SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 1, 2003
Commission Registrant, State of Incorporation I.R.S. Employer
File Number Address and Telephone Number Identification No.
333-42427 J. CREW GROUP, INC. 22-2894486
- --------- ----------
(Incorporated in New York)
770 Broadway
New York, New York 10003
Telephone: (212) 209-2500
333-42423 J. CREW OPERATING CORP. 22-3540930
- --------- ----------
(Incorporated in Delaware)
770 Broadway
New York, New York 10003
Telephone: (212) 209-2500
Securities Registered Pursuant to section 12(b) of the Act:
J. Crew Group, Inc. None
J. Crew Operating Corp. None
Securities Registered Pursuant to section 12(g) of the Act:
J. Crew Group, Inc. None
J. Crew Operating Corp. None
Indicate by check mark whether each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of each registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The common stock of each registrant is not publicly traded. Therefore, the
aggregate market value is not readily determinable.
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As of March 15, 2003, there were 12,870,373 shares of Common Stock, par value
$.01 per share, of J. Crew Group, Inc. outstanding and 100 shares of Common
Stock, par value $.01 per share, of J. Crew Operating Corp. outstanding (all of
which are owned beneficially and of record by J. Crew Group, Inc.).
Documents incorporated by reference: None
J. Crew Operating Corp. meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of the Form 10-K and is therefore filing this Form 10-K with
the reduced disclosure format.
This combined Form 10-K is separately filed by each of J. Crew Group, Inc. and
J. Crew Operating Corp. The information contained herein relating to each
individual registrant is filed by such registrant on its own behalf. No
registrant makes any representation as to information relating to the other
registrant.
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FILING FORMAT
This Annual Report on Form 10-K is a combined report being filed by two
different registrants: J. Crew Group, Inc. ("Holdings") and J. Crew Operating
Corp., a wholly-owned subsidiary of Holdings ("Operating Corp."). Except where
the content clearly indicates otherwise, any references in this report to the
"Company", "J. Crew" or "Holdings" include all subsidiaries of Holdings,
including Operating Corp. Operating Corp. makes no representation as to the
information contained in this report in relation to Holdings and its
subsidiaries other than Operating Corp.
FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K under the captions
"Business", "Selected Financial Data", "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Financial Statements and
Supplementary Data" and elsewhere constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. We may also
make written or oral forward looking statements in our periodic reports to the
Securities and Exchange Commission on Forms 10-Q, 8-K, etc., in press releases
and other written materials and in oral statements made by our officers,
directors or employees to third parties. Statements that are not historical
facts, including statements about our beliefs and expectations, are
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company, or industry results,
to differ materially from historical results, any future results, performance or
achievements expressed or implied by such forward-looking statements. Such risks
and uncertainties include, but are not limited to, competitive pressures in the
apparel industry, changes in levels of consumer spending or preferences in
apparel and acceptance by customers of the Company's products, overall economic
conditions, governmental regulations and trade restrictions, acts of war or
terrorism in the United States or worldwide, political or financial instability
in the countries where the Company's goods are manufactured, postal rate
increases, paper and printing costs, availability of suitable store locations at
appropriate terms, the level of the Company's indebtedness and exposure to
interest rate fluctuations, and other risks and uncertainties described in this
report and the Company's other reports and documents filed or which may be
filed, from time to time, with the Securities and Exchange Commission. These
statements are based on current plans, estimates and projections, and therefore
you should not place undue reliance on them. Forward looking statements speak
only as of the date they are made and we undertake no obligation to update
publicly any of them in light of new information or future events.
References herein to fiscal years are to the fiscal years of J. Crew Group, Inc.
and J. Crew Operating Corp., which end on the Saturday closest to January 31 in
the following calendar year for fiscal years 1998, 1999, 2000, 2001 and 2002.
Accordingly, fiscal years 1998, 1999, 2000, 2001 and 2002 ended on January 30,
1999, January 29, 2000, February 3, 2001, February 2, 2002 and February 1, 2003.
All fiscal years for which financial information is included had 52 weeks,
except fiscal year 2000 which had 53 weeks.
WEBSITE ACCESS TO COMPANY REPORTS
The Company's filings under the Securities Exchange Act of 1934 (including
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to these reports) are available free of charge on
our internet website at www.jcrew.com. These reports are available as soon as
reasonably practicable after such material is electronically filed with or
furnished to the SEC. The reference to the Company's website address does not
constitute incorporation by reference of the information contained on the
website, and the information contained on the website is not part of this
document.
Part I
In this section, "we," "us" and "our" refer to Holdings and its
subsidiaries.
General
We are a leading retailer of women's and men's apparel, shoes, and
accessories sold under the "J. Crew" brand name. Started in 1983, we have built
and reinforced our brand name and image through the circulation of catalogs that
use magazine-quality photography to portray a classic American perspective and
aspirational lifestyle and the operation of our
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stores and Internet website. We believe that the "J. Crew" brand name is widely
recognized for its timeless styles at price points that represent exceptional
product value. We offer a full line of men's and women's clothing, including
basic durables (casual weekend), workwear (casual weekday), swimwear, sport,
accessories and shoes to meet our customers lifestyle needs. Many of the
original items introduced by us in the early 1980s (such as the rollneck
sweater, weathered chino, barn jacket and pocket tee) were instrumental in
establishing the J. Crew brand and continue to be our core product offerings.
J. Crew products are distributed exclusively through our retail and
factory stores, our catalog and our Internet website located at www.jcrew.com.
As of February 1, 2003, we operated 152 retail stores and 42 factory outlet
stores in the United States. We believe that our customer base consists
primarily of college-educated, professional and upscale customers who in our
experience have demonstrated strong brand loyalty and a tendency to make
repeated purchases. In addition, J. Crew products are distributed through 50
free-standing and shop-in-shop stores in Japan under a licensing agreement with
Itochu Corporation.
We have three major operating divisions: J. Crew Retail, J. Crew
Direct, and J. Crew Factory, each of which operate under the J. Crew brand name.
In fiscal 2002, products sold under the J. Crew brand contributed $732.2 million
in revenues, comprised of:
. $408.0 million from J. Crew Retail;
. $248.0 million from J. Crew Direct; and
. $76.2 million from J. Crew Factory.
In addition, in fiscal 2002, we generated licensing revenues of $2.3
million and shipping and handling revenues of $31.8 million. We refer you to "J.
Crew Retail," "J. Crew Factory," "J. Crew Direct," "Trademarks and Licensing"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations of Holdings."
Holdings was incorporated in the State of New York in 1988. Our
principal executive offices are located at 770 Broadway, New York, NY 10003, and
our telephone number is (202) 209-2500.
Merchandising and Design
Over time, the J. Crew merchandising strategy has evolved from
providing unisex products to creating full lines of men's and women's clothing,
shoes and accessories. This strategy had the effect of increasing overall J.
Crew brand sales volume and significantly increasing revenues from sales of
women's apparel to 75% of J. Crew brand sales in 2002.
All of our products are designed by an in-house design staff to reflect
a classic, clean aesthetic that is consistent with our American lifestyle brand
image. Design teams are formed around J. Crew product lines and categories to
develop concepts, themes and products for each of our J. Crew businesses. Our
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, production and
quality assurance staffs in order to gain market and other input and ensure
quality of the J. Crew products.
Sourcing and Production
All of our merchandise is produced for us by a variety of manufacturers
in over 22 countries. We do not own or operate any manufacturing facilities and
instead contract with third-party vendors for production of our merchandise. In
fiscal 2002, approximately 80% of our merchandise was sourced in Asia, 5% was
sourced in the United States and 15% was sourced in Europe and other regions.
Any event causing a sudden disruption of manufacturing or imports from China,
including the imposition of additional import restrictions, could have a
material adverse impact on our operations. In addition, one vendor supplies
approximately 16% of our merchandise, but we believe that the loss of this
vendor would not have a material adverse impact on our ability to source our
products. Substantially all of our foreign purchases are negotiated and paid for
in U.S. dollars.
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We cannot predict whether any of the countries in which our merchandise
is currently produced or may be produced in the future will be subject to
additional trade restrictions imposed by the U.S. and other foreign governments,
including the likelihood, type or effect of any such restrictions. Trade
restrictions, including increased tariffs or quotas, against apparel and other
items sold by us could increase the cost or reduce the supply of merchandise
available to us and adversely affect our business, financial condition and
results of operations. Our sourcing operations may also be adversely affected by
political and financial instability in any country in which our goods are
produced or acts of war or terrorism in the United States or worldwide to the
extent these acts impact the production, shipment or receipt of merchandise.
Sourcing operations may also be adversely affected by significant fluctuation in
the value of the U.S. dollar against foreign currencies or restrictions on the
transfer of funds.
Distribution
We operate two major customer contact and distribution facilities for
our operations. Order fulfillment for J. Crew Direct takes place primarily at a
406,500 square foot facility located in Lynchburg, Virginia. The Lynchburg
facility processes catalog and Internet website orders and serves as the
distribution center for our factory store operations. This facility employs
approximately 800 full and part-time employees during our non-peak season and
additional employees during our peak season. The main distribution center for
our retail store operations and a back-up order taking facility for catalog
orders is located in a 192,500 square foot facility in Asheville, North
Carolina. This facility employs approximately 300 full- and part-time employees
during our non-peak season and additional employees during our peak season.
Orders for merchandise may be received by telephone, facsimile, mail and through
our Internet website. Each customer contact associate is trained to assist
customers in determining the customer's correct size and describing merchandise
fabric, texture and function. We believe that our fulfillment and distribution
operations are designed to process and ship customer orders in a
customer-friendly, quick, and cost-effective manner.
In March 2003, we announced our plan to permanently close the customer
contact department of the Asheville facility in May 2003.
We ship merchandise via the United States Postal Service, Airborne and
FedEx. To enhance efficiency, each facility is fully equipped with an advanced
telephone system, automated warehouse locator system and inventory bar coding
system. In addition, our Lynchburg facility has automated packing and shipping
sorters.
Information Systems
Our management information systems are designed to provide, among other
things, comprehensive order processing, production, accounting and management
information for the marketing, manufacturing, importing and distribution
functions of our business. We have point-of-sale registers in our retail and
factory outlet stores that enable us to track inventory from store receipt to
final sale on a real-time basis. We believe our merchandising and financial
systems, coupled with our point-of-sale registers and software programs, allow
for rapid stock replenishment, concise merchandise planning and real-time
inventory accounting practices. Our telephone and telemarketing systems,
warehouse package sorting systems, automated warehouse locator and inventory bar
coding systems utilize advanced technology. These systems have provided us with
a number of benefits in the form of enhanced customer service, improved
operational efficiency and increased management control and reporting. In
addition, our real-time inventory systems provide inventory management on a
stock keeping unit basis and allow for an efficient fulfillment process.
We have installed a SAP enterprise resource planning system for our
information technology requirements. This system was implemented in fiscal years
2000 and 2001. In fiscal 2000, our accounting systems were implemented. A
corporate-wide purchasing system, a retail sales and inventory system (including
new point-of-sale registers) and a human resource and payroll system were
completed in fiscal 2001. In November 2000, we outsourced our data center,
desktop, network and telecommunication services management and operations
support. In February 2001, we outsourced the hosting and support of our Internet
website to a third-party vendor.
J. Crew Retail
At February 1, 2003, we operated 152 retail stores throughout the
United States, of which 16 stores were opened during fiscal 2002. These stores
are located in upscale regional malls, lifestyle centers, shopping centers and
street
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locations. During fiscal 2002, J. Crew Retail generated revenues of $408.0
million, representing 55.7% of our total revenues.
An important aspect of our business strategy is an expansion program
designed to reach new and existing customers through the opening of J. Crew
Retail stores. As a result of the slowdown in the overall economic environment
and our declining comparable store sales trends for the last two years, we have
decided to restrict the number of new store openings in fiscal 2003 to four. We
do not plan to close any retail stores in 2003. 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. Store locations are
determined based on several factors, including the following:
. geographic location;
. demographic information;
. anchor tenants in mall locations; and
. proximity to other specialty retail stores in mall and street
locations.
J. Crew Retail stores that were open during all of fiscal 2002 averaged
$2.8 million per store in sales, produced sales per gross square foot of $365
and generated store contribution margins of approximately 14%. J. Crew Retail
stores have an average size of 7,712 total square feet.
The table below highlights certain information regarding J. Crew Retail
stores opened through fiscal 2002.
Stores Open Stores Stores
At Beginning Opened Closed Stores Open Total Square Average
of Fiscal During During at End of Footage (in Store Square
Fiscal Year Year Fiscal Year Fiscal Year Fiscal Year thousands) Footage
- ----------- -------------- ------------- ------------- ------------- -------------- --------------
1998 ............................ 51 14 -- 65 530 8,150
1999 ............................ 65 16 -- 81 668 8,243
2000 ............................ 81 24 -- 105 833 7,933
2001 ............................ 105 34 3 136 1,054 7,752
2002 ............................ 136 16 -- 152 1,172 7,712
J. Crew Direct
J. Crew Direct consists of our catalog and Internet website operations.
During fiscal 2002, J. Crew Direct generated $248.0 million in revenues
(including $108.6 from the catalog and $139.4 million from the Internet
website), representing 33.9% of our total J. Crew revenues.
We believe we have distinguished ourselves from other catalog retailers
by our award-winning catalog which utilizes magazine-quality, "real moment"
pictures to depict an aspirational lifestyle image. In fiscal 2002, we
distributed 32 catalog editions with a total circulation of approximately 66
million and pages circulated of approximately 7.8 billion. This represented a
decrease from fiscal 2001's total circulation of approximately 71 million and
pages circulated of approximately 8.3 billion.
J. Crew Direct's circulation strategy focuses on continually improving
the segmentation of customer files and the acquisition of additional customer
names. In fiscal 2002, approximately 65% of J. Crew Direct revenues were from
customers who have made a purchase from any J. Crew catalog or on the Internet
in the prior 12 months. We segment our customer file and tailor our catalog
offerings to address the different product needs of our customer segments. To
increase core catalog productivity and improve the effectiveness of marginal and
prospecting circulation, each customer segment is offered appropriate catalog
editions. We also acquire new names from various sources, including the
following:
. our retail stores;
. our Internet website;
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. list rentals;
. exchanges with other catalog companies; and
. "friend's names" card inserts.
We are in the process of placing telephones in all of our J. Crew Retail
stores with direct access to the J. Crew Direct telemarketing center to allow
customers in the stores to order catalog-specific or out-of-stock items.
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
desktop publishing system. Digital images are transmitted directly to outside
printers, thereby reducing lead times and improving reproduction quality. We
believe that appropriate page presentation of our merchandise stimulates demand,
and therefore we place great emphasis on page layout.
J. Crew Direct does not have long-term contracts with paper mills.
Projected paper requirements are communicated on an annual basis to paper mills
to ensure the availability of an adequate supply. Management believes that our
long-standing relationships with a number of the largest coated paper mills in
the United States allow us to purchase paper at favorable prices commensurate
with our size.
In 1996, we launched our Internet website located at www.jcrew.com, making
J. Crew merchandise available to our customers over the Internet. In fiscal
2002, the website logged over 41 million unique visitors and represents over 50%
of the J. Crew Direct business. We design and operate our website using an
in-house technical staff and our website emphasizes simplicity and ease of
customer use while integrating the J. Crew brand's aspirational lifestyle
imagery used in the catalog. A significant aspect of our Internet marketing
strategy is to utilize an email program to generate repeat and new customers,
and we deliver weekly marketing emails targeted to customers based upon certain
demographic and purchase transaction information.
J. Crew Factory
As of February 1, 2003, we operated 42 factory stores in the United States,
which offer J. Crew merchandise at an average of 30% below retail prices. The
factory stores target value-oriented customers and also serve to liquidate
excess, irregular or out-of-season J. Crew merchandise. During fiscal 2002, J.
Crew Factory generated revenues of $76.2 million, representing 10.4% of our
total revenues.
J. Crew Factory stores have an average size of 6,500 total square feet and
are generally located in major regional outlet centers in 24 states across the
United States. We believe that the factory stores, which are designed in-house,
maintain fixturing, visual presentation and service standards comparable to
those typically associated with outlet stores.
Trademarks and Licensing
The "J. Crew" trademark and variations thereon, and certain other
trademarks, are registered or are subject to pending trademark applications with
the United States Patent and Trademark Office and with the registries of many
foreign countries.
In addition, we license our "J. Crew" trademark to Itochu Corporation in
Japan for which we receive royalty fees. Under the license agreement, we retain
a high degree of control over the manufacture, design, marketing and sale of
merchandise by Itochu Corporation under the J. Crew trademark. This agreement
expires in January 2005. In fiscal 2002, licensing revenues totaled $2.3
million.
Employees
As of February 1, 2003, we had approximately 5,600 associates, of whom
approximately 1,800 were full-time associates and 3,800 were part-time
associates. In addition, approximately 2,600 associates are hired on a seasonal
basis to meet demand during the peak season. None of our associates are
represented by a union. We believe that our relationship with our associates is
good.
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Competition
All aspects of our business are highly competitive. We compete primarily
with specialty brand retailers, other catalog and Internet operations,
department stores, and mass merchandisers that offer similar merchandise. We
believe that the principal bases upon which we compete are quality, design,
efficient service, selection and price. Many of our competitors are
substantially larger, have a more established retail store presence and
experience and have greater financial, marketing and other resources than us.
There is no assurance that we will be able to successfully compete with our
competitors in the future. In addition, our business is sensitive to a number of
factors that could affect the level of consumer spending, including the
following:
. adverse economic conditions;
. the levels of disposable consumer income;
. consumer confidence; and
. interest rates.
We have suffered a substantial loss of customer sales and traffic in the
recent past and the continuation of this as well as further declines in the
current economic conditions and declines in consumer spending on apparel and
accessories could have a material adverse effect on our financial condition and
operating results.
ITEM 2. PROPERTIES
We are headquartered in New York City. The New York City headquarter
offices are leased under a lease agreement expiring in 2012, with an option to
renew thereafter. We own two customer contact and distribution facilities: a
406,500-square-foot customer contact and distribution center for J. Crew Direct
operations in Lynchburg, Virginia and a 192,500-square-foot distribution center
in Asheville, North Carolina servicing the J. Crew Retail operations. In March
2003, we announced our plan to permanently close the customer contact department
of the Asheville facility in May 2003.
As of February 1, 2003, we operated 152 J. Crew retail stores and 42
factory stores in 38 states and the District of Columbia. All of the retail and
factory stores are leased from third parties, and the leases in most cases have
terms of 10 to 12 years, with options to renew for periods typically ranging
from five to ten years. As a 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 generally comprised of
annual base rent plus a contingent rent payment based on the store's sales in
excess of a specified threshold. Substantially all of the leases are guaranteed
by us.
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The table below sets forth the number of stores by state operated by us in
the United States as of February 1, 2003.
Total
-----
Retail Factory Number
------ ------- ------
Stores Stores Of Stores
------ ------ ---------
Alabama 1 1 2
Arizona 4 -- 4
California 20 3 23
Colorado 4 2 6
Connecticut 5 1 6
Delaware 1 1 2
Florida 4 3 7
Georgia 4 2 6
Illinois 9 -- 9
Indiana 2 2 4
Kansas 1 -- 1
Kentucky 1 -- 1
Louisiana 1 -- 1
Maine -- 2 2
Maryland 3 1 4
Massachusetts 6 2 8
Michigan 6 1 7
Minnesota 3 -- 3
Missouri 2 1 3
Nevada 1 -- 1
New Hampshire 1 2 3
New Jersey 9 1 10
New Mexico 1 -- 1
New York 15 4 19
North Carolina 4 -- 4
Ohio 7 -- 7
Oklahoma 2 -- 2
Oregon 2 -- 2
Pennsylvania 7 3 10
Rhode Island 1 - 1
South Carolina 2 2 4
Tennessee 3 1 4
Texas 7 2 9
Utah 2 -- 2
Vermont 1 1 2
Virginia 5 2 7
Washington 2 1 3
Wisconsin 1 1 2
District of Columbia 2 -- 2
--- --- ---
Total. 152 42 194
=== === ===
ITEM 3. LEGAL PROCEEDINGS
Charles E. Hill & Associates, Inc., or Hill, filed a lawsuit on August 16,
2002 in the U. S. District Court for the Eastern District of Texas against us
and seventeen other defendants, primarily large retailers, alleging infringement
of three patents registered to Hill relating to electronic catalog systems and
methods for processing data at a remote location and updating and displaying
that data. The suit seeks an injunction against continuing infringement,
unspecified damages, including treble damages for willful infringement, and
interest, costs, expenses and fees. We believe that we have meritorious defenses
and intend to defend ourselves vigorously.
In addition, we are subject to various legal proceedings and claims that
arise in the ordinary conduct of our business. Although the outcome of these
other claims cannot be predicted with certainty, management does not believe
that the ultimate resolution of these matters will have a material adverse
effect on our financial condition or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
February 1, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for Holdings or Operating Corp.
Common Stock. As of March 15, 2003, there were 39 shareholders of record of the
Holdings Common Stock. See "Item 12. Security Ownership of Certain Beneficial
Owners and Management" for a discussion of the ownership of Holdings. Holdings
owns 100% of the Common Stock of Operating Corp.
Holdings has not paid cash dividends on its Common Stock and does not anticipate
paying any such dividends in the foreseeable future. Operating Corp. may from
time to time pay cash dividends on its Common Stock to permit Holdings to make
required payments relating to its Senior Discount Debentures.
The credit agreement (the "Credit Agreement") and the Indenture relating to the
Senior Discount Debentures (the "Holdings Indenture") prohibit the payment of
dividends by Holdings on shares of Common Stock (other than dividends payable
solely in shares of capital stock of Holdings). Additionally, because Holdings
is a holding company, its ability to pay dividends is dependent upon the receipt
of dividends from its direct and indirect subsidiaries. Each of the Credit
Agreement, the Holdings Indenture and the Indenture relating to the Senior
Subordinated Notes of Operating Corp., contains covenants which impose
substantial restrictions on Operating Corp.'s ability to pay dividends or make
distributions to Holdings.
The Directors of Holdings have the right to receive all or a portion of the fees
for their services as a Director in Common Stock. In fiscal year 2002, certain
Directors elected to receive a total of 12,318 shares of Common Stock in payment
of their fees, at purchase price per share equal to the fair market value
thereof. Holdings issued the Common Stock to the Directors in transactions which
did not involve any public offering in reliance upon Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
Equity Compensation Plan Information
The following table summarizes information about the Amended and Restated J.Crew
Group, Inc. 1997 Stock Option Plan and the J.Crew Group, Inc. 2003 Equity
Incentive Plan (the "2003 Plan"), as of February 1, 2003. Our shareholders have
approved both of these plans.
