessories operating
primarily under the J. Crew(R) brand name. Under the direction of
Emily Woods and Arthur Cinader (co-founders of the J. Crew brand
and father and daughter), the Company has built a strong and
widely recognized brand name known for its timeless styles at
price points that the Company believes represent exceptional
product value. The J. Crew image has been built and reinforced
over its 14-year history through the circulation of more than
one-half billion catalogs that use magazine-quality photography
to portray a classic American perspective and aspirational
lifestyle. Many of the original items introduced by the Company
in the early 1980s (such as the rollneck sweater, weathered
chino, barn jacket and pocket tee) were instrumental in
establishing the J. Crew brand and continue to be core product
offerings. The Company has capitalized on the strength of the J.
Crew brand to provide customers with clothing to meet more of
their lifestyle needs, including casual, career and sport. The
strength of the J. Crew brand is demonstrated by a compound
annual growth rate of 15.4% in J. Crew brand revenues between
fiscal 1992 and fiscal 1996.

      The J. Crew merchandising strategy emphasizes timeless
styles and a broad assortment of high-quality products designed
to provide customers with one-stop shopping opportunities at
attractive prices. J. Crew catalogs and retail stores offer a
full line of men's and women's basic durables (casual weekend
wear), sport, swimwear, accessories and shoes, as well as the
more tailored men's sportswear and women's "Classics" lines.
Approximately 60% of the Company's J. Crew brand sales are
derived from its core offerings of durables and sport clothing,
the demand for which the Company believes is stable and resistant
to changing fashion trends. The Company believes that the J. Crew
image and merchandising strategy appeal to college-educated,
professional and affluent customers who, in the Company's
experience, have demonstrated strong brand loyalty and a tendency
to make repeat purchases.

      J. Crew products are distributed exclusively through the
Company's catalog and store distribution channels. The Company
currently circulates over 76 million J. Crew catalogs per annum
and owns and operates 49 J. Crew retail stores and 42 J. Crew
factory outlets. In addition, J. Crew products are distributed
through 67 free-standing and shop-in-shop stores in Japan under a
licensing agreement with Itochu Corporation and Itochu Fashion
System Co., Ltd. (collectively "Itochu").





      In addition to the Company's J. Crew operations, the Company
operates Clifford & Wills, Inc. ("C&W"), a mail order and factory
store women's apparel business that targets older, more
conservative customers, and Popular Club Plan, Inc. ("PCP"), a
direct selling catalog merchandiser of consumer branded goods
through a "club" concept that provides credit sales to
lower-income customers. During the twelve-month period ended
November 7, 1997, the Company generated total revenues of $836.7
million, of which $583.1 million or approximately 70% was
attributable to the J. Crew brand, and total Adjusted EBITDA of
$47.6 million. See "--Summary Unaudited Pro Forma Consolidated
Financial Data" for a description of Adjusted EBITDA.

Business Strengths

      Since its inception, the Company has pursued a consistent
operating strategy which has resulted in the following key
strengths and distinguishing characteristics:

   - Strong, Recognizable Brand. The Company has created a
     recognizable, differentiated brand image reflecting an
     American aspirational lifestyle. The J. Crew image is
     consistently communicated through all aspects of the
     Company's business including its merchandise design,
     distinctive catalogs and retail store environment. The
     Company's high-quality products, strong brand image and
     customer loyalty have resulted in strong gross margins and
     retail sales productivity.

   - Premium Quality Products and Distinctive Designs at
     Attractive Price Points. The Company offers premium quality
     products reflecting a classic, clean aesthetic with a
     consistent design philosophy. All J. Crew products are
     designed by an in-house team of 15 designers led by Emily
     Woods. The Company believes that its in-house design
     capabilities ensure a coherent set of product offerings from
    season to season and year to year that provides significant
     value to its customers through attractive price points.

   - Proven Retail Store Concept.  J. Crew retail stores 
     historically have generated strong and stable operating
     results. The Company believes that its sales per gross 
     square foot are among the highest in its industry
     segment. J. Crew retail stores open during all of 
     fiscal 1996 generated the following key operating
     statistics:

                                                  Fiscal 1996
                                                  -----------
                                                    Average
                                                    -------
Sales per gross square foot ....................     $575
Store contribution margin ......................       25.9%

      Approximately 81% of the J. Crew retail stores that were
open during all of 1996 had store contribution margins above 20%.
All of the Company's J. Crew retail stores are profitable and
have generated positive store contribution within the first
twelve months of operation. In addition, J. Crew retail stores
opened since fiscal 1992 have averaged approximately $550 in
sales per gross square foot and 23.0% store contribution margin
during the first twelve months of operation.

   - Broad and Stable Product Offering. The Company's J. Crew
     product offering includes a broad array of items which appeal
     to a diverse customer base, spanning gender and age segments.
     A substantial portion of the J. Crew product line consists of
     basic durables, such as chinos, jeans and sweaters, which are
     not significantly modified from year to year and, in the
     Company's opinion, are resistant to shifting fashion trends.
     In 1996, sales of durables and sport clothing represented
     approximately 60% of total J. Crew brand revenues, having
     increased at a compound annual growth rate of approximately
     15% since 1992.

   - Synergistic Distribution Channels.   The Company believes 
     that the concurrent operation of the J. Crew mail
     order business and J. Crew retail stores provides a 
     distinct advantage in the development of the J. Crew
     brand. Visibility and exposure of the brand are enhanced
     by the broad circulation of catalogs, aiding the
     expansion of the retail concept. In addition, the Company
     believes that the retail operations help attract first-


                                2



     time "walk-by" customers to the catalog and improve the
     salability of fit-critical items through the catalog. The
     Company further believes that diversified distribution
     channels help insulate the Company against circumstances and
     events uniquely affecting one distribution channel or the
     other.

   - Tightly Controlled Distribution. By selling products
     exclusively through J. Crew catalogs, J. Crew retail stores
     and J. Crew factory outlets, the Company is able to present
     and maintain a consistent brand image, control the
     presentation and pricing of its merchandise, provide a higher
     level of customer service, and closely monitor retail
     sell-through. The Company believes that tight control over
     the distribution of its products provides competitive
     advantages over other branded apparel retailers that
     distribute their goods through department stores.


Opportunities

      The Company believes that substantial opportunities exist
to enhance revenue and profitability by increasing efficiencies
in the J. Crew mail order business and by expanding the J. Crew
retail business.

   - Implement Tactical Cost Savings Opportunities. While the
     Company believes that gross margins in the J. Crew mail order
     business have been strong, overall catalog profitability has
     been depressed by unnecessarily high operating expenses. The
     Company has identified a number of tactical cost savings that
     could be realized without affecting the Company's franchise
     or brand image. Included in Adjusted EBITDA are $7.5 million in
     estimated annual savings resulting from actions implemented
     prior to the Recapitalization, including the recent renegotiation
     of its catalog vendor contract, selected headcount and net
     payroll reductions and the insourcing of certain photography
     functions. The Company has identified approximately $7
     million of further potential annual savings that are not
     reflected in Adjusted EBITDA, including process efficiencies
     currently under review, reduction of the Base Book trim size,
     installation of automatic sorting equipment and consolidation
     of the J. Crew and C&W New York corporate offices. The
     Company believes these additional cost savings could be
     implemented by mid-1998.

   - Realize Cash Flow Increases Through J. Crew Mail Order SKU
     Rationalization. The Company's J. Crew mail order product
     offerings have increased from 33,000 stock-keeping units
     ("SKUs") in 1992 to 66,000 SKUs in 1996, partly as a result
     of a proliferation in colors and sizes offered. In recent
     season-to-season testing on the Company's swimwear and chino
     lines, the Company reduced SKUs by 33% and 45%, respectively,
     while posting category revenue increases. By eliminating
     slower-selling colors and sizes from its core offering, the
     Company believes it will be better able to forecast demand,
     increase fill rates and increase inventory turns, resulting
     in enhanced operating cash flow.

   - Increase J. Crew Catalog Productivity Through Increased
     Segmentation. The Company believes that it circulates fewer
     and less-targeted catalog editions than its competitors, and
     that catalog productivity (as measured by initial demand per
     page circulated) could be enhanced by more precise targeting
     of catalog mailings through further customer segmentation.
     For example, in 1996 the Company introduced a Women's catalog
     which to date has achieved 20% higher initial demand per page
     circulated than that of the Company's primary mailing, the
     Base Book. To further enhance its segmentation efforts, the
     Company has recently introduced a College catalog and plans
     to introduce a Swimwear catalog in 1998. From 1997 to 1998,
     the increased segmentation is expected to result in an
     approximately 5% increase in the number of catalogs
     circulated, but an approximately 8% decrease in total pages
     circulated. Reductions in total pages circulated should
     result in a decrease in paper and postage expenses.

    - Expand J. Crew Retail Operations. The Company's J. Crew
      retail store expansion strategy is to continue to increase
      its market share in its existing markets and to penetrate
      new markets. The Company expects to open a total of 12
      stores in fiscal 1997, ten of which were open as of November
      7, 1997. The Company currently intends to open 12 to 20
      stores annually, funded primarily by cash flow generated
      from operations, resulting


                                3



     in approximately 100 stores in operation by the end of
     fiscal 2000. Historically, new stores have cost the Company
     an average of $1.5 million in building improvements and
     working capital expenditures and have experienced a pay-back
     period of approximately 20 months. The Company has
     established an administrative infrastructure that it
     believes is sufficient to accommodate the retail expansion
     plan, providing the Company with additional margin
     improvement through overhead leverage. In addition, the
     Company believes, with a store base of only 49 stores, its
     markets are underpenetrated relative to its competitors and
     enough suitable locations exist nationwide to accommodate
     its expansion plan.

      Holdings was incorporated under the laws of the State of
New York in 1988 as a successor to Popular Services, Inc.
Holdings maintains its principal executive office at 770
Broadway, New York, New York, 10003, and its telephone number is
(212) 209-2500.

      J. Crew (R) is a registered trademark of a wholly-owned
subsidiary of the Company.


                       The Recapitalization

      Holdings, its shareholders (the "Shareholders") and TPG
Partners II, L.P. ("TPG Partners II") entered into a
Recapitalization Agreement dated as of July 22, 1997, as amended
as of October 17, 1997 (the "Recapitalization Agreement") which
provided for the recapitalization of Holdings (the
"Recapitalization"). Pursuant to the Recapitalization Agreement,
Holdings purchased from the Shareholders all outstanding shares
of Holdings' capital stock, other than shares having an implied
value of $11.1 million, almost all of which continues to be held
by Emily Woods, and which represented 14.8% of the outstanding
shares of common stock, par value $.01 per share, of Holdings
("Holdings Common Stock") immediately following the transaction.

      In connection with the Recapitalization, Holdings organized
Operating Corp and immediately prior to the consummation of the
Recapitalization, Holdings transferred substantially all of its
assets and liabilities to Operating Corp. Holdings' current
operations are, and future operations are expected to continue to
be, limited to owning the stock of Operating Corp. Operating Corp
has repaid substantially all of the Company's funded debt
obligations existing immediately before the consummation of the
Recapitalization (the "Debt Retirement"). At October 17, 1997,
the aggregate principal amount of the Company's funded
indebtedness was $186.0 million, consisting of $85.0 million
aggregate principal amount of Senior Notes (the "Retired Senior
Notes"), $99.0 million outstanding under a seasonal revolving
credit facility (the "Retired Bank Credit Facility") and $2.0
million outstanding under an industrial revenue bond (the
"Industrial Revenue Bond").

      Cash funding requirements for the Recapitalization (which
was consummated on October 17, 1997) totalled $559.7 million
(including $99.0 million in seasonal borrowings) and were
satisfied through the purchase by TPG Partners II and investors
of an aggregate $188.9 million in Holdings' equity securities
together with an aggregate $330.8 million in borrowings and $40.0
million in proceeds from the securitization of certain of the
Company's accounts receivable, as follows: (i) the purchase by
TPG Partners II, its affiliates and other investors of shares of
Holdings' Common Stock (representing 85.2% of the outstanding
shares) for $63.9 million (the "Holdings Common Equity
Contribution"); (ii) the purchase by TPG Partners II, its
affiliates and other investors of $125.0 million in liquidation
value of preferred stock issued by Holdings (the "Holdings
Preferred Stock"); (iii) gross proceeds of $75.3 million from the
issuance and sale by Holdings of the Old Debentures (the
"Offering"); (iv) $150.0 million from the gross proceeds of the
offering by Operating Corp of the 10 3/8% Senior Subordinated
Notes due 2007 (the "Operating Corp Senior Subordinated Notes")
in a separate offering in which the Initial Purchasers acted as
initial purchasers; (v) $40.0 million in proceeds from the
securitization of certain of the Company's accounts receivable
(the "Securitization"); (vi) $70.0 million of borrowings under a
senior secured term loan facility among Operating Corp, Holdings,
the several lenders from time to time parties thereto
(collectively, the "Banks"), The Chase Manhattan Bank, as
administrative and collateral agent ("Chase"), and Donaldson,
Lufkin & Jenrette Securities Corporation, as syndication agent
("DLJ"), (the "Term Loan Facility"); and (vii) $35.6 million of
borrowings under a senior secured revolving credit facility among
the Operating Corp, Holdings, the Banks, Chase


                                4



and DLJ (the "Revolving Credit Facility" and, together with the
Term Loan Facility, the "Bank Facilities"). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Description of the
New Debentures," "Description of Operating Corp Indebtedness" and
"Capital Stock of Holdings and Operating Corp."

      The Recapitalization was accounted for as a
recapitalization transaction for accounting purposes. The
repurchase of shares from the Shareholders, the Debt Retirement,
the Holdings Common Equity Contribution, the issuance and sale by
Holdings of the Holdings Preferred Stock and the Old Debentures,
the borrowing by Operating Corp of funds under the Bank
Facilities and the Securitization and the issuance and sale by
Operating Corp of the Operating Corp Senior Subordinated Notes
were effected in connection with the "Recapitalization."

      The following table sets forth the sources and uses of
funds in connection with the Recapitalization as it occurred on
October 17, 1997:

                                           (dollars in
                                           thousands)
Sources:
Revolving Credit Facility (1)............. $  35,559
Term Loan Facility........................    70,000
Securitization (2)........................    40,000
Operating Corp Senior Subordinated Notes..   150,000
Debentures issued in the Offering.........    75,257
Holdings Preferred Stock..................   125,000
Holdings Common Equity Contribution.......    63,891
- ------------------------------------------    ------
  Total Sources........................... $ 559,707
                                             =======
Uses:
Repurchase of Holdings' Capital Stock..... $ 316,688
Repayment of Retired Bank Credit
Facility (3) .............................    99,212
Repayment of Retired Senior Notes (4).....    93,104
Retirement of Industrial Revenue Bond.....     1,963
Transaction Fees and Expenses and 
  Other Transacayments(5) ................    48,740
  ----------------------------------------    ------
  Total Uses.............................. $ 559,707
                                             =======

(1) Reflects borrowings to partially refinance seasonal
    borrowings outstanding under the Retired Bank Credit Facility.
    Giving effect to the Recapitalization, average outstanding
    borrowings under the Revolving Credit Facility would have been
    $12.2 million during the twelve months ended November 7, 1997.
    Excludes letters of credit issued to facilitate international
    merchandise purchases, which had an aggregate outstanding
    balance of $37.4 million as of November 7, 1997. See the notes
    to the "Unaudited Pro Forma Statements of Operations" included
    herein.

(2) The Company securitized approximately $40 million of PCP
    consumer loan installment receivables off-balance sheet
    simultaneously with the consummation of the Recapitalization
    pursuant to a facility arranged by affiliates of the Initial
    Purchasers. See "Management's Discussion and Analysis of
    Financial Condition and Results of Operations--Liquidity and
    Capital Resources" and "Description of Other Issuer
    Indebtedness--Receivables Facility."

(3) Includes $0.2 million of accrued interest.

(4) Includes a $5.8 million make-whole premium in connection 
    with the prepayment of the Retired Senior Notes and $2.3
    million of accrued interest.

(5) Includes Holdings' expenses, management bonuses,
    financial advisory, consulting and other professional 
    fees and deferred financing costs.  See "Certain Relationships
    and Related Transactions."


                                5



                        Texas Pacific Group

           Texas Pacific Group ("TPG") was founded by David
Bonderman, James G. Coulter and William S. Price, III in 1992 to
pursue public and private investment opportunities through a
variety of methods, including leveraged buyouts,
recapitalizations, joint ventures, restructurings and strategic
public securities investments. The principals of TPG operate TPG
Partners, L.P. and TPG Partners II, both Delaware limited
partnerships with aggregate committed capital of over $3.2
billion. Among TPG's investments are branded consumer products
companies Beringer Wine Estates, Del Monte Foods Company and
Ducati Motor. Other TPG portfolio companies include America West
Airlines, Belden & Blake Corporation, Favorite Brands
International, Paradyne, Virgin Entertainment and Vivra Specialty
Partners. In addition, the principals of TPG led the $9 billion
reorganization of Continental Airlines in 1993.


                        The Exchange Offer

Registration Rights           The Old Debentures were issued 
Agreement.................... on October 17, 1997 to the 
                              Initial Purchasers. The Initial
                              Purchasers placed the Old
                              Debentures with institutional
                              investors. In connection therewith,
                              the Issuer and the Initial
                              Purchasers entered into the
                              Registration Rights Agreement,
                              providing, among other things, for
                              the Exchange Offer. See "The
                              Exchange Offer."

The Exchange Offer........... New Debentures are being offered in exchange  
                              For an equal principal amount of Old 
                              Debentures.  As of the date hereof,
                              $142,000,000 aggregate principal amount 
                              at maturity of Old Debentures is
                              outstanding.  Old Debentures may be 
                              tendered only in integral multiples
                              of $1,000 of principal amount at 
                              maturity.

Resale of New Debentures..... Based on interpretations by the staff 
                              of the Commission, as set forth in
                              no-action letters issued to third
                              parties, including the Exchange
                              Offer No-Action Letters, the Issuer
                              believes that the New Debentures
                              issued pursuant to the Exchange
                              Offer may be offered for resale,
                              resold or otherwise transferred by
                              each holder thereof (other than a
                              broker-dealer who acquires such New
                              Debentures directly from the Issuer
                              for resale pursuant to Rule 144A
                              under the Securities Act or any
                              other available exemption under the
                              Securities Act and other than any
                              holder that is an "affiliate" (as
                              defined under Rule 405 of the
                              Securities Act) of the Issuer)
                              without compliance with the
                              registration and prospectus
                              delivery provisions of the
                              Securities Act, provided that such
                              New Debentures are acquired in the
                              ordinary course of such holder's
                              business and such holder is not
                              engaged in, and does not intend to
                              engage in, a distribution of such
                              New Debentures and has no
                              arrangement with any person to
                              participate in a distribution of
                              such New Debentures. By tendering
                              the Old Debentures in exchange for
                              New Debentures, each holder, other
                              than a broker-dealer, will
                              represent to the Issuer that: (i)
                              it is not an affiliate (as defined
                              in Rule 405 under the Securities
                              Act) of the Issuer; (ii) it is not
                              a broker-dealer tendering Old
                              Debentures acquired for its own
                              account directly from the Issuer;
                              (iii) any New Debentures to be
                              received by it were acquired in the
                              ordinary course of its business;
                              and (iv) it is not engaged in, and
                              does not intend to engage in, a
                              distribution of such New Debentures
                              and has no 


                                6



                              arrangement or understanding to
                              participate in a distribution of
                              the New Debentures. If a holder of
                              Old Debentures is engaged in or
                              intends to engage in a distribution
                              of the New Debentures or has any
                              arrangement or understanding with
                              respect to the distribution of the
                              New Debentures to be acquired
                              pursuant to the Exchange Offer,
                              such holder may not rely on the
                              applicable interpretations of the
                              staff of the Commission and must
                              comply with the registration and
                              prospectus delivery requirements of
                              the Securities Act in connection with 
                              any secondary resale transaction. Each
                              Participating Broker-Dealer that
                              receives New Debentures for its own
                              account pursuant to the Exchange
                              Offer must acknowledge that it will
                              deliver a prospectus meeting the
                              requirements of the Securities Act
                              in connection with any resale of
                              such New Debentures. The Letter of
                              Transmittal states that by so
                              acknowledging and by delivering a
                              prospectus, a Participating
                              Broker-Dealer will not be deemed to
                              admit that it is an "underwriter"
                              within the meaning of the
                              Securities Act. This Prospectus, as
                              it may be amended or supplemented
                              from time to time, may be used by a
                              Participating Broker-Dealer in
                              connection with resales of New
                              Debentures received in exchange for
                              Old Debentures where such Old
                              Debentures were acquired by such
                              Participating Broker-Dealer as a
                              result of market-making activities
                              or other trading activities. The
                              Issuer has agreed that it will make
                              this Prospectus available to any
                              Participating Broker-Dealer for a
                              period of time not to exceed one
                              year after the date on which the
                              Exchange Offer is consummated for
                              use in connection with any such
                              resale. See "Plan of Distribution."
                              To comply with the securities laws
                              of certain jurisdictions, it may be
                              necessary to qualify for sale or
                              register the New Debentures prior
                              to offering or selling such New
                              Debentures. The Issuer has agreed,
                              pursuant to the Registration Rights
                              Agreement and subject to certain
                              specified limitations therein, to
                              register or qualify the New
                              Debentures for offer or sale under
                              the securities or "blue sky" laws
                              of such jurisdictions as may be
                              necessary to permit consummation of
                              the Exchange Offer.

Consequences of 
Failure to Exchange Old
Debentures................... Upon consummation of the Exchange 
                              Offer, subject to certain  exceptions,
                              holders of Old Debentures who do not
                              exchange their Old Debentures for
                              New Debentures in the Exchange Offer will
                              no longer be entitled to registration
                              rights and will not be able to
                              offer or sell their Old Debentures, 
                              unless such Old Debentures are
                              subsequently registered under the 
                              Securities Act (which, subject to
                              certain limited exceptions, the Issuer
                              will have no obligation to do), except
                              pursuant to an exemption from, 
                              or in a transaction not subject 
                              to, the Securities Act and 
                              applicable state securities laws.
                              See "Risk Factors--Risk Factors Relating 
                              to the Debentures--Consequences of
                              Failure to Exchange"  and "The Exchange
                              Offer--Terms of the Exchange Offer."


                                7



Expiration Date.............. 5:00 p.m., New York City time, on _________,
                              1997 (30 calendar
                              days following the commencement of the
                              Exchange Offer), unless the Exchange
                              Offer is extended, in which case
                              the term "Expiration Date"
                              means the latest date and
                              time to which the
                              Exchange Offer is extended.

Yield and Interest on
the New Debentures............13 1/8% (computed on a semi-annual
                              bond equivalent basis) calculated
                              from October 17, 1997. The New
                              Debentures will accrete at a rate
                              of 13 1/8%, compounded semi-
                              annually, to an aggregate
                              principal amount of $142.0 million
                              by October 15, 2002. Cash interest
                              will not accrue on the New
                              Debentures prior to October 15, 2002. 
                              Commencing October 15, 2002, cash 
                              interest on the New Debentures will 
                              accrue and be payable, at a rate of 
                              13 1/8% per annum, semi-annually in 
                              arrears on each April 15 and October 15.

Conditions to the             The Exchange Offer is not conditioned
Exchange Offer                upon any minimum principal amount of 
                              Old Debentures being tendered for
                              exchange. However, the Exchange
                              Offer is subject to certain
                              customary conditions, which may,
                              under certain circumstances, be
                              waived by the Issuer. See "The
                              Exchange Offer--Conditions." Except
                              for the requirements of applicable
                              federal and state securities laws,
                              there are no federal or state
                              regulatory requirements to be
                              complied with or obtained by the
                              Issuer connection in with the
                              Exchange Offer.

Procedures for Tendering 
Old Debentures .............. Each holder of Old Debentures 
                              wishing to accept the Exchange Offer
                              must complete, sign and date
                              the Letter of Transmittal,
                              in accordance with the
                              instructions contained herein and
                              therein, and mail or otherwise
                              deliver such Letter of Transmittal,
                              together with the Old Debentures to
                              be exchanged and any other required
                              documentation to the Exchange Agent
                              (as defined herein) at the address
                              set forth herein or effect a tender
                              of Old Debentures pursuant to the
                              procedures for book-entry transfer
                              as provided for herein. See "The
                              Exchange Offer--Procedures for
                              Tendering" and "--Book Entry
                              Transfer."

Guaranteed Delivery           Holders of Old Debentures who wish to 
Procedures....................tender their Old Debentures and whose 
                              Old Debentures are not immediately
                              available or who cannot deliver
                              their Old Debentures and a properly
                              completed Letter of Transmittal or
                              any other documents required by the
                              Letter of Transmittal to the
                              Exchange Agent prior to the
                              Expiration Date may tender their
                              Old Debentures according to the
                              guaranteed delivery procedures set
                              forth in "The Exchange
                              Offer--Guaranteed Delivery
                              Procedures."

Withdrawal Rights............ Tenders of Old Debentures may be
                              withdrawn at any time prior to
                              5:00 p.m., New York City time, on 
                              the Expiration Date.  To withdraw a tender
                               of Old Debentures, a written notice of
                              withdrawal must be received by the 
                              Exchange Agent at its address
                              set forth herein under "The Exchange
                              Offer--Exchange Agent" prior to 5:00 p.m.,
                              New York City time, on the Expiration Date.


                                8



Acceptance of Old 
Debentures and
Delivery of 
New Debentures .............. Subject to certain conditions, any and 
                              all Old Debentures that are properly
                              tendered in the Exchange Offer
                              prior to 5:00 p.m., New York City
                              time, on the Expiration Date will
                              be accepted for exchange. The New
                              Debentures issued pursuant to the
                              Exchange Offer will be delivered
                              promptly following the Expiration
                              Date. See "The Exchange
                              Offer--Terms of the Exchange
                              Offer."

Certain Tax Considerations... The exchange of New Debentures for
                              Old Debentures should not
                              be considered a sale or exchange 
                              or otherwise a taxable event for
                              Federal income tax purposes.  See 
                              "Certain U.S. Federal Tax
                              Considerations."

Exchange Agent............... State Street Bank and Trust Company 
                              is serving as exchange agent (the "Exchange
                              Agent") in connection with the Exchange
                              Offer.

Fees and Expenses............ All expenses incident to consummation
                              of the Exchange Offer and compliance with the
                               Registration Rights Agreement will be borne
                              by the Issuer.  See "The Exchange Offer--Fees
                              and Expenses."

Use of Proceeds.............. There will be no cash proceeds 
                              payable to the Issuer from the
                              issuance of the New Debentures 
                              pursuant to the Exchange Offer.
                              See "Use of Proceeds."


                                9



                Summary of Terms of New Debentures

      The Exchange Offer relates to the exchange of up to
$142,000,000 aggregate principal amount at maturity of Old
Debentures for up to an equal aggregate principal amount of New
Debentures. The New Debentures will be entitled to the benefits
of the same Indenture that governs the Old Debentures and that
will govern the New Debentures. The form and terms of the New
Debentures are the same in all material respects as the form and
terms of the Old Debentures, except that the New Debentures have
been registered under the Securities Act and therefore will not
bear legends restricting the transfer thereof. See "Description
of the New Debentures."

Maturity Date.............    October 15, 2008.

Yield and Interest Rate and   13 1/8% (computed on a semi-annual 
Payment Dates.............    bond equivalent basis) calculated 
                              from October 17, 1997.  The New 
                              Debentures will accrete at a rate 
                              of 13 1/8%, compounded semi-annually, 
                              to an aggregate principal amount of 
                              $142.0 million by October 15, 2002. 
                              Cash interest will not accrue on the 
                              New Debentures prior to October 15,
                              2002. Commencing October 15, 2002,
                              cash interest on the New Debentures
                              will accrue and be payable, at a
                              rate of 13 1/8% per annum,
                              semi-annually in arrears on each
                              April 15 and October 15.

Optional Redemption.......    The New Debentures will be 
                              redeemable at the option of Holdings,
                              in whole or in part, at any time 
                              on or after October 15, 2002, in
                              cash at the redemption prices set
                              forth herein, plus accrued and
                              unpaid interest and Liquidated Damages
                              (as defined herein), if any,
                              thereon to the redemption date.
                              In addition, at any time prior to
                              October 15, 2000, Holdings may, 
                              at its option, on any one or more
                              occasions, redeem up to 35% of the
                              aggregate principal amount at
                              maturity of the New Debentures
                              originally issued at a redemption
                              price equal to 113.125% of the 
                              Accreted Value (as defined herein)
                              thereof, plus Liquidated Damages,
                              if any, with the net cash
                              proceeds of one or more Equity 
                              Offerings (as defined herein);
                              provided that at least 65% of 
                              the original aggregate principal
                              amount at maturity of the New 
                              Debentures will remain outstanding
                              immediately following each such 
                              redemption.  See "Description of
                              the New Debentures--Optional Redemption."

Repurchase at the Option 
of Holders................    Upon the occurrence of a Change of 
                              Control (as defined herein) each holder 
                              of New Debentures will have the right
                              to require Holdings to repurchase
                              all or any part of such holder's
                              New Debentures at a price in cash
                              equal to 101% of the Accreted Value
                              thereof plus Liquidated Damages, if
                              any, thereon to the date of
                              repurchase in the case of any such
                              purchase on or after October 15,
                              2002. Holdings does not have, and
                              may not in the future have, any
                              assets other than common stock of
                              Operating Corp (which will be
                              pledged to secure Operating Corp's
                              obligations under the Bank
                              Facilities). As a result, Holdings'
                              ability to repurchase all or any
                              part of the New Debentures upon the
                              occurrence of a Change of Control
                              will be dependent upon the receipt
                              of dividends or other distributions
                              from its direct and indirect
                              subsidiaries. The Bank Facilities
                              and the Operating Corp Senior
                              Subordinated Notes restrict
                              Operating Corp from paying
                              dividends and making any


                               10





                              other distributions to Holdings. If
                              Holdings is unable to obtain
                              dividends from Operating Corp
                              sufficient to permit the repurchase
                              of the New Debentures or does not
                              refinance such indebtedness,
                              Holdings will likely not have the
                              financial resources to purchase New
                              Debentures upon the occurrence of a
                              Change of Control. In any event,
                              there can be no assurance that
                              Holdings' subsidiaries will have
                              the resources available to pay any
                              such dividend or make any such
                              distribution. Furthermore, the Bank
                              Facilities provide that certain
                              change of control events will
                              constitute a default thereunder and
                              the Operating Corp Senior
                              Subordinated Notes provide that, in
                              the event of a Change of Control,
                              Operating Corp will be required to
                              offer to repurchase the Operating
                              Corp Senior Subordinated Notes at
                              the price specified therefore.
                              Holdings' failure to make a Change
                              of Control Offer (as defined
                              herein) when required or to
                              purchase tendered New Debentures
                              when tendered would constitute an
                              Event of Default (as defined
                              herein) under the Indenture. See
                              "Description of the New
                              Debentures--Repurchase at the
                              Option of Holders."

Ranking...................... The New Debentures will be senior 
                              obligations of Holdings. The
                              New Debentures will rank pari passu 
                              in right of payment with all
                              future senior indebtedness of Holdings
                              and will rank senior in right
                              of payment to all future subordinated
                              indebtedness of Holdings.
                              The New Debentures will be effectively 
                              subordinated to all liabilities of Holdings'
                              subsidiaries. See "Description of the New
                              Debentures."

Covenants...................  The Indenture contains certain 
                              covenants that, among other things,
                              will limit the ability of Holdings 
                              and its Restricted Subsidiaries (as
                              defined herein) to: incur indebtedness
                              and issue preferred stock,
                              repurchase Capital Stock (as defined herein)
                              and certain indebtedness, engage in
                              transactions with affiliates, incur or suffer
                              to exist certain liens, pay dividends or 
                              other distributions, make certain investments,
                               sell assets and engage in certain mergers and
                              consolidations.  See "Description of 
                              the New Debentures--Certain
                              Covenants."

                          Use of Proceeds

      There will be no cash proceeds payable to the Issuer from
the issuance of the New Debentures pursuant to the Exchange
Offer. The proceeds from the sale of the Old Debentures were used
to fund the Recapitalization. See "Use of Proceeds" and "The
Recapitalization."

                           Risk Factors

      See "Risk Factors" for a discussion of certain factors that
should be considered in evaluating an investment in the
Debentures.


                               11



      Summary Unaudited Pro Forma Consolidated Financial Data

      The following table sets forth summary unaudited pro forma
consolidated statement of operations data of the Issuer for the
fiscal year ended January 31, 1997, for the forty weeks ended
November 8, 1996 and November 7, 1997 and for the twelve months
ended November 7, 1997 and summary unaudited historical and pro
forma consolidated balance sheet data at July 18, 1997. The pro
forma consolidated statement of operations data for the fiscal
year ended January 31, 1997, for the forty weeks ended November
8, 1996 and November 7, 1997, and for the twelve months ended
November 7, 1997 give effect to the Recapitalization as if it had
occurred at February 3, 1996. The data presented below should be
read in conjunction with the Consolidated Financial Statements,
including the related Notes thereto, included herein, the other
financial information included herein, "Unaudited Pro Forma
Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

                     Fiscal Year Ended   Forty Weeks Ended    Twelve Months
                     -----------------   -----------------    -------------
                                              November             Ended
                                              --------             -----

                      January 31, 1997    8, 1996    7, 1997   November 7, 1997
                      ----------------    -------    -------   ----------------
                    
                                         (dollars in thousands)

Statement of 
Operations Data:
Revenues (1) .......... $  806,193      $ 536,743   $ 564,958    $ 834,408
Gross profit ..........    377,474        244,687     254,093      386,880
Selling, general and 
administrative 
expenses ..............    350,105        241,582     254,544      363,067
Income from 
operations ............     27,369          3,105        (451)      23,813
Net income (loss)(2)...     (4,301)       (13,691)    (40,138)     (30,748)

Other Data:
Depreciation and 
amortization .......... $   10,541        $ 7,625    $ 10,191    $  13,107
Net capital 
expenditures (3)
  New store openings ..     10,894          6,903      15,253       19,244
  Other ...............     11,587          8,044      13,012       16,555
                           ----------      --------   ---------    ---------
  Total net capital
  expenditures ........ $   22,481       $  14,947  $  28,265    $  35,799

Credit Ratios:
Total average 
debt (6) ..............                                          $ 307,494
Adjusted EBITDA (4) ...                                             47,590
Cash interest 
expense (5) ...........                                             22,941
Total interest 
expense (5) ...........                                             36,304
Adjusted EBITDA/cash
interest expense ......                                                2.1
Adjusted EBITDA/total
interest expense ......                                                1.3
Total average 
debt/Adjusted
EBITDA (6) ............                                                6.5

Cash flows from
operating activities...                                           $ (1,837)
Cash flows from
investing activities...                                           $(35,799)
Cash flows from
financing activities...                                           $ 39,990

_________________

(1)  Revenues include the pro forma effect of the Securitization
     of accounts receivable. See "Management's Discussion and
     Analysis of Financial Condition and Results of
     Operations--Liquidity and Capital Resources" and
     "Description of Other Issuer Indebtedness-- Receivables
     Facility."

(2)  In the forty weeks ended November 7, 1997, the Company
     recognized an extraordinary loss of $4.5 million, net
     of income tax benefit, related to the early retirement of
     debt. The Company also recognized expenses of $19.9 million
     in connection with the Recapitalization.

(3)  Capital expenditures are net of proceeds from construction
     allowances.

(4)  EBITDA represents income (loss) before extraordinary item
     and cumulative effect of accounting changes, income taxes,
     interest expense, depreciation and amortization and expenses
     of $19.9 million incurred in connection with the
     Recapitalization. The Issuer believes that EBITDA provides
     useful information regarding the Company's ability to
     service its debt; however, holders tendering Old Debentures
     in the Exchange Offer should consider the following factors
     in evaluating such measures: EBITDA and related measures (i)
     should not be considered in isolation, (ii) are not measures
     of performance calculated in accordance with generally
     accepted accounting principles ("GAAP"), (iii) should not be
     construed as alternatives or substitutes for income from
     operations, net income or cash flows from operating
     activities in analyzing the Company's operating performance,
     financial position or cash flows (in each case, as
     determined in accordance with GAAP) and (iv) should not be
     used as indicators of the Company's operating performance or
     measures of its liquidity. Additionally, because all
     companies do not calculate EBITDA and related measures in a
     uniform fashion, the calculations presented in this
     Prospectus may not be comparable to other similarly titled
     measures of other companies.


                               12



     Adjusted EBITDA is defined as EBITDA, as defined above,
     revised to reflect management's estimate of certain cost
     savings and cost eliminations implemented prior to the
     Recapitalization. Holders tendering Old Debentures in the
     Exchange Offer should consider that Adjusted EBITDA (i)
     should not be considered in isolation, (ii) is not a measure
     of performance calculated in accordance with GAAP, (iii)
     should not be construed as alternatives or substitutes for
     income from operations, net income or cash flows from
     operating activities in analyzing the Company's operating
     performance, financial position or cash flows (in each case,
     as determined in accordance with GAAP) and (iv) should not
     be used as indicators of the Company's operating performance
     or measures of its liquidity. See notes to "Unaudited Pro
     Forma Statements of Operations" included herein. This
     information should be read in conjunction with the Unaudited
     Pro Forma Consolidated Financial Data and the related Notes
     thereto included herein.

    
                                            Twelve Months Ended
                                             -------------------
                                              November 7, 1997
                                              ----------------
                                           (dollars in thousands)
  Historical EBITDA .......................      $40,970
    Recapitalization pro forma 
  adjustments:
    Loss on Securitization of 
    accounts receivable ...................       (2,250)
  Cost savings and cost eliminations
  implemented prior to the Recapitalization:
    Renegotiation of catalog 
    vendor contract(a) ....................        2,100
    Headcount and net payroll
    reductions(b) .........................        4,550
    Insourcing of photography
    shop(c) ...............................          820
    Non-recurring 
    severance(d) ...........................       1,400
                                               ---------
      Total adjustments ....................       6,620
                                               ---------
  Adjusted EBITDA ..........................     $47,590
                                                ========

   (a)  Reflects the recent renegotiation of the Company's catalog
        vendor contract. The adjustment represents the difference
        between the amounts previously expensed for such items and
        the amounts which are expected to be expensed under the
        terms of the new contract.

   (b)  Represents compensation savings as a result of the termination 
        of certain positions.

   (c)  Represents the estimated cost savings from bringing
        in-house certain photography functions that were previously
        performed by outside vendors.

   (d)  Reflects non-recurring severance associated with the termination
        of certain managers.

(5) Cash interest expense excludes, and total interest expense 
    includes, non-cash interest in respect of the Debentures.

(6) For purposes of computing the ratio of total average debt to
    Adjusted EBITDA, total average debt on a pro forma basis as of
    November 7, 1997 reflects average outstanding balances under
    the Revolving Credit Facility of $12.2 million during the
    twelve months ended November 7, 1997 (giving effect to the
    Recapitalization), $70.0 million in aggregate principal amount
    of indebtedness under the Term Loan Facility and $150.0
    million in aggregate principal amount of the Operating Corp
    Senior Subordinated Notes and $75.3 million in initial
    aggregate principal amount of the Debentures issued in the
    Offering. See the notes to "Unaudited Pro Forma Statements of
    Operations" included herein.


         Summary Consolidated Financial And Operating Data

      The following table sets forth summary consolidated
historical financial, operating and other data of Holdings. The
summary financial data for each of the five fiscal years ended
January 31, 1997 are derived from the Consolidated Financial
Statements of Holdings, which have been audited by Deloitte &
Touche LLP, independent auditors. The summary financial data for
the forty weeks ended November 8, 1996 and November 7, 1997 have
been derived from the Unaudited Condensed Consolidated Financial
Statements of the Company and include, in the opinion of
management, all adjustments necessary to present fairly the data
for such periods. The results for the forty weeks ended November
7, 1997 are not necessarily indicative of the results to be
expected for the fiscal year ending January 30, 1998 or for any
future period. The data presented below should be read in
conjunction with the Consolidated Financial Statements, including
the related Notes thereto included herein, the other financial
information included herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