(a) (b) (c)
Number of Securites
Number of Securities Remaining Available for
to be Issued Upon Weighted Average Future Issuance Under
Exercise of Exercise Price of Equity Compensation Plans
Outstanding Options Outstanding Options, (Excluding Securites
Plan Category Warrants and Rights Warrants and Rights Reflected in Column (a))
------------- ------------------- ------------------- ------------------------
Equity Compensation
Plans Approved by
Shareholders 4,474,469 $18.10 782,967
Equity Compensation
Plans Not Approved by
Shareholders 0 N/A 0
---------- ------- --------
TOTAL 4,474,469 $18.10 782,967
========== ======= ========
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In addition to options, the 2003 Plan authorizes the issuance of restricted
stock of Holdings. The 2003 Plan contains a sub-limit of 1,450,724 shares on the
aggregate number of shares of restricted Holdings Common Stock which may be
issued.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated historical financial,
operating, balance sheet and other data of the Company. The selected income
statement and balance sheet data for each of the five fiscal years ended
February 1, 2003 are derived from the Consolidated Financial Statements of the
Company, which have been audited by KPMG LLP, independent auditors. The data
presented below should be read in conjunction with the Consolidated Financial
Statements, including the related Notes thereto, included herein, the other
financial information included herein, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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Fiscal Year Ended
January 30, January 29, February 3, February 2, February 1,
----------- ----------- ----------- ----------- -----------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(dollars in thousands, except per square foot data)
Income Statement Data:
Revenues $ 870,842 $ 750,696 $ 825,975 $ 777,940 $ 766,382
Cost of goods sold(a) 511,716 431,193 463,909 462,371 478,700
Selling, general and administrative expenses 332,050 279,302 301,865 295,568 291,518
Other charges 7,995 7,018 -- -- --
Charges incurred in connection with discontinuance of
Clifford & Wills 13,300 4,000 4,130 -- --
Income/(loss) from operations 5,781 29,183 56,071 20,001 (3,836)
Interest expense-net 39,323 38,861 36,642 36,512 40,954
Gain on sale of Popular Club Plan (10,000) (1,000) -- -- --
Provision (benefit) for income taxes (8,162) (2,050) 7,500 (5,500) (4,200)
--------- --------- --------- --------- ---------
Net income (loss) $ (15,380) $ (6,628) $ 11,929 $ (11,011) $ (40,590)
========= ========= ========= ========= =========
Balance Sheet Data (at period end):
Cash and cash equivalents $ 9,643 $ 38,693 $ 32,930 $ 16,201 $ 18,895
Working capital 95,710 75,929 49,482 39,164 38,015
Total assets 376,330 373,604 389,861 401,320 348,878
Total long term debt and redeemable preferred stock 433,243 458,218 464,310 510,147 556,038
Stockholders' deficit $(235,773) $(264,593) $(278,347) $(319,043) $(391,663)
Operating Data:
Revenues:
J. Crew retail $ 273,972 $ 333,575 $ 406,784 $ 397,998 $ 408,028
J. Crew direct
Catalog 230,752 213,308 177,535 135,353 108,531
Internet 22,000 65,249 107,225 122,844 139,456
--------- --------- --------- --------- ---------
252,752 278,557 284,760 258,197 247,987
--------- --------- --------- --------- ---------
J. Crew factory 96,461 101,987 96,114 85,085 76,264
J. Crew licensing 2,712 2,505 3,020 2,560 2,280
J. Crew shipping & handling fees 30,575 34,072 35,297 34,100 31,823
--------- --------- --------- --------- ---------
Total J. Crew brand 656,472 750,696 825,975 777,940 766,382
Other divisions(b) 214,370 -- -- -- --
--------- --------- --------- --------- ---------
Total $ 870,842 $ 750,696 $ 825,975 $ 777,940 $ 766,382
========= ========= ========= ========= =========
J. Crew Direct:
Number of catalogs circulated (in thousands) 73,440 75,479 72,522 71,000 66,000
Number of pages circulated (in millions) 8,819 9,319 8,677 8,300 7,800
J. Crew Retail:
Sales per gross square foot(c) $ 558 $ 571 $ 567 $ 439 $ 365
Store contribution margin(c) 25.0% 26.0% 23.9% 18.0% 14.1%
Number of stores open at end of period 65 81 105 136 152
Comparable store sales change(c) 9.0% 1.8% 1.7% (15.5)% (10.4)%
Depreciation and amortization $ 15,972 $ 19,241 $ 22,600 $ 31,718 $ 34,451
Net capital expenditures(d)
New store openings $ 14,749 $ 13,300 $ 16,700 $ 17,572 $ 11,400
Other 21,605 27,953 25,475 25,003 9,018
--------- --------- --------- --------- ---------
Total net capital expenditures $ 36,354 $ 41,253 $ 42,175 $ 42,575 $ 20,418
========= ========= ========= ========= =========
S-12
(a) Includes buying and occupancy costs.
(b) Includes revenues from the Company's Popular Club Plan, Inc. ("PCP") and
Clifford & Wills, Inc. ("C&W") divisions and finance charge income from PCP
installment sales. PCP was sold effective October 30, 1998 and the Company
made a decision in 1998 to exit the catalog and outlet store operations of
C&W.
(c) Includes stores that have been opened for a full twelve month period.
(d) Capital expenditures are net of proceeds from construction allowances.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - J.CREW GROUP, INC.
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity of J. Crew Group, Inc. and
subsidiaries during the three-year period ended February 1, 2003. This
discussion should be read in conjunction with the audited consolidated financial
statements of J. Crew Group, Inc. and subsidiaries for the three-year period
ended February 1, 2003 and notes thereto included elsewhere herein.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations is based upon the consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires estimates
and judgements that effect the reported amounts of assets, liabilities, revenues
and expenses. The Company bases its estimates on historical experience and other
assumptions that are believed to be reasonable under the circumstances and
evaluates these estimates on an on-going basis. Actual results may differ from
these estimates under different assumptions or conditions.
The following critical accounting policies reflect the more significant
estimates and judgements used in the preparation of the consolidated financial
statements.
(a) Inventory valuation
Merchandise inventories are carried at the lower of average cost or
market. We evaluate all of our inventories to determine excess
inventories based on estimated future sales. Excess inventories may be
disposed of through outlet stores, clearance catalogs, Internet
clearance sales and other liquidations. Based on the historical
results experienced by the Company through the various methods of
disposition the Company writes down the carrying value of inventories
which are not expected to be sold at or above costs.
In March 2003 the Company decided to modify its strategy on the
disposition of inventory to achieve inventory clearing at the end of
each selling season. Under its previous disposition strategy, excess
prior season inventories would have been carried over for sale in
subsequent seasons. Under its new strategy, the Company will
accelerate the disposition of these excess inventories through factory
stores, Internet promotions, clearance catalogs and warehouse sales.
These changes in the method and timing of inventory disposition are
expected to result in a decrease in the amounts ultimately received
for these inventories. Accordingly, the Company took additional
inventory reserves of $9.0 million as of February 1, 2003.
(b) Deferred catalog costs
The costs associated with direct response advertising, which consist
primarily of catalog production and mailing costs, are capitalized and
amortized over the expected future revenue stream of the catalog
mailings, which approximates four months. The expected future revenue
stream is determined based on historical revenue trends developed over
an extended period of time. If the current revenue streams were to
diverge from the expected trend, the future revenue streams would be
adjusted accordingly.
(c) Asset impairment
The Company is exposed to potential impairment if the book value of
its assets exceeds their future cash flows. The major component of our
long lived assets represents store fixtures, equipment and leasehold
improvements. The impairment of unamortized costs is measured at the
store level and the unamortized cost
S-13
is reduced to fair value if it is determined that the sum of expected
future net cash flows is less than net book value.
(d) Sales returns
The Company must make estimates of future sales returns related to
current period sales. Management analyzes historical returns, current
economic trends and changes in customer acceptance of its products
when evaluating the adequacy of the reserve for sales returns.
(e) Deferred income taxes
The Company has significant deferred tax assets resulting from net
operating loss carryforwards and deductible temporary differences,
which will reduce taxable income in future periods. SFAS No. 109
"Accounting for Income Taxes" states that a valuation allowance is
required when it is more likely than not that all or a portion of a
deferred tax asset will not be realized. A review of all available
positive and negative evidence needs to be considered, including a
company's current and past performance, the market environment in
which a company operates, length of carryback and carryforward
periods, existing contracts or sales backlog that will result in
future profits, etc. Forming a conclusion that a valuation allowance
is not needed is difficult when there is negative evidence such as
cumulative losses in recent years. Cumulative losses weigh heavily in
the overall assessment. As a result of our assessment, we established
a valuation allowance for the net deferred tax assets at February 1,
2003. The Company does not expect to recognize any tax benefit in
future results of operations until an appropriate level of
profitability is sustained.
Results of Operations
Consolidated statements of operations presented as a percentage of revenues are
as follows:
Fiscal year ended
February 1, February 2, February 3,
2003 2002 2001
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of goods sold, including buying and occupancy costs 62.5 59.4 56.2
Selling, general and administrative expenses 38.0 38.0 36.5
Charges incurred in connection with discontinuance of C&W -- -- .5
Income/(loss) from operations (.5) 2.6 6.8
Interest expense, net (5.3) (4.7) (4.4)
Income/(loss) before income taxes (5.8) (2.1) 2.4
Income taxes .5 .7 (.9)
----- ----- -----
Net income/(loss) (5.3)% (1.4)% 1.5%
===== ===== =====
Fiscal 2002 Compared to Fiscal 2001
Revenues
Revenues in the fiscal year ended February 1, 2003 decreased 1.5% to $766.4
million from $778.0 million in the fiscal year ended February 2, 2002.
J. Crew Retail net sales increased by 2.5% from $398.0 million in fiscal 2001 to
$408.0 million in fiscal 2002. The percentage of the Company's total net sales
derived from J. Crew Retail increased to 55.7% in fiscal year 2002 compared to
53.7% in fiscal 2001. The increase in net sales was due to net sales from stores
opened for less than a full fiscal year. This increase was offset by a decrease
of 10.4% in comparable store sales. The decrease in comparable store sales was
primarily attributable to a decrease in store traffic. There were 152 retail
stores open at February 1, 2003 compared to 136 at February 2, 2002.
J. Crew Direct net sales (which includes net sales from catalog and internet
operations) decreased by 4.0% from $258.2 million in fiscal 2001 to $248.0
million in fiscal 2002. The percentage of the Company's total net sales derived
from J. Crew Direct decreased to 33.9% in fiscal 2002 from 34.8% in fiscal 2001.
Catalog net sales decreased to $108.6 million in fiscal 2002 from $135.3 million
in fiscal 2001. Pages circulated decreased from 8.3 billion in fiscal 2001 to
7.8 billion
S-14
in fiscal 2002. Internet net sales increased to $139.4 million in fiscal 2002
from $122.9 million in fiscal 2001 as the Company continued to migrate catalog
customers to the Internet.
J.Crew Factory net sales decreased by 10.5% from $85.1 million in fiscal 2001 to
$76.2 million in fiscal 2002. The percentage of the Company's total net sales
derived from J. Crew Factory decreased to 10.4% in fiscal 2002 from 11.5% in
fiscal 2001. Comparable store sales for J. Crew Factory decreased by 14.1% in
fiscal 2002. There were 42 J. Crew Factory outlet stores open at February 1,
2003 compared to 41 at February 2, 2002.
Other revenues which consist of shipping and handling fees and royalties
decreased to $34.1 million in fiscal 2002 from $36.7 million in fiscal 2001,
primarily as a result of a decrease in shipping and handling fees which is
attributable to the decrease in net sales of J.Crew Direct.
Cost of sales, including buying and occupancy costs
Cost of sales (including buying and occupancy costs) as a percentage of revenues
increased to 62.5% in fiscal 2002 from 59.4% in fiscal 2001. This increase was
caused by a 130 basis point increase in buying and occupancy costs caused by a
decrease in leverage related to the decline in comp store sales and a 180 basis
point decrease in merchandising margin due to markdowns taken to clear
inventories in the fourth quarter which contributed to the improvement in our
year-end inventory position compared to the prior year. The fourth quarter also
included a $9,000,000 charge as a result of the Company's decision to modify its
strategy on the disposition of inventory to accelerate inventory clearing at the
end of each selling season.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased to $291.5 million in
fiscal 2002 (38.0% of revenues) from $295.6 million in fiscal 2001 (38.0% of
revenues).
Selling expenses were $53.2 million in fiscal 2002 (6.9% of revenues) compared
to $60.8 million in fiscal 2001 (7.8% of revenues). This decrease was due to a
decrease in pages circulated from 8.3 billion pages in fiscal year 2001 to 7.8
billion pages in fiscal 2002 and a decrease in paper costs.
General and administrative expenses increased to $238.3 million in fiscal 2002
(31.0% of revenues) from $234.8 million in fiscal 2001 (30.2% of revenues). This
increase resulted from severance and other one-time employment related charges
of $13.7 million in fiscal year 2002 versus $3.2 million last year and
additional retail stores in operation in 2002 partially offset by the cost
reduction initiatives instituted in the first quarter of 2002.
Interest expense
Interest expense, net was $41.0 million in fiscal year 2002 compared to $36.5
million in fiscal 2001. The increase in interest expense resulted primarily from
(a) an increase of $2.1 million relating to the 13-1/8% Senior Discount Notes
and (b) an increase of $2.4 million in amortization of deferred financing costs,
including $1.8 million written off in December 2002 related to the refinancing
of the revolving credit arrangement with a new lender. Average borrowings under
the Revolving Credit Facility were $40.4 million in fiscal year 2002 compared to
$43.1 million in fiscal 2001.
Interest expense included non-cash interest and amortization of deferred
financing costs of $16.7 million in fiscal 2002 compared to $17.4 million in
fiscal 2001. Interest expense related to the 13 1/8% Senior Discount Debentures
became cash pay commencing in October 2002 with the first semi-annual payment of
$9.3 million due in April 2003.
Income Taxes
The effective tax rate was a benefit of 9.4% in fiscal 2002 compared to a
benefit of 33.3% in fiscal 2001. The lower effective rate in 2002 resulted from
the non-recognition of a full tax benefit due to the establishment of a
valuation allowance to reduce the net deferred tax assets to estimated
recoverable amount at February 1, 2003. The Company does not expect to recognize
any tax benefits in future results of operations until an appropriate level of
profitability is sustained.
S-15
Fiscal 2001 Compared to Fiscal 2000
Revenues
Revenues in the fiscal year ended February 2, 2002 decreased 5.8% to $778.0
million from $826.0 million in the fiscal year ended February 3, 2001. The
fiscal year ended February 2, 2002 consisted of 52 weeks compared to 53 weeks in
fiscal year 2000. Net sales for the fifty-third week were $10.8 million.
J. Crew Retail net sales decreased by 2.2% from $406.8 million in fiscal 2000 to
$398.0 million in fiscal 2001. The percentage of the Company's total net sales
derived from J. Crew Retail increased to 53.7% in fiscal year 2001 compared to
51.6% in fiscal 2000. The decrease in net sales was due to a decrease of 15.5%
in comparable store sales. This decrease offset a 30% increase in the number of
stores from 105 at February 3, 2001 to 136 at February 2, 2002.
J.Crew Direct net sales (which includes net sales from catalog and internet
operations) decreased by 9.3% from $284.8 million in fiscal 2000 to $258.2
million in fiscal 2001. The percentage of the Company's total net sales derived
from J. Crew Direct decreased to 34.8% in fiscal 2001 from 36.2% in fiscal 2000.
Catalog net sales decreased to $135.3 million in fiscal 2001 from $177.5 million
in fiscal 2000. Pages circulated decreased from 8.7 billion in fiscal 2000 to
8.3 billion in fiscal 2001. Internet net sales increased to $122.9 million in
fiscal 2001 from $107.3 million in fiscal 2000 as the Company continued to
migrate catalog customers to the Internet.
J.Crew Factory net sales decreased from $96.1 million in fiscal 2000 to $85.1
million in fiscal 2001. The percentage of the Company's total net sales derived
from J. Crew Factory decreased to 11.5% in fiscal 2001 from 12.2% in fiscal
2000. Comparable store sales for J. Crew Factory decreased by 10.5% in fiscal
2001. There were 41 J. Crew Factory outlet stores at February 2, 2002 and
February 3, 2001.
Other revenues which consist of shipping and handling fees and royalties
decreased to $36.7 million in fiscal 2001 from $38.3 million in fiscal 2000,
primarily as a result of a decrease in shipping and handling fees which is
attributable to the decrease in net sales of J.Crew Direct.
Cost of sales, including buying and occupancy costs
Cost of sales (including buying and occupancy costs) as a percentage of revenues
increased to 59.4% in fiscal 2001 from 56.2% in fiscal 2000. This increase was
caused by a significant increase in markdowns as a result of the highly
promotional retail environment and an increase in buying and occupancy costs
caused by a decrease in leverage related to the decline in comp store sales.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased to $295.6 million in
fiscal 2001 (38.0% of revenues) from $301.9 million in fiscal 2000 (36.6% of
revenues).
General and administrative expenses of the J.Crew brand decreased to $234.8
million in fiscal 2001 (30.2% of revenues) from $239.2 million in fiscal 2000
(29.0% of revenues). This decrease resulted from a decrease in bonus provision
in fiscal 2001 and the cost cutting initiatives instituted in the first quarter
of 2001 which were offset by the additional retail stores in operation during
fiscal 2001 and a $10.1 million increase in depreciation and amortization.
Selling expenses were $60.8 million in fiscal 2001 (7.8% of revenues) compared
to $62.7 million in fiscal 2000 (7.6% of revenues). This decrease was due to a
decrease in pages circulated from 8.7 billion pages in fiscal year 2000 to 8.3
billion pages in fiscal 2001.
Interest expense
Interest expense, net was $36.5 million in fiscal year 2001 compared to $36.6
million in fiscal 2000. The increase resulting from higher average borrowings in
fiscal 2001 under the Revolving Credit Facility and higher non-cash interest was
offset by the pay off of the term loan in January 2001 and a decrease in
interest rates. Average borrowings under the Revolving Credit Facility required
to fund inventories and capital expenditures were $43.1 million in fiscal 2001
compared to $9.8 million in fiscal 2000.
S-16
Interest expense included non-cash interest and amortization of deferred
financing costs of $17.4 million in fiscal 2001 compared to $16.4 million in
fiscal 2000.
Income Taxes
The effective tax rate was a benefit of 33.3% in fiscal 2001 compared to a
provision of 38.6% in fiscal 2000. The effective rate in 2001 was less than the
normal rate due primarily to the inability of subsidiaries to carry back net
operating losses for state tax purposes.
Liquidity and Capital Resources
The Company's sources of liquidity have been primarily cash flows from
operations and borrowings under the Revolving Credit Facility. The Company's
primary cash needs have been for capital expenditures incurred primarily for
opening new stores and system enhancements, debt service requirements and
working capital.
On December 23, 2002 the Company entered into a Loan and Security Agreement with
Wachovia Bank, N.A., as arranger, Congress Financial Corporation, as
administrative and collateral agent, and a syndicate of lenders which provides
for maximum credit availability of up to $180.0 million (the "Congress Credit
Facility"). The Congress Credit Facility replaced a revolving credit facility
which was scheduled to expire in October 2003. The Congress Credit Facility
provides for revolving loans of up to $160.0 million; supplemental loans of up
to $20.0 million each year during the period from April 15 to September 15; and
letter of credit accommodations. The Congress Credit Facility expires in
December 2005. The total amount of availability is subject to limitations based
on specified percentages of eligible receivables, inventories and real property.
The Congress Credit Facility includes restrictions, including the incurrence of
additional indebtedness, the payment of dividends and other distributions, the
making of investments, the granting of loans and the making of capital
expenditures. The Company is required to maintain minimum levels of earnings
before interest, taxes, depreciation, amortization and certain non-cash items,
("EBITDA") if excess availability is less than $15.0 million for any 30
consecutive day period.
Cash provided by operating activities was $24.7 million in fiscal 2002 compared
to $25.8 million in fiscal 2001. The increase in net loss in 2002 was offset by
an improvement in working capital, primarily a $31.6 million decrease in
inventories, net of an $11.8 million decrease in accounts payable.
Capital expenditures, net of construction allowances, were $20.4 million in
fiscal 2002 compared to $42.6 million in fiscal 2001. Capital expenditures in
2002 related primarily to the opening of 16 retail stores during the year.
Capital expenditures in 2001 related primarily to the opening of 34 retail
stores and for systems enhancements, primarily the SAP enterprise resource
planning system.
Capital expenditures are expected to be approximately $10.0 million in fiscal
2003, primarily for the opening of four retail stores. The expected capital
expenditures will be funded from internally generated cash flows and by
borrowings from available financing sources.
There were no borrowings under the Revolving Credit Facility at February 1, 2003
and February 2, 2002. Average borrowings under the Revolving Credit Facility
were $40.4 million for fiscal 2002 and $43.1 million for fiscal 2001.
Effective October 15, 2002, the interest payments accruing on the 13 1/8% Senior
Discount Debentures became payable in cash on April 15 and October 15 of each
year subsequent thereto. The annual cash payments will be approximately $18.6
million. On April 4, 2003, Holdings commenced through J. Crew Intermediate LLC,
its newly formed wholly-owned subsidiary ("Intermediate"), an offer to exchange
the outstanding 13 1/8% Senior Discount Debentures due 2008 issued by Holdings
for Intermediate's unissued 16.0% Senior Discount Contingent Principal Notes due
2008.
Holdings will not pay accrued and unpaid interest on the existing debentures on
the scheduled interest payment date of April 15, 2003. Rather, Holdings will pay
such interest on the settlement date of the exchange offer (which is expected to
occur on or about May 6, 2003) together with interest thereon at a rate of
13 1/8% per annum from April 15, 2003 to the settlement date, to the holders of
the existing debentures who do not tender their existing debentures in the
exchange offer.
S-17
Management believes that cash flow from operations and availability under the
Congress Credit Facility will provide adequate funds for the Company's
foreseeable working capital needs, planned capital expenditures and debt service
obligations. The Company's ability to fund its operations and make planned
capital expenditures, to make scheduled debt payments, to refinance indebtedness
and to remain in compliance with the financial covenants under its debt
agreements depends on its future operating performance and cash flow, which in
turn, are subject to prevailing economic conditions and to financial, business
and other factors, some of which are beyond its control.
Contractual Obligations And Other Commercial Commitments
The following summarizes the Company's contractual and other commercial
obligations as of February 1, 2003 and the effect such obligations are expected
to have on its liquidity and cash flows in future periods.
Contractual Obligations Within 1 year 2 - 3 years 4 - 5 years after 5 years Total
- ----------------------- ------------- ----------- ----------- ------------- -----
($ in millions)
Long term debt $ -- $ -- $ 150.0 $ 142.0 $ 292.0
Operating lease obligations 52.4 97.3 88.8 143.9 382.4
Inventory purchase commitments 110.2 -- -- -- 110.2
------- ------- ------- -------- -------
$ 162.6 $ 97.3 $ 238.8 $ 285.9 $ 784.6
======= ======= ======= ======== =======
Other commercial commitments Within 1 year 2 - 3 years 4 - 5 years after 5 years Total
- ---------------------------- ------------- ----------- ----------- ------------- -----
Letters of Credit
Stand by $ .7 $ -- $ -- $ 1.9 $ 2.6
Import 43.3 -- -- -- 43.3
------- ------- ------- -------- -------
$ 44.0 $ -- $ -- $ 1.9 $ 45.9
======= ======= ======= ======== =======
Impact of Inflation
The Company's results of operations and financial condition are presented based
upon historical cost. While it is difficult to accurately measure the impact of
inflation due to the imprecise nature of the estimates required, the Company
believes that the effects of inflation, if any, on its results of operations and
financial condition have been minor. However, there can be no assurance that
during a period of significant inflation, the Company's results of operations
would not be adversely affected.
Seasonality
The Company's retail and direct businesses experience two distinct selling
seasons, spring and fall. The spring season is comprised of the first and second
quarters and the fall season is comprised of the third and fourth quarters. Net
sales are usually substantially higher in the fall season and selling, general
and administrative expenses as a percentage of net sales are usually higher in
the spring season. Approximately 32% of annual net sales in fiscal 2002 occurred
in the fourth quarter. The Company's working capital requirements also fluctuate
throughout the year, increasing substantially in September and October in
anticipation of the holiday season inventory requirements.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - J.CREW OPERATING CORP.
This discussion should be read in conjunction with the audited consolidated
financial statement of J.Crew Operating Corp. and subsidiaries for the two year
period ended February 1, 2003 and notes thereto included elsewhere in this
Annual Report on Form 10-K.
S-18
Results of Operations
Fiscal 2002 Compared to Fiscal 2001
Revenues
Revenues in the fiscal year ended February 1, 2003 decreased 1.5% to $766.4
million from $778.0 million in the fiscal year ended February 2, 2002.
J. Crew Retail net sales increased by 2.5% from $398.0 million in fiscal 2001 to
$408.0 million in fiscal 2002. The percentage of the Company's total net sales
derived from J. Crew Retail increased to 55.7% in fiscal year 2002 compared to
53.7% in fiscal 2001. The increase in net sales was due to net sales from stores
opened for less than a full fiscal year. This increase was offset by a decrease
of 10.4% in comparable store sales. The decrease in comparable store sales was
primarily attributable to a decrease in store traffic. There were 152 retail
stores open at February 1, 2003 compared to 136 at February 2, 2002.
J. Crew Direct net sales (which includes net sales from catalog and internet
operations) decreased by 4.0% from $258.2 million in fiscal 2001 to $248.0
million in fiscal 2002. The percentage of the Company's total net sales derived
from J. Crew Direct decreased to 33.9% in fiscal 2002 from 34.8% in fiscal 2001.
Catalog net sales decreased to $108.6 million in fiscal 2002 from $135.3 million
in fiscal 2001. Pages circulated decreased from 8.3 billion in fiscal 2001 to
7.8 billion in fiscal 2002. Internet net sales increased to $139.4 million in
fiscal 2002 from $122.9 million in fiscal 2001 as the Company continued to
migrate catalog customers to the Internet.
J.Crew Factory net sales decreased from $85.1 million in fiscal 2001 to $76.2
million in fiscal 2002. The percentage of the Company's total net sales derived
from J. Crew Factory decreased to 10.4% in fiscal 2002 from 11.5% in fiscal
2001. Comparable store sales for J. Crew Factory decreased by 14.1% in fiscal
2002. There were 42 J. Crew Factory stores open at February 1, 2003 compared to
41 at February 2, 2002.
Other revenues which consist of shipping and handling fees and royalties
decreased to $34.1 million in fiscal 2002 from $36.7 million in fiscal 2001,
primarily as a result of a decrease in shipping and handling fees which is
attributable to the decrease in net sales of J.Crew Direct.
Cost of sales, including buying and occupancy costs
Cost of sales (including buying and occupancy costs) as a percentage of revenues
increased to 62.5% in fiscal 2002 from 59.4% in fiscal 2001. This increase was
caused by a 130 basis point increase in buying and occupancy costs caused by a
decrease in leverage related to the decline in comp store sales and an 180 basis
point decrease in merchandising margin due to markdowns taken to clear
inventories in the fourth quarter which contributed to the improvement in our
year-end inventory position compared to the prior year. The fourth quarter also
included a $9,000,000 charge as a result of the Company's decision to modify its
strategy on the disposition of inventory to accelerate inventory clearing at the
end of each selling season.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased to $291.1 million in
fiscal 2002 (38.0% of revenues) from $294.9 million in fiscal 2001 (37.9% of
revenues).
Selling expenses were $53.2 million in fiscal 2002 (6.9% of revenues) compared
to $60.8 million in fiscal 2001 (7.8% of revenues). This decrease was due to a
decrease in pages circulated from 8.3 billion pages in fiscal year 2001 to 7.8
billion pages in fiscal 2002 and a decrease in paper costs.
General and administrative expenses increased to $237.9 million in fiscal 2002
(31.0% of revenues) from $234.1 million in fiscal 2001 (30.1% of revenues). This
increase resulted from severance and other one-time employment related charges
of $13.7 million in fiscal year 2002 versus $3.2 million last year and
additional retail stores in operation in 2002 partially offset by the cost
reduction initiatives instituted in the first quarter of 2002.
S-19
Interest expense
Interest expense, net was $23.4 million in fiscal year 2002 compared to $20.9
million in fiscal 2001. The increase in interest expense resulted primarily from
an increase of $2.5 million in amortization of deferred financing costs,
including $1.8 million related to the old revolving credit arrangement which
were written off in December 2002. Average borrowings under the Revolving Credit
Facility were $40.4 million in fiscal year 2002 compared to $43.1 million in
fiscal 2001.
Income Taxes
The effective tax rate was a benefit of 66.8% in fiscal 2002 compared to a
benefit of 73.2% in fiscal 2001. The benefit in 2002 resulted from the reversal
of prior year tax accruals, whereas the 2001 effective rate was effected by the
low dollar amount of pre-tax income.
Factors Affecting Future Results of Operations
We must successfully gauge fashion trends and changing consumer preferences to
succeed.
We believe that our success depends in substantial part on our 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 we will be successful in this regard. We attempt to reduce the
risks of changing fashion trends and product acceptance by devoting a
substantial portion of our product line to basic durables which are not
significantly modified from year to year. Nevertheless, if we misjudge the
market for our products, we may be faced with significant excess inventories for
some products and missed opportunities with others.
The fashion and apparel industry is highly competitive.
The fashion and apparel industry is highly competitive. We compete primarily
with other catalog operations, specialty brand retailers, department stores,
mass merchandisers and Internet businesses that engage in the retail sale of
men's and women's apparel, accessories footwear and general merchandise. We
believe that the principal bases upon which we compete are quality, design,
efficient service, selection and price. However, many of our competitors are
larger and have greater financial, marketing and other resources, and there can
be no assurance that we will be able to compete successfully with them in the
future. We have lost market share to some of our competitors in the recent past,
and we may not recover that share and could also lose additional market share in
the future if we do not strengthen our competitive position.
Competition for qualified personnel is intense in the fashion and apparel
industry.
Our ability to anticipate and effectively respond to changing fashion trends
depends in part on our ability to attract and retain key personnel in our
design, merchandising and marketing staff. Competition for these personnel is
intense, and there can be no assurance that we will be able to attract and
retain a sufficient number of qualified personnel in the future. Our future
performance depends, in substantial part, on the performance of our new
management team implemented in January 2003. We rely, in particular, on the
strategic guidance of Millard S. Drexler, our Chief Executive Officer, and
Jeffrey A. Pfeifle, our President. The loss, for any reason, of the services of
either of these individuals could have a material adverse effect on us.
The fashion and apparel industry is cyclical and further decline in consumer
spending on apparel and accessories could have an adverse effect on our results
of operation.
The industry in which we operate is cyclical. Purchases of apparel and related
merchandise is sensitive to a number of factors that influence the levels of
general consumer spending, including economic conditions and the level of
disposable consumer income, consumer debt, interest rates and consumer
confidence. The recent and current recessionary economic environment has had a
negative impact on our sales and has contributed to a higher level of
promotional sales activities, which have adversely affected our profitability.
The war in Iraq or acts of terrorism in the United States or world wide
S-20
may prolong the current recessionary economic environment. A further decline in
consumer spending on apparel and accessories could have an adverse effect on our
financial condition and results of operations.
Increase in costs of mailing, paper and printing will have an adverse effect on
our results of operations.
Postal rate increases and paper and printing costs affect the cost of our
catalog and promotional mailings. We rely on discounts from the basic postal
rate structure, such as discounts for bulk mailings and sorting by zip code and
carrier routes. We are not a party to any long-term contracts for the supply of
paper. Our cost of paper has fluctuated significantly, and our future paper
costs are subject to supply and demand forces external to our business.
Consequently, there can be no assurance that we will not be subject to an
increase in paper costs. Future increases in postal rates or paper or printing
costs would have a negative impact on our earnings to the extent that we are
unable to pass such increases directly to customers or offset such increases by
raising selling prices or by implementing more efficient mailings.
We rely on foreign sourcing and are subject to a variety of risks associated
with doing business abroad.
In fiscal 2002, approximately 95% of our merchandise was sourced from
independent foreign factories located primarily in Asia, and many of our
domestic vendors import a substantial portion of their merchandise from abroad.
Any event causing a sudden disruption of manufacturing or imports from China,
including the imposition of additional import restrictions, could have a
material adverse impact on our operations. We have no long-term merchandise
supply contracts, and many of our imports are subject to existing or potential
duties, tariffs or quotas that may limit the quantity of certain types of goods
that may be imported into the United States from countries in those regions. We
compete with other companies for production facilities and import quota
capacity. Our business is also subject to a variety of other risks generally
associated with doing business abroad, such as political instability, currency
and exchange risks and potential local issues. Trade restrictions, including
increased tariffs or quotas, against apparel and other items sold by us could
increase the cost or reduce the supply of merchandise available to us and
adversely affect our business, financial condition and results of operations.
Our sourcing operations may also be adversely affected by political and
financial instability in any country in which our goods are produced or acts of
war or terrorism in the United States or worldwide to the extent these acts
impact the production, shipment or receipt of merchandise. Our future
performance will be subject to such factors, which are beyond our control, and
there can be no assurance that such factors would not have a material adverse
effect on our financial condition and results of operations.
We require our licensing partner and independent manufacturers to operate in
compliance with applicable laws and regulations. While our internal and vendor
operating guidelines promote ethical business practices, we do not control such
manufacturers or their labor practices. Violation of labor or other laws by our
independent manufacturers or our licensing partner, or the divergence of an
independent manufacturer's or our licensing partner's labor practices from those
generally accepted as ethical in the United States, could have a material
adverse effect on our financial condition and results of operations if, as a
result of such violation, we were to incur substantial liability or attract
negative publicity that damaged our brand.
Success of J.Crew Retail growth strategy remains uncertain.
We intend to expand our base of J.Crew retail stores as part of our growth
strategy. There can be no assurance that this strategy will be successful. Our
success depends, in part on our ability to improve sales and margins in our
stores. 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 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
can be no assurance that we will be able to open and operate new stores on a
timely or profitable basis. We believe that the opening of J.Crew retail stores
has diverted some revenues from the J.Crew Direct operations. There can be no
assurance that future store openings will not continue to have such an effect.
Our quarterly results of operations fluctuate significantly due to seasonality
and a variety of other factors.
We experience seasonal fluctuations in revenues and operating income, with a
disproportionate amount of our revenues and a majority of our income from
operations typically realized during the fourth quarter of each fiscal year.
Revenues and income from operations are generally weakest during the first and
second quarters of each fiscal year. Our quarterly results of operations may
also fluctuate significantly as a result of variety of other factors, including
the timing of new
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store openings and of catalog mailings, and the revenues contributed by new
stores, merchandise mix and the timing and level of markdowns.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal market risk relates to interest rate sensitivity, which
is the risk that future changes in interest rates will reduce net income or the
net assets of the Company. The Company's variable rate debt consists of
borrowings under the Congress Credit Facility. The interest rates are a function
of the bank prime rate or LIBOR. A one percentage point change in the base
interest rate would result in approximately $400,000 change in income before
taxes.
The Company enters into letters of credit to facilitate the international
purchase of merchandise. The letters of credit are primarily denominated in U.S.
dollars. Outstanding letters of credit at February 1, 2003 were approximately
$45.9 million.
The Company has a licensing agreement in Japan which provides for royalty
payments based on sales of J. Crew merchandise as denominated in yen. The
Company has from time to time entered into forward foreign exchange contracts to
minimize this risk. There were no forward foreign exchange contracts outstanding
during fiscal year 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are set forth herein commencing on page F-1 of this
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
Information required by items 10 - 14 with respect to Operating Corp. has been
omitted pursuant to General Instruction I of Form 10-K. Information required by
items 10 -14 with respect to Holdings is described below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of individuals who are
serving as directors and executive officers of Holdings as of April 1, 2003.
Each director of Holdings will hold office until the next annual meeting of
shareholders or until his or her successor has been elected and qualified.
Officers are elected by the Board of Directors and serve at the discretion of
the Board.
Name Age Position
- ---- --- --------
Millard S. Drexler ................... 58 Chief Executive Officer, Chairman of the Board and Director
Jeffrey A. Pfeifle ................... 44 President
Kathy Boyer .......................... 54 Executive Vice President, Merchandising
Michael Dadario ...................... 44 Executive Vice President, Stores
Scott M. Rosen ....................... 44 Executive Vice President, Chief Financial Officer
Scott Gilbertson ..................... 34 Chief Operating Officer
Scott D. Hyatt ....................... 45 Senior Vice President, Manufacturing
Nicholas Lamberti .................... 60 Vice President, Corporate Controller
Richard W. Boyce ..................... 48 Director
Jonathan J. Coslet ................... 38 Director
James G. Coulter ..................... 43 Director
Steven Grand-Jean .................... 60 Director
Thomas W. Scott ...................... 37 Director
Josh S. Weston ....................... 74 Director
Emily Woods .......................... 41 Director
Millard S. Drexler
Mr. Drexler has been Chief Executive Officer since January 2003 and became
Chairman of the Board and a Director in March 2003. Before joining Holdings, he
was Chief Executive Officer of The Gap, Inc. from 1995 until September 2002, and
prior thereto he was President of The Gap, Inc. since 1987. Mr. Drexler also
serves as a director of Apple Computer Inc.
Jeffrey A. Pfeifle
Mr. Pfeifle has been President since February 2003. Before joining
Holdings, he was Executive Vice President, Product and Design of the Old Navy
division of The Gap, Inc. from 1995.
Kathy Boyer
Ms. Boyer has been Executive Vice President, Merchandising since June 2002.
Before joining Holdings, she was Senior Vice President, Merchandising of the
Banana Republic division of The Gap, Inc. from 1995 to September 2001.
Michael Dadario
Mr. Dadario has been Executive Vice President, Stores since January 2003.
Before joining Holdings, he was a retail consultant with Sense Consulting from
February 2000 until end of 2002 and Executive Vice President (retail store
operations) of the Banana Republic division of The Gap, Inc. for more than five
years.
S-23
Scott M. Rosen
Mr. Rosen has been Executive Vice President and Chief Financial Officer
since 1999. He was Senior Vice President and Chief Financial Officer from 1998
to 1999 and prior thereto he was Chief Financial Officer of the Mail Order
Division for four years.
Scott Gilbertson
Mr. Gilbertson has been Chief Operating Officer since January 2003. Before
joining Holdings, he was a principal of Texas Pacific Group from January 2001 to
January 2003 and a portion of 1998. He was a founding partner of eVolution
Global Partners (a private venture capital company) from March 2000 to January
2001 and held various positions at Holdings from September 1998 to April 2000,
including President of e-commerce.
Scott D. Hyatt
Mr. Hyatt has been Senior Vice President, Manufacturing since 1998. Before
joining Holdings, he was Vice President, Production and Source of the Express
division of Limited Brands (retail apparel company) from 1996 to 1998.
Nicholas Lamberti
Mr. Lamberti has been Vice President, Corporate Controller for more than
five years.
Richard W. Boyce
Mr. Boyce became a director in 1997 and has served as Chief Executive
Officer during portions of 1997 and 1999 while also providing operating
oversight to the remainder of the Texas Pacific Group portfolio. He is the
senior operating partner of Texas Pacific Group and joined Texas Pacific Group
in 1997. He was Chairman of Favorite Brands International Holding Corp., which
filed for protection under Chapter 11 of the Bankruptcy Code in 1999. He is also
a director of Burger King Corp., ON Semiconductor Corporation and Spirit Group
Holdings, Ltd.
Jonathan J. Coslet
Mr. Coslet became a director in 2003. He is a senior partner of Texas
Pacific Group, responsible for the firm's generalist and healthcare investment
activities. Prior to joining Texas Pacific Group, Mr. Coslet worked in the
investment banking department of Donaldson, Lufkin & Jenrett, specializing in
leveraged acquisitions and high-yield finance from 1991 to 1993. He is a
director of Magellan Health Services, Inc., Oxford Health Plans, Inc., Petco
Animal Supplies, Inc., Endurance Specialty and Burger King Corporation.
James G. Coulter
Mr. Coulter became a director in 1997. He is a founding partner of Texas
Pacific Group and has been Managing General Partner of Texas Pacific Group for
more than eight years. He is a director of Genesis Health Ventures, Inc.,
Globespan, Inc., Seagate Technology, Inc., MEMC Electronic Materials, Inc.,
Evolution Global Partners and Zhone Technologies.
Steven Grand-Jean
Mr. Grand-Jean became a director in 2003. He has been President of
Grand-Jean Capital Management for more than five years.
Thomas W. Scott
Mr. Scott became a director in January 2002. He is a founding partner of
Nantucket Allserve Inc. (beverage supplier) and has been Co-Chairman thereof
since 1989 and Co-Chairman and Co-Chief Executive Officer from 1989 to
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2000. He has also been Co-Chairman of Shelflink (supply chain software company)
since 2000. Mr. Scott is married to Emily Woods, the Chairperson of the Board of
Directors of Holdings.
Josh S. Weston
Mr. Weston became a director in 1998. He has been Honorary Chairman of the
Board of Directors of Automatic Data Processing (computing services business)
since 1998. He was Chairman of the Board of Automatic Data Processing from 1996
until 1998, and Chairman and Chief Executive Officer for more than five years
prior thereto. He is also a director of Gentiva Health Services, Inc., Aegis
Communications Group, Inc. and Russ Berrie & Company, Inc.
Emily Woods
Ms. Woods resigned as Chairperson of the Board of Directors of Holdings in
March 2003 but continues to serve as director. She co-founded the J. Crew brand
in 1983 and has served as Chief Executive Officer and Vice Chairperson of
Holdings and as Chief Executive Officer of Operating Corp. She is also a
director of Yankee Candle Company, Inc. Ms. Woods is married to Thomas Scott, a
director of Holdings.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid by Holdings for fiscal
2002, 2001, and 2000:
. to each individual serving as our chief executive officer during
fiscal 2002;
. to each of the four other most highly compensated executive
officers as of the end of fiscal 2002; and
. to two additional executive officers who were not employed as of
the end of fiscal 2002.
Long-Term Compensation
Annual Compensation Awards Payouts
------------------- ------ -------
Numbers of
Restricted Securities
Name Stock Underlying LTIP All Other
And Fiscal Salary Bonus Other Award(s) Options/ Payouts Compensation
--------
Principal Position Year ($) ($) ($) (1) SARS (1) ($) ($) (2)
------------------ ---- --- --- --- --- -------- --- -------
Millard S. Drexler ............... 2002 -- -- -- (4) 2,231,704 -- --
Chief Executive Officer
And Chairman (3)
Kenneth S. Pilot ................. 2002 201,900 520,000(5) -- 105,000 150,000 -- 3,341,900
Chief Executive Officer (6)
Mark A. Sarvary .................. 2002 247,700 -- -- -- -- -- 1,407,500
Chief Executive Officer (7) 2001 675,000 -- -- -- -- -- 5,250
2000 675,000 502,500 -- -- -- -- 5,250
Emily Woods ...................... 2002 886,900 -- -- -- -- -- 7,600
Director (8) 2001 1,000,000 -- -- -- -- -- 5,250
2000 1,000,000 1,000,000 -- -- -- -- 5,250
Blair Gordon (9) ................. 2002 400,000 -- -- -- 30,000 -- --
Executive Vice President,
Creative Director
Scott D. Hyatt ................... 2002 364,000 -- -- -- -- -- 9,700
Senior Vice President, 2001 364,000 -- -- -- 10,000 -- 5,250
Manufacturing 2000 350,000 183,800 -- -- -- -- 5,250
Walter Killough (10) ............. 2002 390,000 -- -- -- -- -- 7,400
Executive Vice President, 2001 390,000 -- -- -- 25,000 -- 5,250
Direct and Supply Chain 2000 390,000 429,400 -- -- 18,600 -- 5,250
Scott M. Rosen ................... 2002 365,000 -- -- -- -- -- 7,400
Executive Vice President, 2001 365,000 -- -- -- -- -- 5,250
Chief Financial Officer 2000 357,000 298,800 -- -- 18,600 -- 5,250
Michael Scandiffio (11) .......... 2002 402,000 -- -- -- -- 157,900
Executive Vice President, Mens 2001 262,800 100,000(5) -- -- 40,000 -- 223,600
- -----------------
(1) There is no established public market for shares of Holdings common stock.
Holders of restricted stock have the same right to receive dividends as
other holders of Holdings common stock. Holdings has not paid any cash
dividends on its common stock.
(2) For Mr. Pilot, this includes $2,494,500 in severance compensation paid upon
the termination of his employment and $847,400 in relocation compensation.
For Mr. Sarvary, this includes $1,400,000 in severance compensation paid
upon the termination of his employment. For Mr. Scandiffio, this includes
$293,900 in relocation compensation and $85,000 in severance compensation.
The remaining amounts represent Holdings' matching contributions to its
401(k) plan.
(3) Mr. Drexler became Chief Executive Officer in January 2003 and Chairman of
the Board of Directors in March 2003.
(4) Mr. Drexler was granted 725,303 shares of Holdings common stock on February
12, 2003, of which 181,326 shares will vest on each January 27 of 2004,
2005 and 2006 and 181,325 shares will vest on January 27, 2007. Mr. Drexler
paid $800,000 to Holdings for these shares, which was in excess of their
fair market value at the time of grant. A corporation of which Mr. Drexler
is a principal was also granted 55,793 shares of Holdings common stock on
February 12, 2003, all of which vested immediately upon grant.
(5) Represents sign-on bonus.
(6) Mr. Pilot was Chief Executive Officer from September 2002 to January 2003.
(7) Mr. Sarvary's employment terminated in April 2002.
(8) Ms. Woods was granted 661,600 shares of Holdings common stock on October
17, 1997, all of which are currently vested. Ms. Woods was Chairperson of
the Board until her resignation from this position in March 2003.
(9) Mr. Gordon's employment commenced in January 2002 and terminated in January
2003.
(10) Mr. Killough's employment terminated in March 2003.
S-26
(11) Mr. Scandiffio's employment commenced in June 2001 and terminated in
October 2002.
The following table shows information concerning stock options to purchase
shares of Holdings common stock granted to any of the named executive officers
during fiscal 2002.
Potential Realizable Value at Assumed Annual
Rates of Stock Price Appreciation for
Individual Grants Option Term (2)
----------------- ---------------
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Expiration
Name Granted (1) Fiscal Year Price($/Sh) Date 5%($) 10% ($)
- ---- ----------- ----------- ----------- ---- ----- -------
Blair Gordon (2) ...... 30,000 7% $10.00 2/28/2012 -- --
(1) Holdings has not granted any SARs.
(2) Mr. Gordon's employment terminated in January 2003, at which time all of
these options were forfeited automatically pursuant to Holdings' Stock
Option Plan. As a result, the potential realizable value for these options
is zero.
The following table shows the number of stock options held to purchase shares of
Holdings common stock by the named executive officers at the end of fiscal 2002.
The named executive officers did not exercise any stock options in fiscal 2002.
Value of Unexercised
Number of Securities In-the-Money Options/
Underlying Unexercised SARs at Fiscal Year End
Options at Fiscal Year End ($) (1)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------------ -----------------------------
Millard S. Drexler (2) ..................................... 0/2,231,704 0/0
Kenneth S. Pilot (3) ....................................... 0/0 0/0
Mark A. Sarvary (4) ........................................ 163,200/0 0/0
Scott D. Hyatt ............................................. 22,000/13,000 0/0
Walter Killough (5) ........................................ 47,560/27,440 0/0
Scott M. Rosen ............................................. 47,560/27,440 0/0
Emily Woods ................................................ 164,000/328,200 0/0
Blair Gordon (6) ........................................... 0/0 0/0
Michael Scandiffio (7) ..................................... 0/0 0/0
- ------------
(1) There is no established public market for shares of Holdings common stock.
(2) Mr. Drexler became Chief Executive Officer in January 2003.
(3) Mr. Pilot was Chief Executive Officer from September 2002 to January 2003.
(4) Mr. Sarvary resigned as Chief Executive Officer in April 2002.
(5) Mr. Killough's employment terminated in March 2003.
(6) Mr. Gordon's employment terminated in January 2003.
(7) Mr. Scandiffio's employment terminated in October 2002.
Employment Agreements and Other Compensation Arrangements
Employment Agreements
Emily Woods. Ms. Woods had an employment agreement with Holdings and
Operating Corp. pursuant to which she served as Chairperson of the Board of
Directors of Holdings for five years beginning on October 17, 1997. The
agreement provided for a minimum annual base salary of $1.0 million, an annual
bonus of up to $1.0 million based on achievement of earnings objectives to be
determined each year, the grant of 661,600 shares of Holdings Common Stock,
which we refer to as the "Woods Restricted Shares", the reimbursement of income
taxes incurred by Ms. Woods in connection with such grant, and various executive
benefits and perquisites. The employment agreement expired by its terms on
October 17, 2002. Ms. Woods currently receives an annual base salary of
$200,000.
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Under the terms of stock options awarded to Ms. Woods under Holdings'
stock option plan, all unvested options shall become exercisable (1) if Ms.
Woods' employment is terminated by Holdings without cause, by Ms. Woods for good
reason or by reason of death or disability or (2) in the event of a change in
control of Holdings.
Millard S. Drexler. Mr. Drexler has a services agreement with Holdings
and Operating Corp. pursuant to which he will serve as Chief Executive Officer
for five years beginning on January 27, 2003, provided that Mr. Drexler can step
down as Chief Executive Officer after January 2006 and serve only as Executive
Chairman. The agreement provides for a minimum annual base salary of $200,000,
an annual bonus based on the achievement of earnings objectives to be determined
each year, and reimbursement of business expenses, provided that such total
compensation not exceed $700,000 per year. The agreement also provides for the
grant of options to purchase 557,926 shares of Holdings common stock, which we
refer to as initial options, and the grant of premium options to purchase an
additional 1,673,778 shares of Holdings common stock, which we refer to as
premium options. The agreement also provides for the grant of 55,793 immediately
vested shares of Holdings common stock and the grant of 725,303 shares of
Holdings common stock, which we refer to as the "Drexler Restricted Shares". We
refer you to footnote 4 to the Executive Compensation Table for information on
the vesting of the Drexler Restricted Shares. Mr. Drexler paid Holdings $200,000
for the Initial Options and $800,000 for the Drexler Restricted Shares.
If Mr. Drexler's employment is terminated without "cause" or for "good
reason" (each as defined in the services agreement), Mr. Drexler will be
entitled to receive his base salary for one year, the immediate vesting of any
unvested Drexler Restricted Shares and the immediate vesting of that portion of
the initial options and the premium options that would have become vested and
exercisable on the anniversary of the grant date immediately following the
termination date. If such termination occurs after a "change in control" (as
defined in the services agreement), all of the unvested initial options and
premium options will immediately vest and become exercisable.
Kenneth S. Pilot. Mr. Pilot had an employment agreement with Holdings
and Operating Corp. pursuant to which he would serve as Chief Executive Officer
for five years commencing on September 9, 2002. Holdings would also cause Mr.
Pilot to be elected as a director. The agreement provided for a minimum annual
base salary of $700,000, a signing bonus of $520,000, two additional payments of
$60,000 payable in September 2003 and 2004, and certain relocation benefits. The
agreement also provided for an annual bonus based on the achievement of earnings
objectives to be determined each year, provided that he was guaranteed prorated
bonuses for fiscal 2002 equal to 85% of his base salary and 42.5% of his base
salary for fiscal 2003. He also received a grant of 105,000 shares of Holdings
common stock, which we refer to as the "Pilot Restricted Shares", of which
35,000 shares would vest over time and 70,000 shares vested immediately, and a
grant of options to purchase 150,000 shares of Holdings common stock. If Mr.