Fiscal Year Ended Forty Weeks Ended -------------------------------------------------------------------- ----------------- January 29, January 28, February 3, February 2, January 31, Nov. 8, Nov. 7, ----------- ----------- ----------- ----------- ----------- ------- ------- 1993 1994 1995 1996 1997 1996 1997 ---- ---- ---- ---- ---- ---- ---- (dollars in thousands, except per square foot data) (unaudited) Financial Data: Revenues ............... $ 571,047 $ 646,972 $ 737,725 $ 745,909 $ 808,843 $538,781 $566,596 Gross profit ........... 267,120 292,083 343,652 346,241 380,124 246,725 255,731 Selling, general and administrative expenses ............... 238,730 265,857 311,468 327,672 348,305 240,197 253,159 Income from operations ........ 28,390 26,226 32,184 18,569 31,819 6,528 2,572 Net income (loss) (1) .. 14,019 12,019 14,919 6,450 12,549 (573) (28,598) Operating Data: Revenues: J. Crew mail order ... $ 201,463 $ 199,954 $ 247,272 $ 274,653 $ 289,772 $165,936 $157,840 J. Crew retail ....... 72,906 108,650 135,726 134,959 167,957 110,399 140,574 J. Crew factory ...... 38,563 49,253 62,626 79,203 94,579 70,266 75,965 J. Crew licensing .... -- 1,900 3,269 3,975 3,817 3,729 2,968 ------- ------- ------- -------- -------- -------- ------- Total J. Crew brand .. 312,932 359,757 448,893 492,790 556,125 350,330 377,347 Other divisions (2) .. 258,115 287,215 288,832 253,119 252,718 188,451 189,249 ------- ------- -------- -------- Total ................ $ 571,047 $ 646,972 $ 737,725 $ 745,909 $ 808,843 $538,781 $566,596 ========= ========== ========== ========== ========= ======= ======== EBITDA(3): J. Crew mail order ... $ 12,840 $ 11,980 $ 24,345 $ 16,831 $ 17,524 $ (1,924) $ (8,225) J. Crew retail ....... 6,720 5,055 13,333 15,194 16,847 8,800 8,177 J. Crew factory. ..... 3,660 1,797 1,653 (66) 2,876 3,395 3,244 J. Crew licensing .... (51) 1,239 2,422 2,820 2,467 2,797 2,285 Total J. Crew brand .. 23,169 20,071 41,753 34,779 39,714 13,068 5,481 Other divisions (2) .. 11,611 12,941 (1,459) (5,938) 2,646 1,085 7,282 -------- -------- -------- -------- ------ ------- -------- Total ............... $ 34,870 $ 33,012 $ 40,294 $ 28,841 $ 42,360 $ 14,153 $ 12,763 ========= ======== ======== ======== ========= ======= ======== 14 Other Data: Cash flows from operating activities ..... $22,400 $1,467 $1,774 $(7,849) $16,497 $(42,766) $(61,110) Cash flows from investing activities ..... $(14,965) $(11,086) $(13,467) $(14,640) $(22,481) $(14,947) $(28,265) Cash flows from financing activities ..... $638 $5,020 $6,763 $17,763 $(413) $54,822 $95,255 J. Crew Mail Order: Number of catalogs circulated (in thousand$) ........ $ 56,983 62,547 $ 61,187 $ 67,519 $ 76,087 $ 53,942 $ 53,977 Number of pages circulated (in millions) ......... 6,576 6,965 8,277 10,198 9,827 6,341 6,293 J. Crew Retail: Sales per gross square foot (4) ...... $ 622 $ 559 $ 594 $ 533 $ 551 NM NM Store contribution margin (5) ........... 24.0% 18.7% 22.7% 25.5% 25.4% NM NM Number of stores open at end of period ............. 18 28 29 31 39 39 49 Comparable store sales change (6) 22.0% (8.0)% 6.9% (6.0)% 4.5% 4.0% (6.1)% Depreciation and amortization .......... $ 6,390 $ 6,786 $ 8,110 $ 10,272 $ 10,541 $ 7,625 $ 10,191 Net capital expenditures (7) New store openings .. 5,519 2,789 2,804 6,009 10,894 6,903 15,253 Other ............... 9,446 8,297 10,663 8,631 11,587 8,044 13,012 ------- ------- -------- -------- ------- -------- Total net capital expenditures ....... $14,965 $11,086 $ 13,467 $ 14,640 $ 22,481 $14,947 $ 28,265 ======= ======= ======== ======== ======== ======= ========
(1) In fiscal 1995, Holdings changed its method of accounting for catalog costs and for merchandise inventories and recognized an increase in net income from the aggregate cumulative effect of such accounting changes, net of income taxes, of $2.6 million. In the same year, Holdings recognized an extraordinary loss of $1.7 million, net of income tax benefit, related to the early retirement of debt. See Notes 11 and 12 of Notes to Consolidated Financial Statements. During the forty weeks ended November 7, 1997, the Company recognized an extraordinary loss of $4.5 million, net of income tax benefit, related to the early retirement of debt and incurred other expenses of $19.9 million in connection with the Recapitalization. (2) Includes the Company's PCP and C&W divisions and finance charge income derived from PCP installment sales. (3) EBITDA represents income (loss) before extraordinary items and cumulative effect of accounting changes plus income taxes, interest expense, depreciation and amortization and expenses of $19.9 million incurred in connection with the Recapitalization. The Company believes that EBITDA provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as a substitute for net income as an indicator of the Company's operating performance or cash flow as a measure of liquidity. Holders tendering Old Debentures in the Exchange Offer should consider the following factors in evaluating such measures: EBITDA and related measures (i) should not be considered in isolation, (ii) are not measures of performance calculated in accordance with GAAP, (iii) should not be construed as alternatives or substitutes for income from operations, net income or cash flows from operating activities in analyzing the Company's operating performance, financial position or cash flows (in each case, as determined in accordance with GAAP) and (iv) should not be used as indicators of the Issuer's operating performance or measures of its liquidity. Additionally, because all companies do not calculate EBITDA and related measures in a uniform fashion, the calculations presented in this Prospectus may not be comparable to other similarly titled measures of other companies. (4) Sales per gross square foot is the result of dividing annualized net retail sales for the period (reflecting adjustments based on management estimates of the impact of opening stores in different periods during the year) by gross square footage at the end of each fiscal period. (5) Store contribution margin is computed as gross profit less in-store operating expenses divided by sales. (6) Comparable store sales includes stores that have been open for one full twelve-month period. (7) Capital expenditures are net of proceeds from construction allowances. 15 RISK FACTORS Prospective holders of the New Debentures should carefully review the information contained and incorporated by reference in this Prospectus and should particularly consider the following matters: Risk Factors Relating to the Company Substantial Leverage; Liquidity; Stockholders' Deficit In connection with the Recapitalization, the Company incurred a significant amount of additional indebtedness. As of November 7, 1997, the Company had total consolidated indebtedness of $194.7 million and stockholders' deficit of $342.3 million. In addition, subject to the restrictions in the Bank Facilities, the Operating Corp Senior Subordinated Notes and the Debentures, the Company may incur additional senior or other indebtedness from time to time to finance acquisitions or capital expenditures or for other general corporate purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." The level of the Company's indebtedness could have important consequences to the holders of the Debentures, including, but not limited to, the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired; (ii) a significant portion of the Company's cash flow from operations must be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available to the Company for its operations; (iii) significant amounts of the Company's borrowings will bear interest at variable rates, which could result in higher interest expense in the event of increases in interest rates; (iv) the Indenture, the Senior Subordinated Note Indenture (as defined herein) and the Bank Facilities contain financial and restrictive covenants, the failure to comply with which may result in an event of default which, if not cured or waived, could have a material adverse effect on the Company; (v) the indebtedness outstanding under the Bank Facilities is secured and matures prior to the maturity of the Debentures; (vi) the Company may be substantially more leveraged than certain of its competitors, which may place the Company at a competitive disadvantage; and (vii) the Company's substantial degree of leverage may limit its flexibility to adjust to changing market conditions, reduce its ability to withstand competitive pressures and make it more vulnerable to a downturn in general economic conditions or its business. See "Description of the New Debentures" and "Description of Other Issuer Indebtedness." The Company's ability to make scheduled payments or to refinance its debt obligations will depend upon its future financial and operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond its control. There can be no assurance that the Company's operating results, cash flow and capital resources will be sufficient for payment of its indebtedness in the future. In the absence of such operating results and resources, the Company could face substantial liquidity problems and might be required to dispose of material assets or operations to meet its debt service and other obligations, and there can be no assurance as to the timing of such sales or the proceeds that the Company could realize therefrom. In addition, because significant amounts of the Company's borrowings will bear interest at variable rates, an increase in interest rates could adversely affect, among other things, the Company's ability to meet its debt service obligations. If the Company is unable to service its indebtedness, it may take actions such as reducing or delaying planned expansion and capital expenditures, selling assets, restructuring or refinancing its indebtedness or seeking additional equity capital. There can be no assurance that any of these actions could be effected on satisfactory terms, if at all. Dependence on Key Personnel Emily Woods' leadership in the areas of design, merchandising and operations has been a significant factor in the Company's success. The loss of Ms. Woods' services could have a material adverse affect on the Company. The Company also depends on the services of key members of its design and merchandising teams and other key officers and employees. While the Company believes that it has developed depth and experience among its key 16 personnel, there can be no assurance that the Company's business would not be affected if one or more of these individuals left the Company. The Company has entered into an employment agreement with Ms. Woods and has employment agreements with certain other employees. See "Management--Employment Agreements and Other Compensation Arrangements." The Company maintains key person life insurance on Ms. Woods. Fashion and Apparel Industry Risks The Company believes that its success depends in substantial part on its ability to originate and define product and fashion trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. There can be no assurance that the Company will continue to be successful in this regard. The Company attempts to reduce the risks of changing fashion trends and product acceptance by devoting a substantial portion of its product line to basic durables which are not significantly modified from year to year. Nevertheless, if the Company misjudges the market for its products, it may be faced with significant excess inventories for some products and missed opportunities with others. The industry in which the Company operates is cyclical. Purchases of apparel and related merchandise tend to decline during recessionary periods and also may decline at other times. There can be no assurance that the Company will be able to maintain its historical growth in revenues or earnings, or remain profitable in the future. Further, a recession in the general economy or uncertainties regarding future economic prospects could affect consumer spending habits and have an adverse effect on the Company's results of operations. Increases in Costs of Mailing, Paper and Printing Postal rate increases and paper and printing costs affect the cost of the Company's catalog and promotional mailings. The Company relies on discounts from the basic postal rate structure, such as discounts for bulk mailings and sorting by zip code and carrier routes. The Company is not a party to any long-term contracts for the supply of paper. The Company's cost of paper has fluctuated significantly during the past three fiscal years, and its future paper costs are subject to supply and demand forces external to its business. The Company's average cost per hundred-pound weight of paper was $39, $58 and $52 during fiscal 1994, 1995 and 1996, respectively, and $52 and $41 during the forty weeks ended November 8, 1996 and November 7, 1997, respectively. Consequently, there can be no assurance that the Company will not be subject to an increase in paper costs. Although the Company has recently entered into a new four-year contract for the printing of its catalogs, the contract offers no assurance that the Company's printing costs will not increase following expiration of the contract. Future increases in postal rates or paper or printing costs would have a negative impact on the Company's earnings to the extent that the Company is unable to pass such increases on directly to customers or offset such increases by raising selling prices or by implementing more efficient mailings. See "Business--J. Crew Brand--J. Crew Mail Order--Catalog Creation and Production." Reliance on Foreign Sourcing In 1996, approximately 50% of the J. Crew brand and Clifford & Wills merchandise was sourced from independent foreign factories located primarily in the Far East, and many of the Company's domestic vendors import a substantial portion of their merchandise from abroad. The Company has no long-term merchandise supply contracts and many of its imports are subject to existing or potential duties, tariffs or quotas that may limit the quantity of certain types of goods which may be imported into the United States from countries in those regions. The Company competes with other companies for production facilities and import quota capacity. The Company's business is also subject to a variety of other risks generally associated with doing business abroad, such as political instability (including issues concerning the future of Hong Kong following the transfer of Hong Kong to The People's Republic of China on July 1, 1997), currency and exchange risks and potential local issues. The Company's future performance will be subject to such factors, which are beyond its control, and there can be no assurance that such factors would not have a material adverse effect on the Company's results of operations. See "Business--General--Sourcing, Production and Quality." 17 The Company requires its licensing partners and independent manufacturers to operate in compliance with applicable laws and regulations. While the Company's internal and vendor operating guidelines promote ethical business practices, the Company does not control such manufacturers or their labor practices. The violation of labor or other laws by an independent manufacturer of the Company or by one of the Company's licensing partners, or the divergence of an independent manufacturer's or licensing partner's labor practices from those generally accepted as ethical in the United States, could have a material adverse effect on the Company's financial condition and results of operations. Uncertainty Relating to Ability to Implement J. Crew Retail Growth Strategy The Company intends to expand its base of J. Crew retail stores as part of its growth strategy. There can be no assurance that this strategy will be successful. The actual number and type of such stores to be opened and their success will be dependent upon a number of factors, including, among other things, the ability of the Company to manage such expansion and hire and train qualified associates, the availability of suitable store locations and the negotiation of acceptable lease terms for new locations and upon lease renewals for existing locations. There is no assurance that the Company will be able to open and operate new stores on a timely or profitable basis. In 1996, net of construction allowances, the Company spent $10.9 million for new stores and remodeling and anticipates spending approximately $16.2 million in 1997 and $23.0 million in 1998 for such capital expenditures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--J. Crew Brand--J. Crew Retail--New Store Expansion." The Company believes that the opening of J. Crew retail stores has diverted some customer revenues from the J. Crew mail order operations. There can be no assurance that future store openings will not continue to have such an effect. Seasonality The Company experiences seasonal fluctuations in its revenues and operating income, with a disproportionate amount of the Company's revenues and a majority of its income from operations typically realized during the fourth quarter of its fiscal year. Revenues and income from operations are generally weakest during the first and second quarters of the Company's fiscal year. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new store openings and of catalog mailings, and the revenues contributed by new stores, merchandise mix and the timing and level of markdowns. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Seasonality." Competition All aspects of the Company's businesses are highly competitive. The Company competes primarily with other catalog operations, specialty brand retailers, department stores, and mass merchandisers engaged in the retail sale of men's and women's apparel, accessories, footwear and general merchandise. The Company believes that the principal bases upon which it competes are quality, design, efficient service, selection and price. However, certain of the Company's competitors are larger and have greater financial, marketing and other resources than the Company, and there can be no assurance that the Company will be able to compete successfully with them in the future. Cautionary Statement Concerning Ability to Achieve Anticipated Cost Savings and Forward-Looking Statements Management of the Company estimates that approximately $7 million of annualized net cost savings (in addition to the $7.5 million in estimated annual savings included in Adjusted EBITDA) could be achieved by mid- 1998, including process efficiencies, reduction of the Base Book trim size, installation of an automated sortation system at the Company's Lynchburg, Virginia distribution center and relocation of C&W to the J. Crew corporate headquarters office. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview," "Business--Overview" and "--Opportunities." The cost savings estimates were prepared solely by members of the management of the Company. The estimates necessarily reflect numerous assumptions as to future sales levels and other operating results, the availability of funds for capital expenditures as well as general industry and business conditions and other matters, many of which are beyond the control of the Company. Other 18 estimates were based on a management consensus as to what levels of purchasing and similar efficiencies should be achievable by an entity the size of the Company. All of these forward-looking statements are based on estimates and assumptions made by management of the Company, which although believed to be reasonable, are inherently uncertain and difficult to predict. There can be no assurance that the savings anticipated in these forward-looking statements will be achieved. In addition, there can be no assurance that unforeseen costs and expenses or other factors will not offset the estimated cost savings or other components or the Company's plan in whole or in part. The information contained herein contains forward-looking statements that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the competitive environment in the apparel industry in general and in the Company's specific market areas; changes in prevailing interest rates and the availability of and terms of financing to fund the anticipated growth of the Company's business; inflation; changes in costs of goods and services; economic conditions in general and in the Company's specific market areas; demographic changes; changes in or failure to comply with federal, state and/or local government regulations; liability and other claims asserted against the Company; changes in operating strategy or development plans; the ability to attract and retain qualified personnel; the ability to control inventory levels; the significant indebtedness of the Company; labor disturbances; the ability to negotiate agreements with suppliers on favorable terms; changes in the Company's capital expenditure plan; and other factors referenced herein. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Forward-looking statements regarding revenues and EBITDA are particularly subject to a variety of assumptions, some or all of which may not be realized. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Forward-looking statements can be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "pro forma," "anticipates" or "intends" or the negative of any thereof, or other variations thereon or comparable terminology, or by discussions of strategy or intentions. Given these uncertainties, prospective purchasers of New Debentures are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligations to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. Risk Factors Relating to the Debentures Limitation on Access to Cash Flow of Subsidiaries; Holding Company Structure Holdings is a holding company, and its ability to pay interest on the Debentures is dependent upon the receipt of dividends from its direct and indirect subsidiaries. Holdings does not have and may not in the future have, any assets other than the common stock of Operating Corp. Operating Corp and its subsidiaries are parties to the Bank Facilities and an indenture relating to the Operating Corp Senior Subordinated Notes (the "Senior Subordinated Note Indenture"), each of which imposes substantial restrictions on Operating Corp's ability to pay dividends to Holdings. Any payment of dividends will be subject to the satisfaction of certain financial conditions set forth in the Senior Subordinated Note Indenture and the Bank Facilities. The ability of Operating Corp and its subsidiaries to comply with such conditions in the Senior Subordinated Note Indenture may be affected by events that are beyond the control of Holdings. The breach of any such conditions could result in a default under the Senior Subordinated Note Indenture, the Term Loan Facility and/or the Revolving Credit Facility, and in the event of any such default, the holders of the Operating Corp Senior Subordinated Notes or the lenders under the Bank Facilities could elect to accelerate the maturity of all the Operating Corp Senior Subordinated Notes or the loans under such facilities. If the maturity of the Operating Corp Senior Subordinated Notes or the loans under the Bank Facilities were to be accelerated, all such outstanding debt would be required to be paid in full before Operating Corp or its subsidiaries would be permitted to distribute any assets or cash to Holdings. There can be no assurance that the assets of Holdings would be sufficient to repay all of such outstanding debt and to meet its obligations under the Indenture. Future borrowings by Operating Corp can be expected to contain restrictions or prohibitions on the 19 payment of dividends by Operating Corp and its subsidiaries to Holdings. In addition, under Delaware law, a subsidiary of a company is permitted to pay dividends on its capital stock, only out of 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 immediately preceding fiscal year. Surplus is defined as the excess of a company's total assets over the sum of its total liabilities plus the par value of its outstanding capital stock. In order to pay dividends in cash, Operating Corp must have surplus or net profits equal to the full amount of the cash dividend at the time such dividend is declared. In determining Operating Corp's ability to pay dividends, Delaware law permits the Board of Directors of Operating Corp to revalue its assets and liabilities from time to time to their fair market values in order to create surplus. Holdings cannot predict what the value of its subsidiaries' assets or the amounts of their liabilities will be in the future and, accordingly, there can be no assurance that Holdings will be able to pay its debt service obligations on the Debentures. In addition, indebtedness outstanding under the Bank Facilities will be secured by substantially all of the assets of the Company (including the common stock of Operating Corp). As a result of the holding company structure of Holdings, the Holders of the Debentures will be structurally junior to all creditors of the Holdings' subsidiaries, except to the extent that Holdings is itself recognized as a creditor of any such subsidiary, in which case the claims of Holdings would still be subordinate to any security in the assets of such subsidiary and any indebtedness of such subsidiary senior to that held by Holdings. In the event of insolvency, liquidation, reorganization, dissolution or other winding-up of the Holdings' subsidiaries, Holdings will not receive any funds available to pay to creditors of the subsidiaries. As of November 7, 1997, the aggregate amount of indebtedness and other obligations of Holdings' subsidiaries (including trade payables and other accrued liabilities) was $508.3 million. Restrictive Debt Covenants The Indenture, the Senior Subordinated Note Indenture and the Bank Facilities contain a number of significant covenants that, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, prepay other indebtedness (including the Debentures) or amend certain debt instruments pay dividends, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, change the business conducted by the Issuer or its subsidiaries, make capital expenditures or engage in certain transactions with affiliates and otherwise restrict certain corporate activities. In addition, under the Bank Facilities, Operating Corp is required to comply with specified financial ratios and tests, including minimum interest coverage ratios, leverage ratios below a specified maximum, minimum net worth levels and minimum ratios of inventory to senior debt. See "Description of the New Debentures" and "Description of Operating Corp Indebtedness." The Company's ability to comply with such agreements may be affected by events beyond its control, including prevailing economic, financial and industry conditions. The breach of any of such covenants or restrictions could result in a default under the Bank Facilities, the Senior Subordinated Note Indenture and/or the Indenture, which would permit the senior lenders, or the holders of the Operating Corp Senior Subordinated Notes and/or the Debentures, or both, as the case may be, to declare all amounts borrowed thereunder to be due and payable, together with accrued and unpaid interest, and the commitments of the senior lenders to make further extensions of credit under the Bank Facilities could be terminated. If the Company were unable to repay its indebtedness to its senior lenders, such lenders could proceed against the collateral securing such indebtedness as described under "Description of Operating Corp Indebtedness." Fraudulent Transfer Statutes Under federal or state fraudulent transfer laws, if a court were to find that, at the time the Debentures were issued, the Issuer (i) issued the Debentures with the intent of hindering, delaying or defrauding current or future creditors or (ii) (A) received less than fair consideration or reasonably equivalent value for incurring the indebtedness represented by the Debentures, and (B)(1) was insolvent or was rendered insolvent by reason of the issuance of the Debentures, (2) was engaged, or about to engage, in a business or transaction for which its assets were unreasonably small or (3) intended to incur, or believed (or should have believed) it would incur, debts beyond 20 its ability to pay as such debts mature (as all of the foregoing terms are defined in or interpreted under such fraudulent transfer statutes), such court could avoid all or a portion of the Issuer's obligations to the holders of Debentures, subordinate the Issuer's obligations to the holders of the Debentures to other existing and future indebtedness of the Issuer, the effect of which would be to entitle such other creditors to be paid in full before any payment could be made on the Debentures, and take other action detrimental to the holders of the Debentures, including in certain circumstances, invalidating the Debentures. In that event, there would be no assurance that any repayment on the Debentures would ever be recovered by the holders of the Debentures. The definition of insolvency for purposes of the foregoing considerations varies among jurisdictions depending upon the federal or state law that is being applied in any such proceeding. However, the Issuer generally would be considered insolvent at the time it incurs the indebtedness constituting the Debentures if (i) the fair market value (or fair saleable value) of its assets is less than the amount required to pay its total existing debts and liabilities (including the probable liability on contingent liabilities) as they become absolute or matured or (ii) it is incurring debts beyond its ability to pay as such debts mature. There can be no assurance as to what standard a court would apply in order to determine whether the Issuer was "insolvent" as of the date the Debentures were issued, or that, regardless of the method of valuation, a court would not determine that the Issuer was insolvent on that date. Nor can there be any assurance that a court would not determine, regardless of whether the Issuer was insolvent on the date the Debentures were issued, that the payments constituted fraudulent transfers on another ground. To the extent that proceeds from the sale of the Debentures are used to make a distribution to a stockholder on account of the ownership of capital stock, a court may find that the Issuer did not receive fair consideration or reasonably equivalent value for the incurrence of the indebtedness represented by the Debentures. Based upon financial and other information currently available to it, management of the Issuer believes that the Debentures are being incurred for proper purposes and in good faith and that the Issuer (i) is solvent and will continue to be solvent after issuing the Debentures, (ii) will have sufficient capital for carrying on its business after such issuance, and (iii) will be able to pay its debts as they mature. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Possible Inability to Repurchase Debentures upon Change of Control In the event of a Change of Control, each holder of Debentures will have the right to require Holdings to repurchase all or any part of such holder's Debentures at the offer price specified therefore in the Indenture. Holdings does not have, and may not in the future have, any assets other than common stock of Operating Corp (which is pledged to secure Operating Corp's obligations under the Bank Facilities). As a result, Holdings' ability to repurchase all or any part of the Debentures upon the occurrence of a Change of Control will be dependent upon the receipt of dividends or other distributions from its direct and indirect subsidiaries. The Bank Facilities and the Operating Corp Senior Subordinated Notes restrict Operating Corp from paying dividends and making any other distributions to Holdings. If Holdings does not obtain dividends from Operating Corp sufficient to permit the repurchase of the Debentures or does not refinance such indebtedness, Holdings will likely not have the financial resources to purchase Debentures upon the occurrence of a Change of Control. In any event, there can be no assurance that Holdings' subsidiaries will have the resources available to pay such dividend or make any such distribution. Furthermore, the Bank Facilities provide that certain change of control events will constitute a default thereunder, and the Operating Corp Senior Subordinated Notes provide that, in the event of a Change of Control, Operating Corp will be required to offer to repurchase the Operating Corp Senior Subordinated Notes at the price specified therefore. Holdings' failure to make a Change of Control offer when required or to purchase tendered Debentures when tendered would constitute an Event of Default under the Indenture. See "Description of the New Debentures" and "Description of Other Issuer Indebtedness." Original Issue Discount; Limitations on Holders' Claims Under the Indenture, in the event of an acceleration of the maturity of the Debentures upon the occurrence of an Event of Default, the holders of the Debentures, which have been (in the case of Old Debentures) or will be (in the case of New Debentures) issued at a substantial original issue discount from their principal amount at maturity, 21 may be entitled to recover only the amount which may be declared due and payable pursuant to the Indenture, which will be less than the principal amount at maturity of such Debentures. See "Description of the Debentures-- Events of Default and Remedies." If a bankruptcy case is commenced by or against Holdings under the Bankruptcy Code (as defined herein), the claim of a holder of Debentures with respect to the principal amount thereof may be limited to an amount equal to the sum of (i) the issue price of the Debentures and (ii) that portion of the original issue discount (as determined on the basis of such issue price) which is not deemed to constitute "unmature interest" for purposes of the Bankruptcy Code. Accordingly, holders of the Debentures under such circumstances may, even if sufficient funds are available, receive a lesser amount than they would be entitled to under the express terms of the Indenture. In addition, the same rules as those used for the calculation of original issue discount under federal income tax law and, accordingly, a holder might be required to recognize gain or loss in the event of a distribution related to such a bankruptcy case. Consequences of Failure to Exchange Holders of Old Debentures who do not exchange their Old Debentures for New Debentures pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Debentures as set forth in the legend thereon as a consequence of the issuance of the Old Debentures pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Debentures may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Issuer does not currently anticipate that it will register the Old Debentures under the Securities Act. To the extent that Old Debentures are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Debentures could be adversely affected. Absence of Public Market The Old Debentures have been designated as eligible for trading in the PORTAL market. Prior to this Exchange Offer, there has been no public market for the New Debentures. If such a market were to develop, the New Debentures could trade at prices that may be higher or lower than their principal amount. The Issuer does not intend to apply for listing of the New Debentures on any securities exchange or for quotation of the New Debentures on The Nasdaq Stock Market's National Market or otherwise. The Initial Purchasers have previously made a market in the Old Debentures, and the Issuer has been advised that the Initial Purchasers currently intend to make a market in the New Debentures, as permitted by applicable laws and regulations, after consummation of the Exchange Offer. The Initial Purchasers are not obligated, however, to make a market in the Old Debentures or the New Debentures and any such market making activity may be discontinued at any time without notice at the sole discretion of the Initial Purchasers. There can be no assurance as to the liquidity of the public market for the New Debentures or that any active public market for the New Debentures will develop or continue. If an active public market does not develop or continue, the market price and liquidity of the New Debentures may be adversely affected. THE RECAPITALIZATION The Shareholders, Holdings and TPG Partners II are parties to the Recapitalization Agreement which provided for the recapitalization of Holdings. Pursuant to the Recapitalization Agreement, Holdings purchased from the Shareholders all outstanding shares of Holdings' capital stock, other than shares having an implied value of $11.1 million, almost all of which continues to be held by Emily Woods, and which represented 14.8% of the outstanding shares of Holdings' Common Stock immediately following the transaction. In connection with the Recapitalization, Holdings organized Operating Corp and immediately prior to the consummation of the Recapitalization, Holdings transferred substantially all of its assets and liabilities to Operating Corp. Holdings' current operations are, and future operations are expected to be, limited to owning the stock of Operating Corp. Operating Corp repaid substantially all of the Company's funded debt obligations existing immediately before the consummation of the Recapitalization. At October 17, 1997, the aggregate principal amount of the Company's funded indebtedness was $186.0 million, consisting of the Retired Senior Notes, the Retired Bank Credit Facility and the Industrial Revenue Bond. Cash funding requirements for the Recapitalization (which was consummated on October 17, 1997) totalled $559.7 million (including $99.0 million in seasonal borrowings) and were satisfied through the purchase by TPG Partners II and investors of an aggregate $188.9 million in Holdings' equity securities together with an aggregate $330.8 million in borrowings and $40.0 million in proceeds from the Securitization, as follows: (i) the purchase by TPG Partners II, its affiliates and other investors of shares of Holdings' Common Stock (representing 85.2% of the outstanding shares) for $63.9 million; (ii) the purchase by TPG Partners II, its affiliates and other investors of $125.0 million in liquidation value of Holdings Preferred Stock; (iii) gross proceeds of $75.3 million from the issuance and sale by Holdings of Holdings Senior Discount Debentures; (iv) $150.0 million from the gross proceeds of the Offering; (v) $40.0 million in proceeds from the Securitization; (vi) $70.0 million of borrowings under the Term Loan Facility; and (vii) $35.6 million of borrowings under the Revolving Credit Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources," "Description of the New Debentures," "Description of Operating Corp Indebtedness" and "Capital Stock of Holdings and Operating Corp." The Recapitalization was accounted for as a recapitalization transaction for accounting purposes. The repurchase of shares from the Shareholders, the Debt Retirement, the Holdings Common Equity Contribution, the issuance and sale by Holdings of the Holdings Preferred Stock and the Holdings Senior Discount Debentures, the borrowing by Operating Corp of funds under the Bank Facilities and the Securitization and the issuance and sale by Operating Corp of the Operating Corp Senior Subordinated Notes were effected in connection with the Recapitalization. The following table summarizes the sources and uses of funds in the Recapitalization: (dollars in thousands) Sources: Revolving Credit Facility (1)............. $ 35,559 Term Loan Facility........................ 70,000 Securitization (2)........................ 40,000 Operating Corp Senior Subordinated Notes.. 150,000 Debentures issued in the Offering......... 75,257 Holdings Preferred Stock.................. 125,000 Holdings Common Equity Contribution....... 63,891 Total Sources........................... $559,707 ======== Uses: Repurchase of Holdings' Capital Stock..... $ 316,688 Repayment of Retired Bank Credit Facility (99,212) Repayment of Retired Senior Notes (4)..... 93,104 Retirement of Industrial Revenue Bond (5) 1,963 Transaction Fees and Expenses and Other Transaction Payments (6)....... 48,740 Total Uses.............................. $559,707 ======== (1) Reflects borrowings to partially refinance seasonal borrowings outstanding under the Retired Bank Credit Facility. Giving effect to the Recapitalization, average outstanding borrowings under the Revolving Credit Facility would have been $12.2 million during the twelve months ended November 7, 1997. Excludes letters of credit issued to facilitate international merchandise purchases, which had an aggregate outstanding balance of $37.4 million as of November 7, 1997. See the notes to the "Unaudited Pro Forma Statements of Operations" included herein. (2) The Company securitized approximately $40 million of PCP consumer loan installment receivables off-balance sheet simultaneously with the consummation of the Recapitalization pursuant to a facility arranged by affiliates of the Initial Purchasers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of Other Issuer Indebtedness--Receivables Facility." (3) The Retired Bank Credit Facility was in an aggregate principal amount of up to $200.0 million, of which up to $120.0 million was available for direct borrowings. Borrowings under the Retired Bank Credit Facility were prepaid in whole without penalty or premium and included accrued interest of $0.2 million. (4) The Retired Senior Notes were prepaid in connection with the Recapitalization. The prepayment required the Issuer to pay a make-whole premium in the amount of $5.8 million. Also included is $2.3 million of accrued interest. (5) The industrial revenue bond was prepaid in whole without penalty or premium. (6) Includes Holdings' expenses, management bonuses, financial advisory, consulting and other professional fees and deferred financing costs. See "Certain Relationships and Related Transactions." TEXAS PACIFIC GROUP TPG was founded by David Bonderman, James G. Coulter and William S. Price, III in 1992 to pursue public and private investment opportunities through a variety of methods, including leveraged buyouts, recapitalizations, joint ventures, restructurings and strategic public securities investments. The principals of TPG operate TPG Partners, L.P. and TPG Partners II, both Delaware limited partnerships with aggregate committed capital of over $3.2 billion. Among TPG's investments are branded consumer products companies Beringer Wine Estates, Del Monte Foods Company and Ducati Motor. Other TPG portfolio companies include America West Airlines, Belden & Blake Corporation, Favorite Brands International, Paradyne, Virgin Entertainment and Vivra Specialty Partners. In addition, the principals of TPG led the $9 billion reorganization of Continental Airlines in 1993. 24 The principal executive office of TPG is located at 201 Main Street, Suite 2420, Fort Worth, Texas 76102 and its telephone number is (817) 871-4000. USE OF PROCEEDS There will be no cash proceeds payable to the Issuer from the issuance of the New Debentures pursuant to the Exchange Offer. The proceeds from the sale of the Old Debentures were used by Holdings to finance the Recapitalization. CAPITALIZATION The following table sets forth as of November 7, 1997 the actual unaudited capitalization of the Company. See "The Recapitalization," "Use of Proceeds," "Description of the New Debentures," "Description of Operating Corp Indebtedness" and "Capital Stock of Holdings and Operating Corp." This table should be read in conjunction with the "Selected Consolidated Financial Data" and "Unaudited Pro Forma Consolidated Financial Data" included elsewhere in this Prospectus. As of November 7, 1997 Actual (dollars in thousands) Cash and cash equivalents....... $12,992 ======= Debt: Revolving Credit Facility(1) .................... $47,000 Term Loan Facility .............................. 70,000 10-3/8% Senior Subordinated Notes due 2007 ...... 150,000 13-1/8% Senior Discount Debentures .............. 75,257 Total debt ..................................... 342,257 14-1/2% Preferred Stock ........................... 125,000 Stockholders' deficit (194,712) Total capitalization .......................... $272,545 ======= (1) Excludes letters of credit issued to facilitate international merchandise purchases, which had an aggregate outstanding balance of $37.4 million as of November 7, 1997. 25 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The following unaudited pro forma consolidated financial data with respect to the Company (the "Unaudited Pro Forma Financial Data") is based on the historical Consolidated Financial Statements of the Company included elsewhere in this Prospectus adjusted to give effect to the Recapitalization. The Unaudited Pro Forma Statements of Operations give effect to the Recapitalization as if it had occurred on February 3, 1996. The Recapitalization and the related adjustments are described in the accompanying notes. The pro forma adjustments are based upon preliminary estimates and certain assumptions that management of the Company believes are reasonable in the circumstances. In the opinion of management, all adjustments have been made that are necessary to present fairly the pro forma data. Actual amounts could differ from those set forth below. The Unaudited Pro Forma Financial Data should be read in conjunction with the notes included herewith, the Company's Consolidated Financial Statements and notes thereto as of February 2, 1996 and January 31, 1997 and for each of the fiscal years in the three-year period ended January 31, 1997, the Company's Unaudited Condensed Consolidated Financial Data as of November 7, 1997 and for the forty week periods ended November 7, 1997 and November 8, 1996, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The Unaudited Pro Forma Financial Data do not purport to represent what the Company's results of operations would have been had the Recapitalization occurred on the dates specified, or to project the Company's results of operations for any future period or date. The unaudited supplemental data reflect (i) certain pro forma adjustments and (ii) management's estimates of certain cost savings and cost eliminations which management believes will be attained. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS Twelve Months Ended November 7, 1997 Pro Forma Adjustments --------------------- Historical Operating Holdings Pro Forma ---------- --------- -------- --------- Corp ---- (dollars in thousands) Revenues..................... $836,658 $ (2,250)(1) $ -- $834,408 Cost of sales................ 447,528 -- -- 447,528 ------- ------------ ------ ------- Gross profit................. 389,130 (2,250)(1) -- 386,880 Selling, general and administrative expensess ................... 361,267 1,800(5) -- 363,067 ------- ---------- ------ ------- Income (loss) from operations .................. 27,863 (4,050) -- 23,813 Interest expense: Non-cash interest expense ......... 1,052 1,397(2) 10,914(7) 13,363 Cash interest expense..... 13,736 9,205(3) -- 22,941 Expenses incurred in connection with the Recapitalization ............ 19,851 -- -- (8) 19,851 Provision (benefit) for income taxes ............ 4,200 (6,007)(4) (4,487)(4) (6,904) Extraordinary loss (net of income benefit) ............. 4,500 -- -- (8) 4,500 - --------------- ------ --------- ---------- -------- Net income (loss)............ $(15,476) $(8,645) $(6,627) $(30,748) ========= ========== ============ ========== Pro Forma and ------------- Supplemental ------------ Historical Adjustments Adjusted ---------- ----------- -------- (dollars in thousands) Supplemental Data: Depreciation and amortization ................ $13,107 $ -- $13,107 EBITDA....................... 40,970 6,620(8) 47,590 Ratio of Adjusted EBITDA/cash interest expense (6) ........ 2.1x Ratio of Adjusted EBITDA/total interest expense (6) ........ 1.3x Ratio of total average debt/Adjusted EBITDA (9) .................. 6.5x Cash flows from operating activities........ $ Cash flows from investing activities........ $ Cash flows from financing activities........ $ Fiscal Year Ended January 31, 1997 Pro Forma Adjustments --------------------- Historical Operating Corp Holdings ProForma ---------- -------------- -------- -------- (dollars in thousands) Revenues.................... $808,843 (2,650)(1) -- $806,193 Cost of sales............... 428,719 -- -- 428,719 Gross profit................ 380,124 (2,650)(1) -- 377,474 Selling, general and administrative expenses .... 348,305 1,800 (5) -- 350,105 Income (loss) from operations ................. 31,819 (4,450) -- 27,369 Interest expense: Non-cash interest expense ........ 401 1,485 (2) 10,422 12,308 Cash interest expense.... 10,069 11,894 (3) -- 21,963 Provision (benefit) for income taxes ............... 8,800 (7,310)(4) (4,091)(4) (2,601) Net income (loss)........... $12,549 (10,519) $(6,331) (4,301) See accompanying notes to the unaudited pro forma statements of operations. 27 UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS Forty Weeks Ended November 7, 1997 Pro Forma Adjustments --------------------- Historical Operating Holdings Pro Forma ---------- --------- -------- --------- Corp ---- (dollars in thousands) Revenues.................... $566,596 $(1,638)(1) $ -- $564,958 Cost of sales............... 310,865 -- -- 310,865 ------- ------- ------- ------- Gross profit................ 255,731 (1,638)(1) -- 254,093 Selling, general and administrative expenses ................... 253,159 1,385 (5) -- 254,544 ------- ------- ------- ------- Income (loss) from operations ............ 2,572 (3,023) -- (451) Interest expense: Non-cash interest expense ......... 962 1,052 (2) 8,274(7) 10,288 Cash interest expense.... 10,907 6,966 (3) -- 17,873 Expenses incurred in connection with the Recapitalization............ 19,851 -- -- 19,851 Provision (benefit) for income taxes ........... (5,050) (4,527)(4) (3,248)(4) (12,825) Extraordinary loss (net of income benefit) ..... 4,500 -- -- 4,500 ------- ------- ------- ------- Net income (loss)........... $(28,598) (6,514) $(5,026) $(40,138) ======== ======= ======= ======== Forty Weeks Ended November 8, 1996 Pro Forma Adjustments Historical Operating Corp Holdings Pro Forma (dollars in thousands) Revenues.................... $538,781 $(2,038)(1) $-- 536,743 Cost of sales............... 292,056 -- -- 292,056 ------- ------- ------- ------- Gross profit................ 246,725 (2,038)(1) -- 244,687 Selling, general and administrative expenses 240,197 1,385 (5) -- 241,582 ------- ------- ------- ------- Income (loss) from operations ................. 6,528 (3,423) -- 3,105 Interest expense: Non-cash interest expense ................. 311 1,140 (2) 7,782(7) 9,233 Cash interest expense.... 7,240 9,655 (3) -- 16,895 Provision (benefit) for income taxes ............... (450) (5,829) (3,053)(4) (9,332) ------- ------- ------- ------- Net income (loss)........... $ (573) $(8,389)(5) $(4,729) (13,691) See accompanying notes to the unaudited pro forma statements of operations. 28 NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS (1) Represents the estimated loss on the Securitization of accounts receivable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of Operating Corp Indebtedness--Receivables Facility." (2) Represents the net increase in non-cash interest expense relating to the amortization of debt issuance costs of Operating Corp of $13.0 million relating to debt issued in connection with the Recapitalization. (3) Gives effect to the increase in estimated cash interest expense from the use of borrowings to finance the Recapitalization and future working capital requirements of Operating Corp: Fiscal Year Forty Weeks Ended Twelve Months Ended ------------------- Ended January November November November 31, 8, 7, 7, 1997 1996 1997 1997 ---- ---- ---- ---- (dollars in thousands) Interest on the Operating Corp Senior Subordinated Notes(a) .................... $15,563 $11,972 $11,972 $15,563 Interest on the Bank Facilities: Term Loan Facility(b) ..... 5,600 4,308 4,308 5,600 Revolving Credit Facility(b) ............... -- -- 978 978 Other ........................ 800 615 615 800 ----- ----- ----- ------ Total ..................... 21,963 16,895 17,873 22,941 Less: amounts in historical statement of operations ...... 10,069 7,240 10,907 13,736 ------ ----- ------ ------ Adjustment to interest expense ...................... $11,894 $9,655 $6,966 $ 9,205 ====== ====== ====== ======= (a) Interest is calculated at an effective interest rate of 10.375% for the period indicated. (b) Interest is calculated at an estimated weighted average effective interest rate of 8.0%. (c) Interest is based on the average of historical daily outstanding borrowings under the revolving credit facility during the period, reduced (without giving effect to any negative average daily balances) by $63.5 million, reflecting the application of the proceeds of the Recapitalization. No interest income was assumed. (4) Estimated income tax effects of the pro forma adjustments at an effective tax rate of 41%. (5) Reflects non-cash compensation expense in connection with a grant of restricted stock. (6) Cash interest expense excludes, and total interest expense includes, non-cash interest in respect of the Debentures. (7) Represents the increase in non-cash interest expense relating to the amortization of original issue discount of the Debentures at an annual rate of 13.125%, compounded semi-annually, and amortization of debt issuance costs of Holdings of $2.4 million. (8) Historical EBITDA is defined as income before extraordinary items and cumulative effect of accounting changes, interest expense, income tax expense, depreciation and amortization and expenses of $19.9 million incurred in connection with the Recapitalization. The Issuer believes that EBITDA provides useful information regarding the Company's ability to service its debt; however holders tendering Old Debentures in the Exchange Offer should consider the following factors in evaluating such measures: EBITDA and related measures (i) should not be considered in isolation, (ii) are not measures of performance calculated in accordance with GAAP, (iii) should not be construed as alternatives or substitutes for income from operations, net income or cash flows from operating activities in analyzing the Company's operating performance, financial position or cash flows (in each case, as determined in accordance with GAAP) and (iv) should not be used as indicators of the Company's operating performance or measures of its liquidity. Additionally, because all companies do not calculate EBITDA and 29 related measures in a uniform fashion, the calculations presented in this Prospectus may not be comparable to other similarly titled measures of other companies. Adjusted EBITDA is defined as EBITDA, revised to reflect management's estimate of certain cost savings and cost eliminations implemented prior to the Recapitalization. The Issuer believes that EBITDA provides useful information regarding the Company's ability to service its debt; however, Adjusted EBITDA (i) should not be considered in isolation, (ii) is not a measure of performance calculated in accordance with GAAP, (iii) should not be construed as alternatives or substitutes for income from operations, net income or cash flows from operating activities in analyzing the Company's operating performance, financial position or cash flows (in each case, as determined in accordance with GAAP) and (iv) should not be used as indicators of the Company's operating performance or measures of its liquidity. The management estimates of cost savings and cost eliminations which are anticipated on a going-forward basis and which are reflected in Adjusted EBITDA are as set forth below: Twelve Months Ended ------------------- November 7, 1997 ---------------- (dollars in thousands) Historical EBITDA ...................... $40,970 Recapitalization pro forma adjustments: Loss on Securitization of accounts receivable .................. (2,250) Cost savings and cost eliminations implemented prior to the Recapitalization: Renegotiation of catalog vendor contract(a) .......................... 2,100 Headcount and net payroll reductions(b) ........................ 4,550 Insourcing of photography shop(c) .... 820 Non-recurring severance(d) ........... 1,400 ------- Total adjustments ................... 6,620 ------- Adjusted EBITDA ........................ $47,590 ======= (a) Reflects the recent renegotiation of the Company's catalog vendor contract. The adjustment represents the difference between the amounts previously expensed for such items and the amounts which are expected to be expensed under the terms of the new contract. (b) Represents compensation savings as a result of the termination of certain positions. (c) Represents the estimated cost savings from bringing in-house certain photography functions that were previously performed by outside vendors. (d) Reflects non-recurring severance associated with the termination of certain managers. (9) For purposes of computing the ratio of total average debt to Adjusted EBITDA, total average debt on a pro forma basis as of November 7, 1997 reflects average outstanding balances under the Revolving Credit Facility of $12.2 million during the twelve months ended November 7, 1997 (giving effect to the Recapitalization), $70.0 million in aggregate principal amount of indebtedness under the Term Loan Facility, $150.0 million in aggregate principal amount of Operating Corp Senior Subordinated Notes and $75.3 million in initial aggregate principal amount of the Old Debentures. Actual daily outstanding borrowings under the revolving credit facility were reduced (without giving effect to any negative average daily balances) by $63.5 million, reflecting the application of the proceeds of the Recapitalization, in computing average outstanding borrowings. 30 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated historical financial, operating, other and balance sheet data of Holdings. The selected financial and balance sheet data for each of the five fiscal years ended January 31, 1997 are derived from the Consolidated Financial Statements of Holdings, which have been audited by Deloitte & Touche LLP, independent auditors. The selected financial data for the forty weeks ended November 8, 1996 and November 7, 1997 have been derived from the Holdings' Unaudited Condensed Consolidated Financial Statements and include, in the opinion of management, all adjustments necessary to present fairly the data for such periods. The results for the forty weeks ended November 7, 1997 are not necessarily indicative of the results to be expected for the fiscal year ending January 30, 1998 or for any future period. The data presented below should be read in conjunction with the Consolidated Financial Statements, including the related Notes thereto, included herein, the other financial information included herein, and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Fiscal Year Ended Forty Weeks Ended --------------------------------------------------------------- --------------------------- January 29, January 28, February 3, February 2, January 31, November 8, November 7, ----------- ----------- ----------- ----------- ----------- ---------- ----------- 1993 1994 1995 1996 1997 1996 1997 ---- ---- ---- ---- ---- ---- ---- (dollars in thousands, except per square foot data) (unaudited) Financial Data: Revenues.................. $ 571,047 $ 646,972 $ 737,725 $ 745,909 $ 808,843 $ 538,781 $ 566,596 Cost of goods sold(1)..... 303,927 354,889 394,073 399,668 428,719 292,056 310,865 ------- ------- ------- ------- ------- ------- ------- Gross profit............ 267,120 292,083 343,652 346,241 380,124 246,725 255,731 Selling, general and administrative expenses .. 238,730 265,857 311,468 327,672 348,305 240,197 253,159 ------- ------- ------- ------- ------- ------- ------- Income from operations ........ 28,390 26,226 32,184 18,569 31,819 6,528 2,572 Interest expense-net...... 5,241 6,107 6,965 9,350 10,470 7,551 11,869 Expenses incurred- Recapitalization ......... -- -- -- -- -- -- 19,851 for income taxes ......... 9,130 8,100 10,300 3,700 8,800 (450) (5,050) Extraordinary item and cumulative effect of accounting changes(2)..... -- -- -- 931 -- -- 4,500 ------- ------- ------- ------- ------- ------- ------- Net income (loss)(2)...... $ 14,019 $ 12,019 $ 14,919 $ 6,450 $ 12,549 $ (573) $(28,598) ======= ======== ======= ======== ======== ======= ======== Operating Data: Revenues: J. Crew mail order...... $ 201,463 $ 199,954 $ 247,272 $ 274,653 $ 289,772 $ 165,936 $ 157,840 J. Crew retail.......... 72,906 108,650 135,726 134,959 167,957 110,399 140,574 J. Crew factory......... 38,563 49,253 62,626 79,203 94,579 70,266 75,965 J. Crew licensing....... -- 1,900 3,269 3,975 3,817 3,279 2,968 ------- ------- ------- ------- ------- ------- ------- Total J. Crew brand....... 312,932 359,757 448,893 492,790 556,125 350,330 377,347 Other divisions(3)........ 258,115 287,215 288,832 253,119 252,718 188,451 189,249 ------- ------- ------- ------- ------- ------- ------- Total................... $ 571,047 $ 646,972 $ 737,725 $ 745,909 $ 808,843 $ 538,781 $ 566,566 ======= ======== ======= ======== ======= ======= ======= EBITDA(4): J. Crew mail order...... $ 12,840 $ 11,980 $ 24,345 $ 16,831 $ 17,524 $ (1,924) $ (8,225) J. Crew retail.......... 6,720 5,055 13,333 15,194 16,847 8,800 8,177 J. Crew factory......... 3,660 1,797 1,653 (66) 2,876 3,395 3,244 J. Crew licensing....... (51) 1,239 2,422 2,820 2,467 2,797 2,285 ------- ------- ------- ------- ------- ------- ------- Total J. Crew brand..... 23,169 20,071 41,753 34,779 39,714 13,068 5,481 Other divisions(3)...... 11,611 12,941 (1,459) (5,938) 2,646 1,085 7,282 ------- ------- ------- ------- ------- ------- ------- Total..................... $ 34,870 $ 33,012 $ 40,294 $ 28,841 $ 42,360 $ 14,153 $ 12,763 ======= ======== ======= ======== ======== ======= ======== Other Data: Cash flows from operating activities $22,400 $1,467 $1,774 $(7,849) $16,497 $(42,766) $(61,100) Cash flows from investing activities $(14,965) $(11,086) $(13,467) $(14,640) $(22,481) $(14,947) $(28,265) Cash flows from financing activities $638 $5,020 $6,763 $17,763 $(413) $54,822 $ 95,225 J. Crew Mail Order: Number of catalogs circulated (in thousands) ......... 56,983 62,547 61,187 67,519 76,087 53,942 53,977 Number of pages circulated (in millions) .......... 6,576 6,965 8,277 10,198 9,827 6,341 6,293 J. Crew Retail: Sales per gross square foot(5) ......... $ 622 $ 559 $ 594 $ 533 $ 551 NM NM Store contribution margin(6) .............. 24.0% 18.7% 22.7% 25.5% 25.4% NM NM 31 Number of stores open at end of period ... 18 28 29 31 39 39 49 Comparable store sales change(7) ......... 22.0% (8.0)% 6.9% (6.0)% 4.5% 4.0% (6.1)% Depreciation and amortization .............. $ 6,390 $ 6,786 $ 8,110 $ 10,272 $ 10,541 $ 7,625 $ 10,191 Net capital expenditures(8) New store openings. ..... 5,519 2,789 2,804 6,009 10,894 6,903 15,253 Other ................... 9,446 8,297 10,663 8,631 11,587 8,044 13,012 ------- ------- ------- ------- ------- ------- ------- Total net capital expenditures ............ 14,965 11,086 13,467 14,640 22,481 14,947 28,265 Ratio of earnings to fixed charges(9) ....... 3.1x 2.5x 2.6x 1.5x 2.0x 1.5x 1.1x Balance Sheet Data (at period end): Cash and cash equivalents . $ 27,784 $ 23,185 $18,255 $ 13,529 $ 7,132 $ 10,638 $ 12,992 Working capital(10) ....... 56,864 75,391 96,437 118,964 125,327 167,908 173,341 Total assets .............. 232,582 287,233 324,795 355,249 410,821 454,177 439,391 Total debt ................ 56,783 61,803 69,566 87,329 87,092 142,151 342,257 Stockholders' equity (deficit) ................. 53,584 66,221 82,041 89,633 102,006 89,060 (194,712)
(1) Includes buying and occupancy costs. (2) In fiscal 1995, Holdings changed its method of accounting for catalog costs and for merchandise inventories and recognized an increase in net income from the aggregate cumulative effect of such accounting changes, net of income taxes, of $2.6 million. In the same year, Holdings recognized extraordinary losses of $1.7 million, net of income tax benefit, related to the early retirement of debt. See Notes 11 and 12 of Notes to Consolidated Financial Statements. In the forty weeks ended November 7, 1997, Holdings recognized an extraordinary loss of $4.5 million net of income tax benefit related to the early retirement of debt. (3) Includes the Company's PCP and C&W divisions and finance charge income derived from PCP installment sales. (4) EBITDA represents income (loss) before extraordinary items and cumulative effect of accounting changes plus income taxes, interest expense, depreciation and amortization and expenses of $19.9 million incurred in connection with the Recapitalization. The Company believes that EBITDA provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as a substitute for net income as an indicator of the Company's operating performance or cash flow as a measure of liquidity. Holders tendering Old Debentures in the Exchange Offer should consider the following factors in evaluating such measures: EBITDA and related measures (i) should not be considered in isolation, (ii) are not measures of performance calculated in accordance with GAAP, (iii) should not be construed as alternatives or substitutes for income from operations, net income or cash flows from operating activities in analyzing the Company's operating performance, financial position or cash flows (in each case, as determined in accordance with GAAP) and (iv) should not be used as indicators of the Issuer's operating performance or measures of its liquidity. Additionally, because all companies do not calculate EBITDA and related measures in a uniform fashion, the calculations presented in this Prospectus may not be comparable to other similarly titled measures of other companies. (5) Sales per gross square foot is the result of dividing annualized net retail sales for the period (reflecting adjustments based on management estimates of the impact of opening stores in different periods during the year) by gross square footage at the end of each fiscal period. (6) Store contribution margin is computed as gross profit less in-store operating expenses divided by sales. (7) Comparable store sales includes stores that have been open for one full twelve-month period. (8) Capital expenditures are net of proceeds from construction allowances. (9) For purposes of computing the ratio of earnings to fixed charges, earnings include income before income taxes, extraordinary items and cumulative effect of accounting changes and expenses incurred in connection with the Recapitalization of $19.9 million in the forty weeks ended November 7, 1997, plus fixed charges. Fixed charges consist of interest expense and one-third of rental expense (deemed by management to be representative of the interest factor of rental payments). (10) Working capital is computed as current assets less current liabilities, excluding cash and cash equivalents, current portion of long-term debt and borrowings under the revolving credit facility. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Selected Consolidated Financial Data and the Consolidated Financial Statements of Holdings and the related notes thereto which are included elsewhere in this Prospectus. The Company's fiscal year ends on the Friday closest to January 31. Accordingly, fiscal years 1992, 1993, 1994, 1995 and 1996 ended on January 29, 1993, January 28, 1994, February 3, 1995, February 2, 1996 and January 31, 1997. All fiscal years for which financial information is included in this Prospectus had 52 weeks, except fiscal 1994 which had 53 weeks. Overview The Company's origins date back to the 1947 founding of Popular Merchandising Co. which operated PCP, a direct selling catalog merchandiser of consumer branded goods. In 1983, drawing upon their family's 35- year experience in catalog retailing, Arthur Cinader and Emily Woods, the son and granddaughter of PCP's founder, founded the J. Crew brand with innovative durables products (including the rollneck sweater, weathered chino, barn jacket and pocket tee) that continue to be core J. Crew brand product offerings today. In 1984, C&W was founded as a mail order women's apparel business targeting an older, more conservative customer than J. Crew. Capitalizing on the strength of its J. Crew brand franchise, the Company began developing select retail store locations in 1989. Today, the Company is a leading mail order and store retailer of women's and men's apparel, shoes and accessories operating primarily under the J. Crew brand name. Since the introduction of the J. Crew brand in 1983, the Company has mailed more than one-half billion J. Crew catalogs, opened 49 J. Crew retail stores and 42 J. Crew Factory Outlet stores. In addition, J. Crew products are distributed through 67 free-standing and shop-in- shop stores in Japan under a licensing agreement with Itochu. The Company's J. Crew brand revenues have increased from $312.9 million in fiscal 1992 to $556.1 million in fiscal 1996, representing a compound annual growth rate of 15.4%. 33 The following table sets forth, for the periods indicated, revenues and EBITDA for the Company's major operating divisions: Forty Twelve Fiscal Year Weeks Ended Months ----------- ----------- ------ Ended Nov. 8, Nov. 7, Nov. 7, ------- ------- ------- 1992 1993 1994 1995 1996 1996 1997 1997 ---- ---- ---- ---- ---- ---- ---- ---- (dollars in millions) Revenues: J. Crew mail order .$201.5 $200.0 $247.3 $274.6 $289.8 $166.0 $157.8 $281.6 J. Crew retail ..... 72.9 108.7 135.7 135.0 168.0 110.4 140.6 198.2 J. Crew factory .... 38.5 49.2 62.6 79.2 94.5 70.2 76.0 100.3 J. Crew licensing .. -- 1.9 3.3 4.0 3.8 3.7 2.9 3.0 -- --- --- --- --- --- --- --- Total J. Crew brand .... 312.9 359.8 448.9 492.8 556.1 350.3 377.3 583.1 Other divisions (1) 258.1 287.2 288.8 253.1 252.7 188.4 189.3 253.6 ----- ----- ----- ----- ----- ----- ----- ----- Total revenues . $571.0 $647.0 $737.7 $745.9 $808.8 $538.7 $566.6 $836.7 ===== ===== ==== ===== ===== ===== ===== ===== EBITDA (2): J. Crew mail order . $ 12.8 $ 12.0 $ 24.4 $ 16.8 $ 17.5 $ (1.9) $ (8.2) $ 11.2 J. Crew retail ..... 6.7 5.1 13.3 15.2 16.8 8.8 8.2 16.2 J. Crew factory .... 3.7 1.8 1.7 -- 2.9 3.4 3.2 2.7 J. Crew licensing .. -- 1.2 2.4 2.8 2.5 2.8 2.3 2.0 -- --- --- --- --- --- --- --- Total J. Crew brand .... 23.2 20.1 41.8 34.8 39.7 13.1 5.5 32.1 Other divisions (3) 11.6 12.9 (1.5) (5.9) 2.6 1.0 7.3 8.9 ---- ---- ----- ----- --- --- --- --- Total EBITDA ... $34.8 $33.0 $40.3 $28.9 $42.3 $14.1 $12.8 $41.0 ==== ==== ==== ==== ==== ==== ==== ==== Cash flow from operating activities .. $22.4 $1.5 $1.8 $(7.8) $16.5 $(42.8) $(61.1) $(1.8) Cash flow from investing activities ..$(15.0) $(11.1) $(13.5) $(14.6 $(22.5) $(14.9) $(28.3) $(35.8) Cash flow from financing activities .. $0.6 $5.0 $6.8 $17.8 $(0.4) $54.8 $ 95.2 $(40.0) (1) Includes net sales from the Company's PCP and C&W divisions and finance charge income derived from PCP installment sales. (2) EBITDA represents income (loss) before extraordinary items and cumulative effect of accounting changes plus income taxes, interest expense, depreciation and amortization and expenses of $19.9 million incurred in connection with the Recapitalization. The Company believes that EBITDA provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as a substitute for net income as an indicator of the Company's operating performance or cash flow as a measure of liquidity. Holders tendering Old Debentures in the Exchange Offer should consider the following factors in evaluating such measures: EBITDA and related measures (i) should not be considered in isolation, (ii) are not measures of performance calculated in accordance with GAAP, (iii) should not be construed as alternatives or substitutes for income from operations, net income or cash flows from operating activities in analyzing the Company's operating performance, financial position or cash flows (in each case, as determined in accordance with GAAP) and (iv) should not be used as indicators of the Issuer's operating performance or measures of its liquidity. Additionally, because all companies do not calculate EBITDA and related measures in a uniform fashion, the calculations presented in this Prospectus may not be comparable to other similarly titled measures of other companies. (3) Includes EBITDA from the Company's PCP and C&W divisions. The following sets forth, for the periods indicated, the percentage relationship to revenues of certain items in the Company's consolidated statements of operations for the fiscal periods shown below: Fiscal Year Forty Weeks Ended 1994 1995 1996 Nov. 8, 1996 Nov. 7, 1997 ------ ------ ------- ------------ ------------ Revenues ........... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold, including buying and occupancy costs .............. 53.4 53.6 53.0 54.2 54.9 ---- ---- ---- ---- ---- Gross profit ........... 46.6 46.4 47.0 45.8 45.1 Selling, general and administrative expenses ........... 42.2 43.9 43.1 44.6 44.7 ---- ---- ---- ---- ---- Income from operations ...... 4.4 2.5 3.9 1.2 0.4 Interest expense, net ...... 1.0 1.3 1.3 1.4 2.1 Expenses incurred- recapitalization .. -- -- -- -- 3.5 -- ----- ---- ---- ------ Income (loss) before provision for income taxes, extraordinary item and cumulative effect of accounting changes ......... 3.4 1.2 2.6 (0.2) (5.2) Provision (benefit) for income taxes .. 1.4 0.5 1.0 (0.1) (0.9) --- --- ---- ---- ---- Income (loss) before extraordinary item and cumulative effect of accounting changes ......... 2.0% 0.7% 1.6% (0.1)% (4.3)% ==== ==== ==== ==== ==== The Company's revenues include sales of the Company's merchandise offered through the J. Crew, C&W and PCP catalogs, as well as through the C&W Factory stores, the retail stores operated through Grace Holmes, Inc. ("J. Crew Retail") and the factory outlet stores operated through H.F.D. No. 55, Inc. ("J. Crew Factory Outlet"). Also included in revenues are J. Crew brand licensing royalties and finance charge income derived from PCP installment sales. Cost of goods sold includes the cost of products purchased for sale, design, purchasing and 34 warehousing costs, as well as occupancy costs of the Company's retail and factory stores. Selling, general and administrative expenses include all other operating expenses, principally catalog and other selling costs, payroll, depreciation and corporate expenses. In fiscal 1995, the Company operations were affected by: (i) an increase in selling, general and administrative expenses tied to a spike in paper prices to levels never before experienced in the Company's history coupled with an increase in catalog circulation; (ii) the unsuccessful repositioning of C&W from targeting more mature, conservative customers to targeting younger, more urban customers; and (iii) negative comparable store sales in the J. Crew Retail and J. Crew Factory Outlet operations, primarily as a result of severe weather conditions during the holiday season and weak menswear performance. Since 1995, paper prices have declined in each period indicated and C&W has been reoriented toward its traditional conservative, career-oriented customer base and its operating results have stabilized. The Company has identified a number of tactical cost savings that could be realized without affecting the Company's franchise or brand image. The Company implemented actions prior to the Recapitalization which management believes will result in estimated annual savings of $7.5 million. These actions include the recent renegotiation of its new catalog vendor contract, selected headcount and net payroll reductions and insourcing of certain photography functions. The Company has identified approximately $7 million of further potential savings through process efficiencies, reduction of the Base Book trim size, installation of automatic sorting equipment and consolidation of J. Crew and C&W New York corporate offices. The Company believes these additional cost savings could be implemented by mid-1998. See "Risk Factors--Cautionary Statement Concerning Ability to Achieve Anticipated Cost Savings and Forward-Looking Statements." In August 1997, United Parcel Service ("UPS"), which had traditionally shipped approximately 60% of merchandise orders for J. Crew Mail Order and C&W, experienced a two-week strike. In anticipation of the strike, J. Crew Mail Order, C&W and PCP made alternative arrangements with the United States Postal Service to ensure uninterrupted delivery service for the same volume of shipments as ordinarily made during the affected period. However, under the perception that orders would not be filled in a timely manner, many consumers hesitated to place orders for catalog merchandise during the strike, adversely affecting operations of J. Crew Mail Order, C&W and PCP. The Company also delayed, by approximately three weeks of the "back-to-school" season mailing of its J. Crew College catalog during the pendency of the strike. Results of Operations The Forty Weeks Ended November 7, 1997 Compared to the Forty Weeks Ended November 8, 1996 Revenues Revenues increased 5.2% to $566.6 million in the forty weeks ended November 7, 1997 from $538.7 million in the forty weeks ended November 8, 1996, as a result of increased sales of J. Crew brand merchandise. J. Crew brand revenues increased by 7.7% to $377.3 million in the forty weeks ended November 7, 1997 from $350.3 million in the comparable 1996 period. Other divisions contributed $189.3 million of revenues during the forty weeks ended November 7, 1997 as compared to $188.4 million in the same period in 1996. J. Crew Mail Order revenues decreased 4.9% to $157.8 million in the forty weeks ended November 7, 1997 from $166.0 million in the forty weeks ended November 8, 1996. The percentage of the Company's total revenues derived from J. Crew Mail Order decreased to 27.9% in the forty weeks ended November 7, 1997 from 30.8% in the forty weeks ended November 8, 1996. The decrease in J.Crew Mail Order revenues was primarily the result of the UPS strike. Gross sales were down 19% from July 18, 1997 to the end of the UPS strike on August 23, 1997 35 compared to the same period in 1996. Additionally, weak performance in menswear sales and unseasonably warm weather on the east coast in the first part of the fall season also contributed to the decreased sales. The number of catalogs mailed were at the same approximate level of 54 million as in the same forty week period in the prior year. J. Crew Retail revenues increased by 27.4% to $140.6 million in the forty weeks ended November 7, 1997 from $110.4 million in the forty weeks ended November 8 ,1996. The percentage of the Company's total revenues derived from its J. Crew Retail stores increased to 24.8% in the forty weeks ended November 7, 1997 from 20.5% in the forty weeks ended November 8, 1996. The increase in J. Crew Retail revenues is the result of opening 10 new stores since the comparable period in 1996. Comparable store sales decreased 6.1% as the result of the opening of new stores in proximity to existing store locations and weak performance in menswear sales. Unseasonably warm weather in the first part of the fall season also contributed to a decreased sales of fall and winter clothing. J. Crew Factory Outlet revenues increased by 8.1% to $76.0 million in the forty weeks ended November 7, 1997 from $70.2 million in the forty weeks ended November 8, 1996. The percentage of the Company's total revenue derived from J. Crew Factory Outlet remained at approximately 13.0% in the forty weeks ended November 7, 1997 as compared to the forty weeks ended November 8, 1996. J. Crew Factory stores comparable store sales increased 6% in the forty weeks ending November 7, 1997. The comparable store sales increase was principally due to the overall improvement in store merchandising under the direction of a new factory outlet merchandising Vice President. J. Crew Factory Outlet opened two new stores and closed one store. PCP revenues increased 2.0% to $136.7 million in the forty weeks ended November 7, 1997 compared to $134.0 million in the forty weeks ended November 8, 1996. The percentage of the Company's total revenues derived from PCP decreased to 24.1% in the forty weeks ended November 7, 1997 from 24.9% in the forty weeks ended November 8, 1996. The number of catalogs mailed remained at the same approximate level of 7 million and the number of selling agents remained unchanged at approximately 106,000 during the forty weeks ended November 7, 1997 compared to the same period in 1996. The increased sales in the forty week period ended November 7, 1997 over the same period in the prior year is attributable to better performance in ready-to-wear and specifically in the new branded merchandise. C&W revenues decreased 3.3% to $52.6 million in the forty weeks ended November 7, 1997 from $54.4 million in the forty weeks ended November 8, 1996. The percentage of the Company's revenues derived from C&W decreased to 9.3% in the forty weeks ended November 7, 1997 from 10.1% in the forty weeks ended November 8, 1996. The number of catalogs mailed increased to approximately 27.9 million in the forty weeks ended November 7, 1997 from approximately 24.8 million in the forty weeks ended November 8, 1996. The decrease in sales is the result of unseasonably warm weather on the east coast in the first part of the fall season affecting the sales of fall and winter clothing. Gross Profit Gross profit as a percentage of revenues was 45.1% for the forty weeks ended November 7, 1997 as compared to 45.8% in the same period in 1996. The slight decrease in gross profit was primarily due to an increase in J. Crew Retail buying and occupancy costs, reflecting the higher cost associated with opening new stores in urban areas such as New York City. Selling, General and Administrative Expenses Selling, general and administrative expenses as a percentage of revenues increased to 44.7% in the forty weeks ended November 7, 1997 from 44.6% in the forty weeks ended November 8, 1996. The increase as a percentage of revenues is a result of increased general and administration expenses of 2.2% of revenues primarily in J. Crew Mail Order, which was partially offset by decreases in selling expenses in J. Crew Mail Order, C&W and PCP of 2.1% of revenues. The increase in general and administrative expenses was primarily a result of increased staffing and the decrease in selling expenses was principally a result of decreased paper costs. 36 Interest Expense Interest expense increased to $11.9 million or 2.1% of revenues in the forty weeks ended November 7, 1997 from $7.6 million or 1.4% of revenues in the forty weeks ended November 8, 1996. This increase was due to an over 90% increase in average borrowing to $66.7 million in the forty weeks ended November 7, 1997 compared to average borrowings of $34.5 million in the same period last year. The borrowings were required to fund the increased inventory levels and the increased capital expenditures. Additionally, the issuance of the Old Notes in the Offering in aggregate principal amount of $150 million contributed approximately $0.9 million to the increased interest and the issuance of Senior Discount Debentures of $75.3 million contributed approximately $0.6 million to the increased interest. Fiscal 1996 Compared to Fiscal 1995 Revenues Revenues increased 8.4% to $808.8 million in fiscal 1996 from $745.9 million in fiscal 1995, as the result of increased sales of J. Crew brand merchandise. J. Crew brand revenues increased 12.8% to $556.1 million in fiscal 1996 from $492.8 million in fiscal 1995. Other divisions contributed $252.7 million in revenues in fiscal 1996 as compared to $253.1 million in fiscal 1995. J. Crew Mail Order revenues increased 5.5% to $289.8 million in fiscal 1996 from $274.6 million in fiscal 1995. The percentage of the Company's total revenues derived from J. Crew Mail Order decreased to 35.8% in fiscal 1996 from 36.8% in fiscal 1995. The increase in J. Crew Mail Order revenues principally resulted from the introduction of the Women's Book and the related increase in overall J. Crew catalog circulation to approximately 76 million in 1996 from approximately 68 million in 1995. J. Crew Retail revenues increased by 24.4% to $168.0 million in fiscal 1996 from $135.0 million in fiscal 1995. The percentage of the Company's total revenues derived from its J. Crew Retail stores increased to 20.8% in 1996 from 18.1% in 1995. The increase in revenues was principally the result of the opening of eight new stores and a 4.5% increase in comparable store sales in fiscal 1996. The increase in comparable store sales was principally due to strong performance in the J. Crew womenswear lines, including Durables, Classics and Collection. J. Crew Factory Outlet revenues increased by 19.3% to $94.5 million in fiscal 1996 from $79.2 million in fiscal 1995. The percentage of the Company's total revenues derived from its J. Crew Factory Outlet stores increased to 11.7% in fiscal 1996 from 10.6% in fiscal 1995. The increase in J. Crew Factory Outlet revenues was principally the result of a 7.0% increase in comparable store sales. During fiscal 1996, J. Crew Factory Outlets opened three stores and closed four stores. Similar to J. Crew Retail, the increase in comparable store sales for J. Crew Factory Outlets was principally due to strong performance in the J. Crew womenswear lines. PCP revenues decreased by 2.4% to $177.7 million in fiscal 1996 from $182.1 million in fiscal 1995. The percentage of the Company's total revenues derived from PCP decreased to 22.0% in fiscal 1996 from 24.4% in fiscal 1995. The decrease in revenues primarily resulted from competitive discounting in the northeastern market which was partially offset by revenues from the introduction of brand-name apparel. During fiscal 1996, the number of catalogs mailed remained flat at approximately seven million and the number of selling agents remained unchanged at approximately 106,000. C&W revenues increased by 5.6% to $75.0 million in fiscal 1996 from $71.0 million in fiscal 1995. The percentage of the Company's revenues derived from C&W decreased slightly to 9.3% in fiscal 1996 from 9.5% in fiscal 1995. The increase in C&W revenues during fiscal 1996 reflected: (i) the return to its original merchandising strategy of providing conservative career-oriented clothing, see "--Overview;" and (ii) the introduction of a value pricing strategy. In addition, the Company reduced the catalog circulation of C&W in fiscal 1996 to 38 million from 37 40 million in fiscal 1995. The Company believes that C&W's return to its original focus is in place and currently plans to increase its C&W catalog mailings. Gross Profit Gross profit increased to 47.0% of revenues in 1996 as compared to 46.4% of revenues in 1995. This increase primarily resulted from an increase in merchandise margins in J. Crew Mail Order. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased to 43.1% of revenues in fiscal 1996 from 43.9% of revenues in 1995. The decline in selling, general and administrative expenses as a percentage of revenues principally reflects a decrease in catalog circulation costs (consisting primarily of paper, postage and printing). These costs declined to 15.9% of revenues in fiscal 1996 from 16.9% of revenues in fiscal 1995, principally as a result of a decrease in paper costs to 3.2% of revenues in fiscal 1996 from 3.9% of revenues in fiscal 1995, and a decrease in number of pages circulated by J. Crew Mail Order from 10.2 billion in fiscal 1995 to 9.8 billion in fiscal 1996 as a result of the J. Crew Mail Order customer segmentation strategy. Circulation at C&W also decreased. This decrease was partially offset by an increase in general and administrative expenses related to payroll for new J. Crew retail stores opened during the period. Absolute dollar amounts of selling, general and administrative expenses increased to $348.3 million in fiscal 1996 from $327.7 million in fiscal 1995, primarily reflecting volume related costs. Interest Expense Interest expense increased to $10.5 million or 1.3% of revenues in fiscal 1996 from $9.4 million or 1.3% of revenues in fiscal 1995. This increase was due primarily to higher average borrowings under the revolving credit agreement. Fiscal 1995 Compared to Fiscal 1994 Revenues. Revenues increased 1.1% to $745.9 million in fiscal 1995 from $737.7 million in fiscal 1994, reflecting increased sales of J. Crew brand merchandise, which more than offset declines in other divisions. J. Crew brand revenues increased by 9.8% to $492.8 million in fiscal 1995 from $448.9 million in fiscal 1994. Other divisions contributed $253.1 million in revenues in fiscal 1995 compared to $288.8 million in fiscal 1994, a decrease of 12.4%. J. Crew Mail Order revenues increased 11.0% to $274.6 million in fiscal 1995 from $247.3 million in fiscal 1994. The percentage of the Company's total revenues derived from J. Crew Mail Order increased to 36.8% in fiscal 1995 from 33.5% in fiscal 1994. The revenue improvement was primarily due to an increase in the number of catalogs mailed to approximately 68 million in fiscal 1995 from approximately 61 million in fiscal in 1994 as a result of growth in the 12-month buyer file. J. Crew Retail revenues were $135.0 million in fiscal 1995 compared to $135.7 million in fiscal 1994. The percentage of the Company's total revenues derived from its J. Crew Retail stores decreased to 18.1% in fiscal 1995 from 18.4% in fiscal 1994. The sales performance was primarily the result of a 6.3% decrease in comparable store sales which was partially offset by the opening of two new stores in November, 1995. The decrease in comparable store sales was principally a result of: (i) severe weather conditions in the Northeast, which negatively affected sales during the holiday season; and (ii) weak performance in menswear as a result of competitive pressures from men's sport offerings by the Company's principal competitors. J. Crew Factory Outlet revenues increased by 26.5% to $79.2 million in fiscal 1995 from $62.6 million in fiscal 1994. The percentage of the Company's total revenues derived from its J. Crew Factory Outlet stores 38 increased to 10.6% in fiscal 1995 from 8.5% in fiscal 1994. J. Crew Factory Outlet revenue improvement primarily reflected the opening of 12 new stores (and the closing of two underperforming stores) in fiscal 1995, partially offset by a 9.9% decrease in comparable store sales. The decrease in comparable store sales was principally due to the lack of key products in the merchandise assortment in the stores and poor weather in the Northeast which negatively affected the holiday retail season. PCP revenues decreased by 4.0% to $182.1 million in fiscal 1995 from $189.7 million in fiscal 1994. The percentage of the Company's total revenues derived from PCP decreased to 24.4% in fiscal 1995 from 25.7% in fiscal 1994. The decrease in revenues principally resulted from fulfillment disruptions during PCP's relocation to its new distribution center in Edison, New Jersey. During fiscal 1995, the number of catalogs mailed remained flat at approximately seven million and the number of selling agents remained unchanged at approximately 106,000. C&W revenues decreased by 28.4% to $71.0 million in fiscal 1995 from $99.1 million in fiscal 1994. The percentage of the Company's revenues derived from C&W decreased to 9.5% in fiscal 1995 from 13.4% in fiscal 1994. The decrease in revenues reflected the unsuccessful attempt at repositioning C&W as a retailer of urban- oriented clothing. See "--Overview." The number of C&W catalogs circulated remained at 40 million during fiscal 1995 compared to fiscal 1994. Gross Profit In 1995, gross profit was 46.4% of revenues as compared to 46.6% of revenues in 1994. The decrease was primarily attributable to an increase in buying and occupancy costs, which was offset by improved merchandise margins in J. Crew Mail Order. Selling, General and Administrative Expenses Selling, general and administrative expenses were 43.9% of revenues in fiscal 1995 as compared to 42.2% of revenues in 1994. The increase primarily reflects a substantial increase in catalog circulation costs (consisting primarily of paper, postage and printing) to 16.9% of revenues in fiscal 1995 from 14.5% of revenues in fiscal 1994. Paper costs increased from 2.7% of revenues in fiscal 1994 to 3.9% of revenues in fiscal 1995, reflecting a spike in paper prices to levels not previously experienced in the Company's history. Postage costs increased sharply, as a result of an approximately 14% postal rate increase that occurred in January, 1995. Increased catalog circulation costs also reflected an approximately 10% increase in catalogs circulated by J. Crew Mail Order, from 61 million in fiscal 1994 to 68 million in fiscal 1995 and an approximately 23% increase in pages circulated from 8.3 billion in fiscal 1994 to 10.2 billion in fiscal 1995. C&W circulation was unchanged. These factors more than offset a decrease in general and administrative expenses and a decrease in J. Crew Retail store operating expenses. Interest Expense Interest expense increased to $9.4 million or 1.3% of revenues in fiscal 1995 from $7.0 million or 1.0% of revenues in fiscal 1994. This increase was due primarily to higher average borrowings under the revolving credit agreement and the issuance of an additional $15.0 million of long-term debt. Seasonality The Company's retail and mail order businesses experience two distinct selling seasons, spring and fall. The spring season is comprised of the first and second quarters, consisting of twelve and sixteen weeks, respectively, and the fall season is comprised of the third and fourth quarters, each consisting of twelve weeks. J. Crew Retail stores, J. Crew Factory Outlet stores, C&W Factory stores and PCP are stronger in the third and fourth quarters and the J. Crew and C&W Mail Order businesses are strongest in the fourth quarter. In addition, the Company's working capital requirements fluctuate throughout the year, increasing substantially in September and 39 October in anticipation of the holiday season inventory requirements. The Company funds its working capital requirements primarily through a revolving credit facility, which historically has been paid down in full at the end of the Company's fiscal year. The following table sets forth certain unaudited quarterly information for fiscal 1995 and 1996: Fiscal Year 1995 Fiscal Year 1996 ---------------- ---------------- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 -- -- -- -- -- -- -- -- (dollars in millions) Revenues: J. Crew mail order .. $ 45.5 $ 57.5 $ 61.8 $109.8 $ 46.1 $ 54.1 $ 65.6 $124.0 J. Crew retail ...... 23.3 35.3 33.1 43.3 27.3 40.8 42.3 57.6 J. Crew factory ..... 13.0 25.3 21.2 19.7 15.4 30.9 24.0 24.2 J. Crew licensing ... 1.2 1.2 1.2 0.4 1.2 1.2 1.3 0.1 --- --- --- --- --- --- --- --- Total J. Crew brand .... 83.0 119.3 117.3 173.2 90.0 127.0 133.2 205.9 Other divisions ... 57.8 61.0 72.2 62.1 56.5 60.8 71.0 64.4 ---- ---- ---- ---- ---- ---- ---- ---- Total revenues . $140.8 $180.3 $189.5 $235.3 $146.5 $187.8 $204.2 $270.3 ====== ====== ====== ====== ====== ====== ====== ====== % of full year ..... 18.9% 24.2% 25.4% 31.5% 18.1% 23.3% 25.2% 33.4% Gross profit ...... $ 66.5 $ 87.3 $ 82.9 $109.5 $ 68.9 $ 83.6 $ 94.2 $133.4 % of full year ..... 19.2% 25.2% 23.9% 31.7% 18.1% 22.0% 24.8% 35.1% Operating income (loss) ...... $ (2.3) $ (3.1) $ 11.3 $ 12.7 $ (4.5) $ (9.6) $ 20.7 $ 25.2 % of full year ..... (12.4)% (16.7)% 60.8% 68.3% (14.2)% (30.2)% 65.1% 79.3% Liquidity and Capital Resources Historical The Company's primary cash needs have been for opening new stores, warehouse expansion and working capital. The Company's sources of liquidity have been cash flow from operations, proceeds from the private placement of long-term debt and borrowings under a revolving credit facility. In April 1997, the Company entered into the Retired Bank Credit Facility with a group of twelve banks with Morgan Guaranty Trust Company of New York as agent. The Retired Bank Credit Facility provided for commitments in an aggregate amount of up to $200.0 million of which up to $120.0 million was available for direct borrowings. The Retired Bank Credit Facility replaced the Company's previous revolving credit agreement which provided for commitments in an aggregate amount of up to $125.0 million, of which up to $75.0 million was available for direct borrowings. Borrowings under the Retired Bank Credit Facility were unsecured and bore interest, at the Company's option, at the base rate (defined as the higher of the bank's prime rate or the Federal Funds rate plus 0.5%) or the London Interbank Offering Rate ("LIBOR") plus 0.625%. The Retired Bank Credit Facility was to expire on April 17, 2000. There were no borrowings outstanding under the Company's revolving credit agreements at January 31, 1997 and February 2, 1996. Average borrowings under the Company's revolving credit agreements were $25.5 million and $31.2 million for the years ended on February 2, 1996 and January 31, 1997, respectively. Outstanding letters of credit issued to facilitate international merchandise purchases were $25.9 million and $37.8 million on February 2, 1996 and January 31, 1997, respectively. Borrowings under the Retired Bank Credit Facility on October 17, 1997, prior to the Recapitalization, were $99.0 million and letters of credit outstanding were $38.7 million. Average borrowings under the credit agreement were $68.8 million for the period ended on October 17, 1997. In June 1995, the Company issued $85.0 million of the Retired Senior Notes to institutional investors in a private placement. At October 17, 1997 the Retired Senior Notes were retired by the Company at a cost of $93.1 million that included accrued interest on the Retired Senior Notes and a make-whole premium. In the first forty weeks of fiscal 1997, cash used in operating activities was $61.1 million compared to $42.8 million in the comparable period in 1996, an increase of $18.3 million. This increase resulted primarily from an increase in the net loss of $28.0 million and 40 is primarily attributable to $25.6 million of cash paid relating to expenses incurred in connection with the Recapitalization and an extraordinary item of $4.5 million relating to the early retirement of debt. Net cash provided by (used in) operating activities was $16.5 million, ($7.8) million and $1.8 million for fiscal years 1996, 1995 and 1994, respectively. The improvement in cash flow from operations in 1996 was primarily attributable to the increase in net income and the timing of income tax payments/refunds for fiscal years 1995 and 1996. In 1995, the decrease in cash flow from operations was attributable to the decrease in net income. Net cash used in investing activities included capital expenditures, primarily for the Company's J. Crew Retail expansion strategy, net of construction allowances. Net capital expenditures increased from $14.9 million in the forty weeks ended November 8, 1996 to $28.3 million in the comparable period in 1997. Capital expenditures in the 1996 period resulted from the opening of eight J. Crew Retail stores and the $6.0 million relocation of the retail warehouse to Asheville, North Carolina. Capital expenditures in the 1997 period included the opening of ten J. Crew Retail stores and the $6.0 million relocation of the Company's headquarters office in New York City. Net capital expenditures totaled $22.5 million, $14.6 million and $13.5 million in fiscal years 1996, 1995 and 1994. Capital expenditures included the opening of eight J. Crew Retail stores and three J. Crew Factory Outlet stores in 1996, two J. Crew Retail stores and 12 J. Crew Factory Outlet stores in 1995 and one J. Crew Retail store and seven J. Crew Factory Outlet stores in 1994. In fiscal 1994, $4.2 million was expended for the PCP distribution facility in Edison, New Jersey and $2.2 million was used to expand the Lynchburg, Virginia telemarketing and distribution center. Net cash provided by (used in) financing activities totaled ($0.4) million, $17.8 million and $6.8 million in fiscal years 1996, 1995 and 1994. In fiscal 1995, the Company borrowed $85.0 million in private placement debt of which $67.0 million was used to repay then outstanding long-term debt. In fiscal 1994, $15.0 million of additional long-term debt was offset by required payments of $7.0 million for outstanding long-term debt and a $1.0 million dividend. After the Recapitalization Since consummating the Recapitalization, the Company's primary sources of liquidity have been cash flow from operations and borrowings under the Revolving Credit Facility. The Company's primary uses of cash have been debt service requirements, capital expenditures and working capital. The Company expects that ongoing requirements for debt service, capital expenditures and working capital will be funded from operating cash flow and borrowings under the Revolving Credit Facility. The Company has incurred substantial indebtedness in connection with the Recapitalization. After giving effect to the Recapitalization and application of the proceeds of the Old Debentures, the Holdings Preferred Stock, the Holdings Common Equity contribution and the distribution by Operating Corp to Holdings of the net proceeds of the issuance of the Operating Corp Senior Subordinated Notes, the Securitization and borrowings under the Bank Facilities (less the repayment of the Retired Bank Credit Facility, the Retired Senior Notes and other indebtedness and transaction expenses), the Company had $342.3 million of indebtedness outstanding and $194.7 million of stockholders' deficit, in each case as of November 7, 1997. The Company's significant debt service obligations following the Recapitalization could, under certain circumstances, have material consequences to security holders of the Company, including holders of the New Debentures. See "Risk Factors." Concurrent with the Recapitalization, Operating Corp issued the Operating Corp Senior Subordinated Notes for $150.0 million in gross proceeds, entered into the Term Loan Facility and the Revolving Credit Facility and consummated the Securitization. The Term Loan Facility is a single tranche term loan in the aggregate principal amount of $70.0 million. The Revolving Credit Facility provides revolving loans in an aggregate amount of up to $200.0 million. Upon closing of the Recapitalization, Operating Corp borrowed the full amount available under the 41 Term Loan Facility and approximately $35.6 million under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility were used to partially refinance seasonal borrowings outstanding under the Retired Bank Credit Facility. The amount remaining available under the Revolving Credit Facility is available to fund the working capital requirements of Operating Corp. The Securitization generated approximately $40 million in proceeds. Proceeds to Operating Corp from the issuance of the Operating Corp Senior Subordinated Notes, the Securitization and from initial borrowings under the Bank Facilities, less the repayment of the Retired Bank Credit Facility, the Retired Senior Notes and other indebtedness and transaction expenses, were distributed to Holdings to finance the Recapitalization and the fees and expenses in connection therewith (the "Operating Corp Distribution"). To provide additional financing to fund the Recapitalization, Holdings raised $264.2 million through (i) the sale to TPG Partners II, its affiliates and other investors of approximately 46,853 shares of Holdings Common Stock (representing 85.2% of the outstanding shares) for $63.9 million, (ii) gross proceeds of $75.3 million from the issuance of the Old Debentures and (iii) the issuance of $125.0 million in liquidation value of Holdings Preferred Stock. The proceeds of the Operating Corp Senior Subordinated Notes, the Securitization, the Holdings Senior Discount Debentures, the Holdings Preferred Stock, the purchase of Holdings Common Stock by TPG Partners II, its affiliates and other investors and the initial borrowings under the Bank Facilities were used to finance the repurchase from the Shareholders of all outstanding shares of Holdings' capital stock (other than shares of Holdings Common Stock having an implied value of $11.1 million, almost all of which continues to be held by Emily Woods, and which represented 14.8% of the shares of Holdings Common Stock immediately following the transaction) to refinance outstanding indebtedness of Holdings and to pay fees and expenses incurred in connection with the Recapitalization. Borrowings under the Bank Facilities bear interest at a rate per annum equal (at Operating Corp's option) to a margin over either a base rate or LIBOR. The Bank Facilities will mature six years after the closing date of the Recapitalization. Operating Corp's obligations under the Bank Facilities are guaranteed by each of Operating Corp's direct and indirect subsidiaries. The Bank Facilities and the guarantees thereof are secured by substantially all assets of Holdings and its direct and indirect subsidiaries (other than any receivables subsidiary) and a pledge of the capital stock of Operating Corp and all direct and indirect subsidiaries of Holdings, subject to certain limitations with respect to foreign subsidiaries. The Bank Facilities contain customary covenants and events of default, including substantial restrictions on Operating Corp's ability to make dividends or distributions to Holdings. See "Description of Operating Corp Indebtedness." Simultaneously with the consummation of the Recapitalization, the Company entered into an agreement with affiliates of the Initial Purchasers establishing a revolving securitization facility in which the initial transaction was the securitization of approximately $40 million of PCP consumer loan installment receivables. The Securitization involved the transfer of receivables to a trust in exchange for cash and subordinated interests in the pool of receivables, and the subsequent sale by the trust of certificates of beneficial interest to third party investors. Although the Company remains obligated to repurchase receivables in the event of return of the related merchandise and under certain other limited circumstances, the Company has no obligation to reimburse the trust or the purchasers of beneficial interests for credit losses. The trust is held by a special-purpose, bankruptcy remote subsidiary ("SPV") established by PCP. At November 7, 1997, the SPV had net assets of approximately $17.5 million. The SPV is not a guarantor of the Operating Corp Senior Subordinated Notes or the Bank Facilities. See "Description of Operating Corp Indebtedness--Receivables Facility." The Securitization was accounted for as a sale of receivables, and resulted in a charge to earnings of approximately $0.4 million million for the period ended November 7, 1997. The Operating Corp Senior Subordinated Notes are guaranteed by each subsidiary of Operating Corp, but are not guaranteed by Holdings. The Operating Corp Senior Subordinated Notes mature in 2007. Interest on the Operating Corp Senior Subordinated Notes is payable semi-annually in cash. The Operating Corp Senior Subordinated Notes contain customary covenants and events of default, including covenants that limit the ability of Operating Corp and its subsidiaries to incur debt, pay dividends and make certain investments. 42 The Holdings Preferred Stock bears cumulative dividends at the rate of 14.50% per annum (payable quarterly) for all periods ending on or prior to October 17, 2009 and 16.50% per annum thereafter. Dividends compound to the extent not paid in cash. Subject to restrictions imposed by the Operating Corp Senior Subordinated Notes, the Bank Facilities, the Debentures and other documents relating to the Company's indebtedness, Holdings may redeem the Holdings Preferred Stock at any time, at the then-applicable redemption price and, in certain circumstances (including the occurrence of a change of control of Holdings), may be required to repurchase shares of Holdings Preferred Stock at liquidation value plus accumulated and unpaid dividends to the date of repurchase. See "Capital Stock of Holdings and Operating Corp." The New Debentures will mature on October 15, 2008. Cash interest will not accrue on the New Debentures prior to October 15, 2002. Thereafter, interest on the New Debentures will be payable semiannually in cash. See "Description of the New Debentures." The Company expects that capital expenditures, net of construction allowances, during fiscal 1997 will be approximately $34 million, primarily to fund the opening of 12 retail stores, the relocation of the Company's headquarters office in New York City and the consolidation of J. Crew and C&W corporate offices. Capital expenditures are expected to be funded from internally generated cash flows and by borrowing from available financing sources. See "Business--J. Crew Brand--J. Crew Retail--New Store Expansion." Borrowings outstanding under the Revolving Credit Facility on November 7, 1997 were $47.0 million and letters of credit outstanding as of November 7, 1997 were $37.4 million. Management believes that cash flow from operations and availability under the Revolving Credit Facility will provide adequate funds for the Company's foreseeable working capital needs, planned capital expenditures and debt service obligations. The Company's ability to fund its operations and make planned capital expenditures, to make scheduled debt payments, to refinance indebtedness and to remain in compliance with all of the financial covenants under its debt agreements depends on its future operating performance and cash flow, which in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond its control. See "Risk Factors." Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, which will be effective for financial statements beginning after December 15, 1997. SFAS No. 131 redefines how operating segments are determined and requires expanded quantitative and qualitative disclosures relating to a company's operating segments. The Company has not yet completed its analysis of how it will be affected. Impact of Inflation The Company's results of operations and financial condition are presented based upon historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, the Company believes that the effects of inflation, if any, on its results of operations and financial condition have been minor. However, there can be no assurance that during a period of significant inflation, the Company's results of operations would not be adversely affected. 43 BUSINESS Overview The Company is a leading mail order and store retailer of women's and men's apparel, shoes and accessories operating primarily under the J. Crew(R) brand name. Under the direction of Emily Woods and Arthur Cinader (co-founders of the J. Crew brand and father and daughter), the Company has built a strong and widely recognized brand name known for its timeless styles at price points that the Company believes represent exceptional product value. The J. Crew image has been built and reinforced over its 14-year history through the circulation of more than one-half billion catalogs that use magazine-quality photography to portray a classic American perspective and aspirational lifestyle. Many of the original items introduced by the Company in the early 1980s (such as the rollneck sweater, weathered chino, barn jacket and pocket tee) were instrumental in establishing the J. Crew brand and continue to be core product offerings. The Company has capitalized on the strength of the J. Crew brand to provide customers with clothing to meet more of their lifestyle needs, including casual, career and sport. The strength of the J. Crew brand is demonstrated by a compound annual growth rate of 15.4% in J. Crew brand revenues between fiscal 1992 and fiscal 1996. The J. Crew merchandising strategy emphasizes timeless styles and a broad assortment of high-quality products designed to provide customers with one-stop shopping opportunities at attractive prices. J. Crew catalogs and retail stores offer a full line of men's and women's basic durables (casual weekend wear), sport, swimwear, accessories and shoes, as well as the more tailored men's sportswear and women's "Classics" lines. Approximately 60% of the Company's J. Crew brand sales are derived from its core offerings of durables and sport clothing, the demand for which the Company believes is stable and resistant to changing fashion trends. The Company believes that the J. Crew image and merchandising strategy appeal to college-educated, professional and affluent customers who, in the Company's experience, have demonstrated strong brand loyalty and a tendency to make repeat purchases. J. Crew products are distributed exclusively through the Company's catalog and store distribution channels. The Company currently circulates over 76 million J. Crew catalogs per annum and owns and operates 49 J. Crew retail stores and 42 J. Crew factory outlets. In addition, J. Crew products are distributed through 67 free-standing and shop-in-shop stores in Japan under a licensing agreement with Itochu. In addition to the Company's J. Crew operations, the Company operates C&W, a mail order and factory store women's apparel business that targets older, more conservative customers, and PCP, a direct selling catalog merchandiser of consumer branded goods through a "club" concept that provides credit sales to lower-income customers. During the twelve-month period ended November 7, 1997, the Company generated total revenues of $836.7 million, of which $583.1 million or approximately 70% was attributable to the J. Crew brand, and total Adjusted EBITDA of $47.6 million. See "Summary--Summary Unaudited Pro Forma Consolidated Financial Data" for a description of Adjusted EBITDA. Business Strengths Since its inception, the Company has pursued a consistent operating strategy which has resulted in the following key strengths and distinguishing characteristics: - Strong, Recognizable Brand. The Company has created a recognizable, differentiated brand image reflecting an American aspirational lifestyle. The J. Crew image is consistently communicated through all aspects of the Company's business including its merchandise design, distinctive catalogs and retail store environment. The Company's high-quality products, strong brand image and customer loyalty have resulted in strong gross margins and retail sales productivity. 44 - Premium Quality Products and Distinctive Designs at Attractive Price Points. The Company offers premium quality products reflecting a classic, clean aesthetic with a consistent design philosophy. All J. Crew products are designed by an in-house team of 15 designers led by Emily Woods. The Company believes that its in-house design capabilities ensure a coherent set of product offerings from season to season and year to year that provides significant value to its customers through attractive price points. - Proven Retail Store Concept. J. Crew Retail stores historically have generated strong and stable operating results. The Company believes that its sales per gross square foot are among the highest in its industry segment. J. Crew Retail stores open during all of fiscal 1996 generated the following key operating statistics: Fiscal 1996 Average Sales per gross square foot ....... $575 Store contribution margin ......... 25.9 Approximately 81% of the J. Crew Retail stores that were open during all of 1996 had store contribution margins above 20%. All of the Company's J. Crew Retail stores are profitable and have generated positive store contribution within the first twelve months of operation. In addition, J. Crew Retail stores opened since fiscal 1992 have averaged approximately $550 in sales per gross square foot and 23.0% store contribution margin during the first twelve months of operation. - Broad and Stable Product Offering. The Company's J. Crew product offering includes a broad array of items which appeal to a diverse customer base, spanning gender and age segments. A substantial portion of the J. Crew product line consists of basic durables, such as chinos, jeans and sweaters, which are not significantly modified from year to year and, in the Company's opinion, are resistant to shifting fashion trends. In 1996, sales of durables and sport clothing represented approximately 60% of total J. Crew brand revenues, having increased at a compound annual growth rate of approximately 15% since 1992. - Synergistic Distribution Channels. The Company believes that the concurrent operation of the J. Crew Mail Order business and J. Crew Retail stores provides a distinct advantage in the development of the J. Crew brand. Visibility and exposure of the brand are enhanced by the broad circulation of catalogs, aiding the expansion of the retail concept. In addition, the Company believes that the retail operations help attract first-time "walk-by" customers to the catalog and improve the salability of fit-critical items through the catalog. The Company further believes that diversified distribution channels help insulate the Company against circumstances and events uniquely affecting one distribution channel or the other. - Tightly Controlled Distribution. By selling products exclusively through J. Crew catalogs, J. Crew Retail stores and J. Crew Factory Outlets, the Company is able to present and maintain a consistent brand image, control the presentation and pricing of its merchandise, provide a higher level of customer service, and closely monitor retail sell-through. The Company believes that tight control over the distribution of its products provides competitive advantages over other branded apparel retailers that distribute their goods through department stores. Opportunities The Company believes that substantial opportunities exist to enhance revenue and profitability by increasing efficiencies in the J. Crew Mail Order business and by expanding the J. Crew Retail business. - Implement Tactical Cost Savings Opportunities--While the Company believes that gross margins in the J. Crew Mail Order business have been strong, overall catalog profitability has been depressed by unnecessarily high operating expenses. The Company has identified a number of tactical cost savings that could be realized 45 without affecting the Company's franchise or brand image. Included in Adjusted EBITDA are $7.5 million in estimated annual savings resulting from actions implemented prior to the Recapitalization, including negotiation of a new catalog vendor contract, selected headcount and net payroll reductions and the insourcing of certain photography functions. The Company has identified approximately $7 million of further potential annual savings that are not reflected in Adjusted EBITDA, including process efficiencies currently under review, reduction of the Base Book trim size, installation of automatic sorting equipment and consolidation of the J. Crew and C&W New York corporate offices. The Company believes these additional cost savings could be implemented by mid-1998. - Realize Cash Flow Increases Through J. Crew Mail Order SKU Rationalization--The Company's J. Crew Mail Order product offerings have increased from 33,000 SKUs in 1992 to 66,000 SKUs in 1996, partly as a result of a proliferation in colors and sizes offered. In recent season-to-season testing on the Company's swimwear and chino lines, the Company reduced SKUs by 33% and 45%, respectively, while posting category revenue increases. By eliminating slower-selling colors and sizes from its core offering, the Company believes it will be better able to forecast demand, increase fill rates and increase inventory turns, resulting in enhanced operating cash flow. - Increase J. Crew Catalog Productivity Through Increased Segmentation--The Company believes that it circulates fewer and less-targeted catalog editions than its competitors, and that catalog productivity (as measured by initial demand per page circulated) could be enhanced by more precise targeting of catalog mailings through further customer segmentation. For example, in 1996 the Company introduced a Women's catalog which to date has achieved 20% higher initial demand per page circulated than that of the Company's primary mailing, the Base Book. To further enhance its segmentation efforts, the Company has recently introduced a College catalog and plans to introduce a Swimwear catalog in 1998. From 1997 to 1998, the increased segmentation is expected to result in an approximately 5% increase in the number of catalogs circulated, but an approximately 8% decrease in total pages circulated. Reductions in total pages circulated should result in a decrease in paper and postage expenses. - Expand J. Crew Retail Operations--The Company's J. Crew Retail store expansion strategy is to continue to increase its market share in its existing markets and to penetrate new markets. The Company expects to open a total of 12 stores in fiscal 1997, ten of which were open as of November 7, 1997. The Company currently intends to open 12 to 20 stores annually, funded primarily by cash flow generated from operations, resulting in approximately 100 stores in operation by the end of fiscal 2000. Historically, new stores have cost the Company an average of $1.5 million in building improvements and working capital expenditures and have experienced a pay-back period of approximately 20 months. The Company has established an administrative infrastructure that it believes is sufficient to accommodate the retail expansion plan, providing the Company with additional margin improvement through overhead leverage. In addition, the Company believes, with a store base of only 49 stores, its markets are underpenetrated relative to its competitors and enough suitable locations exist nationwide to accommodate its expansion plan. The Company has five major operating divisions: J. Crew Mail Order, J. Crew Retail, J. Crew Factory Outlets, PCP and C&W. J. Crew Mail Order, J. Crew Retail and J. Crew Factory Outlets each operate under the J. Crew brand name. In 1996, products sold under the J. Crew brand contributed $556.1 million in revenues (including licensing revenues) or 68.8% of the Company's total revenues. J. Crew brand revenues in 1996 were comprised of $289.8 million (52.1%) from J. Crew Mail Order, $168.0 million (30.2%) from J. Crew Retail and $94.5 million (17.0%) from J. Crew Factory Outlets. In fiscal 1996, PCP and C&W contributed revenues of $177.7 million and $75.0 million, respectively, representing approximately 22.0% and 9.3%, respectively, of the Company's total revenues. 46 J. Crew Brand Merchandising and Design Strategy The J. Crew merchandising strategy focuses on creating and delivering a broad assortment of high-quality products in timeless styles intended to provide customers with one-stop shopping opportunities at attractive prices. Many of the original items introduced by the Company in the early 1980s (such as the rollneck sweater, weathered chino, barn jacket and pocket tee) were instrumental in establishing the J. Crew brand, and continue to be core product offerings. The Company has capitalized on the strength of the J. Crew brand image to provide its customers with clothing to meet more of their lifestyle needs, including casual, career and sport. Over time, the J. Crew merchandising strategy has evolved from providing unisex products to creating full lines of men's and women's clothing, shoes and accessories. This has had the effect of increasing overall J. Crew brand sales volume, and significantly increasing revenues from sales of women's apparel as a percentage of total J. Crew brand sales. J. Crew Mail Order sales in 1996 were approximately 55% women's and 45% men's, while sales in the J. Crew Retail stores were approximately 60% women's and 40% men's. The following table sets forth the J. Crew merchandise mix as a percentage of total J. Crew Mail Order and Retail revenues for the years 1992 through 1996. (J. Crew brand sales statistics throughout this section exclude sales in J. Crew Factory Outlets.) FY 1992 FY 1993 FY 1994 FY 1995 FY 1996 Women's ...... 38% 42% 47% 53% 56% Men's ........ 62 58 53 47 44 --- --- --- --- --- 100% 100% 100% 100% 100% === === === === === J. Crew Womenswear The ready-to-wear women's apparel market is divided by price point into five segments ranging from lowest to highest as follows: Budget, Moderate, Better, Bridge and Designer. J. Crew womenswear competes primarily in the Better and Bridge segments of the market. J. Crew womenswear comprises the Durables, Sport, Classics, Collection, Swim, Shoes, Accessories and Intimates lines. The Durables and Sport lines consist of casual apparel and comprised 52.5% of J. Crew womenswear sales in 1996. The Durables line includes core items such as jeans, knits and sweaters that retail between $20 to $100, while the Sport line includes basic outerwear and knits that retail between $40 to $200. Revenues from the Durables and Sport lines have increased from $44.2 million in 1992 to $135.6 million in 1996, representing a compound annual growth rate of 32.3%. The Company has capitalized on the strength of these lines with the successful extension of its womenswear offering through its Classics and Collection lines. The Classics line features women's suits, dresses, jackets and trousers that retail between $50 to $300. Women's Collection is positioned as a designer line at substantially lower price points than other designer lines, and features suits, dresses, jackets and trousers made of fine Italian fabrics that retail between $250 to $1,800. Women's Accessories includes sunglasses, hats, scarves, gloves, belts, bags, hosiery, hair products and small leather goods. J. Crew catalogs provide a broader selection of the Durables and Sport lines than the retail stores, while the retail stores provide a broader selection of the Classics line than the catalogs. The Collection line is featured exclusively in select retail stores, and Classics are sold primarily through retail stores, to reinforce a high-end brand image and to accommodate customer fit, fabric and price considerations before purchase. J. Crew Menswear J. Crew menswear comprises the Durables, Sport, Sportswear, Swim, Shoes, Accessories and Underwear/Loungewear lines. The Durables and Sport lines consist of casual apparel and comprised 78.2% of J. Crew menswear sales in 1996. The Durables line includes casual jeans and chinos, sweaters and outerwear that retail between $40 and $400. The Company recently introduced the Sport line to meet growing consumer demand for sport and outdoor apparel that combines designer styling with technical authenticity. Revenues from the Durables 47 and Sport lines have increased from $121.8 million in 1992 to $155.8 million in 1996, representing a compound annual growth rate of 6.3%. The Sportswear line includes men's sportscoats, shirts and trousers that retail between $50 and $500. J. Crew catalogs feature a broader selection of men's casual Durables and Sport merchandise than in the retail stores. Men's Sportswear is featured exclusively in the retail stores to reinforce a high-end brand image and to accommodate customer fit, fabric and price considerations before purchase. Design Every J. Crew product is designed by Emily Woods and her in-house design staff of 15 designers to reflect a classic, clean aesthetic that is consistent with the brand's American lifestyle image. Design teams are formed around J. Crew product lines and categories to develop concepts, themes and products for each of the Company's J. Crew businesses. Members of the J. Crew technical design team develop construction and fit specifications for every product to ensure quality workmanship and consistency across product lines. These teams work in close collaboration with the merchandising and production staff in order to gain market and other input. Product merchandisers provide designers with market trend and other information at initial stages of the design process. J. Crew designers and merchants source globally for fabrics, yarns and finishing products to ensure quality and value, while manufacturing teams research and develop key vendors worldwide to identify and maintain the essential characteristics for every style. J. Crew Mail Order Since its inception in 1983, J. Crew Mail Order has distinguished itself from other catalog retailers by its award-winning catalog, which utilizes magazine-quality "real moment" pictures to depict an aspirational lifestyle image. During fiscal 1996, J. Crew Mail Order distributed 30 catalog editions with a combined circulation of more than 76 million, generating $289.8 million in revenues or 52.1% of the Company's total J. Crew brand revenues. Circulation Strategy J. Crew Mail Order's circulation strategy focuses on continually improving the segmentation of customer files and the acquisition of additional customer names. In 1996, approximately 60% of J. Crew Mail Order revenues were from customers in the 12-month buyer file (buyers who have made a purchase from any J. Crew catalog in the prior 12 months). Between 1992 and 1996 the J. Crew Mail Order 12-month buyer file grew at a compound annual growth rate of 10.0%. Customer Segmentation. In 1996, the Company began segmenting its customer file and tailoring its catalog offerings to address the different product needs of its customer segments. To increase core catalog productivity and improve the effectiveness of marginal and prospecting circulation, each customer segment is offered different catalog editions. The Company currently circulates Base, Women's, Prospect and Sale catalogs to targeted customer segments, has recently introduced a College catalog and intends to introduce a Swimwear catalog in 1998. Descriptions of the Company's current catalogs follow: - Base Books. These catalogs contain the entire mail order product offering and are sent primarily to 12-month buyers. - Women's Books. Introduced in the spring of 1996, the Women's books feature women's merchandise and are sent to buyers who purchase primarily women's merchandise. These books represent an additional customer contact potentially generating incremental revenue from women customers. 