Pilot was terminated without "cause" or for "good reason" (as defined in the
employment agreement), he was entitled to receive any accrued bonus and a
lump-sum payment equal to two times his base salary.
Mr. Pilot resigned effective January 29, 2003. Pursuant to his
separation agreement, Mr. Pilot was entitled to $2,494,500 in severance
compensation, the immediate vesting of 35,000 Pilot Restricted Shares, the
continuation of his medical benefits for the eighteen month period following his
resignation and certain outplacement benefits. In addition, Holdings waived the
call rights it had in respect of such Pilot Restricted Shares.
Mark A. Sarvary. Mr. Sarvary had an employment agreement with Holdings
and Operating Corp. pursuant to which he would serve as Chief Executive Officer
for a period of five years commencing on May 10, 1999. Holdings would also cause
Mr. Sarvary to be elected as a director.
The agreement provided for a minimum annual base salary of $670,000, a
$1,000,000 signing bonus, and an annual target bonus of 50% of his annual base
salary based on achievement of earnings objectives to be determined each year.
The agreement also provided for the grant of options to purchase 272,000 shares
of Holdings common stock and the grant of additional options to purchase 68,000
shares on the earlier of the date of an initial public offering of Holdings
common stock or May 10, 2004. In the event of a change in Mr. Sarvary's duties
and responsibilities, upon the termination of Mr. Sarvary's employment, he was
entitled to receive severance and other benefits described in the January 15,
2002 amendment to his employment agreement. These included a lump-sum payment
equal to two times his base salary and the continuation of medical and life
insurance benefits for a period of time after the termination date. In addition,
all of his vested options will remain exercisable for three years.
Mr. Sarvary resigned effective April 30, 2002. Pursuant to his
separation agreement, he is entitled to $1,400,000
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in severance compensation and the continuation of medical benefits for two years
and life insurance benefits for 21 months. In addition, the portion of his stock
options scheduled to vest on the anniversary of their grant date following the
termination date was permitted to vest and become exercisable.
Blair Gordon. Mr. Gordon had an employment agreement with Holdings and
Operating Corp. pursuant to which he would serve as Executive Vice-President and
Creative Director for three years commencing on January 7, 2002. The agreement
provided for a minimum annual base salary of $400,000, an annual bonus based on
achievement of earnings objectives to be determined each year, and the grant of
options to purchase 30,000 shares of Holdings common stock. The agreement also
provided for the continuation of Mr. Gordon's base salary and medical benefits
for one year if he was terminated without "cause" (as defined in the employment
agreement). Mr. Gordon's employment terminated effective January 30, 2003.
Pursuant to his separation agreement, he is entitled to these payments and
benefits.
Walter Killough. Mr. Killough had a severance agreement with Holdings
and Operating Corp. which provided that, in the event of a termination for any
reason other than death, disability or cause, as defined in the severance
agreement, he will receive a continuation of his base salary and certain expense
reimbursement for a period of one year, subject to offset if he obtains new
full-time employment during that period. Mr. Killough's employment terminated
effective March 14, 2003. Pursuant to his agreement, he is entitled to these
payments and benefits.
Michael Scandiffio. Mr. Scandiffio had an employment agreement with
Holdings and Operating Corp. pursuant to which he would serve as Executive
Vice-President of Mens for three years commencing June 12, 2001. The agreement
provided for a minimum annual base salary of $480,000, a $100,000 signing bonus,
an annual bonus based on achievement of earnings objectives to be determined
each year, and the grant of options to purchase 40,000 shares of Holdings common
stock. The agreement also provided for relocation benefits and the continuation
of base salary and medical benefits for one year if Mr. Scandiffio is terminated
without "cause" (as defined in the employment agreement). Mr. Scandiffio's
employment terminated effective October 17, 2002 as a result of which he is
entitled to these payments and benefits.
Executive Severance Arrangements
Messrs. Hyatt and Rosen each have an agreement with Holdings and
Operating Corp. which provides that, in the event of a termination without
"cause" (as defined in the agreement), he will receive a continuation of his
base salary and medical benefits for a period of one year after the termination
date and the payment of any bonus that he would otherwise have received for the
fiscal year ending before the termination date.
Shareholders Agreements
The Woods Restricted Shares, the Pilot Restricted Shares, and the
Drexler Restricted Shares and any shares of Holdings common stock acquired by
any of the named executive officers described above pursuant to the exercise of
options are subject to a shareholders' agreement providing for certain transfer
restrictions, registration rights and customary tag-along and drag-along rights.
In addition, Mr. Drexler's shareholders' agreement provides him with
certain rights to appoint three directors by himself and three additional
directors by mutual agreement with Texas Pacific Group, consent to our
operating/capital budgets, and antidilution and co-investment rights. Pursuant
to this right, Mr. Drexler appointed Steven Grand-Jean as a director in March
2003. The agreement also requires Mr. Drexler to pay $1.0 million to us if
Jeffrey Pfeifle, current President of Holdings and Operating Corp. is terminated
for cause or resigns without good reason, or if Mr. Pfeifle is terminated
without cause with Mr. Drexler's consent or for good reason as a result of
actions approved by Mr. Drexler before February 1, 2005. Mr. Drexler is also
required to pay the excess of $480,000 over Mr. Pfeifle's pro-rata bonus if such
termination is without cause or for good reason. If such termination occurs
between February 1, 2004 and February 1, 2005, Mr. Drexler is also required to
pay us the amount of any long-term incentive paid to Mr. Pfeifle, not to exceed
$400,000.
S-29
Compensation Committee Interlocks and Insider Participation
Ms. Woods, a director, and Mr. Boyce, a director and former Chief
Executive Officer, are members of the Compensation Committee of Holdings.
Compensation of Directors
An attendance fee of $10,000 for each Board of Directors meeting (up to a
maximum of $40,000 per year) is paid to each director who is neither an employee
of Holdings nor a representative of Texas Pacific Group. Directors have the
option to receive all or a portion of that fee paid in cash or in shares of
Holdings common stock at a per share purchase price equal to the fair market
value.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of
the common stock of Holdings as of April 1, 2003 for each person who is known to
Holdings to be the beneficial owner of 5% or more of Holdings common stock. The
holders listed have sole voting power and investment power over the shares held
by them, except as indicated by the notes following the table.
Name and Address Amount and Nature of Percent of
Title of Class of Beneficial Owner Beneficial Ownership Class
- -------------- ------------------- -------------------- -----
Common stock .............. TPG Partners II, L.P. 8,780,073 shares (1) (4) 59%
301 Commerce Street, Suite 3300
Fort Worth, TX 76102
Common stock .............. Emily Woods 2,429,177 shares (2) 16%
J. Crew Group, Inc.
770 Broadway
New York, NY 10003
Common stock .............. Millard S. Drexler 1,522,249 shares (3) (4) 10%
J. Crew Group, Inc.
770 Broadway
New York, NY 10003
- ---------------
(1) These shares of common stock are beneficially owned by Texas Pacific Group
and the following affiliates of Texas Pacific Group (collectively, "TPG
Affiliates"): TPG Parallel II L.P., TPG Partners II L.P., TPG Investors II,
L.P., and TPG Bacchus II, LLC.
(2) Includes 164,000 shares not currently owned but which are issuable upon the
exercise of stock options awarded under stock option plan that are
currently exercisable.
(3) These shares of common stock are beneficially owned by a company of which
Mr. Drexler is a principal.
(4) Includes 1,466,276 shares not currently owned but which are issuable to
each of TPG Bacchus II, LLC and Mr. Drexler's company upon the exercise by
each of them of an exchange right. We refer you to "Certain Relationships
and Related Transactions" for more information.
The following table sets forth information regarding the beneficial ownership of
each class of equity securities of Holdings as of April 1, 2003 for (a) each
director, (b) each of the executive officers identified in the table set forth
under Management and (c) all directors and executive officers as a group. The
holders listed have sole voting power and investment power over the shares held
by them, except as indicated by the notes following the table.
S-30
Number of Shares
and Nature of Percent of
Title of Class Name of Beneficial Owner Beneficial Ownership Class
- -------------- ------------------------ -------------------- -----
Common stock ..................... Richard W. Boyce 55,200 (1) *
Common stock ..................... Jonathan J. Coslet 8,780,073 (2) 59%
Common stock ..................... James G. Coulter 8,780,073 (2) 59%
Common stock ..................... Millard S. Drexler 1,522,249 (3) 10%
Common stock ..................... Scott D. Hyatt 22,000 (1)
Common stock ..................... Steven Grand-Jean
Common stock ..................... Walter Killough (4) 47,560 (1) *
Common stock ..................... Kenneth S. Pilot (5) 105,000
Common stock ..................... Scott M. Rosen 47,560 (1)
Common stock ..................... Mark A. Sarvary (6) 163,200 (1) *
Common stock ..................... Thomas W. Scott 0 *
Common stock ..................... Josh S. Weston 25,478 *
Common stock ..................... Emily Woods 2,429,177 (7) 16%
Common stock ..................... All directors and executive 13,197,497 (1)(2)(3)(7) 89%
officers as a group
Series A preferred stock ......... Jonathan J. Coslet 73,475 (2) 79%
Series A preferred stock ......... James G. Coulter 73,475 (2) 79%
Series A preferred stock ......... Josh S. Weston 60 *
Series A preferred stock ......... Emily Woods 2,979 3%
Series A preferred stock ......... All directors and executive 76,514 (2) 83%
officers as a group
- -------------
* Represents less than 1% of the class.
(1) These are shares not currently owned but which are issuable upon the
exercise of stock options awarded under the stock option plan that are
currently exercisable or become exercisable within 60 days.
(2) Attributes ownership of the shares beneficially owned by TPG Affiliates to
Messrs. Coslet and Coulter, who are partners of Texas Pacific Group.
Includes 1,466,276 shares not currently owned but which are issuable to TPG
Bacchus II, LLC upon the exercise of an exchange right. We refer you to
"Certain Relationships and Related Transactions" for more information.
Messrs. Coslet and Coulter disclaim beneficial ownership of the shares
owned by TPG Affiliates.
(3) Attributes ownership of the shares beneficially owned by Mr. Drexler's
company to Mr. Drexler. Includes 1,466,276 shares not currently owned but
which are issuable to Mr. Drexler's company upon the exercise of an
exchange right. We refer you to "Certain Relationships and Related
Transactions" for more information.
(4) Mr. Killough's employment terminated in March 2003.
(5) Mr. Pilot was Chief Executive Officer from September 2002 to January 2003.
(6) Mr. Sarvary resigned as Chief Executive Officer in April 2002.
(7) Includes 164,000 shares not currently owned but which are issuable upon the
exercise of stock options awarded under the stock option plan that are
currently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mark Sarvary Loan
In connection with Mr. Sarvary's relocation to our headquarters,
Holdings loaned Mr. Sarvary $1.0 million on an interest-free basis to purchase a
residence, which loan was secured by a mortgage on that residence. The largest
amount outstanding in fiscal 2002 was $850,000. As part of Mr. Sarvary's
separation from Holdings in April 2002, Mr. Sarvary agreed to repay the loan on
the earlier of (a) June 1, 2005, (b) the sale of his residence and (c) the first
anniversary of his employment with a new employer. In October 2002, Mr. Sarvary
paid $782,000 to Holdings in full satisfaction of the loan in exchange for a
$68,000 present value discount granted by us in consideration of his early
repayment.
Tax Sharing Arrangement
Holdings and its subsidiaries entered into a tax sharing agreement
providing (among other things) that each of the subsidiaries will reimburse
Holdings for its share of income taxes determined as if such subsidiary had
filed its tax returns on a "separate return" basis.
TPG-MD Investment Notes Payable
On February 4, 2003, Operating Corp. entered into a credit agreement
with TPG-MD Investment, LLC, an entity controlled by Texas Pacific Group and
Millard S. Drexler, which provides for:
S-31
. Tranche A loan in an aggregate principal amount of $10.0 million;
and
. Tranche B loan in an aggregate principal amount of $10.0 million.
The loans are due in February 2008 and bear interest at 5.0% per annum
payable semi-annually in arrears on January 31 and July 31, commencing on July
31, 2003. Interest will compound and be capitalized and added to the principal
amount on each interest payment date. Payment of the loans is subordinated in
right of payment to the prior payment of all senior debt and on the same terms
as Operating Corp.'s senior subordinated notes. The loans are guaranteed by
certain subsidiaries of Operating Corp.
The lender has the right, exercisable at anytime prior to the maturity
date, to exchange the principal amount of and accrued and unpaid interest on the
loans into shares of common stock of Holdings at an exercise price of $6.82 per
share. The lender also has the right to require Operating Corp. to prepay the
Tranche B loan without premium or penalty under certain circumstances.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Annual Report on Form 10-K, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of disclosure controls and
procedures as provided in Rule 13a-14 under the Securities Exchange Act of 1934,
as amended. There are inherent limitations on the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error and
the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this annual report has been made known to
them in a timely fashion. There have been no significant changes in internal
controls, or in factors that could significantly affect internal controls,
subsequent to the date the Chief Executive Officer and Chief Financial Officer
completed their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
S-32
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
J. Crew Group, Inc.
(a) 1. Financial Statements
The following financial statements of J. Crew Group, Inc. and
subsidiaries are included in Item 8:
(i) Report of KPMG LLP, Independent Auditors
(ii) Consolidated Balance Sheets as of February 1, 2003 and
February 2, 2002
(iii) Consolidated Statements of Operations - Years ended
February 1, 2003, February 2, 2002 and February 3, 2001
(iv) Consolidated Statements of changes in Stockholders' Deficit
- Years ended February 1, 2003, February 2, 2002 and
February 3, 2001
(v) Consolidated Statements of Cash Flows - Years ended
February 1, 2003, February 2, 2002 and February 3, 2001
(vi) Notes to consolidated financial statements
2. Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts.
3. Exhibits
The exhibits listed on the accompanying Exhibit Index are
incorporated by reference herein and filed as part of this report.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter
ended February 1, 2003:
Date of Report Item(s) Reported
-------------- ----------------
Dec. 27, 2002 Item 5
Jan. 27, 2003 Item 5
(c) Exhibits
See Item 15(a) 3 above.
(d) Financial Statement Schedules
See Item 15(a) 1 and 15(a) 2 above.
S-33
J. Crew Operating Corp.
(a) 1. Financial Statements
The following financial statements of J. Crew Operating Corp. and
subsidiaries are included in Item 8:
(i) Report of KPMG LLP, Independent Auditors
(ii) Consolidated Balance Sheets as of February 1, 2003 and
February 2, 2002
(iii) Consolidated Statements of Operations - Years ended
February 1, 2003, February 2, 2002 and February 3, 2001
(iv) Consolidated Statements of Cash Flows - Years ended
February 1, 2003, February 2, 2002 and February 3, 2001
(v) Notes to consolidated financial statements
2. Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts.
S-34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
J. CREW GROUP, INC.
Date: April 21, 2003 J. CREW OPERATING CORP.
By: /s/ Millard S. Drexler
------------------------
Millard S. Drexler
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of each
registrant and in the capacities indicated, on April 21, 2003.
Signature Title
--------- -----
/s/ Millard S. Drexler Chairman of the Board, Chief Executive Officer
--------------------------- and a Director (Principal Executive Officer)
Millard S. Drexler
/s/ Scott M. Rosen Executive Vice President, Chief Financial
--------------------------- Officer (Principal Financial Officer)
Scott M. Rosen
/s/ Nicholas Lamberti Vice President, Corporate Controller
--------------------------- (Principal Accounting Officer)
Nicholas Lamberti
/s/ Richard W. Boyce Director
---------------------------
Richard W. Boyce
/s/ Jonathan J. Coslet Director
---------------------------
Jonathan J. Coslet
/s/ James G. Coulter Director
---------------------------
James G. Coulter
/s/ Steven Grand-Jean Director
---------------------------
Steven Grand-Jean
/s/ Thomas W. Scott Director
---------------------------
Thomas W. Scott
/s/ Josh Weston Director
---------------------------
Josh Weston
/s/ Emily Woods Director
---------------------------
Emily Woods
S-35
CERTIFICATION
I, Millard S. Drexler, certify that:
1. I have reviewed this annual report on Form 10-K of J. Crew Group, Inc.
and J. Crew Operating Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of each registrant as of, and for, the periods presented in this
annual report.
4. Each registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for such registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to such registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of such registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Report"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. Each registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to such registrant's auditors and the
audit committee of such registrant's board of directors (or persons
performing the equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect such registrant's ability to
record, process, summarize and report financial data and have
identified for such registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in such registrant's
internal controls; and
6. Each registrant's other certifying officers and I have indicated in this
annual report whether or not there were any significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
April 21, 2003 /s/ Millard S. Drexler
----------------------
Millard S. Drexler
Chief Executive Officer
S-36
CERTIFICATION
I, Scott M. Rosen, certify that:
1. I have reviewed this annual report on Form 10-K of J. Crew Group, Inc.
and J. Crew Operating Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of each registrant as of, and for, the periods presented in this
annual report.
4. Each registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for such registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to such registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of such registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Report"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. Each registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to such registrant's auditors and the
audit committee of such registrant's board of directors (or persons
performing the equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect such registrant's ability to
record, process, summarize and report financial data and have
identified for such registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in such registrant's
internal controls; and
6. Each registrant's other certifying officers and I have indicated in this
annual report whether or not there were any significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
April 21, 2003 /s/ Scott M. Rosen
------------------
Scott M. Rosen
Executive Vice-President
and Chief Financial Officer
S-37
Independent Auditors' Report
The Board of Directors and Stockholders
J. Crew Group, Inc. and Subsidiaries:
We have audited the consolidated financial statements of J. Crew Group, Inc. and
subsidiaries (the "Company") as listed in the accompanying Index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of J. Crew Group, Inc.
and subsidiaries as of February 1, 2003 and February 2, 2002 and the results of
their operations and their cash flows for each of the years in the three-year
period ended February 1, 2003, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects the information set forth therein.
KPMG LLP
March 25, 2003,
except as to note 17, which is as of
April 4, 2003
F-1
J. CREW GROUP, INC. AND
SUBSIDIARIES
Consolidated Balance Sheets
February 1, February 2,
Assets 2003 2002
------ ---- ----
(in thousands)
Current assets:
Cash and cash equivalents $ 18,895 $ 16,201
Merchandise inventories 107,318 138,918
Prepaid expenses and other current assets 24,886 27,026
Refundable income taxes 6,278 -
--------- ---------
Total current assets 157,377 182,145
--------- ---------
Property and equipment - at cost:
Land 1,710 1,610
Buildings and improvements 11,705 11,700
Furniture, fixtures and equipment 102,108 105,292
Leasehold improvements 182,226 170,195
Construction in progress 3,161 4,903
--------- ---------
300,910 293,700
Less accumulated depreciation and amortization 129,363 106,427
--------- ---------
171,547 187,273
--------- ---------
Deferred income tax assets 5,000 18,071
Other assets 14,954 13,831
--------- ---------
Total assets $ 348,878 $ 401,320
========= =========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 54,921 $ 66,703
Other current liabilities 61,463 61,788
Income taxes payable 2,978 8,840
Deferred income tax liabilities - 5,650
--------- ---------
Total current liabilities 119,362 142,981
--------- ---------
Deferred credits and other long-term liabilities 65,141 67,235
--------- ---------
Long-term debt 292,000 279,687
--------- ---------
Redeemable preferred stock 264,038 230,460
--------- ---------
Stockholders' deficit (391,663) (319,043)
--------- ---------
Total liabilities and stockholders' deficit $ 348,878 $ 401,320
========= =========
See accompanying notes to consolidated financial statements.
F-2
J. CREW GROUP, INC. AND
SUBSIDIARIES
Consolidated Statements of Operations
Years ended
-----------
February 1, February 2, February 3,
----------- ----------- -----------
2003 2002 2001
---- ---- ----
(in thousands)
Revenues:
Net sales $ 732,279 $ 741,280 $ 787,658
Other 34,103 36,660 38,317
--------- --------- ---------
766,382 777,940 825,975
Operating costs and expenses:
Cost of goods sold, including buying and occupancy costs 478,700 462,371 463,909
Selling, general and administrative expenses 291,518 295,568 301,865
Write down of assets and other charges in
connection with discontinuance of Clifford & Wills -- -- 4,130
--------- --------- ---------
770,218 757,939 769,904
--------- --------- ---------
Income/(loss) from operations (3,836) 20,001 56,071
Interest expense - net 40,954 36,512 36,642
Income/(loss) before income taxes (44,790) (16,511) 19,429
(Provision) benefit for income taxes 4,200 5,500 (7,500)
--------- --------- ---------
Net income/(loss) $ (40,590) $ (11,011) $ 11,929
========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
J. CREW GROUP, INC. AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended
-----------
February 1, February 2, February 3,
----------- ----------- -----------
2003 2002 2001
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income/(loss) $ (40,590) $ (11,011) $ 11,929
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization 34,451 31,718 22,600
Amortization of deferred financing costs 4,435 1,997 2,793
Non-cash interest expense 12,313 15,395 13,608
Deferred income taxes 7,421 (3,460) 27
Non-cash compensation expense (589) 1,574 649
Write down of assets and other charges
in connection with discontinued catalog -- -- 4,130
Changes in operating assets and liabilities:
Merchandise inventories 31,600 1,749 (10,739)
Prepaid expenses and other current assets 2,140 (3,286) 6,343
Other assets (2,470) (3,416) (2,788)
Net assets held for disposal -- -- 4,797
Accounts payable (11,782) 16,998 8,754
Other liabilities 495 (13,767) 5,263
Income taxes payable (12,140) (8,741) 2,894
--------- --------- ---------
Net cash provided by operating activities 25,284 25,750 70,260
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (26,920) (61,862) (55,694)
Proceeds from construction allowances 6,502 19,287 13,519
--------- --------- ---------
Net cash used in investing activities (20,418) (42,575) (42,175)
--------- --------- ---------
Cash flows from financing activities:
Costs incurred in refinancing Credit Facility (3,256) -- --
Repayment of long-term debt -- -- (34,000)
Proceeds from the issuance of common stock 1,084 96 178
Repurchase of common stock -- -- (26)
--------- --------- ---------
Net cash provided by/(used in) financing activities (2,172) 96 (33,848)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 2,694 (16,729) (5,763)
Cash and cash equivalents at beginning of year 16,201 32,930 38,693
--------- --------- ---------
Cash and cash equivalents at end of year $ 18,895 $ 16,201 $ 32,930
========= ========= =========
Supplementary cash flow information:
Income taxes paid $ 453 $ 6,442 $ 4,279
========= ========= =========
Interest paid $ 19,380 $ 19,389 $ 20,513
========= ========= =========
Noncash financing activities:
Dividends on redeemable preferred stock $ 33,578 $ 30,442 $ 26,484
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
J. CREW GROUP, INC. AND
SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Deficit
(in thousands, except shares)
Common stock Additional Retained Deferred Stock-
------------ paid-in earnings Treasury compen- holders'
Shares Amount capital (deficit) stock sation deficit
------ ------ ------- --------- ----- ------ -------
Balance at January 29, 2000 12,214,265 $ 1 $ 70,537 $ (331,178) $ (2,325) $ (1,628) $ (264,593)
=== ======== =========== ========= ========= ==========
Net loss -- -- -- 11,929 -- -- 11,929
Preferred stock dividends -- -- -- (26,484) -- -- (26,484)
Issuance of common stock 18,400 -- 178 -- -- -- 178
Amortization of restricted stock -- -- -- -- -- 649 649
Repurchase of common stock -- -- -- -- (26) -- (26)
---------- --- -------- ----------- --------- ------- -----------
Balance at February 3, 2001 12,232,665 1 70,715 (345,733) (2,351) (979) (278,347)
=== ======== =========== ========= ========= ==========
Net loss -- -- -- (11,011) -- -- (11,011)
Preferred stock dividends -- -- -- (30,442) -- -- (30,442)
Issuance of common stock 5,524 -- 96 -- -- -- 96
Amortization of restricted stock -- -- -- -- -- 661 661
---------- --- -------- ----------- --------- ------- -----------
Balance at February 2, 2002 12,238,189 1 70,811 (387,186) (2,351) (318) (319,043)
========== === ======== =========== ========= ========= ==========
Net loss -- -- -- (40,590) -- -- (40,590)
Preferred stock dividends -- -- -- (33,578) -- -- (33,578)
Issuance of common stock 737,621 -- 1,084 -- -- -- 1,084
Issuance of restricted stock 383,963 -- 311 -- -- (311) --
Amortization of restricted stock -- -- -- -- -- 464 464
---------- --- -------- ----------- --------- ------- -----------
Balance at February 1, 2003 13,359,773 1 72,206 (461,354) (2,351) (165) (391,663)
========== === ======== =========== ========= ========= ==========
See accompanying notes to consolidated financial statements.
F-5
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(1) Nature Of Business And Summary Of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of J. Crew Group, Inc. ("Holdings") and its wholly-owned
subsidiaries (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Business
The Company designs, contracts for the manufacture of, markets and
distributes men's and women's apparel, shoes and accessories under the
J.Crew brand name. The Company's products are marketed, primarily in
the United States, through various channels of distribution, including
retail and factory stores, catalogs, and the Internet. The Company is
also party to a licensing agreement which grants the licensee
exclusive rights to use the Company's trademarks in connection with
the manufacture and sale of products in Japan. The license agreement
provides for payments based on a specified percentage of net sales.
The Company is subject to seasonal fluctuations in its merchandise
sales and results of operations. The Company expects its sales and
operating results generally to be lower in the first and second
quarters than in the third and fourth quarters (which include the
back-to-school and holiday seasons) of each fiscal year.
A significant amount of the Company's products are produced in the Far
East through arrangements with independent contractors. As a result,
the Company's operations could be adversely affected by political
instability resulting in the disruption of trade from the countries in
which these contractors are located or by the imposition of additional
duties or regulations relating to imports or by the contractor's
inability to meet the Company's production requirements.
(c) Segment Information
The Company operates in one reportable business segment. All of the
Company's identifiable assets are located in the United States. Export
sales are not significant.
(d) Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31.
The fiscal years 2002, 2001, and 2000 ended on February 1, 2003 (52
weeks), February 2, 2002 (52 weeks), and February 3, 2001 (53 weeks).
(e) 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 $11,224,000 and $7,895,000 at February 1, 2003 and February
2, 2002, are stated at cost, which approximates market value.
F-6
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(f) Merchandise Inventories
Merchandise inventories are stated at the lower of average cost or
market. The Company capitalizes certain design, purchasing and
warehousing costs in inventory.
(g) Advertising and Catalog Costs
Direct response advertising which consists primarily of catalog
production and mailing costs, are capitalized and amortized over the
expected future revenue stream. The Company accounts for catalog costs
in accordance with the AICPA Statement of Position ("SOP") 93-7,
"Reporting on Advertising Costs." SOP 93-7 requires that the
amortization of capitalized advertising costs be the amount computed
using the ratio that current period revenues for the catalog cost pool
bear to the total of current and estimated future period revenues for
that catalog cost pool. Deferred catalog costs, included in prepaid
expenses and other current assets, as of February 1, 2003 and February
2, 2002 were $6,197,000 and $7,959,000. Catalog costs, which are
reflected in selling and administrative expenses, for the fiscal years
2002, 2001, and 2000 were $56,695,000 $65,477,000 and $69,000,000.
All other advertising costs, which are not significant, are expensed
as incurred.
(h) Property and Equipment
Property and equipment are stated at cost and are depreciated over the
estimated useful lives by the straight-line method. Buildings and
improvements are depreciated over estimated useful lives of twenty
years. Furniture, fixtures and equipment are depreciated over
estimated useful lives, ranging from three to ten years. Leasehold
improvements are amortized over the shorter of their useful lives or
related lease terms.
Significant systems development costs are capitalized and amortized on
a straight-line basis over periods ranging from three to five years.
Approximately $.6 million and $8.5 million of system development costs
were capitalized in fiscal years 2002 and 2001.
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) Debt Issuance Costs
Debt issuance costs (included in other assets) of $6,743,000 and
$6,906,000 at February 1, 2003 and February 2, 2002 are amortized over
the term of the related debt agreements.
(j) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". This statement requires the use of the asset and
liability method of accounting for income taxes. Under the asset and
liability method, deferred taxes are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. The 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.
F-7
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(k) Revenue Recognition
Revenue is recognized for catalog and internet sales when merchandise
is shipped to customers and at the time of sale for retail sales. The
Company accrues a sales return allowance for estimated returns of
merchandise subsequent to the balance sheet date that relate to sales
prior to the balance sheet date. Amounts billed to customers for
shipping and handling fees related to catalog and internet sales are
included in other revenues at the time of shipment.
(l) Store Preopening Costs
Costs associated with the opening of new retail and outlet stores are
expensed as incurred.
(m) Derivative Financial Instruments
Derivative financial instruments are used by the Company from time to
time to manage its interest rate and foreign currency exposures. For
interest rate swap agreements, the net interest paid is recorded as
interest expense on a current basis. Gains or losses resulting from
market fluctuations are not recognized. The Company from time to time
enters into forward foreign exchange contracts as hedges relating to
identifiable currency positions to reduce the risk from exchange rate
fluctuations.
(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
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
The Company assesses the recoverability of such assets based upon
estimated cash flow forecasts.
(p) Stock Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method of accounting for employee stock options as permitted by
SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly,
compensation expense is not recorded for options granted if the option
price is equal to or in excess of the fair market price at the date of
grant. If the Company had adopted the fair value recognition
provisions of SFAS No. 123, the effect on net income would not be
material.
Restricted stock awards which are granted at less than fair market
value result in the recognition of deferred compensation, which is
charged to expense over the vesting period of the awards. Deferred
compensation is shown as a reduction of stockholders' equity.
F-8
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(2) Events of September 11, 2001
The terrorist events of September 11, 2001 resulted in the destruction of
the Company's retail store located at the World Trade Center in New York
City, resulting in the loss of inventories and store fixtures, equipment
and leasehold improvements. These losses and the resulting business
interruption are covered by insurance policies maintained by the Company.
The statement of operations for the year ended February 2, 2002 included
losses of $1.9 million relating to inventories and stores fixtures,
equipment and leasehold improvements. Insurance recoveries in fiscal 2001
were recorded to the extent of the losses recognized. The statement of
operations for the year ended February 1, 2003 includes a gain of
$1,420,000, as a result of additional insurance recoveries during fiscal
2002. This gain was classified as a reduction of selling, general and
administrative expenses. Additional insurance recoveries, which may be
received in the future including recoveries for business interruption, will
be recorded at the time of settlement.
(3) Disposal of a Business
In 1998, management of the Company made a decision to exit the catalog and
outlet store operations of Clifford & Wills ("C&W"). Revenues and expenses
of C&W for fiscal 2000 were not material and as a result have been netted
in the accompanying consolidated statements of operations.
In February 2000, the Company sold certain intellectual property assets to
Spiegel Catalog Inc. for $3.9 million. In connection with this sale the
Company agreed to cease the fulfillment of catalog orders but retained the
right to operate C&W outlet stores and conduct other liquidation sales of
inventories through December 31, 2000. After consideration of the proceeds
from the sale of assets and other terms of the agreement the Company
provided $4,000,000 to write down inventories to net realizable value as of
January 29, 2000. At February 3, 2001, the Company determined that the
realizable value of the remaining net assets of C&W, primarily inventories,
was less than their carrying amounts and an additional charge of $4,130,000
was taken.
(4) Other Current Liabilities
Other current liabilities consist of:
February 1, February 2,
2003 2002
---- ----
Customer liabilities $9,993,000 $11,381,000
Accrued catalog and marketing costs 2,536,000 3,655,000
Taxes, other than income taxes 2,670,000 2,930,000
Accrued interest 9,598,000 4,690,000
Accrued occupancy 1,024,000 1,036,000
Reserve for sales returns 5,313,000 6,475,000
Accrued compensation 7,475,000 1,697,000
Other 22,854,000 29,924,000
----------- -----------
$61,463,000 $61,788,000
----------- -----------
F-9
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(5) Lines of Credit
On December 23, 2002 the Company entered into a Loan and Security Agreement
with Wachovia Bank, N.A., as arranger, Congress Financial Corporation, as
administrative and collateral agent, and a syndicate of lenders which
provides for a maximum credit availability of up to $180.0 million (the
"Congress Credit Facility"). The Congress Credit Facility replaced a
revolving credit facility which was scheduled to expire in October 2003.
The Congress Credit Facility provides for revolving loans of up to $160.0
million; supplemental loans of up to $20.0 million each year during the
period from April 15 to September 15; and letter of credit accommodations.
The Congress Credit Facility expires in December 2005. The total amount of
availability is subject to limitations based on specified percentages of
eligible receivables, inventories and real property. Real property
availability is limited to $5.8 million and will be reduced at a rate of
$97,000 per month commencing June 1, 2003.
Borrowings are secured by a perfected first priority security interest in
all the assets of the Company's subsidiaries and bear interest, at the
Company's option, at the prime rate plus 0.5% or the Eurodollar rate plus
2.5%. Supplemental loans bear interest at the prime rate plus 3.0%.
The Congress Credit Facility includes restrictions, including the
incurrence of additional indebtedness, the payment of dividends and other
distributions, the making of investments, the granting of loans and the
making of capital expenditures. The Company is required to maintain minimum
levels of earnings before interest, taxes, depreciation, amortization and
certain non-cash items, ("EBITDA") if excess availability is less than
$15.0 million for any 30 consecutive day period.
The Congress Credit Facility was amended on February 7, 2003 to provide for
an exclusion from the definition of consolidated net income of severance
and other one-time employment-related charges of up to $6.7 million in the
last quarter of fiscal 2002 and $3.0 million in the first quarter of fiscal
2003.
Maximum borrowings under revolving credit agreements were $63,000,000,
$95,000,000 and $34,000,000 during fiscal years 2002, 2001 and 2000 and
average borrowings were $40,400,000, $43,100,000 and $9,800,000. There were
no borrowings outstanding at February 1, 2003 and February 2, 2002.
Outstanding letters of credit established primarily to facilitate
international merchandise purchases at February 1, 2003 and February 2,
2002 amounted to $45,900,000 and $46,300,000.
(6) Long-Term Debt
Long term debt consists of:
February 1, February 2,
2003 2002
---- ----
10-3/8% senior subordinated notes (a) $150,000,000 $150,000,000
13-1/8% senior discount debentures (b) 142,000,000 129,687,000
------------ ------------
Total $292,000,000 $279,687,000
============ ============
F-10
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(a) The senior subordinated notes are unsecured general obligations of J. Crew
Operating Corp., a subsidiary of Holdings, and are subordinated in right of
payment to all senior debt. Interest on the notes accrues at the rate of
10-3/8% per annum and is payable semi-annually in arrears on April 15 and
October 15. The notes mature on October 15, 2007 and may be redeemed at the
option of the issuer subsequent to October 15, 2002 at prices ranging from
105.188% of principal in 2002 to 100% in 2005 and thereafter.
(b) The senior discount debentures were issued in aggregate principal amount of
$142.0 million at maturity and mature on October 15, 2008. These debentures
are senior unsecured obligations of Holdings. Cash interest did not accrue
prior to October 15, 2002. However, the Company recorded non-cash interest
expense as an accretion of the principal amount of the debentures at a rate
of 13-1/8% per annum. Interest will be payable in arrears on April 15 and
October 15 of each year subsequent to October 15, 2002. The senior discount
debentures may be redeemed at the option of Holdings on or after October
15, 2002 at prices ranging from 106.563% of principal to 100% in 2005 and
thereafter.
Long term debt of $150,000,000 matures in fiscal 2007.
(7) Redeemable Preferred Stock
The restated certificate of incorporation authorizes Holdings to issue up
to:
(a) 1,000,000 shares of Series A cumulative preferred stock; par value
$.01 per share; and
(b) 1,000,000 shares of Series B cumulative preferred stock; par value
$.01 per share.
At February 1, 2003, 92,800 shares of Series A Preferred Stock and 32,500
shares of Series B Preferred Stock were outstanding.
The Preferred Stock accumulates dividends at the rate of 14.5% per annum
(payable quarterly) for periods ending on or prior to October 17, 2009.
Dividends compound to the extent not paid in cash. On October 17, 2009,
Holdings is required to redeem the Series B Preferred Stock and to pay all
accumulated but unpaid dividends on the Series A Preferred Stock.
Thereafter, the Series A Preferred Stock will accumulate dividends at the
rate of 16.5% per annum. Subject to restrictions imposed by certain
indebtedness of the Company, Holdings may redeem shares of the Preferred
Stock at any time at redemption prices ranging from 103% of liquidation
value plus accumulated and unpaid dividends at October 17, 1998 to 100% of
liquidation value plus accumulated and unpaid dividends at October 17, 2000
and thereafter. In certain circumstances (including a change of control of
Holdings), subject to restrictions imposed by certain indebtedness of the
Company, Holdings may be required to repurchase shares of the Preferred
Stock at liquidation value plus accumulated and unpaid dividends.
Accumulated but unpaid dividends amounted to $138,738,000 at February 1,
2003. Dividends are recorded as an increase to redeemable preferred stock
and a reduction of retained earnings.
(8) Common Stock
The restated certificate of incorporation authorizes Holdings to issue up
to 100,000,000 shares of common stock; par value $.01per share. At February
1, 2003, shares issued were 13,359,773 and shares outstanding were
12,870,373. During 2000, 2001 and 2002 directors converted fees into
18,400, 5,524 and 12,318 shares of Holdings common stock.
F-11
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(9) Commitments and Contingencies
(a) Operating Leases
As of February 1, 2003, the Company was obligated under various
long-term operating leases for retail and outlet stores, warehouses,
office space and equipment requiring minimum annual rentals. These
operating leases expire on varying dates through 2014. At February 1,
2003 aggregate minimum rentals in future periods are, as follows:
Fiscal year Amount
----------- ------
2003 52,372,000
2004 49,867,000
2005 47,396,000
2006 45,192,000
2007 43,636,000
Thereafter 143,875,000
Certain of these leases include renewal options and escalation clauses
and provide for contingent rentals based upon sales and require the
lessee to pay taxes, insurance and other occupancy costs.
Rent expense for fiscal 2002, 2001, and 2000 was $50,403,000,
$46,573,000 and $45,138,000 including contingent rent based on store
sales of $1,187,000, $1,023,000, and $1,974,000.
(b) Employment Agreements
The Company is party to employment agreements with certain executives
which provide for compensation and certain other benefits. The
agreements also provide for severance payments under certain
circumstances.
(c) Litigation
The Company is subject to various legal proceedings and claims that
arise in the ordinary conduct of its business. Although the outcome of
these claims cannot be predicted with certainty, management does not
believe that the ultimate resolution of these matters will have a
material adverse effect on the Company's financial condition or
results of operations.
(10) Employee Benefit Plan
The Company has a thrift/savings plan pursuant to Section 401 of the
Internal Revenue Code whereby all eligible employees may contribute up to
15% of their annual base salaries subject to certain limitations. The
Company's contribution is based on a percentage formula set forth in the
plan agreement. Company contributions to the thrift/savings plan were
$1,834,000, $1,334,000 and $1,241,000 for fiscal 2002, 2001 and 2000.
(11) License Agreement
The Company has a licensing agreement through January 2005 with Itochu
Corporation, a Japanese trading company. The agreement permits Itochu to
distribute J. Crew merchandise in Japan. The Company earns royalty payments
under the agreement based on the sales of its merchandise. Royalty income,
which is included in other revenues, for fiscal 2002, 2001, and 2000 was
$2,280,000, $2,560,000 and $3,020,000.
F-12
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(12) Interest Expense - Net
Interest expense, net consists of the following:
2002 2001 2000
---- ---- ----
Interest expense $36,548,000 $34,810,000 $34,390,000
Amortization of deferred financing costs 4,435,000 1,997,000 2,793,000
Interest income (29,000) (295,000) (541,000)
----------- ----------- -----------
Interest expense, net $40,954,000 $36,512,000 $36,642,000
----------- ----------- -----------
Deferred financing costs of $1,800,000 were written off in connection with
the refinancing of our revolving credit facility in December 2002.
(13) Other Revenues
Other revenues consist of the following:
2002 2001 2000
---- ---- ----
Shipping and handling fees $31,823,000 $34,100,000 $35,297,000
Royalties 2,280,000 2,560,000 3,020,000
----------- ----------- -----------
$34,103,000 $36,660,000 $38,317,000
=========== =========== ===========
(14) Financial Instruments
The following disclosure about the fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments." The fair value of the Company's
long-term debt is estimated to be approximately $238,692,000 and
$187,191,000 at February 1, 2003 and February 2, 2002, and is based on
dealer quotes or quoted market prices of the same or similar instruments.
The carrying amounts of long-term debt were $292,000,000 and 279,687,000 at
February 1, 2003 and February 2, 2002. The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents, notes
payable-bank, accounts payable and other current liabilities approximate
fair value because of the short-term maturity of those financial
instruments. The estimates presented herein are not necessarily indicative
of amounts the Company could realize in a current market exchange.
(15) Income Taxes
The income tax provision/benefit consists of:
2002 2001 2000
---- ---- ----
Current:
Foreign $ 193,000 $ 260,000 $ 300,000
Federal (12,014,000) (2,400,000) 6,253,000
State and local 200,000 100,000 920,000
------------- ------------ -----------
(11,621,000) (2,040,000) 7,473,000
------------- ------------ -----------
Deferred 7,421,000 (3,460,000) 27,000
------------- ------------ -----------
Total $ (4,200,000) $ (5,500,000) $ 7,500,000
============= ============ ===========
F-13
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
A reconciliation between the provision/(benefit) for income taxes based on
the U.S. Federal statutory rate and the Company's effective rate is as
follows.
2002 2001 2000
---- ---- ----
Federal income tax rate (35.0)% (35.0)% 35.0%
State and local income taxes, net
of federal benefit - (2.3) 7.6
Valuation allowance 47.0 - -
Reversal of prior tax accruals (20.9) - -
Nondeductible expenses and other (.5) 4.0 (4.0)
------- ------ -----
Effective tax rate (9.4)% (33.3)% 38.6%
======= ======= =====
The tax effect of temporary differences which give rise to deferred tax
assets and liabilities are:
February 1, February 2,
2003 2002
---- ----
Deferred tax assets:
Original issue discount $ 24,896,000 $ 20,836,000
Federal NOL carryforwards 7,100,000 -
State and local NOL carryforwards 1,400,000 1,900,000
Reserve for sales returns 2,202,000 2,603,000
Other 3,873,000 3,826,000
------------ -------------
39,471,000 29,165,000
------------ -------------
Valuation allowance (21,046,000) --
------------ -------------
18,425,000 29,165,000
Deferred tax liabilities:
Prepaid catalog and other prepaid expenses (9,872,000) (8,841,000)
Difference in book and tax basis
for property and equipment (3,553,000) (7,903,000)
------------ -------------
(13,425,000) (16,744,000)
------------ -------------
Net deferred income tax asset $ 5,000,000 $ 12,421,000
============ =============
The Company has significant deferred tax assets resulting from net
operating loss carryforwards and deductible temporary differences, which
will reduce taxable income in future periods. SFAS No. 109 "Accounting for
Income Taxes" states that a valuation allowance is required when it is more
likely than not that all or a portion of a deferred tax asset will not be
realized. A review of all available positive and negative evidence needs to
be considered, including a company's current and past performance, the
market environment in which a company operates, length of carryback and
carryforward periods, existing contracts or sales backlog that will result
in future profits, etc. Forming a conclusion that a valuation allowance is
not needed is difficult when there is negative evidence such as cumulative
losses in recent years. Cumulative losses weigh heavily in the overall
assessment. As a result of our assessment, we established a valuation
allowance for the net deferred tax
F-14
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
assets at February 1, 2003. The Company does not expect to recognize any
tax benefits in future results of operations until an appropriate level of
profitability is sustained.
The Company has state and local income tax net operating loss carryforwards
of varying amounts.
(16) Stock Compensation Plans
1997 Stock Option Plan
Under the terms of the 1997 Stock Option Plan, an aggregate of 1,910,000
shares are available for grant to certain key employees or consultants. The
options have terms of seven to ten years and become exercisable over a
period of five years. Options granted under the Option Plan are subject to
various conditions, including under some circumstances, the achievement of
certain performance objectives.
A summary of stock option activity for the 1997 Plan was, as follows:
2002 2001 2000
---- ---- ----
Weighted Weighted Weighted
-------- -------- --------
average average average
------- ------- -------
Shares exercise price Shares exercise price Shares exercise price
------ -------------- ------ -------------- ------ --------------
Outstanding, beginning of year 1,808,790 $ 9.97 1,788,750 $ 9.15 1,532,800 $ 8.87
Granted 395,500 7.64 283,000 14.53 374,700 10.17
Exercised -- -- -- -- (2,000) 6.82
Cancelled (597,560) 10.29 (262,960) 9.31 (116,750) 8.72
--------- ------ --------- ------ --------- ------
Outstanding, end of year 1,606,730 $ 9.27 1,808,790 $ 9.97 1,788,750 $ 9.15
--------- ------ --------- ------ ========= ======
Options exercisable
at end of year 842,340 $ 9.81 728,950 $ 9.21 583,000 $ 9.24
========== ====== ========= ====== ========= ======
2003 Equity Incentive Plan
In January 2003, the Board of Directors of Holdings approved the adoption
of the 2003 Equity Incentive Plan. Under the terms of the 2003 Plan, an
aggregate of 4,798,160 shares of common stock are available for award to
key employees and consultants in the form of non-qualified stock options
and restricted shares as follows:
. 1,115,812 shares are reserved for the issuance of stock options
at an exercise price of $6.82 of fair market value, whichever is
greater;
. 1,115,812 shares are reserved for the issuance of stock options
at an exercise price of $25.00 or fair market value, whichever is
greater;
. 1,115,812 shares are reserved for the issuance of stock options
at an exercise price of $35.00 or fair market value, whichever is
greater;
. 1,450,724 shares are reserved for the issuance of restricted
shares.
F-15
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
The options have terms of ten years and become exercisable over the period
provided in each grant agreement.
During fiscal 2002, Holdings granted 836,889 options with an exercise price
of $6.82, 1,015,425 options with an exercise price of $25.00 and 1,015,425
options with an exercise price of $35.00, and issued 1,004,266 restricted
shares under the 2003 plan.
(17) Subsequent Events
TPG - MD Investment Loans
On February 4, 2003, Operating Corp. entered into a credit agreement with
TPG-MD Investment, LLC, a related party, which provides for a Tranche A
loan to Operating Corp. in an aggregate principal amount of $10.0 million
and a Tranche B loan to Operating Corp. in an aggregate principal amount of
$10.0 million. The loans are due in February 2008 and bear interest at 5.0%
per annum payable semi-annually in arrears on January 31 and July 31,
commencing on July 31, 2003. Interest will compound and be capitalized and
added to the principal amount on each interest payment date. Payment of the
loans is subordinated in right of payment to the prior payment of all
senior debt and on the same terms as Operating Corp's 10-3/8% senior
subordinated notes due 2008.
Exchange Offer
On April 4, 2003, Holdings commenced through J. Crew Intermediate LLC, its
newly formed wholly-owned subsidiary ("Intermediate"), an offer to exchange
the outstanding 13 1/8% Senior Discount Debentures due 2008 issued by
Holdings for Intermediate's unissued 16.0% Senior Discount Contingent
Principal Notes due 2008.
Holdings will not pay accrued and unpaid interest on the existing
debentures on the scheduled interest payment date of April 15, 2003.
Rather, Holdings will pay such interest on the settlement date of the
exchange offer (which is expected to occur on or about May 6, 2003)
together with interest thereon at a rate of 13 1/8% per annum from
April 15, 2003 to the settlement date, to the holders of the existing
debentures who do not tender their existing debentures in the exchange
offer.
Congress Credit Facility
The Congress Credit Facility was amended on April 4, 2003 to (a) consent to
the formation of J.Crew Intermediate LLC and the Exchange Offer; (b)
carve-out a $9.0 million one-time charge for non-current inventory from the
EBITDA covenant; (c) modify required EBITDA covenant levels and (d)
eliminate the supplemental loan availability in fiscal 2003.
(18) Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board, ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations". SFAS No. 143 requires the Company to
record the fair value of an asset retirement obligation as a liability in
the period in which it incurs a legal obligation associated with the
retirement of tangible long-lived assets and a corresponding asset which is
depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be
adjusted at the end of each period to reflect the passage of time and
changes in the estimated future cash flows underlying the obligation. SFAS
No. 143 is effective for fiscal years beginning after
F-16
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
June 15, 2002. Management does not believe that the adoption of SFAS No.
143 will have a significant impact on the Company's financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142., "Goodwill and Other Intangible Assets". SFAS No. 141
eliminates the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001 and modifies the application of
the purchase accounting method effective for transactions that are
completed after June 30, 2001. SFAS No. 142 eliminated the requirement to
amortize goodwill and intangible assets having indefinite useful lives but
requires testing at least annually for impairment. Intangible assets that
have finite lives will continue to be amortized over their useful lives.