48 - Prospect Books. Introduced in late 1995, these editions are abridged versions of the Base Books and are sent to less active and prospective customers in order to cost-effectively reactivate old customers and acquire new customers. - Sale Books. These catalogs contain overstock merchandise to be sold at reduced prices without adversely affecting the J. Crew brand image. The following are descriptions of the recently introduced College book and the Swimwear book planned for 1998: - College Books. College books present a merchandise mix (primarily men's and women's Durables, Sport and Swimwear) that is most often purchased by and for students. These catalogs consist of a new creative presentation involving a lifestyle setting appealing to the youth market. The Company believes that these new catalogs will also be effective as prospecting vehicles: the page counts are relatively low (68 pages) and the product lines offered are of above average productivity. - Swimwear Books. The Company plans to offer its full swimwear line together with selected casual weekend clothing in a special catalog edition to be mailed to its most productive women customers as well as to prospective customers. The Company's analysis of buyer performance indicates that swimwear is the most productive category for existing buyers and the product classification most frequently purchased by first-time buyers. The Company believes that it circulates fewer and less-targeted catalog editions than its competitors, and that segmentation will improve the productivity (as measured by initial demand per page circulated) of its circulation by: (i) increasing its offers to its most productive customers and decreasing its offers to its less productive customers, and (ii) reducing both the page count and number of mailings of its Base Books. For example, in 1996, the Company introduced the Women's catalog which to date has achieved 20% higher initial demand per page circulated than that of the Base Book. The overall effect of increased segmentation is expected to be an increase in books circulated (and customer contacts made) and a decrease in pages circulated. In 1996, total circulation increased to approximately 76 million from approximately 68 million in 1995, primarily as a result of the introduction of Prospect and Women's catalogs, while pages circulated during this period decreased to 9.8 billion from 10.2 billion. From 1997 to 1998, the increased segmentation is expected to result in an approximately 5% increase in the number of catalogs circulated, but an approximately 8% decrease in total pages circulated. Reductions in total pages circulated should result in a decrease in paper and postage expenses. Customer Acquisition and List Management. J. Crew Mail Order's name acquisition programs are designed to attract new customers in a cost-effective manner. The Company acquires new names from various sources, including list rentals, exchanges with other catalog and credit card companies, "friends' name" card inserts and, recently, through J. Crew Retail stores which represent an increasingly significant resource in prospecting for new names. Names and addresses of 25% to 30% of the customers making credit card purchases at J. Crew Retail stores are automatically captured at the point of sale. Customers are also asked to fill out cards at the cash register when they make purchases. In addition, the Company is exploring the feasibility of placing telephones in its J. Crew Retail stores with direct access to the J. Crew Mail Order telemarketing center to allow customers in the stores to order catalog-specific or out-of-stock items. The Company believes that circulation planning based on more sophisticated statistical circulation models will increase the effectiveness of catalog mailings and maximize the productivity of its buyer file. As a result, the Company is testing increasingly sophisticated statistical circulation planning models to improve its ability to predict customer purchase behavior based on a wide range of variables. The Company plans to use these analyses to enhance its circulation efficiencies. 49 Catalog Creation and Production The Company is distinguished from other catalog retailers by its award-winning catalog, which utilizes magazine-quality "real moment" pictures to depict an aspirational lifestyle image. All creative work on the catalogs is coordinated by J. Crew personnel to maintain and reinforce the J. Crew brand image. Photography is executed both on location and in studios, and creative design and copy writing are executed on a desk-top publishing system. Digital images are transmitted directly to outside printers, thereby reducing lead times and improving reproduction quality. The Company believes that appropriate page presentation of its merchandise stimulates demand and therefore places great emphasis on page layout. J. Crew Mail Order does not have long-term contracts with paper mills and, instead, purchases paper from paper mills at a two and one-half month specified rate. Projected paper requirements are communicated on an annual basis to paper mills to ensure the availability of an adequate supply. Management believes that the Company's long-standing relationships with a number of the largest coated paper mills in the United States allow it to purchase paper at favorable prices commensurate with the Company's size and payment terms. See "Risk Factors--Increases in Costs of Mailing, Paper and Printing." Telemarketing and Customer Service J. Crew Mail Order's primary telemarketing and fulfillment facilities are located in Lynchburg, Virginia. Telemarketing operations are open 24 hours a day, seven days a week and handled over 7.5 million calls in fiscal 1996. Orders for merchandise may be received by telephone, facsimile, mail and the Company's website, although orders through the toll-free telephone service accounted for 90% of orders in fiscal 1996. The telemarketing center is staffed by a total of 900 full-time telemarketing associates, and up to 2,500 associates during peak periods, who are trained to assist customers in determining the customer's correct size and to describe merchandise fabric, texture and function. Each telemarketing associate utilizes a terminal with access to an IBM mainframe computer which houses complete and up-to-date product and order information. The fulfillment operations are designed to process and ship customer orders in a quick and cost-effective manner. Orders placed before 9:00 p.m. are shipped the following day. Same-day shipping is available for orders placed before noon. During non-peak periods, approximately 11,000 packages are shipped daily, and during peak periods, 25,000 daily. J. Crew Retail An important aspect of the Company's business strategy is an expansion program designed to reach new and existing customers through the opening of J. Crew Retail stores. In addition to generating sales of J. Crew products, J. Crew Retail stores help set and reinforce the J. Crew brand image. The stores are designed in-house and fixtured to create a distinctive J. Crew environment and store associates are trained to maintain high standards of visual presentation and customer service. The result is a complete statement of J. Crew's timeless American style, classic design and attractive product value. During fiscal 1996, J. Crew Retail generated revenues of $168.0 million, representing 30.2% of the Company's total J. Crew brand revenues. The Company believes that J. Crew Retail derives significant benefits from the concurrent operation of J. Crew Mail Order. The broad circulation of J. Crew catalogs performs an advertising function, enhancing the visibility and exposure of the brand, aiding the expansion of the retail concept and increasing the profitability of the stores. J. Crew Retail maintains a uniform appearance throughout its store base, in terms of merchandise display and location on the selling floor. Store managers receive detailed store plans that dictate fixture and merchandise placement to ensure uniform execution of the merchandising strategy at the store level. Standardization of store design and merchandise presentation also maximizes usage and productivity of selling space and lowers the cost of store furnishings allowing J. Crew Retail to cost-effectively open new stores and refurbish existing ones. 50 Store Economics The Company believes that its J. Crew Retail stores are among the most productive in its industry segment. All of the Company's J. Crew Retail stores are profitable and have generated positive store contribution within the first 12 months of opening. J. Crew Retail stores that were open during all of fiscal 1996 averaged $4.8 million per store in sales, produced sales per gross square foot of approximately $575 and generated store contribution margins of approximately 25.9%. The Company believes that these results compare favorably to the average among retailers that the Company believes to be its primary competitors. J. Crew Retail stores have an average size of 8,300 gross square feet. The Company's historical average cost for leasehold improvements, furniture and fixtures for new stores was approximately $950,000 per store, after giving effect to construction allowances. The Company anticipates that the cost of these improvements will increase as it targets more urban, high-traffic areas for its stores. Average pre-opening costs per store, which are expensed as incurred, were $87,000. In addition, working capital requirements, consisting almost entirely of inventory purchases, averaged approximately $550,000 per store. Current Stores As of November 7, 1997 J. Crew Retail operated 49 retail stores nationwide, having expanded from 18 stores in 1993. The Company intends to open 12 stores in fiscal 1997, ten of which were open as of November 7, 1997. The stores are located in upscale shopping malls and in retail areas within major metropolitan markets that have an established higher-end retail business. The table below highlights certain information regarding J. Crew Retail stores opened through fiscal 1996. Average Store Stores Total Open at Stores Stores Stores Square Beginning Opened Closed at Total Footage of During During End of Square at Fiscal Fiscal Fiscal Fiscal Footage End of Year Year Year Year (000's) Year --------- ------ ------- ------ ------- ------- 1992 ... 9 9 -- 18 140 7,778 1993 ... 18 10 -- 28 226 8,071 1994 ... 28 1 -- 29 235 8,103 1995 ... 29 2 -- 31 266 8,581 1996 ... 31 8 -- 39 338 8,667 New Store Expansion J. Crew Retail plans to expand its store base to 51 in 1997 and currently intends to increase the number of stores in operation by 12 to 20 stores annually, resulting in approximately 100 stores in operation by the end of fiscal 2000. The retail expansion plan will initially focus on markets in which J. Crew Mail Order has been successful and, more generally, in areas within major metropolitan markets with affluent and well educated populations. The Company will continue to cluster stores in markets which provide the greatest sales potential, such as New York, New Jersey, Massachusetts, California and Florida. Historically, new stores have cost the Company an average of $1.5 million in building and working capital expenditures and have experienced a pay-back period of approximately 20 months. The Company believes, with a base of 49 stores, its markets are underpenetrated relative to its competitors and enough suitable locations exist nationwide to accommodate its expansion plan. 51 The following is a summary of the stores opened as of November 7, 1997 and those expected to be opened in 1997 after November 7, 1997: Total Opening Square Location Date Footage -------- ---- ------- Opened: 91 Fifth Avenue, New York, NY 3/4 5,875 Boca Town Center, Boca Raton, FL 4/16 7,099 Copley Place, Boston, MA 5/9 6,792 Short Hills Mall, Short Hills, NJ 6/4 10,000 South Park, Charlotte, NC 6/18 8,402 Danbury Fair (Durables), Danbury, CT 7/16 5,398 Century City, Los Angeles, CA 7/30 6,497 Westfarms, West Hartford, CT 8/1 8,000 Beachwood, Cleveland, OH 9/19 7,900 Fashion Valley, San Diego, CA 10/8 8,312 Expected: South Shore Mall, Braintree, MA 11/12 7,600 Aventura Mall, Miami, FL 11/30 7,749 J. Crew Factory Outlets The Company extends its reach to additional consumer groups through its 42 J. Crew Factory Outlets. Offering J. Crew products at an average of 30% below full retail prices, J. Crew Factory Outlets target value-oriented consumers. The factory outlet stores also serve to liquidate excess, irregular or out-of-season J. Crew products outside of the Company's two primary distribution channels. During fiscal 1996, J. Crew Factory Outlets generated revenues of $94.5 million, representing 17.0% of the Company's total J. Crew brand revenues. J. Crew Factory Outlets offer selections of J. Crew menswear and womenswear. Ranging in size from 3,800 to 10,000 square feet with an average of 6,500 square feet, the stores are generally located in major outlet centers in 25 states across the United States. The Company believes that the outlet stores, which are designed in-house, maintain fixturing, visual presentation and service standards superior to those typically associated with outlet stores. Popular Club Plan PCP is a direct selling catalog business offering a broad range of department store merchandise on proprietary, in-house credit plans to the lower and lower-middle income market. PCP markets its catalog products primarily in eleven states in the northeastern United States. PCP offers two distinct product categories: Home Store (53% of 1996 sales) and Ready-to-Wear (47% of 1996 sales). Home Store products include textiles, home furnishings, housewares and electronics. Ready-to-Wear includes men's and women's sportswear, coats, lingerie, juniors, accessories, jewelry, shoes, children's wear, infants, special size and swimwear. During fiscal 1996, Popular Club Plan's annual circulation of 7.3 million catalogs generated revenues of $177.7 million, representing 22.0% of total Company revenues. PCP markets products through an extensive network of over 100,000 local independent sales representatives ("Secretaries"), using a unique combination of mail order and direct selling methods. In contrast to a retail store sales associate, a Secretary is a lead shopper who solicits his or her own circle of friends, relatives, and co-workers to shop from the catalog. Secretaries are compensated through commission reward credits which can be redeemed for free merchandise. This provides them with both a sales and collection incentive. All Secretary applicants are screened and scored with proprietary behavior models in conjunction with national credit bureau information. Only 60% of applicants are set up as new accounts. 52 PCP offers customers a 22-week payment plan and a 44-week payment plan for payment of merchandise ordered from PCP. Sales through these proprietary credit products accounted for 96.3% of PCP revenues in 1996. PCP performs ongoing credit analysis on each Secretary and his or her club. Although Secretaries do not guarantee payment of members they recruit, reward credits of club Secretaries may be withheld to offset poor credit performance. PCP monitors collections through its approximately 70-person credit and collection department. While the primary dunning process is done through club Secretaries, if an individual is delinquent more than ten weeks, credit collectors will also take on the responsibility of contacting the customer directly. Over the last five years, PCP's annual credit losses have averaged approximately 4% of net credit sales. Clifford & Wills C&W is a direct mail order and factory store business which offers a broad range of women's updated apparel covering career to casual as well as accessories and shoes. The typical customer is a 36 to 55 year old upper-moderate to better-priced women's apparel customer, parallel to that of a full-price department store. The brand is positioned to offer bridge level clothing at prices which are 20% to 30% below the prices offered in better departments of department stores, thereby satisfying the target customer's desire for updated apparel at a compelling price advantage. The Company also operates nine C&W outlet stores in Pennsylvania, Florida, Wisconsin, Indiana, Texas, Georgia and Connecticut. During 1996, C&W had revenues of $75.0 million representing 9.3% of total Company revenues. General Sourcing, Production and Quality The Company maintains separate merchandising, design, manufacturing and quality assurance teams for the production of J. Crew and C&W merchandise. The Company's products are designed exclusively by in-house design and product development teams which support each line and class of product. These teams provide individual attention and expertise to every style, ensuring that these styles fit the respective J. Crew and C&W brand images. PCP primarily purchases merchandise from manufacturers and distributors. The Company's merchandise is produced for the Company by a variety of manufacturers, both domestically and outside the United States. The Company does not own or operate any manufacturing facilities, instead contracting with third party vendors for the production of its products. Manufacturing teams research and develop products and source from vendors across 38 countries to identify and maintain essential quality and value for every product. In 1996, approximately 60% of the Company's J. Crew brand products were sourced in the Far East, 20% were sourced domestically and 20% were from Europe and other regions. PCP and C&W source the majority of their products through domestic vendors. Rarely does the Company represent the majority of any one vendor's business and no one vendor supplies more than 10% of the Company's merchandise. The Company employs independent buying agents to conduct in-line and final quality inspections at each manufacturing site. Random inspections of all incoming J. Crew and C&W merchandise at the Lynchburg and Asheville distribution facilities further assure that the Company's products are of a consistently high quality. PCP primarily sells consumer goods which have been subjected to the manufacturer's own quality control processes prior to receipt by PCP. Due to the high concentration of foreign suppliers of J. Crew brand merchandise, the Company estimates 10-month lead times for its products. Currently, the Company must make commitments on its piece goods eight to nine months prior to the issuance of the respective catalog and must decide on SKU color buys within six months of issuance. The Company is working to establish, either through the use of more domestic vendors or through strategic partnerships, a core group of long-term suppliers that provide quicker response times. The Company 53 believes that the implementation of shorter lead times will improve fill rates, reduce the overall complexity in inventory management and improve its ability to more accurately forecast demand, all of which should provide substantial savings to the Company. Distribution The Company operates three main telemarketing and distribution facilities for its operations. Order fulfillment for J. Crew Mail Order and C&W takes place at the 406,500 square foot telemarketing and distribution center located in Lynchburg, Virginia. The Lynchburg facility processes approximately 3.8 million orders per year and employs approximately 1,800 full- and part-time employees during its peak season. The 192,500 square foot telemarketing and distribution facility in Asheville, North Carolina was recently converted into the main distribution center to service the retail and outlet store operations and also houses a J. Crew Mail Order telemarketing center. This facility employs approximately 700 full- and part-time employees during its non-peak season and an additional 1,100 employees during the peak holiday season. PCP conducts its fulfillment operations from a 369,000 square foot distribution facility located in Edison, New Jersey. The Edison facility employs approximately 300 and 600 full- and part-time employees during the non-peak and peak seasons, respectively. Each fulfillment center is designed to process and ship customer orders in a quick and cost-efficient manner. Same-day shipping is available for orders placed before noon; and orders placed before 9:00 p.m. are shipped the following day. The Company ships merchandise via the UPS, the United States Postal Service and FedEx. To enhance efficiency, each facility is fully equipped with a highly advanced telephone system, an automated warehouse locator system and an inventory bar coding system. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments." Management Information Systems The Company's management information systems are designed to provide, among other things, comprehensive order processing, production, accounting and management information for the marketing, manufacturing, importing and distribution functions of the Company's business. The Company has installed sophisticated point-of-sale registers in its J. Crew Retail and Factory Outlet stores that enable it to track inventory from store receipt to final sale on a real-time basis. The Company believes its merchandising and financial system, coupled with its point-of-sale registers and software programs, allow for rapid stock replenishment, concise merchandise planning and real-time inventory accounting practices. J. Crew Mail Order and C&W share the same management information system and each of the Company's business units has its own information system that is customized to the needs of that particular business. The Company's telephone and telemarketing systems, warehouse package sorting systems, automated warehouse locators and inventory bar coding systems utilize advanced technology. These systems have provided the Company with a number of benefits in the form of enhanced customer service, improved operational efficiency and increased management control and reporting. The Company's IBM 3990 system stores data, such as customer list segmentation and analysis of market trends, and rapidly transfers the information throughout the Company. In addition, the Company's real-time inventory computer systems provide inventory management on a per SKU basis and allow for a more efficient fulfillment process. J. Crew's management information systems also produce daily and weekly sales and performance reports. Trademarks and International Licensing J. Crew International, Inc., an indirect subsidiary of Holdings, currently owns all of the trademarks for the J. Crew name that the Company holds in the United States and internationally, as well as its international licensing 54 contracts with third parties. Trademarks related to the J. Crew name are registered in the United States Patent and Trademark Office. The Company derives revenues from the international licensing of its trademarks in the J. Crew name and the know-how it has developed. The Company has entered into a licensing agreement with Itochu in Japan which gives the Company the right to receive payments of percentage royalty fees in exchange for the exclusive right to use the Company's trademarks in Japan. In 1996, licensee sales at retail stores in Japan were approximately $100 million through 67 free-standing and shop-in-shop stores. Under the license agreement the Company retains a high degree of control over the manufacture, design, marketing and sale of merchandise under the J. Crew trademarks. The Company is currently negotiating a five-year renewal of this agreement which otherwise expires in January, 1998. The Company believes there is significant growth potential in international markets as the Company can leverage off its base in Japan into other key Asian markets. The Company is in the process of exploring licensing agreements covering Hong Kong, China, Singapore, Thailand and Malaysia. In 1996, licensing revenues totaled $3.8 million. Employees The Company focuses significant resources on the selection and training of sales associates in both its mail order, retail and factory operations. Sales associates are required to be familiar with the full range of merchandise of the business in which they are working and have the ability to assist customers with merchandise selection. Both retail and factory store management are compensated in a combination of annual salary plus performance-based bonuses. Retail, telemarketing and factory associates are compensated on an hourly basis and may earn team-based performance incentives. At November 7, 1997, the Company had approximately 6,300 associates, of whom approximately 4,300 were full-time associates and 2,000 were part-time associates. In addition, approximately 3,000 associates are hired on a seasonal basis to meet demand during the peak holiday buying season. None of the associates employed by J. Crew Mail Order, J. Crew Retail, J. Crew Factory Outlets or C&W are represented by a union. Approximately 240 warehouse employees at PCP are represented by the Teamsters under a collective bargaining agreement which expires in June 1999. The Company believes that its relationship with its associates is good. Properties The Company is headquartered in New York City, although PCP maintains a separate main office in Garfield, New Jersey. Both the New York City headquarters offices and PCP's Garfield office are leased from third parties. The Company owns two telemarketing and distribution facilities: a 406,500-square-foot telemarketing and distribution center for J. Crew and C&W mail order in Lynchburg, Virginia and a 192,500-square-foot distribution center in Asheville, North Carolina servicing the J. Crew Retail and J. Crew and C&W outlet store operations. The Company also leases from a third party a 369,000-square-foot distribution facility located in Edison, New Jersey dedicated to PCP's fulfillment operations. As of November 7, 1997, the Company operated 100 retail and factory outlet stores. All of the retail and factory outlet stores are leased from third parties, and the leases in most cases have terms of 10 to 12 years, not including renewal options. As a general matter, the leases contain standard provisions concerning the payment of rent, events of default and the rights and obligations of each party. Rent due under the leases is comprised of annual base rent plus a contingent rent payment based on the store's sales in excess of a specified threshold. Substantially all the leases are guaranteed by Holdings. 55 The table below sets forth the number of stores by state operated by the Company in the United States as of November 7, 1997: Total Retail Outlet Number Stores Stores(1) of Stores ------ ------ --------- Alabama ............... -- 1 1 Arizona ............... 1 -- 1 California ............ 8 3 11 Colorado .............. 1 2 3 Connecticut ........... 3 2 5 Delaware .............. -- 1 1 Florida ............... 2 5 7 Georgia ............... 1 3 4 Illinois .............. 4 -- 4 Indiana ............... 1 3 4 Kansas ................ -- 1 1 Maine ................. -- 2 2 Maryland .............. 1 -- 1 Massachusetts ......... 4 1 5 Michigan .............. 1 1 2 Minnesota ............. 1 -- 1 Missouri .............. 1 1 2 New Hampshire ......... -- 2 2 New Jersey ............ 2 1 3 New Mexico ............ 1 -- 1 New York .............. 4 4 8 North Carolina ........ 2 -- 2 Ohio .................. 2 -- 2 Oregon ................ 1 -- 1 Pennsylvania .......... 2 5 7 South Carolina ........ -- 1 1 Tennessee ............. -- 1 1 Texas ................. 3 5 8 Utah .................. -- 1 1 Vermont ............... -- 1 1 Virginia .............. 1 1 2 Washington ............ 1 1 2 Wisconsin ............. -- 2 2 District of Columbia .. 1 -- 1 --- --- --- Total ............ 49 51 100 === === === (1) Includes nine C&W outlet stores. Competition All aspects of the Company's businesses are highly competitive. The Company competes primarily with other catalog operations, specialty brand retailers, department stores, and mass merchandisers engaged in the retail sale of men's and women's apparel, accessories, footwear and general merchandise. The Company believes that the principal bases upon which it competes are quality, design, efficient service, selection and price. 56 The Company believes that it has significant competitive strength because of its strong brand name, distinctive designs, premium quality products, controlled distribution and strong catalog and retail market positions. However, certain of the Company's competitors are larger and have greater financial, marketing and other resources than the Company, and there can be no assurance that the Company will be able to compete successfully with them in the future. Legal and Regulatory Matters The Company is a defendant in several lawsuits arising in the ordinary course of business. Although the amount of any liability that could arise with respect to any such lawsuit cannot be accurately predicted, in the opinion of management, the resolution of these matters is not expected to have a material adverse effect on the financial position or results of operations of the Company. A 1992 Supreme Court decision confirmed that the Commerce Clause of the United States Constitution prevents a state from requiring the collection of its use tax by a mail order company unless the company has a physical presence in the state. However, there continues to be some uncertainty in this area due to inconsistent application of the Supreme Court decision by state and federal courts. The Company attempts to conduct its operations in compliance with its interpretation of the applicable legal standard, but there can be no assurance that this compliance will not be challenged. From time to time, various states have sought to require companies to begin collection of use taxes and/or pay taxes from previous sales. The Company has not received assessments from any state in which it is not currently collecting sales taxes since the 1992 Supreme Court decision. The Supreme Court decision also established that Congress has the power to enact legislation that would permit states to require collection of use taxes by mail order companies. Congress has from time to time considered proposals for such legislation. The Company anticipates that any legislative change, if adopted, would be applied only on a prospective basis. 57 MANAGEMENT Directors and Executive Officers The following table sets forth the name, age and position of individuals who are serving as directors of Holdings and executive officers of the Company. TPG Partners II anticipates that it will cause to be elected additional individuals, including individuals unaffiliated with either TPG Partners II or the Company, to serve as directors of Holdings. Each director of Holdings will hold office until the next annual meeting of shareholders or until his or her successor has been elected and qualified. Officers of the Company are elected by their respective Boards of Directors and serve at the discretion of such Board. Name Age Position - ---- --- -------- Emily Woods ....... 35 Director--J. Crew Group, Inc. Chairman and Chief Executive Officer-- J. Crew Group, Inc. Chief Executive Officer--J. Crew Operating Corp. President--J. Crew, Inc. David Bonderman ... 54 Director--J. Crew Group, Inc. James G. Coulter .. 37 Director--J. Crew Group, Inc. Richard W. Boyce .. 43 Director--J. Crew Group, Inc. Michael P. McHugh . 58 Vice President--Finance - CFO--J. Crew Group, Inc. Vice President--Finance - CFO--J. Crew Operating Corp. President--J. Crew International, Inc. and J. Crew Services, Inc. Matthew E. Rubel .. 39 President--Popular Club Plan, Inc. David M. DeMattei . 41 President--Grace Holmes, Inc.; H.F.D. No. 55, Inc. Nicholas Lamberti . 55 Vice President--J. Crew Operating Corp. Emily Woods Chairman and Chief Executive Officer--J. Crew Group, Inc.; Chief Executive Officer and President--J. Crew Operating Corp.; President--J. Crew, Inc. Ms. Woods became Chairman of the Board of Directors and Chief Executive Officer of Holdings upon consummation of the Recapitalization. Ms. Woods is also currently the Chief Executive Officer and a director of Operating Corp and the President of J. Crew, Inc., a wholly owned subsidiary of Operating Corp. Ms. Woods co-founded the J. Crew brand in 1983 and is currently its designer. Ms. Woods has also served as Vice-Chairman of J. Crew Group, Inc. David Bonderman Director--J. Crew Group, Inc. Mr. Bonderman became a director of Holdings upon consummation of the Recapitalization. Mr. Bonderman is also currently serving as a director of Operating Corp. Mr. Bonderman is a principal and founding partner of TPG. Prior to forming TPG, Mr. Bonderman was Chief Operating Officer and Chief Investment Officer of Keystone Inc. ("Keystone"), the private investment firm, from 1983 to August 1992. Mr. Bonderman serves on the Boards of Directors of Continental Airlines, Inc., Bell & Howell Company, Virgin Entertainment, Beringer Wine Estates, Inc., Denbury Resources, Inc., Ducati Motor Holdings, S.p.A., Washington Mutual, Inc., Ryanair, Ltd., and Credicom Asia, N.V. Mr. Bonderman also serves in general partner advisory board roles for Acadia Partners, L.P., Newbridge Investment Partners, L.P., Newbridge Latin America, L.P. and Aqua International, L.P. 58 James G. Coulter Director--J. Crew Group, Inc. Mr. Coulter became a director of Holdings upon consummation of the Recapitalization. Mr. Coulter is also currently serving as a director of Operating Corp. Mr. Coulter is a principal and founding partner of TPG. Prior to forming TPG, Mr. Coulter was a Vice President of Keystone from 1986 to 1992. Mr. Coulter serves on the Boards of Directors of America West Airlines, Inc., Virgin Entertainment, Beringer Wine Estates, Inc. and Paradyne Partners, L.P. and was formerly on the Board of Directors of Allied Waste Industries Inc. and Continental Airlines, Inc. Richard W. Boyce Director--J. Crew Group, Inc. Mr. Boyce became a director of Holdings upon consummation of the Recapitalization. Mr. Boyce is also currently serving as a director of Operating Corp and J. Crew Operating Corp., C&W Outlet, Inc., Clifford & Wills, Inc., J. Crew Retail, J. Crew Factory Outlet, J. Crew, Inc, J. Crew International, Inc., J. Crew Services, Inc. and Popular Club Plan, Inc., each of which is a wholly owned subsidiary of Operating Corp. Mr. Boyce is the President of CAF, Inc., a management consulting firm which advises various companies controlled by TPG. Prior to founding CAF, Inc. in 1997, Mr. Boyce served as Senior Vice President of Operations for Pepsi-Cola North America ("PCNA") from 1996 to 1997, and Chief Financial Officer of PCNA from 1994 to 1996. From 1992 to 1994, Mr. Boyce served as Senior Vice President-Strategic Planning for PepsiCo. Prior to joining PepsiCo., Mr. Boyce was a Director at the management consulting firm of Bain & Company where he was employed from 1980 to 1992. Michael P. McHugh Vice President Finance - CFO--J. Crew Group, Inc.; Vice President Finance - CFO--J. Crew Operating Corp.; President--J. Crew International, Inc. and J. Crew Services, Inc. Mr. McHugh is the Vice President Finance and Chief Financial Officer of Holdings. Mr. McHugh has been with the Company since September 1986 and is also currently the Vice President Finance and Chief Financial Officer of Operating Corp and the President of J. Crew International, Inc. and J. Crew Services, Inc. Prior to joining the Company, Mr. McHugh was the Vice President of Finance and Director of the Regina Company from 1983 to 1986, served as the Controller of Operations for Revlon, Inc. from 1977 to 1983, was the U.S. Controller for Canada Dry Corp. from 1975 to 1977 and was a Division Controller and Division Vice President of Finance and Administration at Borden, Inc. from 1968 to 1975. David M. DeMattei President--Grace Holmes, Inc.; H.F.D. No. 55, Inc. Mr. DeMattei became President of J. Crew Factory Outlet upon consummation of the Recapitalization. Mr. DeMattei joined the Company in 1995 and has served as President of J. Crew Retail since June 1995. From 1993 to 1994, Mr. DeMattei served as President of Banana Republic, a division of The Gap, Inc., and from 1983 to 1993, Mr. DeMattei worked in various other executive level positions at The Gap, Inc., including Executive Vice President-Chief Financial Officer from April 1992 to May 1995 and Senior Vice President-Chief Financial Officer from February 1991 to March 1992. Matthew E. Rubel President--Popular Club Plan, Inc. Mr. Rubel joined the Company in September 1994 as the President of PCP. Prior to joining the Company, Mr. Rubel served as the President, CEO, and a member of the Board of Directors at Pepe Jeans USA in 1994, and from 1987 to 1993, he was the President of Specialty Division at Revlon, Inc. From 1984 to 1987, Mr. Rubel served as an Executive Vice President of Murjani International and from 1980 to 1984, he was employed by Bonwit Teller. Nicholas Lamberti Vice President--J. Crew Operating Corp. Mr. Lamberti joined the Company in January 1991 as Vice President - Corporate Controller. Prior to joining the Company, Mr. Lamerti was with Deloitte & Touche from 1966 to 1991. 59 Employment Agreements and Other Compensation Arrangements Holdings and Operating Corp (the "Employers") and Ms. Woods entered into an employment agreement, which provides that, for a period of five years commencing on the closing of the Recapitalization, she will serve as Chairman of the Board of Directors and Chief Executive Officer of Holdings and as Chief Executive Officer of Operating Corp. The employment agreement provides for an annual base salary of $1.0 million, and provides an annual target bonus of up to $1.0 million based on achievement of earnings objectives to be determined each year. The employment agreement also provides for the grant of 3,308 shares of Holdings Common Stock (the "Restricted Shares") on January 1, 1998. The Restricted Shares will vest as follows: (i) 393 shares immediately upon grant; (ii) 972 shares on each of the third and fourth anniversaries of the Recapitalization and (iii) 971 shares on the fifth anniversary of the Recapitalization. In connection with the grant of the Restricted Shares, the Employers will pay Ms. Woods an amount equal to the federal, state and local income and payroll taxes incurred by Ms. Woods in 1998 as a result of the grant of the Restricted Shares and any federal, state and local income and payroll taxes incurred as a result of such payment. Ms. Woods is also entitled to various executive benefits and perquisites under the employment agreement. In connection with the Recapitalization, Ms. Woods retained shares of Holdings Common Stock representing approximately 14.8% of the total outstanding shares of Holdings Common Stock determined immediately after the closing of the Recapitalization, such retention effected using an implied purchase price for the retained shares equal to the price that TPG Partners II paid for shares of Holdings Common Stock in connection with the Recapitalization (the "TPG Partners II Price"). Ms. Woods also purchased approximately $3.0 million of Preferred Stock issued in connection with the Recapitalization. Under the Option Plan (as defined herein), Holdings has granted Ms. Woods an option to purchase 1,641 shares of Holdings Common Stock at an exercise price equal to the TPG Partners II Price, 20% of which shall become exercisable following the end of each of fiscal years 1998 through 2002, provided that the Company attains certain earnings targets; however, all unvested options shall become exercisable (i) if Ms. Woods' employment is terminated by Holdings without cause, by Ms. Woods for good reason or by reason of death or disability, (ii) in the event of a change in control of Holdings, or (iii) if Ms. Woods is still employed by Holdings, on the seventh anniversary of the closing of the Recapitalization. Also under the Option Plan, Holdings has granted Ms. Woods the option to purchase 820 shares of Holdings Common Stock. Under this option, Ms. Woods has the right to exercise 20% of the option after each of the first through the fifth anniversaries of the grant date at an exercise price equal to 125%, 156.25%, 195.31%, 244.14% and 305.18% of the TPG Partners II Price, respectively. The exercise of this option may require Ms. Woods to purchase a proportional amount of Preferred Stock issued in connection with the Recapitalization. In addition, all options shall become exercisable (i) if Ms. Woods' employment is terminated by Holdings without cause, by Ms. Woods for good reason or by reason of her death or disability or (ii) in the event of a change in control of Holdings. All options granted to Ms. Woods are generally governed by and subject to the J. Crew Group, Inc. Stock Option Plan described below. The shares of Holdings Common Stock acquired by Ms. Woods pursuant to the foregoing are subject to a shareholders' agreement providing for certain transfer restrictions, registration rights and customary tag-along and drag-along rights. Operating Corp and Mr. DeMattei are parties to an employment agreement which provides that Mr. DeMattei will be employed as president of J. Crew Retail Division with an annual salary of $525,000, which increases by $25,000 on each of June 1, 1998 and June 1, 1999. In addition, the agreement provides that Mr. DeMattei is eligible for an annual bonus for fiscal year 1997 of up to approximately $350,000 and a long-term incentive bonus if certain performance objectives are satisfied. Annual bonuses for subsequent years will be 60 determined on a year to year basis. Mr. DeMattei is also entitled to various executive benefits and perquisites under the agreement. The agreement expires on January 28, 2000. Operating Corp and Mr. Rubel are parties to an employment agreement which provides that Mr. Rubel will be employed as president of PCP with an annual salary of $475,000. The agreement provides that Mr. Rubel is eligible for annual bonus and long-term incentive bonus based on the performance of PCP. The agreement expires on January 31, 1999. Holdings has adopted, subject to the receipt of applicable stockholder approval, the J. Crew Group Inc. Stock Option Plan (the "Option Plan") in order to promote the interests of the Company and its shareholders by providing the Company's key employees and consultants with an appropriate incentive to encourage them to continue in the employ of the Company and to improve the growth and profitability of the Company. Under the Option Plan, the Board of Directors of Holdings will appoint a committee to administer the Option Plan and to grant options to purchase shares of Holdings Common Stock to certain key employees and consultants of the Company. Currently, there is an aggregate of 7,388 shares of Holdings Common Stock available for grants to key employees and consultants under the Option Plan (including the 2,461 shares underlying the options granted to Ms. Woods as described above). The options granted under the Option Plan may be subject to various vesting conditions, including, under some circumstances, the achievement of certain performance objectives. All shares of Holdings Common Stock acquired by key employees or consultants pursuant to the foregoing shall be subject to a shareholders' agreement providing for certain transfer restrictions, registration rights and customary tag-along and drag-along rights. 61 Executive Compensation The following table sets forth compensation paid by the Company for fiscal years 1994, 1995 and 1996 to each individual serving as its chief executive officer during fiscal 1996 and to each of the four other most highly compensated executive officers of the Company as of the end of fiscal 1996.
Long Term Compensation ------------ Other Annual LTIP All Other Name and Principal Fiscal Salary Bonus Comp. Payouts Comp. Positions Year ($) ($) ($) ($) ($) - ------------------ ------ ------- ----- ----------- ------------ --------- Arthur Cinader (1) 1996 307,692 -- -- -- -- Chief Executive Officer 1995 700,000 109,000 -- -- -- 1994 700,000 83,000 -- -- -- Emily Woods (2) 1996 700,000 -- -- -- -- President 1995 700,000 1,327,700(3) 1,079,713(4) -- -- 1994 700,000 1,970,040(5) 1,816,811(6) -- -- David DeMattei (7) 1996 475,771 100,000 -- -- -- President, J. Crew 1995 352,661 100,000 -- -- -- Retail Matthew Rubel 1996 422,418 150,000 -- -- -- President, Popular 1995 391,346 50,000 -- -- -- Club Plan 1994 112,500 -- -- -- -- Paul Raffin (8) (9) 1996 426,663 75,000 -- -- -- President, J. Crew 1995 304,200 50,000 -- -- -- Catalogue Robert Bernard (10) 1996 650,000 136,500 752,500(11) -- -- 1995 650,000 350,000 -- -- -- 1994 581,930 -- -- -- --
- ---------------------- (1) Mr. Cinader was replaced as Chief Executive Officer on October 17, 1997. (2) Ms. Woods became Chief Executive Officer on October 17, 1997. (3) Of this amount, $1,139,000 represents the value of a grant to the executive of Holdings Common Stock. (4) This amount was paid as reimbursement for income taxes incurred as a result of the grant of Holdings Common Stock. (5) Of this amount, $1,884,240 represents the value of a grant to the executive of Holdings Common Stock. (6) This amount was paid as reimbursement for income taxes incurred as a result of the grant of Holdings Common Stock. (7) Mr. DeMattei was not employed by the Company in 1994. (8) Mr. Raffin resigned from the Company as of November 13, 1997. (9) Mr. Raffin was not employed by the Company in 1994. (10) Mr. Bernard resigned from the Company as of October 28, 1996. (11) This amount represents severance payment to the executive. 62 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As part of arrangements made prior to the negotiation and execution of the Recapitalization Agreement, Holdings agreed to make bonus payments to certain of its executive officers upon consummation of any merger, acquisition, recapitalization or other transaction resulting in a change of control of Holdings. Thus, Holdings made bonus payments in the amount of (i) $10.0 million to Emily Woods, (ii) $0.3 million to Matthew Rubel, (iii) $0.3 million to Michael McHugh and (iv) $1.2 million to other employees. In addition, effective on the closing of the Recapitalization, the Company and Arthur Cinader entered into an Employment/Consulting and Non-Compete Agreement, under which Mr. Cinader agreed to serve as an employee and/or consultant for twelve months following the closing of the Recapitalization. Under the agreement, Mr. Cinader agreed, for a period of five years from the closing of the Recapitalization, not to compete, directly or indirectly, in association with or as a stockholder, director, officer, consultant, employee, partner, joint venturer, member or otherwise through any person or entity work for, act as a consultant to, or own any interest in, any competitor of the Company or its affiliates. In consideration of Mr. Cinader's non-compete, employment and consulting undertakings, the Company paid Mr. Cinader a total of $4.2 million. In addition, during this five-year period, Mr. Cinader is entitled to coverage under the Company's health and welfare plans. In connection with the Recapitalization, the Company paid TPG a financial advisory fee in the amount of $5.5 million. Holdings and its subsidiaries also entered into a tax sharing agreement providing (among other things) that each of the subsidiaries will reimburse Holdings for its share of income taxes determined as if such subsidiary had filed its tax returns separately from Holdings. CAPITAL STOCK OF HOLDINGS AND OPERATING CORP General Operating Corp is authorized by the terms of its certificate of incorporation to issue 1,000 shares of common stock and 1,000 shares of preferred stock. Operating Corp has issued and outstanding 100 shares of common stock, each share of which is entitled to one vote. Holdings owns all of the issued and outstanding stock of Operating Corp. Holdings does not have any material assets other than the common stock of Operating Corp. Holdings' restated certificate of incorporation authorizes Holdings to issue capital stock consisting of 100,000,000 shares of common stock, par value $.01 per share, 1,000,000 shares of Series A cumulative preferred stock, par value $.01 per share ("Series A Preferred Stock"), and 1,000,000 shares of Series B cumulative preferred stock, par value $.01 per share ("Series B Preferred Stock"). Holdings currently has outstanding 55,000 shares of common stock, 92,500 shares of Series A Preferred Stock and 32,500 shares of Series B Preferred Stock. The Series A Preferred Stock and Series B Preferred Stock (collectively, the "Holdings Preferred Stock") will accumulate dividends at the rate of 14.50% per annum (payable quarterly) for periods ending on or prior to October 17, 2009. Thereafter, the Series A Preferred Stock will accumulate dividends at the rate of 16.50% per annum. Dividends on the Holdings Preferred Stock will compound to the extent not paid. The Holdings Preferred Stock had an initial liquidation preference of $1,000 per share. Holdings will be required on October 17, 2009 to redeem shares of Series B Preferred Stock and to pay all accumulated dividends that have been applied, if any, to increase liquidation value of the Series A Preferred Stock (the "clean-down"). Shares of Holdings Preferred Stock may be redeemed at the option of Holdings, in whole or in part, at the redemption prices set forth below (expressed as percentages of liquidation preference), together with all accumulated and unpaid dividends to the redemption date, if redeemed during the six month period beginning on the dates indicated below: 63 October 17, 1997 ........... 103.0% April 17, 1998 ............. 102.5% October 17, 1998 ........... 102.0% April 17, 1999 ............. 101.5% October 17, 1999 ........... 101.0% April 17, 2000 ............. 100.5% October 17, 2000 and thereafter ................. 100.0% Optional redemption of the Holdings Preferred Stock is subject to, and expressly conditioned upon, certain limitations under the Senior Subordinated Note Indenture, the Bank Facilities, the Debentures and other documents relating to the Company's indebtedness. Holdings may also be required to redeem shares of Holdings Preferred Stock in certain other circumstances, including the occurrence of a change of control of Holdings, in each case subject to the terms of the Senior Subordinated Note Indenture, the Bank Facilities, the Debentures and other documents relating to the Company's indebtedness. Holders of Holdings Preferred Stock do not have any voting rights with respect thereto, except for such rights as are provided under applicable law, the right to elect, as a class, two directors of Holdings in the event that Holdings fails to comply with its redemption and clean-down obligations and class voting rights with respect to transactions adversely affecting the rights, preferences or powers of the Holdings Preferred Stock. Security Ownership of Certain Beneficial Owners and Management Security Ownership of Beneficial Owners of More Than 5% of the Issuer's Voting Securities (1) (2) (3) (4) Title of Class Name and Address Amount and Nature of Percent of of Beneficial Owner Beneficial Ownership Class - -------------------------------------------------------------------------- Holdings Common TPG Partners II, L.P. 31,566.779 shares 57.39% Stock 201 Main Street, Suite 2420 Fort Worth, TX 76102 Holdings Common Emily Woods 8,017.883 shares 14.58% Stock Chairman and Chief Executive Officer J. Crew Group, Inc. 770 Broadway New York, NY 10003 Security Ownership of Management (1) (2) (3) (4) Title of Class Name of Beneficial Amount and Nature of Percent of Owner Beneficial Ownership Class - -------------------------------------------------------------------------- Holdings Common Emily Woods 8,017.883 14.58% Stock Holdings Series A Emily Woods 2,978.505 3.22% Preferred Stock 64 DESCRIPTION OF OPERATING CORP INDEBTEDNESS Bank Facilities On the closing date of the Recapitalization, Operating Corp entered into the Bank Facilities among Operating Corp, Holdings, the several lenders from time to time parties thereto (collectively, the "Banks"), Chase, as administrative and collateral agent (the "Administrative Agent") and DLJ as syndication agent (collectively, the "Agents"). The following is a summary description of the principal terms of the Bank Facilities and the other loan documents. The description set forth below does not purport to be complete and is qualified in its entirety by reference to certain agreements setting forth the principal terms and conditions of the Bank Facilities, which are available upon request from the Issuer. Structure. The Bank Facilities provide Operating Corp with: (i) a senior secured term loan facility of up to $70.0 million; and (ii) a senior secured revolving credit facility of up to $200.0 million. The full amount of the Term Loan Facility and approximately $35.6 million of Revolving Credit Facility were borrowed on the closing date under the Bank Facilities (i) to partially finance the Recapitalization, (ii) to repay certain existing outstanding indebtedness of Operating Corp and (iii) to pay certain fees and expenses related to the Recapitalization. See "The Recapitalization." The Bank Facilities may be utilized to fund Operating Corp's working capital requirements, including issuance of stand-by and trade letters of credit, bankers' acceptances and for other general corporate purposes. The Term Loan Facility is a single tranche term facility of $70.0 million which has a maturity of six years. Loans, letters of credit and bankers' acceptances under the Revolving Credit Facility will be available at any time during its six-year term subject to the fulfillment of customary conditions precedent including the absence of a default under the Bank Facilities; provided, that at least once during each fiscal year, for a period of 30 consecutive days, Operating Corp must repay all loans outstanding under the Revolving Credit Facility in excess of the amounts set forth below: Amount Fiscal Year (in millions) ----------- ------------- 1998 ........................ $ 25.0 1999 ........................ $ 20.0 2000 ........................ $ 15.0 2001 ........................ $ 10.0 2002 and thereafter ......... $ 0.0 Security; Guaranty. Operating Corp's obligations under the Bank Facilities are guaranteed by each of its direct and indirect domestic and, to the extent no adverse tax consequences would result, foreign subsidiaries, other than any receivables subsidiary. The Bank Facilities and the guarantees thereof are secured by a perfected first priority security interest in substantially all assets of Operating Corp and its direct and indirect domestic and, to the extent no adverse tax consequences would result, foreign subsidiaries including: (i) all real property; (ii) all accounts receivable (but excluding the accounts receivable of PCP), inventory and intangibles; and (iii) all of the capital stock of Operating Corp and its direct and indirect domestic and, to the extent no adverse tax consequences would result, foreign subsidiaries. Interest; Maturity. Borrowings under the Bank Facilities bear interest at a rate per annum equal (at Operating Corp's option) to: (i) the Administrative Agent's Eurodollar rate plus an applicable margin or (ii) an alternate base rate equal to the highest of the Administrative Agent's prime rate, a certificate of deposit rate plus 1%, or the Federal Funds effective rate plus 1/2 of 1% plus, in each case, an applicable margin. Initially, the 65 applicable margin is 2.25% per annum for Eurodollar rate loans and 1.25% per annum for alternate base rate loans. The Bank Facilities will mature October 17, 2003. Fees. Operating Corp is required to pay the Banks, on a quarterly basis, a commitment fee on the undrawn portion of the Bank Facilities at a rate equal to 1/2 of 1% per annum. Operating Corp is also obligated to pay (i) a per annum letter of credit fee on the aggregate amount of outstanding letters of credit; (ii) a fronting bank fee for the letter of credit issuing bank; (iii) certain fees in connection with the issuance of bankers' acceptances; and (iv) customary agent, arrangement and other similar fees. Covenants. The Bank Facilities contain a number of covenants that, among other things, restrict the ability of Operating Corp and its subsidiaries to dispose of assets, incur additional indebtedness, prepay other indebtedness or amend certain debt instruments, pay dividends, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, change the business conducted by Operating Corp or its subsidiaries, or engage in certain transactions with affiliates and otherwise restrict certain corporate activities. In addition, under the Bank Facilities, Operating Corp is required to maintain specified financial ratios and tests, including minimum interest coverage ratios, leverage ratios below a specified maximum, minimum net worth levels and minimum ratios of inventory to senior debt. Events of Default. The Bank Facilities contain customary events of default, including nonpayment of principal, interest or fees, material inaccuracy of representations and warranties, violation of covenants, cross- default and cross-acceleration to certain other indebtedness, certain events of bankruptcy and insolvency, material judgments against Operating Corp, invalidity of any guarantee or security interest and a change of control of Operating Corp in certain circumstances as set forth therein. Receivables Facility In connection with the Recapitalization, affiliates of the Initial Purchasers (the "Receivables Lenders") arranged a facility to securitize certain PCP consumer loan installment receivables (the "Receivables") on a revolving basis under a receivables program (the "Receivables Facility"). The Securitization involved the transfer of the Receivables with limited recourse through a special purpose, bankruptcy-remote subsidiary to a trust in exchange for cash and subordinated certificates representing undivided interests in the pool of Receivables, and the subsequent sale by the trust of certificates of beneficial interests, also representing undivided interests in the Receivables, to third party investors. The Securitization provided approximately $40 million of proceeds. The Company is obligated to repurchase Receivables related to customer credits such as merchandise returns and other Receivables defects. The Company has no obligation to reimburse the trust or the purchasers of beneficial interests for credit losses. The Receivables Facility is contemplated to be an interim agreement pending the consummation of a private placement of Receivables-based securities or such other refinancing as the parties may agree to, proceeds of which will be used to prepay the Receivables Facility. If the Receivables Facility is not refinanced within two months of the date of closing, the interest rates thereunder will increase. THE EXCHANGE OFFER The summary herein of certain provisions of the Registration Rights Agreement does not purport to be complete and reference is made to the provisions of the Registration Rights Agreement, which has been filed as an exhibit to the Registration Statement and a copy of which is available as set forth under the heading "Available Information." 66 Terms of the Exchange Offer In connection with the issuance of the Old Debentures pursuant to a Purchase Agreement dated as of October 14, 1997, by and among the Issuer and the Initial Purchasers, the Initial Purchasers and their respective assignees became entitled to the benefits of the Registration Rights Agreement. Under the Registration Rights Agreement, the Issuer is required to file within 60 days after October 17, 1997 (the date the Registration Rights Agreement was entered into (the "Closing Date")) a registration statement (the "Exchange Offer Registration Statement") for a registered exchange offer with respect to an issue of new debentures identical in all material respects to the Old Debentures except that the new debentures shall contain no restrictive legend thereon. Under the Registration Rights Agreement, the Issuer is required to (i) cause the Exchange Offer Registration Statement to be filed with the Commission no later than 60 days after the Closing Date, (ii) use its best efforts to cause such Exchange Offer Registration Statement to become effective within 135 days after the Closing Date, (iii) use its best efforts to keep the Exchange Offer open for at least 20 Business Days (or longer if required by applicable law), (iv) use its best efforts to consummate the Exchange Offer on or prior to the 30th Business Day following the date on which the Exchange Offer Registration Statement is declared effective by the Commission and (v) cause the Exchange Offer to comply with all applicable federal and state securities laws. The Exchange Offer being made hereby, if commenced and consummated within the time periods described in this paragraph, will satisfy those requirements under the Registration Rights Agreement. Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, all Old Debentures validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date will be accepted for exchange. New Debentures of the same class will be issued in exchange for an equal principal amount of outstanding Old Debentures accepted in the Exchange Offer. Old Debentures may be tendered only in integral multiples of $1,000 of principal amount at maturity. This Prospectus, together with the Letter of Transmittal, is being sent to all registered holders as of _______ __, 1997. The Exchange Offer is not conditioned upon any minimum principal amount of Old Debentures being tendered in exchange. However, the obligation to accept Old Debentures for exchange pursuant to the Exchange Offer is subject to certain conditions as set forth herein under "--Conditions." Old Debentures shall be deemed to have been accepted as validly tendered when, as and if the Trustee has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders of Old Debentures for the purposes of receiving the New Debentures and delivering New Debentures to such holders. Based on interpretations by the staff of the Commission, as set forth in no-action letters issued to third parties, including the Exchange Offer No-Action Letters, the Issuer believes that the New Debentures issued pursuant to the Exchange Offer may be offered for resale, resold or otherwise transferred by each holder thereof (other than a broker-dealer who acquires such New Debentures directly from the Issuer for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act and other than any holder that is an "affiliate" (as defined in Rule 405 under the Securities Act) of the Issuer without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Debentures are acquired in the ordinary course of such holder's business and such holder is not engaged in, and does not intend to engage in, a distribution of such New Debentures and has no arrangement with any person to participate in a distribution of such New Debentures. By tendering the Old Debentures in exchange for New Debentures, each holder, other than a broker-dealer, will represent to the Issuer that: (i) it is not an affiliate (as defined in Rule 405 under the Securities Act) of the Issuer; (ii) it is not a broker-dealer tendering Old Debentures acquired for its own account directly from the Issuer; (iii) any New Debentures to be received by it will be acquired in the ordinary course of its business; and (iv) it is not engaged in, and does not intend to engage in, a distribution of such New Debentures and has no arrangement or understanding to participate in a distribution of the New Debentures. If a holder of Old Debentures is engaged in or intends to engage in a distribution of the New Debentures or has any arrangement or understanding with respect to the distribution of the New Debentures to be acquired pursuant to the 67 Exchange Offer, such holder may not rely on the applicable interpretations of the staff of the Commission and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. Each Participating Broker-Dealer that receives New Debentures for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Debentures. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of New Debentures received in exchange for Old Debentures where such Old Debentures were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities. The Issuer has agreed that it will make this Prospectus available to any Participating Broker-Dealer for a period of time not to exceed one year after the date on which the Exchange Offer is consummated for use in connection with any such resale. See "Plan of Distribution." In the event that (i) any changes in law or the applicable interpretations of the staff of the Commission do not permit the Issuer to effect the Exchange Offer, or (ii) if any holder of Old Debentures shall notify the Issuer within 20 business days following the consummation of the Exchange Offer that (A) such holder was prohibited by law or Commission policy from participating in the Exchange Offer or (B) such holder may not resell the New Debentures acquired by it in the Exchange Offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such holder or (C) such holder is a broker-dealer and holds Old Debentures acquired directly from the Issuer or one of its affiliates, then the Issuer shall (x) cause to be filed a shelf registration statement pursuant to Rule 415 under the Act (the "Shelf Registration Statement") on or prior to 30 days after the date on which the Issuer determines that it is not required to file the Exchange Offer Registration Statement pursuant to clause (i) above or 60 days after the date on which the Issuer receives the notice specified in clause (ii) above and shall (y) use its best efforts to cause such Shelf Registration Statement to become effective within 135 days after the date on which the Issuer becomes obligated to file such Shelf Registration Statement. If, after the Issuer has filed an Exchange Offer Registration Statement, the Issuer is required to file and make effective a Shelf Registration Statement solely because the Exchange Offer shall not be permitted under applicable federal law, then the filing of the Exchange Offer Registration Statement shall be deemed to satisfy the requirements of clause (x) above. Such an event shall have no effect on the requirements of clause (y) above. The Issuer shall use its best efforts to keep the Shelf Registration Statement continuously effective, supplemented and amended to the extent necessary to ensure that it is available for sales of Transfer Restricted Securities (as defined below) by the holders thereof for a period of at least two years following the date on which such Shelf Registration Statement first becomes effective under the Securities Act. The term "Transfer Restricted Securities" means each Debenture, until the earliest to occur of (a) the date on which such Debenture is exchanged in the Exchange Offer and entitled to be resold to the public by the holder thereof without complying with the prospectus delivery requirements of the Act, (b) the date on which such Debenture has been disposed of in accordance with a Shelf Registration Statement, (c) the date on which such Debenture is disposed of by a broker-dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including delivery of the prospectus contained therein) or (d) the date on which such Debenture is distributed to the public pursuant to Rule 144 under the Act. If (i) the Exchange Offer Registration Statement or the Shelf Registration Statement is not filed with the Commission on or prior to the date specified in the Registration Rights Agreement, (ii) any such Registration Statement has not been declared effective by the Commission on or prior to the date specified for such effectiveness in the Registration Rights Agreement, (iii) the Exchange Offer has not been consummated within 180 days after the Closing Date or (iv) any Registration Statement required by the Registration Rights Agreement is filed and declared effective but shall thereafter cease to be effective or fail to be usable for its intended purpose without being succeeded immediately by a post-effective amendment to such Registration Statement that cures such failure and that is itself declared effective immediately (each such event referred to in clauses (i) through (iv), a "Registration Default"), then the Issuer has agreed to pay liquidated damages to each holder of Transfer Restricted Securities. With respect to the first 90-day period immediately following the occurrence of such Registration Default the liquidated damages shall equal $.05 per week per $1,000 principal amount of Transfer Restricted Securities held by 68 such holder for each week or portion thereof that the Registration Default continues. The amount of the liquidated damages shall increase by an additional $.05 per week per $1,000 in principal amount of Transfer Restricted Securities with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of liquidated damages of $.25 per week per $1,000 principal amount of Transfer Restricted Securities. Notwithstanding anything to the contrary set forth herein, (1) upon filing of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of (i) above, (2) upon the effectiveness of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of (ii) above, (3) upon consummation of the Exchange Offer, in the case of (iii) above, or (4) upon the filing of a post-effective amendment to the Registration Statement or an additional Registration Statement that causes the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement) to again be declared effective or made usable in the case of (iv) above, the liquidated damages payable with respect to the Transfer Restricted Securities a result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease. All accrued liquidated damages shall be paid to the holder of the global debenture representing the Old Debentures by wire transfer of immediately available funds or by federal funds check and to holders of certificated securities by mailing checks to their registered addresses on each April 15 and October 15. All obligations of the Issuer set forth in the preceding paragraph that are outstanding with respect to any Transfer Restricted Security at the time such security ceases to be a Transfer Restricted Security shall survive until such time as all such obligations with respect to such security shall have been satisfied in full. Upon consummation of the Exchange Offer, subject to certain exceptions, holders of Old Debentures who do not exchange their Old Debentures for New Debentures in the Exchange Offer will no longer be entitled to registration rights and will not be able to offer or sell their Old Debentures, unless such Old Debentures are subsequently registered under the Securities Act (which, subject to certain limited exceptions, the Issuer will have no obligation to do), except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. See "Risk Factors--Risk Factors Relating to the Debentures--Consequences of Failure to Exchange." Expiration Date; Extensions; Amendments; Termination The term "Expiration Date" shall mean _________, 1997 (30 calendar days following the commencement of the Exchange Offer), unless the Exchange Offer is extended, if and as required by applicable law, in which case the term "Expiration Date" shall mean the latest date to which the Exchange Offer is extended. In order to extend the Expiration Date, the Issuer will notify the Exchange Agent of any extension by oral or written notice and will notify the holders of the Old Debentures by means of a press release or other public announcement prior to 9:00 A.M., New York City time, on the next business day after the previously scheduled Expiration Date. The Issuer reserves the right (i) to delay acceptance of any Old Debentures, to extend the Exchange Offer or to terminate the Exchange Offer and not permit acceptance of Old Debentures not previously accepted if any of the conditions set forth herein under "--Conditions" shall have occurred and shall not have been waived by the Issuer, by giving oral or written notice of such delay, extension or termination to the Exchange Agent, or (ii) to amend the terms of the Exchange Offer in any manner deemed by it to be advantageous to the holders of the Old Debentures. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the Exchange Agent. If the Exchange Offer is amended in a manner determined by the Issuer to constitute a material change, the Issuer will promptly disclose such amendment in a manner reasonably calculated to inform the holders of the Old Debentures of such amendment. 69 Yield Interest on the New Debentures The New Debentures will accrete at a rate of 13 1/8%, compounded semi-annually, to an aggregate principal amount of $142.0 million by October 15, 2002. Cash interest will not accrue on the New Debentures prior to October 15, 2002. Commencing October 15, 2002, cash interest on the New Debentures will accrue and be payable, at a rate of 13 1/8% per annum, semi-annually in arrears on each April 15 and October 15. Procedures for Tendering To tender in the Exchange Offer, a holder must complete, sign and date the Letter of Transmittal, have the signatures thereon guaranteed if required by the Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal, together with any other required documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. In addition, either (i) certificates for such Old Debentures must be received by the Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old Debentures, if such procedure is available, into the Exchange Agent's account at DTC (the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date or (iii) the holder must comply with the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF OLD DEBENTURES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS OF THE DEBENTURES. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD DEBENTURES SHOULD BE SENT TO THE ISSUER. Delivery of all documents must be made to the Exchange Agent at its address set forth below. Holders of Debentures may also request their respective brokers, dealers, commercial banks, trust companies or nominees to effect such tender for such holders. The tender by a holder of Old Debentures will constitute an agreement between such holder and the Issuer in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. Only a holder of Old Debentures may tender such Old Debentures in the Exchange Offer. The term "holder" with respect to the Exchange Offer means any person in whose name Old Debentures are registered on the books of the Issuer or any other person who has obtained a properly completed bond power from the registered holder. Any beneficial owner whose Old Debentures are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder promptly and instruct such registered holder to tender on his behalf. If such beneficial owner wishes to tender on his own behalf, such beneficial owner must, prior to completing and executing the Letter of Transmittal and delivering his Old Debentures, either make appropriate arrangements to register ownership of the Old Debentures in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by any member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor" institution within the meaning of Rule 17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the Old Debentures tendered pursuant thereto are tendered (i) by a registered holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. If the Letter of Transmittal is signed by a person other than the registered holder of any Old Debentures listed therein, such Old Debentures must be endorsed or accompanied by bond powers and a proxy which authorizes 70 such person to tender the Old Debentures on behalf of the registered holder, in each case as the name of the registered holder or holders appears on the Old Debentures. If the Letter of Transmittal or any Old Debentures or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Issuer, evidence satisfactory to the Issuer of their authority to so act must be submitted with the Letter of Transmittal. All questions as to the validity, form, eligibility (including time of receipt) and withdrawal of the tendered Old Debentures will be determined by the Issuer in its sole discretion, which determination will be final and binding. The Issuer reserves the absolute right to reject any and all Old Debentures not properly tendered or any Old Debentures which, if accepted, would, in the opinion of counsel for the Issuer, be unlawful. The Issuer also reserves the absolute right to waive any irregularities or conditions of tender as to particular Old Debentures. The Issuer's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Debentures must be cured within such time as the Issuer shall determine. Neither the Issuer, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Old Debentures, nor shall any of them incur any liability for failure to give such notification. Tenders of Old Debentures will not be deemed to have been made until such irregularities have been cured or waived. Any Old Debentures received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned without cost to such holder by the Exchange Agent to the tendering holders of Old Debentures, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. In addition, the Issuer reserves the right in its sole discretion, subject to the provisions of the Indenture, to (i) purchase or make offers for any Old Debentures that remain outstanding subsequent to the Expiration Date or, as set forth under "--Conditions", (ii) to terminate the Exchange Offer in accordance with the terms of the Registration Rights Agreement and (iii) to the extent permitted by applicable law, purchase Old Debentures in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers could differ from the terms of the Exchange Offer. Acceptance of Old Debentures for Exchange; Delivery of New Debentures Upon satisfaction or waiver of all of the conditions to the Exchange Offer, all Old Debentures properly tendered will be accepted, promptly after the Expiration Date, and the New Debentures will be issued promptly after acceptance of the Old Debentures. See "-- Conditions" below. For purposes of the Exchange Offer, Old Debentures shall be deemed to have been accepted as validly tendered for exchange when, as and if the Issuer has given oral or written notice thereof to the Exchange Agent. In all cases, issuance of New Debentures for Old Debentures that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of certificates for such Old Debentures or a timely Book-Entry Confirmation of such Old Debentures into the Exchange Agent's account at the Book-Entry Transfer Facility, a properly completed and duly executed Letter of Transmittal and all other required documents. If any tendered Old Debentures are not accepted for any reason set forth in the terms and conditions of the Exchange Offer or if Old Debentures are submitted for a greater principal amount than the holder desires to exchange, such unaccepted or nonexchanged Old Debentures will be returned without expense to the tendering holder thereof (or, in the case of Old Debentures tendered by book-entry transfer procedures described below, such nonexchanged Old Debentures will be credited to an account maintained with such Book-Entry Transfer Facility) as promptly as practicable after the expiration or termination of the Exchange Offer. 71 Book-Entry Transfer The Exchange Agent will make a request to establish an account with respect to the Old Debentures at the Book-Entry Transfer Facility for purposes of the Exchange Offer within two business days after the date of this Prospectus. Any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of Old Debentures by causing the Book-Entry Transfer Facility to transfer such Old Debentures into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for transfer. However, although delivery of Old Debentures may be effected through book-entry transfer at the Book-Entry Transfer Facility, the Letter of Transmittal with any required signature guarantees and any other required documents must, in any case, be transmitted to and received by the Exchange Agent at one of the addresses set forth below under "--Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery procedures described below must be complied with. Guaranteed Delivery Procedures If a registered holder of the Old Debentures desires to tender such Old Debentures, and the Old Debentures are not immediately available, or time will not permit such holder's Old Debentures or other required documents to reach the Exchange Agent before the Expiration Date, or the procedures for book-entry transfer cannot be completed on a timely basis, a tender may be effected if (i) the tender is made through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Letter of Transmittal and Notice of Guaranteed Delivery, substantially in the form provided by the Issuer (by mail or hand delivery), setting forth the name and address of the holder of Old Debentures and the amount of Old Debentures tendered, stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered Old Debentures, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent and (iii) the certificates for all physically tendered Old Debentures, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and all other documents required by the Letter of Transmittal are received by the Exchange Agent within three NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. Withdrawal of Tenders Tenders of Old Debentures may be withdrawn at any time prior to 5:00 p.m., New York City time on the Expiration Date. For a withdrawal to be effective, a written notice of withdrawal must be received by the Exchange Agent prior to 5:00 p.m., New York City time on the Expiration Date at one of the addresses set forth below under "--Exchange Agent." Any such notice of withdrawal must specify the name of the person having tendered the Old Debentures to be withdrawn, identify the Old Debentures to be withdrawn (including the principal amount of such Old Debentures) and (where certificates for Old Debentures have been transmitted) specify the name in which such Old Debentures are registered, if different from that of the withdrawing holder. If certificates for Old Debentures have been delivered or otherwise identified to the Exchange Agent, then, prior to the release of such certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution unless such holder is an Eligible Institution. If Old Debentures have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Old Debentures and otherwise comply with the procedures of such facility. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Issuer, whose determination shall be final and binding on all parties. Any Old Debentures so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Debentures which have been tendered for exchange but which are not exchanged for any reason will be 72 returned to the holder thereof without cost to such holder (or, in the case of Old Debentures tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described above, such Old Debentures will be credited to an account maintained with such Book-Entry Transfer Facility for the Old Debentures) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Debentures may be retendered by following one of the procedures described under "--Procedures for Tendering" and "--Book-Entry Transfer" above at any time on or prior to the Expiration Date. Conditions Notwithstanding any other term of the Exchange Offer, Old Debentures will not be required to be accepted for exchange, nor will New Debentures be issued in exchange for any Old Debentures, and the Issuer may terminate or amend the Exchange Offer as provided herein before the acceptance of such Old Debentures, if because of any change in law, or applicable interpretations thereof by the Commission, the Issuer determines that they are not permitted to effect the Exchange Offer. The Issuer has no obligation to, and will not knowingly, permit acceptance of tenders of Old Debentures from affiliates (within the meaning of Rule 405 under the Securities Act) of the Issuer or from any other holder or holders who are not eligible to participate in the Exchange Offer under applicable law or interpretations thereof by the Commission, or if the New Debentures to be received by such holder or holders of Old Debentures in the Exchange Offer, upon receipt, will not be tradable by such holder without restriction under the Securities Act and the Exchange Act and without material restrictions under the "blue sky" or securities laws of substantially all of the states of the United States. Exchange Agent State Street Bank & Trust Company has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance and requests for additional copies of this Prospectus or of the Letter of Transmittal should be directed to the Exchange Agent addressed as follows: By Mail: By Overnight Mail or Courier: P.O. Box 778 Two International Place Boston, Massachusetts 02102 Boston, Massachusetts 02102 Attention: Corporate Trust Department Attention: Corporate Trust Department Kellie Mullen Kellie Mullen By Hand in New York to 5:00 p.m. By Hand in Boston to 5:00 p.m.: (as drop agent): Two International Place 61 Broadway Fourth Floor 15th Floor Corporation Trust Corporate Trust Window Boston, Massachusetts 02110 New York, New York 10006 For information call: (617) 664-5587 Fees and Expenses The expenses of soliciting tenders pursuant to the Exchange Offer will be borne by the Issuer. The principal solicitation for tenders pursuant to the Exchange Offer is being made by mail; however, additional solicitations may be made by telegraph, telephone, telecopy or in person by officers and regular employees of the Company. The Issuer will not make any payments to brokers, dealers or other persons soliciting acceptances of the Exchange Offer. The Issuer, however, will pay the Exchange Agent reasonable and customary fees for its services 73 and will reimburse the Exchange Agent for its reasonable out-of-pocket expenses in connection therewith. The Issuer may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of the Prospectus and related documents to the beneficial owners of the Old Debentures, and in handling or forwarding tenders for exchange. The expenses to be incurred in connection with the Exchange Offer will be paid by the Issuer, including fees and expenses of the Exchange Agent and Trustee and accounting, legal, printing and related fees and expenses. The Issuer will pay all transfer taxes, if any, applicable to the exchange of Old Debentures pursuant to the Exchange Offer. If, however, certificates representing New Debentures or Old Debentures for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Old Debentures tendered, or if tendered Old Debentures are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Old Debentures pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. 74 DESCRIPTION OF THE NEW DEBENTURES General The Old Debentures were issued, and the New Debentures will be, issued pursuant to the Indenture which is dated as of October 17, 1997 and is between the Company and State Street Bank and Trust Company, as trustee (the "Trustee"). The terms of the New Debentures will include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The New Debentures will be subject to all such terms, and prospective holders of New Debentures are referred to the Indenture and the Trust Indenture Act for a statement thereof. The following summary of the material provisions of the Indenture does not purport to be complete and is qualified in its entirety by reference to the Indenture, including the definitions therein of certain terms used below. Copies of the proposed form of Indenture and Registration Rights Agreement are available as set forth below under "--Additional Information." The definitions of certain terms used in the following summary are set forth below under "--Certain Definitions." The New Debentures will be general unsecured obligations of the Issuer and will be pari passu in right of payment to all current and future unsubordinated Indebtedness of the Issuer and senior in right of payment to all subordinated Indebtedness of the Issuer. The operations of the Issuer are conducted entirely through its Subsidiaries and, therefore, the Issuer is dependent in part upon the cash flow of its Subsidiaries to meet its obligations, including its obligations under the New Debentures. See "Risk Factors--Limitation on Access to Cash Flow of Subsidiaries; Holding Company Structure." The New Credit Facility and the Operating Corp Senior Subordinated Notes restrict Operating Corp. from paying any dividends or making any other distributions to the Issuer. The ability of Operating Corp to comply with the conditions in the Operating Corp Senior Subordinated Notes may be affected by certain events that are beyond the Issuer's control. The New Debentures will be effectively subordinated to all Indebtedness and other liabilities (including, without limitation, to Operating Corp's obligations under the New Credit Facility and the Operating Corp Senior Subordinated Notes). Any right of the Issuer to receive assets of any of its Subsidiaries upon such Subsidiary's liquidation or reorganization (and the consequent right of holders of the Operating Corp Senior Subordinated Notes to participate in those assets) will be effectively subordinated to the claims of that Subsidiary's creditors except to the extent that the Issuer itself is recognized as a creditor of such Subsidiary, in which case the claims of the Issuer would still be subordinate to the claims of such creditors who hold security in the assets of such Subsidiary and to the claims of such creditors who hold Indebtedness of such Subsidiary senior to that held by the Issuer. As of November 7, 1997, the Issuer had Indebtedness of $75.3 million (all of which was attributable to the Old Debentures) and the Issuer's Subsidiaries had $508.3 million of outstanding liabilities, including Indebtedness under the Operating Corp Senior Subordinated Notes and the Bank Facilities and including trade payables and other accrued liabilities. The Indenture will permit the incurrence of certain additional Indebtedness of the Issuer and the Issuer's Subsidiaries in the future. See "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." As of the Issue Date, all of the Issuer's subsidiaries other than any Receivables Subsidiary were Restricted Subsidiaries. However, under certain circumstances, the Issuer will be able to designate current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the restrictive covenants set forth in the Indenture. Principal, Maturity and Interest New Debentures in an aggregate principal amount at maturity of up to $142.0 million will be issued in the Exchange Offer. The New Debentures will mature on October 15, 2008. The New Debentures will be issued at a substantial discount from their principal amount at maturity. Until October 15, 2002, no interest will accrue on the New Debentures, but the Accreted Value will increase (representing amortization of original issue discount) between the date of original issuance and October 15, 2002, on a semi-annual bond equivalent basis using a 360-day year comprised of twelve 30-day months, such that the Accreted Value shall be equal to the full principal amount at 75 maturity of the New Debentures on October 15, 2002. Beginning on October 15, 2002, interest on the New Debentures will accrue at the rate of 13-1/8% per annum and will be payable semi-annually in arrears on April 15 and October 15, commencing on April 15, 2003, to holders of record on the immediately preceding April 1 and October 1, respectively. Interest on the New Debentures will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from October 15, 2002. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal, premium, if any, and interest and Liquidated Damages on the New Debentures will be payable at the office or agency (the "Paying Agent") of the Issuer maintained for such purpose within the City and State of New York or, at the option of the Issuer, payment of principal, premium, interest, and Liquidated Damages may be made by check mailed to the holders of the New Debentures at their respective addresses set forth in the register of holders of Debentures; provided that all payments of principal, premium, interest and Liquidated Damages with respect to New Debentures represented by one or more permanent global debentures ("Global Debentures") will be required to be made by wire transfer of immediately available funds to the accounts of DTC or any successor thereto. Until otherwise designated by the Issuer, the Issuer's office or agency in New York will be the office of the Trustee maintained for such purpose. The New Debentures will be issued in denominations of $1,000 and integral multiples thereof. Optional Redemption Except as described below, the New Debentures will not be redeemable at the Issuer's option prior to October 15, 2002. Thereafter, the New Debentures will be subject to redemption at any time at the option of the Issuer, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on October 15 of the years indicated below: Year Percentage ---- ---------- 2002 ........ 106.563 2003 ........ 104.375 2004 ........ 102.188 2005 and thereafter ... 100.000 Notwithstanding the foregoing, at any time on or prior to October 15 , 2000, the Issuer may (but shall not have the obligation to) redeem, on one or more occasions, up to an aggregate of 35% of the principal amount of New Debentures originally issued at a redemption price equal to 113.125% of the Accreted Value thereof, plus Liquidated Damages thereon, if any, to the redemption date, with the net cash proceeds of one or more Equity Offerings; provided that at least 65% of the aggregate principal amount at maturity of the New Debentures originally issued remain outstanding immediately after the occurrence of such redemption; and provided further, that such redemption shall occur within 90 days of the date of the closing of such Equity Offering. Mandatory Redemption Except as set forth under "--Repurchase at the Option of Holders," the Issuer is not required to make mandatory redemption or sinking fund payments with respect to the New Debentures. Repurchase at the Option of Holders Change of Control Upon the occurrence of a Change of Control, each holder of New Debentures will have the right to require the Issuer to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's New Debentures pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 76 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase or, in the case of repurchases of New Debentures prior to October 15, 2002 at a purchase price equal to 101% of the Accreted Value thereof as of the date of repurchase (the "Change of Control Payment"). Within 65 days following any Change of Control, the Issuer will mail a notice to each holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase New Debentures on the date specified in such notice, which date shall be no earlier than 30 days (or such shorter time period as may be permitted under applicable law, rules and regulations) and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures required by the Indenture and described in such notice. The Issuer will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the New Debentures as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the Indenture relating to such Change of Control Offer, the Issuer will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in the Indenture by virtue thereof. On the Change of Control Payment Date, the Issuer will, to the extent lawful, (1) accept for payment all New Debentures or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all New Debentures or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the New Debentures so accepted together with an officers' certificate stating the aggregate principal amount of New Debentures or portions thereof being purchased by the Issuer. The Paying Agent will promptly mail to each holder of New Debentures so tendered the Change of Control Payment for such New Debentures, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each holder a new New Debenture equal in principal amount to any unpurchased portion of the New Debentures surrendered, if any; provided that each such new New Debenture will be in a principal amount of $1,000 or an integral multiple thereof. The Issuer will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The Change of Control provisions described above will be applicable whether or not any other provisions of the Indenture are applicable. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the holders of the New Debentures to require that the Issuer repurchase or redeem the New Debentures in the event of a takeover, recapitalization or similar transaction. The New Credit Facility and the Operating Corp Senior Subordinated Notes restrict Operating Corp from paying any dividends or making any other distributions to the Issuer. If the Issuer is unable to obtain dividends from Operating Corp sufficient to permit the repurchase of the New Debentures or does not refinance such Indebtedness, the Issuer will likely not have the financial resources to purchase New Debentures. In any event, there can be no assurance that the Issuer's Subsidiaries will have the resources available to pay any such dividend or make any such distribution. Prior to complying with the provisions of the preceding paragraphs, but in any event within 90 days following a Change of Control, the Issuer will either repay all outstanding Indebtedness of its Subsidiaries or obtain the requisite consents, if any, under the New Credit Facility and the Operating Corp Senior Subordinated Notes to permit the repurchase of the New Debentures required by this covenant. The Issuer will not be required to purchase any New Debentures until it has complied with the preceding sentence, but the Issuer's failure to make a Change of Control Offer when required or to purchase tendered New Debentures when tendered would constitute an Event of Default under the Indenture. See "Risk Factors--Substantial Leverage; Liquidity; Stockholders' Deficit" and "--Limitation on Access to Cash Flow of Subsidiaries; Holding Company Structure." The Issuer will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Issuer and purchases all New Debentures validly tendered and not withdrawn under such Change of Control Offer. 77 The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Issuer and its Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase 'substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of New Debentures to require the Issuer to repurchase such New Debentures as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Issuer and its Subsidiaries taken as a whole to another Person or group may be uncertain. Asset Sales The Indenture provides that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Issuer (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an officers' certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 75% of the consideration therefor received by the Issuer or such Restricted Subsidiary is in the form of (A) cash or Cash Equivalents or (B) Qualified Proceeds; provided that the aggregate fair market value of Qualified Proceeds (other than cash or Cash Equivalents), which may be received in consideration for asset sales pursuant to this clause (ii) (B) shall not exceed $7.5 million since the Issue Date; provided further that the amount of (x) any liabilities (as shown on the Issuer's or such Restricted Subsidiary's most recent balance sheet), of the Issuer or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the New Debentures) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Issuer or such Restricted Subsidiary from further liability and (y) any securities, notes or other obligations received by the Issuer or any such Restricted Subsidiary from such transferee that are converted by the Issuer or such Restricted Subsidiary into cash (to extent of the cash received) within 180 days following the closing of such Asset Sale, shall be deemed to be cash for purposes of this provision. Within 395 days after the receipt of any Net Proceeds from an Asset Sale, the Issuer or its Restricted Subsidiaries may apply such Net Proceeds, at its option, (a) to repay Indebtedness of a Restricted Subsidiary of the Issuer, or (b) to the investment in, or the making of a capital expenditure or the acquisition of other property or assets in each case used or useable in a Permitted Business, or Capital Stock of any Person primarily engaged in a Permitted Business if, as a result of the acquisition by the Issuer or any Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary, or (c) as combination of the uses described in clauses (a) and (b). Pending the final application of any such Net Proceeds, the Issuer or its Restricted Subsidiaries may temporarily reduce Indebtedness of a Restricted Subsidiary of the Issuer or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales, other than 20% of the net proceeds from any sale of all or substantially all of the Capital Stock or assets of the Company's Popular Club Plan business or Clifford & Wills business (as each such business is constituted on the Issue Date) which have been utilized to repay, redeem, repurchase or otherwise retire outstanding New Debentures, that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million, the Issuer will be required to make an offer to all holders of New Debentures and, to the extent required by the terms of any Pari Passu Indebtedness to all holders of such Pari Passu Indebtedness (an "Asset Sale Offer"), to purchase the maximum principal amount of New Debentures and any such Pari Passu Indebtedness that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (or, in the case of repurchases of New Debentures prior to October 15, 2002, at a purchase price equal to 100% of the Accreted Value thereof plus Liquidated Damages, as of the date of repurchase), in accordance with the procedures set forth in the Indenture or such Pari Passu Indebtedness, as applicable. To the extent that the aggregate principal amount at maturity of New Debentures (or Accreted Value, as the case may be) and any such Pari Passu Indebtedness tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Issuer or its Restricted Subsidiaries may use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount at maturity (or Accreted Value, as the case may be) of New Debentures and any such 78 Pari Passu Indebtedness surrendered by holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the New Debentures to be purchased on a pro rata basis. Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. The New Credit Facility and the Senior Subordinated Notes restrict J. Crew Corp. from paying any dividends or making any other distributions to the Issuer. If the Issuer is unable to obtain dividends from J. Crew Corp. sufficient to permit the repurchase of the New Debentures or does not refinance such Indebtedness, the Issuer will likely not have the financial resources to purchase New Debentures. In any event, there can be no assurance that the Issuer's Subsidiaries will have the resources available to pay any such dividend or make any such distribution. The Issuer's failure to make an Asset Sale Offer when required or to purchase tendered New Debentures when tendered would constitute an Event of Default under the New Debenture Indenture. See "Risk Factors--Substantial Leverage; Liquidity; Stockholders' Deficit" and "--Limitation on Access to Cash Flow of Subsidiaries; Holding Company Structure." Selection and Notice If less than all of the New Debentures are to be redeemed or repurchased in an offer to purchase at any time, selection of New Debentures for redemption or repurchase will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the New Debentures are listed, or, if the New Debentures are not so listed, on a pro rata basis, by lot or by such other method as the Trustee deems fair and appropriate; provided that Notes to be redeemed with the proceeds of an Equity Offering shall be selected on a pro rata basis; provided further that no Notes of $1,000 or less shall be redeemed or repurchased in part. Notices of redemption may not be conditional. Notices of redemption or repurchase shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date or repurchase date to each holder of New Debentures to be redeemed or repurchased at its registered address. If any New Debenture is to be redeemed or repurchased in part only, the notice of redemption or repurchase that relates to such New Debenture shall state the portion of the principal amount thereof to be redeemed or repurchased. A new New Debenture in principal amount equal to the unredeemed or unrepurchased portion thereof will be issued in the name of the holder thereof upon cancellation of the original New Debenture. On and after the redemption or repurchase date, interest and Liquidated Damages will cease to accrue on New Debentures or portions of them called for redemption or repurchase. Certain Covenants Restricted Payments The Indenture provides that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Issuer's or any of its Restricted Subsidiaries' Equity Interests (including, without limitation, any such dividend, distribution or other payment made as a payment in connection with any merger or consolidation involving the Issuer), other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Issuer or dividends or distributions payable to the Issuer or any Wholly Owned Subsidiary of the Issuer; (ii) purchase, redeem or otherwise acquire or retire for value (including, without limitation, any such purchase, redemption or other acquisition or retirement for value made as a payment in connection with any merger or consolidation involving the Issuer) any Equity Interests of the Issuer or any Restricted Subsidiary (other than any such Equity Interests owned by the Issuer or any Restricted Subsidiary of the Issuer); (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the New Debentures, except a payment of interest or a payment of principal at Stated Maturity; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and immediately after giving effect to such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing; and 79 (b) the Issuer would, at the time of such Restricted Payment and after giving pro forma effect thereto, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under caption "--Incurrence of Indebtedness and Issuance of Preferred Stock;" and (c) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Issuer and its Restricted Subsidiaries after the date of the Indenture (excluding Restricted Payments permitted by clauses (ii), (iii), (iv), and (vi) of the next succeeding paragraph), is less than the sum (without duplication) of (i) 50% of the Consolidated Net Income of the Issuer for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of the Indenture to the end of the Issuer's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate Qualified Proceeds received by the Issuer from contributions to the Issuer's capital or the issue or sale subsequent to the date of the Indenture of Equity Interests of the Issuer (other than Disqualified Stock) or of Disqualified Stock or debt securities of the Issuer that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Subsidiary of the Issuer and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock), plus (iii) to the extent that any Restricted Investment that was made after the date of the Indenture is sold for Qualified Proceeds or otherwise liquidated or repaid (including, without limitation, by way of a dividend or other distribution, a repayment of a loan or advance or other transfer of assets) for in whole or in part, the lesser of (A) the Qualified Proceeds with respect to such Restricted Investment, (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment, plus (iv) upon the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, the lesser of (x) the fair market value of such Subsidiary or (y) the aggregate amount of all Investments made in such Subsidiary subsequent to the Issue Date by the Issuer and its Restricted Subsidiaries, plus (v) $15.0 million. The foregoing provisions will not prohibit (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Indenture; (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness or Equity Interests of the Issuer in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Restricted Subsidiary of the Issuer) of, other Equity Interests of the Issuer (other than any Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition shall be excluded from clause (c) (ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase, retirement or other acquisition of subordinated Indebtedness in exchange for, or with the net cash proceeds from, an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any dividend (or the making of a similar distribution or redemption) by a Restricted Subsidiary of the Issuer to the holders of its common Equity Interests on a pro rata basis; (v) so long as no Default or Event of Default shall have occurred and is continuing, the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Issuer, or any Restricted Subsidiary of the Issuer, held by any member of the Issuer's (or any of its Restricted Subsidiaries') management, employees or consultants pursuant to any management, employee or consultant equity subscription agreement or stock option agreement in effect as of the date of the Indenture; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed the sum of (A) $10.0 million and (B) the aggregate cash proceeds received by the Issuer from any reissuance of Equity Interests by the Issuer to members of management of the Issuer and its Restricted Subsidiaries (provided that the cash proceeds referred to in this clause (B) shall be excluded from clause (c)(ii) of the preceding paragraph); (vi) distributions made by the Issuer on the date of the Indenture, the proceeds of which are utilized solely to consummate the Recapitalization; and (vii) so long as no Default or Event of Default has occurred and is continuing, the declaration and payment of dividends to holders of any class or series of Disqualified Stock of the Issuer issued after the date of the Indenture in accordance with the covenant described below under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock." 80 The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default or an Event of Default. For purposes of making such determination, all outstanding Investments by the Issuer and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the greater of (i) the net book value of such Investments at the time of such designation and (ii) the fair market value of such Investments at the time of such designation. Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of (i) all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Issuer or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment and (ii) Qualified Proceeds (other than cash) shall be the fair market value on the date of receipt thereof by the Issuer of such Qualified Proceeds. The fair market value of any non-cash Restricted Payment and Qualified Proceeds shall be determined by the Board of Directors whose resolution with respect thereto shall be delivered to the Trustee, such determination to be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if such fair market value exceeds $10.0 million. Not later than the date of making any Restricted Payment, the Issuer shall deliver to the Trustee an officers' certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant "Restricted Payments" were computed, together with a copy of any fairness opinion or appraisal required by the Indenture. Incurrence of Indebtedness and Issuance of Preferred Stock The Indenture provides that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt) and that the Issuer will not issue any Disqualified Stock and will not permit any of its Restricted Subsidiaries to issue any shares of preferred stock; provided, however, that the Issuer or any of its Restricted Subsidiaries may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for the Issuer's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 1.75 to 1.0, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period. The Indenture also provides that the Issuer will not incur any Indebtedness that is contractually subordinated in right of payment to any other Indebtedness of the Issuer unless such Indebtedness is also contractually subordinated in right of payment to the New Debentures on substantially identical terms; provided, however, that no Indebtedness of the Issuer shall be deemed to be contractually subordinated in right of payment to any other Indebtedness of the Issuer solely by virtue of being unsecured. The provisions of the first paragraph of this covenant will not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (i) Indebtedness of the Issuer and its Restricted Subsidiaries under Credit Facilities; provided that the aggregate principal amount of all Indebtedness (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Issuer and its Restricted Subsidiaries thereunder) outstanding under all Credit Facilities after giving effect to such incurrence, including all Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (i), does not exceed an amount equal to $270.0 million less the aggregate principal of all principal payments thereunder 81 constituting permanent reductions of such Indebtedness pursuant to and in accordance with the covenant described under "--Repurchase at the Option of Holders--Asset Sales;" (ii) the incurrence by the Issuer of Indebtedness represented by the New Debentures and the incurrence by J. Crew Corp. and its Subsidiaries of Indebtedness represented by the Senior Subordinated Notes and any guarantee thereof; (iii) the incurrence by the Issuer or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvements of property used in the business of the Issuer or such Restricted Subsidiary, in an aggregate principal amount not to exceed $25.0 million at any time outstanding; (iv) other Indebtedness of the Issuer and its Restricted Subsidiaries outstanding on the Issue Date; (v) the incurrence by the Issuer or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) that was permitted by the Indenture to exist or be incurred; (vi) the incurrence of intercompany Indebtedness (A) between or among the Issuer and any Wholly Owned Restricted Subsidiaries of the Issuer or (B) by a Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary of the Issuer or a Wholly Owned Subsidiary; provided, however, that (i) if the Issuer is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the New Debentures and (ii)(A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Issuer or a Wholly Owned Restricted Subsidiary of the Issuer and (B) any sale or other transfer of any such Indebtedness to a Person that is not either the Issuer or a Wholly Owned Restricted Subsidiary of the Issuer shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Issuer or such Subsidiary, as the case may be; (vii) the incurrence by the Issuer or any of the Guarantors of Hedging Obligations that are incurred for the purpose of fixing or hedging (i) interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding or (ii) the value of foreign currencies purchased or received by the Issuer in the ordinary course of business; (viii) Indebtedness incurred in respect of workers' compensation claims, self-insurance obligations, performance, surety and similar bonds and completion guarantees provided by the Issuer or a Restricted Subsidiary in the ordinary course of business; (ix) Indebtedness arising from guarantees of Indebtedness of the Issuer or any Subsidiary or the agreements of the Issuer or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or Capital Stock of a Restricted Subsidiary, or other guarantees of Indebtedness incurred by any person acquiring all or any portion of such business, assets or Capital Stock of a Restricted Subsidiary for the purpose of financing such acquisition, provided that the maximum aggregate liability in respect of all such Indebtedness shall at no time exceed the gross proceeds actually received by the Issuer and its Restricted Subsidiaries in connection with such disposition; (x) Indebtedness of a Receivables Subsidiary that is not recourse to the Issuer or any other Restricted Subsidiary of the Issuer (other than Standard Securitization Undertakings) incurred in connection with a Qualified Receivables Transaction; 82 (xi) the guarantee by any Restricted Subsidiary of the Issuer of Indebtedness of any Restricted Subsidiary of the Issuer that was permitted to be incurred by another provision of this covenant; (xii) the incurrence by the Issuer or any of its Restricted Subsidiaries of Acquired Debt in an aggregate principal amount at any time outstanding not to exceed $20.0 million; (xiii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within five business days of incurrence; and (xiv) the incurrence by the Issuer or any Restricted Subsidiary of additional Indebtedness in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (xiv), not to exceed $30.0 million. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (xiv) above or is entitled to be incurred pursuant to the first paragraph of this covenant, the Issuer shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. Accrual of interest, the accretion of accreted value and the payment of interest in the form of additional Indebtedness will not be deemed to be an incurrence of Indebtedness for purposes of this covenant. Liens The Indenture provides that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien securing Indebtedness or trade payables on any asset now owned or hereafter acquired, or any income or profits therefrom or assign or convey any right to receive income therefrom for purposes of security, except Permitted Liens, unless (i) in the case of Liens securing Indebtedness that is expressly subordinate or junior in right of payment to the New Debentures, the New Debentures are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens, (with the same relative priority as such subordinate or junior Indebtedness shall have with respect to the New Debentures) and (ii) in all other cases, the New Debentures are secured by such Lien on an equal and ratable basis. Dividend and Other Payment Restrictions Affecting Subsidiaries The Indenture provides that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(A) pay dividends or make any other distributions to the Issuer or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (B) pay any Indebtedness owed to the Issuer or any of its Restricted Subsidiaries, (ii) make loans or advances to the Issuer or any of its Restricted Subsidiaries or (iii) transfer any of its properties or assets to the Issuer or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (A) the New Credit Facility and the Senior Subordinated Notes, as in effect as of the date of the Indenture, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are no more restrictive with respect to such dividend and other payment restrictions than those contained in the New Credit Facility or the Senior Subordinated Notes, as the case may be, as in effect on the date of the Indenture, (B) the Indenture and the Notes, (C) applicable law or any applicable rule, regulation or order, (D) any agreement or instrument governing Indebtedness or Capital Stock of a Person acquired by the Issuer or any of its Restricted Subsidiaries as in effect at the time of such 83 acquisition (except to the extent such agreement or instrument was created or entered into in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, (E) by reason of customary non-assignment provisions in leases, licenses, encumbrances, contracts or similar assets entered into or acquired in the ordinary course of business and consistent with past practices, (F) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iii) above on the property so acquired, (G) any Purchase Money Note, or other Indebtedness or contractual requirements incurred with respect to a Qualified Receivables Transaction relating to a Receivables Subsidiary, (H) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced and (I) contracts for the sale of assets containing customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary. Merger, Consolidation or Sale of Assets The Indenture provides that the Issuer may not consolidate or merge with or into (whether or not the Issuer is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another Person unless (i) the Issuer is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than the Issuer) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation or limited liability company organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the Person formed by or surviving any such consolidation or merger (if other than the Issuer) or the Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Issuer under the New Debentures and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately after such transaction no Default or Event of Default exists; and (iv) except in the case of a merger of the Issuer with or into a Wholly Owned Restricted Subsidiary of the Issuer (other than a Receivables Subsidiary), the Issuer or the entity or Person formed by or surviving any such consolidation or merger (if other than the Issuer), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock." For purposes of this covenant, the sale, lease, conveyance, assignment, transfer, or other disposition of all or substantially all of the properties and assets of one or more Subsidiaries of the Issuer, which properties and assets, if held by the Issuer instead of such Subsidiaries, would constitute all or substantially all of the properties and assets of the Issuer on a consolidated basis, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Issuer. The foregoing clause (iv) will not prohibit (a) a merger between the Issuer and a Wholly Owned Subsidiary of the Issuer created for the purpose of holding the Capital Stock of the Issuer, (b) a merger between the Issuer and a Wholly Owned Restricted Subsidiary of the Issuer or (c) a merger between the Issuer and an Affiliate incorporated solely for the purpose of reincorporating the Issuer in another State of the United States so long as, in the case of each of clause (a), (b) and (c), the amount of Indebtedness of the Issuer and its Restricted Subsidiaries is not increased thereby. Transactions with Affiliates The Indenture provides that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, make any payment to or Investment in, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Issuer or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the 84 Issuer or such Restricted Subsidiary with an unrelated Person and (ii) the Issuer delivers to the Trustee (A) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an officers' certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (B) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10.0 million, an opinion as to the fairness to the holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing; provided that (v) transactions with suppliers or other purchasers or sales of goods or services, in each case in the ordinary course of business (including, without limitation, pursuant to joint venture agreements) and otherwise in accordance with the terms of the Indenture which are fair to the Issuer, in the good faith determination of the Board of Directors of the Issuer or the senior management of the Issuer and are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party, (w) any employment agreements, stock option or other compensation agreements or plans (and the payment of amounts or the issuance of securities thereunder) and other reasonable fees, compensation, benefits and indemnities paid or entered into by the Issuer or any of its Restricted Subsidiaries in the ordinary course of business of the Issuer or such Restricted Subsidiary to or with the officers, directors or employees of the Issuer or its Restricted Subsidiaries, (x) transactions between or among the Issuer and/or its Restricted Subsidiaries, (y) sales or other transfers or dispositions of accounts receivable and other related assets customarily transferred in an asset securitization transaction involving accounts receivable to a Receivables Subsidiary in a Qualified Receivables Transaction, and acquisitions of Permitted Investments in connection with a Qualified Receivables Transaction and (z) Restricted Payments (other than Restricted Investments) that are permitted by the provisions of the Indenture described above under the caption "--Restricted Payments," in each case, shall not be deemed Affiliate Transactions. Business Activities The Issuer will not, and will not permit any Restricted Subsidiary to, engage in any business other than Permitted Businesses. Reports The Indenture provides that, whether or not required by the rules and regulations of the Commission, so long as any New Debentures are outstanding, the Issuer will furnish to the holders of New Debentures (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Issuer were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" that describes the financial condition and results of operations of the Issuer and its consolidated Subsidiaries and, with respect to the annual information only, a report thereon by the Issuer's certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K if the Issuer were required to file such reports, in each case within the time periods set forth in the Commission's rules and regulations. In addition, whether or not required by the rules and regulations of the Commission, at any time after the consummation of the Exchange Offer contemplated by the Registration Rights Agreement, the Issuer will file a copy of all such information and reports with the Commission for public availability within the time periods set forth in the Commission's rules and regulations (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, at all times that the Commission does not accept the filings provided for in the preceding sentence, the Issuer has agreed that, for so long as any New Debentures remain outstanding, they will furnish to the holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. 85 Events of Default and Remedies The Indenture provides that each of the following constitutes an Event of Default (each an "Event of Default"): (i) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the New Debentures; (ii) default in payment when due of the principal of or premium, if any, on the New Debentures; (iii) failure by the Issuer or any of its Restricted Subsidiaries for 30 days after notice by the Trustee or by the holders of at least 25% in principal amount of New Debentures then outstanding to comply with the provisions described under the captions "--Repurchase at the Option of Holders--Change of Control" or "--Asset Sales" or "--Certain Covenants--Restricted Payments" or "--Incurrence of Indebtedness and Issuance of Preferred Stock;" (iv) failure by the Issuer or any of its Restricted Subsidiaries for 60 days after notice by the Trustee or by the holders of at least 25% in principal amount of New Debentures then outstanding to comply with any of its other agreements in the Indenture or the New Debentures; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Issuer or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Issuer or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of such Indebtedness after giving effect to any grace period provided in such Indebtedness (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its stated maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $20 million or more; (vi) failure by the Issuer or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $20 million (net of any amounts with respect to which a reputable and creditworthy insurance company has acknowledged liability in writing), which judgments are not paid, discharged or stayed for a period of 60 days; and (vii) certain events of bankruptcy or insolvency with respect to the Issuer or any of its Significant Subsidiaries. If any Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the then outstanding New Debentures may declare all the New Debentures to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Issuer, all outstanding New Debentures will become due and payable without further action or notice. Upon any acceleration of maturity of the New Debentures, all principal of and accrued interest and Liquidated Damages, if any, on (if on or after October 15, 2002) or Accreted Value of and Liquidated Damages, if any, on (if prior to October 15, 2002) the New Debentures shall be due and payable immediately. Holders of the New Debentures may not enforce the Indenture or the New Debentures except as provided in the Indenture. Subject to certain limitations, holders of a majority in principal amount of the then outstanding New Debentures may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from holders of the New Debentures notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. In the event of a declaration of acceleration of the New Debentures because an Event of Default has occurred and is continuing as a result of the acceleration of any Indebtedness described in clause (v) of the preceding paragraph, the declaration of acceleration of the New Debentures shall be automatically annulled if the holders of any Indebtedness described in clause (v) of the preceding paragraph have rescinded the declaration of acceleration in respect of such Indebtedness within 30 days of the date of such declaration and if (a) the annulment of the acceleration of New Debentures would not conflict with any judgment or decree of a court of competent jurisdiction and (b) all existing Events of Default, except nonpayment of principal or interest on the New Debentures that became due solely because of the acceleration of the New Debentures, have been cured or waived. The holders of a majority in aggregate principal amount of the New Debentures then outstanding by notice to the Trustee may on behalf of the holders of all of the New Debentures waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the New Debentures. 