SFAS No. 142 applies to goodwill and intangible assets arising from
transactions completed before and after the statement's effective dated of
January 1, 2002. The adoption of these statements in fiscal 2002 did not
have any effect on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment of disposal of
long-lived assets and requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that
either has been disposed of or is classified as held for sale. This
statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. SFAS No. 144 was effective for
fiscal years beginning after December 15, 2001. The adoption of SFAS No.
144 did not have a significant impact on the Company's financial
statements.
EITF Issue No. 01-9 "Accounting for Consideration Given to a Customer or a
Reseller of the Vendor's Products" (formerly EITF Issue 00-14) became
effective in the first quarter of fiscal 2002. This EITF addresses the
accounting for and classification of consideration given to a customer from
a vendor in connection with the purchase or promotion of the vendor's
product. The adoption of the EITF did not have a significant effect on the
Company's financial statements.
In June 2002, the FASB issued SFAS No. 146 - "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses
accounting and reporting for costs associated with exit or disposal
activities. SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at
fair value when the liability is incurred. SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of SFAS No. 146 in the fourth quarter of 2002 did not have an
impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB statements
No. 4, 44, and 64, Amendment of FASB Statement No 13, and Technical
Corrections". SFAS No. 145 primarily affects the reporting requirements and
classification of gains and losses from the extinguishment of debt,
rescinds the transitional accounting requirement for intangible assets of
motor carriers, and requires that certain lease modifications with economic
effects similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. SFAS No. 145 is effective for
financial statements issued after April 2003, with the exception of the
provisions affecting the accounting for lease transactions, which should be
applied for transactions entered into after May 15, 2002, and the
provisions affecting classification of gains and losses from the
extinguishment of debt, which should be applied in fiscal years after May
15, 2002. Management has classified the loss from the refinancing of its
credit facility in December 2002 as a component of interest expense in the
Company's financial statements.
F-17
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
In November 2002, the FASB issued FASB interpretation ("FIN") No. 45 -
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". This
interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
certain guarantees that it has issued and requires that they be recorded at
fair value. The initial recognition and measurement provisions of this
interpretation are to be applied on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements of
this interpretation are effective for periods ending after December 15,
2002.
In December 2002, the FASB issued SFAS No. 148, - "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123". This Statement amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternate methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. This Statement also amends the
disclosure requirements of SFAS 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The amendments to SFAS 123 regarding disclosure are
effective for fiscal years ending after December 15, 2002. The Company
applies APB Opinion No. 25 in accounting for its employee stock option
plans.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities - and Interpretation of Accounting Research Bulletin No.
51". FIN No. 46 requires unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not
effectively disperse the risks and rewards of ownership among their owners
and other parties involved. The provisions of FIN No. 46 are applicable
immediately to all variable interest entities created after January 31,
2003 and variable interest entities in which a company obtains an interest
after that date. For variable interest entities created before January 31,
2003, the provisions of this interpretation are effective July 1, 2003. The
adoption of FIN No. 46 is not expected to have any effect on the Company's
financial statements.
F-18
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(19) Quarterly Financial Information (Unaudited)
($ in millions)
13 weeks 13 weeks 13 weeks 13 weeks 52 weeks
ended ended ended ended ended
5/4/02 (a) 8/3/02 11/2/02 2/1/03 (b) 2/1/03
------ ------ ------- ------ ------
Net sales $ 157.9 $160.9 $181.9 $ 231.6 $ 732.3
Gross profit 67.0 61.0 75.9 83.8 287.7
Net income (loss) $ (12.1) $ (7.1) $ (.7) $ (20.7) $ (40.6)
13 weeks 13 weeks 13 weeks 14 weeks 53 weeks
ended ended ended ended ended
5/5/01 8/4/01 11/3/01 2/2/02 2/2/02
------ ------ ------- ------ ------
Net sales $ 158.9 $160.5 $187.1 $ 234.8 $ 741.3
Gross profit 68.2 60.5 82.8 104.1 315.6
Net income (loss) $ (9.3) $ (8.6) $ .3 $ 6.6 $ (11.0)
(a) Net income (loss) includes a pre-tax charge of $4.6 million for severance
charges.
(b) Net income (loss) includes (a) pre-tax charges of $7.7 million for
severance and other one-time employment related charges, (b) $1.8 million
to write-off deferred financing charges in connection with the refinancing
of our credit facility (c) a $9,000,000 inventory writedown as a result of
the Company's decision to modify its strategy on the disposition of
inventory to accelerate inventory clearing at the end of each selling
season and (d) a tax provision of $6.5 million on a pre-tax loss of $14.2
million as a result of providing a valuation allowance against deferred tax
assets at February 1, 2003.
F-19
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
beginning charged to cost charged to other ending
balance and expenses accounts deductions balance
($ in thousands)
Inventory reserve
- -----------------
(deducted from inventories)
fiscal year ended:
February 1, 2003 $8,367 $4,053 (a) $ -- $ -- $12,420
February 2, 2002 7,360 1,007 (a) -- -- 8,367
February 3, 2001 4,447 2,913 (a) -- -- 7,360
Allowance for sales returns
- ---------------------------
(included in other current liabilities)
fiscal year ended:
February 1, 2003 $6,475 $(1,162)(a) $ -- $ -- $5,313
February 2, 2002 6,530 (55)(a) -- -- 6,475
February 3, 2001 5,011 1,519(a) -- -- 6,530
(a) The inventory reserve and allowance for sales returns are evaluated at the
end of each fiscal quarter and adjusted (plus or minus) based on the
quarterly evaluation. During each period inventory write-downs and sales
returns are charged to the statement of operations as incurred.
F-20
Independent Auditors' Report
The Board of Directors and Stockholders
J. Crew Operating Corp. and Subsidiaries:
We have audited the consolidated financial statements of J. Crew Operating Corp.
and subsidiaries (the "Company") as listed in the accompanying Index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of J. Crew Operating
Corp. and subsidiaries as of February 1, 2003 and February 2, 2002 and the
results of their operations and their cash flows for each of the years in the
three-year period ended February 1, 2003, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
March 25, 2003,
except as to note 15, the date of which is
April 4, 2003
F-21
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Balance Sheets
February 1, February 2,
Assets 2003 2002
------ ---- ----
(in thousands)
Current assets:
Cash and cash equivalents $ 18,895 $ 16,201
Merchandise inventories 107,318 138,918
Prepaid expenses and other current assets 24,886 27,026
Refundable income taxes 6,278 --
---------- --------
Total current assets 157,377 182,145
---------- --------
Property and equipment - at cost:
Land 1,710 1,610
Buildings and improvements 11,705 11,700
Furniture, fixtures and equipment 102,108 105,292
Leasehold improvements 182,226 170,195
Construction in progress 3,161 4,903
---------- --------
300,910 293,700
Less accumulated depreciation and amortization 129,363 106,427
---------- --------
171,547 187,273
---------- --------
Other assets 13,646 12,310
---------- --------
Total assets $ 342,570 $381,728
========== ========
Liabilities and Stockholder's Equity
------------------------------------
Current liabilities:
Accounts payable $ 54,921 $ 66,703
Other current liabilities 56,255 61,788
Income taxes payable 2,978 10,109
Deferred income taxes 910 5,604
---------- --------
Total current liabilities 115,064 144,204
---------- --------
Long-term debt 150,000 150,000
---------- --------
Deferred credits and other long-term liabilities 65,141 67,235
---------- --------
Due to J.Crew Group, Inc. 2,040 1,142
---------- --------
Stockholder's equity 10,325 19,147
---------- --------
Total liabilities and stockholder's equity $ 342,570 $381,728
========== ========
See accompanying notes to consolidated financial statements.
F-22
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Statements of Operations
Years ended
-----------
February 1, February 2, February 3,
----------- ---------- -----------
2003 2002 2001
---- ---- ----
(in thousands)
Revenues:
Net sales $732,279 $741,280 $ 787,658
Other 34,103 36,660 38,317
-------- -------- ---------
766,382 777,940 825,975
Operating costs and expenses:
Cost of goods sold, including buying and occupancy
costs 478,700 462,371 463,909
Selling, general and administrative expenses 291,054 294,907 301,216
Write down of assets and other charges in
connection with discontinuance of Clifford & Wills -- - 4,130
-------- -------- ---------
769,754 757,278 769,255
-------- -------- ---------
Income/(loss) from operations (3,372) 20,662 56,720
Interest expense - net 23,200 20,890 22,787
Income/(loss) before income taxes (26,572) (228) 33,933
(Provision) benefit for income taxes 17,750 167 (12,180)
-------- -------- ---------
Net income/(loss) $ (8,822) $ (61) $ 21,753
======== ======== =========
See accompanying notes to consolidated financial statements.
F-23
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended
-----------
February 1, February 2, February 3,
----------- ----------- -----------
2003 2002 2001
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income/(loss) $ (8,822) $ (61) $ 21,753
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization 34,451 31,718 22,600
Amortization of deferred financing costs 4,202 1,770 2,548
Deferred income taxes (4,694) 1,873 4,706
Non-cash compensation expense (1,053) 913 --
Write down of assets and other charges
in connection with discontinued catalog -- -- 4,130
Changes in operating assets and liabilities:
Merchandise inventories 31,600 1,749 (10,739)
Prepaid expenses and other current assets 2,140 (3,286) 6,343
Other assets (2,470) (3,416) (2,781)
Net assets held for disposal -- -- 4,797
Accounts payable (11,782) 16,998 8,754
Other liabilities (3,835) (13,671) 5,407
Income taxes payable (13,409) (8,741) 2,894
--------- -------- ---------
Net cash provided by operating activities 26,368 25,846 70,412
--------- -------- ---------
Cash flows from investing activities:
Capital expenditures (26,920) (61,862) (55,694)
Proceeds from construction allowances 6,502 19,287 13,519
--------- -------- ---------
Net cash used in investing activities (20,418) (42,575) (42,175)
--------- -------- ---------
Cash flows from financing activities:
Costs incurred in refinancing Credit Facility (3,256) -- --
Repayment of long-term debt -- -- (34,000)
--------- -------- ---------
Net cash used in financing activities (3,256) -- (34,000)
--------- -------- ---------
Increase (decrease) in cash and cash equivalents 2,694 (16,729) (5,763)
Cash and cash equivalents at beginning of year 16,201 32,930 38,693
--------- -------- ---------
Cash and cash equivalents at end of year $ 18,895 $ 16,201 $ 32,930
========= ======== =========
See accompanying notes to consolidated financial statements.
F-24
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(1) Nature Of Business And Summary Of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of J. Crew Operating Corp. ("Operating Corp.") and its wholly-owned
subsidiaries (collectively, the "Company"). Operating Corp. is a wholly
owned subsidiary of J.Crew Group, Inc. ("Holdings"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Business
The Company designs, contracts for the manufacture of, markets and
distributes men's and women's apparel, shoes and accessories under the
J.Crew brand name. The Company's products are marketed, primarily in
the United States, through various channels of distribution, including
retail and factory stores, catalogs, and the Internet. The Company is
also party to a licensing agreement which grants the licensee exclusive
rights to use the Company's trademarks in connection with the
manufacture and sale of products in Japan. The license agreement
provides for payments based on a specified percentage of net sales.
The Company is subject to seasonal fluctuations in its merchandise
sales and results of operations. The Company expects its sales and
operating results generally to be lower in the first and second
quarters than in the third and fourth quarters (which include the
back-to-school and holiday seasons) of each fiscal year.
A significant amount of the Company's products are produced in the Far
East through arrangements with independent contractors. As a result,
the Company's operations could be adversely affected by political
instability resulting in the disruption of trade from the countries in
which these contractors are located or by the imposition of additional
duties or regulations relating to imports or by the contractor's
inability to meet the Company's production requirements.
(c) Segment Information
The Company operates in one reportable business segment. All of the
Company's identifiable assets are located in the United States. Export
sales are not significant.
(d) Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31.
The fiscal years 2002, 2001, and 2000 ended on February 1, 2003 (52
weeks), February 2, 2002 (52 weeks), and February 3, 2001 (53 weeks).
(e) 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 $11,224,000 and $7,895,000 at February 1, 2003 and February
2, 2002, are stated at cost, which approximates market value.
(f) Merchandise Inventories
Merchandise inventories are stated at the lower of average cost or
market. The Company capitalizes certain design, purchasing and
warehousing costs in inventory.
F-25
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(g) Advertising and Catalog Costs
Direct response advertising which consists primarily of catalog
production and mailing costs, are capitalized and amortized over the
expected future revenue stream. The Company accounts for catalog costs
in accordance with the AICPA Statement of Position ("SOP") 93-7,
"Reporting on Advertising Costs." SOP 93-7 requires that the
amortization of capitalized advertising costs be the amount computed
using the ratio that current period revenues for the catalog cost pool
bear to the total of current and estimated future period revenues for
that catalog cost pool. Deferred catalog costs, included in prepaid
expenses and other current assets, as of February 1, 2003 and February
2, 2002 were $6,197,000 and $7,959,000. Catalog costs, which are
reflected in selling and administrative expenses, for the fiscal years
2002, 2001, and 2000 were $56,695,000, $65,477,000 and $69,000,000.
All other advertising costs, which are not significant, are expensed as
incurred.
(h) Property and Equipment
Property and equipment are stated at cost and are depreciated over the
estimated useful lives by the straight-line method. Buildings and
improvements are depreciated over estimated useful lives of twenty
years. Furniture, fixtures and equipment are depreciated over estimated
useful lives, ranging from three to ten years. Leasehold improvements
are amortized over the shorter of their useful lives or related lease
terms.
Significant systems development costs are capitalized and amortized on
a straight-line basis over periods ranging from three to five years.
Approximately $.6 million and $8.5 million of system development costs
were capitalized in fiscal years 2002 and 2001.
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) Debt Issuance Costs
Debt issuance costs (included in other assets) of $5,435,000 and
$5,195,000 at February 1, 2003 and February 2, 2002 are amortized over
the term of the related debt agreements.
(j) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes". This statement requires the use of the asset and liability
method of accounting for income taxes. Under the asset and liability
method, deferred taxes are determined based on the difference between
the financial reporting and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are
expected to reverse. The 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.
(k) Revenue Recognition
Revenue is recognized for catalog and internet sales when merchandise
is shipped to customers and at the time of sale for retail sales. The
Company accrues a sales return allowance for estimated returns of
merchandise
F-26
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
subsequent to the balance sheet date that relate to sales prior to the
balance sheet date. Amounts billed to customers for shipping and
handling fees related to catalog and internet sales are included in
other revenues at the time of shipment.
(l) Store Preopening Costs
Costs associated with the opening of new retail and outlet stores are
expensed as incurred.
(m) Derivative Financial Instruments
Derivative financial instruments are used by the Company from time to
time to manage its interest rate and foreign currency exposures. For
interest rate swap agreements, the net interest paid is recorded as
interest expense on a current basis. Gains or losses resulting from
market fluctuations are not recognized. The Company from time to time
enters into forward foreign exchange contracts as hedges relating to
identifiable currency positions to reduce the risk from exchange rate
fluctuations.
(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
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
The Company assesses the recoverability of such assets based upon
estimated cash flow forecasts.
(p) Stock Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method of accounting for employee stock options as permitted by
SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly,
compensation expense is not recorded for options granted if the option
price is equal to or in excess of the fair market price at the date of
grant. If the Company had adopted the fair value recognition provisions
of SFAS No. 123, the effect on net income would not be material.
F-27
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(2) Events of September 11, 2001
The terrorist events of September 11, 2001 resulted in the destruction
of the Company's retail store located at the World Trade Center in New
York City, resulting in the loss of inventories and store fixtures,
equipment and leasehold improvements. These losses and the resulting
business interruption are covered by insurance policies maintained by
the Company.
The statement of operations for the year ended February 2, 2002
included losses of $1.9 million relating to inventories and stores
fixtures, equipment and leasehold improvements. Insurance recoveries in
fiscal 2001 were recorded to the extent of the losses recognized. The
statement of operations for the year ended February 1, 2003 includes a
gain of $1,420,000, as a result of additional insurance recoveries
during fiscal 2002. This gain was classified as a reduction of selling,
general and administrative expenses. Additional insurance recoveries,
which may be received in the future including recoveries for business
interruption, will be recorded at the time of settlement.
(3) Disposal of a Business
In 1998, management of the Company made a decision to exit the catalog
and outlet store operations of Clifford & Wills ("C&W"). Revenues and
expenses of C&W for fiscal 2000 were not material and as a result have
been netted in the accompanying consolidated statements of operations.
In February 2000, the Company sold certain intellectual property assets
to Spiegel Catalog Inc. for $3.9 million. In connection with this sale
the Company agreed to cease the fulfillment of catalog orders but
retained the right to operate C&W outlet stores and conduct other
liquidation sales of inventories through December 31, 2000. After
consideration of the proceeds from the sale of assets and other terms
of the agreement the Company provided $4,000,000 to write down
inventories to net realizable value as of January 29, 2000. At February
3, 2001, the Company determined that the realizable value of the
remaining net assets of C&W, primarily inventories, was less than their
carrying amounts and an additional charge of $4,130,000 was taken.
(4) Other Current Liabilities
Other current liabilities consist of:
February 1, February 2,
2003 2002
---- ----
Customer liabilities $ 9,993,000 $11,381,000
Accrued catalog and marketing costs 2,536,000 3,655,000
Taxes, other than income taxes 2,670,000 2,930,000
Accrued interest 4,390,000 4,690,000
Accrued occupancy 1,024,000 1,036,000
Reserve for sales returns 5,313,000 6,475,000
Accrued compensation 7,475,000 1,697,000
Other 22,854,000 29,924,000
------------ ------------
$56,255,000 $61,788,000
------------ ------------
F-28
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(5) Lines of Credit
On December 23, 2002 the Company entered into a Loan and Security
Agreement with Wachovia Bank, N.A., as arranger, Congress Financial
Corporation, as administrative and collateral agent, and a syndicate of
lenders which provides for a maximum credit availability of up to
$180.0 million (the "Congress Credit Facility"). The Congress Credit
Facility replaced a revolving credit facility which was scheduled to
expire in October 2003.
The Congress Credit Facility provides for revolving loans of up to
$160.0 million; supplemental loans of up to $20.0 million each year
during the period from April 15 to September 15; and letter of credit
accommodations. The Congress Credit Facility expires in December 2005.
The total amount of availability is subject to limitations based on
specified percentages of eligible receivables, inventories and real
property. Real property availability is limited to $5.8 million and
will be reduced at a rate of $97,000 per month commencing June 1, 2003.
Borrowings are secured by a perfected first priority security interest
in all the assets of the Company's subsidiaries and bear interest, at
the Company's option, at the prime rate plus 0.5% or the Eurodollar
rate plus 2.5%. Supplemental loans bear interest at the prime rate plus
3.0%.
The Congress Credit Facility includes restrictions, including the
incurrence of additional indebtedness, the payment of dividends and
other distributions, the making of investments, the granting of loans
and the making of capital expenditures. The Company is required to
maintain minimum levels of earnings before interest, taxes,
depreciation, amortization and certain non-cash items, ("EBITDA") if
excess availability is less than $15.0 million for any 30 consecutive
day period.
The Congress Credit Facility was amended on February 7, 2003 to provide
for an exclusion from the definition of consolidated net income of
severance and other one-time employment-related charges of up to $6.7
million in the last quarter of fiscal 2002 and $3.0 million in the
first quarter of fiscal 2003.
Maximum borrowings under revolving credit agreements were $63,000,000,
$95,000,000 and $34,000,000 during fiscal years 2002, 2001 and 2000 and
average borrowings were $40,400,000, $43,100,000 and $9,800,000. There
were no borrowings outstanding at February 1, 2003 and February 2,
2002.
Outstanding letters of credit established primarily to facilitate
international merchandise purchases at February 1, 2003 and February 2,
2002 amounted to $45,900,000 and $46,300,000.
(6) Long-Term Debt
Long term debt consists of:
February 1, February 2,
2003 2002
---- ----
10-3/8% senior subordinated notes $150,000,000 $150,000,000
============ ============
The senior subordinated notes are unsecured general obligations of J.
Crew Operating Corp., a subsidiary of Holdings, and are subordinated in
right of payment to all senior debt. Interest on the notes accrues at
the rate of 10-3/8% per annum and is payable semi-annually in arrears
on April 15 and October 15. The notes mature on October 15, 2007 and
may be redeemed at the option of the issuer subsequent to October 15,
2002 at prices ranging from 105.188% of principal in 2002 to 100% in
2005 and thereafter.
F-29
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(7) Commitments and Contingencies
(a) Operating Leases
As of February 1, 2003, the Company was obligated under various
long-term operating leases for retail and outlet stores,
warehouses, office space and equipment requiring minimum annual
rentals. These operating leases expire on varying dates through
2014. At February 1, 2003 aggregate minimum rentals in future
periods are, as follows:
Fiscal year Amount
----------- ------
2003 52,372,000
2004 49,867,000
2005 47,396,000
2006 45,192,000
2007 43,636,000
Thereafter 143,875,000
Certain of these leases include renewal options and escalation
clauses and provide for contingent rentals based upon sales and
require the lessee to pay taxes, insurance and other occupancy
costs.
Rent expense for fiscal 2002, 2001, and 2000 was $50,403,000,
$46,573,000 and $45,138,000 including contingent rent based on
store sales of $1,187,000, $1,023,000, and $1,974,000.
(b) Employment Agreements
The Company is party to employment agreements with certain
executives which provide for compensation and certain other
benefits. The agreements also provide for severance payments under
certain circumstances.
(c) Litigation
The Company is subject to various legal proceedings and claims
that arise in the ordinary conduct of its business. Although the
outcome of these claims cannot be predicted with certainty,
management does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's
financial condition or results of operations.
(8) Employee Benefit Plan
The Company has a thrift/savings plan pursuant to Section 401 of the
Internal Revenue Code whereby all eligible employees may contribute up
to 15% of their annual base salaries subject to certain limitations.
The Company's contribution is based on a percentage formula set forth
in the plan agreement. Company contributions to the thrift/savings plan
were $1,834,000, $1,334,000 and $1,241,000 for fiscal 2002, 2001 and
2000.
(9) License Agreement
The Company has a licensing agreement through January 2005 with Itochu
Corporation, a Japanese trading company. The agreement permits Itochu
to distribute J. Crew merchandise in Japan. The Company earns royalty
payments under the agreement based on the sales of its merchandise.
Royalty income, which is included in other revenues, for fiscal 2002,
2001, and 2000 was $2,280,000, $2,560,000 and $3,020,000.
F-30
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
(10) Interest Expense - Net
Interest expense, net consists of the following:
2002 2001 2000
---- ---- -----
Interest expense $19,027,000 $19,415,000 $20,780,000
Amortization of deferred financing costs 4,202,000 1,770,000 2,548,000
Interest income (29,000) (295,000) (541,000)
------------ ------------ ------------
Interest expense, net $23,200,000 $20,890,000 $22,787,000
------------ ------------ ------------
Deferred financing costs of $1,800,000 were written off in connection
with the refinancing of our revolving credit facility in December 2002.
(11) Other Revenues
Other revenues consist of the following:
2002 2001 2000
---- ---- ----
Shipping and handling fees $ 31,823,000 $ 34,100,000 $ 35,297,000
Royalties 2,280,000 2,560,000 3,020,000
------------ ------------ ------------
$ 34,103,000 $ 36,660,000 $ 38,317,000
============ ============ ============
(12) Financial Instruments
The following disclosure about the fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The fair value
of the Company's long-term debt is estimated to be approximately
$138,110,000 and $119,754,000 at February 1, 2003 and February 2, 2002,
and is based on dealer quotes or quoted market prices of the same or
similar instruments. The carrying amount of long-term debt was
$150,000,000 at February 1, 2003 and February 2, 2002. The carrying
amount reported in the consolidated balance sheets for cash and cash
equivalents, notes payable-bank, accounts payable and other current
liabilities approximate fair value because of the short-term maturity
of those financial instruments. The estimates presented herein are not
necessarily indicative of amounts the Company could realize in a
current market exchange.
(13) Income Taxes
The income tax provision/benefit consists of:
2002 2001 2000
---- ---- ----
Current:
Foreign $ 193,000 $ 260,000 $ 300,000
Federal (13,449,000) (2,400,000) 6,253,000
State and local 200,000 100,000 920,000
-------------- ------------ ------------
(13,056,000) (2,040,000) 7,473,000
-------------- ------------ ------------
Deferred (4,694,000) 1,873,000 4,707,000
-------------- ------------ ------------
Total $ (17,750,000) $ (167,000) $ 12,180,000
============== ============ ============
F-31
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
A reconciliation between the provision/(benefit) for income taxes based
on the U.S. Federal statutory rate and the Company's effective rate is
as follows.
2002 2001 2000
-------- -------- --------
Federal income tax rate (35.0)% (35.0)% 35.0%
State and local income taxes, net
of federal benefit -- 134.6 3.2
Reversal of prior year tax accruals (38.6) -- --
Nondeductible expenses and other 6.8 (172.8) (2.3)
-------- -------- --------
Effective tax rate (66.8)% (73.2)% 35.9%
======== ======== ========
The tax effect of temporary differences which give rise to deferred tax
assets and liabilities are:
February 1, February 2,
2003 2002
------------ ------------
Deferred tax assets:
Federal NOL carryforwards $ 5,040,000 $ --
State and local NOL carryforwards 1,400,000 1,900,000
Reserve for sales returns 2,202,000 2,603,000
Other 3,873,000 6,637,000
------------ ------------
12,515,000 11,140,000
------------ ------------
Deferred tax liabilities:
Prepaid catalog and other prepaid expenses (9,872,000) (8,841,000)
Difference in book and tax basis
for property and equipment (3,553,000) (7,903,000)
------------ ------------
(13,425,000) (16,744,000)
------------ ------------
Net deferred income tax liabilities $ (910,000) $ (5,604,000)
============ ============
The Company has state and local income tax net operating loss
carryforwards of varying amounts.
(14) Stock Compensation Plans
1997 Stock Option Plan
Under the terms of the 1997 Stock Option Plan, an aggregate of
1,910,000 shares are available for grant to certain key employees or
consultants. The options have terms of seven to ten years and become
exercisable over a period of five years. Options granted under the
Option Plan are subject to various conditions, including under some
circumstances, the achievement of certain performance objectives.
F-32
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
A summary of stock option activity for the 1997 Plan was, as follows:
2002 2001 2000
---- ---- ----
Weighted Weighted Weighted
-------- -------- --------
average average average
------- ------- -------
exercise exercise exercise
-------- -------- --------
Shares price Shares price Shares price
---------- ------- ---------- ------- --------- --------
Outstanding, beginning of year 1,808,790 $ 9.97 1,788,750 $ 9.15 1,532,800 $ 8.87
Granted 395,500 7.64 283,000 14.53 374,700 10.17
Exercised -- -- -- -- (2,000) 6.82
Cancelled (597,560) 10.29 (262,960) 9.31 (116,750) 8.72
---------- ------- ---------- ------- --------- --------
Outstanding, end of year 1,606,730 $ 9.27 1,808,790 $ 9.97 1,788,750 $ 9.15
---------- ------- ---------- ------- ========= ========
Options exercisable
at end of year 842,340 $ 9.81 728,950 $ 9.21 583,000 $ 9.24
========== ======= ========== ======= ========= ========
2003 Equity Incentive Plan
In January 2003, the Board of Directors of Holdings approved the
adoption of the 2003 Equity Incentive Plan. Under the terms of the 2003
Plan, an aggregate of 4,798,160 shares of common stock are available
for award to key employees and consultants in the form of non-qualified
stock options and restricted shares as follows:
. 1,115,812 shares are reserved for the issuance of stock
options at an exercise price of $6.82 of fair market value,
whichever is greater;
. 1,115,812 shares are reserved for the issuance of stock
options at an exercise price of $25.00 or fair market
value, whichever is greater;
. 1,115,812 shares are reserved for the issuance of stock
options at an exercise price of $35.00 or fair market
value, whichever is greater;
. 1,450,724 shares are reserved for the issuance of
restricted shares.
The options have terms of ten years and become exercisable over the
period provided in each grant agreement.
During fiscal 2002, Holdings granted 836,889 options with an exercise
price of $6.82, 1,015,425 options with an exercise price of $25.00 and
1,015,425 options with an exercise price of $35.00, and issued
1,004,266 restricted shares under the 2003 plan.
(15) Stockholder's Equity
The Company has authorized 100 shares of common stock par
value $1 per share, all of which was issued and outstanding at February
1, 2003 and February 2, 2002.
A reconciliation of stockholder's equity is, as follows:
Year ended
February 1, February 2,
2003 2002
------------- -----------
Balance, beginning of year $ 19,147,000 $ 19,208,000
Net loss (8,822,000) (61,000)
------------- ------------
Balance, end of year $ 10,325,000 $ 19,147,000
============ ============
(16) Subsequent Events
TPG - MD Investment Loans
On February 4, 2003, Operating Corp. entered into a credit
agreement with TPG-MD Investment, LLC, a related party, which provides
for a Tranche A loan to Operating Corp. in an aggregate principal
amount of $10.0 million and a Tranche B loan to Operating Corp. in an
aggregate principal amount of $10.0 million. The loans are due in
February 2008 and bear interest at 5.0% per annum payable semi-annually
in arrears on January 31 and July 31, commencing on July 31, 2003.
Interest will compound and be capitalized and added to the principal
amount on each interest payment date. Payment of the loans is
subordinated in right of payment to the prior payment of all senior
debt and on the same terms as Operating Corp's 10-3/8% senior
subordinated notes due 2008.
F-33
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
Exchange Offer
On April 4, 2003, Holdings commenced through J. Crew Intermediate LLC, its
newly formed wholly-owned subsidiary ("Intermediate"), an offer to exchange
the outstanding 13 1/8% Senior Discount Debentures due 2008 issued by
Holdings for Intermediate's unissued 16.0% Senior Discount Contingent
Principal Notes due 2008.
Holdings will not pay accrued and unpaid interest on the existing
debentures on the scheduled interest payment date of April 15, 2003.
Rather, Holdings will pay such interest on the settlement date of the
exchange offer (which is expected to occur on or about May 6, 2003)
together with interest thereon at a rate of 13 1/8% per annum from
April 15, 2003 to the settlement date, to the holders of the existing
debentures who do not tender their existing debentures in the exchange
offer.
Congress Credit Facility
The Congress Credit Facility was amended on April 4, 2003 to (a) consent to
the formation of J.Crew Intermediate LLC and the Exchange Offer; (b)
carve-out a $9.0 million one-time charge for non-current inventory from the
EBITDA covenant; (c) modify required EBITDA covenant levels and (d)
eliminate the supplemental loan availability in fiscal 2003.
(17) Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board, ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations". SFAS No. 143 requires the Company to
record the fair value of an asset retirement obligation as a liability in
the period in which it incurs a legal obligation associated with the
retirement of tangible long-lived assets and a corresponding asset which is
depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be
adjusted at the end of each period to reflect the passage of time and
changes in the estimated future cash flows underlying the obligation. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002.
Management does not believe that the adoption of SFAS No. 143 will have a
significant impact on the Company's financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142., "Goodwill and Other Intangible Assets". SFAS No. 141
eliminates the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001 and modifies the application of
the purchase accounting method effective for transactions that are
completed after June 30, 2001. SFAS No. 142 eliminated the requirement to
amortize goodwill and intangible assets having indefinite useful lives but
requires testing at least annually for impairment. Intangible assets that
have finite lives will continue to be amortized over their useful lives.
SFAS No. 142 applies to goodwill and intangible assets arising from
transactions completed before and after the statement's effective dated of
January 1, 2002. The adoption of these statements in fiscal 2002 did not
have any effect on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment of disposal of
long-lived assets and requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that
either has been disposed of or is classified as held for sale. This
statement requires
F-34
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. SFAS No. 144 was effective for fiscal years beginning
after December 15, 2001. The adoption of SFAS No. 144 did not have a
significant impact on the Company's financial statements.
EITF Issue No. 01-9 "Accounting for Consideration Given to a Customer or a
Reseller of the Vendor's Products" (formerly EITF Issue 00-14) became
effective in the first quarter of fiscal 2002. This EITF addresses the
accounting for and classification of consideration given to a customer from
a vendor in connection with the purchase or promotion of the vendor's
product. The adoption of the EITF did not have a significant effect on the
Company's financial statements.
In June 2002, the FASB issued SFAS No. 146 - "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses
accounting and reporting for costs associated with exit or disposal
activities. SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at
fair value when the liability is incurred. SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of SFAS No. 146 in the fourth quarter of 2002 did not have an
impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB statements
No. 4, 44, and 64, Amendment of FASB Statement No 13, and Technical
Corrections". SFAS No. 145 primarily affects the reporting requirements and
classification of gains and losses from the extinguishment of debt,
rescinds the transitional accounting requirement for intangible assets of
motor carriers, and requires that certain lease modifications with economic
effects similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. SFAS No. 145 is effective for
financial statements issued after April 2003, with the exception of the
provisions affecting the accounting for lease transactions, which should be
applied for transactions entered into after May 15, 2002, and the
provisions affecting classification of gains and losses from the
extinguishment of debt, which should be applied in fiscal years after May
15, 2002. Management has classified the loss from the refinancing of its
credit facility in December 2002 as a component of interest expense in the
Company's financial statements.
In November, 2002, the FASB issued FASB interpretation ("FIN") No. 45 -
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". This
interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
certain guarantees that it has issued and requires that they be recorded at
fair value. The initial recognition and measurement provisions of this
interpretation are to be applied on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements of
this interpretation are effective for periods ending after December 15,
2002.
In December 2002, the FASB issued No. 148, - "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No. 123" ("SFAS 148"). This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternate methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. This Statement also
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. The amendments to Statement 123
regarding disclosure are effective for fiscal years ending after December
15, 2002. The Company applies APB Opinion No. 25 in accounting for its
employee stock option plans.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities - an Interpretation of Accounting Research Bulletin No.
51". FIN No. 46 requires unconsolidated variable interest entities to be
F-35
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 1, 2003, February 2, 2002 and February 3, 2001
consolidated by their primary beneficiaries if the entities do not
effectively disperse the risks and rewards of ownership among their owners
and other parties involved. The provisions of FIN No. 46 are applicable
immediately to all variable interest entities created after January 31,
2003 and variable interest entities in which a company obtains an interest
after that date. For variable interest entities created before January 31,
2003, the provisions of this interpretation are effective July 1, 2003. The
adoption of FIN No. 46 is not expected to have any effect on the Company's
financial statements.
(17) Quarterly Financial Information (Unaudited)
($ in millions)
13 weeks 13 weeks 13 weeks 13 weeks 52 weeks
ended ended ended ended ended
5/4/02 (a) 8/3/02 11/2/02 2/1/03 (b) 2/1/03
------ ------ ------- ------ ------
Net sales $ 157.9 $ 160.9 $ 181.9 $ 231.6 $ 732.3
Gross profit 67.0 61.0 75.9 83.8 287.7
Net income (loss) $ (9.1) $ (4.1) $ 2.1 $ 2.3 $ (8.8)
13 weeks 13 weeks 13 weeks 14 weeks 53 weeks
ended ended ended ended ended
5/5/01 8/4/01 11/3/01 2/2/02 2/2/02
------ ------ ------- ------ ------
Net sales $ 158.9 $ 160.5 $ 187.1 $ 234.8 $ 741.3
Gross profit 68.2 60.5 82.8 104.1 315.6
Net income (loss) $ (7.1) $ (6.1) $ 2.7 $ 10.4 $ (.1)
(a) Net income (loss) includes a pre-tax charge of $4.6 million for severance
charges.
(b) Net income (loss) includes pre-tax charges of (a) $7.7 million for severance
and other one-time employment related charges, (b) $1.8 million to write-off
deferred financing charges in connection with the refinancing of our credit
facility and (c) a $9,000,000 inventory writedown as a result of the
Company's decision to modify its strategy on the disposition of inventory to
accelerate inventory clearing at the end of each selling season and (d) a
tax benefit of $11.8 million on a pre-tax loss of $9.5 million as a result
of the reversal of $10.3 million of prior year tax accruals at February 1,
2003.
F-36
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
beginning charged to cost charged to other ending
balance and expenses accounts deductions balance
($ in thousands)
Inventory reserve
- -----------------
(deducted from inventories)
fiscal year ended:
February 1, 2003 $ 8,367 $ 4,053 (a) $ -- $ -- $ 12,420
February 2, 2002 7,360 1,007 (a) -- -- 8,367
February 3, 2001 4,447 2,913 (a) -- -- 7,360
Allowance for sales returns
- ---------------------------
(included in other current liabilities)
fiscal year ended:
February 1, 2003 $ 6,475 $(1,162)(a) $ -- $ -- $ 5,313
February 2, 2002 6,530 (55)(a) -- -- 6,475
February 3, 2001 5,011 1,519 (a) -- -- 6,530
(a) The inventory reserve and allowance for sales returns are evaluated at the
end of each fiscal quarter and adjusted (plus or minus) based on the
quarterly evaluation. During each period inventory write-downs and sales
returns are charged to the statement of operations as incurred.
F-37
EXHIBIT INDEX
Articles of Incorporation and By-Laws
3.1 Restated Certificate of Incorporation of J. Crew Group, Inc.
Incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-4, File No. 333-42427, filed December 16, 1997
(the "Group Registration Statement").
3.2 By-laws of J. Crew Group, Inc., as amended. Incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended February 3, 2001.
3.3 Certificate of Incorporation of J.Crew Operating Corp., as amended.
Incorporated by reference to Exhibits 3.1 and 3.2 to the Company's
Registration Statement on Form S-4, File No. 333-4243, filed December
16, 1997 (the "Operating Registration Statement").
3.4 By-laws of J.Crew Operating Corp., as amended. Incorporated by
reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q
for the period ended October 31, 1998 and Exhibit 3.14 to the
Operating Registration Statement.
Instruments Defining the Rights of Security Holders, Including Indentures
4.1 Indenture, dated as of October 17, 1997, between J.Crew Group, Inc.
and State Street Bank and Trust Company. Incorporated by reference to
Exhibit 4.3 to the Group Registration Statement.
4.2 Indenture, dated as of October 17, 1997, between J.Crew Operating
Corp. and State Street Bank and Trust Company. Incorporated by
reference to Exhibit 4.1 to the Operating Registration Statement.
4.3 Registration Rights Agreement, dated as of October 17, 1997, by and
among the Company, Donaldson, Lufkin & Jenrette Securities Corporation
and Chase Securities Inc. Incorporated by reference to Exhibit 4.10 to
the Group Registration Statement.
4.4 Stockholders' Agreement, dated as of October 17, 1997, between the
Company and the Stockholder signatories thereto. Incorporated by
reference to Exhibit 4.1 to the Group Registration Statement.
4.5(a) Stockholders' Agreement, dated as of October 17, 1997, among the
Company, TPG Partners II, L.P. and Emily Woods. Incorporated by
reference to Exhibit 10.1 to the Group Registration Statement.
4.5(b) Amendment to Stockholders' Agreement, dated as of February 3, 2003,
among the Company, TPG Partners II, L.P. and Emily Woods. Incorporated
by reference to Exhibit 4.1 of the Company's Form 8-K filed on
February 7, 2003.
4.6* Stockholders' Agreement, dated as of September 9, 2002, between the
Company, TPG Partners II, L.P. and Kenneth Pilot.
4.7 Stockholders' Agreement, dated as of January 24, 2003, among the
Company, TPG Partners II, L.P. and Millard S. Drexler. Incorporated by
reference to Exhibit 4.1 of the Company's Form 8-K filed on February
3, 2003.
4.8 Stockholders' Agreement, dated as of February 20, 2003, among the
Company, TPG Partners II, L.P. and Jeffrey A. Pfeifle. Incorporated by
reference to Exhibit 4.1 of the Company's Form 8-K filed on February
26, 2003.
4.9 Stockholders' Agreement, dated as of February 12, 2003, among the
Company, TPG Partners II, L.P. and Scott Gilbertson. Incorporated by
reference to Exhibit 4.1 of the Company's Form 8-K filed on February
14, 2003.
Material Contracts
10.1(a) Loan and Security Agreement, dated as of December 23, 2002, by and
among J. Crew Operating Corp., J. Crew Inc., Grace Holmes, Inc. and
H.F.D. No. 55, Inc. as Borrowers, J. Crew Group, Inc. and J. Crew
International, Inc. as Guarantors, Wachovia Bank, National Association
as Arranger, Congress Financial Corporation as Administrative and
I-1
Collateral Agent, and the Lenders. Incorporated by reference to
Exhibit 10.1 of the Company's Form 8-K filed on December 27, 2002.
10.1(b) Amendment No. 1, dated as of February 7, 2003, to the Loan and
Security Agreement. Incorporated by reference to Exhibit 10.1 of the
Company's Form 8-K filed on February 14, 2003.
10.1(c) Amendment No. 2, dated as of April 4, 2003, to the Loan and Security
Agreement. Incorporated by reference to Exhibit 10.1 of the Company's
Form 8-K filed on April 8, 2003.
10.2 Credit Agreement, dated as of February 4, 2003, by and between J. Crew
Group, Inc., J. Crew Operating Corp., and certain subsidiaries
thereof, and TPG-MD Investment, LLC. Incorporated by reference to
Exhibit 10.1 of the Company's Form 8-K filed on February 7, 2003.
Management Contracts and Compensatory Plans and Arrangements
10.3 Amended and Restated J. Crew Group, Inc. 1997 Stock Option Plan.
Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the period ended August 3, 2002.
10.4* J. Crew Group, Inc. 2003 Equity Incentive Plan.
10.5(a) Employment Agreement, dated May 3, 1999, between the Company and Mark
Sarvary. Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended May 1, 1999.
10.5(b) Letter Agreement, dated August 9, 1999, between the Company and Mark
Sarvary. Incorporated by reference to Exhibit 10.5(b) to the Company's
Annual Report on Form 10-K for the fiscal year ended January 29, 2000.
10.5(c) Letter Agreement, dated January 15, 2002, between the Company and Mark
Sarvary. Incorporated by reference to Exhibit 10.5(c) of the Company's
Annual Report on Form 10-K for the fiscal year ended February 2, 2002.
10.5(d)* Separation Agreement, dated April 29, 2002, between the Company and
Mark Sarvary.
10.6(a) Employment Agreement, dated May 17, 2001, between the Company and
Michael Scandiffio. Incorporated by reference to Exhibit 10.12 of the
Company's Annual Report on Form 10-K for the fiscal year ended
February 2, 2002.
10.6(b)* Separation Agreement, dated October 17, 2002, between the Company and
Michael Scandiffio.
10.7(a) Employment Agreement, dated December 12, 2001, between the Company and
Blair Gordon. Incorporated by reference to Exhibit 10.13 of the
Company's Annual Report on Form 10-K for the fiscal year ended
February 2, 2002.
10.7(b)* Separation Agreement, dated January 30, 2003, between the Company and
Blair Gordon.
10.8(a) Employment Agreement, dated August 26, 2002, between the Company and
Kenneth Pilot. Incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the period ended August 3,
2002.
10.8(b)* Separation Agreement, dated January 29, 2003, between the Company and
Kenneth Pilot.
10.9* Services Agreement, dated January 24, 2003, between the Company,
Millard S. Drexler, Inc. and Millard S. Drexler.
I-2
10.10* Employment Agreement, dated January 24, 2003, between the Company and
Jeffrey A. Pfeifle.
10.11* Employment Agreement, dated January 27, 2003, between the Company and
Scott Gilbertson.
10.12* Separation Agreement, dated March 7, 2003, between the Company and
Walter Killough.
Other Exhibits
21.1* Subsidiaries of J. Crew Group, Inc.
23.1* Consent of KPMG LLP, Independent Auditors.
99.1* Certification of Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002.
99.2* Certification of Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002.
_____________
* Filed herewith
I-3
Exhibit 4.6
STOCKHOLDERS' AGREEMENT
STOCKHOLDERS' AGREEMENT (this "Agreement"), dated as of September 9,
2002, between J. Crew Group, Inc. (the "Company"), TPG Partners II, L.P. ("TPG")
and Kenneth S. Pilot (the "Stockholder").
WHEREAS, the Stockholder is an employee of the Company and J. Crew
Operating Corp., a wholly-owned subsidiary of the Company (the "Subsidiary"), in
such capacity is on the date hereof being, and may in the future be, granted
certain options (the "Options") to purchase shares of common stock, $.01 par
value per share, of the Company ("Common Stock") pursuant to the Company's 1997
Stock Option Plan (the "Option Plan") or the Employment Agreement, dated August
26, 2002, among the Stockholder, the Company and the Subsidiary (the "Employment
Agreement"), and is being granted pursuant to the Employment Agreement certain
Granted Shares and Restricted Shares (each as defined therein) and may be
granted additional shares of Common Stock or rights to purchase Common Stock in
the future in connection with his employment; and
WHEREAS, the Stockholder and the Company desire to enter into this
Agreement and to have this Agreement apply to the shares of Common Stock to be
purchased or granted pursuant to the Option Plan or the Employment Agreement,
and to any shares of Common Stock acquired after the date hereof by the
Stockholder from whatever source, subject to any future agreement between the
Company and the Stockholder to the contrary (in the aggregate, the "Shares").
NOW THEREFORE, in consideration of the premises hereinafter set forth,
and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows.
1. Investment. The Stockholder represents that the Shares are being
acquired for investment and not with a view toward the distribution thereof.
2. Issuance of Shares. The Stockholder acknowledges and agrees that the
certificate for the Shares shall bear the following legends (except that the
second paragraph of this legend shall not be required after the Shares have been
registered and except that the first paragraph of this legend shall not be
required after the termination of this Agreement):
The shares represented by this certificate are subject to the terms and
conditions of a Stockholders' Agreement dated as of September 9, 2002 and
may not be sold, transferred, hypothecated, assigned or encumbered, except
as may be permitted by the aforesaid Agreement. A copy of the Stockholders'
Agreement may be obtained from the Secretary of the Company.
The shares represented by this certificate have not been registered under
the Securities Act of 1933. The shares have been acquired for investment
and may not be sold, transferred, pledged or hypothecated in the absence of
an effective registration statement for the shares under the Securities Act
of 1933 or an opinion of counsel for the Company that registration is not
required under said Act.
Upon the termination of this Agreement, or upon registration of the
Shares under the Securities Act of 1933 (the "Securities Act"), the Stockholder
shall have the right to exchange any Shares containing the above legend (i) in
the case of the registration of the Shares, for Shares legended only with the
first paragraph described above and (ii) in the case of the termination of this
Agreement, for Shares legended only with the second paragraph described above.
3. Transfer of Shares; Call Rights.
(a) The Stockholder agrees that he will not cause or permit the Shares
or his interest in the Shares to be sold, transferred, hypothecated, assigned or
encumbered except as expressly permitted by this Section 3; provided, however,
that the Shares or any such interest may be transferred (i) on the Stockholder's
death by bequest or inheritance to the Stockholder's executors, administrators,
testamentary trustees, legatees or beneficiaries, (ii) to a trust or
custodianship the beneficiaries of which may include only the Stockholder, the
Stockholder's spouse, or the Stockholder's lineal descendants (by blood or
adoption) and (iii) in accordance with Section 4 of this Agreement, subject in
any such case to the agreement by each transferee (other than the Company) in
writing to be bound by the terms of this Agreement and provided in any such case
that no such transfer that would cause the Company to be required to register
the Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), shall be permitted.
(b) The Company (or its designated assignee) shall have the right,
during the ninety-day period commencing on the later of (x) the termination of
the Stockholder's employment with the Company for any reason and (y)
one-hundred-eighty-one (181) days following the date of the acquisition by the
Stockholder of any Shares, to purchase from the Stockholder, and upon the
exercise of such right the Stockholder shall sell to the Company (or its
designated assignee), all or any portion of the Shares held by the Stockholder
as of the date as of which such right, is exercised at a per Share price equal
to the Fair Market Value (as defined in the Option Plan) of a share of Common
Stock determined as of the date as of which such right is exercised. The Company
(or its designated assignee) shall exercise such right by delivering to the
Stockholder a written notice specifying its intent to purchase Shares held by
the Stockholder, the date as of which such right is to be exercised and the
number of Shares to be purchased. Such purchase and sale shall occur on such
date as the Company (or its designated assignee) shall specify which date shall
not be later than ninety (90) days after the fiscal quarter-end immediately
following the date as of which the Company's right is exercised.
4. Certain Rights.
(a) Drag Along Rights. If TPG desires to sell all or substantially all
of its shares of Common Stock to a good faith independent purchaser (a
"Purchaser") (other than any other investment partnership, limited liability
company or other entity established for investment purposes and controlled by
the principals of TPG or any of its affiliates and other than any employees of
TPG or any of its affiliates, hereinafter referred to as a "Permitted
Transferee") and said Purchaser desires to acquire all or substantially all of
the issued and outstanding shares of Common Stock (or all or substantially all
of the assets of the Company) upon such terms and conditions as agreed to with
TPG, the Stockholder agrees to sell all of his Shares to said
2
Purchaser (or to vote all of his Shares in favor of any merger or other
transaction which would effect a sale of such shares of Common Stock or assets
of the Company) at the same price per share of Common Stock and pursuant to the
same terms and conditions with respect to payment for the shares of Common Stock
as agreed to by TPG. In such case, TPG shall give written notice of such sale to
the Stockholder at least 30 days prior to the consummation of such sale, setting
forth (i) the consideration to be received by the holders of shares of Common
Stock, (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.