86 The Issuer is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Issuer is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. No Personal Liability of Directors, Officers, Employees and Stockholders No director, officer, employee, incorporator or stockholder of the Issuer, as such, shall have any liability for any obligations of the Issuer under the New Debentures or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of New Debentures by accepting a New Debenture waives and releases all such liability. The waiver and release are part of the consideration for issuance of the New Debentures. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. Legal Defeasance and Covenant Defeasance The Issuer may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding New Debentures ("Legal Defeasance") except for (i) the rights of holders of outstanding New Debentures to receive payments in respect of the principal of, premium, if any, and interest and Liquidated Damages on such New Debentures when such payments are due from the trust referred to below, (ii) the Issuer's obligations with respect to the New Debentures concerning issuing temporary New Debentures, registration of New Debentures, mutilated, destroyed, lost or stolen New Debentures and the maintenance of an office or agency for payment and money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee, and the Issuer's obligations in connection therewith and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Issuer may, at its option and at any time, elect to have the obligations of the Issuer released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the New Debentures. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "--Events of Default and Remedies" will no longer constitute an Event of Default with respect to the New Debentures. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of the holders of the New Debentures, cash in U.S. dollars, non-callable government securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal amount at maturity of or Accreted Value (as applicable) of, premium, if any, and interest and Liquidated Damages on the outstanding New Debentures on the stated maturity or on the applicable redemption date, as the case may be, and the Issuer must specify whether the New Debentures are being defeased to maturity or to a particular redemption date; (ii) in the case of Legal Defeasance, the Issuer shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Issuer has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, subject to customary assumptions and exclusions, the holders of the outstanding New Debentures will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Issuer shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that, subject to customary assumptions and exclusions, the holders of the outstanding New Debentures will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the financing of amounts to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are 87 concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the Indenture) to which the Issuer or any of its Subsidiaries is a party or by which the Issuer or any of its Subsidiaries is bound; (vi) the Issuer must have delivered to the Trustee an opinion of counsel to the effect that, subject to customary assumptions and exclusions (which assumptions and exclusions shall not relate to the operation of Section 547 of the United States Bankruptcy Code or any analogous New York State law provision), after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) the Issuer must deliver to the Trustee an officers' certificate stating that the deposit was not made by the Issuer with the intent of preferring the holders of New Debentures over the other creditors of the Issuer with the intent of defeating, hindering, delaying or defrauding creditors of the Issuer or others; and (viii) the Issuer must deliver to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. Transfer and Exchange A holder may transfer or exchange New Debentures in accordance with the Indenture. The Registrar and the Trustee may require a holder, among other things, to furnish appropriate endorsements and transfer documents and the Issuer may require a holder to pay any taxes and fees required by law or permitted by the Indenture. The Issuer is not required to transfer or exchange any New Debentures selected for redemption. Also, the Issuer is not required to transfer or exchange any New Debentures for a period of 15 days before a selection of New Debentures to be redeemed. The registered holder of a New Debentures will be treated as the owner of it for all purposes. Amendment, Supplement and Waiver Except as provided in the next two succeeding paragraphs, the Indenture or the New Debentures may be amended or supplemented with the consent of the holders of at least a majority in principal amount at maturity of the New Debentures then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, New Debentures), and any existing default or compliance with any provision of the Indenture or the New Debentures may be waived with the consent of the holders of a majority in principal amount of the then outstanding New Debentures (including consents obtained in connection with a purchase of, or tender offer or exchange offer for, New Debentures). Without the consent of each holder affected, an amendment or waiver may not (with respect to any New Debentures held by a non-consenting holder): (i) reduce the principal amount of New Debentures whose holders must consent to an amendment, supplement or waiver, (ii) reduce the principal of or change the fixed maturity of any New Debentures or alter the provisions with respect to the redemption of the New Debentures (other than provisions relating to the covenants described above under the caption "--Repurchase at the Option of Holders") or amend or modify the calculation of the Accreted Value so as to reduce the amount of the Accreted Value of the New Debentures, (iii) reduce the rate of or change the time for payment of interest on any New Debenture, (iv) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the New Debentures (except a rescission of acceleration of the New Debentures by the holders of at least a majority in aggregate principal amount at maturity of the New Debentures and a waiver of the payment default that resulted from such acceleration), (v) make any New Debenture payable in money other than that stated in the New Debentures, (vi) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of holders of New Debentures to receive payments of principal of or premium, if any, or interest on the New Debentures, (vii) waive a redemption payment with respect to any New Debenture (other than a payment required by one of the covenants described above under the caption "--Repurchase at the Option of Holders"), or (viii) make any change in the foregoing amendment and waiver provisions. 88 Notwithstanding the foregoing, without the consent of any holder of New Debentures, the Issuer and the Trustee may amend or supplement the Indenture or the New Debentures to cure any ambiguity, defect or inconsistency, to provide for uncertificated New Debentures in addition to or in place of certificated New Debentures, to provide for the assumption of the Issuer's obligations to holders of New Debentures in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the holders of New Debentures or that does not adversely affect the legal rights under the Indenture of any such holder, to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. Concerning the Trustee The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Issuer, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign. The holders of a majority in principal amount at maturity of the then outstanding New Debentures will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default shall occur (which shall not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any holder of New Debentures, unless such holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. Book-Entry, Delivery and Form The Old Debentures were offered and sold to qualified institutional buyers in reliance on Rule 144A ("Rule 144A New Debentures"). New Debentures will be issued in registered, global form in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof. The Global Debentures will be deposited upon issuance with the Trustee as custodian for DTC in New York, New York, and registered in the name of DTC or its nominee, in each case for credit to an account of a direct or indirect participant in DTC as described below. Except as set forth below, the Global Debentures may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the Global Debentures may not be exchanged for New Debentures in certificated form except in the limited circumstances described below. See "--Exchange of Book-Entry Debentures for Certificated Debentures." In addition, transfer of beneficial interests in the Global Debentures will be subject to the applicable rules and procedures of DTC and its direct or indirect participants (including, if applicable, those of Euroclear and CEDEL), which may change from time to time. Initially, the Trustee will act as Paying Agent and Registrar with respect to the New Debentures. The New Debentures may be presented for registration of transfer and exchange at the offices of the Registrar. Depository Procedures DTC has advised the Issuer that DTC is a limited-purpose trust company created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance and settlement of transactions in those securities between Participants through electronic book-entry changes in accounts of its Participants. The Participants include securities brokers and dealers (including the Initial Purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship 89 with a Participant, either directly or indirectly (collectively, the "Indirect Participants"). Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Participants or the Indirect Participants. The ownership interests and transfer of ownership interests of each actual purchaser of each security held by or on behalf of DTC are recorded on the records of the Participants and Indirect Participants. DTC has also advised the Issuer that, pursuant to procedures established by it, (i) upon deposit of the Global Debentures, DTC will credit the accounts of Participants tendering Old Debentures with portions of the applicable Global Debentures and (ii) ownership of such interests in the Global Debentures will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interest in the Global Debentures). Investors in the Global Debentures may hold their interests therein directly through DTC, if they are participants in such system, or indirectly through organizations (including Euroclear and CEDEL) which are participants in such system. Euroclear or CEDEL will hold interests in the Global Debentures on behalf of their participants through customers' securities accounts in their respective names on the books of their respective depositaries, which are Morgan Guaranty Trust Company of New York, Brussels office, as operator of Euroclear, and Citibank, N.A., as operator of CEDEL. The depositaries, in turn, will hold such interests in the Global Debentures in customers' securities accounts in the depositaries' names on the books of DTC. All interests in a Global Debenture, including those held through Euroclear or CEDEL, may be subject to the procedures and requirements of DTC. Those interests held through Euroclear or CEDEL may also be subject to the procedures and requirements of such systems. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global Debenture to such persons will be limited to that extent. Because DTC can act only on behalf of Participants, which in turn act on behalf of Indirect Participants and certain banks, the ability of a person having beneficial interests in a Global Debenture to pledge such interests to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. For certain other restrictions on the transferability of the New Debentures, see "--Exchange of Book- Entry Debentures for Certificated Debentures" and "--Exchange of Certificated Debentures for Book-Entry Debentures." EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL DEBENTURES WILL NOT HAVE NEW DEBENTURES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF NEW DEBENTURES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE. Payments in respect of the principal of, premium, if any, interest and Liquidated Damages, if any, on a Global Debenture registered in the name of DTC or its nominee will be payable by the Trustee to DTC in its capacity as the registered holder under the Indenture. Under the terms of the Indenture, the Issuer and the Trustee will treat the persons in whose names the New Debentures, including the Global Debentures, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither the Issuer nor the Trustee has or will have any responsibility or liability for (i) any aspect of DTC's records or any Participant's or Indirect Participant's records relating to or payments made on account of beneficial ownership interest in the Global Debentures, or for maintaining, supervising or reviewing any of DTC's records or any Participant's or Indirect Participant's records relating to the beneficial ownership interests in the Global Debentures or (ii) any other matter relating to the actions and practices of DTC or any of its Participants or Indirect Participants. DTC has advised the Issuer that its current practice, upon receipt of any payment in respect of securities such as the New Debentures (including principal and interest), is to credit the accounts of the relevant Participants with the payment on the payment date, in amounts proportionate to their respective holdings in the principal amount of beneficial interest in the relevant security as shown on the records of DTC unless DTC has reason to believe it will not receive payment on such payment date. Payments by the Participants and the Indirect Participants to the beneficial owners of New Debentures will be governed by standing instructions and customary 90 practices and will be the responsibility of the Participants or the Indirect Participants and will not be the responsibility of DTC, the Trustee or the Issuer. Neither the Issuer nor the Trustee will be liable for any delay by DTC or any of its Participants in identifying the beneficial owners of the New Debentures, and the Issuer and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes. Except for trades involving only Euroclear and CEDEL participants, interests in the Global Debentures are expected to be eligible to trade in DTC's Same-Day Funds Settlement System and secondary market trading activity in such interests will therefore settle in immediately available funds, subject in all cases to the rules and procedures of DTC and its participants. See "--Same-Day Settlement and Payment." Transfers between Participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same-day funds, and transfers between participants in Euroclear and CEDEL will be effected in the ordinary way in accordance with their respective rules and operating procedures. Cross-market transfers between the Participants in DTC, on the one hand, and Euroclear or CEDEL participants, on the other hand, will be effected through DTC in accordance with DTC's rules on behalf of Euroclear or CEDEL, as the case may be, by its respective depositary; however, such cross-market transactions will require delivery of instructions to Euroclear or CEDEL, as the case may be, by the counterparty in such system in accordance with the rules and procedures and within the established deadlines (Brussels time) of such system. Euroclear or CEDEL, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving interests in the relevant Global Debentures in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear participants and CEDEL participants may not deliver instructions directly to the depositaries for Euroclear or CEDEL. Because of time zone differences, the securities account of a Euroclear or CEDEL participant purchasing an interest in Global Debentures from a Participant in DTC will be credited, and any such crediting will be reported to the relevant Euroclear or CEDEL participant, during the securities settlement processing day (which must be a business day for Euroclear and CEDEL) immediately following the settlement date of DTC. DTC has advised the Issuer that cash received in Euroclear or CEDEL as a result of sales of interests in a Global Debenture by or through a Euroclear or CEDEL participant to a Participant in DTC will be received with value on the settlement date of DTC but will be available in the relevant Euroclear or CEDEL cash account only as of the business day for Euroclear or CEDEL following DTC's settlement date. DTC has advised the Issuer that it will take any action permitted to be taken by a holder of New Debentures only at the direction of one or more Participants to whose account with DTC interests in the Global Debentures are credited and only in respect of such portion of the aggregate principal amount of the New Debentures as to which such Participant or Participants has or have given such direction. However, if there is an Event of Default under the New Debentures, DTC reserves the right to exchange the Global Debentures for legended New Debentures in certificated form, and to distribute such New Debentures to its Participants. The information in this section concerning DTC, Euroclear and CEDEL and their book-entry systems has been obtained from sources that the Issuer believes to be reliable, but the Issuer takes no responsibility for the accuracy thereof. Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to facilitate transfers of interests in the Global Debentures among Participants in DTC, Euroclear and CEDEL, they are under no obligation to perform or to continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Issuer nor the Trustee will have any responsibility for the performance by DTC, Euroclear or CEDEL or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. 91 Exchange of Book-Entry Debentures for Certificated Debentures A Global Debenture is exchangeable for definitive New Debentures in registered certificated form if (i) DTC (x) notifies the Issuer that it is unwilling or unable to continue as depositary for the Global Debentures and the Issuer thereupon fails to appoint a successor depositary or (y) has ceased to be a clearing agency registered under the Exchange Act, (ii) the Issuer, at its option, notifies the Trustee, in writing that it elects to cause the issuance of the New Debentures in certificated form or (iii) there shall have occurred and be continuing an Event of Default or any event which after notice or lapse of time or both would be an Event of Default with respect to the New Debentures. In addition, beneficial interests in a Global Debenture may be exchanged for certificated New Debentures upon request but only upon at least 20 days prior written notice given to the Trustee by or on behalf of DTC in accordance with its customary procedures. In all cases, certificated New Debentures delivered in exchange for any Global Debenture or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary (in accordance with its customary procedures) and will bear the applicable restrictive legend referred to in "Notice to Investors," unless the Issuer determines otherwise in compliance with applicable law. Same-Day Settlement and Payment The Indenture requires that payments in respect of the New Debentures represented by the Global Debentures (including principal, premium, if any, and interest and Liquidated Damages, if any) be made by wire transfer of immediately available funds to the accounts specified by the Global Debentures holder. With respect to New Debentures in certificated form, the Issuer will make all payments of principal, premium, if any, interest and Liquidated Damages, if any, by wire transfer of immediately available funds to the accounts specified by the holders thereof or, if no such account is specified, by mailing a check to each such holder's registered address. The New Debentures represented by the Global Debentures are expected to be eligible to trade in the PORTAL market and to trade in the Depositary's Same-Day Funds Settlement System, and any permitted secondary market trading activity in such New Debentures will, therefore, be required by the Depositary to be settled in immediately available funds. The Issuer expects that secondary trading in any certificated New Debentures will also be settled in immediately available funds. Because of time zone differences, the securities account of a Euroclear or CEDEL participant purchasing an interest in a Global Debenture from a Participant in DTC will be credited, and any such crediting will be reported to the relevant Euroclear or CEDEL participant, during the securities settlement processing day (which must be a business day for Euroclear and CEDEL) immediately following the settlement date of DTC. DTC has advised the Issuer that cash received in Euroclear or CEDEL as a result of sales of interests in a Global Debenture by or through a Euroclear or CEDEL participant to a Participant in DTC will be received with value on the settlement date of DTC but will be available in the relevant Euroclear or CEDEL cash account only as of the business day for Euroclear or CEDEL following DTC's settlement date. Registration Rights; Liquidated Damages Pursuant to the Registration Rights Agreement, the Issuer agreed to file with the Commission the Exchange Offer Registration Statement on the appropriate form under the Securities Act with respect to the New Debentures. Upon the effectiveness of the Exchange Offer Registration Statement, the Issuer will offer to the holders of Transfer Restricted Securities pursuant to the Exchange Offer who are able to make certain representations the opportunity to exchange their Transfer Restricted Securities for New Debentures. If (i) the Issuer is not required to file the Exchange Offer Registration Statement or permitted to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (ii) any holder of Transfer Restricted Securities notifies the Issuer within the specified time period that (A) it is prohibited by law or Commission policy from participating in the Exchange Offer (other than due solely to the status of such holder as an affiliate of the Issuer within the meaning of the Securities Act) or (B) that it may not resell the New Debentures acquired by it in the Exchange Offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer 92 Registration Statement is not appropriate or available for such resales or (C) that it is a broker-dealer and owns Debentures acquired directly from the Issuer or an affiliate of the Issuer, the Issuer will file with the Commission a Shelf Registration Statement to cover resales of the Debentures by the holders thereof who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement. The Issuer will use its best efforts to cause the applicable registration statement to be declared effective as promptly as possible by the Commission. For purposes of the foregoing, "Transfer Restricted Securities" means each Debenture until (i) the date on which such Debenture has been exchanged by a person other than a broker-dealer for a New Debenture in the Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of a Debenture for a New Debenture, the date on which such New Debenture is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Debenture has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iv) the date on which such Debenture is distributed to the public pursuant to Rule 144 under the Act. The Registration Rights Agreement will provide that (i) the Issuer will file an Exchange Offer Registration Statement with the Commission on or prior to 60 days after the Closing Date, (ii) the Issuer will use its best efforts to have the Exchange Offer Registration Statement declared effective by the Commission on or prior to 135 days after the Closing Date, (iii) unless the Exchange Offer would not be permitted by applicable law or Commission policy, the Issuer will commence the Exchange Offer and use its best efforts to issue within 180 days after the Issue Date New Debentures in exchange for all Debentures tendered prior thereto in the Exchange Offer and (iv) if obligated to file the Shelf Registration Statement, the Issuer will use its best efforts to file the Shelf Registration Statement with the Commission on or prior to 60 days after such filing obligation arises and to cause the Shelf Registration to be declared effective by the Commission on or prior to 135 days after such obligation arises. If (a) the Issuer fails to file any of the Registration Statements required by the Registration Rights Agreement on or before the date specified for such filing, (b) any of such Registration Statements is not declared effective by the Commission on or prior to the date specified for such effectiveness (the "Effectiveness Target Date"), or (c) the Issuer fails to consummate the Exchange Offer within 180 days after the Issue Date, or (d) the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter ceases to be effective or usable in connection with resales of Transfer Restricted Securities during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (a) through (d) above a "Registration Default"), then the Issuer will pay liquidated damages ("Liquidated Damages") determined as follows: to each holder of Debentures, with respect to such 90-day period immediately following the occurrence of the first Registration Default in an amount equal to $0.05 per week per $1,000 principal amount of Debentures held by such holder. The amount of the Liquidated Damages will increase by an additional $0.05 per week per $1,000 principal amount of Debentures with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Liquidated Damages of $0.25 per week per $1,000 principal amount of Debentures. All accrued Liquidated Damages will be paid by the Issuer to the Global Debenture holder by wire transfer of immediately available funds or by federal funds check and to holders of Certificated Debentures by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease. Holders of Debentures will be required to make certain representations to the Issuer (as described in the Registration Rights Agreement) in order to participate in the Exchange Offer and will be required to deliver information to be used in connection with the Shelf Registration Statement and to provide comments on the Shelf Registration Statement within the time periods set forth in the Registration Rights Agreement in order to have their Debentures included in the Shelf Registration Statement and benefit from the provisions regarding Liquidated Damages set forth above. 93 Certain Definitions Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Accreted Value" means, as of any date of determination prior to October 15, 2002, with respect to any Debenture, the sum of (a) the initial offering price (which shall be calculated by discounting the aggregate principal amount at maturity of such Debenture at a rate of 13-1/8% per annum, compounded semi-annually on each April 15 and October 15 from October 15, 2002 to the date of issuance) of such Debenture and (b) the portion of the excess of the principal amount of such Debenture over such initial offering price which shall have been accreted thereon through such date, such amount to be so accreted on a daily basis at a rate of 13-1/8% per annum of the initial offering price of such Debenture, compounded semi-annually on each April 15 and October 15 from the date of issuance of the Debentures through the date of determination, computed on the basis of a 360-day year of twelve 30-day months. "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person or assumed in connection with the acquisition of any asset used or useful in a Permitted Business acquired by such specified Person; provided that such Indebtedness was not incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, or such acquisition, as the case may be. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. "Asset Sale" means (i) the sale, lease (other than an operating lease), conveyance or other disposition of any assets or rights (including, without limitation, by way of a sale and leaseback) other than in the ordinary course of business consistent with past practices (provided that the sale, lease (other than an operating lease), conveyance or other disposition of all or substantially all of the assets of the Issuer and its Restricted Subsidiaries taken as a whole will be governed by the provisions of the Indenture described above under the caption "--Repurchase at the Option of Holders--Change of Control" and/or the provisions described above under the caption "--Certain Covenants--Merger, Consolidation or Sale of Assets" and not by the provisions of the Asset Sale covenant), and (ii) the sale by the Issuer and the issue or sale by any of the Restricted Subsidiaries of the Issuer of Equity Interests of any of the Issuer's Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions that have a fair market value (as determined in good faith by the Board of Directors) in excess of $1.0 million or for net cash proceeds in excess of $1.0 million. Notwithstanding the foregoing: (i) a transfer of assets by the Issuer to a Wholly Owned Restricted Subsidiary of the Issuer (other than a Receivables Subsidiary) or by a Wholly Owned Restricted Subsidiary of the Issuer (other than a Receivables Subsidiary) to the Issuer or to a Wholly Owned Restricted Subsidiary of the Issuer (other than a Receivables Subsidiary), (ii) an issuance of Equity Interests by a Restricted Subsidiary of the Issuer to the Issuer or to a Wholly Owned Restricted Subsidiary of the Issuer (other than a Receivables Subsidiary), (iii) a Restricted Payment that is permitted by the covenant described above under the caption "--Restricted Payments," (iv) the sale and leaseback of any assets within 90 days of the acquisition of such assets, (v) foreclosures on assets, (vi) the clearance of inventory and (vii) the sale, conveyance or other disposition of accounts receivables and related assets customarily transferred in an asset securitization transaction involving accounts receivable to a Receivables Subsidiary or by a Receivables Subsidiary, in connection with a Qualified Receivables Transaction, in each case, will not be deemed to be Asset Sales. 94 "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participation, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means (i) securities issued or unconditionally and fully guaranteed or insured by the full faith and credit of the United States government or any agency or instrumentality thereof having maturities of not more than one year from the date of acquisition, (ii) obligations issued or fully guaranteed by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's"), (iii) certificates of deposit and eurodollar time deposits with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding one year and overnight bank deposits, in each case with any lender party to the New Credit Facility or with any domestic commercial bank having capital and surplus in excess of $250.0 million, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (i) and (iii), above entered into with any financial institution meeting the qualifications specified in clause (iii) above, (v) commercial paper having one of the two of the highest ratings obtainable from either Moody's or S&P and in each case maturing within one year after the date of acquisition and (vi) investments in funds investing exclusively in investments of the types described in clauses (i) through (v) above. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Issuer and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act), other than the Principals and their Related Parties (ii) the adoption of a plan relating to the liquidation or dissolution of the Issuer, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that (A) any "person" (as defined above), other than the Principal and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of 40% or more of the Voting Stock of the Issuer (measured by voting power rather than number of shares) and (B) the Principals and their Related Parties beneficially own, directly or indirectly, in the aggregate a lesser percentage of the Voting Stock of the Issuer than such other "person", (iv) the first day on which a majority of the members of the Board of Directors of the Issuer are not Continuing Directors or (v) the Issuer consolidates with, or merges with or into, any Person, or any Person consolidates with, or merges with or into, the Issuer, in any such event pursuant to a transaction in which any of the outstanding Voting Stock of the Issuer is converted into or exchanged for cash, securities or other property, other than any such transaction where (A) the Voting Stock of the Issuer outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock (other than Disqualified Stock) of the surviving or transferee Person and (B) the "beneficial owners" (as defined above) of the Voting Stock of the Issuer immediately prior to such transaction own, directly or indirectly through one or more subsidiaries, not less than a majority of the total Voting Stock of the surviving or transferee corporation immediately after such transaction. "Consolidated Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus (i) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale (to the extent such losses were deducted in computing such Consolidated Net Income of such Person and its Restricted Subsidiaries), plus (ii) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, to the extent that such provision for taxes was included in computing such Consolidated Net Income, plus (iii) consolidated interest expense of such Person and its Restricted 95 Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income, plus (iv) depreciation and amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash charge that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash expenses were deducted in computing such Consolidated Net Income, plus (v) any interest expense on Indebtedness of another Person that is Guaranteed by such Person or any of its Restricted Subsidiaries or secured by a Lien on assets of such Person or any of its Restricted Subsidiaries, in each case, to the extent that such interest expense is deducted in computing such Consolidated Net Income, minus (vi) non-cash items increasing such Consolidated Net Income for such period, in each case, on a consolidated basis and determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and other non-cash charges of, a Restricted Subsidiary of a Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in the same proportion) that the Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP, provided that (i) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Restricted Subsidiary thereof, (ii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, and (iii) the cumulative effect of a change in accounting principles shall be excluded. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Issuer or any Holding Company of the Issuer who (i) was a member of such Board of Directors on the date of the Indenture immediately after consummation of the Recapitalization or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were either members of such Board at the time of such nomination or election or are successor Continuing Directors appointed by such Continuing Directors (or their successors). "Credit Facilities" means, with respect to the Issuer, one or more debt facilities (including, without limitation, the New Credit Facility) or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. Indebtedness under Credit Facilities outstanding on the Issue Date shall be deemed to have been incurred on such date in reliance on the exceptions provided by clauses (i) and (ii) of the definition of Permitted Debt. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date on which the Debentures mature; 96 provided, however, that a class of Capital Stock shall not be Disqualified Stock hereunder solely as the result of any maturity or redemption that is conditioned upon, and subject to, compliance with the covenant described above under the caption "--Certain Covenants--Restricted Payments;" and provided further, that Capital Stock issued to any plan for the benefit of employees of the Issuer or its subsidiaries or by any such plan to such employees shall not constitute Disqualified Stock solely because it may be required to be repurchased by the Issuer in order to satisfy applicable statutory or regulatory obligations. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Equity Offering" means an offering of common stock (other than Disqualified Stock) of the Issuer, pursuant to an effective registration statement filed with the Commission in accordance with the Securities Act, other than an offering pursuant to Form S-8 (or any successor thereto). "Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations; provided, however, that in no event shall any amortization of deferred financing costs incurred in connection with the Recapitalization be included in Fixed Charges) and (ii) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, and (iii) any interest expense on Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv) the product of (a) (without duplication) (1) all dividends paid or accrued in respect of Disqualified Stock which are not included in the interest expense of such Person for tax purposes for such period and (2) all cash dividend payments on any series of preferred stock of such Person or any of its Restricted Subsidiaries, other than dividend payments on Equity Interests payable solely in Equity Interests (other than Disqualified Stock) of the Issuer, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person and its Restricted Subsidiaries for such period to the Fixed Charges of such Person and its Restricted Subsidiaries for such period. In the event that the Issuer or any of its Restricted Subsidiaries incurs, assumes, Guarantees, repays or redeems any Indebtedness (other than revolving credit borrowings) or issues or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee, repayment or redemption of Indebtedness, or such issuance or redemption of preferred stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of making the computation referred to above, (i) acquisitions that have been made by the Issuer or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow and Fixed Charges for such reference period shall be calculated without giving effect to clause (ii) of the proviso set forth in the definition of Consolidated Net Income and shall reflect any pro forma expense and cost reductions attributable to such acquisitions (to the extent such expense and cost reduction would be permitted by the Commission to be reflected in pro forma financial statements included in a registration statement filed with the Commission), and (ii) the Consolidated Cash Flow and Fixed Charges attributable to discontinued operations, as determined in accordance 97 with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded and Consolidated Cash Flow shall reflect any pro forma expense or cost reductions relating to such discontinuance or disposition (to the extent such expense or cost reductions would be permitted by the Commission to be reflected in pro forma financial statements included in a registration statement filed with the Commission), and (iii) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of the referent Person or any of its Subsidiaries following the Calculation Date. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of the Indenture provided, however, that all reports and other financial information provided by the Issuer to the holders, the Trustee and/or the Commission shall be prepared in accordance with GAAP, as in effect on the date of such report or other financial information. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or the value of foreign currencies. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness that does not require current payments of interest, and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Issuer or any Restricted Subsidiary of the Issuer sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Issuer such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of the Issuer, the Issuer shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described above under the caption "--Certain Covenants--Restricted Payments." "Issue Date" means the date on which notes are first issued and authenticated under the Indenture. 98 "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any option or other agreement to sell or give a security interest therein). "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the extinguishment of any Indebtedness of such Person or any of its Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Issuer or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness (other than Indebtedness under the Credit Facilities) secured by a Lien on the asset or assets that were the subject of such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "New Credit Facility" means that certain credit facility, dated as of October 17, 1997, by and among the J. Crew Corp., Holdings, Chase, DLJ and DLJ Capital Funding, as agents and lenders, providing for up to $70.0 million of term borrowings and $200.0 million of revolving credit borrowings, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, extended, modified, renewed, refunded, replaced or refinanced from time to time. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Issuer nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), or (b) is directly or indirectly liable (as a guarantor or otherwise), and (ii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Issuer or any of its Restricted Subsidiaries, including the stock of such Unrestricted Subsidiary. "Obligations" means, with respect to any Indebtedness, any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Permitted Business" means the design, manufacture, importing, exporting, distribution, marketing, licensing and wholesale and retail sale of apparel, housewares, home furnishings and related items, and businesses reasonably related thereto. "Permitted Investments" means (a) any Investment in the Issuer or in a Restricted Subsidiary of the Issuer (other than a Receivables Subsidiary) (b) any Investment in Cash and Cash Equivalents; (c) any Investment by the Issuer or any Restricted Subsidiary in a Person, if as a result of such Investment (i) such Person becomes a Restricted Subsidiary of the Issuer (other than a Receivables Subsidiary) or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Issuer or a Restricted Subsidiary of the Issuer (other than a Receivables Subsidiary); (d) any Restricted Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described above under the caption "--Repurchase at the Option of Holders--Asset Sales" or any transaction not constituting an Asset Sale by reason of the $1.0 million threshhold contained in the definition 99 thereof; (e) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Issuer; (f) Hedging Obligations entered into in the ordinary course of the Issuer's or its Restricted Subsidiaries' Businesses and otherwise in compliance with the Indenture; (g) loans and advances to employees and officers of the Issuer and its Restricted Subsidiaries in the ordinary course of business for bona fide business purposes not in excess of $5 million at any one time outstanding; (h) additional Investments not to exceed $25 million at any one time outstanding; (i) Investments in securities of trade creditors or customers received in settlement of obligations or pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers; and (j) Investments by the Issuer or a Restricted Subsidiary in a Receivables Subsidiary or any Investment by a Receivables Subsidiary in any other Person, in each case, in connection with a Qualified Receivables Transaction, provided, that any Investment in any such Person is in the form of a Purchase Money Note, any equity interest or interests in accounts receivable and related assets generated by the Issuer or a Restricted Subsidiary and transferred to any Person in connection with a Qualified Receivables Transaction or any such Person owning such accounts receivable. "Permitted Liens" means (i) Liens existing as of the Issue Date to the extent and in the manner such Liens are in effect on the Issue Date; (ii) Liens on assets of Restricted Subsidiaries securing Indebtedness of Restricted Subsidiaries permitted to be incurred under the Indenture; (iii) Liens securing the Debentures; (iv) Liens securing the Issuer's obligations under the New Credit Facility; (v) Liens of the Issuer or a Wholly Owned Restricted Subsidiary on assets of any Restricted Subsidiary of the Issuer; (vi) Liens securing Permitted Refinancing Indebtedness which is incurred to refinance any Indebtedness which has been secured by a Lien permitted under the Indenture and which has been incurred in accordance with the provisions of the Indenture, provided, however, that such Liens (A) are not materially less favorable to the holders and are not materially more favorable to the lienholders with respect to such Liens than the Liens in respect of the Indebtedness being refinanced and (B) do not extend to or cover any property or assets of the Issuer or any of its Restricted Subsidiaries not securing the Indebtedness so refinanced; (vii) Liens for taxes, assessments or governmental charges or claims either (A) not delinquent or (B) contested in good faith by appropriate proceedings and as to which the Issuer or its Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP; (viii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, supplies, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent for a period of more than 60 days or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (ix) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance an other types of social security or similar obligations, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (x) judgment Liens not giving rise to an Event of Default so long as such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgement shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; (xi) easements, rights-of-way, zoning restrictions and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Issuer or any of its Restricted Subsidiaries; (xii) any interest or title of a lessor under any lease, whether or not characterized as capital or operating; provided that such Liens do not extend to any property or assets which is not leased property subject to such lease; (xiii) Liens securing Capital Lease Obligations and purchase money Indebtedness incurred in accordance with the covenant described under "-- Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock;" provided, however, that (A) the Indebtedness shall not exceed the cost of such property or assets being acquired or constructed and shall not be secured by any property or assets of the Issuer or any Restricted Subsidiary of the Issuer other than the property or assets of the Issuer or any Restricted Subsidiary of the Issuer other than the property and assets being acquired or constructed and (B) the Lien securing such Indebtedness shall be created within 90 days of such acquisition or construction; (xiv) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (xv) Liens securing reimbursement obligations 100 with respect to letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (xvi) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of the Issuer or any of its Restricted Subsidiaries, including rights of offset an set-off; (xvii) Liens securing Hedging Obligations which Hedging Obligations relate to Indebtedness that is otherwise permitted under the Indenture; (xviii) Liens securing Acquired Debt incurred in accordance with the covenant described under "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock;" provided that (A) such Liens secured such Acquired Debt at the time of and prior to the incurrence of such Acquired Debt by the Issuer or a Restricted Subsidiary of the Issuer and were not granted in connection with, or in anticipation of, the incurrence of such Acquired Debt by the Issuer or a Restricted Subsidiary of the Issuer and (B) such Liens do not extend to or cover any property or assets of the Issuer or any of its Restricted Subsidiaries other than the property or assets that secured the Acquired Debt prior to the time such Indebtedness became Acquired Debt of the Issuer or a Restricted Subsidiary of the Issuer and are not more favorable to the lienholders than those securing the Acquired Debt prior to the incurrence of such Acquired Debt by the Issuer or a Restricted Subsidiary of the Issuer; (xix) leases or subleases granted to others not interfering in any material respect with the business of the Issuer or its Restricted Subsidiaries; (xx) Liens arising out of consignment or similar arrangements for the sale of goods entered into by the Issuer or any Restricted Subsidiary in the ordinary course of business; and (xxi) Liens or assets of a Receivables Subsidiary arising in connection with a Qualified Receivables Transaction. "Permitted Refinancing Indebtedness" means any Indebtedness of the Issuer or any of its Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, prepay, retire, renew, replace, defease or refund Indebtedness of the Issuer or any of its Subsidiaries (other than such Indebtedness described in clauses (i), (vi), (vii), (viii), (ix), (x), (xi), (xiii) and (xiv) of the covenant described above under the caption "-- Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock"); provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, the Indebtedness so extended, refinanced, renewed, prepaid, retired, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith including premiums paid, if any, to the holders thereof); (ii) such Permitted Refinancing Indebtedness has a final maturity date at or later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, prepaid, retired, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, prepaid, retired, replaced, defeased or refunded is subordinated in right of payment to the Debentures, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the holders of Debentures as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Issuer or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means an individual, partnership, corporation, limited liability company, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. "Principals" means TPG Partners II, L.P., a Delaware limited partnership. "Purchase Money Note" means a promissory note evidencing a line of credit, or evidencing other Indebtedness owed to the Issuer or any Restricted Subsidiary in connection with a Qualified Receivables Transaction, which note shall be repaid from cash available to the maker of such note, other than amounts required to be established as reserves pursuant to agreement, amounts paid to investors in respect of interest, principal and other amounts owing to such investors and amounts paid in connection with the purchase of newly generated receivables. "Qualified Proceeds" means any of the following or any combination of the following: (i) cash, (ii) Cash Equivalents, (iii) long-term assets that are used or useful in a Permitted Business and (iv) the Capital Stock of any Person engaged primarily in a Permitted Business if, in connection with the receipt by the Issuer or any Restricted 101 Subsidiary of the Issuer of such Capital Stock, (a) such Person becomes a Wholly-Owned Restricted Subsidiary and a Guarantor or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Issuer or any Wholly-Owned Restricted Subsidiary of the Issuer that is a Guarantor. "Qualified Receivables Transaction" means any transaction or series of transactions that may be entered into by the Issuer or any Restricted Subsidiary pursuant to which the Issuer or any Restricted Subsidiary may sell, convey or otherwise transfer to (a) a Receivables Subsidiary (in the case of a transfer by the Issuer or any Restricted Subsidiary) and (b) any other Person (in the case of a transfer by a Receivables Subsidiary), or may grant a security interest in, any accounts receivable (whether now existing or arising in the future) of the Issuer or any Restricted Subsidiary and any asset related thereto including, without limitation, all collateral securing such accounts receivable, all contracts and all guarantees or other obligations in respect of such accounts receivable, proceeds of such accounts receivable and other assets which are customarily transferred, or in respect of which security interests are customarily granted, in connection with asset securitization transactions involving accounts receivable. "Receivables Subsidiary" means a Wholly Owned Restricted Subsidiary which engages in no activities other than in connection with the financing of accounts receivables and which is designated by the Board of Directors of the Issuer (as provided below) as a Receivables Subsidiary (a) no portion of the Indebtedness or any other Obligations (contingent or otherwise) of which (i) is guaranteed by the Issuer or any other Restricted Subsidiary (excluding guarantees of obligations (other than the principal of, and interest on, Indebtedness) pursuant to Standard Securitization Undertakings), (ii) is recourse to or obligates the Issuer or any other Restricted Subsidiary in any way other than pursuant to Standard Securitization Undertakings or (iii) subjects any property or asset of the Issuer or any other Restricted Subsidiary, directly or indirectly, contingently or otherwise, to the satisfaction thereof, other than pursuant to Standard Securitization Undertakings, (b) with which neither the Issuer nor any other Restricted Subsidiary has any material contract, agreement, arrangement or understanding (except in connection with a Purchase Money Note or Qualified Receivables Transaction) other than on terms no less favorable to the Issuer or such other Restricted Subsidiary than those that might be obtained at the time from persons that are not Affiliates of the Issuer, other than fees payable in the ordinary course of business in connection with servicing accounts receivable, and (c) to which neither the Issuer nor any other Restricted Subsidiary has any obligation to maintain or preserve such entity's financial condition or cause such entity to achieve certain levels of operating results. Any such designation by the Board of Directors of the Issuer shall be evidenced by the Trustee by filing with the Trustee a certified copy of the resolution of the Board of Directors of the Issuer giving effect to such designation and an officers' certificate certifying, to the best of such officer's knowledge and belief after consulting with counsel, that such designation complied with the foregoing conditions. "Related Party" with respect to any Principal means (A) any controlling stockholder or a majority of (or more) owned Subsidiary of such Principal or, in the case of an individual, any spouse or immediate family member of such Principal, or (B) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding a majority (or more) controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (A). "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" means any Subsidiary of the Issuer other than an Unrestricted Subsidiary. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect on the date hereof of the Indenture. "Standard Securitization Undertakings" means representations, warranties, covenants and indemnities entered into by the Issuer or any Restricted Subsidiary which are reasonably customary in an accounts receivable transaction. 102 "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total Voting Stock thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Unrestricted Subsidiary" means any Subsidiary of the Issuer that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution; but only to the extent that such Subsidiary: (a) is not party to any agreement, contract, arrangement or understanding with the Issuer or any Restricted Subsidiary unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Issuer or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Issuer; (b) is a Person with respect to which neither the Issuer nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; and (c) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Issuer or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with a Trustee a certified copy of the Board Resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing conditions and was permitted by the covenant described above under the caption "--Certain Covenants--Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Issuer as of such date. The Board of Directors of the Issuer may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness and issuance of preferred stock by a Restricted Subsidiary of the Issuer of any outstanding Indebtedness or outstanding issue of preferred stock of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness and preferred stock is permitted under the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," and (ii) no Default or Event of Default would exist following such designation. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Subsidiary" of any Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. 103 CERTAIN U.S. FEDERAL TAX CONSIDERATIONS Exchange of Old Debentures for New Debentures The following summary describes the principal U.S. federal income tax consequences of the exchange of the Old Debentures for New Debentures (the "Exchange") that may be relevant to a beneficial owner of Debentures that will hold the New Debentures as capital assets and that is a citizen or resident of the United States, or that is a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, an estate the income of which is subject to U.S. federal income taxation regardless of its source or a trust if (i) a U.S. court is able to exercise primary supervision over the trust's administration and (ii) one or more U.S. fiduciaries have the authority to control all of the trust's substantial decisions. The Exchange pursuant to the Exchange Offer will not be a taxable event for U.S. federal income tax purposes. As a result, a holder of an Old Debenture whose Old Debenture is accepted in an Exchange Offer will not recognize gain on the Exchange. A tendering holder's tax basis in the New Debentures will be the same as such holder's tax basis in its Old Debentures. A tendering holder's holding period for the New Debentures received pursuant to the Exchange Offer will include its holding period for the Old Debentures surrendered therefor. ALL HOLDERS OF OLD DEBENTURES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE EXCHANGE OF OLD DEBENTURES FOR NEW DEBENTURES AND OF THE OWNERSHIP AND DISPOSITION OF NEW DEBENTURES RECEIVED IN THE EXCHANGE OFFER IN VIEW OF THEIR OWN PARTICULAR CIRCUMSTANCES. Tax Considerations for Non-United States Holders The following is a general discussion of certain United States federal income and estate tax consequences of the acquisition, ownership and disposition of Debentures by an initial beneficial owner of Debentures that, for United States federal income tax purposes, is not a "United States person" (a "Non-United States Holder"), but does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase the Debentures. This discussion is based upon the United States federal tax law now in effect, which is subject to change, possibly retroactively, which could affect the continued validity of this summary. For purposes of this discussion, a "United States person" means a holder of a Debenture who is a citizen or resident of the United States, a corporation, partnership or other entity created or organized in the United States or under the laws of the United States or of any political subdivision thereof, an estate whose income is includable in gross income for United States federal income tax purposes regardless of its source or a trust, if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. The tax treatment of the holders of the Debentures may vary depending upon their particular situations. U.S. persons acquiring the Debentures are subject to different rules than those discussed below. In addition, certain other holders (including insurance companies, tax exempt organizations, financial institutions, subsequent purchasers of Debentures and broker-dealers) may be subject to special rules not discussed below. In addition, this summary does not describe any tax consequences arising under the laws of any state, locality or taxing jurisdiction other than the United States federal government. In general, the summary assumes that a Non-U.S. Holder acquires a Debenture at original issuance and holds such Debenture as a capital asset and not as part of a "hedge," "straddle," "conversion transaction," "synthetic security" or other integrated investment. Prospective investors are urged to consult their tax advisors regarding the United States federal tax consequences of acquiring, holding and disposing of Debentures, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction. 104 Interest Interest paid by the Issuer to a Non-United States Holder will not be subject to United States federal income or withholding tax if such interest is not effectively connected with the conduct of a trade or business within the United States by such Non-United States Holder and Non-United States Holder (i) does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Issuer; (ii) is not a controlled foreign corporation with respect to which the Issuer is a "related person" within the meaning of the United States Internal Revenue Code of 1986 (the "Code") and (iii) certifies, under penalties of perjury, that such holder is not a United States person and provides such holder's name and address. Gain on Disposition A Non-United States Holder will generally not be subject to United States federal income tax on gain recognized on a sale, redemption or other disposition of a Debenture unless (i) the gain is effectively connected with the conduct of a trade or business within the United States by the Non-United States Holder or (ii) in the case of a Non-United States Holder who is a nonresident alien individual and holds the Debenture as a capital asset, such holder is present in the United States for 183 or more days in the taxable year and certain other requirements are met. Federal Estate Taxes If interest on the Debentures is exempt from withholding of United States federal income tax under the rules described above, the Debentures will not be included in the estate of a deceased Non-United States Holder for United States federal estate tax purposes. Information Reporting and Backup Withholding The Issuer will, where required, report to the holders of Debentures and the Internal Revenue Service the amount of any interest paid on the Debentures in each calendar year and the amounts of tax withheld, if any, with respect to such payments. In the case of payments of interest to Non-United States Holders, temporary Treasury regulations provide that the 31% backup withholding tax and certain information reporting will not apply to such payments with respect to which either the requisite certification, as described above, has been received or an exemption has otherwise been established; provided that neither the Issuer nor its payment agent has actual knowledge that the holder is a United States person or that the conditions of any other exemption are not in fact satisfied. Under temporary Treasury regulations, these information reporting and backup withholding requirements will apply, however, to the gross proceeds paid to a Non-United States Holder on the disposition of the Debentures by or through a United States office of a United States or foreign broker, unless the holder certifies to the broker under penalties of perjury as to its name, address and status as a foreign person or the holder otherwise establishes an exemption. Information reporting requirements, but not backup withholding, will also apply to a payment of the proceeds of a disposition of the Debentures by or through a foreign office of a United States broker or foreign brokers with certain types of relationships to the United States unless such broker has documentary evidence in its file that the holder of the Debentures is not a United States person, and such broker has no actual knowledge to the contrary, or the holder establishes an exception. Neither information reporting nor backup withholding generally will apply to payment of the proceeds of a disposition of the Debentures by or through a foreign office of a foreign broker not subject to the preceding sentence. On October 14, 1997, the Treasury Department published final regulations regarding the withholding and information reporting rules discussed above. In general, the final regulations do not alter the substantive withholding and information reporting requirements but unify current certification procedures and forms and clarify reliance standards. The final regulations will generally be effective for payments made after December 31, 1998 subject to certain transition rules. 105 Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or credited against the Non-United States Holder's United States federal income tax liability, provided that the required information is furnished to the Internal Revenue Service. 106 PLAN OF DISTRIBUTION Each broker-dealer that receives New Debentures for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Debentures. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Debentures received in exchange for Old Debentures where such Old Debentures were acquired as a result of market-making activities or other trading activities. The Issuer and the Guarantors have agreed that they will make this Prospectus available to any Participating Broker- Dealer for a period of time not to exceed one year after the date on which the Exchange Offer is consummated for use in connection with any such resale. In addition, until such date, all broker-dealers effecting transactions in the New Debentures may be required to deliver a prospectus. Neither the Issuer nor the Guarantors will receive any proceeds from any sale of New Debentures by broker-dealers. New Debentures received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Debentures or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Debentures. Any broker-dealer that resells New Debentures that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Debentures may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Debentures and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Starting on the Expiration Date, the Issuer and the Guarantors will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Issuer has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the holders of the Old Debentures) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the Old Debentures (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The validity of the New Debentures have been passed upon for the Issuer by Cleary, Gottlieb, Steen & Hamilton, New York, New York. Certain legal matters relating to the New Debentures have been passed upon for the Initial Purchasers by Latham & Watkins, New York, New York. EXPERTS The consolidated financial statements of J. Crew Group, Inc. and subsidiaries, as of January 31, 1997 and February 2, 1996, and for the fiscal years ended February 3, 1995, February 2, 1996 and January 31, 1997, appearing in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 107 CHANGE IN ACCOUNTANTS At a meeting held on October 9, 1997, the Board of Directors of the Company approved the engagement of KPMG Peat Marwick LLP as its independent auditors for the fiscal year ending January 1998 to replace the firm of Deloitte & Touche LLP, effective October 9, 1997. The reports of Deloitte & Touche LLP on the financial of J. Crew Group, Inc. statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits of the financial statements of J. Crew Group, Inc. for each of the two fiscal years ended January 31, 1997 and in the subsequent interim period, there were no disagreements with Deloitte & Touche LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Deloitte & Touche LLP would have caused Deloitte & Touche LLP to make reference to the matter in their report. The Issuer has requested Deloitte & Touche LLP to furnish it a letter addressed to the Commission stating whether it agrees with the above statements. A copy of that letter, dated December 15, 1997 is filed as Exhibit 16.1 to this Registration Statement. 108 J. CREW GROUP, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- INDEPENDENT AUDITORS' REPORT ................................... F-2 CONSOLIDATED FINANCIAL STATEMENTS AS OF FEBRUARY 2, 1996 AND JANUARY 31, 1997 AND FOR EACH OF THE THREE FISCAL YEARS IN THE PERIOD ENDED JANUARY 31, 1997: Consolidated Balance Sheets as of February 2, 1996 and Januar 31, 1997 .......................................... F-3 Consolidated Statements of Income for the Fiscal Years Ended February 3, 1995, February 2, 1996 and January 31, 1997 ............................................. F-4 Consolidated Statements of Cash Flows for the Fiscal Years Ended February 3, 1995, February 2, 1996 and January 31, 1997 ......................................... F-5 Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended February 3, 1995, February 2, 1996 and January 31, 1997 ........................ F-6 Notes to Consolidated Financial Statements ................... F-7 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF NOVEMBER 7, 1997 AND FOR THE FORTY WEEK PERIODS ENDED NOVEMBER 8, 1996 AND NOVEMBER 7, 1997: Condensed Consolidated Balance Sheets as of January 31, 1997 and November 7, 1997 ........................ F-14 Condensed Consolidated Statements of Operations for the Forty Week Periods Ended November 8, 1996 and November 7, 1997 ......................................... F-15 Condensed Consolidated Statements of Cash Flows for the Forty Week Periods Ended November 8, 1996 and November 7, 1997 .................................... F-16 Notes to Unaudited Condensed Consolidated Financial Statements ................................................... F-17 F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of J. Crew Group, Inc. We have audited the accompanying consolidated balance sheets of J. Crew Group, Inc. and subsidiaries as of February 2, 1996 and January 31, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three fiscal years in the period ended January 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of J. Crew Group, Inc. and subsidiaries as of February 2, 1996 and January 31, 1997, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 1997 in conformity with generally accepted accounting principles. As discussed in Note 12 to the consolidated financial statements, in 1995, the Company changed its method of accounting for catalog costs to conform with the provisions of Statement of Position 93-7, "Reporting on Advertising Costs," and changed its method of accounting for merchandise inventories. Deloitte & Touche LLP New York, New York March 31, 1997 F-2 J. CREW GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS February 2, January 31, 1996 1997 (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents.......................... $ 13,529 $ 7,132 Accounts receivable (net of allowance for doubtful accounts of $4,824 and $4,357, respectively)................................... 58,280 58,079 Merchandise inventories........................... 148,055 197,657 Prepaid expenses and other current assets.......... 54,311 58,318 Refundable income taxes............................ 4,900 -- ------- ------- Total current assets.............................. 279,075 321,186 ------- ------- PROPERTY AND EQUIPMENT--at cost: Land 1,405 1,405 Buildings and improvements......................... 11,360 11,167 Furniture, fixtures and equipment.................. 38,703 43,537 Leasehold improvements............................. 60,218 75,378 Construction in progress........................... 2,128 4,063 ------- ------- 113,814 135,550 Less accumulated depreciation and amortization.... 41,005 49,121 ------- ------- 72,809 86,429 ------- ------- OTHER ASSETS......................................... 3,365 3,206 ------- ------- TOTAL ASSETS......................................... $355,249 $410,821 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................... $ 71,415 $103,279 Other current liabilities.......................... 59,243 62,938 Deferred income taxes.............................. 13,739 12,555 Federal and state income taxes payable............. 2,185 9,955 Current portion of long-term debt.................. 237 237 ------- ------- Total current liabilities......................... 146,819 188,964 ------- ------- LONG-TERM DEBT....................................... 87,092 86,855 ------- ------- DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES..... 31,705 32,996 ------- ------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: 6% noncumulative preferred stock................... 1,579 1,579 8% cumulative preferred stock...................... 500 500 Common stock....................................... 263 263 Additional paid-in capital......................... 3,710 3,710 Retained earnings.................................. 89,477 101,850 Treasury stock, at cost............................ (5,896) (5,896) ------- ------- Total stockholders' equity........................ 89,633 102,006 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $355,249 $410,821 ======== ======== See notes to consolidated financial statements. F-3 J. CREW GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Fiscal Year Ended --------------------------------------- February 3, February 2, January 31, 1995 1996 1997 ---- ----- ---- (In thousands) Net sales....................... $724,756 $732,580 $795,931 Other revenues.................. 12,969 13,329 12,912 ------- ------- ------- Revenues.................... 737,725 745,909 808,843 Cost of goods sold, including buying and occupancy costs................. 394,073 399,668 428,719 ------- ------- ------- Gross profit................ 343,652 346,241 380,124 Selling, general and administrative expenses......... 311,468 327,672 348,305 ------- ------- ------- Income from operations...... 32,184 18,569 31,819 Interest expense--net........... 6,965 9,350 10,470 ------- ------- ------- Income before provision for income taxes, extraordinary item and cumulative effect of accounting changes.................... 25,219 9,219 21,349 Provision for income taxes.................... 10,300 3,700 8,800 ------- ------- ------- Income before extraordinary item and cumulative effect of accounting changes.......... 14,919 5,519 12,549 Extraordinary item--loss on early retirement of debt (net of income tax benefit of $1,200).......... -- (1,679) -- Cumulative effect of accounting changes (net of income taxes of $1,800)................ -- 2,610 -- ------- ------- ------- Net income.................. $14,919 $6,450 $12,549 ======= ======= ======= See notes to consolidated financial statements. F-4 J. CREW GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended --------------------------------------- February 3, February 2, January 31, 1995 1996 1997 ---- ----- ---- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................. $14,919 $6,450 $12,549 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............. 8,110 10,272 10,541 Amortization of deferred financing costs.................... 249 1,186 401 Deferred incomes taxes.................... (987) 10,131 (1,184) Provision for losses on accounts receivable... 7,956 7,277 6,945 Noncash compensation expense.................. 1,901 1,142 -- Changes in operating assets and liabilities: Accounts receivable...... (7,041) (7,708) (6,744) Merchandise inventories.............. (35,409) (10,417) (49,602) Prepaid expenses and other current assets................... (4,349) (12,444) (4,007) Other assets............. (1,244) (2,031) (375) Accounts payable......... 7,876 6,318 31,864 Other liabilities........ 2,504 (5,351) 3,439 Federal and state income taxes payable..... 7,289 (12,674) 12,670 ------- ------- ------- Net cash provided by (used in) operating activities... 1,774 (7,849) 16,497 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures........ (14,595) (18,466) (27,462) Proceeds from construction allowances..... 1,128 3,826 4,981 ------- ------- ------- Net cash used in investing activities... (13,467) (14,640) (22,481) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of long-term debt.............. 15,000 85,000 -- Repayment of long-term debt.............. (7,237) (67,237) (237) Dividends paid.............. (1,000) -- (176) ------- ------- ------- Net cash provided by (used in) financing activities............ 6,763 17,763 (413) ------- ------- ------- DECREASE IN CASH AND CASH EQUIVALENTS............ (4,930) (4,726) (6,397) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..................... 23,185 18,255 13,529 ------- ------- ------- CASH AND CASH EQUIVALENTS, END OF YEAR..................... $18,255 $13,529 $7,132 ======= ======= ======= SUPPLEMENTARY CASH FLOW INFORMATION: Income taxes paid (refunded).................. $4,063 $7,000 $(3,600) ======= ======= ======= Interest paid............... $6,520 $9,601 $9,880 ======= ======= ======= See notes to consolidated financial statements. F-5 J. CREW GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
6% 8% Total Noncumulative Cumulative Additional Stock- Preferred Stock Preferred Stock Common Stock Paid-in Retained Treasury holders' Issued Issued Issued Capital Earnings Stock Equity Shares Amount Shares Amount Shares Amount (In thousands, except shares) BALANCE, JANUARY 28, 1994..........15,794 $1,579 5,000 $500 262,912 $263 $1,827 $69,108 $(7,056) $66,221 Net income.............. -- -- -- -- -- -- -- 14,919 -- 14,919 Issuance of 5,033 shares of common stock from treasury under stock bonus agreement............... -- -- -- -- -- -- 1,166 -- 735 1,901 Dividends............... -- -- -- -- -- -- -- (1,000) -- (1,000) ------- ------ ----- ---- ------- ---- ------ -------- ------- -------- BALANCE, FEBRUARY 3, 1995..........15,794 1,579 5,000 500 262,912 263 2,993 83,027 (6,321) 82,041 Net income.............. -- -- -- -- -- -- -- 6,450 -- 6,450 Issuance of 2,898 shares of common stock from treasury under stock bonus agreement............... -- -- -- -- -- -- 717 -- 425 1,142 ------- ------ ----- ---- ------- ---- ------ -------- ------- -------- BALANCE, FEBRUARY 2, 1996..........15,794 1,579 5,000 500 262,912 263 3,710 89,477 (5,896) 89,633 Net income.............. -- -- -- -- -- -- -- 12,549 -- 12,549 Dividends............... -- -- -- -- -- -- -- (176) -- (176) ------- ------ ----- ---- ------- ---- ------ -------- ------- -------- BALANCE, JANUARY 31, 1997..........15,794 $1,579 5,000 $500 262,912 $263 $3,710 $101,850 $(5,896) $102,006 ======= ====== ===== ==== ======= ==== ====== ======== ======= ========
See notes to consolidated financial statements. F-6 J. CREW GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FISCAL YEARS ENDED FEBRUARY 3, 1995, FEBRUARY 2, 1996 AND JANUARY 31, 1997 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Principles of Consolidation--The accompanying consolidated financial statements include the accounts of J. Crew Group, Inc. and its wholly-owned subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. b. Business--The Company, which operates in one business segment, designs, contracts for the manufacture of, markets and distributes men's, women's and children's apparel, accessories and home furnishings. The Company's products are marketed through catalogs and retail stores primarily in the United States. The Company is also party to a licensing agreement which grant the licensees exclusive rights to use the Company's trademarks in connection with the manufacture and sale of products in Japan. The license agreement provides for payments based on specified percentages of net sales. The Company is subject to seasonal fluctuations in its merchandise sales and results of operations. The Company expects its sales and operating results generally to be lower in the first, and second quarters than in the third and fourth quarters (which include the back-to-school and holiday season) of each fiscal year. A significant amount of the Company's products are produced in the Far East through arrangements with independent contractors. As a result, the Company's operations could be adversely affected by political instability resulting in the disruption of trade from the countries in which these contractors are located or by the imposition of additional duties or regulations relating to imports or by the contractor's inability to meet the Company's production requirements. c. Fiscal Year--The Company's fiscal year ends on the Friday closest to January 31. The fiscal years 1994, 1995 and 1996 ended on February 3, 1995 (53 weeks), February 2, 1996 (52 weeks) and January 31, 1997 (52 weeks). d. Cash Equivalents--For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments, with maturities of 90 days or less when purchased, to be cash equivalents. Cash equivalents, which were $9,700,000 and $1,968,000 at February 2, 1996 and January 31, 1997, are stated at cost, which approximates market value. e. Accounts Receivable--Accounts receivable consists of installment receivables resulting from the sale of merchandise of Popular Club Plan, Inc. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of customers comprising the accounts receivable base. Finance charge income, which is included in other revenues, for the fiscal years 1994, 1995 and 1996 was $9,700,000, $9,354,000 and $9,095,000. f. Merchandise Inventories--Merchandise inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. The Company capitalizes certain design, purchasing and warehousing costs into inventory. (See Note 12.) g. Catalog Costs--Catalog costs, which primarily consist of catalog production and mailing costs, are capitalized and amortized over the expected future revenue stream, which is principally from three to five months from the date catalogs are mailed. The Company accounts for catalog costs in accordance with the AICPA F-7 Statement of Position ("SOP") 93-7, "Reporting on Advertising Costs." SOP 93-7 requires that the amortization of capitalized advertising costs should be the amount computed using the ratio that current period revenues for the catalog cost pool bear to the total of current and estimated future period revenues for that catalog cost pool. Deferred catalog costs, included in prepaid expenses and other current assets, as of February 2, 1996 and January 31, 1997 were $40,743,000 and $41,191,000. Catalog costs, which are reflected in selling and administrative expenses, for the fiscal years 1994, 1995 and 1996 were $112,979,000, $132,566,000, and $135,633,000. (See Note 12). h. Property and Equipment--Property and equipment are stated at cost. Buildings and improvements are depreciated by the straight-line method over the estimated useful lives of the respective assets of twenty years. Furniture, fixtures and equipment are depreciated by the straight-line method over the estimated useful lives of the respective assets, ranging from three to ten years. Leasehold improvements are amortized over the shorter of their useful lives or related lease terms. The Company receives construction allowances upon entering into certain store leases. These construction allowances are recorded as deferred credits and are amortized over the term of the related lease. i. Other Assets--Other assets consist primarily of debt issuance costs which are amortized over the term of the related debt agreements. j. Income Taxes--The provision for income taxes includes taxes currently payable and deferred taxes resulting from the tax effects of temporary differences between the financial statement and tax bases of assets and liabilities, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." k. Revenue Recognition--Revenue is recognized when merchandise is shipped to customers. The Company accrues a sales return allowance in accordance with its return policy for estimated returns of merchandise subsequent to the balance sheet date that relate to sales prior to the balance sheet date. l. Store Preopening Costs--Costs associated with the opening of new retail and outlet stores are expensed as incurred. m. Financial Instruments--The following disclosure about the fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." The fair value of the Company's long-term debt, including current portion, is estimated to be approximately $93,500,000 and $89,100,000 at February 2, 1996 and January 31, 1997, and is based on management's estimate of the present value of future cash flows discounted at the current market rate for financial instruments with similar characteristics and maturity. The carrying amounts of long-term debt are $87,329,000 and $87,092,000 at February 2, 1996 and January 31, 1997. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of those financial instruments. The estimates presented herein are not necessarily indicative of amounts the Company could realize in a current market exchange. The Company from time to time enters into forward foreign exchange contracts as hedges relating to identifiable currency positions to reduce the risk from exchange rate fluctuations. Gains and losses on these contracts are deferred and recognized as adjustments to the bases of those assets. Such gains and losses were not material. At February 2, 1996, the Company had a forward foreign exchange contract outstanding with J. P. Morgan to deliver 230 million yen on March 29, 1996. At January 31, 1997, the Company had a forward foreign exchange contract outstanding with J. P. Morgan to deliver 235 million yen on March 31, 1997. These contracts are hedges F-8 relating to foreign licensing revenues. The fair value of these contracts approximated carrying value due to their short-term maturities. The Company is exposed to credit losses in the event of nonperformance by the counterparties to the forward foreign exchange contract, but it does not expect any counterparties to fail to meet their obligation given their high-credit rating. n. Use of Estimates in the Preparation of Financial Statements--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. o. Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of--In March 1995, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and is effective for fiscal years beginning after December 15, 1995. The adoption of SFAS No. 121 did not have an effect on the Company's financial position or results of operations. p. Reclassifications--Certain items in prior years in specific captions of the consolidated financial statements and notes to financial statements have been reclassed for comparative purposes. 2. OTHER CURRENT LIABILITIES Other current liabilities consist of: February 2, January 31, 1996 1997 Customer liabilities....... $18,827,000 $22,968,000 Accrued catalog and marketing costs............ 9,191,000 10,734,000 Taxes, other than income taxes............... 7,235,000 9,093,000 Other...................... 23,990,000 20,143,000 ---------- ---------- Total................... $59,243,000 $62,938,000 =========== =========== 3. LONG-TERM DEBT February 2, January 31, 1996 1997 Senior Notes(a).............................. $85,000,000 $85,000,000 Industrial Development Revenue Bond, bearing interest at 73.33% of prime rate (8.25% at January 31, 1997); due in monthly principal payments of $19,737 from January 1, 1987 through December 1, 2005(b)........ 2,329,000 2,092,000 ----------- ----------- ............................................. 87,329,000 87,092,000 ----------- ----------- Less payments due within one year............ (237,000) (237,000) Total.................................. $87,092,000 $86,855,000 =========== =========== F-9 (a) In June 1995, the Company issued privately to institutional investors $85,000,000 of 8.1% Senior Notes (the "Senior Notes") due December 15, 2004. Interest on the Senior Notes is payable semiannually on June 15 and December 15. The Senior Notes are payable in annual installments of $4,000,000 in December 1998 and $13,500,000 from December 1999 through December 2004. The proceeds of this private placement were used to prepay $58,000,000 principal amount of senior notes then outstanding and for general corporate purposes. The provisions of the note agreement and the credit agreement (see Note 4) include (i) requirements that the Company maintain minimum levels of tangible net worth, fixed charges coverage, current ratio and funded debt as a percentage of tangible net worth; and (ii) limitations on liens, sale and leaseback transactions, funded debt, payment of dividends and repurchases of capital stock, acquisitions, investments and sales of assets, among others. (b) Property with a net carrying value of approximately $3,400,000 is encumbered as collateral under the Industrial Development Revenue Bond as of January 31, 1997 and February 2, 1996. The maturities of long-term debt required during the next five fiscal years are: Fiscal Year Amount 1997................ $ 237,000 1998................ 4,237,000 1999................ 13,737,000 2000................ 13,737,000 2001................ 13,737,000 4. LINES OF CREDIT In March 1995, the Company entered into a $125 million syndicated revolving credit agreement (the "Credit Agreement") with a group of seven banks with J. P. Morgan as agent. The Credit Agreement provides for commitments for direct borrowings of up to $75 million and letters of credit of up to $125 million. Borrowings under the Credit Agreement are unsecured and bear interest, at the Company's option, at the base rate (defined as the higher of the bank's prime rate or the Federal funds rate plus .5%) or the London Interbank Offering Rate plus .5%. The Credit Agreement expires on March 31, 1998. During fiscal 1994, 1995 and 1996, maximum borrowings under revolving credit agreements were $25,900,000, $49,000,000 and $55,000,000, and average borrowings were $6,600,000, $25,500,000 and $31,200,000. There were no borrowings outstanding under the Credit Agreement at February 2, 1996 or January 31, 1997. Outstanding letters of credit issued to facilitate international merchandise purchases at February 2, 1996 and January 31, 1997 amounted to $25,850,000 and $37,800,000. 5. STOCKHOLDERS' EQUITY The Company has authorized 1,000,000 shares of common stock, $1 par value; 20,000 shares of 6% noncumulative preferred stock, $100 par value; and 10,000 shares of 8% cumulative preferred stock, $100 par value. The common and preferred stock have the right to vote, with each share entitled to one vote. The holders of the 8% cumulative preferred stock shall be entitled to receive cash dividends when, as and if declared by the Board of Directors, at the rate of 8% per annum on its par value in priority to the payment of any F-10 dividends for other classes of stock during any year. Such dividends shall be cumulative from the date of issue, so that if applicable dividends for any past dividend period shall not have been paid thereon or declared and a sum sufficient for payment not set apart, the deficiency shall be fully paid or set apart, without interest, before any dividend shall be paid or set apart for any other class of stock. The Company has agreements with its stockholders requiring the stockholders to offer preferred or common shares to the Company at prices computed in accordance with the agreements before disposing of these shares to others. The Company may, at its option, redeem shares of preferred stock at a price equal to the par value of the preferred stock. At January 31, 1997, the Company had 34,925 shares of common stock, 6,455 shares of 6% noncumulative preferred stock and 2,495 shares of 8% cumulative preferred stock held in treasury. 6. COMMITMENTS AND CONTINGENCIES a. Operating Leases--As of January 31, 1997, the Company was obligated under various long-term operating leases for retail and outlet stores, warehouses and office space and equipment requiring minimum annual rentals. These operating leases expire on varying dates to 2012. At January 31, 1997 aggregate minimum rentals in future periods are as follows: Fiscal Year Amount ----------- ------- 1997.............. $27,949,000 1998.............. 28,766,000 1999.............. 26,591,000 2000.............. 24,000,000 2001.............. 22,003,000 Thereafter........ 116,438,000 Certain of these leases include renewal options and provide for contingent rentals based upon sales and require the lessee to pay taxes, insurance and other occupancy costs. Rent expense for fiscal 1994, 1995 and 1996 was $25,902,000, $27,366,000 and $29,852,000, including percentage rent of $2,470,000, $2,197,000 and $2,850,000. 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. In connection with an employment agreement, the Company was obligated to pay to an employee a bonus based upon a predetermined formula, payable in shares of common stock at fair value and cash. In connection with the agreement, the Company issued 5,033 and 2,898 treasury shares during fiscal 1994 and 1995. c. Litigation--The Company is involved in various legal proceedings, both as plaintiff and as defendant, which are routine litigations incidental to the conduct of its business. The Company believes that the ultimate resolution of these matters will not have a material effect on its financial position or results of operations. 7. EMPLOYEE BENEFIT PLAN The Company has a thrift/savings plan pursuant to Section 401 of the Internal Revenue Code whereby all eligible employees may contribute up to 15% of their annual base salaries subject to certain limitations. The F-11 Company's contribution is based on a percentage formula set forth in the plan agreement. Company contributions to the thrift/savings plan for fiscal 1994, 1995 and 1996 were $1,325,000, $1,478,000 and $1,680,000. 8. LICENSE AGREEMENTS The Company has a licensing agreement through January 1998 with Itochu, a Japanese trading company. The agreement permits Itochu to distribute J. Crew merchandise in Japan. The Company earns royalty payments under the agreement based on the sales of its merchandise. Royalty income, which is included in other revenues, for fiscal 1994, 1995 and 1996 was $3,269,000, $3,975,000 and $3,817,000. 9. INTEREST EXPENSE--NET Interest expense, net consists of the following: Fiscal Fiscal Fiscal 1994 1995 1996 ------- ------- ---- Interest expense........ $7,145,000 $9,548,000 $10,613,000 Interest income......... (180,000) (198,000) (143,000) ---------- ---------- ----------- Interest expense--net... $6,965,000 $9,350,000 $10,470,000 ========== ========== =========== 10. INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". This statement requires the use of the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax expense represents the change in the deferred tax asset/liability balance. The provision for income taxes consists of: Fiscal Fiscal Fiscal 1994 1995 1996 ------- ------- ---- Current: Federal ................... $9,100,000 $(5,131,0000) $9,384,000 State and local ........... 2,187,000 500,000 600,000 ----------- ---------- ---------- 11,287,000 (4,631,000) 9,984,000 Deferred ..................... (987,000) 8,331,000 (1,184,000) ----------- ---------- ---------- Income taxes before tax effect of extraordinary item and cumulative effect of accounting changes ..... 10,300,000 3,700,000 8,800,000 Extraordinary item--current -- (1,200,000) -- Cumulative effect of accounting changes--deferred . -- 1,800,000 -- ----------- ---------- ---------- Total provision for income taxes ........................ $10,300,000 $4,300,000 $8,800,000 =========== ========== ========== F-12 The difference between the provision for income taxes based on the U.S. Federal statutory rate and the Company's effective rate is due primarily to state income taxes. Fiscal Fiscal Fiscal 1994 1995 1996 ------ ------ ---- Federal income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of Federal benefit 5.8 5.1 6.2 ---- ---- ---- Effective tax rate 40.8% 40.1% 41.2% ==== ==== ==== The tax effect of temporary differences which give rise to deferred tax assets and liabilities are: February 2 January 31, 1996 1997 Deferred tax assets: Allowance for doubtful accounts... $1,979,000 $1,769,000 State net operating loss carryforwards .................... 1,100,000 1,300,000 Other 1,177,000 3,155,000 --------- --------- 4,256,000 6,224,000 Deferred tax liabilities: Prepaid catalog costs and other prepaid costs (17,995,000) (18,779,000) ----------- ----------- Net deferred income taxes $(13,739,000) $(12,555,000) ============ ============ 11. EXTRAORDINARY ITEM In June 1995, the Company prepaid $58 million principal amount of senior notes and recorded an extraordinary loss of $1,679,000 (net of an income tax benefit of $1,200,000), consisting of the write-off of deferred financing costs and redemption premiums related to the early retirement of debt. 12. ACCOUNTING CHANGES Effective February 4, 1995, the Company changed its method of accounting for catalog costs to conform with the provisions of the SOP 93-7. SOP 93-7 requires that the amortization of capitalized advertising costs should be the amount computed using the ratio that current period revenues for the catalog cost pool bear to the total of current and estimated future period revenues for that catalog cost pool. Prior to fiscal 1995, such costs were amortized on a straight-line basis over the estimated productive life of the catalog. The cumulative effect of applying this change in accounting on prior periods was a decrease in net income of $1,600,000 (net of an income tax benefit of $1,000,000). Effective February 4, 1995, the Company modified its inventory accounting practices to include the capitalization of certain design, purchasing and warehousing costs. Prior to this change, these costs were charged to expense in the period incurred rather than in the period in which the inventories were sold. The Company believes this change is preferable because it provides a better matching of revenues and costs and improves the comparability of operating results and financial position with those of other companies. The cumulative effect of applying this change in accounting on prior periods was an increase in net income of $4,210,000 (net of income taxes of $2,800,000). The effect of these changes on fiscal 1995's results, excluding the cumulative effect, was to increase net income by $1,000,000. The pro forma effect of these changes on net income in fiscal 1994 would not have been material. F-13 J. CREW OPERATING CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS January 31, November 7, 1997 1997 (unaudited) (In thousands) ASSETS Current assets: Cash and cash equivalents............. $7,132 $12,992 Accounts receivable (net of allowance for doubtful accounts of $4,357 and $4,670, respectively) 58,079 17,493 Merchandise inventories............... 197,657 260,506 Prepaid expenses and other current assets ............................ 58,318 69,467 Refundable income taxes............... -- 4,481 -------- -------- Total current assets................. 321,186 364,939 Property and equipment--at cost: 135,550 171,976 Less accumulated depreciation and amortization...................... (49,121) (61,485) -------- -------- 86,429 110,491 -------- -------- Other assets............................ 3,206 17,961 -------- -------- Total assets............................ $410,821 $493,391 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable--bank.................... $ -- $47,000 Accounts payable...................... 103,279 115,648 Other current liabilities............. 62,938 50,403 Federal and state income taxes payable 9,955 -- Deferred income taxes................. 12,555 12,555 Current portion of long-term debt..... 237 -------- -------- Total current liabilities............ 188,964 225,606 Long-term debt.......................... 86,855 295,257 Deferred credits and other long-term liabilities............................. 32,996 42,240 Total liabilities.................... 308,815 563,103 ======== ======== Redeemable preferred stock ............. -- 125,000 Stockholders' equity.................... 102,006 (194,712) -------- -------- Total liabilities, redeemable preferred stock and stockholders' equity.................................. $410,821 $493,391 ======== ======== See notes to unaudited condensed consolidated financial statements. F-14 J. CREW OPERATING CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Forty Week Period Ended November 8, November 7, 1996 1997 (Unaudited) (Unaudited) (In thousands) Net sales............................ $528,351 $556,993 Other revenues....................... 10,430 9,603 -------- ------- Revenues........................... 538,781 566,596 Cost of goods sold, including buying and occupancy costs 292,056 310,865 Gross profit...................... 246,725 255,731 Selling, general and administrative expenses............................ 240,197 253,159 -------- ------- Income from operations............ 7,078 2,572 Interest expense--net................ 8,101 11,869 Expenses incurred in connection with recapitalization -- 19,851 -------- ------- Loss before income taxes and extraordinary items (1,023) (29,148) Income tax benefit................... 450 5,050 -------- ------- Net loss before extraordinary item $ (573) $(24,098) Extraordinary item--loss on refinancing of debt ($7,627 net of income tax benefit of $3,127)...... -- (4,500) -------- ------- Net loss........................... $ (573) $(28,598) ======== ======== See notes to unaudited condensed consolidated financial statements. F-16 J. CREW OPERATING CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Forty Week Period Ended November 8, November 7, 1996 1997 (Unaudited) (Unaudited) (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................. $(573) $(28,598) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ............ 7,625 10,191 Amortization of deferred financing costs..................................... 311 2,268 Provision for losses on accounts receivable .............................. 4,921 4,946 Changes in assets and liabilities providing/(using) cash: Accounts receivable ...................... (3,204) 35,640 Merchandise inventories .................. (79,203) (62,849) Prepaid expenses and other current assets ................................... (18,927) (11,149) Other assets ............................. (590) (464) Accounts payable ......................... 55,853 12,369 Other liabilities ........................ (11,134) (9,018) Income taxes payable ..................... 2,155 (14,436) ------- ------- Net cash used in operating activities .... (42,766) (61,100) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ..................... (19,826) (38,426) Proceeds from construction allowances .... 4,879 8,745 ------- ------- Net cash used in investing activities .... (13,042) (28,265) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolving credit agreement ................................ 55,000 47,000 Issuance of long-term debt ............... -- 295,257 Costs incurred in connection with issuance of debt ......................... -- (16,820) Repayment of long-term debt .............. (178) (87,092) Issuance of preferred stock............... -- 125,000 Issuance of common stock.................. -- 63,891 Distribution to stockholders.............. -- (316,688) Preferred stock dividends................. -- (14,318) Expenses incurred in connection with recapitalization.......................... -- (13,594) ------- ------- Net cash provided by financing activities ............................... 54,822 95,225 ------- ------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .............................. (2,891) 5,860 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................................... 13,529 7,132 ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD ...... $10,638 $12,992 ======= ======= See notes to unaudited condensed consolidated financial statements. F-16 J. CREW GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FORTY WEEK PERIODS ENDED NOVEMBER 8, 1996 AND NOVEMBER 7, 1997 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include the accounts of J. Crew Group, Inc. ("Holdings") and its wholly-owned subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. Prior to the Recapitalization, Holdings owned all of the stock, directly or indirectly, of its various operating subsidiaries. In connection with the Recapitalization, Holdings formed J. Crew Operating Corp. and immediately prior to the consummation of the Recapitalization, Holdings transferred substantially all of its assets and liabilities to J. Crew Operating Corp. The consolidated balance sheet as of November 7, 1997 and the consolidated statements of operations and cash flows for the forty week periods ended November 8, 1996 and November 7, 1997 have been prepared by the Company and have not been audited. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position of the Company, the results of its operations and cash flows have been made. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Consolidated Financial Statements for the fiscal year ended January 31, 1997. The results of operations for the forty week period ended November 7, 1997 are not necessarily indicative of the operating results for the full fiscal year. 2. RECAPITALIZATION TRANSACTION The Company, its shareholders (the "Shareholders") and TPG Partners II, L.P. are parties to a Recapitalization Agreement dated July 22, 1997 as amended as of October 17, 1997 (the "Recapitalization Agreement") which provided for the recapitalization of the Company (the "Recapitalization"). Pursuant to the Recapitalization Agreement, the Company purchased from the Shareholders all outstanding shares of the Company's capital stock, other than shares of the Company's Common Stock held by existing shareholders and which represented 14.8% of the outstanding shares of the Company's Common Stock immediately following the transaction. In connection with the Recapitalization, the Company repaid substantially all of its preexisting debt obligations immediately before the consummation of the Recapitalization. The Recapitalization Agreement was accounted for as a recapitalization transaction for accounting purposes. 3. LINES OF CREDIT On October 17, 1997, in connection with the Recapitalization (as defined below), the Company entered into a syndicated revolving credit agreement of up to $200.0 million (the "Revolving Credit Agreement") with a group of banks with The Chase Manhattan Bank, as administrative and collateral agent (the "Administrative Agent"), and Donaldson, Lufkin & Jenrette Securities Corporation, as syndication agent. The Bank Facilities may be utilized to fund the working capital requirements of the Company's subsidiaries, including issuance of stand-by and trade letters of credit and bankers' acceptances. Borrowings under the Bank Facilities are secured by a perfected first priority security interest in all assets (except for the accounts receivable of Popular Club Plan, Inc.) of the Company's direct and indirect domestic, and to the extent no adverse tax consequences would result, foreign subsidiaries and bear interest, at the Company's option at a base rate equal to the Administrative Agent's Eurodollar F-21 rate plus an applicable margin or an alternate base rate equal to the highest of the Administrative Agent's prime rate, a certificate of deposit rate plus 1% or the Federal Funds effective rate plus one-half of 1% plus, in each case, an applicable margin. The Revolving Credit Agreement matures on October 17, 2003. The Revolving Credit Agreement replaced the Company's previous revolving credit agreement which provided for commitments in an aggregate amount of up to $200.0 million, of which up to $120.0 million was available for direct borrowings. During the forty week periods ended November 8, 1996 and November 7, 1997, maximum borrowings under the revolving credit agreements were $55,000,000 and $104,000,000, and average borrowings were $34,500,000 and $66,700,000. Borrowings outstanding under the Revolving Credit Agreement were $47,000,000 at November 7, 1997. Outstanding letters of credit issued to facilitate international merchandise purchases at November 7, 1997 amounted to $37,400,000 million. 4. LONG TERM DEBT The $70.0 million term loan is subject to the same interest rates and security terms as the revolving credit facility. The term loan is repayable in quarterly installments of $4.0 million from February 2001 through November 2001 and $6.75 million from February 2002 through November 2003. See Note 3, "Lines of Credit." The $150.0 million Senior Subordinated Notes are unsecured general obligations of J. Crew Operating Corp. and are subordinated in right of payment to all senior debt. Interest on the notes will accrue at the rate of 10-3/8% per annum and will be payable semi-annually in arrears on April 15 and October 15. The notes will mature on October 15, 2007 and may be redeemed at the option of the issuer subsequent to October 15, 2002 at prices ranging from 105.188% in 2002 to 100% in 2005 and thereafter. The Senior Discount Debentures were issued in aggregate principal amount of $142.0 million at maturity and will mature on October 15, 2008. These debentures are senior unsecured obligations of Holdings. Cash interest will not accrue prior to October 15, 2002 and the principal amount of the debentures will accrete at a rate of 13- 1/8% per annum and will be payable in arrears on April 15 and October 15 of each year. The Senior Discount Debentures may be redeemed at the option of Holdings on or after October 15, 2002 at prices ranging from 106.563% to 100% in 2005 and thereafter. 5. SECURITIZATION In connection with the Recapitalization, a facility was entered into to securitize certain consumer loan installment receivables of Popular Club Plan, Inc. on a revolving basis. This securitization involved the transfer of receivables with limited recourse through a special purpose bankruptcy remote subsidiary to a trust in exchange for cash and subordinated certificates representing undivided interests in the pool of receivables and the subsequent sale by the trust of certificates of beneficial interest to third party investors. The Company has no obligation to reimburse the trust or the purchasers of beneficial interests for credit losses. This transaction has been accounted for as a sale in accordance with the provisions of Statement of Financial Accounting Standards No. 125 and accordingly the accounts receivable and the corresponding obligations are not reflected in the consolidated financial statements as of November 7, 1997. At November 7, 1997, $42.0 million of proceeds were received from the sale of accounts receivable and a loss on sale of $400,000 has been recognized in the statement of operations. F-22 6. CAPITAL STOCK Holdings' restated certificate of incorporation authorizes Holdings to issue capital stock consisting of: (a) 100,000,000 shares of common stock; par value $.01 per share; (b) 1,000,000 shares of Series A cumulative preferred stock; par value $.01 per share; and (c) 1,000,000 shares of Series B cumulative preferred stock; par value $.01 per share. In connection with the Recapitalization, Holdings issued 55,000 shares of Common Stock, 92,500 shares of Series A Preferred Stock and 32,500 shares of Series B Preferred Stock. The preferred stock will have an initial liquidation value of $1,000 per share. The preferred stock will accumulate dividends at the rate of 14.5% per annum payable quarterly for periods ending on or prior to October 17, 2009. Shares of the preferred stock may be redeemed at the option of Holdings at redemption prices ranging from 103% of liquidation value at October 17, 1997 to 100% at October 17, 2000 and thereafter. On October 17, 2009, Holdings is required to redeem the Series B Preferred Stock and to pay all accumulated but unpaid dividends on the Series A Preferred Stock. Thereafter, the Series A Preferred Stock will accumulate dividends at the rate of 16.5% per annum. * * * * * * F-23 ================================================================= No person has been authorized to give any information or to make any representations other than those contained or incorporated by reference in this Prospectus and the accompanying Letter of Transmittal and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or the Exchange Agent. Neither this Prospectus nor the accompanying Letter of Transmittal, or both together, constitute an offer to sell or the solicitation of an offer to buy securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus, nor the accompanying Letter of Transmittal, or both together, nor any sale made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company since the date hereof or thereof or that the information contained herein is correct at any time subsequent to the date hereof or thereof. Until , 1998 (90 days after the date of this Prospectus), all dealers effecting transactions in the New Debentures, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of the dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. TABLE OF CONTENTS Page Available Information .................................... i Incorporation of Certain Documents by Reference .......... i Prospectus Summary ....................................... 1 Risk Factors ............................................. 16 The Recapitalization ..................................... 23 Texas Pacific Group ...................................... 25 Use of Proceeds .......................................... 25 Capitalization ........................................... 25 Unaudited Pro Forma Consolidated Financial Data .......... 26 Selected Consolidated Financial Data ..................... 31 Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 33 Business ................................................. 45 Management ............................................... 59 Certain Relationships and Related Transactions ........... 64 Capital Stock of Holdings and Operating Corp ............. 64 Description of Operating Corp Indebtedness ............... 66 The Exchange Offer ....................................... 68 Description of the New Debentures ........................ 76 Certain U.S. Federal Tax Considerations .................. 104 Plan of Distribution ..................................... 107 Legal Matters ............................................ 107 Experts .................................................. 108 Change in Accountants..................................... 108 onsolidated Financial Statements ......................... F-1 ================================================================= ================================================================= J. Crew Group, Inc. Offer to Exchange Series B 13-1/8% Senior Discount Debentures due 2008, which have been registered under the Securities Act of 1933, as amended, for any and all outstanding 13-1/8% Senior Discount Debentures due 2008 PROSPECTUS _________ __, 1998 ================================================================= PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers. The Issuer's Articles of Incorporation provide that a person who is or was a director of the Issuer shall not have any personal liability to the corporation or its shareholders for damages for any breach of duty in such capacity, provided that the foregoing shall not eliminate or limit liability where such liability is imposed under the New York Business Corporation Law (the "NYBCL"). The By-Laws of the Issuer provide that except to the extent expressly prohibited by the NYBCL, the Issuer shall indemnify each person made or threatened to be made a party to or called as a witness in or asked to provide information in connection with any pending or threatened action, proceeding, hearing or investigation, whether civil or criminal, and whether judicial, quasi-judicial, administrative, or legislative, and whether or not for or in the right of the Issuer or any other enterprise, by reason of the fact that such person or such persons testator or intestate is or was a director or officer of the Issuer, or is or was a director or officer of the Issuer who also serves or served at the request of the Issuer any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, penalties, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred in connection with such action or proceeding, or any appeal therein, provided that no such indemnification shall be made if a judgment or other final adjudication adverse to such person establishes that his or her acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled, and provided further that no such indemnification shall be required with respect to any settlement or other nonadjudicated disposition of any threatened or pending action or proceeding unless the Issuer has given its prior consent to such settlement or other disposition. In case any provision in the By-Laws of the Issuer relating to indemnification shall be determined at any time to be unenforceable in any respect, the affected provision shall be given the fullest possible enforcement in the circumstances, it being the intention of the Issuer to afford indemnification and advancement of expenses to its directors and officers, acting in such capacities or in the other capacities mentioned herein, to the fullest extent permitted by law. Section 722 of the NYBCL provides as follows: Authorization for indemnification of directors and officers (a) A corporation may indemnify any person made, or threatened to be made, a party to an action or proceeding (other than one by or in the right of the corporation to procure a judgment in its favor), whether civil or criminal, including an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, which any director or officer of the corporation served in any capacity at the request of the corporation, by reason of the fact that he, his testator or intestate, was a director or officer of the corporation, or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such director or officer acted, in good faith, for a purpose which he resonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his conduct was unlawful. (b) The termination of any such civil or criminal action or proceedings by judgment, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not in itself create a presumption that any such director or officer did not act, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, II-1 employee benefit plan or other enterprise, not opposed to, the best interests of the corporation or that he had reasonable cause to believe that his conduct was unlawful. (c) A corporation may indemnify any person made, or threatened to be made, a party to an action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he, his testator or intestate, is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of any other corporation of any type or kind, domestic or foreign, of any partnership, joint venture, trust, employee benefit plan or other enterprise, against amounts paid in settlement and reasonable expenses, including attorneys' fees, actually and necessarily incurred by him in connection with the defense or settlement of such actions, or in connection with an appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation, except that no indemnification under this paragraph shall be made in respect of (1) a threatened action, or a pending action which is settled or otherwise disposed of, or (2) any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnify for such portion of the settlement amount and expenses as the court deems proper. (d) For the purposes of this section, a corporation shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to applicable law shall be considered fines; and action taken or omitted by a person with respect to an employee benefit plan in the performance of such person's duties for a purpose reasonably believed by such person to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the corporation. The Issuer maintains directors' and officers' liability insurance. Item 21. Exhibits and Financial Statement Schedules. (a) Exhibits. A list of exhibits included as part of this Registration Statement is set forth in the Exhibit Index which immediately precedes such exhibits and is hereby incorporated by reference herein. (b) Financial Statement Schedules. Schedules have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information is included in the financial statements or notes thereto. Item 22. Undertakings. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plans annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant, pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or II-2 paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by any such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether or not such indemnification is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf, thereunto duly authorized, in the City of New York, State of New York, on December 15, 1997. J. CREW GROUP, INC. By: /s/ Emily Woods ----------------------------- Name: Emily Woods Title: Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below on this Registration Statement hereby constitutes and appoints Emily Woods and Michael P. McHugh, and each of them, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (unless revoked in writing) to sign any and all amendments (including post-effective amendments thereto) to this Registration Statement to which this power of attorney is attached, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as full to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated, on December 15, 1997. Signature Title --------- ----- /s/ Emily Woods Director and Chief Executive - ---------------------------- Officer Emily Woods /s/ David Bonderman Director - ---------------------------- David Bonderman /s/ James G. Coulter Director - ---------------------------- James G. Coulter /s/ Richard W. Boyce Director - ---------------------------- Richard W. Boyce S-1 Signature Title --------- ----- /s/ Michael P. McHugh Vice President Finance and - ---------------------------- Chief Financial Officer Michael P. McHugh /s/ Nicholas Lamberti Vice President - ---------------------------- Nicholas Lamberti S-3 EXHIBIT INDEX Exhibit No. Description - ------- ----------- 2.1 Recapitalization Agreement, dated as of July 22, 1997 between TPG Partners II, L.P. and J. Crew Group, Inc. (the "Recapitalization Agreement") NOTE: Pursuant to the provisions of paragraph (b)(2) of Item 601 of Regulation S-K, the Registrant hereby undertakes to furnish to the Commission upon request copies of any schedule to the Recapitalization Agreement. 2.2 Amendment to Recapitalization Agreement, dated as of October 17, 1997 between TPG Partners II, L.P. and J. Crew Group, Inc. (the "Amendment") NOTE: Pursuant to the provisions of paragraph (b)(2) of Item 601 of Regulation S-K, the Registrant hereby undertakes to furnish to the Commission upon request copies of any schedule to the Amendment. 3.1 Restated Certificate of Incorporation of J. Crew Group, Inc. 3.2 By-laws of J. Crew Group, Inc. 4.1 Stockholders' Agreement, dated as of October 17, 1997, among J. Crew Group, Inc. and the Stockholder signatories thereto 4.2 Stockholders' Agreement, dated as of October 17, 1997, among J. Crew Group, Inc., TPG Partners II, L.P. and Emily Woods (included as Exhibit B to the Woods Employment Agreement filed as Exhibit 10.1) 4.3 Indenture, dated as of October 17, 1997, between J. Crew Group, Inc. as issuer, and State Street Bank and Trust Company, as trustee, relating to the Debentures (the "Indenture") 4.4 Form of Series B 13-1/8% Senior Discount Debenture due 2008 of J. Crew Group, Inc. (the "New Debentures") (included as Exhibit B of the Indenture filed as Exhibit 4.2) 4.5 Credit Agreement, dated as of October 17, 1997, among J. Crew Group, Inc., J. Crew Operating Corp., the Lenders Party thereto, the Chase Manhattan Bank, as Administrative Agent, and Donaldson, Lufkin & Jenrette Securities Corporation, as Syndication Agent* 4.6 Guarantee Agreement dated as of October 17, among J. Crew Group, Inc., the subsidiary guarantors of J. Crew Operating Corp. that are signatories thereto and The Chase Manhattan Bank - -------- to be filed by amendment X-1 Exhibit No. Description - ------- ----------- 4.7 Indemnity, Subrogation and Contribution Agreement dated as of October 17, 1997, amonhg J. Crew Operating Corp., the subsidiary guarantors of J. Crew Operating Corp. that are signatories thereto and The Chase Manhattan Bank 4.8 Pledge Agreement, dated as of October 17, among J. Crew Operating Corp., J. Crew Group, Inc., the subsidiary guarantors of J. Crew Operating Corp. that are signatories thereto and The Chase Manhattan Bank 4.9 Security Agreement, dated as of October 17, among J. Crew Operating Corp., J. Crew Group, Inc., the subsidiary guarantors of J. Crew Operating Corp. that are signatories thereto and The Chase Manhattan Bank 4.10 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. NOTE: Pursuant to the provisions of paragraph (b)(4)(iii) of Item 601 of Regulation S-K, the Registrant hereby undertakes to furnish to the Commission upon request copies of the instruments pursuant to which various entities hold long-term debt of the Company or its subsidiaries, none of which instruments govern indebtedness exceeding 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. 5.1 Opinion of Cleary, Gottlieb, Steen & Hamilton regarding legality of the New Debentures 10.1 Employment Agreement, dated October 17, 1997, among J. Crew Group, Inc., J. Crew Operating Corp., TPG Partners II, L.P. (only with respect to Section 2(c) therein) and Emily Woods (the "Woods Employment Agreement") 10.2 J. Crew Operating Corp. Senior Executive Bonus Plan (included as Exhibit A to the Woods Employment Agreement filed as Exhibit 10.1) 10.3 Stock Option Grant Agreement, made as of October 17, 1997 between J. Crew Group Inc. and Emily Woods (time based) 10.4 Stock Option Grant Agreement, made as of October 17, 1997 between J. Crew Group Inc. and Emily Woods (performance based) 10.5 Letter Agreement between Matthew Rubel and J. Crew Group, Inc.* - -------------- * to be filed by amendment X-2 Exhibit No. Description 10.6 Contract Carrier Agreement, between J. Crew Group, Inc. and United Parcel Service, Inc. 10.7 Custom Pricing Agreement, made November 15, 1996 between Federal Express Corporation and J Crew Group, Inc. 10.8 Lease dated as of October 21, 1981 between Vornado, Inc. and Popular Services, Inc. 10.9 Agreement of Sublease dated November 4, 1993 between Revlon Holdings Inc., as Sublessor, and Popular Club Plan, Inc., as Sublessee 10.10 Letter Agreement, dated July 29, 1996, between World Color and Clifford & Wills, Inc. 10.11 Agreement dated August 14, 1997 between R.R. Donnelley & Sons Company and J. Crew Inc. 10.12 Letter Agreement between David DeMattei and J. Crew Group, Inc.* 10.13 J. Crew Group, Inc. 1997 Stock Option Plan 16.1 Letter re Change in Certifying Accountant 21.1 Subsidiaries of J. Crew Group, Inc. 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Cleary, Gottlieb, Steen & Hamilton (included in its opinion filed as Exhibit 5.1) 25.1 Form T-1 with respect to the eligibility of State Street Bank and Trust Company with respect to the Indenture 27.1 Financial Data Schedule 99.1 Form of Letter of Transmittal 99.2 Form of Notice of Guaranteed Delivery 99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees 99.4 Form of Letter to Clients - -------------- * to be filed by amendment X-3
                                                   EXECUTION COPY
                                                   --------------



                   RECAPITALIZATION AGREEMENT



                           by and among



           THE SHAREHOLDERS LISTED ON SCHEDULE A HERETO,

                            as Sellers



                        J. CREW GROUP, INC.



                                and



                       TPG PARTNERS II, L.P.

                             as Buyer





                           July 22, 1997





                         TABLE OF CONTENTS

                               Page



SECTION 1.  DEFINITIONS...........................................1


SECTION 2.  PURCHASE AND REDEMPTION OF SHARES.....................8
      2.1.    Purchase and Redemption of Shares...................8
      2.2.    Closing.............................................8
      2.3.    Deliveries and Actions at the Closing...............9


SECTION 3.  REPRESENTATIONS AND WARRANTIES REGARDING
             SELLERS AND THE COMPANY.............................10
      3.1.    Organization and Good Standing of the
                Company..........................................10
      3.2.    Subsidiaries.......................................11
      3.3.    Capitalization; Title to Shares....................12
      3.4.    Authority, Approvals and Consents..................12
      3.5.    Financial Statements...............................13
      3.6.    Absence of Material Adverse Change;
                Conduct of Business..............................14
      3.7.    Taxes..............................................14
      3.8.    Legal Matters......................................15
      3.9.    Real Property......................................15
      3.10.   Contracts..........................................17
      3.11.   Employee Benefit Plans.............................17
      3.12.   Intellectual Property..............................18
      3.13.   Brokers............................................18
      3.14.   Environmental Matters..............................19
      3.15.   Transactions with Insiders.........................19
      3.16.   Insurance..........................................20
      3.17.   Certain Additional Items...........................20
      3.18.   No Other Representations or Warranties.............21


SECTION 4.  REPRESENTATIONS AND WARRANTIES REGARDING
             BUYER...............................................21
      4.1.    Organization of Buyer..............................21
      4.2.    Power; Authorization; Consents.....................22
      4.3.    Brokers............................................22
      4.4.    Investment Intent of Buyer.........................23
      4.5.    Financial Matters..................................23
      4.6.    No Reliance........................................23


                                -i-





SECTION 5.  COVENANTS............................................24
      5.1.    Access; Confidentiality............................24
      5.2.    Announcements......................................24
      5.3.    New Financing......................................25
      5.4.    Recapitalization...................................25
      5.5.    Consents; Cooperation..............................26
      5.6.    Additional Agreement...............................26
      5.7.    Notification of Certain Matters....................27
      5.8.    Hart-Scott-Rodino..................................27
      5.9.    Further Assurances.................................27
      5.10.   Retention of Books and Records.....................27
      5.11.   Personnel..........................................28
      5.12.   Conduct of Business Prior to the Closing...........28
      5.13.   Sellers' Rights with Respect to Resales............30
      5.14.   Transfer Taxes.....................................32
      5.15.   Landlord Consents..................................32
      5.16.   Retention of Shares................................32
      5.17.   Termination of Existing Shareholder
                Agreement........................................32
      5.18.   Indemnification....................................33


SECTION 6.  CONDITIONS TO THE OBLIGATIONS OF BUYER...............33
      6.1.    Representations and Warranties;
                Covenants........................................33
      6.2.    Hart-Scott-Rodino..................................34
      6.3.    Opinion of Sellers' Counsel........................34
      6.4.    Absence of Injunction..............................34
      6.5.    Directors..........................................34
      6.6.    Certificates.......................................34
      6.7.    Shareholder Approval...............................35


SECTION 7.  CONDITIONS TO THE OBLIGATIONS OF SELLERS.............35
      7.1.    Representations and Warranties;
                Covenants........................................35
      7.2.    Hart-Scott-Rodino..................................35
      7.3.    Opinion of Buyer's Counsel.........................35
      7.4.    Absence of Injunction..............................36
      7.5.    Certificates.......................................36
      7.6.    Employment/Consulting Agreement....................36


SECTION 8.  TERMINATION..........................................36
      8.1.    Termination........................................36
      8.2.    Effect of Termination..............................37


SECTION 9.  SURVIVAL AND INDEMNIFICATION.........................37
      9.1.    Survival...........................................37


                              -ii-





      9.2.    Sellers' Indemnification...........................37
      9.3.    Buyer's Indemnification............................40
      9.4.    Claims by Third Parties............................41
      9.5.    Tax Claims of the Buyer............................43


SECTION 10. MISCELLANEOUS........................................44
      10.1.   Headings...........................................44
      10.2.   Notices............................................44
      10.3.   Assignment.........................................45
      10.4.   Entire Agreement...................................46
      10.5.   Amendment; Waiver..................................46
      10.6.   Counterparts.......................................46
      10.7.   Governing Law......................................46
      10.8.   Severability.......................................46
      10.9.   Consent to Jurisdiction............................47
      10.10.  Third Person Beneficiaries.........................47
      10.11.  Representations and Warranties;
                Disclosure Schedule..............................47
      10.12.  United States Dollars..............................48
      10.13.  Expenses...........................................48
      10.14.  Liquidated Damages.................................48


Schedule A      Shareholders
- ----------
Schedule B      Seller Addresses
- ----------

Exhibit A       Fees, Costs and Expenses
- ----------
Exhibit B       Sellers Retained Shares
- ----------
Exhibit C       Employment/Consulting Agreement
- ----------


                              -iii-





                    RECAPITALIZATION AGREEMENT
                    --------------------------

           THIS AGREEMENT dated as of this 22nd day of July,
1997, by and among J. Crew Group, Inc., a New York corporation
(the "Company"), the holders of shares of Common Stock listed on
Schedule A hereto (each a "Seller," and collectively, the
"Sellers"), and TPG Partners II, L.P., a Delaware limited
partnership ("Buyer").

           The parties hereto desire to effect a series of
transactions pursuant to which, among other things, the Buyer
will acquire from the Company equity securities of the Company,
which securities will represent all of the economic value and
voting power of the Company other than the Retained Shares (as
defined below), and Sellers will sell to the Company all of their
current equity ownership of the Company other than the Retained
Shares.

           Accordingly, in consideration of the premises and of
the respective covenants and agreements contained herein, the
parties hereto hereby agree as follows:

SECTION 1.   DEFINITIONS
             -----------

           In this Agreement (including the recitals), except as
expressly provided or as the context otherwise requires:

           "Affiliate" means with respect to any Person, any
other Person directly or indirectly controlling, controlled by,
or under direct or indirect common control with, such Person. A
Person will be deemed to control a corporation if such Person
possesses, directly or indirectly, the power to direct or cause
the direction of the management and policies of such corporation,
whether through the ownership of voting securities, by contract
or otherwise.

           "Agreement" means this agreement including all
recitals, exhibits and the Disclosure Schedule relating hereto.

           "Amended Charter" shall have the meaning given such
term in Section 5.4 hereof.

           "Business Day" means any day which is not a Saturday,
Sunday or any other day on which banks in the State of New York
are authorized or required by law to close.





"Closing" means the closing of the purchase and sale of the
Recapitalization Shares and the Redeemed Shares pursuant to this
Agreement.

           "Closing Date" means the date on which the Closing
occurs as determined by Section 2.2 of this Agreement.

           "Closing Deadline" shall have the meaning given such
term in Section 2.2 hereof.

           "Closing Deliveries" means the deliveries specified by
Section 2.3 of this Agreement.

           "Closing Payments" means (a) the aggregate principal
amount of indebtedness outstanding under the Senior Notes, the
IRB Debt and the Revolving Facility on the Closing Date, (b) the
aggregate amount of accrued and unpaid interest and any premium
due on such indebtedness as of the Closing, (c) any unpaid fees
or expenses due on such indebtedness as of the Closing, (d) the
redemption price for all of the Preferred Shares as specified in
the Company's Certificate of Incorporation as in effect on the
date hereof, and, without duplication, (e) the aggregate amount
of fees, costs and expenses set forth on Exhibit A hereto.

           "Code" means the Internal Revenue Code of 1986, as
amended.

           "Common Shares" means all shares of Common Stock
issued and outstanding on the date hereof.

           "Common Stock" means the common stock, par value $1.00
per share, of the Company.

           "Company Agreement" means any mortgage, indenture,
note, agreement, contract, lease, license, franchise, obligation,
instrument or other commitment, arrangement or understanding of
any kind, to which the Company or a Subsidiary is a party or by
which the Company or a Subsidiary or any of their respective
property may be bound or affected.

           "Confidentiality Agreement" means the Confidentiality
Agreement between Buyer and the Company dated April 26, 1996.

           "Debt" shall mean any liability in respect of (i)
borrowed money, (ii) capitalized lease obligations, (iii)
obligations under interest rate agreements and currency


                              -2-





agreements and (iv) guarantees of any of the foregoing, provided
that Debt shall not include any New Financing.

           "Disclosure Schedule" means the disclosure schedule
relating to this Agreement.

           "8% Preferred Shares" means all issued and outstanding
shares of 8% Cumulative Preferred Stock, par value $100 per
share, of the Company.

           "Employee Benefit Plan" shall have the meaning given
such term in Section 3.11 hereof.

           "Employment/Consulting Agreement" shall have the
meaning given such term in Section 7.6 hereof.

           "Environmental Law" means any and all federal, state
or local laws, ordinances or regulations relating to pollution,
the protection of the environment and the discharge or release of
materials into the environment.

           "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.

           "Financial Statements" means the audited consolidated
balance sheets of the Company for the years ended February 3,
1995, February 2, 1996 and January 31, 1997, and the related
statements of income, stockholders equity and cash flow for the
periods then ended and the notes thereto accompanied by the
report thereon of Deloitte & Touche LLP.

           "GAAP" shall mean United States generally accepted
accounting principles.

           "Hazardous Material" shall mean any substance,
chemical, compound, product, solid, gas, liquid, waste or
byproduct which is classified or regulated as "hazardous" or
"toxic" pursuant to any Environmental Law and includes, without
limitation, asbestos, PCBs and petroleum (including crude oil or
any fraction thereof).

           "HSR Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.


                              -3-





           "Indemnitee" shall mean the Buyer, Sellers or Company upon
receipt by the Buyer, Sellers or Company of a Third Party Claim.

           "Indemnitor" shall mean any of the Buyer, Sellers or
Company upon receipt by the Buyer, Sellers or Company of a claim
for indemnification from the Indemnitee pursuant to a Third Party
Claim.

           "Insider" shall have the meaning given such term in
Section 3.15 hereof.

           "Intellectual Property" means all of the following:
(i) trademarks and service marks (registered or unregistered) and
trade names, and all goodwill associated therewith; (ii) patents,
patentable inventions, discoveries, improvements, ideas, know-how
and processes; (iii) trade secrets and the right to limit the use
or disclosure thereof; (iv) copyrights in all works; and (v)
domain names.

           "IRB Debt" means the aggregate principal amount
outstanding under the Deed of Assumption, dated as of December 1,
1985, between the Industrial Development Authority of the City of
Lynchburg, Virginia and the Company.

           "Knowledge of Sellers", or words of similar import,
means the actual knowledge of Arthur Cinader, Emily Woods and/or
Michael McHugh.

           "Leased Property" shall have the meaning given such
term in Section 3.9 hereof.

           "Legal Requirements" means all statutes, ordinances,
codes, rules, regulations, standards, judgments, decrees, writs,
rulings, injunctions, orders and other requirements of
governmental, administrative or judicial entities that are
material and applicable to the Company and any of its property.

           "Lien" means any encumbrance, mortgage, charge, right
or other security interest.

           "Losses" means, in respect of Buyer or Sellers, any
and all losses, liabilities, claims and reasonable expenses of
defense thereof (including, without limitation, fees and
disbursements of counsel, but excluding compensation paid to
employees of Buyer or Sellers or their respective Affiliates, as


                              -4-





the case may be, in connection with such defense), Liens or other
obligations of any nature whatsoever.

           "Material Adverse Effect" means any material adverse
effect on the business, operations, assets, financial condition,
properties or results of operations of the Company and its
Subsidiaries, taken as a whole.

           "Material Agreement" means each Company Agreement that
is material to the business, operations, assets, financial
condition or properties of the Company and its Subsidiaries,
taken as a whole, including, without regard to materiality, each
of the following Company Agreements:

                (a) any mortgage, indenture, note, installment
      obligation or other instrument, agreement or arrangement
      for or relating to borrowing of money by the Company or a
      Subsidiary in excess of $100,000;

                (b) any guaranty, direct or indirect, by the Company
      or a Subsidiary of any obligation for borrowed money,
      excluding endorsements made for collection in the ordinary
      course of business in excess of $100,000;

                (c) any obligation to sell or to register the sale of
      any of the Common Shares or Preferred Shares or other
      securities of the Company or a Subsidiary;

                (d) any obligation to make payments, contingent or
      otherwise, arising out of the prior acquisition of the
      business of other persons;

                (e) any collective bargaining agreement with any labor
      union;

                (f) any lease or similar arrangement for the use of
      personal property involving payments by the Company or a
      Subsidiary in excess of $100,000 per annum;

                (g) any Company Agreement to which any Insider is a
      party;

                (h) any Company Agreement providing for aggregate
      payments in excess of $100,000 per annum after the Closing
      that is not terminable by the Company or a Subsidiary on
      less than 180 days' notice without penalty;


                              -5-





                (i) any Company Agreement containing non-competition
      covenants binding on the Company or a Subsidiary;

                (j) any partnership, joint venture or similar
      agreement to which the Company or a Subsidiary is a party;
      and

                (k) any employment contracts, arrangements,
      commitments or understandings of any kind with any officer,
      director, employee or consultant of the Company or a
      Subsidiary which may not be terminated by the Company or a
      Subsidiary without penalty upon not more than 90 days'
      notice, pursuant to which payments may be required to be
      made following the Closing.

           "New Financing" shall have the meaning given such term
in Section 5.3 hereof.

           "Owned Property" shall have the meaning given such
term in Section 3.9 hereof.

           "Person" means and includes an individual,
corporation, partnership (limited or general), joint venture,
association, trust, limited liability company, any other
unincorporated organization or entity and a governmental entity
or any department or agency thereto.

           "Preferred Shares" means the 6% Preferred Shares and
the 8% Preferred Shares.

           "Property Leases" shall have the meaning given such
term in Section 3.9 hereof.

           "Real Property" shall mean the Owned Property and the
Leased Property.

           "Recapitalization Purchase Price" shall have the
meaning given such term in Section 2.1 hereof.

           "Recapitalization Shares" shall have the meaning given
such term in Section 2.1 hereof.

           "Redeemed Shares" shall mean all of the Common Shares
except the Retained Shares.


                              -6-





           "Release" shall mean any spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping,
leaching, dumping, or disposing into the outdoor environment.

           "Retained Shares" shall mean the Common Shares
retained by the Sellers pursuant to Section 5.16 hereof.

           "Revolving Facility" means the $200,000,000 Credit
Agreement, dated as of April 18, 1997, among the Company, as
borrower, the Banks listed therein, the Issuing Banks listed
therein, and Morgan Guaranty Trust Company of New York, as agent.

           "Sellers Redemption Price" shall mean $347,770,000
less the sum of (i) the value of the Retained Shares as set forth
in Section 5.16 of this Agreement and (ii) $1,184,400,
representing the amount necessary to redeem the Preferred Shares
pursuant to Section 2.3(a).

           "Senior Notes" means the Company's 8.10% Senior Notes
due 2004.

           "6% Preferred Shares" means all issued and outstanding
shares of 6% Noncumulative Preferred Stock, par value $100 per
share, of the Company.

           "Subsidiaries" or "Subsidiary" shall mean any
corporation of which the Company, directly or indirectly, owns a
majority of the common stock or has the power to vote or direct
the voting of sufficient securities to elect a majority of the
board of directors of such corporation, including, but not
limited to, those corporations listed in Section 3.2 of the
Disclosure Schedule.

           "Tax" or "Taxes" means all taxes, charges, fees,
levies or other assessments, and all estimated payments thereof,
including but not limited to income, excise, property, sales,
use, value added, environmental, franchise, payroll, transfer,
gross receipts, withholding, social security, and unemployment
taxes, imposed by any federal, state, county or local government,
or any subdivision or agency thereof, and any interest, penalties
and expenses relating to such taxes, charges, fees, levies or
other assessments.

           "Tax Returns" means all federal, state and local Tax
returns, reports and declarations which are due and required to
be filed by any applicable Tax law.


                              -7-





           "Third Party Claim" shall have the meaning given such
term in Section 9.4.

SECTION 2.  PURCHASE AND REDEMPTION OF SHARES
            ---------------------------------

           2.1.  Purchase and Redemption of Shares. Upon and subject
to the terms and conditions of this Agreement, Buyer agrees to
purchase from the Company, and the Company agrees to sell to the
Buyer 48,400 shares of Common Stock, which immediately following
the Closing will constitute eighty-eight percent (88%) of all of
the outstanding common equity securities of the Company and all
of the then outstanding common equity securities of the Company
other than the Retained Shares (the "Recapitalization Shares").
The aggregate purchase price payable for the Recapitalization
Shares by the Buyer (the "Recapitalization Purchase Price") shall
be the amount equal to $549,600,000, less (i) the amount of
proceeds from the New Financing which the Company actually
receives and (ii) the value of the Retained Shares as set forth
in Section 5.16 of this Agreement. Buyer shall provide, or shall
cause one or more other Persons to provide, to the Company the
New Financing. Under no circumstances shall the failure of the
Company or the Buyer to obtain the New Financing relieve the
Buyer of its obligation to purchase the Recapitalization Shares
for the Recapitalization Purchase Price at the Closing. The Buyer
shall pay the Recapitalization Purchase Price in cash, by wire
transfer of immediately available funds to the account of the
Company as designated by the Company. Simultaneously with the
purchase of the Recapitalization Shares by the Buyer, the Company
shall redeem from the Sellers all of the Redeemed Shares for the
Sellers Redemption Price. The Sellers Redemption Price shall be
allocated among the Redeemed Shares in the manner set forth on
Schedule A hereto.

           2.2.  Closing.

           (a) Subject to the satisfaction or waiver of
the conditions set forth in Sections 6 and 7 of this Agreement
(other than those requiring Closing Deliveries), the Closing will
take place at the offices of Willkie Farr & Gallagher, at 10:00
A.M. on a date to be mutually agreed upon by the Sellers and
Buyer (the "Closing Date"), which date shall not be more than 90
days from and after the date hereof (the "Closing Deadline"), or
at such other time and place as the parties may agree. Buyer
shall


                              -8-





use its best efforts to cause the Closing Date to occur not more
than 60 days from and after of the date hereof.

           (b) If the Closing occurs at or before 12:00
noon New York time on the Closing Date, the Closing will be
effective as of the start of business on the Closing Date;
otherwise, the Closing will be effective as of the start of
business on the day following the Closing Date.

           (c) Two business days prior to the Closing
Date, the Company shall deliver to Buyer a certificate of the
Chief Financial Officer of the Company, reflecting the best
available estimates of the Company of the amounts, as of the date
thereof, of the fees, costs and expenses set forth on Exhibit A
of this Agreement. To the extent that the amounts set forth in
such certificate, in the aggregate, exceed the aggregate of the
corresponding amounts set forth on Exhibit A of this Agreement by
at least $100,000, the Sellers Redemption Price payable to the
Sellers at the Closing shall be reduced by the amount by which
such excess exceeds $100,000 (which reduction shall be allocated
to the Sellers in proportion to the amounts set forth opposite
their names on Schedule A hereto).

           2.3.  Deliveries and Actions at the Closing.
Subject to the satisfaction or waiver of the conditions set forth
in Sections 6 and 7 hereof, at and in connection with the
Closing:

                (a)  the Company shall redeem the
      Preferred Shares at the per share redemption price set
      forth in the Company's Certificate of Incorporation as in
      effect on the date hereof;

                (b)  the Company shall file the Amended Charter as
      provided in Section 5.4 hereof;

                (c)  the Company shall borrow funds under the New
      Financing;

                (d)  the Company shall deliver to the
Buyer:

                          (i)  certificates representing the
           Recapitalization Shares; and

                          (ii)  all opinions, certificates and
           other instruments or documents contemplated under


                              -9-





           Section 6 to be delivered by the Company at or prior to
           the Closing;

                (e)  the Sellers shall deliver to the
      Company or the Buyer, as the case may be, all opinions,
      certificates and other instruments or documents
      contemplated under Section 6 to be delivered by the Sellers
      at or prior to the Closing;

                (f)  the Sellers shall deliver to the
      Company certificates representing the Redeemed Shares duly
      endorsed for transfer;

                (g)  the Buyer shall deliver to the
      Company the Recapitalization Purchase Price in immediately
      available federal funds by wire transfer to the bank
      account or accounts designated by the Company prior to the
      Closing;

                (h)  the Company shall (i) deliver to the
      Sellers the Sellers Redemption Price in immediately
      available federal funds by wire transfer to the bank
      account or accounts designated by the Sellers prior to the
      Closing and (ii) pay, or make arrangements to pay, the
      Closing Payments; and

                (i)  the Buyer shall deliver to the
      Company and the Sellers all opinions, certificates and
      other instruments and documents contemplated under Section
      7 to be delivered by the Buyer at or prior to the Closing.

SECTION  3.1.  REPRESENTATIONS AND WARRANTIES REGARDING SELLERS AND
               THE COMPANY
               -----------
           Except as disclosed in this Agreement, Sellers hereby
represent and warrant to Buyer as follows:

           3.1.  Organization and Good Standing of the
Company. The Company is duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
New York, and has the corporate power and authority to own, lease
and operate the property used in its business and to carry on its
business as now being conducted. The Company is registered to do
business and is in good standing in all jurisdictions in which
the character of the properties owned or held under lease by it
makes qualification necessary, except where the failure to be so
qualified or in good standing would not have a Material Adverse


                              -10-





Effect. Sellers have made available to Buyer true and complete
copies of the Certificate of Incorporation and all amendments
thereto of the Company and each Subsidiary to the date hereof and
the By-Laws of the Company and each Subsidiary as in effect on
the date hereof. The minute and stock transfer books of the
Company have been made available to Buyer and the originals
thereof will be delivered to Buyer at Closing.

           3.2.  Subsidiaries. Except as set forth in
Section 3.2 of the Disclosure Schedule, the Company does not own,
directly or indirectly, any debt, shares or other equity interest
or securities in any corporation, partnership, joint venture or
other Person, and has no agreement or commitment to purchase any
such interest. Except as set forth in Section 3.2 of the
Disclosure Schedule, each Subsidiary is duly incorporated,
validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate
power and authority to own, lease and operate the property used
in its business and to carry on its business as now being
conducted, except where the failure to be in good standing would
not have a Material Adverse Effect. Except as set forth in
Section 3.2 of the Disclosure Schedule, each Subsidiary is
registered to do business and is in good standing in all
jurisdictions in which the character of the properties owned or
held under lease by such Subsidiary makes qualification
necessary, except where the failure to be so qualified or in good
standing would not have a Material Adverse Effect. Except as set
forth in Section 3.2 of the Disclosure Schedule, all of the
outstanding shares of capital stock of each Subsidiary of the
Company are validly issued, fully paid and non-assessable and
none of the Subsidiaries owns or controls, directly or
indirectly, any other equity interest in any corporation,
partnership, joint venture, limited liability company, trust,
firm or other entity. Except as set forth in Section 3.2 of the
Disclosure Schedule, the Company owns, directly or through a
Subsidiary, 100% of the outstanding capital stock of each
Subsidiary and there is no security, option, warrant, right,
call, subscription agreement, commitment or understanding of any
nature whatsoever to which the Company or the Sellers is a party,
that directly or indirectly (i) calls for the issuance, sale,
pledge or other disposition of any shares of capital stock of the
Subsidiaries or any securities convertible into, or other rights
to acquire, any shares of capital stock of the Subsidiaries, (ii)
obligates the Company or the Sellers to grant, offer or enter


                              -11-





into any of the foregoing or (iii) relates to the voting or
control of such capital stock, securities or rights.

           3.3.  Capitalization; Title to Shares. The
authorized capital stock of the Company consists of (i) 1,000,000
shares of Common Stock of which 227,988 shares are issued and
outstanding, (ii) 20,000 shares of 6% Preferred Shares of which
9,339 shares are issued and outstanding and (iii) 10,000 shares
of 8% Preferred Shares of which 2,505 shares are issued and
outstanding. All of the Common Shares have been validly
authorized and issued, and are fully paid and nonassessable.
Section 3.3 of the Disclosure Schedule sets forth the record and
beneficial owners of all of the Common Shares and Preferred
Shares. Except as contemplated by this Agreement, or as set forth
in Section 3.3 of the Disclosure Schedule, there is no security,
option, warrant, right, call, subscription agreement, commitment
or understanding of any nature whatsoever to which any of the
Sellers or the Company is a party, that directly or indirectly
(i) calls for the issuance, sale, pledge or other disposition of
any shares of capital stock of the Company or any securities
convertible into, or other rights to acquire, any shares of
capital stock of the Company, (ii) obligates Sellers or the
Company to grant, offer or enter into any of the foregoing or
(iii) relates to the voting or control of such capital stock,
securities or rights. Except as set forth in Section 3.3 of the
Disclosure Schedule, Sellers have good and marketable title to
the Common Shares, free and clear of any Liens.

           3.4.  Authority, Approvals and Consents. The
Company has the corporate power and authority to execute, deliver
and perform this Agreement and, subject to the requisite approval
of the filing of the Amended Charter by the shareholders of the
Company, to consummate the transactions contemplated hereby. The
execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been
duly authorized and approved by the board of directors of the
Company and, except for the requisite approval of the filing of
the Amended Charter by the shareholders of the Company, no other
proceedings on the part of the Company are necessary to authorize
and approve this Agreement or any of the transactions
contemplated hereby. This Agreement has been duly executed and
delivered by the Company and constitutes a valid and binding
bligation of the Company, enforceable against the Company in
accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization,


                              -12-





moratorium, or similar laws affecting creditors' rights generally
or by the principles governing the availability of equitable
remedies. This Agreement has been duly executed and delivered by
the Sellers and constitutes a valid and binding obligation of
each Seller, enforceable against such Seller in accordance with
its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting creditors' rights generally or by the principles
governing the availability of equitable remedies. Except as
otherwise set forth in Section 3.4 of the Disclosure Schedule,
the execution, delivery and performance of this Agreement by the
Company and the Sellers and the consummation of the transactions
contemplated hereby do not and will not:

           (a)  contravene any provisions of the Certificate of
      Incorporation or By-Laws of the Company;

           (b) (after notice or lapse of time or both)
      conflict with, result in a breach of any provision of,
      constitute a default under, result in the modification or
      cancellation of, or give rise to any right of prepayment
      under or termination in respect of, any contract,
      agreement, commitment, understanding or arrangement of any
      kind to which Sellers or the Company is a party or to which
      Sellers or any of Company's or any Subsidiary's property is
      subject which is likely to have a Material Adverse Effect;

           (c)  violate or conflict with any Legal
      Requirements applicable to Sellers, the Company or any
      Subsidiary, except where such violation or conflict would
      not have a Material Adverse Effect; or

           (d)  except for filings under the HSR Act,
      require any authorization, consent, order, permit or
      approval of, or notice to, or filing, registration or
      qualification with, any governmental, administrative or
      judicial authority which if not obtained or made is likely
      to have a Material Adverse Effect.

           3.5.  Financial Statements. The Financial
Statements attached hereto as Section 3.5 of the Disclosure
Schedule have been prepared in accordance with the books and
records of the Company and its Subsidiaries and fairly present in
all material respects the financial position of the Company and
its Subsidiaries as of the dates indicated and the results of


                              -13-




operations of the business of the Company and its Subsidiaries
for the periods indicated, in conformity with GAAP applied on a
consistent basis.

           3.6.  Absence of Material Adverse Change;
Conduct of Business. Except as set forth in Section 3.6 of the
Disclosure Schedule or reflected in the most recent Financial
Statements of the Company, since the date of the most recent
Financial Statements, the business of the Company and its
Subsidiaries has been conducted in the ordinary course of
business and the Company and its Subsidiaries have not: (i)
experienced or suffered any change, occurrence or event that has
had a Material Adverse Effect; (ii) sold or otherwise disposed of
any assets or properties material to the Company and its
Subsidiaries, taken as a whole, other than sales of inventory in
the ordinary course of business; (iii) waived, released or
canceled any rights or indebtedness owing to the Company or any
Subsidiary that are material to the Company and its Subsidiaries,
taken as a whole, or prepaid any interest on any Debt; (iv) made
any material changes in its accounting systems, policies,
principles or practices; (v) acquired or leased any assets
material to the Company and its Subsidiaries, taken as a whole,
other than in the ordinary course of business; or (vi) taken any
of the actions addressed by Section 5.12(h) of this Agreement.

           3.7.  Taxes. Except as set forth in Section 3.7
of the Disclosure Schedule, each of the Company and its
Subsidiaries has filed all Tax Returns required to be filed by
any of them, and has paid (or the Company has paid on its
behalf), or has set up an adequate reserve for the payment of,
all material Taxes required to be paid in respect of the periods
covered by such Tax Returns. The information contained in such
Tax Returns is true, complete and accurate, except where a
failure to be so would not have a Material Adverse Effect. Except
as set forth in Section 3.7 of the Disclosure Schedule: (A) the
income Tax Returns have been examined by the Internal Revenue
Service or the appropriate state, local or foreign taxing
authority or the period of assessment of the Taxes in respect of
which such returns were required to be filed has expired; (B)
neither the Company nor any Subsidiary of the Company is
delinquent in the payment of any material Tax, assessment or
governmental charge; (C) no material deficiencies for any Tax
have been proposed, asserted or assessed against the Company or
any of its Subsidiaries that have not been finally settled or
paid in full, or for which adequate reserves have not been set
aside for the payment thereof; and (D) no


                              -14-





requests for waivers of the time to assess any such Tax
are pending.

           3.8.  Legal Matters. Except as set forth in
Section 3.8 of the Disclosure Schedule, (i) there is no claim,
action, suit, litigation, formal investigation or proceeding
pending against, or, to the Knowledge of Sellers, threatened in
writing against, the Company or any Subsidiary before or by any
court, arbitrator, panel, agency or other governmental,
administrative or judicial entity which is likely to have a
Material Adverse Effect and (ii) neither the Company nor any
Subsidiary is subject to any judgment, decree, writ, injunction
or order of any governmental, administrative or judicial
authority which is likely to have a Material Adverse Effect. The
business of the Company is being conducted in compliance with all
Legal Requirements, except where the failure to comply would not
have a Material Adverse Effect. Except as set forth in Section
3.8 of the Disclosure Schedule, as of the date of this Agreement,
the Company has not received any written notice asserting any
noncompliance with any Legal Requirement, except for such
failures as would not have a Material Adverse Effect.

           3.9.  Real Property.

           (a)  Set forth in Section 3.9 of the Disclosure
      Schedule are (i) a complete list of all real property (the
      "Owned Property") owned by the Company or a Subsidiary of
      the Company that is material to the Company and its
      Subsidiaries considered as a whole; (ii) a complete list of
      all real property (the "Leased Property") with respect to
      which the Company or any Subsidiaries are parties to a
      lease, sublease, license or other occupancy agreement,
      together with a list of each lease, sublease, license or
      other agreement or understanding pursuant to which any
      party other than the Company or a Subsidiary occupies such
      Leased Property; and (iii) a complete list of each lease,
      sublease, license or other agreement or understanding, oral
      or written, pursuant to which any party other than the
      Company or a Subsidiary occupies all or any part of the
      Owned Property or the Leased Property. (The Owned Property and
      the Leased Property are sometimes collectively referred to
      as the "Real Property.") True and complete copies of all
      leases, subleases, licenses and other documents,
      instruments, agreements and understandings to which the
      Company or a Subsidiary is a party, whether as lessee,


                              -15-





      lessor, sublessee, sublessor, licensee or licensor,
      pertaining to the current or future occupancy of any Real
      Property or any current or future right to occupy any Real
      Property, together with all material amendments,
      modifications and supplements thereto (collectively, the
      "Property Leases") have been made available to the Buyer.

           (b)  With respect to the Property Leases, no
      breach or event of default on the part of any party thereto
      and no event that, with the giving of notice or lapse of
      time or both, would constitute such breach or event of
      default, has occurred and is continuing, except where such
      breach or event of default would not have a Material
      Adverse Effect. All of the Property Leases are in full
      force and effect and are valid and enforceable against the
      parties thereto in accordance with their terms. All rental
      and other payments due under each of the Property Leases
      have been duly paid in accordance with the terms of such
      Property Lease, except where a failure to make such
      payments would not have a Material Adverse Effect. Except
      as set forth in Section 3.9 of the Disclosure Schedule, the
      transactions contemplated by this Agreement do not require
      the consent of any party to, and will not constitute an
      event of default under or permit any party to terminate or
      change the existing terms of, any Property Lease except
      where the failure to obtain such consent or where such
      default, termination or change would not have a Material
      Adverse Effect.

           (c)  The Company and, as applicable, each
      Subsidiary, has good and marketable title in fee simple to
      the Owned Property, good and marketable leasehold title to
      the Leased Property, and good and marketable title to all
      plants, buildings, fixtures and improvements located on the
      Real Property, in each case free and clear of any
      mortgages, deeds of trust, liens, security interests,
      judgments, options, rights, claims, charges, encroachments,
      easements, rights-of-way, squatters' rights, encumbrances,
      covenants, conditions, restrictions and other imperfections
      of title (collectively, "Impairments"), except for those
      Impairment that are set forth in Section 3.9 of the
      Disclosure Schedule, or except where such Impairments would not
      have a Material Adverse Effect.

           (d)  To the Knowledge of the Sellers, there is
      no Impairment encumbering the title of the lessor to any
      Leased

                              -16-




      Property or the plants, buildings, fixtures and
      improvements thereon, except for those Impairments that are
      set forth in Section 3.9 of the Disclosure Schedule, or
      except where such Impairments would not have a Material
      Adverse Effect.

           3.10.  Contracts. Sellers have made available to
Buyer for inspection true and complete copies of all Material
Agreements. Except as set forth in Section 3.10 of the Disclosure
Schedule, neither the Company nor, to the Knowledge of Sellers,
any other party to any of the Material Agreements, is in breach
of or default under any Material Agreement, except for breaches
or defaults which are not likely to have a Material Adverse
Effect.

           3.11.  Employee Benefit Plans. Section 3.11 of
the Disclosure Schedule sets forth all pension plans,
profit-sharing plans or other employee pension benefit plans and
all bonus, severance, incentive, savings, insurance, welfare or
other employee benefit plans (including without limitation any
such plan within the meaning of Section 3(2) or 3(3) of ERISA)
maintained by the Company or a Subsidiary, in which any employee
of the Company or a Subsidiary participates ("Employee Benefit
Plans"). Except as set forth in Section 3.11 of the Disclosure
Schedule:

           (a)  Neither the Company nor any Subsidiary is
required to make contributions to any multi-employer plan (within
the meaning of Section 3(37) of ERISA), and no employee of the
Company or a Subsidiary participates in any multi-employer plan;

           (b)  With respect to each Employee Benefit Plan
and any other similar arrangement or plan either currently or
previously terminated, maintained, or contributed to by any
entity which either is currently or was previously under common
control with the Company as determined under Code Section 414, no
event has occurred during the period when such entity was under
common control with the Company and no condition exists that
after the Closing could reasonably be expected to subject the
Company or any Subsidiary, directly or indirectly, to any
liability including liability under any indemnification agreement)
under Section 412, 413, 4971, 4975, or 4980B of the Code or Section
302, 502, 515, 601, 606, or Title IV of ERISA that is likely to
have a Material Adverse Effect;

                              -17-




           (c)  All benefits due under each Employee
Benefit Plan have been paid and there is no lawsuit or claim that
is likely to have a Material Adverse Effect, other than routine
claims for benefits, pending, or to the Knowledge of Sellers
threatened, against any Employee Benefit Plan or the fiduciaries
of any such plan or otherwise involving or pertaining to any such
plan;

           (d)  No audit or investigation by any
governmental authority is pending, or to the Knowledge of Sellers
threatened, regarding any Employee Benefit Plan, and, to the
Knowledge of Sellers, no party dealing with any Employee Benefit
Plan has engaged in any prohibited transactions (within the
meaning of Section 406 of ERISA or Section 4975 of the Code) or
any breach of fiduciary duty that is likely to have a Material
Adverse Effect; and

           (e) The Company is not obligated to make any payments
in connection with the transactions contemplated by this
Agreement pursuant to any severance, change of control or "golden
parachute" arrangements with any Insider or employee of the
Company.

           3.12.  Intellectual Property.  Except as set forth in
Section 3.12 of the Disclosure Schedule:

           (a)  The Company either owns, or has by license
      or otherwise the right to use, all Intellectual Property
      owned by the Company or used in the business of the
      Company; and

           (b)  To the Knowledge of Sellers, the conduct
      by the Company or any Subsidiary of its business does not
      infringe in any material respect on any valid Intellectual
      Property rights of any other Person.

           3.13.  Brokers. Except for fees and expenses
payable by the Company to Goldman, Sachs & Co. listed on Exhibit
A hereto, which is acting for the Company, none of the Sellers
nor the Company has incurred or will incur any broker's, finder's
or similar fee, commission or expense, in each case in connection
with the transactions contemplated by this Agreement.

           3.14.  Environmental Matters. Except as set forth
in Section 3.14 to the Disclosure Schedule or otherwise disclosed
in environmental reports provided to or prepared by or on behalf
of Buyer, to the Knowledge of Sellers:


                              -18-





           (a)  the Company's and its Subsidiaries' real
      property complies with applicable Environmental Laws,
      except for failures to comply that in the aggregate have
      not had and would not be expected to have a Material
      Adverse Effect;

           (b)  the Company and the Subsidiaries have
      obtained all environmental consents, approvals, licenses
      and permits required for its operations by any applicable
      Environmental Law except for failures to obtain that in the
      aggregate have not had and would not be expected to have a
      Material Adverse Effect; and

           (c)  except as is not likely to have a Material
      Adverse Effect, neither Sellers nor any other Person
      (including the Company or any Subsidiary) has caused any
      Release, threatened Release or disposal of any Hazardous
      Material at or from the Company's or any Subsidiary's real
      property and none of such real property is adversely
      affected by any Release, threatened Release or disposal of
      a Hazardous Material originating or emanating from any
      adjoining property.

           3.15.  Transactions with Insiders. Set forth in
Section 3.15 to the Disclosure Schedule is a true and complete
list of the following agreements and transactions: (i) all
Company Agreements to which any Insider or, to the Knowledge of
Sellers, any Affiliate of the Company is a party and (ii) a true
and complete description of all transactions between the Company,
a Subsidiary or any Employee Benefit Plan, on the one hand, and
any Insider or, to the Knowledge of Sellers, any Affiliate of the
Company, on the other hand, other than benefits provided under
any Employee Benefit Plan in the ordinary course of business. For
purposes of this Agreement the term "Insider" means any
shareholder, director or officer of the Company or a Subsidiary.

           3.16.  Set forth in Section 3.16 of the
Disclosure Schedule is a complete and correct schedule of all
currently effective material insurance policies or binders of
insurance or programs of self-insurance which relate to the
business of the Company and its Subsidiaries. The coverage under
each such policy and binder is in full force and effect, and no
notice of cancellation or nonrenewal with respect to, or
disallowance of any claim under, or material increase of premium
for, any such policy or binder has been received by the Company


                              -19-





or any Subsidiary, except such notices, disallowances or
increases which are not likely to have a Material Adverse Effect.

           3.17.  Certain Additional Items . The aggregate
principal amount outstanding under the Senior Notes is
$85,000,000 and the aggregate amount of accrued but unpaid
interest and prepayment premium on the Senior Notes is
$5,490,500, in each case as of the date hereof. The aggregate
principal amount outstanding under the IRB Debt is $1,974,000 and
the aggregate amount of accrued but unpaid interest on the IRB
Debt is $6,000, in each case as of the date hereof. The aggregate
principal amount outstanding under the Revolving Facility is
$81,500,000 and the aggregate amount of accrued but unpaid
interest on the Revolving Facility is $342,000, in each case as
of the date hereof. As of the date hereof, there are no unpaid
fees or expenses due in respect of the Senior Notes, the IRB Debt
or the Revolving Facility. Neither the Company nor any Subsidiary
has any capitalized lease obligations on the date hereof. The
number of Preferred Shares is as set forth in Section 3.3, the
redemption price per Preferred Share is $100.00 and no dividends
on the Preferred Shares have been paid since January 31, 1997 nor
declared which have not been paid as of the date hereof. Exhibit
A hereto sets forth all fees, costs, expenses and payments to be
incurred by the Company specifically in connection with this
Agreement and the consummation of the transactions contemplated
hereby (except for the other Closing Payments, any fees, costs,
expenses and payments incurred or accrued in connection with
Section 5.14 and obtaining any consents under the leases or other
agreements relating to Leased Properties identified in Section
3.4 of the Disclosure Schedule, and any fees, costs, expenses and
payments to be incurred by Buyer in connection with its
obligations hereunder, in each case other than the fees and
expenses of legal counsel to the Company). It is understood and
agreed that, notwithstanding anything contained in this Agreement
to the contrary, (i) all fees, costs, expenses and payments
referred to in the preceding sentence, (ii) any prepayment
premium payable on the Senior Notes in excess of $4,000,000, and
(iii) solely for purposes of this Agreement, any amounts payable
to Matt Rubel pursuant to the letter agreement, dated January 29,
1997, by and between the Company and Mr. Rubel in excess of
$300,000, shall not be the responsibility and obligation of the
Sellers.

           3.18.  No Other Representations or Warranties.
Except for the representations and warranties contained in this
Section


                              -20-





3, Sellers make no representation or warranty, express or
implied, written or oral, and Sellers hereby disclaim any such
representation or warranty (including without limitation any
warranty of merchantability or of fitness for a particular
purpose), whether by Sellers or the Company or any of their
officers, directors, employees, agents or representatives or any
other Person, with respect to the Company or the execution and
delivery of this Agreement or the transactions contemplated
hereby, notwithstanding the delivery or disclosure to Buyer, any
Affiliate of Buyer or any of its officers, directors, employees,
agents or representatives or any other Person of any
documentation or other information by Sellers or the Company or
any of their Affiliates, officers, directors, employees, agents
or representatives or any other Person with respect to any one or
more of the foregoing.

SECTION 4.   REPRESENTATIONS AND WARRANTIES REGARDING BUYER
             ----------------------------------------------

           Except as disclosed in this Agreement, Buyer
represents and warrants to the Sellers as follows:

           4.1.  Organization of Buyer. Buyer is duly
organized and is validly existing as a limited partnership in
good standing under the laws of Delaware, and has the requisite
power and authority to own, lease and operate the property used
in its business and to carry on its business as now being
conducted. Buyer is registered to do business in all
jurisdictions where it is required to be qualified as a foreign
entity except where the failure to be so qualified would not
impair Buyer's ability to execute, deliver and perform this
Agreement and consummate the transactions contemplated hereby or
have a Material Adverse Effect.

           4.2.   Power; Authorization; Consents. Buyer has the
requisite power and authority to execute, deliver and perform
this Agreement and to consummate the transactions contemplated
hereby. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby and
thereby have been duly authorized and approved by the general
partner of the Buyer, and no other proceedings on the part of
Buyer are necessary to authorize and approve this Agreement or
any of the transactions contemplated hereby. This Agreement has
been duly executed and delivered by Buyer and constitutes and
will constitute a valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms,


                              -21-





except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or similar
laws affecting creditors' rights generally or by the principles
governing the availability of equitable remedies. Except as
disclosed in Section 4.2 of the Disclosure Schedule, the
execution, delivery and performance of this Agreement by Buyer
and the consummation of the transactions contemplated hereby do
not and will not:

           (a)  contravene any provisions of the Certificate of
      Limited Partnership or the Agreement of Limited Partnership
      of Buyer;

           (b)  (after notice or lapse of time or both)
      conflict with, result in a breach of any provision of,
      constitute a default under, result in the modification or
      cancellation of, or give rise to any right of termination
      in respect of, any material contract, agreement,
      commitment, understanding or arrangement of any kind to
      which Buyer is a party;

           (c)  violate or conflict with any material Legal
      Requirement applicable to Buyer or any of its business or
      property; or

           (d)  except for filings under the HSR Act,
      require any material authorization, consent, order, permit
      or approval of, or notice to, or filing, registration or
      qualification with, any governmental, administrative or
      judicial authority.

           4.3.  Brokers. Except as disclosed in Section
4.3 of the Disclosure Schedule, Buyer has not employed any broker
or finder or has incurred or will incur any broker's, finder's or
similar fees, commissions or expenses, in each case in connection
with the transactions contemplated by this Agreement except for
such fees, commissions or expenses which will be borne by the
Buyer.

           4.4.  Investment Intent of Buyer. Buyer is
receiving the Recapitalization Shares delivered pursuant to this
Agreement for investment purposes for its own account, and not
with the view to or in connection with any distribution thereof.
Buyer understands that the Recapitalization Shares may not be
sold, assigned, offered for sale, pledged or otherwise
transferred unless such transaction is registered under the
Securities Act of 1933, as amended, and applicable state
securities laws, or 


                              -22-





exemptions from such registration requirements are
available or such requirements are not applicable.

           4.5.  Financial Matters. Buyer has sufficient
funds available to it to meet its obligations to pay the
Recapitalization Purchase Price on Closing and all of the fees,
costs and expenses related thereto.

           4.6.  No Reliance. Buyer has conducted its own
investigation and examination of the Company and its assets,
liabilities (actual, accrued and contingent), condition
(financial and otherwise), businesses, operations, affairs and
prospects based primarily upon its own knowledge and experience
and upon information and data provided by management of the
Company, and Buyer has such knowledge and experience, and has
consulted with such legal, financial and other professional
advisers to review such information and data, in order to enable
Buyer, based upon such information and data and upon Buyer's own
knowledge and experience and such professional advice, as has
been necessary to evaluate the merits and risks associated with
the purchase of the Recapitalization Shares and the completion of
the transactions contemplated hereby. Buyer and its respective
officers, employees and representatives have been given such
access to the offices, properties, personnel, businesses,
contracts, books and records of the Company, and have been
furnished with all such information and data, as they have
considered sufficient to enable Buyer pursuant to this Agreement,
to purchase the Recapitalization Shares pursuant to this
Agreement and to complete the transactions contemplated hereby
without relying in any respect upon any representation or
warranty, whether written or oral, express or implied, of the
Sellers, the Company or any Affiliate thereof or any of their
respective directors, officers, employees, representatives and
controlling persons (except only for the representations and
warranties of the Sellers contained in Section 3 of this
Agreement).

SECTION  5.  COVENANTS
             ---------

           5.1.  Access; Confidentiality. Between the date
hereof and the Closing, Sellers will cause the Company and its
Subsidiaries, during normal business hours and upon reasonable
notice to the Company, to (i) provide to Buyer and its
representatives full access to the premises, property, files,
books, records, documents, and other information of or concerning


                              -23-





the Company and its Subsidiaries; (ii) furnish to Buyer and its
representatives financial, technical and operating data and other
information pertaining to the business and property of the
Company and its Subsidiaries; (iii) make available for inspection
and copying by Buyer and its representatives copies of any
documents relating to the foregoing; (iv) permit Buyer and its
representatives to conduct reasonable interviews of the
employees, sales representatives and auditors of the Company and
its Subsidiaries; and (v) make the officers of the Company and
the Subsidiaries reasonably available to cooperate with the Buyer
in obtaining financing for the transactions contemplated hereby;
provided, however, that (x) any such investigation will be
conducted in such a manner so (A) as to preserve the
confidentiality of the transactions contemplated hereby and (B)
as not to interfere unreasonably with the operation of the
business of the Company and its Subsidiaries and (y) Sellers may
limit such access described in clauses (i) through (v) above to
the extent such access could in the opinion of Sellers' counsel,
violate or give rise to liability under applicable law. During
the period from the date hereof to the Closing, all information
provided to Buyer or its representatives by or on behalf of
Sellers or the Company, or their representatives (whether
pursuant to this Section 5.1 or otherwise) will be governed and
protected by the Confidentiality Agreement.

           5.2.  Announcements. Prior to the Closing, no
party hereto will issue any press release or otherwise directly
or indirectly make any public statement or furnish any statement
or make any announcement to its customers with respect to the
transactions contemplated hereby without the prior consent of the
other, except as may be required by law.

           5.3.  New Financing. Buyer shall provide, or
shall cause one or more Persons to provide, to the Company
financing arrangements (the "New Financing") in an amount not
less than $474,600,000, the proceeds of which shall be used,
inter alia, to discharge Debt, to redeem the Preferred Shares, to
pay costs and expenses incurred by Buyer and the Company in
connection with the transactions contemplated hereby and the
other Closing Payments, to provide working capital to the Company
and the Subsidiaries, and to fund a portion of the Sellers
Redemption Price. To the extent Buyer is unable to obtain from
third parties the full amount of the New Financing, Buyer shall
provide the balance of the New Financing. Any amounts provided by
Buyer pursuant to the preceding sentence shall constitute New
Financing for purposes of 


                              -24-





this Agreement. The failure of the Company to obtain
the New Financing shall not relieve Buyer of its obligations to
purchase the Recapitalization Shares for the Recapitalization
Purchase Price at the Closing. Neither the Company nor the
Sellers shall be required to pay any fees or other costs with
respect to the New Financing under any circumstances and any
agreements or understandings which the Company may make prior to
the Closing relating to the New Financing shall be conditioned
upon the occurrence of the Closing; provided, that the Company
may pay any fees or other costs with respect to the New Financing
following the Closing. The Company shall use all reasonable
efforts to assist Buyer in obtaining the New Financing, including
without limitation, by making available its senior officers to
participate in investor presentations and similar functions.

           5.4.  Recapitalization. The Recapitalization
Shares to be acquired by Buyer at the Closing shall consist of
48,400 shares of Common Stock, which immediately following the
Closing will constitute eighty-eight percent (88%) of all of the
outstanding equity securities of the Company and all of the then
outstanding equity securities of the Company other than the
Retained Shares. The Company and the Sellers agree to take or
cause to be taken all action necessary to effect the filing of an
Amended and Restated Certificate of Incorporation, in form and
substance reasonably satisfactory to Buyer and the Sellers (the
"Amended Charter"), immediately prior to the Closing as herein
contemplated.

           5.5. Consents; Cooperation. Subject to the terms and
conditions hereof, Sellers, the Company and Buyer will use their
reasonable efforts:

           (a)  to obtain prior to the earlier of the date
      required (if so required) or the Closing Date, all
      authorizations, consents, orders, permits or approvals of,
      or notices to, or filings, registrations or qualifications
      with, any governmental, administrative or judicial
      authority or any other Person that are required on their
      respective parts, for the consummation of the transactions
      contemplated by this Agreement;

           (b)  to defend, consistent with applicable
      principles and requirements of law, any lawsuit or other
      legal proceeding, whether judicial or administrative,
      whether brought derivatively or on behalf of third persons
      


                              -25-





      (including governmental authorities) challenging this
      Agreement or the transactions contemplated hereby;

           (c)  to furnish to each other such information
      and assistance as may reasonably be requested in connection
      with the foregoing; and

           (d) to take, or cause to be taken, all actions
      and to do, or cause to be done, all things reasonably
      necessary, proper or advisable under applicable laws and
      regulations to consummate and make effective the
      transactions contemplated by this Agreement.

           5.6.  Additional Agreement. Notwithstanding the
provisions of Section 5.5(a) hereof, Buyer will use reasonable
efforts to eliminate any concern on the part of any court or
government authority regarding the legality of the proposed
transactions contemplated hereby and take or cause to be taken
all such action as may reasonably be required in order to
consummate the transactions contemplated hereby under applicable
antitrust and other laws and regulations regarding competition,
including, without limitation, promptly (i) taking all steps
reasonably necessary to secure government antitrust clearance,
(ii) taking all reasonable steps to make arrangements for or to
effect the sale or other disposition of assets, voting securities
or business of Buyer, any of its subsidiaries or the Company, the
ownership of which causes any governmental authority to withhold
such clearance, and (iii) entering into a hold-separate agreement
with government authorities pending such sale or other
disposition of assets, voting securities or business of Buyer,
any of its subsidiaries, the Company, including without
limitation pursuant to a trust or other arrangement that
restricts, limits or prohibits access by Buyer to any business or
subsidiary of Buyer to the Company or to the voting shares or
capital stock thereof.

           5.7.  Notification of Certain Matters. Between
the date hereof and the Closing, Sellers, the Company and Buyer
will give prompt notice in writing to the other of: (i) any
information known to Sellers, the Company or Buyer that indicates
that any representation or warranty of the Sellers, the Company
or Buyer, as the case may be, contained herein will not be true
and correct in any material respect as of the Closing and (ii)
the occurrence of any event known to Sellers, the Company or
Buyer which will result, or has a reasonable prospect of


                              -26-





resulting, in the failure to satisfy a condition specified in
Section 6 or 7 hereof.

           5.8.  Hart-Scott-Rodino. As soon as practicable
(but in no event later than 10 days) after the date hereof, Buyer
and the Company will prepare and file all documents with the
Federal Trade Commission and the United States Department of
Justice that are required to comply with the HSR Act. The Company
and Buyer will promptly respond to any "second request" made in
connection with such filings and will promptly furnish all
materials requested by any of the regulatory agencies having
jurisdiction over such filings.

           5.9.  Further Assurances. Any time after the
Closing, Sellers and Buyer will, and Buyer will cause the Company
to, promptly execute, acknowledge and deliver any other
assurances or documents reasonably requested by Buyer or Sellers,
as the case may be, to satisfy or in connection with its
obligations hereunder.

           5.10. Retention of Books and Records. For a
period of six years after the Closing Date (or in the case of
books, records and other documents relating to Taxes until the
expiration of the applicable statute of limitations), Buyer will
cause the Company to retain all books, records and other
documents pertaining to the Company in existence on the Closing
Date and to make the same available after the Closing Date for
examination and copying by Sellers or their representatives, at
such Sellers' expense, upon reasonable notice. No such books,
records or documents will be destroyed by Buyer or the Company
without first advising Sellers in writing and providing Sellers a
reasonable opportunity to obtain possession or make copies
thereof at such Seller's expense.

           5.11. Personnel. For one year after the Closing,
Buyer shall cause the Company to continue in effect its Employee
Benefit Plans as are in effect on the date hereof; provided,
however, that the Company may replace or amend any such Employee
Benefit Plan if the benefits thereafter provided are at least
comparable to those provided prior to the Closing and the costs
to the employees therefor are not appreciably increased.

           5.12. Conduct of Business Prior to the Closing.
From the date hereof to the Closing, Sellers shall cause the
business of the Company and each of its Subsidiaries to be
conducted in


                              -27-





the ordinary course and shall cause the Company and
each of its Subsidiaries to use their commercially reasonable
efforts to preserve the current business organization and
existing business relationships. In addition, Sellers shall not
cause or permit the Company or any of its Subsidiaries to do any
of the following without the prior written consent of Buyer:

           (a)  except as contemplated by this Agreement, amend
      its Certificate of Incorporation or By-Laws;

           (b)  except as set forth in Section 5.12 of the
      Disclosure Schedule, make or grant any increase in
      compensation or employee benefits or in severance or
      termination pay to, any officer, executive officer,
      employee, director, agent or consultant, or enter into any
      employment agreement with any executive officer or other
      individual, except as may be required under employment,
      collective bargaining or termination agreements in effect
      on the date hereof or, solely with respect to employees
      other than officers, executive officers and directors, in
      the ordinary course of business;

           (c)  except as set forth in Section 5.12 of the
      Disclosure Schedule, acquire or agree to acquire by merging
      or consolidating with, or by purchasing a substantial
      portion of the assets of, or by any other manner, any
      business or any corporation, partnership, association or
      other business organization or division thereof or
      otherwise acquire or agree to acquire, other than in the
      ordinary course of business, any assets which are material,
      individually or in the aggregate, to the Company;

           (d)  except as set forth in Section 5.12 of the
      Disclosure Schedule, sell, pledge, mortgage, assign, lease,
      give a security interest in or otherwise encumber or
      dispose of, or agree to do any of the foregoing with
      respect to, any of its assets, except in the ordinary
      course of business;

           (e)  except in the ordinary course of business,
      enter into or amend any other commitment, contractual
      obligation or transaction which calls for aggregate
      payments in excess of $100,000 and which does not expire or
      is not terminable without cost or penalty at the Company's
      option within a 180 day period;

                               -28-




           (f)  except in the ordinary course of business,
      accelerate the receipt of amounts due with respect to the
      Company's trade accounts receivable or any other accounts
      receivable;

           (g)  except in the ordinary course of business,
      lengthen the period for payment of the Company's accounts
      payable;

           (h)  (i) declare, set aside, pay or make any
      dividend or other distribution or payment (whether in cash,
      stock or property) with respect to, or, except as
      contemplated by this Agreement, purchase or redeem, any
      shares of capital stock, or (ii) make any other payments or
      benefits to Insiders, other than payments contemplated by
      this Agreement or under any employment arrangement in
      existence on the date hereof;

           (i)  except as set forth in Section 5.12 of the
      Disclosure Schedule, (i) incur any Debt (excluding for this
      purpose any interest, fees or premiums accruing on Debt
      outstanding on the date hereof and borrowings in the
      ordinary course of business for seasonal working capital
      needs under the Revolving Facility and any interest, fees
      and premiums thereon), (ii) prepay any interest on any
      Debt, (iii) except in the ordinary course of business, make
      any loans, advances or capital contributions to, or
      investments in, any other person, other than the Company or
      any direct or indirect wholly owned Subsidiary of the
      Company or (iv) issue any shares of capital stock of the
      Company;

           (j)  except as set forth in Section 5.12 of the
      Disclosure Schedule, make or agree to make any new capital
      expenditure or capital expenditures in excess of $100,000
      in the aggregate, except in the ordinary course of
      business; or

           (k)  except as set forth in Section 5.12 of the
      Disclosure Schedule, except in the ordinary course of
      business or except as is not likely to have a Material
      Adverse Effect, modify, amend or terminate any Material
      Agreement.

           5.13. Sellers' Rights with Respect to Resales. In the
event that a Transfer (as defined below) occurs at any time
during the period commencing on the Closing Date and ending on
the date which is eighteen months from the Closing Date (the


                              -29-





"Resale Period"), the Buyer agrees to pay or cause to be paid to
the Sellers an aggregate amount equal to (i) if such Transfer
occurs on or prior to the first anniversary of the Closing Date
(the "First Period"), 75% of the Resale Profit (as defined below)
on such Transfer, or (ii) in all other cases, 50% of the Resale
Profit on such Transfer, such amount to be paid in the same form
as the Transfer Consideration upon consummation of any such
Transfer such that the Sellers shall receive such percentage of
the Resale Profit in the kind and amount of cash, securities and
other property that they would have been entitled to receive had
they been holders of shares of capital stock of the Company
immediately prior to consummation of such Transfer. Buyer will
not, by amendment of the Company's charter or through a
reorganization, consolidation, merger, dissolution, sale of
assets or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Section
5.13, but will at all times in good faith assist in the carrying
out of all such terms and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the
Sellers to receive any Resale Profit. A Transfer consummated
after the expiration of the Resale Period or the First Period
shall be deemed to have occurred during the Resale Period or the
First Period, as the case may be, and Resale Profit shall be
payable to the Sellers in respect of such a Transfer, if such
Transfer was effected pursuant to an agreement, arrangement or
understanding entered into prior to the expiration of the Resale
Period or the First Period, as the case may be.

           For purposes of this Section 5.13, the following terms
have the meanings set forth below:

           "Resale Profit" means, with respect to any Transfer,
an amount equal to the excess, if any, of (I) the sum of (a) the
aggregate value of the Transfer Consideration received by,
payable to or inuring to the benefit of, the Buyer and its
Affiliates, directly or indirectly, as a result of such Transfer,
plus (b) the value of any dividends or distributions of any kind
paid, at any time following the Closing, in respect of the
Recapitalization Shares or any other equity interests in the
Company held by the Buyer or its Affiliates or upon any
redemption or repurchase of such shares or equity interests, over
(II) the sum of (x) $75,000,000 less the value of the Retained
Shares, plus (y) the fees and expenses incurred by Buyer in
connection with such Transfer, plus (z) any additional equity


                              -30-





capital contributed to the Company or its Subsidiaries by the
Buyer or its Affiliates following the Closing.

           "Transfer" means any sale, conveyance, assignment,
disposition or other transfer, other than to an Affiliate of any
of the Buyer who agrees in writing to be bound by the provisions
of this Section 5.13, in one or a series of related transactions,
of (i) all or substantially all of the assets or stock of the
Company and its Subsidiaries, taken as a whole (whether by sale
of stock or assets, merger, consolidation or otherwise), (ii) the
consummation of any transaction (other than the sale of shares of
capital stock of the Company or any Affiliate of the Company in
an underwritten public offering but including, without
limitation, any merger or consolidation) the result of which is
that the Buyer ceases to be the "beneficial owner" (as such term
is defined in Rule 13d-3 and Rule 12d-5 under the Securities
Exchange Act of 1934) of a majority of the voting capital stock
of the Company. Notwithstanding the foregoing, a pledge or
assignment of interests or assets of Buyer or the Company to a
lender in the ordinary course of business (and the subsequent
exercise of remedies by such lender) shall not constitute a
Transfer for purposes of this Section 5.13.

           "Transfer Consideration" means the value of all cash,
securities and other property paid, or to be paid, directly or
indirectly, by an acquiror to the Buyer, its Affiliates or the
Company in connection with the Transfer. The value of any
non-cash consideration shall be the fair market value of such
consideration, as determined in good faith by the Board of
Directors of the Company. Transfer Consideration shall also
include the aggregate amount of any liabilities assumed or paid,
directly or indirectly, by the acquiror.

           5.14.  Transfer Taxes. The Company shall properly
prepare and file on a timely basis any transfer Tax Returns
required in connection with the transactions described in this
Agreement, including, without limitation, any real property,
personal property or gains Tax Returns, and shall pay any Taxes
shown as due thereon.

           5.15.   Landlord Consents. Sellers shall use
commercially reasonable efforts to obtain the landlord lease
consents set forth on Section 5.15 of the Disclosure Schedule, in
a form reasonably acceptable to Buyer; provided, however, that


                              -31-





the receipt of any or all of such landlord lease consents shall
not be a condition to the Closing under this Agreement.

           5.16.  Retention of Shares. At the Closing, the
Sellers shall retain such number of Common Shares as is set forth
opposite their respective names on Exhibit B hereto, which
immediately following the Closing will constitute twelve percent
(12%) of all of the outstanding common equity securities of the
Company and all of the outstanding common equity securities of
the Company other than the Recapitalization Shares. In the
aggregate, the Retained Shares shall represent 12% of the voting
power in the Company upon the Closing. For purposes of this
Agreement, the value of Retained Shares shall be $9,000,000.

           5.17.  Termination of Existing Shareholder Agreement.
Each of the Sellers and the Company hereby agree to terminate the
Agreement, dated as of April 18, 1997, by and among the Company
and the stockholders of the Company listed on the signature pages
thereof, and if requested by Buyer, any agreement between any
Seller or any entity controlled by a Seller, on the one hand, and
the Company or any Subsidiary, on the other hand, effective as
of, and conditioned upon, the Closing.

           5.18.  Indemnification. From and after the
Closing Date, the Company shall indemnify each present and former
director and officer of the Company and its Subsidiaries from any
and all claims arising out of or in connection with activities in
such capacity to the fullest extent provided under New York law,
and in addition, to the fullest extend provided in their
respective articles of incorporation, charters or by-laws, as
applicable, which obligations shall survive the Closing and shall
continue in full force and effect for a period of not less than
six years from the Closing Date; provided, however, that if any
claim or claims are asserted or made within such six-year period,
all rights to indemnification in respect of any such claim or
claims shall continue until disposition of any and all such
claims. Without limiting the foregoing, after the Closing Date,
the Company shall advance expenses (including reasonable
attorneys' fees and expenses) incurred with respect to the
foregoing, as they are incurred, to the fullest extent permitted
under applicable law, provided that the person on whose behalf
the expenses are advanced provides an undertaking to repay such
advances if it is ultimately determined that such person is not
entitled to indemnification.


                              -32-





SECTION  6.   CONDITIONS TO THE OBLIGATIONS OF BUYER
              --------------------------------------

           The obligations of Buyer required to be performed by
it at the Closing are subject to the satisfaction, at or prior to
the Closing, of each of the following conditions, each of which
may be waived by Buyer:

           6.1. Representations and Warranties; Covenants. The
representations and warranties of the Sellers contained in
Section 3 of this Agreement will be true and correct as of the
Closing (except for those that are made as of a certain time,
which shall be true and correct as of such time and provided
that, for this purpose only, no effect shall be given to any
materiality qualifiers contained in such representations and
warranties), except for changes contemplated by this Agreement
and failures to be true and correct that do not, in the
aggregate, result in a Material Adverse Effect. Each obligation
of Sellers required by this Agreement to be performed by them at
or prior to the Closing will have been duly performed and
complied with in all material respects at the Closing provided
that the covenants contained in Section 2.3(d)(i) will have been
complied with in all respects. At the Closing, Buyer will have
received certificates, dated the Closing Date and duly executed
by or on behalf of each of the Sellers, to the effect that the
conditions set forth in the preceding sentences have been
satisfied.

           6.2.  Hart-Scott-Rodino. Any applicable waiting
period under the HSR Act and the rules and regulations
promulgated thereunder will have expired or been terminated.

           6.3.  Opinion of Sellers' Counsel. Buyer will
have been furnished with the opinion of Willkie Farr & Gallagher,
dated the Closing Date, addressed to Buyer, in form and substance
reasonably satisfactory to Buyer with respect to (i) the first
sentence of Section 3.1, (ii) the first two sentences of Section
3.3 and (iii) the first four sentences of Section 3.4. In
rendering such opinion, such counsel may rely as to factual
matters upon certificates or other documents furnished by Sellers
and officers of the Company and by government officials and upon
such other documents and data, including opinions of local
counsel, as such counsel deem appropriate as a basis for such
opinion.


                              -33-





           6.4.  Absence of Injunction. No order, stay,
judgment or decree will have been issued by any court and be in
effect restraining or prohibiting the consummation of the
transactions contemplated hereby.

           6.5.  Directors. Buyer will have received the
written resignation of any director of the Company or any
Subsidiary of the Company (or such directors will have otherwise
been removed) whose resignation it has requested.

           6.6.  Certificates. Sellers and the Company will
have furnished Buyer with such certificates of their respective
officers and others as Buyer may reasonably request to evidence
satisfaction of the conditions set forth in this Section 6, such
certificates to be made without personal liability of such
officer or other person signing such certificate.

           6.7.  Shareholder Approval. The shareholders of
the Company shall have approved in form and substance reasonably
satisfactory to Buyer and to the Company, in order to take
advantage of the exemption provided in Section 280G(b)(5) of the
Code, all payments and benefits that may be deemed to constitute
parachute payments under Section 280G of the Code, in connection
with the transactions contemplated hereby.

SECTION  7.  CONDITIONS TO THE OBLIGATIONS OF SELLERS
             ----------------------------------------

           The obligations of the Sellers to be performed by them
at the Closing are subject to the satisfaction, at or prior to
the Closing, of each of the following conditions, each of which
may be waived by the Sellers:

           7.1.  Representations and Warranties; Covenants.
The representations and warranties of Buyer contained in this
Agreement will be true and correct as of the Closing (except for
those made as of a certain date, which shall be true and correct
as of such date), except for changes contemplated by this
Agreement and failures to be true and correct that do not result
in a material adverse effect on Buyer. Each obligation of Buyer
required by this Agreement to be performed by it at or prior to
the Closing will have been duly performed in all material
respects at or prior to the Closing except that the obligations
of Buyer pursuant to Section 2.3(g) shall be performed in all
respects. At the Closing, Sellers will have received a
certificate, dated the Closing Date and duly executed by an
executive officer of Buyer (without personal liability to such


                              -34-





officer) to the effect that the conditions set forth in the
preceding sentences have been satisfied.

           7.2.  Hart-Scott-Rodino. Any applicable waiting
period under the HSR Act and the rules and regulations
promulgated thereunder will have expired or been terminated.

           7.3.  Opinion of Buyer's Counsel. Sellers will
have been furnished with the opinion of Cleary, Gottlieb, Steen &
Hamilton, counsel to Buyer, dated the Closing Date, addressed to
Sellers, in form and substance reasonably satisfactory to Sellers
with respect to (i) the first sentence of Section 4.1 and (ii)
the first three sentences of Section 4.2. In rendering their
opinion, such counsel may rely as to factual matters upon
certificates or other documents furnished by officers and
directors of Buyer and by government officials, and upon such
other documents and data, including opinions of local counsel, as
such counsel deem appropriate as a basis for their opinion.

           7.4.  Absence of Injunction. No order, stay,
judgment or decree will have been issued by any court and be in
effect restraining or prohibiting the consummation of the
transactions contemplated hereby.

           7.5.  Certificates. Buyer will have furnished
Sellers with such certificates of its officers and others as
Sellers may reasonably request to evidence satisfaction of the
conditions set forth in this Section 7, such certificates to be
made without personal liability of such officer or other person
signing such certificate.

           7.6.  Employment/Consulting Agreement. The
Company shall have executed and delivered the
Employment/Consulting and Non-Compete Agreement with Arthur
Cinader in substantially the form of Exhibit C hereto (the
"Employment/Consulting Agreement").

SECTION  8.   TERMINATION
              -----------

            8.1.  Termination. This Agreement may be
terminated at any time prior to the Closing:

            (a)  by mutual consent of Buyer and Sellers;

            (b)  by Buyer, on or after the date 100 days
      from the date hereof, if any condition contained in Section
      6 (other than those requiring a Closing Delivery), has not
      been 


                              -35-





      satisfied or waived; by Sellers, on or after the date
      100 days from the date hereof, if any condition contained
      in Section 7 (other than those requiring a Closing
      Delivery), has not been satisfied or waived; or

           (c)  by Buyer or Sellers, if any court of competent
      jurisdiction or other governmental body has issued an order,
      decree or ruling or taken any other action restraining,
      enjoining or otherwise prohibiting the transactions
      contemplated by this Agreement, and such order, decree,
      ruling or other action has become final and non-appealable.

           If Buyer or Sellers terminate this Agreement pursuant
to the provisions hereof, such termination will be effected by
written notice to the other party specifying the provision hereof
pursuant to which such termination is made.

            8.2.  Effect of Termination.

            (a)  Upon termination of this Agreement
      pursuant to Section 8.1 hereof, except as provided in
      clause (b) below:

                (i)  this Agreement will forthwith become null
                     and void;

                (ii)  such termination will be the sole
                      remedy with respect to any breach of any
                      representation or warranty contained in or
                      made pursuant to this Agreement, and

                (iii) no party hereto or any of their
                      respective officers, directors, employees,
                      agents, consultants, stockholders or
                      principals will have any liability or
                      obligation hereunder or with respect
                      hereto.

           (b)  The provisions of clause (a) above
      notwithstanding, no party will be relieved of liability for
      any willful breach of this Agreement.

SECTION  9.   SURVIVAL AND INDEMNIFICATION
              ----------------------------

           9.1.  Survival. Notwithstanding any otherwise
applicable statute of limitations, no claim, lawsuit, or other
proceeding arising out of or related to the breach of any


                              -36-





representation or warranty of the parties contained herein may be
made more than one year after the Closing Date.

           9.2.  Sellers' Indemnification.

           (a)  Sellers, severally but not jointly, subject to
      the limitations set forth in this Section 9, will indemnify
      Buyer against and in respect of any and all Losses, other
      than Losses to the extent recoverable by Buyer or the
      Company under any applicable insurance policy and net of
      the present value of any tax benefit to Buyer or the
      Company as a result of such Losses, which are incurred by
      Buyer by reason of (i) the breach of any representation or
      warranty made by Sellers in Section 3 of this Agreement or
      (ii) of any breach of a covenant made by Sellers in this
      Agreement.

           (b)  Notwithstanding anything to the contrary
      in this Agreement (but subject to the last sentence of this
      Section 9.2(b)), (i) the aggregate liability of Sellers
      pursuant to Section 9.2(a) will not exceed ten percent of
      the Sellers Redemption Price; (ii) Sellers will have no
      liability or obligation to Buyer pursuant to this Section
      9.2 or otherwise for any Losses arising out of any breach
      of any representation or warranty made in this Agreement if
      (x) disclosed in this Agreement or the Disclosure Schedule
      hereto or (y) Buyer had knowledge of such breach as a
      result of the disclosures made in this Agreement or in the
      Disclosure Schedule hereto and (iii) Buyer will not be
      entitled to recover consequential damages pursuant to this
      Section 9.2. Notwithstanding the above, the limitations of
      this Section 9.2(b) shall not apply to a breach of Sellers'
      representations and warranties contained in the last
      sentence of Section 3.3, clause (vi) of Section 3.6 or in
      Section 3.17, in which event, the aggregate liability of
      Sellers under this Section 9.2 shall in no event exceed the
      Sellers Redemption Price.

           (c)  Buyer may make no claim for indemnification
      pursuant to Section 9.2(a), (i) unless notice of such claim
      (describing the basic facts or events, the existence or
      occurrence of which constitute or have resulted in the alleged
      breach of a representation or warranty made in this Agreement)
      has been given to Sellers during the survival period set forth in
      Section 9.1; and (ii) until such claims for which Losses are
      otherwise recoverable hereunder by 


                              -37-





      Buyer are in excess of (x) in the case of Losses
      incurred by reason of a breach of Section 3.17 hereof, the
      excess, if any, of (i) $100,000 over (ii) the amount by which the
      aggregate of the amounts set forth on the officer's certificate
      delivered pursuant to Section 2.2(c) exceeds the
      aggregate of the amounts set forth on Exhibit A or (y) in
      all other cases, the aggregate of 2% of the Sellers
      Redemption Price (other than Losses to the extent
      recoverable by Buyer or the Company under any applicable
      insurance policy and net of the present value of any tax
      benefit to Buyer or the Company as a result of such Losses)
      and all reserves and accruals reflected on the Financial
      Statements, after which Buyer will be entitled to make any
      such claim for amounts in excess of such threshold, and
      (iii) unless the amount of such claim as finally determined
      exceeds $10,000; provided, however, that the limitations
      set forth in this clause (c) shall not apply to Losses
      incurred by reason of a breach of the representations and
      warranties contained in the last sentence of Section 3.3,
      clause (vi) of Section 3.6 or in Section 3.17 (except that
      in the case of a breach of Section 3.17 the limitations set
      forth in clauses (c)(i) and (c)(ii)(x) shall apply).
      Nothing in this clause (c) shall affect the adjustment
      provision relating to the Sellers Redemption Price under
      clause (c) of Section 2.2 hereof.

           (d)  Any payment pursuant to this Section 9,
      made by Sellers to Buyer, will be deemed an adjustment to
      the Sellers Redemption Price.

           (e)  The rights of the Buyer under Section 8.1
      and this Section 9.2 shall be the exclusive remedy of Buyer
      with respect to breaches by Sellers of the representations
      and warranties or covenants contained in this Agreement.
      Buyer, on behalf of itself and its Affiliates (and its
      partners, officers, directors and employees), hereby (i)
      waives and releases each of the Sellers and their
      respective Affiliates (and their shareholders, officers,
      directors and employees) from any statutory or other rights
      of contribution or indemnity (except as set forth in this
      Section 9.2) with respect to Sellers' ownership of the
      Common Shares and the Preferred Shares or operation of, or
      otherwise relating to, the Company and (ii) waives and
      releases all rights of subrogation with respect to claims
      relating thereto.


                              -38-





           (f)  In the event that any of the Sellers is
      obligated to indemnify Buyer pursuant to this Section 9,
      such Seller will, upon payment of such indemnity, be
      subrogated to all rights of Buyer with respect to claims to
      which such indemnification relates.

          9.3.  Buyer's Indemnification.

          (a)  Buyer, subject to the limitations set
      forth in this Section, will indemnify the Sellers against
      and in respect of any and all Losses, other than Losses to
      the extent recoverable by Sellers under any applicable
      insurance policy and net of the present value of any tax
      benefit to Sellers as a result of such Losses, which may be
      incurred by reason of (i) the breach of any representation
      or warranty made by Buyer in Section 4 hereof or (ii) any
      breach of any covenant made by Buyer in this Agreement.
      Buyer will so indemnify the Sellers as a result of Losses
      which may be incurred by such Sellers arising out of the
      operations of the Company after the Closing Date.

          (b)  Notwithstanding anything to the contrary
      in this Agreement (but subject to the last sentence of this
      Section 9.3(b)), (i) the aggregate liability of Buyer
      pursuant to Section 9.3(a) will not exceed ten percent of
      the Sellers Redemption Price; (ii) Buyer will have no
      liability or obligation to Sellers pursuant to Section
      9.3(a) or otherwise for any Losses arising out of any
      breach by Buyer of any representation or warranty made in
      this Agreement if (x) disclosed in this Agreement or the
      Disclosure Schedule hereto or (y) Sellers had Knowledge of
      such breach as a result of the disclosures made in this
      Agreement or in the Disclosure Schedule hereto and (iii)
      Sellers will be entitled to recover no consequential
      damages pursuant to this Section 9.3. Notwithstanding the
      above, the limitations of this Section 9.3(b) shall not
      apply to a breach of Buyer covenants contained in Section
      2.1 or 2.3(g).

          (c)  No claim for indemnification may be made
      by Sellers pursuant to Section 9.3(a)(i), (i) unless notice
      of such claim (describing the basic facts or events, the
      existence or occurrence of which constitute or have
      resulted in the alleged breach of a representation or
      warranty made in this Agreement) has been given to Buyer
      during the 


                              -39-





      survival period set forth in Section 9.1, and (ii)
      until such claims for which Losses are otherwise recoverable
      hereunder by Sellers are in excess of the aggregate of 2% of the
      Sellers Redemption Price (other than Losses to the extent
      recoverable by Sellers under any applicable insurance policy and
      net of the present value of any tax benefit to Sellers as a
      result of such Losses) after which such Sellers will be entitled
      to make any such claim for amounts in excess of such threshold,
      and (iii) unless the amount of such claim as finally determined
      exceeds $10,000.

           (d)  Any payment pursuant to this Section 9,
      made by Buyer to Sellers will be deemed an adjustment to
      the Sellers Redemption Price.

           (e)  The rights of Sellers under this Section
      9.3 will be the exclusive remedy of such Sellers with
      respect to breaches by Buyer of representations and
      warranties or covenants contained in or made pursuant to
      this Agreement.

           (f)  In the event that Buyer is obligated to
      indemnify Sellers pursuant to this Section 9, Buyer will,
      upon payment of such indemnity, be subrogated to all rights
      of Sellers with respect to claims to which such
      indemnification relates.

           9.4.  Claims by Third Parties. Other than in the
case of any Tax Claim, which shall be governed by Section 9.5 of
this Agreement, if a party to this Agreement seeks indemnity
hereunder with respect to a claim by a third party:

           (a)  For the purposes of this Section 9.4,
      "Third Party Claim" means any demand which has been made
      on, or communicated to Buyer, Sellers or the Company by or
      on behalf of any Person other than the entities
      aforementioned in this Subsection 9.4(a) and which, if
      maintained or enforced, might result in a claim for
      indemnification in the nature described in Section 9.2 or
      9.3 of this Agreement being made.

           (b)  Promptly upon receipt by Indemnitee of
      notice of any Third Party Claim in respect of which the
      Indemnitee proposes to demand indemnification from the
      Indemnitor, the Indemnitee shall forthwith give notice to
      that effect to the Indemnitor.


                              -40-





           (c)  The Indemnitor shall have the right, exercisable by
      giving notice to the Indemnitee not later than 30 days after
      receipt of the notice described in Subsection 9.2 (c) or 9.3(c),
      as the case may be, to assume the control of the defense,
      compromise or settlement of the Third Party Claim.

           (d)  Upon the assumption of control by the
      Indemnitor as aforesaid, the Indemnitor shall, at its
      expense, diligently proceed with the defense, compromise or
      settlement of the Third Party Claim at the Indemnitor's
      sole expense, including employment of counsel reasonably
      satisfactory to the Indemnitee, and in connection
      therewith, the Indemnitee shall cooperate fully, but at the
      expense of the Indemnitor, to make available to the
      Indemnitor all pertinent information and witnesses under
      Indemnitee's control and to make such assignments and take
      such other steps as in the opinion of counsel for the
      Indemnitor are necessary to enable the Indemnitor to
      conduct such defense, provided always that the Indemnitee
      shall be entitled to reasonable security from the
      Indemnitor for any expense, costs or other liabilities to
      which it may be or may become exposed by reason of such
      cooperation.

          (e)  The final determination of any such Third
      Party Claim, including all related costs and expenses, will
      be binding and conclusive upon the parties hereto as to the
      validity or invalidity, as the case may be, of such Third
      Party Claim against the Indemnitor hereunder.

          (f)  Should the Indemnitor fail to give notice
      to the Indemnitee as provided in clause (c) hereof or in
      the event the Indemnitor declines to undertake the defense
      of any Third Party Claim, action or proceeding when first
      notified thereof, the Indemnitee shall keep the Indemnitor
      advised as to the current status and progress thereof. The
      Indemnitee agrees not to make any offer of settlement
      without first having provided five (5) days advance written
      notice thereof to the Indemnitor.

          (g)  In the event the Indemnitor undertakes the
      defense of any such claim, action or proceeding, the
      Indemnitee shall nevertheless be entitled to participate in
      (but not direct) the defense thereof with counsel of its
      own choice and at its own expense, and the parties agree to
      cooperate fully with one another in connection with the
      defense and/or 


                              -41-




      settlement thereof; provided, however, that
      any decision to settle any such claim, action or proceeding
      shall be at the Indemnitor's sole discretion. From and
      after delivery of the notice referred to in Section 9.4(c)  above,
      the Indemnitor shall be relieved of the obligation to reimburse
      the Indemnitee for any other legal, accounting or other
      out-of-pocket costs and expenses thereafter incurred by the
      Indemnitee with respect to the defense of such claim,
      action or proceeding notwithstanding any participation by
      the Indemnitee therein.

          (h)  If the Indemnitee subsequently recovers
      all or part of the Third Party Claim from any other person
      legally obligated to pay the claim, the Indemnitee shall
      forthwith repay to the Indemnitor the amounts recovered up
      to an amount not exceeding the payment made by the
      Indemnitor to the Indemnitee by way of indemnity.

           9.5.  Tax Claims of the Buyer. If a claim is made by any
Tax authority which, if successful, would result in a breach of a
representation or warranty contained in Section 3.7 hereof and is
likely to result in an indemnity payment to Buyer pursuant to
Section 9.2 of this Agreement, Buyer shall notify Sellers of such
claim (a "Tax Claim"), stating the nature and basis of such claim
and the amount thereof, to the extent known. Sellers will have
the right, at their option, upon timely notice to Buyer, to
assume control of any defense of any Tax Claim (other than a Tax
Claim relating solely to Taxes of the Company for a taxable
period that begins before but ends after the Closing Date (a
"Straddle Period")) with its own counsel, provided, however, such
counsel is reasonably satisfactory to Buyer. Sellers' right to
control a Tax Claim will be limited to amounts in dispute for
which Sellers would be liable pursuant to Section 9.2 of this
Agreement. Costs of such Tax Claims are to be borne by Sellers
unless the Tax Claim relates to taxable periods ending after the
Closing Date, in which event such costs will be fairly
apportioned. Buyer and the Company shall cooperate with Sellers
in contesting any Tax Claim, which cooperation shall include the
retention and, upon Sellers' request, the provision of records
and information which are reasonably relevant to such Tax Claim
and making employees available on a mutually convenient basis to
provide additional information or explanation of any material
provided hereunder. Notwithstanding the foregoing, Sellers shall
neither consent nor agree (nor cause the Company to consent or
agree) to the settlement of any Tax Claim with respect to any
liability for


                              -42-





Taxes that is likely to affect the liability for
any state or federal income tax of the Company or any affiliated
group (as defined in Section 1504(a) of the Code) of which the
Company is a member for any taxable period ending subsequent to
the Closing Date without the prior written consent of Buyer,
which consent shall not be unreasonably withheld. Buyer and
Seller shall jointly control all proceedings taken in connection
with any claims for Taxes relating solely to a Straddle Period of
the Company.

SECTION  10.    MISCELLANEOUS

           10.1  Headings. The section headings herein are
for convenience of reference only, do not constitute part of this
Agreement and will not be deemed to limit or otherwise affect any
of the provisions hereof. References to Sections, unless
otherwise indicated, are references to Sections of this
Agreement.

           10.2.  Notices. All notices to be given pursuant
to this Agreement to any party must be in writing and will be
deemed to have been validly given:

           (a)  if delivered by hand to an officer or agent of
      such party at its address given below; or

           (b)  if delivered by facsimile transmission, to
      such party at its address given below.

           The address of each party for the purposes of this
Agreement is as follows:

           If to Sellers, to the addresses specified on Schedule B
           hereto;

           With a copy to:

           Willkie Farr and Gallagher
           153 East 53rd Street
           New York, New York  10022
           Fax No.  (212) 821-8111

           Attention:  Jack H. Nusbaum, Esq.
                       Daniel D. Rubino, Esq.


                              -43-





           If to Buyer:

           TPG Partners II, L.P.
           201 Main Street
           Suite 2420
           Fort Worth, Texas 76102
           Fax No.  (817) 871-4010

           Attention:  Richard Ekleberry, Esq.

           With a copy to:

           Cleary, Gottlieb, Steen & Hamilton
           One Liberty Plaza
           New York, New York 10006
           Fax No. (212) 225-3999

           Attention:  Paul J. Shim, Esq.



           Either party may by notice to the other change its
address for notice and will so change its address for notice
whenever its existing address for notice ceases to be adequate
for delivery both by hand and by facsimile.

           Notices so given will be deemed to be given and
received:

           (c)  on the date of delivery, if delivered by hand; and

           (d)  24 hours from the time of the transmission
      if sent by facsimile.

           10.3.  Assignment. This Agreement and all
provisions hereof will be binding upon and inure to the benefit
of the parties hereto and their respective successors and
permitted assigns; provided, however, that neither this Agreement
nor any right, interest, or obligation hereunder may be assigned
by any party hereto without the prior written consent of the
other party; and, provided further, that no party hereto or
successor or assignee has the ability to subrogate any other
person to any right or obligation under this Agreement.

          10.4.  Entire Agreement. This Agreement (including
the Disclosure Schedule, Schedules and Exhibits hereto and
thereto)

                              -44-




embody the entire agreement and understanding of the
parties with respect to the transactions contemplated hereby and
thereby and supersede all prior written or oral commitments,
arrangements or understandings with respect thereto (other than
the Confidentiality Agreement, which will terminate at the
Closing). There is no restriction, agreement, promise, warranty,
covenant or undertaking with respect to the transactions
contemplated hereby and thereby other than those expressly set
forth herein or therein.

           10.5.  Amendment; Waiver.

           (a)  This Agreement may only be amended or
      modified in writing signed on behalf of each of the parties
      hereto.

           (b)  Any party hereto may, by an instrument in
      writing, waive compliance with any term or provision of
      this Agreement on the part of such other party or parties
      hereto. The waiver by any party hereto of a breach of any
      term or provision of this Agreement will not be construed
      as a waiver of any subsequent breach.

           10.6.  Counterparts. This Agreement may be
executed in two or more counterparts, all of which will be
considered one and the same agreement and each of which will be
deemed an original.

           10.7.  Governing Law. This agreement will be
governed by the laws of the State of New York (regardless of the
laws that might be applicable under principles of conflicts of
law) as to all matters, including but not limited to matters of
validity, construction, effect and performance.

           10.8.  Severability. If any one or more of the
provisions of this Agreement is held to be invalid, illegal or
unenforceable, the validity, legality or enforceability of the
remaining provisions of this Agreement will not be affected
thereby, and Sellers and Buyer will use their reasonable efforts
to substitute one or more valid, legal and enforceable provisions
which insofar as practicable implement the purposes and intent
hereof. To the extent permitted by applicable law, each party
waives any provision of law which renders any provision of this
Agreement invalid, illegal or unenforceable in any respect.

           10.9.  Consent to Jurisdiction. Buyer and Sellers
hereby submit to the exclusive jurisdiction of the courts of the
State of New York or the courts of the United States located in


                              -45-





the State of New York in respect of the interpretation and
enforcement of the provisions of this Agreement and any related
agreement and hereby waive, and agree not to assert, as a defense
in any action, suit or proceeding for the interpretation or
enforcement of this Agreement and any related agreement, that
they are not subject thereto or that such action, suit or
proceeding may not be brought or is not maintainable in such
courts or that this Agreement may not be enforced in or by such
courts or that their property is exempt or immune from execution,
that the suit, action or proceeding is brought in an inconvenient
forum, or that the venue of the suit, action or proceeding is
improper. Service of process with respect thereto may be made
upon Buyer or Sellers by mailing a copy thereof by registered or
certified mail, postage prepaid, to such party at its address as
provided in Section 10.2 hereof.

           10.10.  Third Person Beneficiaries. This Agreement
is not intended to confer upon any other Person other than the
parties hereto, any rights or remedies hereunder.

           10.11.  Representations and Warranties; Disclosure
Schedule. Neither the specification of any dollar amount in the
representations and warranties set forth in Section 3 nor the
indemnification provisions of Section 9 nor the inclusion of any
items in the Disclosure Schedule to this Agreement will be deemed
to constitute an admission by Sellers or Buyer, or otherwise
imply, that any such amounts or the items so included are
material for the purposes of this Agreement. All documents or
information disclosed in any section of the Disclosure Schedule
to this Agreement are intended to be disclosed for all purposes
under this Agreement and will also be deemed to be incorporated
by reference in each of the other sections of the Disclosure
Schedule to this Agreement to which they may be relevant. For
purposes of this Agreement, the determination as to whether any
item, event, circumstance or amount is "material" shall be made
with reference to the Company and its Subsidiaries, taken as a
whole, and references to "Material Adverse Effect" shall be
deemed to be qualified by "individually or in the aggregate."

           10.12.  United States Dollars.  All dollar amounts
referred to herein will be in lawful currency of the United
States of America.

           10.13.  Expenses. Except as otherwise provided
herein, each of the parties hereto shall bear its own costs and
expenses 


                              -46-




(including legal fees and expenses) incurred in
connection with this Agreement and the transactions contemplated
hereby.

           10.14.  Liquidated Damages. Notwithstanding
anything to the contrary contained in this Agreement, in the
event that the Buyer shall fail to consummate the transactions
contemplated by this Agreement on or before the Closing Deadline
for any reason whatsoever, other than the Sellers' failure to
deliver the Redeemed Shares, the Buyer shall pay to the Company
$10,000,000 in cash. Such amount is in the nature of liquidated
damages and does not constitute a penalty. The parties agree that
the amount provided for in this Section 10.14 is reasonably
intended to compensate the Company for its expenses incurred in
connection with the negotiation of this Agreement and any lost
opportunity resulting from the Buyer's failure to consummate the
transactions contemplated hereby and, upon payment of such amount
by the Buyer, the Company and the Sellers waive any and all
rights to any payments, damages, amounts, costs, fees or other
expenses, and agree that they shall not bring any action, suit or
proceeding of any kind to recover any amounts in connection with
any breach by Buyer of this Agreement, other than such
$10,000,000.


                              -47-





           IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be duly executed as of the day and year first
above written.

J. CREW GROUP, INC.

By:________________________            ___________________________
   Name:                               Arthur Cinader
   Title:



- ---------------------------            ---------------------------
Emily Woods                            Abigail Cinader



- ---------------------------            ---------------------------
Arthur Cinader, Jr.                    Maud Bryt



- ---------------------------            ---------------------------
Saul Charles                           Edna Charles



- ---------------------------            ---------------------------
Linda Charles Fishman                  Amy Charles



___________________________            TRUST U/A DATED DECEMBER 29, 1992,
Robert Charles                         F/B/O ARTHUR CINADER FAMILY,
                                       BETWEEN ARTHUR CINADER, AS GRANTOR
                                       AND MICHAEL S. INSEL, AS TRUSTEE


                                       By:________________________
                                          Michael S. Insel, Trustee









TRUST U/A DATED DECEMBER 30, 1959      TRUST U/A DATED JUNE 14, 1955,
F/B/O JOHN MITCHELL CINADER,           F/B/O OYER FAMILY, BETWEEN MITCHELL
BETWEEN ARTHUR CINADER, AS GRANTOR     CINADER, AS GRANTOR AND ALICE OYER,
AND ALICE OYER, CALVIN OYER AND        ARTHUR CINADER AND SADIE
SADIE CINADER, AS TRUSTEES             CINADER,  AS TRUSTEES


By:________________________            By:________________________
   Alice Oyer, Trustee                    Arthur Cinader, Trustee


By:________________________            By:________________________
   Calvin Oyer, Trustee                   Alice Oyer, Trustee




                                       ARTHUR CINADER CHARITABLE REMAINDER
                                       UNITRUST U/A DATED APRIL 25, 1997,
                                       BETWEEN ARTHUR CINADER, AS GRANTOR
                                       AND JOHANNA CINADER AND JOSH S.
                                       WESTON, AS TRUSTEES


                                       By:________________________
                                          Johanna Cinader, Trustee


                                       By:________________________
                                          Josh S. Weston, Trustee


                                       TPG PARTNERS II, L.P.

                                       By:  TPG Genpar II, L.P.

                                       By:  TPG Advisors II, Inc.


                                       By:________________________
                                           Name:
                                           Title:

             AMENDMENT TO RECAPITALIZATION AGREEMENT

           Amendment, dated as of October 17, 1997 (this
"Amendment"), to that certain Recapitalization Agreement, dated
as of July 22, 1997 (the "Recapitalization Agreement"), by and
among J. Crew Group, Inc., a New York corporation (the
"Company"), the holders of shares of Common Stock of the Company
listed on the signature pages hereto (each a "Seller," and
collectively the "Sellers"), and TPG Partners II, L.P., a
Delaware limited partnership (the "Buyer").

                       W I T N E S S E T H:

           WHEREAS, the Recapitalization Agreement contemplates a
recapitalization of the Company which provides for, among other
things, the purchase by the Buyer from the Company of certain
shares of Common Stock;

           WHEREAS, the parties desire to amend the
Recapitalization Agreement to, among other things, allow TPG
Investors II, L.P., a Delaware limited partnership ("TPG
Investors"), TPG Parallel II, L.P., a Delaware limited
partnership ("TPG Parallel" and, together with TPG Investors, the
"TPG Affiliates"), and certain other designees of the Buyer
(collectively with the TPG Affiliates, the "TPG Designees") as
set forth herein to purchase Recapitalization Shares directly
from the Company upon the terms and subject to the conditions set
forth herein and in the Recapitalization Agreement;

           NOW, THEREFORE, in consideration of the foregoing
premises, and for other good and valuable consideration, the
parties hereby agree as follows:

      SECTION 1.  AMENDMENTS TO THE RECAPITALIZATION AGREEMENT

           1.1. Addition of TPG Designees. Upon the terms and
subject to the conditions set forth herein, in the
Recapitalization Agreement and in the Participation Agreements to
be entered into on the date hereof by and between the Buyer and
each TPG Designee other than the TPG Affiliates, on the Closing
Date, the Buyer and the TPG Designees shall purchase from the
Company, and the Company shall sell to the Buyer and the TPG
Designees, the number of Recapitalization Shares set forth
opposite the Buyer's and such TPG Designees' names on Schedule I





hereto, and each such TPG Designee shall be entitled to receive
all of the benefits and to exercise all of the rights of the
Buyer under the Recapitalization Agreement with respect to those
Recapitalization Shares purchased by such TPG Designee; provided,
however, that nothing contained herein shall in any way amend or
modify the Buyer's obligations under the Recapitalization
Agreement, including without limitation the Buyer's obligation to
deliver the Recapitalization Purchase Price pursuant to Section
2.1 of the Recapitalization Agreement, to the extent they are not
satisfied by the TPG Designees.

           1.2. Adjustment of Retained Shares. The
Recapitalization Agreement is hereby amended by (i) deleting
Exhibit B to the Recapitalization Agreement in its entirety and
inserting in its place Exhibit B to this Amendment and (ii)
amending Section 5.16 of the Recapitalization Agreement by (A)
deleting each of the references to "twelve percent (12%)"
contained therein and replacing them with "14.8127%" and (B)
deleting the number "$9,000,000" and replacing it with
"$11,109,514".

           1.3.  Adjustment of Sellers Redemption Price;
Allocation of Payment Thereof.  The Recapitalization Agreement is
hereby amended as follows:

           (a)  by amending the definition of Sellers Redemption
Price by deleting the number "$347,770,000" and replacing it with
"$327,797,224"; and

           (b) by modifying the allocation of the Sellers
Redemption Price among the Redeemed Shares by deleting Schedule A
to the Recapitalization Agreement in its entirety and inserting
in its place Schedule A to this Amendment.

           1.4. Adjustment of Recapitalization Shares; Adjustment
of Recapitalization Purchase Price. Section 2.1 of the
Recapitalization Agreement is hereby amended by (i) deleting the
number "48,400" and replacing such number with the number
"46,853.023", (ii) deleting the reference therein to
"eighty-eight percent (88%)" therein and replacing such reference
with "85.1873%" and (iii) deleting the number "549,600,000" and
replacing such number with the number "$554,463,863".

      SECTION 2.  MISCELLANEOUS





           2.1. Governing Law. This Amendment will be governed by
the laws of the State of New York (regardless of the laws that might
be applicable under principles of conflicts of law) as to all
matters, including but not limited to matters of validity,
construction, effect and performance.

           2.2.  Defined Terms; Effect of Amendment

           (a) Capitalized terms used but not defined in this
Amendment shall have the respective meanings ascribed to them in
the Recapitalization Agreement.

           (b) Except as expressly amended by this Amendment, the
Recapitalization Agreement shall remain in full force and effect
as the same was in effect immediately prior to the effectiveness
of this Amendment. All references in the Recapitalization
Agreement to "this Agreement" shall be deemed to refer to the
Recapitalization Agreement as amended by this Amendment.

           2.3.  Counterparts.  This Amendment may be executed in
one or more counterparts, each of which shall be deemed an
original and all of which together shall be considered one and the
same agreement.





           IN WITNESS WHEREOF, the parties hereto have caused
this Amendment to be duly executed as of the day and year first
above written.

J. CREW GROUP, INC.

By: /s/ Michael McHugh                 /s/ A. Cinader
   ------------------------            ---------------------------
   Name: Michael McHugh                Arthur Cinader
   Title: V.P. Finance CFO


/s/ Emily Woods                        /s/ A. Cinader
- ---------------------------            ---------------------------
Emily Woods                            Abigail Cinader*


/s/ A. Cinader                         /s/ A. Cinader
- ---------------------------            ---------------------------
Arthur Cinader, Jr.*                   Maud Bryt*


/s/ Saul Charles                       /s/ Saul Charles
- ---------------------------            ---------------------------
Saul Charles                           Edna Charles**


/s/ Saul Charles                       /s/ Saul Charles
- ---------------------------            ---------------------------
Linda Charles Fishman**                Amy Charles**



/s/ Saul Charles                       TRUST U/A DATED DECEMBER 29, 1992,
- ---------------------------            F/B/O ARTHUR CINADER FAMILY,
Robert Charles**                       BETWEEN ARTHUR CINADER, AS GRANTOR
                                       AND MICHAEL S. INSEL, AS TRUSTEE


                                       By: /s/ Michael S. Insel
                                          ---------------------------
                                          Michael S. Insel, Trustee*



* - By Arthur Cinader, as attorney-in-fact
** - By Saul Charles, as attorney-in-fact


* - By Arthur Cinader, as attorney-in-fact
** - By Saul Charles, as attorney-in-fact





TRUST U/A DATED DECEMBER 30, 1959      TRUST U/A DATED JUNE 14, 1955,
F/B/O JOHN MITCHELL CINADER,           F/B/O OYER FAMILY, BETWEEN MITCHELL
BETWEEN ARTHUR CINADER, AS GRANTOR     CINADER, AS GRANTOR AND ALICE OYER,
AND ALICE OYER, CALVIN OYER AND        ARTHUR CINADER AND CALVIN OYER, AS
SADIE CINADER, AS TRUSTEES             TRUSTEES

By: /s/ A. Cinader                     By: /s/ Saul Charles
   ------------------------               -------------------------
   Alice Oyer, Trustee*                   Arthur Cinader, Trustee**

By: /s/ A. Cinader                     By: /s/ Saul Charles
   ------------------------               -------------------------
   Calvin Oyer, Trustee*                  Alice Oyer, Trustee**

                                       By: /s/ Saul Charles
                                          -------------------------
                                          Calvin Oyer, Trustee**

                                       ARTHUR CINADER CHARITABLE REMAINDER
                                       UNITRUST U/A DATED APRIL 25, 1997,
                                       BETWEEN ARTHUR CINADER, AS GRANTOR
                                       AND JOHANNA CINADER AND JOSH S.
                                       WESTON, AS TRUSTEES

                                       By: /s/ Saul Charles
                                          -------------------------
                                          Johanna Cinader, Trustee**

                                       By: /s/ Saul Charles
                                          -------------------------
                                          Josh S. Weston, Trustee**


TPG INVESTORS II, L.P.                 TPG PARTNERS II, L.P.

By:  TPG GenPar II, L.P.               By:  TPG GenPar II, L.P.

By:  TPG Advisors II, Inc.             By:  TPG Advisors II, Inc.


By: /s/ Jonathan J. Coslet             By: /s/ Jonathan J. Coslet
   ------------------------               -------------------------
   Name: Jonathan J. Coslet               Name: Jonathan J. Coslet
   Title: Principal                       Title: Principal



* - By Arthur Cinader, as attorney-in-fact
** - By Saul Charles, as attorney-in-fact





TPG PARALLEL II, L.P.

By:  TPG GenPar II, L.P.

By:  TPG Advisors II, Inc.


By: /s/ Jonathan J. Coslet 
   ------------------------
   Name: Jonathan J. Coslet
   Title: Principal        



* - By Arthur Cinader, as attorney-in-fact
** - By Saul Charles, as attorney-in-fact





                            SCHEDULE I



Stockholder                                         Recapitalization
                                                         Shares

TPG Parallel II, L.P.                                  2,154.198
TPG Investors II, L.P.                                 3,292.740
BancBoston Investments, Inc.                           2,062.500
General Electric Capital Corporation                   1,948.090
TCW/Crescent Mezzanine Partners, L.P.                  2,323.141
TCW/Crescent Mezzanine Trust                             707.128
TCW/Crescent Mezzanine Investment Partners, L.P.          63.481
Crescent/Mach I Partners, L.P.                           171.875
TCW Shared Opportunity Fund II, L.P.                     171.875
DLJ Fund Investment Partners II, L.P.                    527.745
Ken Moelis                                                25.943
Mark Lanigan                                              25.943
Pauline Boghosian                                         25.943
Stephen Paul                                              13.342
Scott Honour                                               4.447
Bennett Goodman                                           20.013
Steve Rattner                                             20.013
Doug Ostrover                                             20.013
Rob Grien                                                 19.272
Christine Fasano                                          13.342
Eric Swanson                                              10.377
Kevin Smith                                                2.965
Steve Hickey                                              10.377
DLJ Capital Corporation                                    1.482
Farallon Capital Partners, L.P.                          742.500
Farallon Capital Institutional Partners, L.P.            577.500
Farallon Capital Institutional Partners II, L.P.         198.000
Farallon Capital Institutional Partners III, L.P.         66.000
RR Capital Partners, L.P.                                 66.000





             SCHEDULE A TO AMENDMENT TO RECAPITALIZATION AGREEMENT


                         Number of Common Shares     Allocation of Sellers
Seller                       Owned of Record            Redemption Price

Arthur Cinader                   104,836                 $168,369,548 1

Emily Woods                       18,110 2                $12,336,837 2

Arthur Cinader
Charitable Remainder              11,399                  $14,647,063
Unitrust, dated April
25, 1997

Trust u/a dated December
29, 1992, f/b/o Arthur            5,217                    $6,703,547
Cinader Family

Abigail Cinader                    137                      $176,037

Arthur Cinader, Jr.                137                      $176,037

Maud Bryt                          137 2                       $0 2

Trust u/a dated December
30, 1959, f/b/o John              10,000                  $12,849,428
Mitchell Cinader

Trust u/a dated June 14,
1955, f/b/o Oyer Family           24,164                  $31,049,358

Edna Charles                      20,000                  $25,698,856

Saul Charles                      19,861                  $25,520,249

Linda Charles Fishman             3,330                    $4,278,860



- --------

1    Amount includes an additional approximately $321 per share
     as consideration for the sale of Mr. Cinader's controlling
     interest in the Company.

2    Ms. Woods will retain a portion of her existing shares of
     Common Stock (having an aggregate value of $10,933,477)
     representing approximately 14.58% of the common equity of
     the post-Closing Company. The value of such shares owned by
     Ms. Woods, together with the cash to be received by her as
     her pro rata share of the Sellers Redemption Price, equal,
     in the aggregate, $23,270,314. Ms. Bryt will retain 129.094
     of her existing shares of Common Stock (having an aggregate
     value of $176,037) representing approximately .002347% of
     the common equity of the post-Closing Company and will
     surrender her remaining shares of Common Stock to the
     Company for no additional consideration.





Amy Charles                       5,330                    $6,848,745

Robert Charles                    5,330                    $6,848,745

                    TOTAL        227,988                 $315,503,310 2





       EXHIBIT B TO AMENDMENT TO RECAPITALIZATION AGREEMENT




Emily Woods                            8,017.883 Retained Shares


Maud Bryt                               129.094 Retained Shares 1

- --------

1     Ms. Bryt will retain 129.094 of her existing shares of
      Common Stock (having an aggregate value of $176,037)
      representing approximately .002347% of the common equity of
      the post-Closing Company and will surrender her remaining
      shares of Common Stock to the Company for no additional
      consideration.







                             RESTATED

                   CERTIFICATE OF INCORPORATION

                                OF

                        J. CREW GROUP, INC.

                               -----

                     Under Section 807 of the

                     Business Corporation Law

                               -----









                             RESTATED

                   CERTIFICATE OF INCORPORATION

                                OF

                        J. CREW GROUP, INC.

                               -----

                     Under Section 807 of the

                     Business Corporation Law

                               -----


           The undersigned, being Vice President and Assistant
Secretary of J. Crew Group, Inc., pursuant to Section 807 of the
Business Corporation Law of the State of New York, do hereby
restate, certify and set forth:

           1. The name of the corporation is J. CREW GROUP, INC.,
hereinafter sometimes called "the corporation."

           2. The Certificate of Incorporation of the corporation
was filed by the Department of State, Albany, New York, on the
19th day of May, 1988.

           3. The Certificate of Incorporation, as amended
heretofore, is hereby further amended as authorized by Section
801 of the Business Corporation Law (i) to change the purpose of
the corporation, (ii) to change the post office address to which
the secretary of state shall mail a copy of any process against
the corporation served upon him, (iii) to increase the aggregate
number of shares of Common Stock which the corporation shall have
authority to issue from 1,000,000 shares to 100,000,000 shares
and to reduce the par value of such shares from $1.00 per share
to $.01 per share, (iv) to change the existing 227,988 issued and
outstanding shares of Common Stock of the corporation, par value
$1.00 per share, to 55,000 issued and


                               1



outstanding shares of Common Stock of the corporation, par value
$.01 per share, and to change the existing 772,012 unissued
shares of Common Stock of the corporation, par value $1.00 per
share, to 99,945,000 unissued shares of Common Stock of the
corporation, par value $.01 per share, representing a rate of
change of 0.24 and 129.46 for issued and outstanding shares and
unissued shares, respectively, (v) to cancel twenty thousand
(20,000) shares of Preferred Stock with a par value of $100 per
share, (vi) to cancel ten thousand (10,000) shares of Prior
Preferred Stock with a par value of $100 per share, (vii) to add
ten million (10,000,000) shares of preferred stock with a par
value of $.01 per share, (viii) to grant authority to the Board
of Directors, as to the shares of preferred stock added hereby,
to establish or change the number of shares constituting each
series of such preferred stock, and to fix the designation and
relative rights, preferences and limitations of the shares of
each such series, (ix) to strike out certain provisions
addressing the number of directors of the corporation, the
duration of the corporation, and the participation in meetings of
the Board of Directors or any committee thereof by means of a
conference telephone, and (x) to add certain provisions
addressing the rights of the holders of shares of capital stock
of the corporation. This restated Certificate of Incorporation
reduces the stated capital from four million ($4,000,000) dollars
to one million one hundred thousand ($1,100,000) dollars, a
reduction of two million nine hundred thousand ($2,900,000)
dollars. The text of the Certificate of Incorporation is hereby
restated as amended to read as herein set forth in full:

           FIRST: The name of the corporation is J. CREW GROUP, INC.,
hereinafter sometimes called "the corporation."


                               2



           SECOND: The purposes for which the corporation is formed
are as follows:

           The purpose of the corporation is to engage in any
lawful act or activity for which corporations may be organized
under the Business Corporation Law, provided, however, that the
corporation is not formed to engage in any act or activity
requiring the consent or approval of any state official,
department, board, agency or other body without first obtaining
such consent or approval.

           THIRD: The office of the corporation within the State of
New York is to be located in the County of New York.

           FOURTH: The aggregate number of shares of all classes
which the corporation shall have authority to issue is
110,000,000 shares, consisting of one hundred million
(100,000,000) shares of Common Stock with a par value of $.01 per
share and ten million (10,000,000) shares of preferred stock with
a par value of $.01 per share.

           FIFTH: The Board of Directors is authorized, subject
to the limitations prescribed by law and the terms of this
Certificate of Incorporation, to provide for the issuance of
shares of preferred stock in series, and, by filing a certificate
of amendment pursuant to the Business Corporation Law, to
establish or change the number of shares constituting each such
series and to fix the designation and relative rights,
preferences and limitations of the shares of each such series.
The authority of the Board of Directors with respect to each
series shall include, but not be limited to, determination of the
following:

           (1) the number of shares constituting such series and the
distinctive designation of such series;

           (2) the times at which and the conditions under which
dividends shall be payable on shares of such series, the dividend
rate on the shares of such series, whether dividends


                               3



shall be cumulative and, if so, from which date or dates, and the
status of such dividends as participating or non-participating;

           (3) whether such series shall have voting rights in
addition to the voting rights provided by law and, if so, the
terms of such voting rights;

           (4) whether such series shall have conversion or
exchange privileges and, if so, the terms and conditions of such
conversion or exchange, including the price or conversion or
exchange rate and provision for adjustment thereof in such events
as the Board of Directors shall determine;

           (5) whether or not the shares of such series shall be
redeemable and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they
shall be redeemable, and the amount per share payable in case of
redemption, which amount may vary under different conditions and
at different redemption dates;

           (6) the obligation, if any, of the corporation to
retire shares of such series pursuant to a sinking fund or
redemption or purchase account;

           (7) the rights of the shares of such series in the event
of voluntary or involuntary liquidation, dissolution or winding up
of the corporation; and

           (8) any other relative rights, preferences and limitations
of such series.

           SIXTH: No present or future holder of any shares of any
class or series, whether heretofore or hereafter issued, shall
have any preemptive or preferential right to purchase or
subscribe for any part of the stock of the corporation, now or
hereafter authorized, or to any bonds, certificates of
indebtedness, debentures or other securities convertible into or
exchangeable for or carrying options or rights to purchase stock
of the corporation other than as the Board of Directors may
determine.


                               4



           SEVENTH: Subject to the rights of the preferred stock,
if any, dividends may be paid upon the Common Stock as and when
declared by the Board of Directors out of any funds legally
available therefor.

           EIGHTH: Upon any liquidation, dissolution or winding
up of the affairs of the corporation (which shall not be deemed
to include a consolidation or merger of the corporation, or the
sale of all or substantially all of the corporation's assets,
into, with or to any other corporation or corporations), whether
voluntary or involuntary, and after the holders of the preferred
stock, if any, shall have been paid in full the amounts, if any,
to which they respectively shall be entitled or provision for
such payment shall have been made, the remaining net assets of
the corporation shall be distributed pro rata to the holders of
the Common Stock.

           NINTH: Every holder of shares of Common Stock of
record shall be entitled at every meeting of shareholders to one
vote for each share of Common Stock standing in his name on the
record of shareholders. Holders of shares of each series of
preferred stock, if any, shall be entitled to vote in accordance
with the provisions of this Certificate of Incorporation, as
amended, relating to such series.

           TENTH: The secretary of state is designated as the agent
of the corporation upon whom process against the corporation may be
served. The post office address within the State of New York to
which the secretary of state shall mail a copy of any process
against the corporation served upon him is: J. Crew Group, Inc.,
770 Broadway, New York, New York 10003.

           ELEVENTH: The corporation reserves the right to amend,
alter, change or repeal any provision herein contained in the
manner now or hereafter prescribed by applicable law, and all
rights conferred hereunder upon shareholders of the corporation
are granted subject to this reservation.


                               5



           TWELFTH: (1) A person who is or was a director of
the corporation shall not have any personal liability to the
corporation or its shareholders for damages for any breach of
duty in such capacity, provided that the foregoing shall not
eliminate or limit liability where such liability is imposed
under the Business Corporation Law.

           (2) Any repeal or modification of this Article Twelfth
shall be prospective only, and shall not affect any limitation on
the personal liability of a director of the corporation existing
at the time of such repeal or modification.

           4. This restatement of the Certificate of
Incorporation was authorized, pursuant to Sections 803(a) and
615(a) of the Business Corporation Law, by vote of the Board of
Directors, followed by unanimous written consent, setting forth
the action so taken, signed by the holders of all outstanding
shares entitled to vote thereon.


                                6



           IN WITNESS WHEREOF, the undersigned have executed,
signed and verified this Certificate of Incorporation this 17th
day of October, 1997.


                              /s/ Nicholas Lamberti
                              -------------------------
                              Nicholas Lamberti,
                              Vice President
                              Address:


                              /s/ Michael P. McHugh
                              -------------------------
                              Michael P. McHugh,
                              Assistant Secretary
                              Address:




                               7



                      J. CREW GROUP, INC.

                   ------------------------
                           BY-LAWS
                   ------------------------

                           ARTICLE I

                        The Corporation
                        ---------------

           Section 1.01. Name. The legal name of this corporation
(hereinafter called the "Corporation") is J. Crew Group, Inc.

           Section 1.02. Offices. The Corporation shall have its
principal office in the City of New York, County of New York,
State of New York. The Corporation may also have offices at such
other places within and without the State of New York as the
Board of Directors may from time to time appoint or as the
business of the Corporation may require.

           Section 1.03. Seal. The corporate seal shall have
inscribed thereon the name of the Corporation, the year of its
organization and the words "Corporate Seal, New York." One or
more duplicate dies for impressing such seal may be kept and
used.

                          ARTICLE II
                   Meetings of Shareholders
                   ------------------------

           Section 2.01. Place of Meetings. All meetings of the
shareholders shall be held at the principal office of the
Corporation in the State of New York, or at such other place,
within or without the State of New York, as may be fixed in the
notice of the meeting.

           Section 2.02. Annual Meeting. An annual meeting of the
shareholders of the Corporation for the election of directors and
the transaction of such other business as may properly come
before the meeting shall be held on the second Tuesday in May in
each year if not a legal holiday, and if a legal holiday, then on
the next business day following, at such time as may be fixed in
the notice of the meeting. If for any reason any annual meeting
shall not be held at the time herein specified, the same may be
held at any time thereafter upon notice, as herein provided, or
the business thereof may be transacted at any special meeting
called for the purpose.





           Section 2.03. Special Meetings. Special meetings of
shareholders may be called by the Chairman of the Board or the
President whenever he deems it necessary or advisable, and shall
be called by the Chairman of the Board or the President or the
Secretary upon the written request of a majority of the entire
Board of Directors or of the holders of one-third of the number
of shares of the Corporation entitled to vote at such meeting.

           Section 2.04. Notice of Meetings. Written notice of all
meetings stating the place, date and hour of the meeting shall be
given to each shareholder entitled to vote at such meeting
personally or by first class mail, not fewer than ten nor more
than fifty days before the date of the meeting. Notice of each
special meeting shall state the purpose or purposes for which the
meeting is called and shall indicate that it is being called by
or at the direction of the person or persons calling the meeting.
If, at any meeting, action is proposed to be taken which would,
if taken, entitle shareholders fulfilling the requirements of
Section 623 of the New York Business Corporation Law to receive
payment for their shares, the notice of such meeting shall
include a statement of that purpose and to that effect. If
mailed, a notice of meeting shall be deemed given when deposited
in the United States mail, with postage prepaid, directed to the
shareholder at his address as it appears on the record of
shareholders, or at such other address for mailing of notices as
any shareholder may in writing file with the Secretary of the
Corporation. Notice of a meeting need not be given to any
shareholder who submits a signed waiver of notice, in person or
by proxy, whether before or after the meeting. The attendance of
a shareholder at a meeting, in person or by proxy, without
protesting prior to the conclusion of the meeting the lack of
notice of such meeting, shall constitute a waiver of notice by
him.

           Section 2.05. Record Date for Shareholders. For the
purpose of determining the shareholders entitled to notice of or
to vote at any meeting of shareholders or any adjournment
thereof, or to express consent to or dissent from any proposal
without a meeting, or for the purpose of determining shareholders
entitled to receive payment of any dividend or the allotment of
any rights or for the purpose of any other action, the Board of
Directors may fix, in advance, a record date, which shall not be
more than fifty nor less than ten days before the date of such
meeting, nor more than fifty days prior to any other action. If
no record date is fixed, the record


                               -2-



date for determining shareholders entitled to notice of or to
vote at a meeting of shareholders shall be at the close of
business on the day next preceding the day on which notice is
given, or, if no notice is given, the day on which the meeting is
held; the record date for determining shareholders entitled to
express consent to or dissent from any proposal without a
meeting, when no prior action by the Board of Directors is
necessary, shall be the day on which the first written consent or
dissent, as the case may be, is expressed; and the record date
for determining shareholders for any other purpose shall be at
the close of business on the day on which the Board of Directors
adopts the resolution relating thereto. A determination of
shareholders of record entitled to notice of or to vote at any
meeting of shareholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a
new record date for the adjourned meeting.

           Section 2.06. Proxy Representation. Every shareholder
may authorize another person or persons to act for him by proxy
in all matters in which a shareholder is entitled to participate,
whether by waiving notice of any meeting, voting or participating
at a meeting, or expressing consent or dissent without a meeting.
Every proxy must be signed by the shareholder or by his
attorney-in-fact. No proxy shall be valid after the expiration of
eleven months from the date thereof unless such proxy provides
for a longer period. Every proxy shall be revocable at the
pleasure of the shareholder executing it, except as may be
otherwise provided by law.

           Section 2.07. Voting at Shareholders' Meetings. Except
as otherwise provided by statute or by the Certificate of
Incorporation, each outstanding share of stock having voting
power shall be entitled to one vote on each matter submitted to a
vote at a meeting of shareholders. Directors shall be elected by
the vote of the holders of a plurality of the shares present at a
meeting and entitled to vote in the election. Unless otherwise
provided by statute, any other corporate action shall be
authorized by the vote of the holders of a majority of the shares
present at a meeting of shareholders and entitled to vote
thereon. Voting need not be by ballot.

           Section 2.08. Quorum and Adjournment. Except as
otherwise provided by statute or by the Certificate of
Incorporation, the holders of a majority of the shares of the
Corporation shall constitute a quorum for the transaction of any
business. When a quorum is once present to organize a 


                               -3-



meeting, it shall not be broken by the subsequent withdrawal of
any shareholders. If a quorum is not present or represented at
any meeting of the shareholders, the shareholders present in
person or represented by proxy shall have power to adjourn the
meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall be present or represented.
At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been
transacted at the meeting as originally notified.

           Section 2.09. List of Shareholders. The officer who has
charge of the record of shareholders of the Corporation shall
prepare, make and certify, at least ten days before every meeting
of shareholders, a complete list of the shareholders, as of the
record date fixed for such meeting, arranged in alphabetical
order, and showing the address of each shareholder and the number
of shares registered in each shareholder's name. Such list shall
be open to the examination of any shareholder, for any purpose
germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, at the
principal office of the Corporation or at a place within the
city, municipality or community where the meeting is to be held,
and shall be available for the examination of any shareholder at
the place and during the time of the meeting. If the right of any
shareholder to vote at any meeting is challenged, the
inspectors of election, if any, or the person presiding, shall
require such list of shareholders to be produced as evidence of
the right of the persons challenged to vote, and all persons who
appear from such list to be shareholders entitled to vote thereat
may vote at such meeting.

           Section 2.10. Action of the Shareholders Without a
Meeting. Whenever shareholders are required or permitted to take
any action by vote, such action may be taken without a meeting on
written consent, setting forth the action so taken, signed by the
holders of all of the outstanding shares entitled to vote
thereon.

                          ARTICLE III
                           Directors
                           ---------

           Section 3.01. Number of Directors. The number of
directors which shall constitute the entire Board of Directors
shall not be less than five nor more than nine. Subject to the
foregoing limitation, the number of directors may be fixed from


                               -4-



time to time by action of a majority of the entire Board of
Directors or of the shareholders at an annual or special meeting,
or, if the number of directors is not so fixed, the number shall
be five.

           Section 3.02. Election and Term. The initial Board of
Directors shall be elected by the incorporator and the initial
directors so elected shall hold office until the first annual
meeting of shareholders and until their successors have been
elected and qualified. Thereafter, each director who is elected
at an annual meeting of shareholders, and each director who is
elected in the interim to fill a vacancy or a newly created
directorship, shall hold office until the next annual meeting of
shareholders and until his successor has been elected and
qualified.

           Section 3.03. Filling Vacancies, Resignation and
Removal. Any director may be removed, with or without cause, by
vote of the shareholders. In the interim between annual meetings
of shareholders or special meetings of shareholders called for
the election or removal of one or more directors, newly created
directorships and any vacancies in the Board of Directors,
including vacancies resulting from the resignation or removal of
directors, may be filled by the vote of a majority of the
remaining directors then in office, although less than a quorum,
or by the sole remaining director.

           Section 3.04. Qualifications and Powers. Each director
shall be at least eighteen years of age. A director need not be a
shareholder, a citizen of the United States or a resident of the
State of New York. The business of the Corporation shall be
managed by the Board of Directors, subject to the provisions of
the certificate of incorporation. In addition to the powers and
authorities expressly conferred upon it by these bylaws, the
Board may exercise all such powers of the Corporation and do all
such lawful acts and things as are not by statute or by the
certificate of incorporation or by these bylaws directed or
required to be exercised or done exclusively by the shareholders.

           Section 3.05. Regular and Special Meetings of the
Board. The Board of Directors may hold its meetings, regular or
special, within or without the State of New York. The annual
meeting of the Board of Directors shall be held immediately
after, and at the same place as, the annual meeting of
shareholders. No notice shall be required for regular meetings
of the Board of Directors for which the time and place


                               -5-



have been fixed. Special meetings of the Board may be called
by or at the direction of the Chairman of the Board, the
President, any Vice President, the Secretary or a majority of the
directors in office, upon three days notice to each director,
delivered personally, sent by telegraph or mailed to each
director at his residence or usual place of business. Meetings of
the Board, regular or special, may be held at any time and place,
and for any purpose, without notice, when all the directors are
present or when all directors not present, before or after such
meeting, in writing waive notice of the holding of such meeting.
Any requirement of furnishing a notice shall be waived by any
director who attends any meeting of the Board without protesting,
prior thereto or at its commencement, the lack of notice to him.

           Section 3.06. Chairman. At the Annual Meeting of
Directors, the Board shall elect from its members a Chairman of
the Board who shall hold office until the Annual Meeting of
Directors next succeeding his election. At all other meetings of
the Board of Directors, the Chairman of the Board, or in his
absence the President, shall preside. At all meetings of the
stockholders the Chairman of the Board, or in his absence the
President, shall preside.

           Section 3.07. Quorum and Action. A majority of the
directors shall constitute a quorum of the Board of Directors.
Except as otherwise provided by the New York Business
Corporation Law, the vote of the majority of the directors
present at a meeting at which a quorum is present shall be the
act of the Board. A majority of the directors present at the time
and place of any regular or special meeting, although less than a
quorum, may adjourn the same from time to time without further
notice, until a quorum shall be present.

           Section 3.08. Telephonic Meetings. Any member or
members of the Board of Directors, or of any committee designated
by the Board, may participate in a meeting of the Board, or any
such committee, as the case may be, by means of conference
telephone or similar communications equipment allowing all
persons participating in the meeting to hear each other at the
same time, and participation in a meeting by such means shall
constitute presence in person at such meeting.

           Section 3.09. Action Without a Meeting. Any action
required or permitted to be taken by the Board of Directors, or
any committee thereof, may be taken without a meeting if all
members of the Board or committee, as the case may be, consent 


                               -6-



in writing to the adoption of a resolution authorizing
the action. The resolution and the written consents thereto by
the members of the Board or committee shall be filed with the
minutes of proceedings of the Board or committee.

           Section 3.10.  Compensation of Directors.  By
resolution of the Board of Directors, the directors may be paid
their expenses, if any, for attendance at each regular or special
meeting of the Board or of any committee designated by the Board
and may be paid a fixed sum for attendance at such meeting, or a
stated salary as director, or both. Nothing herein contained
shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation
therefor; provided, however, that directors who are also salaried
officers shall not receive fees or salaries as directors.

                          ARTICLE IV
                          Committees
                          ----------

           Section 4.01. In General. The Board of Directors may,
by resolution or resolutions passed by the affirmative vote of a
majority of the entire Board, designate an Executive Committee
and such other committees as the Board may from time to time
determine, each to consist of one or more directors, and each of
which, to the extent provided in the resolution or in the
certificate of incorporation or in the bylaws, shall have all the
powers of the Board, except that no such committee shall have
power to fill vacancies in the Board, or to change the membership
of or to fill vacancies in any committee, or to make, amend,
repeal or adopt By-laws of the Corporation, or to submit to the
shareholders any action that needs shareholder approval under
these By-laws or the New York Business Corporation Law, or to fix
the compensation of the directors for serving on the Board or any
committee thereof, or to amend or repeal any resolution of the
Board which by its terms shall not be so amendable or repealable.
Each committee shall serve at the pleasure of the Board. The
Board may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member
at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to
act at the meeting in the place of any such absent or
disqualified member.


                               -7-



                           ARTICLE V
                           Officers
                           ---------

           Section 5.01. Designation, Term and Vacancies. The
officers of the Corporation shall be a Chairman of the Board, a
President, one or more Vice Presidents (one or more of whom may
be designated as Executive Vice President), a Secretary, a
Treasurer, and such other officers as the Board of Directors may
from time to time deem necessary. Such officers may have and
perform the powers and duties usually pertaining to their
respective offices, the powers and duties respectively prescribed
by law and by these bylaws, and such additional powers and duties
as may from time to time be prescribed by the Board. The same
person may hold any two or more offices, except that the offices
of President and Secretary may not be held by the same person
unless all the issued and outstanding stock of the Corporation is
owned by one person, in which instance such person may hold all
or any combination of offices.

           The initial officers of the Corporation shall be
appointed by the initial Board of Directors. Thereafter, the
officers of the Corporation shall be appointed by the Board as
soon as practicable after the election of the Board at the annual
meeting of shareholders, and shall hold office until the regular
annual meeting of the Board of Directors following their
appointment and until their successors have been appointed and
qualified; provided, however, that the Board of Directors may
remove any officer at any time, with or without cause. Vacancies
occurring among the officers of the Corporation shall be filled
by the Board of Directors. The salaries of all officers of the
Corporation shall be fixed by the Board of Directors.

           Section 5.02. Chairman. The Chairman of the Board shall
direct the policy and management of the Company on behalf of the
Board and shall have general charge of the business, affairs and
property of the Corporation, and general supervision over its
officers and agents.

           Section 5.03. President. The President of the
Corporation shall be the administrative officer of the
Corporation and, as such, shall manage its operations, perform
all the duties incident to his office, and shall see that all
orders and resolutions of the Board of Directors are carried into
effect. In the event of the absence or the disability of the
Chairman of the Board, he shall act in his place and assume his
duties.


                               -8-



           Section 5.04. Vice-Presidents. During the absence or
disability of the President, the Vice-President or, if there be
more than one, a Vice-President or Executive Vice-President
designated by the Board of Directors, shall exercise all the
functions of the President and, when so acting, shall have all
the powers of and be subject to all restrictions upon the
President. Each Vice-President shall have such powers and
discharge such duties as may be assigned to him from time to time
by the Board of Directors.

           Section 5.05. Secretary. The Secretary shall have
custody of the seal of the Corporation and when required by the
Board of Directors, or when any instrument shall have been signed
by the President or by any other officer duly authorized to sign
the same, or when necessary to attest any proceedings of the
shareholders or directors, shall affix it to any instrument
requiring the same and shall attest the same with his signature,
provided that the seal may be affixed by the President or any
Vice President or other officer of the Corporation to any
document executed by either of them respectively on behalf of the
Corporation which does not require the attestation of the
Secretary. He shall attend to the giving and serving of notices
of meetings. He shall have charge of such books and papers as
properly belong to his office or as may be committed to his care
by the Board of Directors. He shall perform such other duties as
appertain to his office or as may be required by the Board of
Directors.

           Section 5.06. Assistant Secretaries. Whenever requested
by or in the absence or disability of the Secretary, the
Assistant Secretary designated by the Secretary (or in the
absence of such designation, the Assistant-Secretary designated
by the Board of Directors) shall perform all the duties of the
Secretary and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the Secretary.

           Section 5.07. Treasurer. The Treasurer shall render to
the President or the Board of Directors whenever requested a
statement of the financial condition of the Corporation and of
all his transactions as Treasurer, and render a full financial
report at the annual meeting of the stockholders if called upon
to do so and perform such duties as are given to him by these
By-laws or as from time to time may be assigned to him by the
Board of Directors or the President.

           Section 5.08. Assistant Treasurer. Whenever requested
by or in the absence or disability of the Treasurer, 


                               -9-



the Assistant Treasurer designated by the Treasurer (or
in the absence of such designation, the Assistant-Treasurer
designated by the Board of Directors) shall perform all the
duties of the treasurer, and when so acting, shall have all the
powers of, and be subject to all the restrictions upon, the
Treasurer.

           Section 5.09. Subordinate Officers and Agents. The
Board of Directors may from to time appoint such other officers
and agents as it may deem necessary or advisable, to hold office
for such period, have such authority and perform such duties as
the Board of Directors may from time to time determine. The Board
of Directors may delegate to any officer or agent the power to
appoint any such subordinate officers or agents and to prescribe
their respective terms of office, authorities and duties.

           Section 5.10. Delegation. In case of the absence of any
officer of the Corporation, or for any other reason that the
Board of Directors may deem sufficient, the Board may temporarily
delegate the powers or duties, or any of them, of such officer to
any other officer or to any director.

           Section 5.11. Compensation. The salaries or other
compensation of the officers shall be fixed from time to time by
the Board of Directors and no officer shall be prevented from
receiving such salary or any compensation by reason of the fact
that he is also a director of the Corporation. The Board of
Directors, in accordance with the provisions of Section 5.11 of
this Article V, may delegate to any officer or agent the power to
fix from time to time the salaries or other compensation of
officers or agents.

                          ARTICLE VI
                            Shares
                            ------

           Section 6.01. Certificates Representing Shares. All
certificates representing shares of the Corporation shall be
signed by the Chairman of the Board, the President or a Vice
President and by the Secretary or an Assistant Secretary or the
Treasurer or an Assistant Treasurer, shall bear the seal of the
Corporation and shall not be valid unless so signed and sealed.
Certificates countersigned by a duly appointed transfer agent or
registered by a duly appointed registrar shall be deemed to be so
signed and sealed whether the signatures be manual or facsimile
signatures and whether the seal be a facsimile seal or any other
form of seal. All certificates shall be consecutively numbered
and the name of the person owning the 


                               -10-



shares represented thereby, his residence, with the
number of such shares and the date of issue, shall be entered on
the Corporation's books. All certificates surrendered shall be
cancelled and no new certificates issued until the former
certificates for the same number of shares shall have been
surrendered and cancelled, except as provided for herein.

           In case any officer who signed or whose facsimile
signature was affixed to any certificate shall have ceased to be
such officer before such certificate is issued, it nevertheless
may be issued by the Corporation as if he were such officer at
the date of its issuance.

           When the Corporation is authorized to issue shares of
more than one class there shall be set forth upon the face or
back of the certificate, or the certificate shall have a
statement that the Corporation will furnish to any shareholder
upon request and without charge, a full statement of the
designation, relative rights, preferences, and limitations of the
shares of each class authorized to be issued and, if the
Corporation is authorized to issue any class of preferred shares
in series, the designation, relative rights, preferences and
limitations of each such series so far as the same have been
fixed and the authority of the Board of Directors to designate
and fix the relative rights, preferences and limitations of other
series.

           Any restrictions on the transfer or registration of
transfer of any shares of any class or series shall be noted
conspicuously on the certificate representing such shares.

           Section 6.02.  Addresses of Shareholders.  Every
shareholder shall furnish the Corporation with an address to
which notices of meetings and all other notices may be served
upon or mailed to him, and in default thereof notices may be
addressed to him at his last known post office address.

           Section 6.03.  Stolen, Lost or Destroyed Certificates.
The Board of Directors may in its sole discretion direct that a
new certificate for shares be issued in place of any certificate
for shares issued by the Corporation alleged to have been stolen,
lost or destroyed. When authorizing such issuance of a new
certificate, the Board of Directors may, in its discretion, and
as a condition precedent thereto, require the owner of such
stolen, lost or destroyed certificate or his legal representatives 
to give the Corporation a bond in such sum as the Corporation may 
direct


                               -11-



not exceeding double the value of the shares represented by the 
certificate alleged to have been stolen, lost or destroyed.

           Section 6.04. Transfers of Shares. Upon compliance with
all provisions restricting the transferability of shares, if any,
transfers of shares shall be made only upon the books of the
Corporation by the holder in person or by his attorney thereunto
authorized by power of attorney duly filed with the Secretary of
the Corporation or with a transfer agent or registrar, if any,
and upon the surrender and cancellation of the certificate or
certificates for such shares properly endorsed and the payment of
all taxes due thereon. The Board of Directors may appoint one or
more suitable banks or trust companies as transfer agents or
registrars of transfers, for facilitating transfers of any class
or series of shares of the Corporation by the holders thereof
under such regulations as the Board of Directors may from time to
time prescribe. Upon such appointment being made, all
certificates of shares of such class or series thereafter issued
shall be countersigned by one of such transfer agents or one of
such registrars of transfers, and shall not be valid unless so
countersigned.

                          ARTICLE VII
                     Dividends and Finance
                     ---------------------

           Section 7.01. Dividends. Subject to the conditions and
limitations set forth in the Certificate of Incorporation, the
Board of Directors shall have power to fix and determine and to
vary, from time to time, the amount of the working capital of the
Corporation before declaring any dividends among its
shareholders, to determine the date or dates for the declaration
and payment of dividends and the amount of any dividend, and the
amount of any reserves necessary in their judgment before
declaring any dividends among its shareholders, and to determine
the amount of surplus of the Corporation from time to time
available for dividends.

           Section 7.02. Fiscal Year. The fiscal year of the
Corporation shall end on the last Friday of January in each year
and shall begin on the next succeeding day, or shall be for such
other period as the Board of Directors may from time to time
designate.


                               -12-



                         ARTICLE VIII
                        Indemnification
                        ---------------

           Section 8.01. Except to the extent expressly prohibited
by the New York Business Corporation Law, the Corporation shall
indemnify each person made or threatened to be made a party to or
called as a witness in or asked to provide information in
connection with any pending or threatened action, proceeding,
hearing or investigation, whether civil or criminal, and whether
judicial, quasi-judicial, administrative, or legislative, and
whether or not for or in the right of the Corporation or any
other enterprise, by reason of the fact that such person or such
person's testator or intestate is or was a director or officer of
the Corporation, or is or was a director or officer of the
Corporation who also serves or served at the request of the
Corporation any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity,
against judgments, fines, penalties, amounts paid in settlement
and reasonable expenses, including attorneys' fees, incurred in
connection with such action or proceeding, or any appeal therein,
provided that no such indemnification shall be made if a judgment
or other final adjudication adverse to such person establishes
that his or her acts were committed in bad faith or were the
result of active and deliberate dishonesty and were material to
the cause of action so adjudicated, or that he or she personally
gained in fact a financial profit or other advantage to which he
or she was not legally entitled, and provided further that no
such indemnification shall be required with respect to any
settlement or other nonadjudicated disposition of any threatened
or pending action or proceeding unless the Corporation has given
its prior consent to such settlement or other disposition.

           The Corporation shall advance or promptly reimburse,
upon request of any person entitled to indemnification hereunder,
all expenses, including attorneys' fees, reasonably incurred in
defending any action or proceeding in advance of the final
disposition thereof upon receipt of a written undertaking by or
on behalf of such person to repay such amount if such person is
ultimately found not to be entitled to indemnification or, where
indemnification is granted, to the extent the expenses so
advanced or reimbursed exceed the amount to which such person is
entitled; provided, however, that such person shall cooperate in
good faith with any request by the Corporation that common
counsel be utilized by the parties to


                               -13-



an action or proceeding who are similarly situated unless to do
so would be inappropriate due to actual or potential differing
interests between or among such parties.

           Nothing herein shall limit or affect any right of any
person otherwise than hereunder to indemnification or expenses,
including attorneys' fees, under any statute, rule, regulation,
certificate of incorporation, by-law, insurance policy, contract
or otherwise.

           No elimination of this by-law, and no amendment of
this by-law adversely affecting the right of any person to
indemnification or advancement of expenses hereunder shall be
effective until the 60th day following notice to such person of
such action, and no elimination of or amendment to this by-law
shall deprive any person of his or her rights hereunder arising
out of alleged or actual occurrences, acts or failures to act
prior to such 60th day. The provisions of this paragraph shall
supersede anything to the contrary in these by-laws.

           The Corporation shall not, except by elimination or
amendment of this by-law in a manner consistent with the
preceding paragraph, take any corporate action or enter into any
agreement which prohibits, or otherwise limits the rights of any
person to, indemnification in accordance with the provisions of
this by-law. The indemnification of any person provided by this
by-law shall continue after such person has ceased to be a
director or officer of the Corporation and shall inure to the
benefit of such person's heirs, executors, administrators and
legal representatives.

           The Corporation is authorized to enter into agreements
with any of its directors, officers or employees extending rights
to indemnification and advancement of expenses to such person to
the fullest extent permitted by applicable law, but the failure
to enter into any such agreement shall not affect or limit the
rights of such person pursuant to this by-law. It is hereby
expressly recognized that all directors and officers of the
Corporation, by serving as such after the adoption hereof, are
acting in reliance hereon and that the Corporation is estopped to
contend otherwise. Additionally, it is hereby expressly
recognized that all persons who serve or served as directors,
officers or employees of corporations which are subsidiaries or
affiliates of the Corporation (or other entities controlled by
the Corporation) and are directors or officers of the Corporation
are conclusively presumed to serve or have served as such at the
request of the Corporation


                               -14-



and, to the extent permitted by law, are entitled to
indemnification hereunder, but that no such person shall have any
rights hereunder or in connection herewith, except to the extent
that indemnification hereunder is permitted by law.

           In case any provision in this by-law shall be
determined at any time to be unenforceable in any respect, the
other provisions shall not in any way be affected or impaired
thereby, and the affected provision shall be given the fullest
possible enforcement in the circumstances, it being the intention
of the Corporation to afford indemnification and advancement of
expenses to its directors and officers, acting in such capacities
or in the other capacities mentioned herein, to the fullest
extent permitted by law.

           For purposes of this by-law, the Corporation shall be
deemed to have requested a director or officer of the Corporation
to serve an employee benefit plan where the performance by such
person of his or her duties to the Corporation also imposes
duties on, or otherwise involves services by, such person to the
plan or participants or beneficiaries of the plan, and excise
taxes assessed on a person with respect to an employee benefit
plan pursuant to applicable law shall be considered indemnifiable
expenses. For purposes of this by-law, the term "Corporation"
shall include any legal successor to the Corporation, including
any corporation which acquires all or substantially all of the
assets of the Corporation in one or more transactions.

           A person who has been successful, on the merits or
otherwise, in the defense of a civil or criminal action or
proceeding of the character described in the first paragraph of
this by-law shall be entitled to indemnification as authorized in
such paragraph. Except as provided in the preceding sentence and
unless ordered by a court, any indemnification under this by-law
shall be made by the Corporation if, and only if, authorized in
the specific case:

           (1) By the Board of Directors acting by a quorum
      consisting of directors who are not parties to such action
      or proceeding upon a finding that the director or officer
      has met the standard of conduct set forth in the first
      paragraph of this by-law, or,

           (2) If such a quorum is not obtainable or, even if
      obtainable, a quorum of disinterested directors so directs:


                               -15-




                (a) By the Board of Directors upon the opinion in
           writing of independent legal counsel that
           indemnification is proper in the circumstances because
           the standard of conduct set forth in the first
           paragraph of this by-law has been met by such director
           or officer, or

                (b) By the shareholders upon a finding that the
           director or officer has met the applicable standard of
           conduct set forth in such paragraph.

           If any action with respect to indemnification of
directors and officers is taken by way of amendment of these
by-laws, resolution of directors, or by agreement, the
Corporation shall, not later than the next annual meeting of
shareholders, unless such meeting is held within three months
from the date of such action and, in any event, within fifteen
months from the date of such action, mail to its shareholders of
record at the time entitled to vote for the election of directors
a statement specifying the action taken.

                          ARTICLE IX
                   Miscellaneous Provisions
                   ------------------------

           Section 9.01.  Books and Records.  Subject to the New
York Business Corporation Law, the Corporation may keep its books
and accounts outside the State of New York.

           Section 9.02.  Notices.  Whenever any notice is
required by these by-laws to be given, personal notice is
required only if it is expressly so stated, and any notice so
required shall be deemed to be sufficient if given by depositing
the same in a post office box in a sealed post-paid wrapper,
addressed to the person entitled thereto at his last known post
office address, and such notice shall be deemed to have been
given on the day of such mailing.

           Any person may waive the right to receive any notice
by signing a written waiver thereof.

           Section 9.03. Amendments. Except as otherwise provided
herein, these by-laws may be altered, amended, or repealed and
by-laws may be adopted by the shareholders or by the Board of
Directors.


                               -16-

                      STOCKHOLDERS' AGREEMENT
                      -----------------------


           This AGREEMENT is made as of this 17th day of October,
1997, by and among J. Crew Group, Inc., a New York corporation
(the "Company"), and each of the following (hereinafter severally
referred to as a "Stockholder" and collectively referred to as
the "Stockholders"): TPG Partners II, L.P. ("TPG II"), TPG
Parallel II, L.P. ("TPG Parallel II"), TPG Investors II, L.P.
("TPG Investors II," and, together with TPG II and TPG Parallel
II, the "TPG Holders"), each of the other signatories hereto, and
each of the parties who become parties to this Agreement pursuant
to Article V hereof as stockholders of the Company.

           WHEREAS, TPG II, the Company and certain shareholders
of the Company have heretofore entered into a Recapitalization
Agreement dated as of July 22, 1997, as amended (the
"Recapitalization Agreement"), which provides for, among other
things, the recapitalization of the Company on the terms and
subject to the conditions set forth in the Recapitalization
Agreement (the "Recapitalization") and the related acquisition of
shares of common stock of the Company by certain parties as
described therein;

           WHEREAS, the Company, each of the TPG Holders and
certain other Stockholders are on the date hereof entering into a
Preferred Stock Subscription Agreement (the "Subscription
Agreement") which provides for, among other things, the
subscription for shares of Series A Cumulative Preferred Stock,
$.01 par value, of the Company ("Series A Preferred Stock") and
Series B Cumulative Redeemable Preferred Stock, $.01 par value,
of the Company ("Series B Preferred Stock" and, together with the
Series A Preferred Stock, the "Preferred Shares") by the other
parties thereto on the terms and subject to the conditions set
forth in the Subscription Agreement;

           WHEREAS, the Stockholders, together with Emily Woods,
will acquire or hold all of the issued and outstanding shares of
common stock, $.01 par value, of the Company (such shares,
together with any additional shares of common stock issued by the
Company, being hereinafter severally referred to as a "Common
Share" and collectively referred to as the "Common Shares," and,
together with the Preferred Shares, being hereinafter severally
referred to as a "Share" and collectively referred to as the
"Shares"); and

           WHEREAS, in consideration of the Recapitalization
Agreement and the Subscription Agreement and the transactions
contemplated thereby, the parties hereto desire to enter into an
agreement regarding certain matters described herein, including
the imposition of certain restrictions on the transferability of
Common Shares.

           NOW, THEREFORE, in consideration of the mutual
covenants and agreements contained herein, the parties mutually
agree as follows:





                             ARTICLE I
                             ---------

                  Representations and Warranties
                  ------------------------------

           Each of the parties hereby severally represents and
warrants to each of the other parties as follows:

           1.1 Authority; Enforceability. Such party has the
legal capacity or corporate power and authority to enter into
this Agreement and to carry out its obligations hereunder. Such
party, if not an individual, is duly organized and validly
existing under the laws of its jurisdiction of organization, and
the execution of this Agreement and the consummation of the
transactions contemplated herein have been duly authorized by all
necessary action. No other act or proceeding, corporate or
otherwise, on its part is necessary to authorize the execution of
this Agreement or the consummation of any of the transactions
contemplated hereby. This Agreement has been duly executed by
such party and constitutes its legal, valid and binding
obligation, enforceable against it in accordance with the terms
of this Agreement, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and other laws affecting the rights of
creditors generally and to the exercise of judicial discretion in
accordance with general principles of equity (whether applied by
a court of law or of equity).

           1.2 No Breach. Neither the execution of this Agreement
nor the performance by such party of its obligations hereunder
nor the consummation of the transactions contemplated hereby does
or will:

           (a) conflict with or violate its articles of
incorporation, bylaws or other organizational documents;

           (b) violate, conflict with or result in the breach or
termination of, or otherwise give any other person the right to
accelerate, re-negotiate or terminate or receive any payment, or
constitute a default or an event of default (or an event which
with notice, lapse of time, or both, would constitute a default
or event of default) under the terms of, any contract or
agreement to which it is a party or by which it or any of its
assets or operations are bound or affected; or

           (c) constitute a violation by such party of any laws,
rules or regulations of any governmental, administrative or
regulatory authority or any judgments, orders, rulings or awards
of any court, arbitrator or other judicial authority or any
governmental, administrative or regulatory authority.

           1.3 Consents. No consent, waiver, approval,
authorization, exemption, registration, license or declaration is
required to be made or obtained by such party, other than those
which have been made or obtained, in connection with (i) the
execution or enforceability of this Agreement or (ii) the
consummation of any of the transactions contemplated hereby.

           1.4 Share Ownership. Such party will own, immediately
following the consummation of the transactions contemplated by
the Recapitalization Agreement, the number of Shares of each
class set forth opposite such party's name in Schedule 1.4
attached hereto, free


                               2



and clear of any and all liens, claims and encumbrances, other
than those created by this Agreement.

                            ARTICLE II
                            ----------

                        Transfer of Shares
                        ------------------

           2.1  Restrictions on Transfers.

           (a) No Stockholder may transfer by way of sale,
exchange, assignment, pledge, gift or other disposition (all of
which acts shall be deemed included in the term "transfer" as
used in this Agreement) any or all of the Shares (whether held in
its, his or her own right or by a representative of the
Stockholder, such Stockholder hereinafter being referred to as a
"Transferor") unless (i) such transfer of Shares is made on the
books of the Company and in accordance with the provisions of
Article II of this Agreement and (ii) the transferee of such
Shares (if other than (A) the Company or another Stockholder, (B)
a transferee in a sale of Shares made under Rule 144 (or any
successor provision) under the Securities Act of 1933, as amended
(the "Securities Act") or (C) a transferee of Shares registered
under the Securities Act, that is otherwise permitted by this
Agreement) agrees to become a party to this Agreement pursuant to
Article V hereof and executes such further documents as may be
necessary, in the opinion of the Company, to make him, her or it
a party hereto.

           (b) Any purported transfer of Shares other than in
accordance with this Agreement by any Transferor shall be null
and void, and the Company shall refuse to recognize any such
transfer for any purpose and shall not reflect in its records any
change in record ownership of Shares pursuant to any such
transfer.

           (c) The Company shall not, without the written consent
of the holders of a majority, by voting power, of the outstanding
Shares, issue any Shares upon original issue or reissue or
otherwise dispose of any Shares unless the recipient or
transferee of such Shares (if other than a Stockholder) shall
agree to become a party to this Agreement pursuant to Article V
hereof and executes such further documents as may be necessary,
in the opinion of the Company, to make him, her or it a party
hereto; provided that if the recipient or transferee of such
Shares is an affiliate of any of the TPG Holders that is not a
Stockholder and the TPG Holders shall hold a majority of the
outstanding Shares, the aforementioned consent must be obtained
from holders of a majority, by voting power, of the outstanding
Shares other than Shares held by the TPG Holders.

           2.2  Right of First Offer.

           (a) Prior to any underwritten initial public offering
by the Company of any Shares, in the event that a Transferor
desires to sell or transfer all or part of its Common Shares
("Offered Common Shares"), other than pursuant to Section 2.3,
2.4 or 2.5 of this Agreement or in reliance and in accordance
with Rule 144 (or any successor provision) under the Securities
Act, the Transferor shall give prompt written notice (a
"Transferor's Notice") of its desire to sell the Offered Common
Shares to the Company and TPG II, which notice shall identify (i)
the


                               3



number of Offered Common Shares, (ii) the number of shares, if
any, of Series A Preferred Stock and/or Series B Preferred Stock
which the Transferor proposes to sell or transfer in conjunction
with the sale or transfer of the Offer Common Shares (the
"Offered Preferred Shares" and, together with the Offered Common
Shares, "Offered Shares") and (iii) any other material items and
conditions of the proposed transfer (other than the offering
price). The date on which such Transferor's Notice is actually
received by the Company and TPG II is referred to hereinafter as
the "Notice Date." Following consummation of any underwritten
initial public offering by the Company of any Shares, a
Transferor shall, subject to compliance with the provisions of
Section 2.1(a), have the right to sell or transfer all or part of
its Shares without complying with the requirements of this
Section 2.2. Unless a Transferor desires to sell or transfer any
or all of its Preferred Shares in conjunction with the sale or
transfer of any or all of its Common Shares, prior to any
underwritten initial public offering by the Company of any
Shares, such Transferor may, subject to compliance with the
provisions of Section 2.1(a), sell any or all of its Preferred
Shares without complying with the provisions of this Section 2.2.

           (b) The TPG Holders shall have fifteen (15) days
following the Notice Date to notify the Transferor and the
Company in writing of an offer to purchase in cash (the "Offer to
Purchase") all (but not less than all) of the Offered Shares by
one or more of the TPG Holders (the "Electing Holders"), the
proposed cash purchase price thereof, the proposed closing date
for the purchase and any other material term or condition of the
proposed purchase. If the Transferor does not receive a written
notice from any of the TPG Holders containing a cash offer to
purchase the Offered Shares within the fifteen (15) day period,
the TPG Holders shall be deemed to have declined to purchase such
Offered Shares and the Transferor may, subject to compliance with
the provisions of Section 2.1(a) and Section 2.2(e), thereafter
transfer to any purchaser at any time within one hundred twenty
(120) days following the Notice Date all (but not less than all)
of the Offered Shares upon the terms and conditions set forth in
the Transferor's Notice; provided that if TPG II notifies the
Transferor in writing, within fifteen (15) days following receipt
of the notice required by Section 2.2(e), of an objection to the
purchaser because the purchaser or one or more of its affiliates
competes with one or more of the businesses of the Company and
its subsidiaries, the Transferor shall not have the right to
transfer any of the Offered Common Shares to such purchaser (but
shall be permitted to transfer the Offered Preferred Shares); and
provided further that if the Offered Common Shares are not
transferred to a purchaser for any reason within one hundred
twenty (120) days following the Notice Date, then such Offered
Common Shares may be transferred only by again complying with all
of the terms and procedures set forth in this Article II.

           (c) The Transferor shall have fifteen (15) days
following receipt of the Offer to Purchase to accept the offer
made by the Electing Holders to purchase all (but not less than
all) of the Offered Shares on the terms and subject to the
conditions set forth in the Offer to Purchase. If, in accordance
with the terms of the preceding sentence, the Transferor accepts
the offer made by the Electing Holders to purchase all (but not
less than all) of the Offered Shares on the terms and subject to
the conditions set forth in the Offer to Purchase, the closing
for such transaction shall take place at a time and place
reasonably acceptable to the Transferor and the Electing Holders;
provided that such closing shall not occur more than thirty (30)
days after the date on which the Electing Holders actually
receive notice that their Offer to Purchase has been


                               4



accepted by the Transferor. At such closing, the Electing Holders
shall deliver to the Transferor the consideration to be exchanged
for such Offered Shares, in immediately available funds, and the
Transferor shall deliver to the Electing Holders all documents
required to effect the sale of such Offered Shares, duly endorsed
and free of any liens, including appropriate documentation
providing indemnities to the Electing Holders regarding its title
to such Offered Shares and such other matters as are customary
for such transactions.

           (d) If, within fifteen (15) days following receipt of
the Offer to Purchase, the Transferor rejects or does not accept
the Offer to Purchase made by the Electing Holders, such
Transferor may, subject to compliance with the provisions of
Section 2.1(a) and Section 2.2(e), thereafter sell all (but not
less than all) of the Offered Shares to any purchaser at any time
within one hundred twenty (120) days following the Notice Date;
provided that (i) the purchase price for such Offered Shares in
any such transaction is in cash and is greater than the proposed
cash purchase price offered by the Electing Holders for such
Offered Shares and (ii) if TPG II notifies the Transferor in
writing, within ten (10) days following receipt of the notice
required by Section 2.2(e), of an objection to the purchaser
because the purchaser or one or more of its affiliates competes
with one or more of the businesses of the Company and its
subsidiaries, the Transferor shall not have the right to transfer
any of the Offered Common Shares to such purchaser (but shall be
permitted to transfer the Offered Preferred Shares); and provided
further that if the Offered Common Shares are not transferred to
a purchaser for any reason within one hundred twenty (120) days
following the Notice Date, then such Offered Common Shares may be
transferred only by again complying with all of the terms and
procedures set forth in this Article II.

           (e) As soon as practicable, but in any event no less
than fifteen (15) days prior to the consummation of a proposed
sale of Offered Shares to a purchaser pursuant to Section 2.2(d),
the Transferor shall give written notice to the Company and TPG
II, which notice shall specify with respect to each such proposed
sale (i) the identity of the purchaser, (ii) the cash purchase
price to be paid by such purchaser for the Offered Shares, (iii)
the date of the proposed transfer and (iv) any other material
items and conditions of the proposed sale.

           2.3 Transfers to Permitted Transferees. A Stockholder
may transfer any or all of the Shares held by such Stockholder to
a Permitted Transferee (as hereinafter defined) of such
Stockholder without complying with any other provision of this
Article II other than Section 2.1. For purposes of this
Agreement, a "Permitted Transferee" means (a) in the case of any
Stockholder that is not a corporation, any general or limited
partner, member, managing director, officer, employee or
affiliate (as defined in Rule 12b-2 under the Securities Exchange
Act of 1934, as amended) of such Stockholder, (b) in the case of
any Stockholder that is a corporation, any other entity that
owns, directly or indirectly, at least 51% of the equity
securities of such Stockholder ("majority ownership") or that is
under common majority ownership with such Stockholder, (c) in the
case of any Stockholder that is an individual, any successor by
death or divorce or (d) in the case of any Stockholder that is a
trust whose sole beneficiaries are individuals, such individuals
or their spouses or lineal descendants.


                               5



2.4   Bankruptcy of a Stockholder.

           (a) Upon the bankruptcy (as hereinafter defined in
Section 2.4(d) below) of a Stockholder (a "Bankrupt
Stockholder"), the TPG Holders may, by written notice given to
the Bankrupt Stockholder, the other Stockholders and the Company
within 30 days following the occurrence of the event specified in
Section 2.4(d) which gives rise to such bankruptcy, elect to
purchase for cash part or all of such Bankrupt Stockholder's
shares (the "Bankrupt Shares") at a price equal to the fair
market value of such shares at the time of purchase, as
determined by an independent appraiser to be selected by the
Company. Fees and expenses of any independent appraiser selected
pursuant to this subsection shall be shared equally by the
Bankrupt Stockholder and the TPG Holders.

           (b) If the TPG Holders elect to acquire fewer than all
of the Bankrupt Shares within 30 days after the event giving rise
to such bankruptcy, the Company shall thereupon have the option,
exercisable by written notice given to the Bankrupt Stockholder
and the other Stockholders within 45 days after the event giving
rise to such bankruptcy, to purchase for cash all or part of the
remaining Bankrupt Shares at the price determined in accordance
with Section 2.4(a) above.

           (c) Upon the giving of the notices provided in
Sections 2.4(a) and (b) above, the TPG Holders and/or the
Company, as the case may be, shall be obligated severally, but
not jointly, to purchase, and the Bankrupt Stockholder shall be
obligated to sell to each of them, the respective numbers of such
Bankrupt Shares specified in such notices (or determined in
accordance with Section 2.4(a) above, as the case may be) for
cash at the price determined in accordance with Section 2.4(a)
above.

           (d) The bankruptcy of a Stockholder shall be deemed to
occur upon the occurrence of any of the following events:

           (i) The filing of a voluntary petition in bankruptcy
by such Stockholder;

           (ii) The filing of an involuntary petition in
bankruptcy with respect to such Stockholder which remains
undismissed for a period of 90 days;

           (iii) The appointment of a receiver with respect to
such Stockholder or with respect to all or substantially all of
his, her or its assets or affairs which remains undismissed for a
period of 60 days; or

           (iv) The admission in writing by the Stockholder of
his, her or its inability to pay his, her or its debts generally
as they become due.

           2.5  Certain Rights.

           (a) Drag Along Rights. If the TPG Holders desire to
sell all or substantially all of their Common Shares to a
purchaser (other than pursuant to Section 2.3) and said purchaser
desires to acquire all or substantially all of the issued and
outstanding Common Shares (or all or


                               6



substantially all of the assets of the Company) upon such terms
and conditions as agreed to with the TPG Holders, each other
Stockholder agrees to sell all of its Common Shares to said
purchaser (or to vote such Common Shares in favor of any merger
or other transaction which would effect a sale of such Common
Shares (or all or substantially all of the assets of the Company)
provided that nothing herein shall in any way constrain, limit or
affect the ability, if any, of any Stockholder to vote its
Preferred Shares in such Stockholder's discretion in accordance
with the terms thereof in connection with any such merger or
other transaction) at the same price per Common Share and
pursuant to the same terms and conditions with respect to payment
for the Common Shares as agreed to by the TPG Holders. For
purposes of this Section 2.5(a), but only with respect to a sale
of Common Shares, "substantially all" shall mean at least 80% of
the Common Shares then owned by the TPG Holders. In all other
circumstances, "substantially all" shall be interpreted within
the meaning of the New York Business Corporation Law. In such
case, the TPG Holders shall give written notice of such sale to
the other Stockholders at least 30 days prior to the consummation
of such sale, setting forth (i) the consideration to be received
by the Stockholders, (ii) the identity of the purchaser, (iii)
any other material items and conditions of the proposed transfer
and (iv) the date of the proposed transfer and shall cause the
terms of any such transaction not to expose such other
Stockholders to joint and several liability as a selling
stockholder in such transaction.

           (b) Tag Along Rights. (i) Subject to paragraph (v) of
this Section 2.5(b), if a TPG Holder proposes to transfer any
Common Shares, Series A Preferred Stock or Series B Preferred
Stock to a purchaser (including the Company or any of its
subsidiaries) other than a Permitted Transferee (which for
purposes of this Section 2.5(b) only, in the case of the TPG
Holders, shall not include the Company or any of its
subsidiaries) of such TPG Holder, such TPG Holder (hereinafter
referred to as a "Selling TPG Stockholder") shall give written
notice (a "Transfer Notice") of such proposed transfer to the
Stockholders other than the TPG Holders (the "Other
Stockholders") at least 30 days prior to the consummation of such
proposed transfer, setting forth for each class of Shares (A) the
number of Shares offered, if any, (B) the consideration to be
received for such Shares by such Selling TPG Stockholder, (C) the
identity of the purchaser, (D) any other material items and
conditions of the proposed transfer (including a representation
that if one or more Other Stockholders elect to sell Shares
pursuant to this Section 2.5, such Selling TPG Stockholder shall
use reasonable efforts to cause any transaction to be on terms
which do not expose such Other Stockholders to joint and several
liability as a selling stockholder in such transaction), (E) the
date of the proposed transfer and (F) that each such Other
Stockholder shall have the right to elect to sell up to the sum
of its Pro Rata Portion plus its Excess Pro Rata Portion (as
defined in Section 2.5(b)(iii) below) of such Shares.

           (ii) Subject to paragraph (iv) of this Section 2.5(b),
upon delivery of a Transfer Notice, each Other Stockholder may
elect to sell up to the sum of (A) the Pro Rata Portion (as
defined in paragraph (iii) of this Section 2.5(b)) and (B) the
Excess Pro Rata Portion of its Shares of the same class and
series proposed to be sold by the Selling TPG Stockholder, at the
same price per Share of the same class and series and pursuant to
the same terms and conditions with respect to payment for the
Shares of the same class and series as agreed to by the Selling
TPG Stockholder, by sending written notice to the Selling TPG
Stockholder within 15 days of the date of the Transfer Notice,
indicating its election to sell up to the sum of the Pro Rata
Portion plus


                               7



the Excess Pro Rata Portion of its Shares of the same class and
series in the same transaction. Following such 15 day period, the
Selling TPG Stockholder and each Other Stockholder, concurrently
with the Selling TPG Stockholder, shall be permitted to sell to
the purchaser on the terms and conditions set forth in the
Transfer Notice the sum of (x) the Pro Rata Portion and (y) the
Excess Pro Rata Portion of its Shares.

           (iii) For purposes of this Agreement, "Pro Rata
Portion" shall mean, with respect to Common Shares or Preferred
Shares, as the case may be, held by a Stockholder, a number equal
to the product of (A) the total number of such shares then owned
by such Stockholder and (B) a fraction, the numerator of which
shall be the total number of such shares proposed to be sold to a
purchaser as set forth in a Transfer Notice or initially proposed
to be registered by the Selling TPG Stockholder, as the case may
be, and the denominator of which shall be the total number of
such shares then outstanding (including such shares proposed to
be sold or registered by the Selling TPG Stockholder). For
purposes of this Agreement, "Excess Pro Rata Portion" shall mean,
with respect to Common Shares or Preferred Shares, as the case
may be, held by a Stockholder, a number equal to the product of
(x) the number of Non-Elected Shares (as defined below) and (y) a
fraction, the numerator of which shall be such Stockholder's Pro
Rata Portion with respect to such shares, and the denominator of
which shall be the sum of (1) the aggregate Pro Rata Portions
with respect to the Common Shares (when calculating "Excess Pro
Rata Portion" with respect to the Common Shares of a Stockholder)
or the Preferred Shares (when calculating "Excess Pro Rata
Portion" with respect to the Preferred Shares of a Stockholder),
as the case may be, of all of the Other Stockholders that have
elected to exercise in full their rights to sell their Pro Rata
Portion of Common Shares or Preferred Shares, as the case may be,
and (2) the Selling TPG Stockholder's Pro Rata Portion of Common
Shares (when calculating "Excess Pro Rata Portion" with respect
to the Common Shares of a Stockholder) or the Preferred Shares
(when calculating "Excess Pro Rata Portion" with respect to the
Preferred Shares of a Stockholder) (the aggregate amount of such
denominator is hereinafter referred to as the "Elected Shares").
For purposes of this Agreement, "Non-Elected Shares" shall mean
the excess, if any, of the total number of Common Shares (when
calculating "Excess Pro Rata Portion" with respect to the Common
Shares of a Stockholder) or the Preferred Shares (when
calculating "Excess Pro Rata Portion" with respect to the
Preferred Shares of a Stockholder), as the case may be, proposed
to be sold to a purchaser as set forth in a Transfer Notice or
initially proposed to be registered by the Selling TPG
Stockholder, as the case may be, less the amount of Elected
Shares.

           (iv) Notwithstanding anything to the contrary
contained herein but subject to the last sentence of Section
2.5(b)(ii), if a Selling TPG Stockholder proposes to transfer
both Common Shares and Preferred Shares in the same transaction
or in related transactions, each Other Stockholder electing to
sell Shares pursuant to this Section 2.5(b) shall be required to
sell both Common Shares and Preferred Shares (of the same series)
proposed to be sold by the Selling TPG Stockholder. In such
event, the number of Preferred Shares which each Other
Stockholder may sell or transfer pursuant to this Section 2.5(b)
shall be up to its applicable Pro Rata Portion plus its Excess
Pro Rata Portion of such shares, and the number of Common Shares
which such Other Stockholder shall be required to sell or
transfer in such transaction or transactions shall be exactly the
product (rounded to the nearest whole number) of (A) the total


                               8



number of Preferred Shares to be sold or transferred by such
Other Stockholder determined in accordance with this Section
2.5(b)(iv) and (B) a fraction, of which the numerator shall be
the number of Common Shares proposed to be sold by the Selling
TPG Stockholder and the denominator shall be the number of
Preferred Shares proposed to be sold by the Selling TPG
Stockholder; provided that if the Selling TPG Stockholder
proposes to sell shares of both Series A Preferred Stock and
Series B Preferred Stock in the same transaction or in related
transactions, the ratio of the number of shares of Series A
Preferred Stock to the number of shares of Series B Preferred
Stock subject to election by each Other Stockholder must be
equivalent to the ratio of the number of shares of Series A
Preferred Stock to the number of shares of Series B Preferred
Stock proposed to be sold by such Selling TPG Stockholder in such
transaction or transactions.

           (v) Notwithstanding anything to the contrary contained
herein, the provisions of this Section 2.5(b) shall not apply to
(A) any sale or transfer by the TPG Holders of Common Shares
unless and until the TPG Holders, after giving effect to the
proposed sale or transfer, shall have sold or transferred in the
aggregate, other than to Permitted Transferees, shares of Common
Shares representing 7.5% of the Common Shares owned by the TPG
Holders on the date hereof or (B) any sale or transfer by the TPG
Holders of Preferred Shares unless and until the TPG Holders,
after giving effect to the proposed sale or transfer, shall have
sold or transferred in the aggregate, other than to Permitted
Transferees, shares of Preferred Shares representing 7.5% of the
Preferred Shares owned by the TPG Holders on the date hereof.

           (c)  Piggyback Registration Rights.

                (i) Notice to Stockholders. If the Company
determines that it will file a registration statement under the
Securities Act, other than a Form S-4, Form S-8 or any similar
form under the Securities Act, for an offering which includes
Common Shares held by a TPG Holder on the date hereof (a
"Registering Stockholder"), then the Company shall give prompt
written notice to each of the Other Stockholders that such filing
is expected to be made (but in no event less than 30 days nor
more than 60 days in advance of filing such registration
statement), the jurisdiction or jurisdictions in which such
offering is expected to be made, and the underwriter or
underwriters (if any) that the Company (or the person requesting
such registration) intends to designate for such offering. If the
Company, within 15 days after giving such notice, receives a
written request for registration of any Common Shares from any of
the Other Stockholders, then the Company shall include in the
same registration statement the number of additional Common
Shares to be sold by each Other Stockholder as shall have been
specified in its request; provided, however, that each Other
Stockholder shall not be permitted to register more than a Pro
Rata Portion (as defined in Section 2.5(b)(iii), substituting
"Registering Stockholder" for "Selling TPG Stockholder") of its
Common Shares; and provided further, that the Company shall not
be required to register any Common Shares which can be sold or
transferred without registration pursuant to Rule 144(k) under
the Securities Act. The Company shall bear all costs of preparing
and filing the registration statement (but shall not be
responsible for underwriting discounts or fees or similar costs
or expenses, or fees or expenses of counsel to any selling
stockholder), and shall indemnify and hold harmless, pursuant to
customary and reasonable indemnification and contribution
provisions to be entered into by the Company at the


                               9



time of filing of the registration statement, the seller of any
Common Shares covered by such registration statement.

           Notwithstanding anything herein to the contrary, the
Company, on prior notice to the participating Stockholder, may
abandon its intention to file a registration statement under this
Section 2.5(c) at any time prior to such filing.

                (ii) Allocation. If the managing underwriter
shall inform the Company (or the person requesting such
registration) in writing that the number of Common Shares
requested to be included in such registration exceeds the number
which can be sold in (or during the time of) such offering within
a price range acceptable to the Company (or, if the offering is
not for the Company's account, such person), then the Company
shall include in such registration such number of Common Shares
which the Company (or such person) is so advised can be sold in
(or during the time of) such offering. All Stockholders proposing
to sell Common Shares shall share pro rata in the number of
Common Shares to be excluded from such offering, such sharing to
be based on the respective numbers of Common Shares as to which
registration has been requested by such Stockholders.

                (iii) Permitted Transfer. Notwithstanding
anything to the contrary contained herein, sales of Common Shares
pursuant to a registration statement filed by the Company may be
made without compliance with any other provision of this Article
II other than this Section 2.5(c).

                            ARTICLE III
                            -----------

                   Legends on Share Certificates
                   -----------------------------

           3.1 The certificates representing the Shares shall
include an endorsement typed conspicuously thereon of the
following legend:

"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO
REGISTRATION OF TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE
BOOKS OF THE ISSUER UNLESS SUCH TRANSFER IS MADE IN CONNECTION
WITH AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR
PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
SUCH ACT OR SUCH ACT DOES NOT APPLY.

THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH IN A STOCKHOLDERS'
AGREEMENT DATED AS OF OCTOBER 17, 1997 AS THE SAME MAY BE AMENDED
FROM TIME TO TIME, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
EXECUTIVE OFFICES OF THE ISSUER. NO REGISTRATION OF TRANSFER OF
SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE ISSUER UNLESS
AND UNTIL SUCH RESTRICTIONS SHALL HAVE BEEN COMPLIED WITH."


                               10



           In the event that any Shares shall cease to be
Restricted Shares (as hereinafter defined), the Company shall,
upon the written request of the holder thereof, issue to such
holder a new certificate representing such Shares without the
first paragraph of the legend required by this Section 3.1. In
the event that any Shares shall cease to be subject to the
restrictions on transfer set forth in this Agreement, the Company
shall, upon the request of the holder thereof, issue to such
holder a new certificate representing such Shares without the
second paragraph of the legend required by Section 3.1.

           "Restricted Shares" shall mean all Shares other than
(a) Shares that have been registered under a registration
statement pursuant to the Securities Act and sold thereunder, (b)
Shares with respect to which a sale or other disposition has been
made in reliance on and in accordance with Rule 144 (or any
successor provision) under the Securities Act, or (c) Shares with
respect to which the holder thereof shall have delivered to the
Company either (i) an opinion, in form and substance satisfactory
to the Company, of counsel, who shall be satisfactory to the
Company, or (ii) a "no action" letter from the Securities and
Exchange Commission, to the effect that subsequent transfers of
such Shares may be effected without registration under the
Securities Act.

           3.2 All certificates for Shares representing
Restricted Shares hereafter issued, whether upon transfer or
original issue, shall be endorsed with a like legend.

           3.3 Upon the exercise of any option to purchase
described herein, the certificates representing the Shares
purchased shall be delivered to the Secretary of the Company and
properly endorsed for transfer on the stock books of the Company.

                            ARTICLE IV
                            ----------

                             Covenants
                             ---------

           4.1 Financial Information. During the term of this
Agreement, the Company shall, at its expense, provide to each
Stockholder signatory hereto at the date hereof, promptly
following the final preparation thereof, copies of consolidated
annual, quarterly and monthly financial statements of the Company
and its subsidiaries, such statements to include such type of
information as is required to be provided to the bank lenders
pursuant to the Credit Agreement, dated as of October 17, 1997,
by and among such lenders, the Company and J. Crew Operating
Corp., a wholly owned subsidiary of the Company, as in effect on
the date hereof. The rights provided by this Section 4.1 may not
be transferred or assigned to any other person without the
consent of the Company and TPG II, and shall be subject as to
each Stockholder to the provision by such Stockholder of
customary confidentiality undertakings.

           4.2 Affiliate Transactions. The Company shall not, and
shall not permit any of its subsidiaries to, enter into any
transaction with any affiliate of the Company (other than a
majority owned subsidiary of the Company; provided that neither
the TPG Holders nor any affiliate of the TPG Holders (other than
the Company and its subsidiaries) has any equity interest in such
subsidiary other than through their ownership of Shares), except
upon fair and reasonable terms no less favorable to the Company
or such subsidiaries than would be obtainable in a


                               11



comparable arm's length transaction, unless the Company shall
obtain the written consent of a majority of the independent
directors of the Company or of the holders of a majority, by
voting power, of the outstanding Shares (excluding such affiliate
and its Shares and the Shares of its affiliates) entitled to vote
at a meeting of Stockholders; provided, that agreements in effect
on the date hereof (but excluding subsequent modifications) shall
be deemed not to violate this provision.

           4.3 Restrictive Covenants. In addition to any
requirements imposed by the governing instruments of the
Preferred Shares, the Company shall not take any action requiring
the consent of holders of Preferred Shares pursuant to Section
3(a) of each of the designations of the Series A Preferred Stock
and the Series B Preferred Stock contained in Article Fifth of
the Company's Restated Certificate of Incorporation without also
obtaining the consent, in writing, of each Stockholder that (i)
owns Preferred Shares on the date hereof and (ii) has not sold,
transferred or otherwise disposed of any of such Preferred
Shares, except to Permitted Transferees which have not sold,
transferred or otherwise disposed of any of such Preferred
Shares.

           4.4 Exchange of Shares. The Stockholders will use all
reasonable efforts to cause the Board of Directors of the Company
to authorize the exchange of (a) Shares held by any Stockholder
subject to the Bank Holding Company Act of 1956, as amended (the
"BHCA"), to the extent necessary, for substantially equivalent
shares with diminished voting rights, to permit the ownership of
such Shares by such Stockholder to comply with the requirements
of Section 4(c)(6) or 4(c)(7) of the BHCA and (b) shares of
Series A Preferred Stock held by any Stockholder for shares of
Series B Preferred Stock, or shares of Series B Preferred Stock
held by any Stockholder for shares of Series A Preferred Stock,
to the extent necessary to permit such Stockholder to sell on a
timely basis the applicable series of shares of its Preferred
Stock pursuant to Section 2.5(b).

                             ARTICLE V
                             ---------

                        Additional Parties
                        ------------------

           Notwithstanding the provisions of Section 6.3,
additional Stockholders may be added to and be bound by this
Agreement upon the signing and delivery of a counterpart of this
Agreement by the Company and the acceptance thereof by such
additional Stockholders, provided that any Permitted Transferee
of a TPG Holder that is an affiliate of such TPG Holder shall, by
signing and delivering such a counterpart of this Agreement,
become a TPG Holder under this Agreement. Promptly after signing
and delivering such a counterpart of this Agreement, the Company
will deliver a conformed copy thereof to the Stockholders.

                            ARTICLE VI
                            ----------

                     Miscellaneous Provisions
                     ------------------------

           6.1 Specific Performance. The parties hereby declare
and acknowledge that it is impossible to measure in money the
damages which will accrue to any party hereto or to a


                               12



representative of a Stockholder by reason of a failure to perform
any of the obligations under this Agreement. Therefore, if any
party hereto or the representative of a Stockholder shall
institute any action or proceeding to enforce the provisions
hereof, the person against whom such action or proceeding is
brought hereby waives the claim or defense that such party or
such representative has an adequate remedy at law, and such
person shall not urge in any such action or proceeding the claim
or defense that such party or such representative has an adequate
remedy at law. The parties hereto agree that this Agreement shall
be specifically enforceable.

           6.2 Notices. Any and all notices, designations,
offers, acceptances or other communications provided for herein
shall be given in writing by registered or certified mail, which
shall be addressed, in the case of the Company, to its principal
office, and, in the case of any Stockholder, to such
Stockholder's address appearing on the stock books of the Company
or to such other address as may be designated by such Stockholder
in writing to the Company.

           6.3 Entire Agreement. This Agreement constitutes the
only agreement between the parties hereto respecting restrictions
on the transferability of the Shares and supersedes all prior
agreements, expressed or implied, between the parties.

           6.4 Governing Law. The validity, construction and
performance of this Agreement shall be governed by the laws of
the State of New York without giving effect to principles of
conflicts of laws except Section 5-1401 of the General
Obligations Law of the State of New York.

           6.5 Binding Effect. This Agreement shall be binding
upon and inure to the benefit of the parties hereto, and their
successors and assigns.

           6.6 Severability. If any portion of this Agreement
shall be declared void or unenforceable by any court or
administrative body of competent jurisdiction, such portion shall
be deemed severable from the remainder of this Agreement, which
shall continue in all respects valid and enforceable.

           6.7 Amendment and Waiver. Any amendment of this
Agreement or any waiver of any provision hereof to be effective
shall be in writing and signed by all of the parties hereto. The
addition of a Transferee of Shares or a recipient of any Shares
as a party hereto pursuant to Article V hereof shall not
constitute an amendment hereto and need be signed only by the
Company and such Transferee or recipient. Any failure by any
party at any time to enforce any of the provisions of this
Agreement shall not be construed a waiver of such provision or
any other provisions hereof.

           6.8 Termination. This Agreement shall terminate on the
earliest of (a) the date on which more than 50% of the issued and
outstanding Shares at such date shall have been registered and
sold pursuant to one or more registration statements filed under
the Securities Act, (b) the date on which the shares of capital
stock of the Company held by the TPG Holders represent, in the
aggregate, less than thirty-five percent (35%) of the total
voting power of the Company's capital stock, (c) in connection
with the underwritten initial public offering by the Company of
any Shares, the date on or after the consummation of such
offering on which the


                               13



holders of a majority of the outstanding Common Shares shall have
agreed, by 30 days' prior written notice to each of the parties
to this Agreement and to each party who becomes a party to this
Agreement, to terminate this Agreement, and (d) the tenth
anniversary of the date hereof; provided, however, that (i) the
rights, if any, of any Stockholder set forth in Section 2.5(b)
(with respect to Common Shares held by such Stockholder) of this
Agreement shall survive any such termination as to such
Stockholder until the Common Shares held by such Stockholder can
be sold pursuant to Rule 144(k) under the Securities Act (or any
successor provision) and (ii) the rights, if any, of Stockholders
set forth in Section 2.5(b) (with respect to Preferred Shares),
2.5(c) and 4.3 of this Agreement shall survive any such
termination.

           6.9 Counterparts. This Agreement may be signed by each
party hereto upon a separate copy of this Agreement in which
event all of said copies shall constitute a single counterpart of
this Agreement. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and it
shall not be necessary in making proof of this Agreement to
produce or account for more than one such counterpart.

           Each Stockholder in agreement with the foregoing
should sign the form of acceptance in the space provided for such
Stockholder's signature on this copy of this Agreement delivered
to such Stockholder. This Agreement will become a binding
agreement among such Stockholders and the Company when signed by
the Company and so accepted by such Stockholders.


                               14



           The foregoing Stockholders' Agreement is hereby
accepted as of the day and year first above written.


                             J. CREW GROUP, INC.


                                 By: /s/ Michael P. McHugh
                                    ---------------------------------
                                 Name:  Michael P. McHugh
                                 Title: Vice President - Finance


          [remainder of page intentionally left blank]


                               S-1



                             Stockholders:


                             TPG PARTNERS II, L.P.


                                 By: TPG GenPar II, L.P.
                                 By: TPG Advisors II, Inc.


                                 By: /s/ Jonathan J. Coslet
                                    ---------------------------------
                                 Name:
                                 Title:


                             TPG PARALLEL II, L.P.


                                 By: TPG GenPar II, L.P.
                                 By: TPG Advisors II, Inc.


                                 By: /s/ Jonathan J. Coslet
                                    ---------------------------------
                                 Name:
                                 Title:


                             TPG INVESTORS II, L.P.


                                 By: TPG GenPar II, L.P.
                                 By: TPG Advisors II, Inc.


                                 By: /s/ Jonathan J. Coslet
                                    ---------------------------------
                                 Name:
                                 Title:

                              S-2



                             BANCBOSTON INVESTMENTS, INC.


                                 By: /s/ Mark H. DeBlois
                                    ---------------------------------
                                 Name: Mark H. DeBlois
                                 Title: Managing Director



          [remainder of page intentionally left blank]



                              S-3



                             GENERAL ELECTRIC CAPITAL CORPORATION


                                 By: /s/ George L. Hashbarger, Jr.
                                    ---------------------------------
                                 Name:  George L. Hashbarger, Jr.
                                 Title: Senior Vice President and
                                        Department Operations Manager


          [remainder of page intentionally left blank]


                              S-4



                             TCW/CRESCENT MEZZANINE PARTNERS, L.P.

                                 By: TCW Asset Management Company


                                 By: /s/
                                    ---------------------------------
                                 Name:  John C. Rocchio
                                 Title: Senior Vice President


                                 By: /s/
                                    ---------------------------------
                                 Name:  Jean-Marc Chapus
                                 Title: Managing Director


                             TCW/CRESCENT MEZZANINE TRUST

                                 By: TCW Asset Management Company


                                 By: /s/
                                    ---------------------------------
                                 Name:  John C. Rocchio
                                 Title: Senior Vice President


                                 By: /s/
                                    ---------------------------------
                                 Name:  Jean-Marc Chapus
                                 Title: Managing Director


                             TCW/CRESCENT MEZZANINE INVESTMENT
                                 PARTNERS, L.P.

                                 By: TCW Asset Management Company


                                 By: /s/
                                    ---------------------------------
                                 Name:  John C. Rocchio
                                 Title: Senior Vice President


                                 By: /s/
                                    ---------------------------------
                                 Name:  Jean-Marc Chapus
                                 Title: Managing Director


                              S-5



                             CRESCENT/MACH I PARTNERS, L.P.

                                 By: TCW Asset Management Company


                                 By: /s/
                                    ---------------------------------
                                 Name:  John C. Rocchio
                                 Title: Senior Vice President


                                 By: /s/
                                    ---------------------------------
                                 Name:  Jean-Marc Chapus
                                 Title: Managing Director


                             TCW SHARED OPPORTUNITY FUND II, L.P.

                                 By: TCW Asset Management Company


                                 By: /s/
                                    ---------------------------------
                                 Name:  John C. Rocchio
                                 Title: Senior Vice President


                                 By: /s/
                                    ---------------------------------
                                 Name:  Jean-Marc Chapus
                                 Title: Managing Director

                              S-6



                             DLJ FUND INVESTMENT PARTNERS II, L.P.

                                 By: DLJ LBO Plans Management Corporation


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President


                             KEN MOELIS

                                 By: DLJ LBO Plans Management Corporation
                                         as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President


                             MARK LANIGAN

                                 By: DLJ LBO Plans Management Corporation
                                          as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President


                             PAULINE BOGHOSIAN

                                 By: DLJ LBO Plans Management Corporation
                                          as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President


                              S-7



                             STEPHEN PAUL

                                 By: DLJ LBO Plans Management Corporation
                                          as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President


                             DLJ CAPITAL CORPORATION

                                 By: DLJ LBO Plans Management Corporation
                                          as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President


                             BENNETT GOODMAN

                                 By: DLJ LBO Plans Management Corporation
                                          as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President


                             STEVE RATTNER

                                 By: DLJ LBO Plans Management Corporation
                                          as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President

                              S-8



                             DOUG OSTROVER

                                 By: DLJ LBO Plans Management Corporation
                                          as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President


                             ROB GRIEN

                                 By: DLJ LBO Plans Management Corporation
                                          as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President


                             SCOTT HONOUR

                                 By: DLJ LBO Plans Management Corporation
                                          as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President


                             CHRISTINE FASANO

                                 By: DLJ LBO Plans Management Corporation
                                          as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President

                             S-9



                                 ERIC SWANSON

                                 By: DLJ LBO Plans Management Corporation
                                          as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President


                             KEVIN SMITH

                                 By: DLJ LBO Plans Management Corporation
                                          as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President


                             STEVE HICKEY

                                 By: DLJ LBO Plans Management Corporation
                                          as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President


                             SCOTT HONOUR

                                 By: DLJ LBO Plans Management Corporation
                                          as Attorney-in Fact


                                 By: /s/
                                    ---------------------------------
                                 Name:  Ivy Dodes
                                 Title: Vice President


                              S-10



                             FARALLON CAPITAL PARTNERS, L.P.

                                 By: Farallon Partners, L.L.C.
                                          its General Partner


                                 By: /s/ Andrew B. Fremder
                                    ---------------------------------
                                 Name:  Andrew B. Fremder
                                 Title: Managing Member


                             FARALLON CAPITAL INSTITUTIONAL PARTNERS, L.P.

                                 By: Farallon Partners, L.L.C.
                                          its General Partner


                                 By: /s/ Andrew B. Fremder
                                    ---------------------------------
                                 Name:
                                 Title:


                             FARALLON CAPITAL INSTITUTIONAL PARTNERS II, L.P.

                                 By: Farallon Partners, L.L.C.
                                          its General Partner


                                 By: /s/ Andrew B. Fremder
                                    ---------------------------------
                                 Name:
                                 Title:


                              S-11



                             MAUD BRYT


                                 By: /s/ Maud Bryt
                                    ---------------------------------
                                 Name: Maud Bryt
                                 Title:


          [remainder of page intentionally left blank]


                              S-12



                             FARALLON CAPITAL INSTITUTIONAL PARTNERS III, L.P.

                                 By: Farallon Partners, L.L.C.
                                          its General Partner


                                 By: /s/ Andrew B. Fremder
                                    ---------------------------------
                                 Name:
                                 Title:


                             RR CAPITAL PARTNERS, L.P.

                                 By: Farallon Partners, L.L.C.
                                          its General Partner


                                 By: /s/ Andrew B. Fremder
                                    ---------------------------------
                                 Name:
                                 Title:


                              S-13


                           Schedule 1.4
                           ------------




Stockholder                                      Common Shares Owned
- -----------                                      -------------------

TPG Partners II, L.P.                                31,566.779
TPG Parallel II, L.P.                                 2,154.198
TPG Investors II, L.P.                                3,292.740
BancBoston Investments, Inc.                          2,062.500
General Electric Capital Corporation                  1,948.090
TCW/Crescent Mezzanine Partners, L.P.                 2,323.141
TCW/Crescent Mezzanine Trust                            707.128
TCW/Crescent Mezzanine Investment Partners, L.P.         63.481
Crescent/Mach I Partners, L.P.                          171.875
TCW Shared Opportunity Fund II, L.P.                    171.875
DLJ Fund Investment Partners II, L.P.                   527.745
Ken Moelis                                               25.943
Mark Lanigan                                             25.943
Pauline Boghosian                                        25.943
Stephen Paul                                             13.342
Scott Honour                                              4.447
Bennett Goodman                                          20.013
Steve Rattner                                            20.013
Doug Ostrover                                            20.013
Rob Grien                                                19.272
Christine Fasano                                         13.342
Eric Swanson                                             10.377
Kevin Smith                                               2.965
Steve Hickey                                             10.377
DLJ Capital Corporation                                   1.482
Farallon Capital Partners, L.P.                         742.500
Farallon Capital Institutional Partners, L.P.           577.500
Farallon Capital Institutional Partners II, L.P.        198.000
Farallon Capital Institutional Partners III, L.P.        66.000
RR Capital Partners, L.P.                                66.000
Maud Bryt                                               129.094
Emily Woods                                           8,017.883





Stockholder                                 Preferred Shares Owned
- -----------                                 ----------------------

TPG Partners II, L.P.                                63,424.117
TPG Parallel II, L.P.                                 4,328.225
TPG Investors II, L.P.                                6,615.789
BancBoston Investments, Inc.                         12,187.500
General Electric Capital Corporation                  3,914.112
TCW/Crescent Mezzanine Partners, L.P.                13,727.651
TCW/Crescent Mezzanine Trust                          4,178.481
TCW/Crescent Mezzanine Investment Partners, L.P.        375.118
Crescent/Mach I Partners, L.P.                        1,015.625
TCW Shared Opportunity Fund II, L.P.                  1,015.625
DLJ Fund Investment Partners II, L.P.                 1,060.347
Ken Moelis                                               52.124
Mark Lanigan                                             52.124
Pauline Boghosian                                        52.124
Stephen Paul                                             26.807
DLJ Capital Corporation                                   2.979
Scott Honour                                              8.936
Bennett Goodman                                          40.210
Steve Rattner                                            40.210
Doug Ostrover                                            40.210
Rob Grien                                                38.721
Christine Fasano                                         26.807
Eric Swanson                                             20.850
Kevin Smith                                               5.957
Steve Hickey                                             20.850
Farallon Capital Partners, L.P.                       4,387.500
Farallon Capital Institutional Partners, L.P.         3,412.500
Farallon Capital Institutional Partners II, L.P.      1,170.000
Farallon Capital Institutional Partners III, L.P.       390.000
RR Capital Partners, L.P.                               390.000
Emily Woods                                           2,978.505


                                                     Execution Copy
- -------------------------------------------------------------------
- -------------------------------------------------------------------








                        J. Crew Group, Inc.




             ----------------------------------------




            13 1/8% SENIOR DISCOUNT DEBENTURES DUE 2008

             ----------------------------------------


                        -------------------

                             INDENTURE

                   DATED AS OF OCTOBER 17, 1997

                        -------------------







               -------------------------------------
                STATE STREET BANK AND TRUST COMPANY

                              TRUSTEE
               -------------------------------------


- -------------------------------------------------------------------
- -------------------------------------------------------------------




      Indenture, dated as of October 17, 1997 between J. Crew
Group, Inc., a New York corporation (the "Company") and State
Street Bank and Trust Company, as trustee (the "Trustee").

      The Company and the Trustee agree as follows for the
benefit of each other and for the equal and ratable benefit of
the holders of the Company's 13 1/8% Senior Discount Debentures
due 2008 (the "Senior Discount Notes") and the exchange 13 1/8%
Senior Discount Debentures due 2008 (the "Exchange Senior
Discount Notes" and, together with the Senior Discount Notes, the
"Notes"):


                             ARTICLE 1
                   DEFINITIONS AND INCORPORATION
                           BY REFERENCE

SECTION 1.01.   DEFINITIONS.

      "Accreted Value" means, as of any date of determination
prior to October 15, 2002, with respect to any Note, the sum of
(a) the initial offering price (which shall be calculated by
discounting the aggregate principal amount at maturity of such
Note at a rate of 13 1/8% per annum, compounded semi-annually on
each April 15 and October 15 from October 15, 2002 to the date of
issuance) of such Note and (b) the portion of the excess of the
principal amount of such Note over such initial offering price
which shall have been accreted thereon through such date, such
amount to be so accreted on a daily basis at a rate of 13 1/8% per
annum of the initial offering price of such Note, compounded
semi-annually on each April 15 and October 15 from the date of
issuance of the Notes through the date of determination, computed
on the basis of a 360-day year of twelve 30-day months.

      "Acquired Debt" means, with respect to any specified
Person, (i) Indebtedness of any other Person existing at the time
such other Person is merged with or into or became a Subsidiary
of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person or
assumed in connection with the acquisition of any asset used or
useful in a Permitted Business acquired by such specified Person;
provided that such Indebtedness was not incurred in connection
with, or in contemplation of, such other Person merging with or
into or becoming a Subsidiary of such specified Person, or such
acquisition, as the case may be.

      "Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under
direct or indirect common control with such specified Person. For
purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting
securities, by agreement or otherwise; provided that beneficial
ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.

      "Agent" means any Registrar, Paying Agent or co-registrar.

      "Applicable Procedures" means, with respect to any transfer
or exchange of beneficial interests in a Global Note, the rules
and procedures of the Depositary that apply to such transfer and
exchange.

      "Asset Sale" means (i) the sale, lease (other than an
operating lease), conveyance or other disposition of any assets
or rights (including, without limitation, by way of a sale and
leaseback) other than in the ordinary course of business
consistent with past practices (provided that the sale, lease
(other than an operating lease), conveyance or other disposition
of all or substantially all of the assets of the



Company and its Restricted Subsidiaries taken as a whole will be
governed by the provisions of this Indenture described in
Sections 4.13 and 5.01 and not by the provisions of Section 4.10
hereof, and (ii) the sale by the Company and the issue or sale by
any of the Restricted Subsidiaries of the Company of Equity
Interests of any of the Company's Subsidiaries, in the case of
either clause (i) or (ii), whether in a single transaction or a
series of related transactions that have a fair market value (as
determined in good faith by the Board of Directors) in excess of
$1.0 million or for net cash proceeds in excess of $1.0 million.
Notwithstanding the foregoing: (i) a transfer of assets by the
Company to a Wholly Owned Restricted Subsidiary of the Company
(other than a Receivables Subsidiary) or by a Wholly Owned
Restricted Subsidiary of the Company to a Wholly-Owned Restricted
Subsidiary of the Company (other than a Receivables Subsidiary),
(ii) an issuance of Equity Interests by a Restricted Subsidiary
of the Company to the Company or to a Wholly Owned Restricted
Subsidiary of the Company (other than a Receivables Subsidiary),
(iii) a Restricted Payment that is permitted by Section 4.07
hereof, (iv) the sale and leaseback of any assets within 90 days
of the acquisition of such assets, (v) foreclosures on assets,
(vi) the clearance of inventory and (vii) the sale, conveyance or
other disposition of accounts receivables and related assets
customarily transferred in an asset securitization transaction
involving accounts receivable to a Receivables Subsidiary or by a
Receivables Subsidiary, in connection with a Qualified
Receivables Transaction, in each case, will not be deemed to be
Asset Sales.

       "Attributable Debt" in respect of a sale and leaseback
transaction means, at the time of determination, the present
value (discounted at the rate of interest implicit in such
transaction, determined in accordance with GAAP) of the
obligation of the lessee for net rental payments during the
remaining term of the lease included in such sale and leaseback
transaction (including any period for which such lease has been
extended or may, at the option of the lessor, be extended).

      "Bankruptcy Law" means Title 11, U.S. Code or any
similar federal or state law for the relief of debtors.

      "Board of Directors" means the board of directors of the
Company or any authorized committee of such board of directors.

      "Business Day" means any day other than a Legal Holiday.

      "Capital Lease Obligation" means, at the time any
determination thereof is to be made, the amount of the liability
in respect of a capital lease that would at such time be required
to be capitalized on a balance sheet in accordance with GAAP.

      "Capital Stock" means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business
entity, any and all shares, interests, participation, rights or
other equivalents (however designated) of corporate stock, (iii)
in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited)
and (iv) any other interest or participation that confers on a
Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.

      "Cash Equivalents" means (i) securities issued or
unconditionally and fully guaranteed or insured by the full faith
and credit of the United States government or any agency or
instrumentality thereof having maturities of not more than one
year from the date of acquisition, (ii) obligations issued or
fully guaranteed by any state of the United States of America or
any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one
of the two highest ratings obtainable from either Standard &
Poor's

                               2


Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's"), (iii) certificates of deposit and eurodollar time
deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding
one year and overnight bank deposits, in each case with any
lender party to the New Credit Facility or with any domestic
commercial bank having capital and surplus in excess of $250.0
million, (iv) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in
clauses (i) and (iii), above entered into with any financial
institution meeting the qualifications specified in clause (iii)
above, (v) commercial paper having one of the two of the highest
ratings obtainable from either Moody's or S&P and in each case
maturing within one year after the date of acquisition and (vi)
investments in funds investing exclusively in investments of the
types described in clauses (i) through (v) above.

      "Cedel" means Cedel Bank, societe anonyme.

      "Change of Control" means the occurrence of any of the
following: (i) the sale, lease, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in
one or a series of related transactions, of all or substantially
all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3)
of the Exchange Act), other than the Principals and their Related
Parties, (ii) the adoption of a plan relating to the liquidation
or dissolution of the Company, (iii) the consummation of any
transaction (including, without limitation, any merger or
consolidation) the result of which is that (A) any "person" (as
defined above), other than the Principal and their Related
Parties, becomes the "beneficial owner" (as such term is defined
in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly, of 40% or more of the Voting Stock of the Company
(measured by voting power rather than number of shares) and (B)
the Principals and their Related Parties beneficially own,
directly or indirectly, in the aggregate a lesser percentage of
the Voting Stock of the Company than such other "person", (iv)
the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors or (v) the
Company consolidates with, or merges with or into, any Person, or
any Person consolidates with, or merges with or into, the
Company, in any such event pursuant to a transaction in which any
of the outstanding Voting Stock of the Company is converted into
or exchanged for cash, securities or other property, other than
any such transaction where (A) the Voting Stock of the Company
outstanding immediately prior to such transaction is converted
into or exchanged for Voting Stock (other than Disqualified
Stock) of the surviving or transferee Person and (B) the
"beneficial owners" (as defined above) of the Voting Stock of the
Company immediately prior to such transaction own, directly or
indirectly through one or more subsidiaries, not less than a
majority of the total Voting Stock of the surviving or transferee
corporation immediately after such transaction.

      "Chase" means Chase Securities Inc.

      "Commission" means the Securities and Exchange Commission.

      "Company" means J. Crew Group, Inc., a New York
corporation, and its permitted successors.

      "Consolidated Cash Flow" means, with respect to any Person
for any period, the Consolidated Net Income of such Person for
such period plus (i) an amount equal to any extraordinary loss
plus any net loss realized in connection with an Asset Sale (to
the extent such losses were deducted in computing such
Consolidated Net Income of such Person and its Restricted
Subsidiaries), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such
period, to the extent that such provision for taxes was included
in computing such Consolidated Net Income, plus (iii)
consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether

                               3


paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation
and amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses
that were paid in a prior period) and other non-cash charges
(excluding any such non-cash charge to the extent that it
represents an accrual of or reserve for cash charges in any
future period or amortization of a prepaid cash charge that was
paid in a prior period) of such Person and its Subsidiaries for
such period to the extent that such depreciation, amortization
and other non-cash expenses were deducted in computing such
Consolidated Net Income, plus (v) any interest expense on
Indebtedness of another Person that is Guaranteed by such Person
or any of its Restricted Subsidiaries or secured by a Lien on
assets of such Person or any of its Restricted Subsidiaries, in
each case, to the extent that such interest expense is deducted
in computing such Consolidated Net Income, minus (vi) non-cash
items increasing such Consolidated Net Income for such period, in
each case, on a consolidated basis and determined in accordance
with GAAP. Notwithstanding the foregoing, the provision for taxes
based on the income or profits of, and the depreciation and
amortization and other non-cash charges of, a Restricted
Subsidiary of a Person shall be added to Consolidated Net Income
to compute Consolidated Cash Flow only to the extent (and in the
same proportion) that the Net Income of such Restricted
Subsidiary was included in calculating the Consolidated Net
Income of such Person.

      "Consolidated Net Income" means, with respect to any Person
for any period, the aggregate of the Net Income of such Person
and its Subsidiaries for such period, on a consolidated basis,
determined in accordance with GAAP, provided that (i) the Net
Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of
dividends or distributions paid in cash to the referent Person or
a Restricted Subsidiary thereof, (ii) the Net Income of any
Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded,
and (iii) the cumulative effect of a change in accounting
principles shall be excluded.

      "Continuing Directors" means, as of any date of
determination, any member of the Board of Directors of the
Company who (i) was a member of such Board of Directors on the
date hereof immediately after consummation of the
Recapitalization or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the
Continuing Directors who were either members of such Board at the
time of such nomination or election or are successor Continuing
Directors appointed by such Continuing Directors (or their
successors).

      "Corporate Trust Office of the Trustee" shall be at the
address of the Trustee specified in Section 10.02 hereof or such
other address as to which the Trustee may give notice to the
Company.

      "Credit Agent" means The Chase Manhattan Bank in its
capacity as Administrative Agent for the lenders party to the New
Credit Facility or any successor thereto or any person otherwise
appointed.

      "Credit Facilities" means, with respect to the Company, one
or more debt facilities (including, without limitation, the New
Credit Facility) or commercial paper facilities with banks or
other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed
to borrow from such lenders against such receivables) or letters
of credit, in each case, as amended, restated, modified,

                               4


renewed, refunded, replaced or refinanced in whole or in part
from time to time. Indebtedness under Credit Facilities
outstanding on the Issue Date shall be deemed to have been
incurred on such date in reliance on the exceptions provided by
clause (i) of the definition of Permitted Debt.

      "Default" means any event that is or with the passage of
time or the giving of notice or both would be an Event of
Default.

      "Definitive Notes" means Notes that are in the form of
EXHIBIT A-1 attached hereto (but without including the text
referred to in footnotes 1 and 3 thereto).

      "Depositary" means, with respect to the Notes issuable or
issued in whole or in part in global form, the Person specified
in Section 2.03 hereof as the Depositary with respect to the
Notes, until a successor shall have been appointed and become
such pursuant to Section 2.06 of this Indenture, and, thereafter,
"Depositary" shall mean or include such successor.

      "Disqualified Stock" means any Capital Stock that, by its
terms (or by the terms of any security into which it is
convertible or for which it is exchangeable at the option of the
holder thereof), or upon the happening of any event, matures or
is mandatorily redeemable, pursuant to a sinking fund obligation
or otherwise, or redeemable at the option of the Holder thereof,
in whole or in part, on or prior to the date on which the Notes
mature; provided, however, that a class of Capital Stock shall
not be Disqualified Stock hereunder solely as the result of any
maturity or redemption that is conditioned upon, and subject to,
compliance with Section 4.07 hereof; and provided, further, that
Capital Stock issued to any plan for the benefit of employees of
the Company or its subsidiaries or by any such plan to such
employees shall not constitute Disqualified Stock solely because
it may be required to be repurchased by the Company in order to
satisfy applicable statutory or regulatory obligations.

      "DLJ" means Donaldson, Lufkin & Jenrette Securities Corporation.

      "Equity Interests" means Capital Stock and all warrants,
options or other rights to acquire Capital Stock (but excluding
any debt security that is convertible into, or exchangeable for,
Capital Stock).

      "Equity Offering" means an offering of common stock (other
than Disqualified Stock) of the Company, pursuant to an effective
registration statement filed with the Commission in accordance
with the Securities Act, other than an offering pursuant to Form
S-8 (or any successor thereto).

      "Euroclear" means Morgan Guaranty Trust Company of New
York, the Brussels office, as operator of the Euroclear system.

      "Exchange Act" means the Securities Exchange Act of 1934, as amended.

      "Exchange Offer" means the offer by the Company to Holders
to exchange Senior Discount Notes for Exchange Senior Discount
Notes.

      "Exchange Offer Registration Statement" has the meaning
set forth in the Registration Rights Agreement.

      "Exchange Senior Discount Notes" means the Company's 13 1/8%
Senior Discount Debentures due 2008, which will be issued in
exchange for the Company's Senior Discount Notes.

                               5



      "Existing Indebtedness" means Indebtedness of the Company
and its Subsidiaries (other than Indebtedness under the New
Credit Facility) in existence on the date of this Indenture,
until such amounts are repaid.

      "Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) the consolidated
interest expense of such Person and its Restricted Subsidiaries
for such period, whether paid or accrued (including, without
limitation, amortization of debt issuance costs and original
issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging
Obligations; provided, however, that in no event shall any
amortization of deferred financing costs incurred in connection
with the Recapitalization be included in Fixed Charges), and (ii)
the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period,
and (iii) any interest expense on Indebtedness of another Person
that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one
of its Restricted Subsidiaries (whether or not such Guarantee or
Lien is called upon), and (iv) the product of (a) (without
duplication) (1) all dividends paid or accrued in respect of
Disqualified Stock which are not included in the interest expense
of such Person for tax purposes for such period and (2) all cash
dividend payments on any series of preferred stock of such Person
or any of its Restricted Subsidiaries, other than dividend
payments on Equity Interests payable solely in Equity Interests
(other than Disqualified Stock) of the Company, times (b) a
fraction, the numerator of which is one and the denominator of
which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal,
in each case, on a consolidated basis and in accordance with
GAAP.

      "Fixed Charge Coverage Ratio" means with respect to any
Person for any period, the ratio of the Consolidated Cash Flow of
such Person and its Restricted Subsidiaries for such period to
the Fixed Charges of such Person and its Restricted Subsidiaries
for such period. In the event that the Company or any of its
Restricted Subsidiaries incurs, assumes, Guarantees, repays or
redeems any Indebtedness (other than revolving credit borrowings)
or issues or redeems preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the
event for which the calculation of the Fixed Charge Coverage
Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to
such incurrence, assumption, Guarantee, repayment or redemption
of Indebtedness, or such issuance or redemption of preferred
stock, as if the same had occurred at the beginning of the
applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i)
acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be
deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow and Fixed Charges for
such reference period shall be calculated without giving effect
to clause (ii) of the proviso set forth in the definition of
Consolidated Net Income and shall reflect any pro forma expense
and cost reductions attributable to such acquisitions (to the
extent such expense and cost reduction would be permitted by the
Commission to be reflected in pro forma financial statements
included in a registration statement filed with the Commission),
and (ii) the Consolidated Cash Flow and Fixed Charges
attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded and Consolidated
Cash Flow shall reflect any pro forma expense or cost reductions
relating to such discontinuance or disposition (to the extent
such expense or cost reductions would be permitted by the
Commission to be

                               6


reflected in pro forma financial statements included in a
registration statement filed with the Commission), and (iii) the
Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the referent Person or any of
its Subsidiaries following the Calculation Date.

      "GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of
the accounting profession, which are in effect on the date
hereof; provided, however, that all reports and other financial
information provided by the Company to the Holders, the Trustee
and/or the Commission shall be prepared in accordance with GAAP,
as in effect on the date of such report or other financial
information.

      "Global Notes" means the Rule 144A Global Notes, the
Regulation S Temporary Global Notes and the Regulation S
Permanent Global Notes and any Notes exchanged for any of the
foregoing in the Exchange Offer.

      "Government Securities" means direct obligations of, or
obligations guaranteed by, the United States of America for the
payment of which guarantee or obligations the full faith and
credit of the United States is pledged.

      "Guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of
business), direct or indirect, in any manner (including, without
limitation, letters of credit and reimbursement agreements in
respect thereof), of all or any part of any Indebtedness.

      "Hedging Obligations" means, with respect to any Person,
the obligations of such Person under (i) interest rate swap
agreements, interest rate cap agreements and interest rate collar
agreements and (ii) other agreements or arrangements designed to
protect such Person against fluctuations in interest rates or the
value of foreign currencies.

      "Holder" means a Person in whose name a Note is registered.

      "Indebtedness" means, with respect to any Person, any
indebtedness of such Person, whether or not contingent, in
respect of borrowed money or evidenced by bonds, notes,
debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the
balance deferred and unpaid of the purchase price of any property
or representing any Hedging Obligations, except any such balance
that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters
of credit and Hedging Obligations) would appear as a liability
upon a balance sheet of such Person prepared in accordance with
GAAP, as well as all indebtedness of others secured by a Lien on
any asset of such Person (whether or not such indebtedness is
assumed by such Person) and, to the extent not otherwise
included, the Guarantee by such Person of any indebtedness of any
other Person. The amount of any Indebtedness outstanding as of
any date shall be (i) the accreted value thereof, in the case of
any Indebtedness that does not require current payments of
interest, and (ii) the principal amount thereof, together with
any interest thereon that is more than 30 days past due, in the
case of any other Indebtedness.

                               7


      "Investments" means, with respect to any Person, all
investments by such Person in other Persons (including
Affiliates) in the forms of direct or indirect loans (including
guarantees of Indebtedness or other obligations), advances or
capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with
all items that are or would be classified as investments on a
balance sheet prepared in accordance with GAAP. If the Company or
any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect
Restricted Subsidiary of the Company such that, after giving
effect to any such sale or disposition, such Person is no longer
a Restricted Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity
Interests of such Restricted Subsidiary not sold or disposed of
in an amount determined as provided in the final paragraph of
Section 4.07 hereof.

      "Indenture" means this Indenture, as amended or
supplemented from time to time.

      "Indirect Participant" means a Person who holds an
interest through a Participant.

      "Initial Purchasers" means DLJ and Chase.

      "Insolvency or Liquidation Proceedings" means (i) any
insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization or other similar case or proceeding,
relative to the Company or to the creditors of the Company, as
such, or to the assets of the Company or (ii) any liquidation,
dissolution, reorganization or winding up of the Company, whether
voluntary or involuntary and involving insolvency or bankruptcy,
or (iii) any assignment for the benefit of creditors or any other
marshalling of assets and liabilities of the Company.

      "Institutional Accredited Investor" means an "accredited
investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act.

      "Issue Date" means the date on which notes are first issued
and authenticated under this Indenture.

      "J. Crew Corp." means J. Crew Operating Corp., a Delaware corporation.

      "Legal Holiday" means a Saturday, a Sunday or a day on
which banking institutions in the City of New York, the city in
which the principal Corporate Trust Office of the Trustee is
located or at a place of payment are authorized by law,
regulation or executive order to remain closed. If a payment date
is a Legal Holiday at a place of payment, payment shall be made
at that place on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period.

      "Lien" means, with respect to any asset, any mortgage,
lien, pledge, charge, security interest or encumbrance of any
kind in respect of such asset, whether or not filed, recorded or
otherwise perfected under applicable law (including any
conditional sale or other title retention agreement, any lease in
the nature thereof, and any option or other agreement to sell or
give a security interest therein).

      "Liquidated Damages" means all liquidated damages then
owing pursuant to Section 5 of the Registration Rights Agreement.

                               8


      "Net Income" means, with respect to any Person, the net
income (loss) of such Person, determined in accordance with GAAP
and before any reduction in respect of preferred stock dividends,
excluding, however, (i) any gain (but not loss), together with
any related provision for taxes on such gain (but not loss),
realized in connection with (a) any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback
transactions) or (b) the extinguishment of any Indebtedness of
such Person or any of its Subsidiaries and (ii) any extraordinary
or nonrecurring gain (but not loss), together with any related
provision for taxes on such extraordinary or nonrecurring gain
(but not loss).

      "Net Proceeds" means the aggregate cash proceeds received
by the Company or any of its Restricted Subsidiaries in respect
of any Asset Sale (including, without limitation, any cash
received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result
thereof, taxes paid or payable as a result thereof (after taking
into account any available tax credits or deductions and any tax
sharing arrangements), amounts required to be applied to the
repayment of Indebtedness (other than Indebtedness under the
Credit Facilities) secured by a Lien on the asset or assets that
were the subject of such Asset Sale and any reserve for
adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.

      "New Credit Facility" means that certain credit facility,
dated as of October 17, 1997, by and among the Company, J. Crew
Corp. and Chase and DLJ, as agents and lenders, providing for up
to $70.0 million of term borrowings and $200.0 million of
revolving credit borrowings, including any related notes,
guarantees, collateral documents, instruments and agreements
executed in connection therewith, and in each case as amended,
extended, modified, renewed, refunded, replaced or refinanced
from time to time.

      "Non-Recourse Debt" means Indebtedness (i) as to which
neither the Company nor any of its Restricted Subsidiaries (a)
provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness), or
(b) is directly or indirectly liable (as a guarantor or
otherwise), and (ii) as to which the lenders have been notified
in writing that they will not have any recourse to the stock or
assets of the Company or any of its Restricted Subsidiaries,
including the stock of such Unrestricted Subsidiary.

      "Note Custodian" means the Trustee when serving as
custodian for the Depositary with respect to the Notes in global
form, or any successor entity thereto.

      "Obligations" means, with respect to any Indebtedness, any
principal, interest, penalties, fees, indemnifications,
reimbursements, damages and other liabilities payable under the
documentation governing any Indebtedness.

      "Offering" means the offer and sale of the Notes of the
Company as contemplated by the Offering Memorandum.

      "Offerings" means the Offering and the concurrent
offering of the 10 3/8% Senior Subordinated Notes due 2007 by J.
Crew Corp. pursuant to an offering memorandum dated as of October
14, 1997.

      "Offering Memorandum" means the Offering Memorandum, dated
October 14, 1997, relating to the Company's offering and
placement of the Senior Discount Notes.

                               9


      "Officer" means, with respect to any Person, the Chairman
of the Board, the Chief Executive Officer, the President, the
Chief Operating Officer, the Chief Financial Officer, the
Treasurer, any Assistant Treasurer, the Controller, the Secretary
or any Vice-President of such Person.

      "Officers' Certificate" means a certificate signed on
behalf of the Company by two Officers of the Company, one of whom
must be the principal executive officer, the principal financial
officer, the treasurer or the principal accounting officer of the
Company, that meets the requirements of Section 10.05 hereof.

      "Opinion of Counsel" means an opinion from legal counsel
who is reasonably acceptable to the Trustee, that meets the
requirements of Section 10.05 hereof. The counsel may be an
employee of or counsel to the Company, any Subsidiary of the
Company or the Trustee.

      "Participant" means, with respect to DTC, Euroclear or
Cedel, a Person who has an account with DTC, Euroclear or Cedel,
respectively (and, with respect to DTC, shall include Euroclear
and Cedel).

      "Permitted Business" means the design, manufacture,
importing, exporting, distribution, marketing, licensing and
wholesale and retail sale of apparel, housewares, home
furnishings and related items, and businesses reasonably related
thereto.

      "Permitted Investments" means (a) any Investment in the
Company or in a Restricted Subsidiary of the Company (other than
a Receivables Subsidiary); (b) any Investment in Cash and Cash
Equivalents; (c) any Investment by the Company or any Restricted
Subsidiary in a Person, if as a result of such Investment (i)
such Person becomes a Restricted Subsidiary of the Company (other
than a Receivables Subsidiary) or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the
Company or a Restricted Subsidiary of the Company (other than a
Receivables Subsidiary); (d) any Restricted Investment made as a
result of the receipt of non-cash consideration from an Asset
Sale that was made pursuant to and in compliance with Section
4.10 hereof or any transaction not constituting an Asset Sale by
reason of the $1.0 million threshold contained in the definition
thereof; (e) any acquisition of assets solely in exchange for the
issuance of Equity Interests (other than Disqualified Stock) of
the Company; (f) Hedging Obligations entered into in the ordinary
course of the Company's or its Restricted Subsidiaries'
businesses and otherwise in compliance with this Indenture; (g)
loans and advances to employees and officers of the Company and
its Restricted Subsidiaries in the ordinary course of business
for bona fide business purposes not in excess of $5 million at
any one time outstanding; (h) additional Investments not to
exceed $25 million at any one time outstanding; (i) Investments
in securities of trade creditors or customers received in
settlement of obligations or pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or
insolvency of such trade creditors or customers; and (j)
Investments by the Company or a Restricted Subsidiary in a
Receivables Subsidiary or any Investment by a Receivables
Subsidiary in any other Person, in each case, in connection with
a Qualified Receivables Transaction, provided, that any
Investment in any such Person is in the form of a Purchase Money
Note, any equity interest or interests in accounts receivable and
related assets generated by the Company or a Restricted
Subsidiary and transferred to any Person in connection with a
Qualified Receivables Transaction or any such Person owning such
accounts receivable.

      "Permitted Liens" means (i) Liens existing as of the Issue
Date to the extent and in the manner such Liens are in effect on
the Issue Date; (ii) Liens on assets of Restricted Subsidiaries
securing Indebtedness of Restricted Subsidiaries permitted to be
incurred under this Indenture; (iii) Liens securing the Notes;
(iv) Liens securing the Company's obligations under the New
Credit Facility; (v) Liens of the

                               10



Company or a Wholly Owned Restricted Subsidiary on assets of any
Restricted Subsidiary of the Company; (vi) Liens securing
Permitted Refinancing Indebtedness which is incurred to refinance
any Indebtedness which has been secured by a Lien permitted under
this Indenture and which has been incurred in accordance with the
provisions hereof; provided, however, that such Liens (A) are not
materially less favorable to the Holders and are not materially
more favorable to the lienholders with respect to such Liens than
the Liens in respect of the Indebtedness being refinanced and (B)
do not extend to or cover any property or assets of the Company
or any of its Restricted Subsidiaries not securing the
Indebtedness so refinanced; (vii) Liens for taxes, assessments or
governmental charges or claims either (A) not delinquent or (B)
contested in good faith by appropriate proceedings and as to
which the Company or its Restricted Subsidiaries shall have set
aside on its books such reserves as may be required pursuant to
GAAP; (viii) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, supplies, materialmen, repairmen and
other Liens imposed by law incurred in the ordinary course of
business for sums not yet delinquent for a period of more than 60
days or being contested in good faith, if such reserve or other
appropriate provision, if any, as shall be required by GAAP shall
have been made in respect thereof; (ix) Liens incurred or
deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other
types of social security or similar obligations, including any
Lien securing letters of credit issued in the ordinary course of
business consistent with past practice in connection therewith,
or to secure the performance of tenders, statutory obligations,
surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed
money); (x) judgment Liens not giving rise to an Event of Default
so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the
review of such judgement shall not have been finally terminated
or the period within which such proceedings may be initiated
shall not have expired; (xi) easements, rights-of-way, zoning
restrictions and other similar charges or encumbrances in respect
of real property not interfering in any material respect with the
ordinary conduct of the business of the Company or any of its
Restricted Subsidiaries; (xii) any interest or title of a lessor
under any lease, whether or not characterized as capital or
operating; provided that such Liens do not extend to any property
or assets which is not leased property subject to such lease;
(xiii) Liens securing Capital Lease Obligations and purchase
money Indebtedness incurred in accordance with Section 4.09
hereof; provided, however, that (A) the Indebtedness shall not
exceed the cost of such property or assets being acquired or
constructed and shall not be secured by any property or assets of
the Company or any Restricted Subsidiary of the Company other
than the property or assets of the Company or any Restricted
Subsidiary of the Company other than the property and assets
being acquired or constructed and (B) the Lien securing such
Indebtedness shall be created within 90 days of such acquisition
or construction; (xiv) Liens upon specific items of inventory or
other goods and proceeds of any Person securing such Person's
obligations in respect of bankers' acceptances issued or created
for the account of such Person to facilitate the purchase,
shipment or storage of such inventory or other goods; (xv) Liens
securing reimbursement obligations with respect to letters of
credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof; (xvi)
Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual, or warranty requirements
of the Company or any of its Restricted Subsidiaries, including
rights of offset and set-off; (xvii) Liens securing Hedging
Obligations which Hedging Obligations relate to Indebtedness that
is otherwise permitted under this Indenture; (xviii) Liens
securing Acquired Debt incurred in accordance with Section 4.09
hereof; provided that (A) such Liens secured such Acquired Debt
at the time of and prior to the incurrence of such Acquired Debt
by the Company or a Restricted Subsidiary of the Company and were
not granted in connection with, or in anticipation of, the
incurrence of such Acquired Debt by the Company or a Restricted
Subsidiary of the Company and (B) such Liens do not extend to or
cover any property or assets of the Company or any of its
Restricted Subsidiaries other than the property or assets that
secured the Acquired Debt prior to the time such Indebtedness

                               11


became Acquired Debt of the Company or a Restricted Subsidiary of
the Company and are not more favorable to the lienholders than
those securing the Acquired Debt prior to the incurrence of such
Acquired Debt by the Company or a Restricted Subsidiary of the
Company; (xix) leases or subleases granted to others not
interfering in any material respect with the business of the
Company or its Restricted Subsidiaries; (xx) Liens arising out of
consignment or similar arrangements for the sale of goods entered
into by the Company or any Restricted Subsidiary in the ordinary
course of business; and (xxi) Liens or assets of a Receivables
Subsidiary arising in connection with a Qualified Receivables
Transaction.

      "Permitted Refinancing Indebtedness" means any Indebtedness
of the Company or any of its Subsidiaries issued in exchange for,
or the net proceeds of which are used to extend, refinance,
prepay, retire, renew, replace, defease or refund Indebtedness of
the Company or any of its Subsidiaries (other than such
Indebtedness described in clauses (i), (vi), (vii), (viii), (ix),
(x), (xi), (xiii) and (xiv) of Section 4.09 hereof); provided
that: (i) the principal amount (or accreted value, if applicable)
of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced,
renewed, prepaid, retired, replaced, defeased or refunded (plus
the amount of reasonable expenses incurred in connection
therewith including premiums paid, if any, to the holders
thereof); (ii) such Permitted Refinancing Indebtedness has a
final maturity date at or later than the final maturity date of,
and has a Weighted Average Life to Maturity equal to or greater
than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, prepaid, retired, replaced,
defeased or refunded; (iii) if the Indebtedness being extended,
refinanced, renewed, prepaid, retired, replaced, defeased or
refunded is subordinated in right of payment to the Notes, such
Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and is subordinated in
right of payment to, the Notes on terms at least as favorable to
the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is
incurred either by the Company or by the Restricted Subsidiary
who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.

      "Person" means an individual, partnership, corporation,
limited liability company, unincorporated organization, trust or
joint venture, or a governmental agency or political subdivision
thereof.

      "Principals" means TPG Partners II, L.P., a Delaware
limited partnership.

      "Private Placement Legend" means the legend initially set
forth on the Senior Discount Notes in the form set forth in
Section 2.06(g) hereof.

      "Purchase Money Note" means a promissory note evidencing a
line of credit, or evidencing other Indebtedness owed to the
Company or any Restricted Subsidiary in connection with a
Qualified Receivables Transaction, which note shall be repaid
from cash available to the maker of such note, other than amounts
required to be established as reserves pursuant to agreement,
amounts paid to investors in respect of interest, principal and
other amounts owing to such investors and amounts paid in
connection with the purchase of newly generated receivables.

      "QIB" means a "qualified institutional buyer" as defined in
Rule 144A under the Securities Act.

      "Qualified Proceeds" means any of the following or any
combination of the following: (i) cash, (ii) Cash Equivalents,
(iii) long-term assets that are used or useful in a Permitted
Business and (iv) the Capital Stock of any Person engaged
primarily in a Permitted Business if, in connection with the
receipt by the Company or any Restricted Subsidiary of the
Company of such Capital Stock, (a) such Person

                               12


becomes a Wholly Owned Restricted Subsidiary or (b) such Person
is merged, consolidated or amalgamated with or into, or transfers
or conveys substantially all of its assets to, or is liquidated
into, the Company or any Wholly-Owned Restricted Subsidiary of
the Company that is a Guarantor.

      "Qualified Receivables Transaction" means any transaction
or series of transactions that may be entered into by the Company
or any Restricted Subsidiary pursuant to which the Company or any
Restricted Subsidiary may sell, convey or otherwise transfer to
(a) a Receivables Subsidiary (in the case of a transfer by the
Company or any Restricted Subsidiary) and (b) any other Person
(in the case of a transfer by a Receivables Subsidiary), or may
grant a security interest in, any accounts receivable (whether
now existing or arising in the future) of the Company or any
Restricted Subsidiary and any asset related thereto including,
without limitation, all collateral securing such accounts
receivable, all contracts and all guarantees or other obligations
in respect of such accounts receivable, proceeds of such accounts
receivable and other assets which are customarily transferred, or
in respect of which security interests are customarily granted,
in connection with asset securitization transactions involving
accounts receivable.

      "Receivables" means, with respect to any Person or entity,
all of the following property and interests in property of such
Person or entity, whether now existing or existing in the future
or hereafter acquired or arising: (i) accounts, (ii) accounts
receivable incurred in the ordinary course of business, including
without limitation, all rights to payment created by or arising
from sales of goods, leases of goods or the rendition of services
no matter how evidenced, whether or not earned by performance,
(iii) all rights to any goods or merchandise represented by any
of the foregoing after creation of the foregoing, including,
without limitation, returned or repossessed goods, (iv) all
reserves and credit balances with respect to any such accounts
receivable or account debtors, (v) all letters of credit,
security, or guarantees for any of the foregoing, (vi) all
insurance policies or reports relating to any of the foregoing,
(vii) all collection or deposit accounts relating to any of the
foregoing, (viii) all proceeds of the foregoing and (ix) all
books and records relating to any of the foregoing.

      "Receivables Subsidiary" means a Wholly Owned Restricted
Subsidiary which engages in no activities other than in
connection with the financing of accounts receivables and which
is designated by the Board of Directors of the Company (as
provided below) as a Receivables Subsidiary (a) no portion of the
Indebtedness or any other Obligations (contingent or otherwise)
of which (i) is guaranteed by the Company or any other Restricted
Subsidiary (excluding guarantees of obligations (other than the
principal of, and interest on, Indebtedness) pursuant to Standard
Securitization Undertakings), (ii) is recourse to or obligates
the Company or any other Restricted Subsidiary in any way other
than pursuant to Standard Securitization Undertakings or (iii)
subjects any property or asset of the Company or any other
Restricted Subsidiary, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to
Standard Securitization Undertakings, (b) with which neither the
Company nor any other Restricted Subsidiary has any material
contract, agreement, arrangement or understanding (except in
connection with a Purchase Money Note or Qualified Receivables
Transaction) other than on terms no less favorable to the Company
or such other Restricted Subsidiary than those that might be
obtained at the time from persons that are not Affiliates of the
Company, other than fees payable in the ordinary course of
business in connection with servicing accounts receivable, and
(c) to which neither the Company nor any other Restricted
Subsidiary has any obligation to maintain or preserve such
entity's financial condition or cause such entity to achieve
certain levels of operating results. Any such designation by the
Board of Directors of the Company shall be evidenced by filing
with the Trustee a certified copy of the resolution of the Board
of Directors of the Company giving effect to such designation and
an Officers' Certificate certifying, to the best of such
officer's knowledge and belief after consulting with counsel,
that such designation complied with the foregoing conditions.

                               13


      "Receivables Transaction" means (i) the sale or other
disposition to a third party of Receivables or an interest
therein, or (ii) the sale or other disposition of Receivables or
an interest therein to a Receivables Subsidiary followed by a
financing transaction in connection with such sale or disposition
of such Receivables (whether such financing transaction is
effected by such Receivables Subsidiary or by a third party to
whom such Receivables Subsidiary sells such Receivables or
interests therein); provided that in each of the foregoing, the
Company or its Subsidiaries receive at least 80% of the aggregate
principal amount of any Receivables financed in such transaction.

      "Registration Rights Agreement" means the Registration
Rights Agreement, dated as of the date hereof, among the Company
and the Initial Purchasers.

      "Regulation S" means Regulation S promulgated under the Securities Act.

      "Regulation S Global Notes" means the Regulation S
Temporary Global Notes or the Regulation S Permanent Global Notes
as applicable.

      "Regulation S Permanent Global Notes" means the permanent
global notes that do not contain the paragraphs referred to in
footnote 1 to the form of Note attached hereto as EXHIBIT A-2 and
that are deposited with and registered in the name of the
Depositary or its nominee, representing a series of Notes sold in
reliance on Regulation S.

      "Regulation S Temporary Global Notes" means the temporary
global notes that contain the paragraphs referred to in footnote
1 to the form of Note attached hereto as EXHIBIT A-2 and that are
deposited with and registered in the name of the Depositary or
its nominee, representing a series of Notes sold in reliance on
Regulation S.

      "Related Party" with respect to any Principal means (A) any
controlling stockholder or a majority of (or more) owned
Subsidiary of such Principal or, in the case of an individual,
any spouse or immediate family member of such Principal, or (B)
any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons
beneficially holding a majority (or more) controlling interest of
which consist of such Principal and/or such other Persons
referred to in the immediately preceding clause (A).

      "Responsible Officer" when used with respect to the
Trustee, means any officer within the Corporate Trust
Administration of the Trustee (or any successor group of the
Trustee) or any other officer of the trustee customarily
performing functions similar to those performed by any of the
above designated officers and also means, with respect to a
particular corporate trust matter, any other officer to whom such
matter is referred because of his knowledge of and familiarity
with the particular subject.

      "Restricted Beneficial Interest" means any beneficial
interest of a Participant or Indirect Participant in the Rule
144A Global Note or the Regulation S Global Note.

      "Restricted Broker Dealer" has the meaning set forth in
the Registration Rights Agreement.

      "Restricted Global Notes" means the Rule 144A Global Notes
and the Regulation S Global Notes, all of which shall bear the
Private Placement Legend.

      "Restricted Investment" means an Investment other than
a Permitted Investment.

                               14


      "Restricted Subsidiary" means any Subsidiary of the
Company other than an Unrestricted Subsidiary.

      "Rule 144A" means Rule 144A promulgated under the Securities Act.

      "Rule 144A Global Notes" means the permanent global notes
that contain the paragraph referred to in footnote 1 and the
additional schedule referred to in footnote 3 to the form of the
Note attached hereto as EXHIBIT A-1, and that is deposited with
and registered in the name of the Depositary or its nominee,
representing a series of Notes sold in reliance on Rule 144A.

      "Securities Act" means the Securities Act of 1933, as amended.

      "Senior Subordinated Notes" means J. Crew Corp.'s 10 3/8%
Senior Subordinated Notes due 2007.

      "Shelf Registration Statement" means the Shelf Registration
Statement as defined in the Registration Rights Agreement.

      "Significant Subsidiary" means any Subsidiary that would be
a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated pursuant to the Act, as such
Regulation is in effect on the date hereof.

      "Standard Securitization Undertakings" means
representations, warranties, covenants and indemnities entered
into by the Company or any Restricted Subsidiary which are
reasonably customary in an accounts receivable transaction.

      "Stated Maturity" means, with respect to any installment of
interest or principal on any series of Indebtedness, the date on
which such payment of interest or principal was scheduled to be
paid in the original documentation governing such Indebtedness,
and shall not include any contingent obligations to repay, redeem
or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.

      "Subsidiary" means, with respect to any Person, (i) any
corporation, association or other business entity of which more
than 50% of the total Voting Stock thereof is at the time owned
or controlled, directly or indirectly, by such Person or one or
more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of
which are such Person or of one or more Subsidiaries of such
Person (or any combination thereof).

       "TIA" means the Trust Indenture Act of 1939 (15 U.S.
Code Sections 77aaa-77bbbb), as amended, as in effect on the date
hereof.

      "Transfer Restricted Securities" means Notes or beneficial
interests therein that bear or are required to bear the Private
Placement Legend.

      "Trustee" means State Street Bank and Trust Company until a
successor replaces it in accordance with the applicable
provisions of this Indenture, and thereafter means the successor.

      "Unrestricted Global Notes" means one or more Global Notes
that do not and are not required to bear the Private Placement
Legend.

                               15


      "Unrestricted Subsidiary" means any Subsidiary of the
Company that is designated by the Board of Directors as an
Unrestricted Subsidiary pursuant to a Board Resolution; but only
to the extent that such Subsidiary: (a) is not party to any
agreement, contract, arrangement or understanding with the
Company or any Restricted Subsidiary unless the terms of any such
agreement, contract, arrangement or understanding are no less
favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not
Affiliates of the Company; (b) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has
any direct or indirect obligation (x) to subscribe for additional
Equity Interests or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any
specified levels of operating results; and (c) has not guaranteed
or otherwise directly or indirectly provided credit support for
any Indebtedness of the Company or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing with a Trustee a
certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was
permitted by Section 4.07 hereof. If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter
cease to be an Unrestricted Subsidiary for purposes of this
Indenture and any Indebtedness of such Subsidiary shall be deemed
to be incurred by a Restricted Subsidiary of the Company as of
such date. The Board of Directors of the Company may at any time
designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be
an incurrence of Indebtedness and issuance of preferred stock by
a Restricted Subsidiary of the Company of any outstanding
Indebtedness or outstanding issue of preferred stock of such
Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness and preferred stock is
permitted to be incurred under Section 4.09 hereof, and (ii) no
Default or Event of Default would exist following such
designation.

      "Voting Stock" of any Person as of any date means the
Capital Stock of such Person that is at the time entitled to vote
in the election of the Board of Directors of such Person.

      "Weighted Average Life to Maturity" means, when applied to
any Indebtedness at any date, the number of years obtained by
dividing (i) the sum of the products obtained by multiplying (a)
the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof, by (b)
the number of years (calculated to the nearest one-twelfth) that
will elapse between such date and the making of such payment, by
(ii) the then outstanding principal amount of such Indebtedness.

      "Wholly Owned Subsidiary" of any Person means a Restricted
Subsidiary of such person all of the outstanding Capital Stock or
other ownership interests of which (other than directors'
qualifying shares) shall at the time be owned by such Person or
by one or more Wholly Owned Restricted Subsidiaries of such
Person or by such Person and one or more Wholly Owned
Subsidiaries of such Person.


SECTION 1.02.   OTHER DEFINITIONS.
                                                         Defined in
      Term                                                  Section

      "Affiliate Transaction"..................................4.11
      "Asset Sale Offer".......................................4.10
      "Change of Control Offer"................................4.13
      "Change of Control Payment"..............................4.13

                               16


      "Change of Control Payment Date".........................4.13
      "Covenant Defeasance"....................................8.03
      "Custodian"..............................................6.01
      "DTC"....................................................2.03
      "Electronic Message".....................................2.02
      "Event of Default".......................................6.01
      "Excess Proceeds"........................................4.10
      "incur"..................................................4.09
      "Legal Defeasance".......................................8.02
      "Offer Amount"...........................................3.09
      "Offer Period"...........................................3.09
      "Pari Passu Indebtedness"................................4.10
      "Paying Agent"...........................................2.03
      "Payment Default"........................................6.01
      "Permitted Debt".........................................4.09
      "Purchase Date"..........................................3.09
      "Registrar"..............................................2.03
      "Repurchase Offer".......................................3.09
      "Restricted Payments"....................................4.07


SECTION 1.03.   INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.

      Whenever this Indenture refers to a provision of the TIA,
the provision is incorporated by reference in, and made a part
of, this Indenture.

      The following TIA terms used in this Indenture have the
following meanings:

           "indenture securities" means the Notes;

           "indenture security holder" means a Holder of a Note;

           "indenture to be qualified" means this Indenture;

           "indenture trustee" or "institutional trustee" means the Trustee;

          "obligor" on the Notes means the Company and any
successor obligor upon the Notes.

      All other terms used in this Indenture that are defined by
the TIA, defined by TIA reference to another statute or defined
by the Commission rule under the TIA have the meanings so
assigned to them therein.

SECTION 1.04.   RULES OF CONSTRUCTION.

      Unless the context otherwise requires:

      (1)  a term has the meaning assigned to it herein;


                               17


      (2) an accounting term not otherwise defined herein has
          the meaning assigned to it in accordance with GAAP;

      (3)  "or" is not exclusive;

      (4) words in the singular include the plural, and in
          the plural include the singular;

      (5)  provisions apply to successive events and transactions; and

      (6)  references to sections of or rules under the
           Securities Act shall be deemed to include substitute,
           replacement or successor sections or rules adopted by
           the Commission from time to time.


                             ARTICLE 2
                             THE NOTES

SECTION 2.01.   FORM AND DATING.

      The Notes and the Trustee's certificate of authentication
shall be substantially in the form of EXHIBIT A-1 or EXHIBIT A-2
attached hereto. The Notes may have notations, legends or
endorsements required by law, stock exchange rule or usage. Each
Note shall be dated the date of its authentication. The Notes
initially shall be issued in denominations of $1,000 and integral
multiples thereof.

      The terms and provisions contained in the Notes shall
constitute, and are hereby expressly made, a part of this
Indenture and the Company and the Trustee, by their execution and
delivery of this Indenture, expressly agree to such terms and
provisions and to be bound thereby.

           (a) Global Notes. Notes offered and sold to QIBs in
reliance on Rule 144A shall be issued initially in the form of
Rule 144A Global Notes, which shall be deposited on behalf of the
purchasers of the Notes represented thereby with a custodian of
the Depositary, and registered in the name of the Depositary or a
nominee of the Depositary, duly executed by the Company and
authenticated by the Trustee as hereinafter provided. The
aggregate principal amount of the Rule 144A Global Notes may from
time to time be increased or decreased by adjustments made on the
records of the Trustee and the Depositary or its nominee as
hereinafter provided.

      Notes offered and sold in reliance on Regulation S shall be
issued initially in the form of the Regulation S Temporary Global
Note, which shall be deposited on behalf of the purchasers of the
Notes represented thereby with the Trustee, as custodian for the
Depositary, and registered in the name of the Depositary or the
nominee of the Depositary for the accounts of designated agents
holding on behalf of Euroclear or Cedel, duly executed by the
Company and authenticated by the Trustee as hereinafter provided.
The "40-day restricted period" (as defined in Regulation S) shall
be terminated upon the receipt by the Trustee of (i) a written
certificate from the Depositary, together with copies of
certificates from Euroclear and Cedel certifying that they have
received certification of non-United States beneficial ownership
of 100% of the aggregate principal amount of the Regulation S
Temporary Global Notes (except to the extent of any beneficial
owners thereof who acquired an interest therein pursuant to
another exemption from registration under the Securities Act and
who will take delivery of a beneficial ownership interest in a
Rule 144A Global Note, all as contemplated by Section 2.06(a)(ii)
hereof), and (ii) an Officers' Certificate from the Company
certifying as to the same matters covered in clause (i) above.

                               18


Following the termination of the 40-day restricted period,
beneficial interests in the Regulation S Temporary Global Note
shall be exchanged for beneficial interests in Regulation S
Permanent Global Notes pursuant to the Applicable Procedures.
Simultaneously with the authentication of Regulation S Permanent
Global Notes, the Trustee shall cancel the Regulation S Temporary
Global Notes. The aggregate principal amount of the Regulation S
Temporary Global Notes and the Regulation S Permanent Global
Notes may from time to time be increased or decreased by
adjustments made on the records of the Trustee and the Depositary
or its nominee, as the case may be, in connection with transfers
of interest as hereinafter provided.

      Each Global Note shall represent such of the outstanding
Notes as shall be specified therein and each shall provide that
it shall represent the aggregate amount of outstanding Notes from
time to time endorsed thereon and that the aggregate amount of
outstanding Notes represented thereby may from time to time be
reduced or increased, as appropriate, to reflect exchanges,
redemptions and transfers of interests. Any endorsement of a
Global Note to reflect the amount of any increase or decrease in
the amount of outstanding Notes represented thereby shall be made
by the Trustee or the Note Custodian, at the direction of the
Trustee, in accordance with instructions given by the Holder
thereof as required by Section 2.06 hereof.

      The provisions of the "Operating Procedures of the
Euroclear System" and "Terms and Conditions Governing Use of
Euroclear" and the "Management Regulations" and "Instructions to
Participants" of Cedel shall be applicable to interests in the
Regulation S Temporary Global Notes and the Regulation S
Permanent Global Notes that are held by Participants through
Euroclear or Cedel. The Trustee shall have no obligation to
notify Holders of any such procedures or to monitor or enforce
compliance with the same.

      Except as set forth in Section 2.06 hereof, the Global
Notes may be transferred, in whole and not in part, only to
another nominee of the Depositary or to a successor of the
Depositary or its nominee.

           (b) Book-Entry Provisions. This Section 2.01(b) shall
apply to Rule 144A Global Notes and Regulation S Permanent Global
Notes deposited with or on behalf of the Depositary.

      The Company shall execute and the Trustee shall, in
accordance with this Section 2.01(b) and Section 2.02,
authenticate and deliver the Global Notes that (i) shall be
registered in the name of the Depositary or the nominee of the
Depositary and (ii) shall be delivered by the Trustee to the
Depositary or pursuant to the Depositary's instructions or held
by the Trustee as custodian for the Depositary.

      Participants shall have no rights either under this
Indenture with respect to any Global Note held on their behalf by
the Depositary or by the Note Custodian as custodian for the
Depositary or under such Global Note, and the Depositary may be
treated by the Company, the Trustee and any agent of the Company
or the Trustee as the absolute owner of such Global Note for all
purposes whatsoever. Notwithstanding the foregoing, nothing
herein shall prevent the Company, the Trustee or any agent of the
Company or the Trustee from giving effect to any written
certification, proxy or other authorization furnished by the
Depositary or impair, as between the Depositary and its
Participants, the operation of customary practices of such
Depositary governing the exercise of the rights of an owner of a
beneficial interest in any Global Note.

           (c) Definitive Notes. Notes issued in certificated
form shall be substantially in the form of EXHIBIT A-1 attached
hereto (but without including the text referred to in footnotes 1
and 3 thereto).

                               19


SECTION 2.02.   EXECUTION AND AUTHENTICATION.

      One Officer of the Company shall sign the Notes for the
Company by manual or facsimile signature. The Company's seal
shall be reproduced on the Notes and may be in facsimile form.

      If an Officer of the Company whose signature is on a Note
no longer holds that office at the time the Note is
authenticated, the Note shall nevertheless be valid.

      A Note shall not be valid until authenticated by the manual
signature of the Trustee. The signature of the Trustee shall be
conclusive evidence that the Note has been authenticated under
this Indenture. The form of Trustee's certificate of
authentication to be borne by the Notes shall be substantially as
set forth in EXHIBIT A-1 OR EXHIBIT A-2 hereto.

      The Trustee shall, upon a written order of the Company
signed by an Officer of the Company, authenticate Notes for
original issue up to an aggregate principal amount at maturity of
Notes stated in the Notes. The aggregate principal amount at
maturity of Notes outstanding at any time shall not exceed such
amount except as provided in Section 2.07 hereof.

      The Trustee may appoint an authenticating agent acceptable
to the Company to authenticate Notes. Unless limited by the terms
of such appointment, an authenticating agent may authenticate
Notes whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes
authentication by such agent. An authenticating agent has the
same rights as an Agent to deal with the Company or an Affiliate
of the Company.

SECTION 2.03.   REGISTRAR AND PAYING AGENT.

      The Company shall maintain (i) an office or agency where
Notes may be presented for registration of transfer or for
exchange ("Registrar") and (ii) an office or agency where Notes
may be presented for payment ("Paying Agent"). The Registrar
shall keep a register of the Notes and of their transfer and
exchange. The Company may appoint one or more additional paying
agents. The term "Paying Agent" includes any additional paying
agent. The Company may change any Paying Agent or Registrar
without notice to any Holder. The Company shall notify the
Trustee in writing of the name and address of any Agent not a
party to this Indenture. If the Company fails to appoint or
maintain another entity as Registrar or Paying Agent, the Trustee
shall act as such. The Company or any of its Subsidiaries may act
as Paying Agent or Registrar.

      The Company initially appoints The Depository Trust Company
("DTC") to act as Depositary with respect to the Global Notes.

      The Company initially appoints the Trustee to act as the
Registrar and Paying Agent and to act as Note Custodian with
respect to the Global Notes. The Company initially appoints the
Trustee to act as the Registrar and Paying Agent with respect to
the Definitive Notes.

SECTION 2.04.   PAYING AGENT TO HOLD MONEY IN TRUST.

      The Company shall require each Paying Agent other than the
Trustee to agree in writing that the Paying Agent shall hold in
trust for the benefit of Holders or the Trustee all money held by
the Paying Agent for the payment of principal, premium or
Liquidated Damages, if any, or interest on the Notes, and shall
notify the Trustee of any default by the Company in making any
such payment. While any such

                               20


default continues, the Trustee may require a Paying Agent to pay
all money held by it to the Trustee. The Company at any time may
require a Paying Agent to pay all money held by it to the
Trustee. Upon payment over to the Trustee, the Paying Agent (if
other than the Company or a Subsidiary) shall have no further
liability for the money. If the Company or a Subsidiary acts as
Paying Agent, it shall segregate and hold in a separate trust
fund for the benefit of the Holders all money held by it as
Paying Agent. Upon the occurrence of events specified in Section
6.01 (vii) or (viii) hereof, the Trustee shall serve as Paying
Agent for the Notes.

SECTION 2.05.   HOLDER LISTS.

      The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of
the names and addresses of all Holders and shall otherwise comply
with TIA Section 312(a). If the Trustee is not the Registrar, the
Company shall furnish to the Trustee at least seven (7) Business
Days before each interest payment date and at such other times as
the Trustee may request in writing, a list in such form and as of
such date as the Trustee may reasonably require of the names and
addresses of the Holders of Notes and the Company shall otherwise
comply with TIA Section 312(a).

SECTION 2.06.   TRANSFER AND EXCHANGE.

      (a) Transfer and Exchange of Global Notes. The transfer and
exchange of Global Notes or beneficial interests therein shall be
effected through the Depositary, in accordance with this
Indenture and the procedures of the Depositary therefor, which
shall include restrictions on transfer comparable to those set
forth herein to the extent required by the Securities Act.
Beneficial interests in a Global Note may be transferred to
Persons who take delivery thereof in the form of a beneficial
interest in the same Global Note in accordance with the transfer
restrictions set forth in the legend in subsection (g) of this
Section 2.06. Transfers of beneficial interests in the Global
Notes to Persons required to take delivery thereof in the form of
an interest in another Global Note shall be permitted as follows:

          (i) Rule 144A Global Note to Regulation S Global Note.
              If, at any time, an owner of a beneficial interest in a Rule 
              144A Global Note deposited with the Depositary (or the Trustee 
              as custodian for the Depositary) wishes to transfer its 
              beneficial interest in such Rule 144A Global Note to a Person who
              is required or permitted to take delivery thereof in the form of
              an interest in a Regulation S Global Note, such owner shall, 
              subject to the Applicable Procedures, exchange or cause the 
              exchange of such interest for an equivalent beneficial interest 
              in a Regulation S Global Note as provided in this Section 
              2.06(a)(i).  Upon receipt by the Trustee of (1) instructions 
              given in accordance with the Applicable Procedures from a 
              Participant directing the Trustee to credit or cause to be 
              credited a beneficial interest in the Regulation S Global Note 
              in an amount equal to the beneficial interest in the Rule 144A 
              Global Note to be exchanged, (2) a written order given in 
              accordance with the Applicable Procedures containing information 
              regarding the Participant account of the Depositary and the 
              Euroclear or Cedel account to be credited with such increase, 
              and (3) a certificate in the form of EXHIBIT B-1 hereto given by 
              the owner of such beneficial interest stating that the transfer 
              of such interest has been made in compliance with the transfer
              restrictions applicable to the Global Notes and pursuant to and
              in accordance with Rule 903 or Rule 904 of Regulation S, then the
              Trustee, as Registrar, shall instruct the Depositary to reduce or
              cause to be reduced the aggregate principal amount at maturity of
              the applicable Rule 144A Global Note and to increase or cause to
              be increased the

                               21


              aggregate principal amount at maturity of the
              applicable Regulation S Global Note by the
              principal amount at maturity of the beneficial
              interest in the Rule 144A Global Note to be
              exchanged or transferred, to credit or cause to
              be credited to the account of the Person
              specified in such instructions, a beneficial
              interest in the Regulation S Global Note equal to
              the reduction in the aggregate principal amount
              at maturity of the Rule 144A Global Note, and to
              debit, or cause to be debited, from the account
              of the Person making such exchange or transfer
              the beneficial interest in the Rule 144A Global
              Note that is being exchanged or transferred.

         (ii) Regulation S Global Note to Rule 144A Global
              Note. If, at any time, after the expiration of
              the 40-day restricted period, an owner of a
              beneficial interest in a Regulation S Global Note
              deposited with the Depositary or with the Trustee
              as custodian for the Depositary wishes to
              transfer its beneficial interest in such
              Regulation S Global Note to a Person who is
              required or permitted to take delivery thereof in
              the form of an interest in a Rule 144A Global
              Note, such owner shall, subject to the Applicable
              Procedures, exchange or cause the exchange of
              such interest for an equivalent beneficial
              interest in a Rule 144A Global Note as provided
              in this Section 2.06(a)(ii). Upon receipt by the
              Trustee of (1) instructions from Euroclear or
              Cedel, if applicable, and the Depositary,
              directing the Trustee, as Registrar, to credit or
              cause to be credited a beneficial interest in the
              Rule 144A Global Note equal to the beneficial
              interest in the Regulation S Global Note to be
              exchanged, such instructions to contain
              information regarding the Participant account
              with the Depositary to be credited with such
              increase, (2) a written order given in accordance
              with the Applicable Procedures containing
              information regarding the participant account of
              the Depositary and (3) a certificate in the form
              of EXHIBIT B-2 attached hereto given by the owner
              of such beneficial interest stating (A) if the
              transfer is pursuant to Rule 144A, that the
              Person transferring such interest in a Regulation
              S Global Note reasonably believes that the Person
              acquiring such interest in a Rule 144A Global
              Note is a QIB and is obtaining such beneficial
              interest in a transaction meeting the
              requirements of Rule 144A and any applicable blue
              sky or securities laws of any state of the United
              States, (B) that the transfer complies with the
              requirements of Rule 144 under the Securities
              Act, (C) if the transfer is to an Institutional
              Accredited Investor that such transfer is in
              compliance with the Securities Act and a
              certificate in the form of EXHIBIT C attached
              hereto and, if such transfer is in respect of an
              aggregate principal amount of less than $250,000,
              an Opinion of Counsel acceptable to the Company
              that such transfer is in compliance with the
              Securities Act or (D) if the transfer is pursuant
              to any other exemption from the registration
              requirements of the Securities Act, that the
              transfer of such interest has been made in
              compliance with the transfer restrictions
              applicable to the Global Notes and pursuant to
              and in accordance with the requirements of the
              exemption claimed, such statement to be supported
              by an Opinion of Counsel from the transferee or
              the transferor in form reasonably acceptable to
              the Company and to the Registrar and in each
              case, in accordance with any applicable
              securities laws of any state of the United States
              or any other applicable jurisdiction, then the
              Trustee, as Registrar, shall instruct the
              Depositary to reduce or cause to be reduced the
              aggregate principal amount at maturity of such
              Regulation S Global Note and to increase or cause
              to be

                               22


             increased the aggregate principal amount at
             maturity of the applicable Rule 144A Global Note
             by the principal amount at maturity of the
             beneficial interest in the Regulation S Global
             Note to be exchanged or transferred, and the
             Trustee, as Registrar, shall instruct the
             Depositary, concurrently with such reduction, to
             credit or cause to be credited to the account of
             the Person specified in such instructions a
             beneficial interest in the applicable Rule 144A
             Global Note equal to the reduction in the
             aggregate principal amount at maturity of such
             Regulation S Global Note and to debit or cause to
             be debited from the account of the Person making
             such transfer the beneficial interest in the
             Regulation S Global Note that is being exchanged
             or transferred.

      (b) Transfer and Exchange of Definitive Notes. When
Definitive Notes are presented by a Holder to the Registrar with
a request to register the transfer of the Definitive Notes or to
exchange such Definitive Notes for an equal principal amount of
Definitive Notes of other authorized denominations, the Registrar
shall register the transfer or make the exchange as requested
only if the Definitive Notes are presented or surrendered for
registration of transfer or exchange, are endorsed and contain a
signature guarantee or accompanied by a written instrument of
transfer in form satisfactory to the Registrar duly executed by
such Holder or by his attorney and contains a signature
guarantee, duly authorized in writing and the Registrar received
the following documentation (all of which may be submitted by
facsimile):

           (i)  in the case of Definitive Notes that are Transfer
                Restricted Securities, such request shall be
                accompanied by the following additional
                information and documents, as applicable:

                (A)  if such Transfer Restricted Security is
                     being delivered to the Registrar by a Holder
                     for registration in the name of such Holder,
                     without transfer, or such Transfer
                     Restricted Security is being transferred to
                     the Company or any of its Subsidiaries, a
                     certification to that effect from such
                     Holder (in substantially the form of EXHIBIT
                     B-3 hereto); or

                (B)  if such Transfer Restricted Security is
                     being transferred to a QIB in accordance
                     with Rule 144A under the Securities Act or
                     pursuant to an exemption from registration
                     in accordance with Rule 144 under the
                     Securities Act or pursuant to an effective
                     registration statement under the Securities
                     Act, a certification to that effect from
                     such Holder (in substantially the form of
                     EXHIBIT B-3 hereto); or

                (C)  if such Transfer Restricted Security is
                     being transferred to a Non-U.S. Person in an
                     offshore transaction in accordance with Rule
                     904 under the Securities Act, a
                     certification to that effect from such
                     Holder (in substantially the form of EXHIBIT
                     B-3 hereto);

                (D)  if such Transfer Restricted Security is
                     being transferred to an Institutional
                     Accredited Investor in reliance on an
                     exemption from the registration requirements
                     of the Securities Act other than those
                     listed in subparagraphs (B) and (C) above, a
                     certification to that effect from such
                     Holder (in substantially the form of EXHIBIT
                     B-3 hereto), a certification substantially
                     in the form of EXHIBIT C hereto, and, if
                     such transfer is in respect of an aggregate
                     principal amount of Notes of less than
                     $250,000,

                               23


                     an Opinion of Counsel acceptable to the Company 
                     that such transfer is in compliance with the 
                     Securities Act; or

                (E)  if such Transfer Restricted Security is
                     being transferred in reliance on any other
                     exemption from the registration requirements
                     of the Securities Act, a certification to
                     that effect from such Holder (in
                     substantially the form of EXHIBIT B-3
                     hereto) and an Opinion of Counsel from such
                     Holder or the transferee reasonably
                     acceptable to the Company and to the
                     Registrar to the effect that such transfer
                     is in compliance with the Securities Act.

      (c)   Transfer of a Beneficial Interest in a Rule 144A
            Global Note or Regulation S Permanent Global Note for a
            Definitive Note.

          (i)   Any Person having a beneficial interest in a Rule
                144A Global Note or Regulation S Permanent Global Note may upon
                request, subject to the Applicable Procedures, exchange such
                beneficial interest for a Definitive Note. Upon receipt by the
                Trustee of written instructions or such other form of
                instructions as is customary for the Depositary (or Euroclear 
                or Cedel, if applicable), from the Depositary or its nominee on
                behalf of any Person having a beneficial interest in a 
                Rule 144A Global Note or Regulation S Permanent Global Note, 
                and, in the case of a Transfer Restricted Security, the 
                following additional information and documents (all of which
                 may be submitted by facsimile):

                (A)  if such beneficial interest is being
                     transferred to the Person designated by the
                     Depositary as being the beneficial owner, a
                     certification to that effect from such
                     Person (in substantially the form of EXHIBIT
                     B-4 hereto);

                (B)  if such beneficial interest is being
                     transferred to a QIB in accordance with Rule
                     144A under the Securities Act or pursuant to
                     an exemption from registration in accordance
                     with Rule 144 under the Securities Act or
                     pursuant to an effective registration
                     statement under the Securities Act, a
                     certification to that effect from the
                     transferor (in substantially the form of
                     EXHIBIT B-4 hereto);

                (C)  if such beneficial interest is being
                     transferred to an Institutional Accredited
                     Investor, pursuant to a private placement
                     exemption from the registration requirements
                     of the Securities Act (and based on an
                     opinion of counsel if the Company so
                     requests), a certification to that effect
                     from such Holder (in substantially the form
                     of EXHIBIT B-4 hereto) and a certificate
                     from the applicable transferee (in
                     substantially the form of EXHIBIT C hereto);
                     or

                (D)  if such beneficial interest is being
                     transferred in reliance on any other
                     exemption from the registration requirements
                     of the Securities Act, a certification to
                     that effect from the transferor (in
                     substantially the form of EXHIBIT B-4
                     hereto) and an Opinion of Counsel from the
                     transferee or the transferor reasonably
                     acceptable to the Company and to the
                     Registrar to the effect that such transfer
                     is in compliance with the

                               24


                     Securities Act, in which case the Trustee or
                     the Note Custodian, at the direction of the
                     Trustee, shall, in accordance with the
                     standing instructions and procedures
                     existing between the Depositary and the Note
                     Custodian, cause the aggregate principal
                     amount of Rule 144A Global Notes or
                     Regulation S Permanent Global Notes, as
                     applicable, to be reduced accordingly and,
                     following such reduction, the Company shall
                     execute and, the Trustee shall authenticate
                     and deliver to the transferee a Definitive
                     Note in the appropriate principal amount.

           (ii) Definitive Notes issued in exchange for a
                beneficial interest in a Rule 144A Global Note or
                Regulation S Permanent Global Note, as
                applicable, pursuant to this Section 2.06(c)
                shall be registered in such names and in such
                authorized denominations as the Depositary,
                pursuant to instructions from its direct or
                Indirect Participants or otherwise, shall
                instruct the Trustee. The Trustee shall deliver
                such Definitive Notes to the Persons in whose
                names such Notes are so registered. Following any
                such issuance of Definitive Notes, the Trustee,
                as Registrar, shall instruct the Depositary to
                reduce or cause to be reduced the aggregate
                principal amount at maturity of the applicable
                Global Note to reflect the transfer.

      (d) Restrictions on Transfer and Exchange of Global Notes.
Notwithstanding any other provision of this Indenture (other than
the provisions set forth in subsection (g) of this Section 2.06),
a Global Note may not be transferred as a whole except by the
Depositary to a nominee of the Depositary or by a nominee of the
Depositary to the Depositary or another nominee of the Depositary
or by the Depositary or any such nominee to a successor
Depositary or a nominee of such successor Depositary.

      (e) Transfer and Exchange of a Definitive Note for
Beneficial Interests in a Global Note. A Definitive Note may not
be transferred or exchanged for a beneficial interest in a Global
Note.

      (f) Authentication of Definitive Notes in Absence of
Depositary. If at any time:

           (i)  the Depositary for the Notes notifies the Company
                that the Depositary is unwilling or unable to
                continue as Depositary for the Global Notes and a
                successor Depositary for the Global Notes is not
                appointed by the Company within 90 days after
                delivery of such notice; or

           (ii) the Company, at its sole discretion, notifies the
                Trustee in writing that it elects to cause the
                issuance of Definitive Notes under this
                Indenture,

then the Company shall execute, and the Trustee shall, upon
receipt of an authentication order in accordance with Section
2.02 hereof, authenticate and deliver, Definitive Notes in an
aggregate principal amount equal to the principal amount of the
Global Notes in exchange for such Global Notes.

      (g)  Legends.

           (i)  Except as permitted by the following paragraphs
                (ii), (iii) and (iv), each Note certificate
                evidencing Global Notes and Definitive Notes (and
                all Notes issued in exchange therefor or
                substitution thereof) shall bear the legend (the
                "Private Placement Legend") in substantially the
                following form:

                               25


                     "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED
                     HEREBY WAS ORIGINALLY ISSUED IN A
                     TRANSACTION EXEMPT FROM REGISTRATION UNDER
                     SECTION 5 OF THE UNITED STATES SECURITIES
                     ACT OF 1933, AS AMENDED (THE "SECURITIES
                     ACT"), AND THE SECURITY EVIDENCED HEREBY MAY
                     NOT BE OFFERED, SOLD OR OTHERWISE
                     TRANSFERRED IN THE ABSENCE OF SUCH
                     REGISTRATION OR AN APPLICABLE EXEMPTION
                     THEREFROM. EACH PURCHASER OF THE SECURITY
                     EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE
                     SELLER MAY BE RELYING ON THE EXEMPTION FROM
                     THE PROVISIONS OF SECTION 5 OF THE
                     SECURITIES ACT PROVIDED BY RULE 144A
                     THEREUNDER. THE HOLDER OF THE SECURITY
                     EVIDENCED HEREBY AGREES FOR THE BENEFIT OF
                     THE COMPANY THAT (A) SUCH SECURITY MAY BE
                     RESOLD, PLEDGED OR OTHERWISE TRANSFERRED,
                     ONLY (1)(a) INSIDE THE UNITED STATES TO A
                     PERSON WHO THE SELLER REASONABLY BELIEVES IS
                     A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED
                     IN RULE 144A UNDER THE SECURITIES ACT), IN A
                     TRANSACTION MEETING THE REQUIREMENTS OF RULE
                     144A, (b) IN A TRANSACTION MEETING THE
                     REQUIREMENTS OF RULE 144 UNDER THE
                     SECURITIES ACT, (c) OUTSIDE THE UNITED
                     STATES TO A FOREIGN PERSON IN A TRANSACTION
                     MEETING THE REQUIREMENTS OF RULE 904 UNDER
                     THE SECURITIES ACT, (d) TO AN INSTITUTIONAL
                     "ACCREDITED INVESTOR" (AS DEFINED IN RULE
                     501(a)(1), (2), (3) OR (7) OF THE SECURITIES
                     ACT (AN "INSTITUTIONAL ACCREDITED
                     INVESTOR"), THAT PRIOR TO SUCH TRANSFER,
                     FURNISHED THE TRUSTEE A SIGNED LETTER
                     CONTAINING CERTAIN REPRESENTATIONS AND
                     AGREEMENTS (THE FORM OF WHICH CAN BE
                     OBTAINED FROM THE TRUSTEE) AND, IF SUCH
                     TRANSFER IS IN RESPECT OF AN AGGREGATE
                     PRINCIPAL AMOUNT OF SECURITIES LESS THAN
                     $250,000, AN OPINION OF COUNSEL THAT SUCH
                     TRANSFER IS IN COMPLIANCE WITH THE
                     SECURITIES ACT, OR (e) IN ACCORDANCE WITH
                     ANOTHER EXEMPTION FROM THE REGISTRATION
                     REQUIREMENTS OF THE SECURITIES ACT (AND, IN
                     THE CASE OF CLAUSE (b), (c), (d) OR (e),
                     BASED UPON AN OPINION OF COUNSEL IF THE
                     COMPANY SO REQUESTS), (2) TO THE COMPANY OR
                     (3) PURSUANT TO AN EFFECTIVE REGISTRATION
                     STATEMENT AND, IN EACH CASE, IN ACCORDANCE
                     WITH ANY APPLICABLE SECURITIES LAWS OF ANY
                     STATE OF THE UNITED STATES OR ANY OTHER
                     APPLICABLE JURISDICTION AND (B) THE HOLDER
                     WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED
                     TO, NOTIFY ANY PURCHASER FROM IT OF THE
                     SECURITY EVIDENCED HEREBY OF THE RESALE
                     RESTRICTIONS SET FORTH IN (A) ABOVE."

           (ii) Upon any sale or transfer of a Transfer
                Restricted Security (including any Transfer
                Restricted Security represented by a Global Note)
                pursuant to Rule 144 under the Securities Act or
                pursuant to an effective registration statement
                under the Securities Act:

                (A)  in the case of any Transfer Restricted
                     Security that is a Definitive Note, the
                     Registrar shall permit the Holder thereof to
                     exchange such Transfer Restricted Security
                     for a Definitive Note that does not bear the
                     legend set forth in (i) above and rescind
                     any restriction on the transfer of such

                               26


                     Transfer Restricted Security upon receipt of
                     a certification from the transferring holder
                     substantially in the form of EXHIBIT B-4
                     hereto; and

                (B)  in the case of any Transfer Restricted 
                     Security represented by a Global
                     Note, such Transfer Restricted Security 
                     shall not be required to bear the legend set 
                     forth in (i) above, but shall continue to
                     be subject to the provisions of Section
                     2.06(a) and (b) hereof; provided, however, 
                     that with respect to any request for an exchange
                     of a Transfer Restricted Security that
                     is represented by a Global Note for a
                     Definitive Note that does not bear
                     the legend set forth in (i) above, which 
                     request is made in reliance upon Rule 144, 
                     the Holder thereof shall certify in writing
                     to the Registrar that such request is
                     being made pursuant to Rule 144 (such
                     certification to be substantially in 
                     the form of EXHIBIT B-4 hereto).
                                                                    
          (iii) Upon any sale or transfer of a Transfer
                Restricted Security (including any Transfer
                Restricted Security represented by a Global Note)
                in reliance on any exemption from the
                registration requirements of the Securities Act
                (other than exemptions pursuant to Rule 144A or
                Rule 144 under the Securities Act) in which the
                Holder or the transferee provides an Opinion of
                Counsel to the Company and the Registrar in form
                and substance reasonably acceptable to the
                Company and the Registrar (which Opinion of
                Counsel shall also state that the transfer
                restrictions contained in the legend are no
                longer applicable):

                (A)  in the case of any Transfer Restricted
                     Security that is a Definitive Note, the
                     Registrar shall permit the Holder thereof to
                     exchange such Transfer Restricted Security
                     for a Definitive Note that does not bear the
                     legend set forth in (i) above and rescind
                     any restriction on the transfer of such
                     Transfer Restricted Security; and

                (B)  in the case of any Transfer Restricted
                     Security represented by a Global Note, such
                     Transfer Restricted Security shall not be
                     required to bear the legend set forth in (i)
                     above, but shall continue to be subject to
                     the provisions of Section 2.06(a) and (b)
                     hereof.

           (iv) Notwithstanding the foregoing, upon the
                consummation of the Exchange Offer in accordance
                with the Registration Rights Agreement, the
                Company shall issue and, upon receipt of an
                authentication order in accordance with Section
                2.02 hereof, the Trustee shall authenticate (i)
                one or more Unrestricted Global Notes in
                aggregate principal amount equal to the principal
                amount of the Restricted Beneficial Interests
                tendered for acceptance by persons that are not
                (x) broker-dealers, (y) Persons participating in
                the distribution of the Notes or (z) Persons who
                are affiliates (as defined in Rule 144) of the
                Company and accepted for exchange in the Exchange
                Offer and (ii) Definitive Notes that do not bear
                the Private Placement Legend in an aggregate
                principal amount equal to the principal amount of
                the Restricted Definitive Notes accepted for
                exchange in the Exchange Offer. The Trustee shall
                be entitled to rely upon the authentication order
                when authenticating the Notes without any
                obligation to verify that the restrictions in the
                preceding sentence have been complied with.
                Concurrently with the issuance of such Notes, the
                Trustee shall cause the aggregate principal
                amount of the

                               27


                applicable Restricted Global Notes to be reduced
                accordingly and the Company shall execute and the
                Trustee shall authenticate and deliver to the
                Persons designated by the Holders of Definitive
                Notes so accepted Definitive Notes in the
                appropriate principal amount.

           (v)  Original Issue Discount Legend.  Each Note shall
                bear a legend in substantially the following form:

                "FOR PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF
                THE INTERNAL REVENUE CODE OF 1986, AS AMENDED,
                THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE
                DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT OF
                THIS SECURITY, THE ISSUE PRICE IS $529.98, THE
                AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $470.02, THE
                ISSUE DATE IS OCTOBER 17, 1997 AND THE YIELD TO
                MATURITY IS 13.125% PER ANNUM."

      (h) Cancellation and/or Adjustment of Global Notes. At such
time as all beneficial interests in Global Notes have been
exchanged for Definitive Notes, redeemed, repurchased or
cancelled, all Global Notes shall be returned to or retained and
cancelled by the Trustee in accordance with Section 2.11 hereof.
At any time prior to such cancellation, if any beneficial
interest in a Global Note is exchanged for Definitive Notes,
redeemed, repurchased or cancelled, the principal amount of Notes
represented by such Global Note shall be reduced accordingly and
an endorsement may be made on such Global Note, by the Trustee or
the Notes Custodian, at the direction of the Trustee, to reflect
such reduction but any failure to make such an endorsement shall
not affect the reductions.

      (i)  General Provisions Relating to Transfers and Exchanges.

           (i)  To permit registrations of transfers and
                exchanges, the Company shall execute and the
                Trustee shall authenticate Global Notes and
                Definitive Notes at the Registrar's request.

           (ii) No service charge shall be made to a Holder for
                any registration of transfer or exchange, but the
                Company may require payment of a sum sufficient
                to cover any stamp or transfer tax or similar
                governmental charge payable in connection
                therewith (other than any such stamp or transfer
                taxes or similar governmental charge payable upon
                exchange or transfer pursuant to Sections 2.10,
                3.06, 4.10, 4.13 and 9.05 hereto).

          (iii) All Global Notes and Definitive Notes issued upon
                any registration of transfer or exchange of
                Global Notes or Definitive Notes shall be the
                valid obligations of the Company, evidencing the
                same debt, and entitled to the same benefits
                under this Indenture, as the Global Notes or
                Definitive Notes surrendered upon such
                registration of transfer or exchange.

           (iv) The Registrar shall not be required: (A) to
                issue, to register the transfer of or to exchange
                Notes during a period beginning at the opening of
                fifteen (15) Business Days before the day of any
                selection of Notes for redemption under Section
                3.02 hereof and ending at the close of business
                on the day of selection, (B) to register the
                transfer of or to exchange any Note so selected
                for redemption

                               28


                in whole or in part, except the unredeemed
                portion of any Note being redeemed in part, or
                (C) to register the transfer of or to exchange a
                Note between a record date and the next
                succeeding interest payment date.

            (v) Prior to due presentment for the registration of
                a transfer of any Note, the Trustee, any Agent
                and the Company may deem and treat the Person in
                whose name any Note is registered as the absolute
                owner of such Note for the purpose of receiving
                payment of principal of and interest on such
                Notes and for all other purposes, and neither the
                Trustee, any Agent nor the Company shall be
                affected by notice to the contrary.

           (vi) The Trustee shall authenticate Global Notes and
                Definitive Notes in accordance with the
                provisions of Section 2.02 hereof.

SECTION 2.07.   REPLACEMENT NOTES.

      If any mutilated Note is surrendered to the Trustee, or the
Company and the Trustee receives evidence to their satisfaction
of the destruction, loss or theft of any Note, the Company shall
issue and the Trustee, upon the written order of the Company
signed by an Officer of the Company, shall authenticate a
replacement Note if the Trustee's requirements are met. If
required by the Trustee or the Company, an indemnity bond must be
supplied by the Holder that is sufficient in the judgment of the
Trustee and the Company to protect the Company, the Trustee, any
Agent and any authenticating agent from any loss that any of them
may suffer if a Note is replaced. The Company and the Trustee may
charge for their expenses in replacing a Note.

      Every replacement Note is an additional obligation of the
Company and shall be entitled to all of the benefits of this
Indenture equally and proportionately with all other Notes duly
issued hereunder.

SECTION 2.08.   OUTSTANDING NOTES.

      The Notes outstanding at any time are all the Notes
authenticated by the Trustee except for those cancelled by it,
those delivered to it for cancellation, those reductions in the
interest in a Global Note effected by the Trustee in accordance
with the provisions hereof, and those described in this Section
2.08 as not outstanding. Except as set forth in Section 2.09
hereof, a Note does not cease to be outstanding because the
Company or an Affiliate of the Company holds the Note.

      If a Note is replaced pursuant to Section 2.07 hereof, it
ceases to be outstanding unless the Trustee receives proof
satisfactory to it that the replaced Note is held by a bona fide
purchaser.

      If the principal amount of any Note is considered paid
under Section 4.01 hereof, it ceases to be outstanding and
interest on it ceases to accrue.

      If the Paying Agent (other than the Company, a Subsidiary
or an Affiliate of any thereof) holds, on a redemption date or
maturity date, money sufficient to pay Notes payable on that
date, then on and after that date such Notes shall be deemed to
be no longer outstanding and shall cease to accrue interest.

                               29


SECTION 2.09.   TREASURY NOTES.

      In determining whether the Holders of the required
principal amount of Notes have concurred in any direction, waiver
or consent, Notes owned by the Company, or by any Affiliate of
the Company shall be considered as though not outstanding, except
that for the purposes of determining whether the Trustee shall be
protected in relying on any such direction, waiver or consent,
only Notes shown on the Trustee's register as being owned shall
be so disregarded. Notwithstanding the foregoing, Notes that are
to be acquired by the Company or an Affiliate of the Company
pursuant to an exchange offer, tender offer or other agreement
shall not be deemed to be owned by such entity until legal title
to such Notes passes to such entity.

SECTION 2.10.   TEMPORARY NOTES.

      Until Definitive Notes are ready for delivery, the Company
may prepare and the Trustee shall authenticate temporary Notes
upon a written order of the Company signed by an Officer of the
Company. Temporary Notes shall be substantially in the form of
Definitive Notes but may have variations that the Company
considers appropriate for temporary Notes. Without unreasonable
delay, the Company shall prepare and the Trustee shall upon
receipt of a written order of the Company signed by an Officer
authenticate Definitive Notes in exchange for temporary Notes.

      Holders of temporary Notes shall be entitled to all of the
benefits of this Indenture.

SECTION 2.11.   CANCELLATION.

      The Company at any time may deliver to the Trustee for
cancellation any Notes previously authenticated and delivered
hereunder or which the Company may have acquired in any manner
whatsoever, and all Notes so delivered shall be promptly
cancelled by the Trustee. All Notes surrendered for registration
of transfer, exchange or payment, if surrendered to any Person
other than the Trustee, shall be delivered to the Trustee. The
Trustee and no one else shall cancel all Notes surrendered for
registration of transfer, exchange, payment, replacement or
cancellation. Subject to Section 2.07 hereof, the Company may not
issue new Notes to replace Notes that it has redeemed or paid or
that have been delivered to the Trustee for cancellation. All
cancelled Notes held by the Trustee shall be destroyed and
certification of their destruction delivered to the Company,
unless by a written order, signed by an Officer of the Company,
the Company shall direct that cancelled Notes be returned to it.

SECTION 2.12.   DEFAULTED INTEREST.

      If the Company defaults in a payment of interest on the
Notes, it shall pay the defaulted interest in any lawful manner
plus, to the extent lawful, interest payable on the defaulted
interest, to the Persons who are Holders on a subsequent special
record date, which date shall be at the earliest practicable date
but in all events at least five (5) Business Days prior to the
payment date, in each case at the rate provided in the Notes and
in Section 4.01 hereof. The Company shall fix or cause to be
fixed each such special record date and payment date, and shall
promptly thereafter, notify the Trustee of any such date. At
least fifteen (15) days before the special record date, the
Company (or the Trustee, in the name and at the expense of the
Company) shall mail or cause to be mailed to Holders a notice
that states the special record date, the related payment date and
the amount of such interest to be paid.

                               30


SECTION 2.13.   RECORD DATE.

      The record date for purposes of determining the identity of
Holders of the Notes entitled to vote or consent to any action by
vote or consent authorized or permitted under this Indenture
shall be determined as provided for in TIA Section 316 (c).

SECTION 2.14.   COMPUTATION OF INTEREST.

      Interest on the Notes shall be computed on the basis of a
360-day year comprised of twelve 30-day months.

SECTION 2.15.   CUSIP NUMBER.

      The Company in issuing the Notes may use a "CUSIP" number,
and if it does so, the Trustee shall use the CUSIP number in
notices of redemption or exchange as a convenience to Holders;
provided that any such notice may state that no representation is
made as to the correctness or accuracy of the CUSIP number
printed in the notice or on the Notes and that reliance may be
placed only on the other identification numbers printed on the
Notes. The Company shall promptly notify the Trustee of any
change in the CUSIP number.


                             ARTICLE 3
                     REDEMPTION AND PREPAYMENT

SECTION 3.01.   NOTICES TO TRUSTEE.

      If the Company elects to redeem Notes pursuant to the
optional redemption provisions of Section 3.07 hereof, it shall
furnish to the Trustee, at least 45 days but not more than 60
days before a redemption date (unless a shorter period is
acceptable to the Trustee) an Officers' Certificate setting forth
(i) the Section of this Indenture pursuant to which the
redemption shall occur, (ii) the redemption date, (iii) the
principal amount of Notes to be redeemed and (iv) the redemption
price.

      If the Company is required to make an offer to purchase
Notes pursuant to Section 4.10 or 4.13 hereof, it shall furnish
to the Trustee, at least 45 days before the scheduled purchase
date, an Officers' Certificate setting forth (i) the section of
this Indenture pursuant to which the offer to purchase shall
occur, (ii) the terms of the offer, (iii) the principal amount of
Notes to be purchased, (iv) the purchase price, (v) the purchase
date and (vi) and further setting forth a statement to the effect
that (a) the Company or one its Subsidiaries has affected an
Asset Sale and there are Excess Proceeds aggregating more than
$10.0 million or (b) a Change of Control has occurred, as
applicable.

SECTION 3.02.   SELECTION OF NOTES TO BE REDEEMED OR PURCHASED.

      If less than all of the Notes are to be redeemed at any
time, selection of Notes for redemption will be made by the
Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are
listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and
appropriate; provided that no Notes of $1,000 or less shall be
redeemed in part. Notices of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed at its
registered address. Notices of redemption may not be conditional.
If any Note is to be redeemed in part

                               31


only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed.
A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. Notes called for redemption
become due on the date fixed for redemption. On and after the
redemption date, interest and Liquidated Damages cease to accrue
on Notes or portions of them called for redemption unless the
Company defaults in making the redemption payment.

SECTION 3.03.   NOTICE OF REDEMPTION.

      At least 30 days but not more than 60 days before a
redemption date, the Company shall mail or cause to be mailed by
first class mail, a notice of redemption to each Holder whose
Notes are to be redeemed.

      The notice shall identify the Notes to be redeemed and
shall state:

           (1)  the redemption date;

           (2)  the redemption price for the Notes and accrued interest,
                 and Liquidated Damages, if any;

           (3)  if any Note is being redeemed in part, the
                portion of the principal amount of such Notes to
                be redeemed and that, after the redemption date,
                upon surrender of such Note, a new Note or Notes
                in principal amount equal to the unredeemed
                portion shall be issued upon surrender of the
                original Note;

           (4)  the name and address of the Paying Agent;

           (5)  that Notes called for redemption must be surrendered to 
                the Paying Agent to collect the redemption price;

           (6)  that, unless the Company defaults in making such
                redemption payment, interest and Liquidated
                Damages, if any, on Notes called for redemption
                ceases to accrue on and after the redemption
                date;

           (7)  the paragraph of the Notes and/or Section of this
                Indenture pursuant to which the Notes called for
                redemption are being redeemed; and

           (8)  that no representation is made as to the
                correctness or accuracy of the CUSIP number, if
                any, listed in such notice or printed on the
                Notes.

      At the Company's request, the Trustee shall give the notice
of redemption in the Company's name and at the Company's expense;
provided, however, that the Company shall have delivered to the
Trustee, at least 45 days prior to the redemption date (or such
shorter period as shall be acceptable to the Trustee), an
Officers' Certificate requesting that the Trustee give such
notice and setting forth the information to be stated in the
notice as provided in the preceding paragraph. The notice mailed
in the manner herein provided shall be conclusively presumed to
have been duly given whether or not the Holder receives such
notice. In any case, failure to give such notice by mail or any
defect in the notice to the Holder of any Note shall not affect
the validity of the proceeding for the redemption of any other
Note.

                               32


SECTION 3.04.   EFFECT OF NOTICE OF REDEMPTION.

      Once notice of redemption is mailed in accordance with
Section 3.03 hereof, Notes called for redemption become
irrevocably due and payable on the redemption date at the
redemption price plus accrued and unpaid interest and Liquidated
Damages, if any, to such date. A notice of redemption may not be
conditional.

SECTION 3.05.   DEPOSIT OF REDEMPTION OR PURCHASE PRICE.

      On or before 10:00 a.m. (New York City time) on each
redemption date or the date on which Notes must be accepted for
purchase pursuant to Section 4.10 or 4.13, the Company shall
deposit with the Trustee or with the Paying Agent money
sufficient to pay the redemption price of and accrued and unpaid
interest and Liquidated Damages, if any, on all Notes to be
redeemed or purchased on that date. The Trustee or the Paying
Agent shall promptly return to the Company upon its written
request any money deposited with the Trustee or the Paying Agent
by the Company in excess of the amounts necessary to pay the
redemption price of (including any applicable premium), accrued
interest and Liquidated Damages, if any, on all Notes to be
redeemed or purchased.

      If Notes called for redemption or tendered in an Asset Sale
Offer or Change of Control Offer are paid or if the Company has
deposited with the Trustee or Paying Agent money sufficient to
pay the redemption or purchase price of, unpaid and accrued
interest and Liquidated Damages, if any, on all Notes to be
redeemed or purchased, on and after the redemption or purchase
date interest and Liquidated Damages, if any, shall cease to
accrue on the Notes or the portions of Notes called for
redemption or tendered and not withdrawn in an Asset Sale Offer
or Change of Control Offer (regardless of whether certificates
for such securities are actually surrendered). If a Note is
redeemed or purchased on or after an interest record date but on
or prior to the related interest payment date, then any accrued
and unpaid interest and Liquidated Damages, if any, shall be paid
to the Person in whose name such Note was registered at the close
of business on such record date. If any Note called for
redemption shall not be so paid upon surrender for redemption
because of the failure of the Company to comply with the
preceding paragraph, interest shall be paid on the unpaid
principal and Liquidated Damages, if any, from the redemption or
purchase date until such principal and Liquidated Dames, if any,
is paid, and to the extent lawful on any interest not paid on
such unpaid principal, in each case, at the rate provided in the
Notes and in Section 4.01 hereof.

SECTION 3.06.   NOTES REDEEMED IN PART.

      Upon surrender of a Note that is redeemed in part, the
Company shall issue and, upon the Company's written request, the
Trustee shall authenticate for the Holder at the expense of the
Company a new Note equal in principal amount to the unredeemed
portion of the Note surrendered.

SECTION 3.07.   OPTIONAL REDEMPTION.

      (a) Except as set forth in the next paragraph, the Notes
will not be redeemable at the Company's option prior to October
15, 2002. Thereafter, the Notes will be subject to redemption at
any time at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest and Liquidated Damages
thereon, if any, to the applicable redemption date, if redeemed
during the twelve-month period beginning on October 15 of the
years indicated below:

                               33


           Year                                     Percentage

           2002 ....................................   106.563%
           2003 ....................................   104.375%
           2004 ....................................   102.188%
           2005 and thereafter......................   100.000%

      (b) Notwithstanding the foregoing, at any time on or prior
to October 15, 2000, the Company may (but shall not have the
obligation to) redeem, on one or more occasions, up to an
aggregate of 35% of the principal amount of Notes originally
issued at a redemption price equal to 113.125% of the Accreted
Value thereof, plus Liquidated Damages thereon, if any, to the
redemption date, with the net cash proceeds of one or more Equity
Offerings; provided that at least 65% of the aggregate principal
amount at maturity of the Notes originally issued remain
outstanding immediately after the occurrence of such redemption;
and provided further, that such redemption shall occur within 90
days of the date of the closing of such Equity Offering.

SECTION 3.08.   MANDATORY REDEMPTION.

      Except as set forth under Sections 3.09, 4.10 and 4.13
hereof, the Company shall not be required to make mandatory
redemption or sinking fund payments with respect to the Notes.

SECTION 3.09.   REPURCHASE OFFERS.

      In the event that the Company shall be required to commence
an offer to all Holders to repurchase Notes (a "Repurchase
Offer") pursuant to Section 4.10 hereof, an "Asset Sale," or
pursuant to Section 4.13 hereof, a "Change of Control Offer," the
Company shall follow the procedures specified below.

      A Repurchase Offer shall commence no earlier than 30 days
and no later than 60 days after a Change of Control (unless the
Company is not required to make such offer pursuant to Section
4.13(c) hereof) or an Asset Sale Offer Triggering Event (as
defined below), as the case may be, and remain open for a period
of twenty (20) Business Days following its commencement and no
longer, except to the extent that a longer period is required by
applicable law (the "Offer Period"). No later than five (5)
Business Days after the termination of the Offer Period (the
"Purchase Date"), the Company shall purchase the principal amount
of Notes required to be purchased pursuant to Section 4.10
hereof, in the case of an Asset Sale Offer, or 4.13 hereof, in
the case of a Change of Control Offer (the "Offer Amount") or, if
less than the Offer Amount has been tendered, all Notes tendered
in response to the Repurchase Offer. Payment for any Notes so
purchased shall be made in the same manner as interest payments
are made.

      If the Purchase Date is on or after an interest record date
and on or before the related interest payment date, any accrued
and unpaid interest and Liquidated Damages, if any, shall be paid
to the Person in whose name a Note is registered at the close of
business on such record date, and no additional interest or
Liquidated Damages, if any, shall be payable to Holders who
tender Notes pursuant to the Repurchase Offer.

      Upon the commencement of a Repurchase Offer, the Company
shall send, by first class mail, a notice to the Trustee and each
of the Holders, with a copy to the Trustee. The notice shall
contain all instructions and materials necessary to enable such
Holders to tender Notes pursuant to such Repurchase

                               34


Offer. The Repurchase Offer shall be made to all Holders. The
notice, which shall govern the terms of the Repurchase Offer,
shall describe the transaction or transactions that constitute
the Change of Control or Asset Sale Offer Triggering Event as the
case may be and shall state:

      (a) that the Repurchase Offer is being made pursuant to
      this Section 3.09 and Section 4.10 or 4.13 hereof, as the
      case may be, and the length of time the Repurchase Offer
      shall remain open;

      (b)  the Offer Amount, the purchase price and the Purchase Date;

      (c)  that any Note not tendered or accepted for payment shall 
      continue to accrue interest;

      (d) that, unless the Company defaults in making such
      payment, any Note accepted for payment pursuant to the
      Repurchase Offer shall cease to accrue interest and
      Liquidated Damages, if any, after the Purchase Date;

      (e) that Holders electing to have a Note purchased pursuant
      to a Repurchase Offer shall be required to surrender the
      Note, with the form entitled "Option of Holder to Elect
      Purchase" on the reverse of the Note, duly completed, or
      transfer by book-entry transfer, to the Company, the
      Depositary, or the Paying Agent at the address specified in
      the notice not later than the close of business on the last
      day of the Offer Period;

      (f) that Holders shall be entitled to withdraw their
      election if the Company, the Depositary or the Paying
      Agent, as the case may be, receives, not later than the
      expiration of the Offer Period, a telegram, telex,
      facsimile transmission or letter setting forth the name of
      the Holder, the principal amount of the Note the Holder
      delivered for purchase and a statement that such Holder is
      withdrawing his election to have such Note purchased;

      (g) that, if the aggregate principal amount of Notes
      surrendered by Holders exceeds the Offer Amount, the
      Company shall select the Notes to be purchased on a pro
      rata basis (with such adjustments as may be deemed
      appropriate by the Company so that only Notes in
      denominations of $1,000, or integral multiples thereof,
      shall be purchased); and

      (h) that Holders whose Notes were purchased only in part
      shall be issued new Notes equal in principal amount to the
      unpurchased portion of the Notes surrendered (or
      transferred by book-entry transfer).

      On or before 10:00 a.m. (New York City time) on each
Purchase Date, the Company shall irrevocably deposit with the
Trustee or Paying Agent in immediately available funds the
aggregate purchase price with respect to a principal amount of
Notes equal to the Offer Amount, together with accrued and unpaid
interest and Liquidated Damages, if any, thereon, to be held for
payment in accordance with the terms of this Section 3.09. On the
Purchase Date, the Company shall, to the extent lawful, (i)
accept for payment, on a pro rata basis to the extent necessary,
the Offer Amount of Notes or portions thereof tendered pursuant
to the Repurchase Offer, or if less than the Offer Amount has
been tendered, all Notes tendered, (ii) deliver or cause the
Paying Agent or depository, as the case may be, to deliver to the
Trustee Notes so accepted and (iii) deliver to the Trustee an
Officers' Certificate stating that such Notes or portions thereof
were accepted for payment by the Company in accordance with the
terms of this Section 3.09. The Company, the Depositary or the
Paying Agent, as the case may be, shall promptly (but in any case
not later than three (3) Business Days after the Purchase Date)
mail or deliver

                               35


to each tendering Holder an amount equal to the purchase price of
the Notes tendered by such Holder and accepted by the Company for
purchase, plus any accrued and unpaid interest and Liquidated
Damages, if any, thereon to the Purchase Date and the Company
shall promptly issue a new Note, and the Trustee, shall
authenticate and mail or deliver such new Note, to such Holder,
equal in principal amount to any unpurchased portion of such
Holder's Notes surrendered. Any Note not so accepted shall be
promptly mailed or delivered by the Company to the Holder
thereof. The Company shall publicly announce in a newspaper of
general circulation or in a press release provided to a
nationally recognized financial wire service the results of the
Repurchase Offer on the Purchase Date.

      Other than as specifically provided in this Section 3.09,
any purchase pursuant to this Section 3.09 shall be made pursuant
to the provisions of Sections 3.01, 3.02, 3.05 and 3.06 hereof.


                             ARTICLE 4
                             COVENANTS

SECTION 4.01.   PAYMENT OF NOTES.

      The Company shall pay or cause to be paid the principal of,
premium, if any, and interest on the Notes on the dates and in
the manner provided in the Notes. The Company shall pay all
Liquidated Damages, if any, in the same manner on the dates and
in the amounts set forth in the Registration Rights Agreement.
Principal, premium and Liquidated Damages, if any, and interest,
shall be considered paid for all purposes hereunder on the date
the Paying Agent if other than the Company or a Subsidiary
thereof holds, as of 10:00 a.m. (New York City time) money
deposited by the Company in immediately available funds and
designated for and sufficient to pay all such principal, premium
and Liquidated Damages, if any, and interest, then due.

      The Company shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue
principal at the rate equal to 1% per annum in excess of the then
applicable interest rate on the Notes to the extent lawful; it
shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue installments of
interest and Liquidated Damages (without regard to any applicable
grace period) at the same rate to the extent lawful.

SECTION 4.02.   MAINTENANCE OF OFFICE OR AGENCY.

      The Company shall maintain in the Borough of Manhattan, the
City of New York an office or agency (which may be an office of
the Trustee or an affiliate of the Trustee or Registrar) where
Notes may be surrendered for registration of transfer or for
exchange and where notices and demands to or upon the Company in
respect of the Notes and this Indenture may be served. The
Company shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or
agency. If at any time the Company shall fail to maintain any
such required office or agency or shall fail to furnish the
Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust
Office of the Trustee.

      The Company may also from time to time designate one or
more other offices or agencies where the Notes may be presented
or surrendered for any or all such purposes and may from time to
time rescind such designations; provided, however, that no such
designation or rescission shall in any manner relieve the Company
of its obligation to maintain an office or agency in the Borough
of Manhattan, the

                               36


City of New York for such purposes. The Company shall give prompt
written notice to the Trustee of any such designation or
rescission and of any change in the location of any such other
office or agency.

      The Company hereby designates the Corporate Trust Office of
the Trustee as one such office or agency of the Company in
accordance with Section 2.03 hereof.

SECTION 4.03.   COMMISSION REPORTS.

      From and after the earlier of the effective date of the
Exchange Offer Registration Statement or the effective date of
the Shelf Registration Statement, whether or not required by the
rules and regulations of the Commission, so long as any Notes are
outstanding, the Company shall furnish to the Holders of Notes
(i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms
10-Q and 10-K if the Company were required to file such Forms,
including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes the financial
condition and results of operation of the Company and its
consolidated subsidiaries and, with respect to the annual
information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would
be required to be filed with the Commission on Form 8-K if the
Company were required to file such reports in each case within
the time periods set forth in the Commission's rules and
regulations. In addition, whether or not required by the rules
and regulations of the Commission, the Company shall file a copy
of all such information and reports with the Commission for
public availability (unless the Commission will not accept such a
filing) and make such information available to securities
analysts and prospective investors upon request. In addition, at
all times that the Commission does not accept the filings
provided for in the preceding sentence, the Company has agreed
that, for so long as any Notes remain outstanding, it shall
furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.

      The financial information to be distributed to Holders of
Notes shall be filed with the Trustee and mailed to the Holders
at their addresses appearing in the register of Notes maintained
by the Registrar, within 90 days after the end of the Company's
fiscal years and within 45 days after the end of each of the
first three quarters of each such fiscal year.

      The Company shall provide the Trustee with a sufficient
number of copies of all reports and other documents and
information and, if requested by the Company and at the Company's
expense, the Trustee will deliver such reports to the Holders
under this Section 4.03.

SECTION 4.04.   COMPLIANCE CERTIFICATE.

      The Company shall deliver to the Trustee, within 90 days
after the end of each fiscal year, an Officers' Certificate
stating that a review of the activities of the Company and its
Subsidiaries during the preceding fiscal year has been made under
the supervision of the signing Officers with a view to
determining whether each has kept, observed, performed and
fulfilled its obligations under this Indenture (including, with
respect to any Restricted Payments made during such year, the
basis upon which the calculations required by Section 4.07 hereof
were computed, which calculations may be based on the Company's
latest available financial statements), and further stating, as
to each such Officer signing such certificate, that, to the best
of his or her knowledge, each entity has kept, observed,
performed and fulfilled each and every covenant contained in this
Indenture and is not in default in the performance or observance
of any of the terms, provisions and conditions of this Indenture
(or, if a Default or Event of Default shall have occurred,
describing all such Defaults or Events of Default of which he or
she may

                               37


have knowledge and what action the Company is taking or proposes
to take with respect thereto) and that, to the best of his or her
knowledge, no event has occurred and remains in existence by
reason of which payments on account of the principal of, premium
or Liquidated Damages, if any, or interest on the Notes is
prohibited or if such event has occurred, a description of the
event and what action the Company is taking or proposes to take
with respect thereto.

      So long as not contrary to the then current recommendations
of the American Institute of Certified Public Accountants, in
connection with the year-end financial statements delivered
pursuant to Section 4.03 hereof, the Company shall use its best
efforts to deliver a written statement of the Company's
independent public accountants (who shall be a firm of
established national reputation) that in making the examination
necessary for certification of such financial statements, nothing
has come to their attention that would lead them to believe that
the Company has violated any provisions of Article Four or
Section 5.01 hereof or, if any such violation has occurred,
specifying the nature and period of existence thereof, it being
understood that such accountants shall not be liable directly or
indirectly to any Person for any failure to obtain knowledge of
any such violation. In the event that such written statement of
the Company's independent public accountants cannot be obtained,
the Company shall deliver an Officers' Certificate certifying
that it has used its best efforts to obtain such statements and
was unable to do so.

      The Company shall, so long as any of the Notes are
outstanding, deliver to the Trustee, forthwith upon any Officer
becoming aware of any Default or Event of Default, an Officers'
Certificate specifying such Default or Event of Default and what
action the Company is taking or proposes to take with respect
thereto.

SECTION 4.05.   TAXES.

      The Company shall pay, and shall cause each of its
Subsidiaries to pay, prior to delinquency all material taxes,
assessments and governmental levies, except such as are contested
in good faith and by appropriate proceedings and with respect to
which appropriate reserves have been taken in accordance with
GAAP.

SECTION 4.06.   STAY, EXTENSION AND USURY LAWS.

      The Company covenants (to the extent that it may lawfully
do so) that it shall not at any time insist upon, plead, or in
any manner whatsoever claim or take the benefit or advantage of,
any stay, extension or usury law wherever enacted, now or at any
time hereafter in force, that may affect the covenants or the
performance of this Indenture; and the Company (to the extent
that it may lawfully do so) hereby expressly waives all benefit
or advantage of any such law, and covenants that it shall not, by
resort to any such law, hinder, delay or impede the execution of
any power herein granted to the Trustee, but shall suffer and
permit the execution of every such power as though no such law
has been enacted.

SECTION 4.07.   RESTRICTED PAYMENTS.

      From and after the date hereof the Company shall not, and
shall not permit any of its Restricted Subsidiaries to, directly
or indirectly: (i) declare or pay any dividend or make any other
payment or distribution on account of the Company's or any of its
Restricted Subsidiaries' Equity Interests (including, without
limitation, any such dividend, distribution or other payment made
as a payment in connection with any merger or consolidation
involving the Company), other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of
the Company or dividends or distributions payable to the Company
or any Wholly Owned Subsidiary of the Company; (ii) purchase,
redeem or otherwise

                               38


acquire or retire for value (including, without limitation, any
such purchase, redemption or other acquisition or retirement for
value made as a payment in connection with any merger or
consolidation involving the Company) any Equity Interests of the
Company or any Restricted Subsidiary (other than any such Equity
Interests owned by the Company or any Restricted Subsidiary of
the Company); (iii) make any payment on or with respect to, or
purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is subordinated to the Notes, except
a payment of interest or principal at Stated Maturity; or (iv)
make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at
the time of and immediately after giving effect to such
Restricted Payment:

           (a) no Default or Event of Default shall have occurred
      and be continuing or would occur as a consequence thereof; and

           (b) the Company would, at the time of such Restricted
      Payment and after giving pro forma effect thereto have been
      permitted to incur at least $1.00 of additional
      Indebtedness pursuant to the Fixed Charge Coverage Ratio
      test set forth in the first paragraph of Section 4.09
      hereof; and

           (c) such Restricted Payment, together with the
      aggregate amount of all other Restricted Payments made by
      the Company and its Restricted Subsidiaries after the date
      hereof (excluding Restricted Payments permitted by clauses
      (ii), (iii), (iv) and (vi) of the next succeeding
      paragraph), is less than the sum (without duplication) of
      (i) 50% of the Consolidated Net Income of the Company for
      the period (taken as one accounting period) from the
      beginning of the first fiscal quarter commencing after the
      date hereof to the end of the Company's most recently ended
      fiscal quarter for which internal financial statements are
      available at the time of such Restricted Payment (or, if
      such Consolidated Net Income for such period is a deficit,
      less 100% of such deficit), plus (ii) 100% of the aggregate
      Qualified Proceeds received by the Company from
      contributions to the Company's capital or the issue or sale
      subsequent to the date hereof of Equity Interests of the
      Company (other than Disqualified Stock) or of Disqualified
      Stock or debt securities of the Company that have been
      converted into such Equity Interests (other than Equity
      Interests (or Disqualified Stock or convertible debt
      securities) sold to a Subsidiary of the Company and other
      than Disqualified Stock or convertible debt securities that
      have been converted into Disqualified Stock), plus (iii) to
      the extent that any Restricted Investment that was made
      after the date hereof is sold for Qualified Proceeds or
      otherwise liquidated or repaid (including, without
      limitation, by way of a dividend or other distribution, a
      repayment of a loan or advance or other transfer of assets)
      for in whole or in part, the lesser of (A) the Qualified
      Proceeds with respect to such Restricted Investment, (less
      the cost of disposition, if any) and (B) the initial amount
      of such Restricted Investment, plus (iv) upon the
      redesignation of an Unrestricted Subsidiary as a Restricted
      Subsidiary, the lesser of (x) the fair market value of such
      Subsidiary or (y) the aggregate amount of all Investments
      made in such Subsidiary subsequent to the Issue Date by the
      Company and its Restricted Subsidiaries, plus (v) $15.0
      million.

      The foregoing provisions will not prohibit (i) the payment
of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would have
complied with the provisions hereof; (ii) the redemption,
repurchase, retirement, defeasance or other acquisition of any
subordinated Indebtedness or Equity Interests of the Company in
exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Restricted
Subsidiary of the Company) of, other Equity Interests of the
Company (other than any Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance

                               39


or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (iii) the defeasance, redemption,
repurchase, retirement or other acquisition of subordinated
Indebtedness in exchange for, or with the net cash proceeds from,
an incurrence of Permitted Refinancing Indebtedness; (iv) the
payment of any dividend (or the making of a similar distribution
or redemption) by a Restricted Subsidiary of the Company to the
holders of its common Equity Interests on a pro rata basis; (v)
so long as no Default or Event of Default shall have occurred and
is continuing, the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company, or
any Restricted Subsidiary of the Company, held by any member of
the Company's (or any of its Restricted Subsidiaries')
management, employees or consultants pursuant to any management,
employee or consultant equity subscription agreement or stock
option agreement in effect as of the date hereof; provided that
the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed the sum of
(A) $10.0 million and (B) the aggregate cash proceeds received by
the Company from any reissuance of Equity Interests by the
Company to members of management of the Company and its
Restricted Subsidiaries (provided that the cash proceeds referred
to in this clause (B) shall be excluded from clause (c)(ii), of
the preceding paragraph); (vi) distributions made by the Company
on the date hereof, the proceeds of which are utilized solely to
consummate the Recapitalization; and (vii) so long as no Default
or Event of Default has occurred and is continuing, the
declaration and payment of dividends to holders of any class or
series of Disqualified Stock of the Company issued after the date
hereof in accordance with Section 4.09.

      The Board of Directors may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation
would not cause a Default or an Event of Default. For purposes of
making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated will be deemed to
be Restricted Payments at the time of such designation and will
reduce the amount available for Restricted Payments under the
first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount
equal to the greater of (i) the net book value of such
Investments at the time of such designation and (ii) the fair
market value of such Investments at the time of such designation.
Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.

      The amount of (i) all Restricted Payments (other than cash)
shall be the fair market value on the date of the Restricted
Payment of the asset(s) or securities proposed to be transferred
or issued by the Company or such Restricted Subsidiary, as the
case may be, pursuant to the Restricted Payment and (ii)
Qualified Proceeds (other than cash) shall be the fair market
value on the date of receipt thereof by the Company of such
Qualified Proceeds. The fair market value of any non-cash
Restricted Payment and Qualified Proceeds shall be determined by
the Board of Directors whose resolution with respect thereto
shall be delivered to the Trustee, such determination to be based
upon an opinion or appraisal issued by an accounting, appraisal
or investment banking firm of national standing if such fair
market value exceeds $10.0 million. Not later than the date of
making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the
calculations required by Section 4.07 were computed, together
with a copy of any fairness opinion or appraisal required by this
Indenture.

SECTION 4.08.  DIVIDENDS AND OTHER PAYMENT RESTRICTIONS
               AFFECTING RESTRICTED SUBSIDIARIES.

      The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Restricted
Subsidiary to (i)(a) pay dividends or make any other
distributions to the

                               40


Company or any of its Restricted Subsidiaries (1) on its Capital
Stock or (2) with respect to any other interest or participation
in, or measured by, its profits, or (b) pay any Indebtedness owed
to the Company or any of its Restricted Subsidiaries, (ii) make
loans or advances to the Company or any of its Restricted
Subsidiaries or (iii) transfer any of its properties or assets to
the Company or any of its Restricted Subsidiaries, except for
such encumbrances or restrictions existing under or by reason of
(a) the New Credit Facility and the Senior Subordinated Notes, as
in effect as of the date hereof, and any amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof, provided that
such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings
are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the New Credit
Facility or the Senior Subordinated Notes, as the case may be, as
in effect on the date hereof, (b) the Indenture and the Notes,
(c) applicable law or any applicable rule, regulation or order,
(d) any agreement or instrument governing Indebtedness or Capital
Stock of a Person acquired by the Company or any of its
Restricted Subsidiaries as in effect at the time of such
acquisition (except to the extent such agreement or instrument
was created or entered into in connection with or in
contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or
assets of the Person, so acquired, (e) by reason of customary
non-assignment provisions in leases, licenses, encumbrances,
contracts or similar assets entered into or acquired in the
ordinary course of business and consistent with past practices,
(f) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so
acquired, (g) any Purchase Money Note, or other Indebtedness or
contractual requirements incurred with respect to a Qualified
Receivables Transaction relating to a Receivables Subsidiary, (h)
Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those
contained in the agreements governing the Indebtedness being
refinanced and (i) contracts for the sale of assets containing
customary restrictions with respect to a Subsidiary pursuant to
an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or
assets of such Subsidiary.

SECTION 4.09.   INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK.

      The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create,
incur, issue, assume, guarantee or otherwise become directly or
indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired
Debt) and that the Company will not issue any Disqualified Stock
and will not permit any of its Restricted Subsidiaries to issue
any shares of preferred stock; provided, however, that the
Company or any of its Restricted Subsidiaries may incur
Indebtedness (including Acquired Debt) or issue shares of
Disqualified Stock if the Fixed Charge Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding
the date on which such additional Indebtedness is incurred or
such Disqualified Stock is issued would have been at least 1.75
to 1.0, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had
been issued, as the case may be, at the beginning of such
four-quarter period.

      The Company shall not incur any Indebtedness that is
contractually subordinated in right of payment to any other
Indebtedness of the Company unless such Indebtedness is also
contractually subordinated in right of payment to the Notes on
substantially identical terms; provided, however, that no
Indebtedness of the Company shall be deemed to be contractually
subordinated in right of payment to any other Indebtedness of the
Company solely by virtue of being unsecured.

                               41


      The provisions of the first paragraph of this covenant will
not apply to the incurrence of any of the following items of
Indebtedness (collectively, "Permitted Debt"):

      (i) Indebtedness of the Company and its Restricted
Subsidiaries under Credit Facilities; provided that the aggregate
principal amount of all Indebtedness (with letters of credit
being deemed to have a principal amount equal to the maximum
potential liability of the Company and its Restricted
Subsidiaries thereunder) outstanding under all Credit Facilities
after giving effect to such incurrence, including all
Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (i), does not
exceed an amount equal to $270.0 million less the aggregate
principal of all principal payments thereunder constituting
permanent reductions of such Indebtedness pursuant to and in
accordance with Section 4.10.

     (ii) the incurrence by the Company of Indebtedness
represented by the Notes and the incurrence by J. Crew Corp. and
its Subsidiaries of Indebtedness represented by the Senior
Subordinated Notes and any guarantee thereof;

    (iii) the incurrence by the Company or any of its
Restricted Subsidiaries of Indebtedness represented by Capital
Lease Obligations, mortgage financings or purchase money
obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or
improvements of property used in the business of the Company or
such Restricted Subsidiary, in an aggregate principal amount not
to exceed $25.0 million at any time outstanding;

     (iv) other Indebtedness of the Company and its
Restricted Subsidiaries outstanding on the Issue Date;

      (v) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange
for, or the net proceeds of which are used to refund, refinance
or replace Indebtedness (other than intercompany Indebtedness)
that is permitted by this Indenture to exist or be incurred;

     (vi) the incurrence of intercompany Indebtedness (A)
between or among the Company and any Wholly Owned Restricted
Subsidiaries of the Company or (B) by a Restricted Subsidiary
that is not a Wholly Owned Restricted Subsidiary to the Company
or a Wholly Owned Subsidiary; provided, however, that (i) if the
Company is the obligor on such Indebtedness, such Indebtedness is
expressly subordinated to the prior payment in full in cash of
all Obligations with respect to the Notes and (ii)(A) any
subsequent issuance or transfer of Equity Interests that results
in any such Indebtedness being held by a Person other than the
Company or a Wholly Owned Restricted Subsidiary of the Company
and (B) any sale or other transfer of any such Indebtedness to a
Person that is not either the Company or a Wholly Owned
Restricted Subsidiary of the Company shall be deemed, in each
case, to constitute an incurrence of such Indebtedness by the
Company or such Subsidiary, as the case may be;

    (vii) the incurrence by the Company or any of the
Restricted Subsidiaries of Hedging Obligations that are incurred
for the purpose of fixing or hedging (i) interest rate risk with
respect to any floating rate Indebtedness that is permitted by
the terms of this Indenture to be outstanding or (ii) the value
of foreign currencies purchased or received by the Company in the
ordinary course of business;

   (viii) Indebtedness incurred in respect of workers'
compensation claims, self-insurance obligations, performance,
surety and similar bonds and completion guarantees provided by
the Company or a Restricted Subsidiary in the ordinary course of
business;

                               42


      (ix) Indebtedness arising from guarantees of Indebtedness
of the Company or any Subsidiary or the agreements of the Company
or a Restricted Subsidiary providing for indemnification,
adjustment of purchase price or similar obligations, in each
case, incurred or assumed in connection with the disposition of
any business, assets or Capital Stock of a Restricted Subsidiary,
or other guarantees of Indebtedness incurred by any person
acquiring all or any portion of such business, assets or Capital
Stock of a Restricted Subsidiary for the purpose of financing
such acquisition, provided that the maximum aggregate liability
in respect of all such Indebtedness shall at no time exceed the
gross proceeds actually received by the Company and its
Restricted Subsidiaries in connection with such disposition;

      (x) Indebtedness of a Receivables Subsidiary that is not
recourse to the Company or any other Restricted Subsidiary of the
Company (other than Standard Securitization Undertakings)
incurred in connection with a Qualified Receivables Transaction;

      (xi) the guarantee by any Restricted Subsidiary of the
Company of Indebtedness of any Restricted Subsidiary of the
Company that was permitted to be incurred by another provision of
this covenant;

      (xii) the incurrence by the Company or any of its
Restricted Subsidiaries of Acquired Debt in an aggregate
principal amount at any time outstanding not to exceed $20.0
million;

      (xiii) Indebtedness arising from the honoring by a bank or
other financial institution of a check, draft or similar
instrument inadvertently (except in the case of daylight
overdrafts) drawn against insufficient funds in the ordinary
course of business; provided, however, that such Indebtedness is
extinguished within five business days of incurrence; and

      (xiv) the incurrence by the Company or any Restricted
Subsidiary of additional Indebtedness in an aggregate principal
amount (or accreted value, as applicable) at any time
outstanding, including all indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this
clause (xiv), not to exceed $30.0 million.

      For purposes of determining compliance with this covenant,
in the event that an item of Indebtedness meets the criteria of
more than one of the categories of Permitted Debt described in
clauses (i) through (xiv) above or is entitled to be incurred
pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify such item of Indebtedness
in any manner that complies with this covenant and such item of
Indebtedness will be treated as having been incurred pursuant to
only one of such clauses or pursuant to the first paragraph
hereof. Accrual of interest, the accretion of accreted value and
the payment of interest in the form of additional Indebtedness
will not be deemed to be an incurrence of Indebtedness for
purposes of this covenant.

SECTION 4.10.   ASSETS SALES.

      The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, consummate an Asset Sale unless (i)
the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least
equal to the fair market value (evidenced by a resolution of the
Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests
issued or sold or otherwise disposed of and (ii) at least 75% of
the consideration therefor received by the Company or such
Restricted Subsidiary is in the form of (A) cash or Cash
Equivalents or (B) Qualified Proceeds; provided that the
aggregate fair market value of Qualified Proceeds (other than
cash or Cash Equivalents), which may be received in consideration
for asset sales pursuant

                               43


to this clause (ii)(B) shall not exceed $7.5 million since the
Issue Date; provided, further, that the amount of (x) any
liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet), of the Company or any
Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes)
that are assumed by the transferee of any such assets pursuant to
a customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability and (y) any
securities, notes or other obligations received by the Company or
any such Restricted Subsidiary from such transferee that are
converted by the Company or such Restricted Subsidiary into cash
(to extent of the cash received) within 180 days following the
closing of such Asset Sale, shall be deemed to be cash for
purposes of this provision.

      Within 395 days after the receipt of any Net Proceeds from
an Asset Sale, the Company or its Restricted Subsidiaries may
apply such Net Proceeds, at its option, (a) to repay Indebtedness
of a Restricted Subsidiary of the Company, or (b) to the
investment in, or the making of a capital expenditure or the
acquisition of other property or assets in each case used or
useable in a Permitted Business, or Capital Stock of any Person
primarily engaged in a Permitted Business if, as a result of the
acquisition by the Company or any Restricted Subsidiary thereof,
such Person becomes a Restricted Subsidiary, or (c) as
combination of the uses described in clauses (a) and (b). Pending
the final application of any such Net Proceeds, the Company or
its Restricted Subsidiaries may temporarily reduce Indebtedness
of a Restricted Subsidiary of the Company or otherwise invest
such Net Proceeds in any manner that is not prohibited by this
Indenture. Any Net Proceeds from Asset Sales other than 20% of
the net proceeds from any sale of all or substantially all of the
Capital Stock or assets of the Company's Popular Club Plan
business or Clifford & Wills business (as each such business is
constituted on the Issue Date) which have been utilized to repay,
redeem, repurchase or otherwise retire outstanding Notes, that
are not applied or invested as provided in the first sentence of
this paragraph will be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0
million (an "Asset Sale Offer Triggering Event"), the Company
will be required to make an offer to all Holders of Notes and, to
the extent required by the terms of any Indebtedness ranking pari
passu with the Notes ("Pari Passu Indebtedness") to all holders
of such Pari Passu Indebtedness (an "Asset Sale Offer"), to
purchase the maximum principal amount of Notes and any such Pari
Passu Indebtedness that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100% of
the principal amount thereof plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of purchase (or,
in the case of repurchases of Notes prior to October 15, 2002, at
a purchase price equal to 100% of the Accreted Value thereof plus
Liquidated Damages, as of the date of repurchase), in accordance
with the procedures set forth in Section 3.09 hereof or such Pari
Passu Indebtedness, as applicable. To the extent that the
aggregate principal amount at maturity of Notes (or Accreted
Value, as the case may be) and any such Pari Passu Indebtedness
tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company or its Restricted Subsidiaries may use any
remaining Excess Proceeds for general corporate purposes. If the
aggregate principal amount at maturity (or Accreted Value, as the
case may be) of Notes and any such Pari Passu Indebtedness
surrendered by holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes to be purchased on a
pro rata basis. Upon completion of such Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.

SECTION 4.11.   TRANSACTIONS WITH AFFILIATES.

      The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, make any payment to or Investment in,
or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from,
or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction
is on terms that are no

                               44


less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers
to the Trustee (a) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate
consideration in excess of $1.0 million, a resolution of the
Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause
(i) above and that such Affiliate Transaction has been approved
by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate
consideration in excess of $10.0 million, an opinion as to the
fairness to the Holders of such Affiliate Transaction from a
financial point of view issued by an accounting, appraisal or
investment banking firm of national standing; provided that (v)
transactions with suppliers or other purchasers or sales of goods
or services, in each case in the ordinary course of business
(including, without limitation, pursuant to joint venture
agreements) and otherwise in accordance with the terms of this
Indenture which are fair to the Company, in the good faith
determination of the Board of Directors of the Company or the
senior management of the Company and are on terms at least as
favorable as might reasonably have been obtained at such time
from an unaffiliated party, (w) any employment agreements, stock
option or other compensation agreements or plans (and the payment
of amounts or the issuance of securities thereunder) and other
reasonable fees, compensation, benefits and indemnities paid or
entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course of business of the Company or such
Restricted Subsidiary to or with the officers, directors or
employees of the Company or its Restricted Subsidiaries, (x)
transactions between or among the Company and/or its Restricted
Subsidiaries, (y) sales or other transfers or dispositions of
accounts receivable and other related assets customarily
transferred in an asset securitization transaction involving
accounts receivable to a Receivables Subsidiary in a Qualified
Receivables Transaction, and acquisitions of Permitted
Investments in connection with a Qualified Receivables
Transaction and (z) Restricted Payments (other than Restricted
Investments) that are permitted by Section 4.07 hereof, in each
case, shall not be deemed Affiliate Transactions.

SECTION 4.12.   LIENS.

      The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Lien securing Indebtedness
or trade payables on any asset now owned or hereafter acquired,
or any income or profits therefrom or assign or convey any right
to receive income therefrom for purposes of security, except
Permitted Liens, unless (x) in the case of Liens securing
Indebtedness that is expressly subordinate or junior in right of
payment to the Notes, the Notes are secured by a Lien on such
property, assets or proceeds that is senior in priority to such
Liens, (with the same relative priority as such subordinate or
junior Indebtedness shall have with respect to the Notes) and (y)
in all other cases, the Notes are secured by such Lien on an
equal and ratable basis.

SECTION 4.13.   OFFER TO PURCHASE UPON CHANGE OF CONTROL.

      Upon the occurrence of a Change of Control, each Holder of
Notes will have the right to require the Company to repurchase
all or any part (equal to $1,000 or an integral multiple thereof)
of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer") at an offer price in cash equal to
101% of the aggregate principal amount thereof plus accrued and
unpaid interest and Liquidated Damages thereon, if any, to the
date of purchase or, in the case of repurchases of Notes prior to
October 15, 2002 at a purchase price equal to 101% of the
Accreted Value thereof as of the date of repurchase plus
Liquidated Damages, if any, (the "Change of Control Payment").
Within 65 days following any Change of Control, the Company shall
mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering
to repurchase Notes on the

                               45


date specified in such notice, which date shall be no earlier
than 30 days (or such shorter time period as may be permitted
under applicable law, rules and regulations) and no later than 60
days from the date such notice is mailed (the "Change of Control
Payment Date"), pursuant to the procedures required by Section
3.09 hereof and described in such notice. The Company will comply
with the requirements of Rule 14e-1 under the Exchange Act and
any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection
with the repurchase of the Notes as a result of a Change of
Control. To the extent that the provisions of any securities laws
or regulations conflict with the provisions hereof relating to
such Change of Control Offer, the Company will comply with the
applicable securities laws and regulations and shall not be
deemed to have breached its obligations described hereof by
virtue thereof.

      On the Change of Control Payment Date, the Company shall,
to the extent lawful, (1) accept for payment all Notes or
portions thereof properly tendered pursuant to the Change of
Control Offer, (2) deposit with the Paying Agent an amount equal
to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of
Notes or portions thereof being purchased by the Company. The
Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the
Trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each Holder a new Notes equal in
principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in
a principal amount of $1,000 or an integral multiple thereof. The
Company shall publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of
Control Payment Date in accordance with Section 3.09 hereof.

      The Change of Control provisions described above will be
applicable whether or not any other provisions of this Indenture
are applicable. Except as described above with respect to a
Change of Control, this Indenture does not contain provisions
that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.

      Prior to complying with the provisions of the preceding
paragraphs, but in any event within 90 days following a Change of
Control, the Company shall either repay all outstanding
Indebtedness of its Subsidiaries or obtain the requisite
consents, if any, under the New Credit Facility and the Senior
Subordinated Notes to permit the repurchase of the Notes required
by this section. The Company will not be required to purchase any
Debentures until it has complied with the preceding sentence, but
the Company's failure to make a Change of Control Offer when
required or to purchase tendered Notes when tendered would
constitute an Event of Default under this Indenture.

      The Company shall not be required to make a Change of
Control Offer upon a Change of Control if a third party makes the
Change of Control Offer in the manner, at the times and otherwise
in compliance with the requirements set forth herein applicable
to a Change of Control Offer made by the Company and purchases
all Notes validly tendered and not withdrawn under such Change of
Control Offer.

SECTION 4.14.   CORPORATE EXISTENCE.

      Subject to Section 4.13 and Article 5 hereof, as the case
may be, the Company shall do or cause to be done all things
necessary to preserve and keep in full force and effect its
corporate existence and the corporate, partnership or other
existence of each of its Subsidiaries in accordance with the
respective

                               46


organizational documents (as the same may be amended from time to
time) of the Company or any such Subsidiary and the rights
(charter and statutory), licenses and franchises of the Company
and its Subsidiaries; provided that the Company shall not be
required to preserve any such right, license or franchise, or the
corporate, partnership or other existence of any of its
Subsidiaries, if the Board of Directors of the Company shall
determine that the preservation thereof is no longer desirable in
the conduct of the business of the Company and its Subsidiaries,
taken as a whole, and that the loss thereof is not adverse in any
material respect to the Holders of the Notes.

SECTION 4.15.   BUSINESS ACTIVITIES.

      The Company shall not, and shall not permit any Restricted
Subsidiary to engage in any business other than a Permitted
Businesses.


                             ARTICLE 5
                            SUCCESSORS

SECTION 5.01.   MERGER, CONSOLIDATION OF SALE OF ASSETS.

      The Company shall not consolidate or merge with or into
(whether or not the Company is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of its properties or assets in one or more
related transactions, to another Person unless (i) the Company is
the surviving corporation or the Person formed by or surviving
any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation or
limited liability company organized or existing under the laws of
the United States, any state thereof or the District of Columbia;
(ii) the Person formed by or surviving any such consolidation or
merger (if other than the Company) or the Person to which such
sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of
the Company under the Notes and this Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the
Trustee; (iii) immediately after such transaction no Default or
Event of Default exists; and (iv) except in the case of a merger
of the Company with or into a Wholly Owned Restricted Subsidiary
of the Company (other than a Receivables Subsidiary), the Company
or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which
such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made at the time of such transaction
and after giving pro forma effect thereto as if such transaction
had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of Section 4.09 hereof.

      For purposes of this Section 5.01, the sale, lease,
conveyance, assignment, transfer, or other disposition of all or
substantially all of the properties and assets of one or more
Subsidiaries of the Company, which properties and assets, if held
by the Company instead of such Subsidiaries, would constitute all
or substantially all of the properties and assets of the Company
on a consolidated basis, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the
Company. Clause (iv) of the foregoing paragraph will not prohibit
(a) a merger between the Company and a Wholly Owned Subsidiary of
the Company created for the purpose of holding the Capital Stock
of the Company, (b) a merger between the Company and a Wholly
Owned Restricted Subsidiary of the Company or (c) a merger
between the Company and an Affiliate incorporated solely for the
purpose of reincorporating the

                               47


Company in another State of the United States so long as, in the
case of each of clause (a), (b) and (c), the amount of
Indebtedness of the Company and its Restricted Subsidiaries is
not increased thereby.

SECTION 5.02.   SUCCESSOR CORPORATION SUBSTITUTED.

      Upon any consolidation or merger, or any sale, assignment,
transfer, lease, conveyance or other disposition of all or
substantially all of the assets of the Company in accordance with
Section 5.01 hereof, the successor corporation formed by such
consolidation or into or with which the Company is merged or to
which such sale, assignment, transfer, lease, conveyance or other
disposition is made shall succeed to, and be substituted for (so
that from and after the date of such consolidation, merger, sale,
lease, conveyance or other disposition, the provisions of this
Indenture referring to the "Company" shall refer instead to the
successor corporation and not to the Company), and shall exercise
every right and power of the Company under this Indenture with
the same effect as if such successor Person had been named as the
Company herein; provided, that, (i) solely for the purposes of
computing Consolidated Net Income for purposes of clause (b) of
the first paragraph of Section 4.07 hereof, the Consolidated Net
Income of any person other than the Company and its Subsidiaries
shall be included only for periods subsequent to the effective
time of such merger, consolidation, combination or transfer of
assets; and (ii) in the case of any sale, assignment, transfer,
lease, conveyance, or other disposition of less than all of the
assets of the predecessor Company, the predecessor Company shall
not be released or discharged from the obligation to pay the
principal of or interest and Liquidated Damages, if any, on the
Notes.


                             ARTICLE 6
                       DEFAULTS AND REMEDIES

SECTION 6.01.   EVENTS OF DEFAULT.

      Each of the following constitutes an "Event of Default":

      (i)     default for 30 days in the payment when due of interest on, 
              or Liquidated Damages with respect to, the Notes;

      (ii)    default in payment when due of principal of or premium,
              if any, on the Notes;

      (iii)   failure by the Company or any of its Restricted
              Subsidiaries for 30 days after notice by the Trustee
              or by the Holders of at least 25% in principal amount
              of the Notes then outstanding to comply with the
              provisions described under Sections 4.07, 4.09, 4.10
              or 4.13;

      (iv)    failure by the Company or any of its Restricted
              Subsidiaries for 60 days after notice from the Trustee
              or by the Holders of at least 25% in principal amount
              of the Notes then outstanding to comply with any of
              its other agreement in this Indenture or the Notes;

      (v)     default under any mortgage, indenture or instrument
              under which there may be issued or by which there may
              be secured or evidenced any Indebtedness for money
              borrowed by the Company or any of its Restricted
              Subsidiaries (or the payment of which is guaranteed by
              the Company or any of its Restricted Subsidiaries)
              whether such Indebtedness or Guarantee now exists, or
              is created after the date hereof, which default (a) is
              caused by a failure to pay principal of such
              Indebtedness after giving effect to any grace period

                               48


              provided in such Indebtedness on the date of such
              default (a "Payment Default") or (b) results in the
              acceleration of such Indebtedness prior to its stated
              maturity and, in each case, the principal amount of
              any such Indebtedness, together with the principal
              amount of any other such Indebtedness under which
              there has been a Payment Default or the maturity of
              which has been so accelerated, aggregates $20.0
              million or more;
              
      (vi)    failure by the Company or any of its Subsidiaries to
              pay final judgments aggregating in excess of $20.0
              million (net of any amounts with respect to which a
              reputable and credit worthy insurance company has
              acknowledged liability in writing), which judgments
              are not paid, discharged or stayed for a period of 60
              days;
              
      (vii)   the Company or any of its Significant Subsidiaries or
              any group of Subsidiaries that, taken as a whole would
              constitute a Significant Subsidiary, pursuant to or
              within the meaning of any Bankruptcy Law:

           (a)  commences a voluntary case,

           (b)  consents to the entry of an order for relief against
                it in an involuntary case,

           (c)  consents to the appointment of a Custodian of it or for all 
                or substantially all of its property,
                
           (d)  makes a general assignment for the benefit of its creditors, or

           (e)  generally is not paying its debts as they become due; or

     (viii)   a court of competent jurisdiction enters an order
              or decree under any Bankruptcy Law that:

           (a)  is for relief against the Company or any of its
                Significant Subsidiaries or any group of
                Subsidiaries that, taken as a whole, would
                constitute a Significant Subsidiary in an
                involuntary case;

           (b)  appoints a Custodian of the Company or any of its
                Significant Subsidiaries or any group of
                Subsidiaries that, taken as a whole, would
                constitute a Significant Subsidiary or for all or
                substantially all of the property of the Company
                or any of its Significant Subsidiaries or any
                group of Subsidiaries that, taken as a whole,
                would constitute a Significant Subsidiary; or

           (c)  orders the liquidation of the Company or any of
                its Significant Subsidiaries or any group of
                Subsidiaries that, taken as a whole, would
                constitute a Significant Subsidiary;

              and the order or decree remains unstayed and in effect for
              60 consecutive days.

      The term "Custodian" means any receiver, trustee, assignee,
liquidator or similar official under any Bankruptcy Law.

SECTION 6.02.   ACCELERATION.

                               49


      If any Event of Default occurs and is continuing, the
Trustee or the Holders of at least 25% in principal amount of the
then outstanding Notes may declare all the Notes to be due and
payable immediately. Notwithstanding the foregoing, in the case
of an Event of Default as described in clause (vii) or (viii) of
Section 6.01 hereof, all outstanding Notes will become due and
payable without further action or notice. Upon such declaration,
all principal of and accrued interest and Liquidated Damages, if
any, on (if on or after October 15, 2002) or Accreted Value of
and Liquidated Damages, if any, on (if prior to October 15, 2002)
the Notes shall be due and payable immediately. Holders of the
Notes may not enforce this Indenture or the Notes except as
provided in this Indenture. In the event of a declaration of
acceleration of the Notes because an Event of Default has
occurred and is continuing as a result of the acceleration of any
Indebtedness described in clause (v) of Section 6.01 hereof, the
declaration of acceleration of the Notes shall be automatically
annulled if the holders of any Indebtedness described in clause
(v) of Section 6.01 hereof have rescinded the declaration of
acceleration in respect of such Indebtedness within 30 days of
the date of such declaration and if (y) the annulment of the
acceleration of the Notes would not conflict with any judgment or
decree of a court of competent jurisdiction and (z) all existing
Events of Default, except nonpayment of principal or interest on
the Notes that became due solely because of the acceleration of
the Notes, have been cured or waived.

SECTION 6.03.   OTHER REMEDIES.

      If an Event of Default occurs and is continuing, the
Trustee may pursue any available remedy to collect the payment of
principal, premium, if any, interest and Liquidated Damages, if
any, on the Notes or to enforce the performance of any provision
of the Notes or this Indenture.

      The Trustee may maintain a proceeding even if it does not
possess any of the Notes or does not produce any of them in the
proceeding. A delay or omission by the Trustee or any Holder of a
Note in exercising any right or remedy accruing upon an Event of
Default shall not impair the right or remedy or constitute a
waiver of or acquiescence in the Event of Default. All remedies
are cumulative to the extent permitted by law.

      The Company is required to deliver to the Trustee annually
a statement regarding compliance with this Indenture, and the
Company is required upon becoming aware of any Default or Event
of Default, to deliver to the Trustee a statement specifying such
Default or Event of Default.

SECTION 6.04.   WAIVER OF PAST DEFAULTS.

      The Holders of a majority in aggregate principal amount of
the Notes then outstanding by notice to the Trustee may on behalf
of the Holders of all of the Notes waive any existing Default or
Event of Default and its consequences under this Indenture
(including any acceleration (other than an automatic acceleration
resulting from an Event of Default under clause (vii) or (viii)
of Section 6.01 hereof) except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the
Notes (other than as a result of an acceleration), which shall
require the consent of all of the Holders of the Notes then
outstanding.

SECTION 6.05.   CONTROL BY MAJORITY.

      The Holders of a majority in principal amount of the then
outstanding Notes may direct the time, method and place of
conducting any proceeding for exercising any remedy available to
the Trustee or exercising any trust power conferred on it.
However, (i) the Trustee may refuse to follow any direction that
conflicts with law or this Indenture, that the Trustee determines
may be unduly prejudicial to the

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rights of other Holders of Notes or that may involve the Trustee
in personal liability, and (ii) the Trustee may take any other
action deemed proper by the Trustee which is not inconsistent
with such direction. In case an Event of Default shall occur
(which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man
in the conduct of his own affairs. Notwithstanding any provision
to the contrary in this Indenture, the Trustee is under no
obligation to exercise any of its rights or powers under this
Indenture at the request of any Holder of Notes, unless such
Holder shall offer to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.

SECTION 6.06.   LIMITATION ON SUITS.

      A Holder of a Note may pursue a remedy with respect to this
Indenture or the Notes only if:

      (a)  the Holder of a Note gives to the Trustee written
           notice of a continuing Event of Default or the Trustee
           receives such notice from the Company;

      (b)  the Holders of at least 25% in principal amount of the
           then outstanding Notes make a written request to the
           Trustee to pursue the remedy;

      (c)  such Holder of a Note or Holders of Notes offer and,
           if requested, provide to the Trustee indemnity
           satisfactory to the Trustee against any loss,
           liability or expense;

      (d)  the Trustee does not comply with the request within 60
           days after receipt of the request and the offer and,
           if requested, the provision of indemnity; and

      (e)  during such 60-day period the Holders of a majority in
           principal amount of the then outstanding Notes do not
           give the Trustee a direction inconsistent with the
           request.

      A Holder of a Note may not use this Indenture to prejudice
the rights of another Holder of a Note or to obtain a preference
or priority over another Holder of a Note.

SECTION 6.07.   RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT.

      Notwithstanding any other provision of this Indenture, the
right of any Holder of a Note to receive payment of principal,
premium, if any, interest, and Liquidated Damages, if any, on
such Note, on or after the respective due dates expressed in such
Note (including in connection with an offer to purchase), or to
bring suit for the enforcement of any such payment on or after
such respective dates, shall not be impaired or affected without
the consent of such Holder.

SECTION 6.08.   COLLECTION SUIT BY TRUSTEE.

      If an Event of Default specified in Section 6.01(i) or (ii)
hereof occurs and is continuing, the Trustee is authorized to
recover judgment in its own name and as trustee of an express
trust against the Company for the whole amount of principal of,
premium and Liquidated Damages, if any, and interest remaining
unpaid on the Notes and interest on overdue principal and, to the
extent lawful, interest and such further amount as shall be
sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel.

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SECTION 6.09.   TRUSTEE MAY FILE PROOFS OF CLAIM.

      The Trustee is authorized to file such proofs of claim and
other papers or documents as may be necessary or advisable in
order to have the claims of the Trustee (including any claim for
the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel) and the Holders of the
Notes allowed in any judicial proceedings relative to the Company
(or any other obligor upon the Notes), its creditors or its
property and shall be entitled and empowered to collect, receive
and distribute any money or other securities or property payable
or deliverable upon the conversion or exchange of the Notes or on
any such claims and any Custodian in any such judicial proceeding
is hereby authorized by each Holder to make such payments to the
Trustee, and in the event that the Trustee shall consent to the
making of such payments directly to the Holders, to pay to the
Trustee any amount due to it for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section
7.07 hereof. To the extent that the payment of any such
compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the
Trustee under Section 7.07 hereof out of the estate in any such
proceeding, shall be denied for any reason, payment of the same
shall be secured by a Lien on, and shall be paid out of, any and
all distributions, dividends, money, securities and other
properties that the Holders may be entitled to receive in such
proceeding whether in liquidation or under any plan of
reorganization or arrangement or otherwise. Nothing herein
contained shall be deemed to authorize the Trustee to authorize
or consent to or accept or adopt on behalf of any Holder any plan
of reorganization, arrangement, adjustment or composition
affecting the Notes or the rights of any Holder, or to authorize
the Trustee to vote in respect of the claim of any Holder in any
such proceeding.

SECTION 6.10.   PRIORITIES.

      If the Trustee collects any money pursuant to this Article
6, it shall pay out the money in the following order:

           First: to the Trustee, its agents and attorneys for
amounts due under Section 7.07 hereof, including payment of all
compensation, expense and liabilities incurred, and all advances
made, by the Trustee and the costs and expenses of collection;

           Second: to Holders of Notes for amounts due and unpaid
on the Notes for principal, premium, if any, interest, and
Liquidated Damages, if any, ratably, without preference or
priority of any kind, according to the amounts due and payable on
the Notes for principal, premium, if any, interest, and
Liquidated Damages, if any, respectively;

           Third: without duplication, to the Holders for any
other Obligations owing to the Holders under this Indenture and
the Notes; and

           Fourth: to the Company or to such party as a court of
competent jurisdiction shall direct.

      The Trustee may fix a record date and payment date for any
payment to Holders of Notes pursuant to this Section 6.10.

SECTION 6.11.   UNDERTAKING FOR COSTS.

      In any suit for the enforcement of any right or remedy
under this Indenture or in any suit against the Trustee for any
action taken or omitted by it as a Trustee, a court in its
discretion may require the

                               52


filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess
reasonable costs, including reasonable attorneys' fees, against
any party litigant in the suit, having due regard to the merits
and good faith of the claims or defenses made by the party
litigant. This Section 6.11 does not apply to a suit by the
Trustee, a suit by a Holder of a Note pursuant to Section 6.07
hereof, or a suit by Holders of more than 10% in principal amount
of the then outstanding Notes.


                             ARTICLE 7
                              TRUSTEE

SECTION 7.01.   DUTIES OF TRUSTEE.

      (a)  If an Event of Default has occurred and is continuing
           of which a Responsible Officer of the Trustee has
           knowledge, the Trustee shall exercise such of the
           rights and powers vested in it by this Indenture and
           use the same degree of care and skill in its exercise,
           as a prudent man would exercise or use under the
           circumstances in the conduct of his own affairs.

      (b)  Except during the continuance of an Event of Default:

           (i)     the duties of the Trustee shall be determined
                   solely by the express provisions of this
                   Indenture or the TIA and the Trustee need perform
                   only those duties that are specifically set forth
                   in this Indenture or the TIA and no others, and
                   no implied covenants or obligations shall be read
                   into this Indenture against the Trustee; and

           (ii)    in the absence of bad faith on its part, the
                   Trustee may conclusively rely, as to the truth of
                   the statements and the correctness of the
                   opinions expressed therein, upon certificates or
                   opinions furnished to the Trustee and conforming
                   to the requirements of this Indenture. However,
                   the Trustee shall examine the certificates and
                   opinions to determine whether or not they conform
                   to the requirements of this Indenture.

      (c)  The Trustee may not be relieved from liabilities for
           its own negligent action, its own negligent failure to
           act, or its own willful misconduct, except that:

           (i)     this paragraph does not limit the effect of paragraph
                   (b) of this Section 7.01;

           (ii)     the Trustee shall not be liable for any error of
                    judgment made in good faith by a Responsible
                    Officer, unless it is proved that the Trustee was
                    negligent in ascertaining the pertinent facts;
                    and

           (iii)    the Trustee shall not be liable with respect to
                    any action it takes or omits to take in good
                    faith in accordance with a direction received by
                    it pursuant to Section 6.05 hereof.

      (d)  Whether or not therein expressly