(b) Tag Along Rights. (i) Subject to paragraph ( iv) of this Section
4(b), if TPG or its affiliates proposes to transfer any of its shares of Common
Stock to a Purchaser (other than a Permitted Transferee), then TPG or such
Permitted Transferee (hereinafter referred to as a "Selling Stockholder") shall
give written notice of such proposed transfer to the Stockholder (the "Selling
Stockholder's Notice") at least 30 days prior to the consummation of such
proposed transfer, and shall provide notice to all other stockholders of the
Company to whom TPG has granted similar "tag-along" rights (such stockholders
together with the Stockholder, referred to herein as the "Other Stockholders")
setting forth (A) the number of shares of Common Stock offered, (B) the
consideration to be received by such Selling Stockholder, (C) the identity of
the Purchaser, (D) any other material items and conditions of the proposed
transfer and (E) the date of the proposed transfer.
(ii) Upon delivery of the Selling Stockholder's Notice, the
Stockholder may elect to sell up to the sum of (A) the Pro Rata Portion (as
hereinafter defined) and (B) the Excess Pro Rata Portion (as hereinafter
defined) of his Shares, at the same price per share of Common Stock and pursuant
to the same terms and conditions with respect to payment for the shares of
Common Stock as agreed to by the Selling Stockholder, by sending written notice
to the Selling Stockholder within 15 days of the date of the Selling
Stockholder's Notice, indicating his election to sell up to the sum of the Pro
Rata Portion plus the Excess Pro Rata Portion of his Shares in the same
transaction. Following such 15 day period, the Selling Stockholder and each
Other Stockholder shall be permitted to sell to the Purchaser on the terms and
conditions set forth in the Selling Stockholder's Notice the sum of (X) the Pro
Rata Portion and (Y) the Excess Pro Rata Portion of its Shares.
(iii) For purposes of Section 4(b) and 4(c) hereof, "Pro Rata Portion"
shall mean, with respect to shares of Common Stock held by the Stockholder or
Selling Stockholder, as the case may be, a number equal to the product of (x)
the total number of such shares then owned by the Stockholder or the Selling
Stockholder, as the case may be, and (y) a fraction, the numerator of which
shall be the total number of such shares proposed to be sold to the Purchaser as
set forth in the Selling Stockholder's Notice or initially proposed to be
registered by the Selling 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 Stockholder);
provided, however, that any fraction of a share resulting from such calculation
shall be disregarded for purposes of determining the Pro Rata Portion. For
purposes of Sections 4(b) and 4(c), "Excess Pro Rata Portion" shall mean, with
respect to shares of Common Stock held by the Stockholder or the Selling
Stockholder, as the case may be, 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
3
such shares, and the denominator of which shall be the sum of (1) the aggregate
Pro Rata Portions with respect to the shares of Common Stock of all of the Other
Stockholders that have elected to exercise in full their rights to sell their
Pro Rata Portion of shares of Common Stock, and (2) the Selling Stockholder's
Pro Rata Portion of shares of Common Stock (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 shares of Common Stock, proposed to be sold to a Purchaser as set
forth in a Selling Stockholder's Notice or initially proposed to be registered
by the Selling Stockholder, as the case may be, less the amount of Elected
Shares.
(iv) Notwithstanding anything to the contrary contained herein, the
provisions of this Section 4(b) shall not apply to any sale or transfer by TPG
of shares of Common Stock unless and until TPG, 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 Stock, representing 7.5%
of shares of Common Stock owned by TPG on the date hereof.
(c) Piggyback Registration Rights.
(i) Notice to Stockholder. If the Company determines that it will file
a registration statement under the Securities Act, other than a registration
statement on Form S-4 or Form S-8 or any successor form, for an offering which
includes shares of Common Stock held by TPG or its affiliates (hereinafter in
this paragraph (c) of Section 4 referred to as a "Selling Stockholder"), then
the Company shall give prompt written notice to the Stockholder 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 Shares from the Stockholder, then the Company shall include in the same
registration statement the number of Shares to be sold by the Stockholder as
shall have been specified in his request, except that the Stockholder shall not
be permitted to register more than the Pro Rata Portion plus the Excess Pro Rata
portion of his Shares. The Company shall bear all costs of preparing and filing
the registration statement, and shall indemnify and hold harmless, to the extent
customary and reasonable, pursuant to indemnification and contribution
provisions to be entered into by the Company at the time of filing of the
registration statement, the seller of any shares of Common Stock 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 4(c) at any time prior to such filing.
(ii) Allocation. If the managing underwriter shall inform the Company
in writing that the number of shares of Common Stock 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 TPG, then the Company shall
include in such registration such number of shares of Common Stock which the
Company is so advised can be sold in (or during the time of) such offering. All
holders of shares of Common Stock proposing to sell shares of Common
4
Stock shall share pro rata in the number of shares of Common Stock to be
excluded from such offering, such sharing to be based on the respective numbers
of shares of Common Stock as to which registration has been requested by such
holders.
(iii) Permitted Transfer. Notwithstanding anything to the contrary
contained herein, sales of Shares pursuant to a registration statement filed by
the Company may be made without compliance with any other provision of this
Agreement.
5. Termination. This Agreement shall terminate immediately following
the existence of a Public Market for the Common Stock except that (i) the
requirements contained in Section 2 hereof shall survive the termination of this
Agreement and (ii) the provisions contained in Section 3 hereof shall continue
with respect to each Share during such period of time, if any, as the
Stockholder is precluded from selling such Shares pursuant to Rule 144 of the
Securities Act. For this purpose, a "Public Market" for the Common Stock shall
be deemed to exist if the Common Stock is registered under Section 12(b) or
12(g) of the Exchange Act and trading regularly occurs in such Common Stock in,
on or through the facilities of securities exchanges and/or inter-dealer
quotation systems in the United States (within the meaning of Section 902(n) of
the Securities Act) or any designated offshore securities market (within the
meaning of Rule 902(a) of the Securities Act).
6. Distributions With Respect To Shares. As used herein, the term
"Shares" includes securities of any kind whatsoever distributed with respect to
the Common Stock acquired by the Stockholder pursuant to the Option Plan or any
such securities resulting from a stock split or consolidation involving such
Common Stock.
7. Amendment; Assignment. This Agreement may be amended, superseded,
canceled, renewed or extended, and the terms hereof may be waived, only by a
written instrument signed by authorized representatives of the parties or, in
the case of a waiver, by an authorized representative of the party waiving
compliance. No such written instrument shall be effective unless it expressly
recites that it is intended to amend, supersede, cancel, renew or extend this
Agreement or to waive compliance with one or more of the terms hereof, as the
case may be. Except for the Stockholder's right to assign his or her rights
under Section 3(a) or the Company's right to assign its rights under Section
3(b), no party to this Agreement may assign any of its rights or obligations
under this Agreement without the prior written consent of the other parties
hereto.
8. Notices. All notices and other communications hereunder shall be
in writing, shall be deemed to have been given if delivered in person or by
certified mail, return receipt requested, and shall be deemed to have been given
when personally delivered or three (3) days after mailing to the following
address:
If to the Company:
J. Crew Group, Inc.
770 Broadway, Twelfth Floor
New York, New York 10003
Attention: Board of Directors and Secretary
5
with a copy to:
Paul Shim, Esq.
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
If to TPG:
301 Commerce Street, Suite 3300
Fort Worth, Texas 76102
Attention: John E. Viola
If to the Stockholder, to the address on record with the Company; or
for any party, to such other address as any party may have furnished to the
others in writing in accordance herewith, except that notices of change of
address shall only be effective upon receipt.
9. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but each of which
together shall constitute one and the same document.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of NEW YORK, without reference to its
principles of conflicts of law.
11. Binding Effect. This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by the heirs, personal representatives,
successors and permitted assigns of the parties hereto. Nothing expressed or
referred to in this Agreement is intended or shall be construed to give any
person other than the parties to this Agreement, or their respective heirs,
personal representatives, successors or assigns, any legal or equitable rights,
remedy or claim under or in respect of this Agreement or any provision contained
herein.
12. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof.
13. Severability. If any term, provision, covenant or restriction of
this Agreement, is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
14. Miscellaneous. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
* * * * * *
6
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above written.
___________________________
Kenneth S. Pilot
J. CREW GROUP, INC.
____________________________
By:
Title:
TPG PARTNERS II, L.P.
____________________________
By:
Title:
7
Exhibit 10.4
J. CREW GROUP, INC.
2003 EQUITY INCENTIVE PLAN
1. Purpose of the Plan
The purpose of the J. Crew Group, Inc. 2003 Equity Incentive Plan (the
"Plan") is to promote the interests of the Company and its stockholders 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.
2. Definitions
As used in this Plan, the following capitalized terms shall have the
following meanings:
(a) "Affiliate" shall mean the Company and any of its direct or
indirect subsidiaries.
(b) "Award" shall mean an Option or shares of Restricted Stock granted
to a Participant pursuant to the terms of the Plan and as evidenced by a Grant
Agreement.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Cause" shall mean, when used in connection with the termination of
a Participant's Employment, unless otherwise provided in the Participant's Grant
Agreement, the termination of the Participant's Employment by the Company or an
Affiliate on account of (i) the willful violation by the Participant of any
federal or state law or any rule of the Company or any Affiliate, (ii) a breach
by a Participant of the Participant's duty of loyalty to the Company and its
Affiliates in contemplation of the Participant's termination of Employment, such
as the Participant's pre-termination of Employment solicitation of customers or
employees of the Company or an Affiliate, (iii) the Participant's unauthorized
removal from the premises of the Company or Affiliate of any document (in any
medium or form) relating to the Company or an Affiliate or the customers of the
Company or an Affiliate, or (iv) any gross negligence in connection with the
performance of the Participant's duties as an Employee. Any rights the Company
or an Affiliate may have hereunder in respect of the events giving rise to Cause
shall be in addition to the rights the Company or Affiliate may have under any
other agreement with the Employee or at law or in equity. If, subsequent to a
Participant's termination of Employment, it is discovered that such
Participant's Employment could have been terminated for Cause, the Participant's
Employment shall, at the election of the Committee, in its sole discretion, be
deemed to have been terminated for Cause retroactively to the date the events
giving rise to Cause occurred.
(e) "Change in Control" shall mean the occurrence of any of the
following events: (i) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all of
the assets of the Company or JCC to any Person or group of related persons for
purposes of Section 13(d) of the Exchange Act (a "Group"), together with any
affiliates thereof other than to TPG Partnership II, L.P. or any of its
affiliates (hereinafter "TPG II") or Millard S. Drexler or any entity that is
directly or indirectly controlled by Millard S.
1
Drexler (hereinafter "MD" and together with TPG II, "TPG Group"); (ii) the
approval by the holders of capital stock of the Company or JCC of any plan or
proposal for the liquidation or dissolution of the Company or JCC, as the case
may be; (iii) (A) any Person or Group (other than TPG Group) shall become the
beneficial owner (within the meaning of Section 13(d) of the Exchange Act),
directly or indirectly, of shares representing more than 40% of the aggregate
voting power of the issued and outstanding stock entitled to vote in the
election of directors, managers or trustees (the "Voting Stock") of the Company
or JCC and (B) TPG Group beneficially owns, directly or indirectly, in the
aggregate a lesser percentage of the Voting Stock of the Company than such other
Person or Group; (iv) the replacement of a majority of the Board of Directors of
the Company or JCC over a two-year period from the directors who constituted the
Board of Directors of the Company or JCC, as the case may be, at the beginning
of such period, and such replacement shall not have been approved either by TPG
Group or by a vote of at least a majority of the Board of Directors of the
Company or JCC, as the case may be, then still in office who either were members
of such Board of Directors at the beginning of such period or whose election as
a member of such Board of Directors was previously so approved or who were
nominated by, or designees of, TPG Group; (v) any Person or Group other than TPG
Group shall have acquired the power to elect a majority of the members of the
Board of Directors of the Company; or (vi) a merger or consolidation of the
Company with another entity in which holders of the Common Stock of the Company
immediately prior to the consummation of the transaction hold, directly or
indirectly, immediately following the consummation of the transaction, 50% or
less of the common equity interest in the surviving corporation in such
transaction.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(g) "Commission" shall mean the U.S. Securities and Exchange
Commission.
(h) "Committee" shall mean the Committee appointed by the Board
pursuant to Section 3 of the Plan.
(i) "Common Stock" shall mean the common stock of the Company.
(j) "Company" shall mean J. Crew Group, Inc.
(k) "Disability" shall mean a permanent disability as defined in the
Company's or an Affiliate's disability plans, or as defined from time to time by
the Company, in its discretion, or as specified in the Participant's Grant
Agreement.
(l) "EBITDA" shall mean, for any period, the consolidated earnings
(losses) of the Company and its affiliates before extraordinary items and the
cumulative effect of accounting changes, as determined by the Company in
accordance with U.S. generally accepted accounting principles, and before
interest (expense or income), taxes, depreciation, amortization, non-cash gains
and losses from sales of assets other than in the ordinary course of business,
Transaction Costs and Valuation Adjustments. For purposes of clarification, in
determining EBITDA, consolidated earnings shall be reduced (or, with respect to
losses, increased), but only once, by compensation expenses attributable to this
Plan and any other compensation plan, program or
2
arrangement of the Company or any of its affiliates, to the extent such expenses
are recorded in accordance with U.S. generally accepted accounting principles.
In the event of the occurrence of any business combination transaction affecting
the earnings or indebtedness of the Company, including (without limitation) any
transaction accounted for as a pooling or as a recapitalization, the Committee
shall adjust EBITDA as the Committee shall in good faith consider necessary or
appropriate, including (without limitation) to reflect transaction-related costs
attributable to such accounting method ("Transaction Costs").
(m) "Eligible Employee" shall mean (i) any Employee who is a key
executive of the Company or an Affiliate, or (ii) certain other Employees,
directors or consultants who, in the judgment of the Committee, should be
eligible to participate in the Plan due to the services they perform on behalf
of the Company or an Affiliate.
(n) "Employment" shall mean employment with the Company or any
Affiliate and shall include the provision of services as a director or
consultant for the Company or any Affiliate. "Employee" and "Employed" shall
have correlative meanings.
(o) "Exercise Date" shall have the meaning set forth in Section 5.10
herein.
(p) "Exercise Notice" shall have the meaning set forth in Section 5.10
herein.
(q) "Exercise Price" shall mean the price that the Participant must pay
under the Option for each share of Common Stock as determined by the Committee
for each Grant and specified in the Stock Option Grant Agreements.
(r) "Fair Market Value" shall mean, as of any date:
(1) prior to the existence of a Public Market for the Common Stock, the
quotient obtained by dividing (i) the excess of (x) the product of (A) 9 (as
such number may be changed as provided below, the "Multiple") and (B) EBITDA for
the twelve month period ending on the fiscal quarter-end immediately preceding
such date over (y) the sum of (I) the weighted arithmetic average indebtedness
(net of all cash and cash equivalents) during such period of the Company and its
consolidated direct and indirect wholly-owned subsidiaries and (II) for each
less than wholly-owned direct or indirect subsidiary of the Company the earnings
of which are either consolidated with those of the Company or accounted for on
an equity basis, the weighted arithmetic average indebtedness (net of all cash
and cash equivalents) during such period of such subsidiary multiplied by the
proportion of the total earnings (determined on the same basis as, and excluding
the same items as in the determination of, EBITDA) of such subsidiary included
in EBITDA (excluding earnings attributable to dividends received from such
subsidiary), by (ii) the total number of shares of Common Stock on the last day
of such period, determined on a fully diluted basis. For purposes of determining
the indebtedness of an entity, all preferred stock of the entity, other than
preferred stock convertible into Common Stock, shall be considered indebtedness
in the amount of the liquidation value thereof plus accumulated but unpaid
dividends thereon. Notwithstanding the foregoing provisions of this paragraph
(1), for the ten (10) day period immediately following the occurrence of a
Change in Control, Fair Market Value shall not be less than the price per share,
if any, paid to any member of the Initial Ownership
3
Group or the public tender offer price paid in connection with such Change in
Control. The Committee shall review the Multiple then in effect following the
audit of the Company's financial statements each fiscal year, and shall make
such increases or decreases in the Multiple as shall be determined by the
Committee in good faith to reflect market conditions and Company performance.
(2) on which a Public Market for the Common Stock exists, (i) the
average of the high and low sales prices on such day of a share of Common Stock
as reported on the principal securities exchange on which shares of Common Stock
are then listed or admitted to trading or (ii) if not so reported, the average
of the closing bid and ask prices on such day as reported on the National
Association of Securities Dealers Automated Quotation System or (iii) if not so
reported, as furnished by any member of the National Association of Securities
Dealers, Inc. selected by the Committee. The Fair Market Value of a share of
Common Stock as of any such date on which the applicable exchange or
inter-dealer quotation system through which trading in the Common Stock
regularly occurs is closed shall be the Fair Market Value determined pursuant to
the preceding sentence as of the immediately preceding date on which the Common
Stock is traded, a bid and ask price is reported or a trading price is reported
by any member of NASD selected by the Committee. In the event that the price of
a share of Common Stock shall not be so reported or furnished, the Fair Market
Value shall be determined by the Committee in good faith to reflect the fair
market value of a share of Common Stock.
(s) "Good Reason" shall mean, unless otherwise provided in a
Participant's Grant Agreement, (i) a material diminution in a Participant's
duties and responsibilities other than a change in such Participant's duties and
responsibilities that directly results from a Change in Control, (ii) a decrease
in a Participant's base salary, bonus opportunity or benefits other than a
decrease in benefits that applies to all employees of the Company or its
Affiliates otherwise eligible to participate in the applicable benefit plan, or
(iii) a relocation following a Change in Control of a Participant's primary work
location more than 50 miles from the work location immediately prior to the
Change in Control, in each case without the Participant's written consent and
after the Participant has provided the Committee with written notice specifying
the circumstances that the Participant believes constitute Good Reason and the
Company fails to cure such circumstances within a reasonable period of time (not
to exceed 30 days) after receipt of such notice.
(t) "Grant" shall mean a grant of (or to grant) an Option under the
Plan evidenced by a Stock Option Grant Agreement or a Grant of (or to grant)
Restricted Stock under the Plan evidenced by a Restricted Stock Grant Agreement,
provided, that in either case, such grant may or may not be made in exchange for
consideration paid in accordance with the terms of the relevant Stock Option
Grant Agreement or Restricted Stock Grant Agreement.
(u) "Grant Agreement" shall mean, in the case of the Grant of an
Option, an Option Grant Agreement, and in the case of a Grant of Restricted
Stock, a Restricted Stock Grant Agreement.
(v) "Grant Date" with respect to an Award, shall mean the date as of
which such Award is granted to a Participant and set forth in the Grant
Agreement evidencing such Award.
4
(w) "JCC" shall mean J. Crew Operating Corp., a wholly owned
subsidiary of the Company.
(x) "Non-Qualified Stock Option" shall mean an Option that is not an
"incentive stock option" within the meaning of Section 422 of the Code.
(y) "Option" shall mean the option to purchase Common Stock granted to
any Participant under the Plan. Each Option granted hereunder shall be a
Non-Qualified Stock Option and shall be identified as such in the Stock Option
Grant Agreement by which it is evidenced.
(z) "Option Spread" shall mean, with respect to an Option, the excess,
if any, of the Fair Market Value of a share of Common Stock as of the applicable
Valuation Date over the Exercise Price.
(aa) "Participant" shall mean an Eligible Employee to whom a Grant of
an Option and/or Restricted Stock under the Plan has been made, and, where
applicable, shall include Permitted Transferees.
(bb) "Permitted Transferee" shall have the meaning set forth in Section
5.6.
(cc) "Person" means an individual, partnership, corporation, limited
liability company, unincorporated organization, trust or joint venture, or a
governmental agency or political subdivision thereof.
(dd) A "Public Market" for the Common Stock shall be deemed to exist
for purposes of the Plan if the Common Stock is registered under Section 12(b)
or 12(g) of the Exchange Act and trading regularly occurs in such Common Stock
in, on or through the facilities of securities exchanges and/or inter-dealer
quotation systems in the United States (within the meaning of Rule 902(j) of the
Securities Act).
(ee) "Restricted Stock" shall mean a share of Common Stock that is
granted to a Participant pursuant to Section 6 herein.
(ff) "Restricted Stock Grant Agreement" shall mean an agreement entered
into by the Participant and the Company evidencing the Grant of Restricted Stock
pursuant to the Plan (a sample of which is attached hereto as Exhibit A).
(gg) "Retirement" shall mean, when used in connection with the
termination of a Participant's Employment, a Participant who is at least age 60
and has been Employed for at least five years at the time of such termination.
(hh) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(ii) "Stock Option Grant Agreement" shall mean an agreement entered
into by each Participant and the Company evidencing the Grant of each Option
pursuant to the Plan (a sample of which is attached hereto as Exhibit B).
5
(jj) "Stockholders' Agreement" shall mean the Stockholders' Agreement,
attached hereto as Exhibit C or such other stockholders' agreement as may be
entered into between the Company and any Participant.
(kk) "Transfer" shall mean any transfer, sale, assignment, gift,
testamentary transfer, pledge, hypothecation or other disposition of any
interest. "Transferee" and "Transferor" shall have correlative meanings.
(ll) "Valuation Adjustments" shall mean that amount of non-cash expense
charged against earnings for any period resulting from the application of
accounting for business combinations in accordance with Statement of Financial
Accounting Standards No. 141. These charges may include, but are not limited to,
amounts such as inventory revaluations, property, plant and equipment
revaluations, goodwill amortization and finance fee amortization.
(mm) "Valuation Date" shall mean (i) prior to the existence of a Public
Market for the Common Stock, the last day of each fiscal quarter, (ii) on or
after the existence of a Public Market for the Common Stock, the trading date
immediately preceding the date of the relevant transaction, or (iii) in the
event of a Change in Control, the date of the consummation of such Change in
Control.
(nn) "Vesting Date" shall mean, in the case of an Option, the date an
Option becomes exercisable pursuant to Section 5.4 herein, and, in the case of
Restricted Stock, the date a share of Restricted Stock vests pursuant to Section
6.3 herein.
(oo) "Withholding Request" shall have the meaning set forth in Section
5.10 herein.
3. Administration of the Plan
The Committee shall be appointed by the Board and shall administer the
Plan. In the absence of a Committee, the Board shall administer the Plan and all
references herein to Committee shall include the Board. No member of the
Committee shall participate in any decision that specifically affects such
member's interest in the Plan.
3.1 Powers of the Committee. In addition to the other powers granted
to the Committee under the Plan, the Committee shall have the power: (a) to
determine to which of the Eligible Employees Grants shall be made; (b) to
determine the time or times when Grants shall be made and to determine the type
of Award and the number of shares of Common Stock subject to each such Grant;
(c) to prescribe the form of any instrument evidencing a Grant; (d) to adopt,
amend and rescind such rules and regulations as, in its opinion, may be
advisable for the administration of the Plan; (e) to construe and interpret the
Plan, such rules and regulations and the instruments evidencing Grants; and (f)
to make all other determinations necessary or advisable for the administration
of the Plan.
3.2 Determinations of the Committee. Any Grant, determination,
prescription or other act of the Committee shall be final and conclusively
binding upon all persons.
6
3.3 Indemnification of the Committee. No member of the Committee or the
Board shall be liable for any action or determination made in good faith with
respect to the Plan or any Grant. To the full extent permitted by law, the
Company shall indemnify and hold harmless each person made or threatened to be
made a party to any civil or criminal action or proceeding by reason of the fact
that such person, or such person's testator or intestate, is or was a member of
the Committee.
3.4 Compliance with Applicable Law. Notwithstanding anything herein to
the contrary, the Company shall not be required to issue or deliver any
certificates evidencing shares of Common Stock pursuant to any Award, unless and
until the Committee has determined, with advice of counsel, that the issuance
and delivery of such certificates is in compliance with all applicable laws,
regulations of governmental authorities and, if applicable, the requirements of
any exchange on which the shares of Common Stock are listed or traded. In
addition to the terms and conditions provided herein, the Committee may require
that a Participant make such reasonable covenants, agreements and
representations as the Committee, in its sole discretion, deems advisable in
order to comply with any such laws, regulations or requirements.
3.5 Inconsistent Terms. Except as specifically provided herein or in
any Participant's Grant Agreement, in the event of a conflict between the terms
of the Plan and the terms of any Grant Agreement, the terms of the Plan shall
govern.
4. Shares Subject to the Plan
Subject to the adjustments provided in Section 7 herein, the maximum
number of shares of Common Stock available for Awards under the Plan shall be
4,798,160 shares. To the extent that any Option or Restricted Stock granted
under the Plan is forfeited, terminates, expires or is canceled without having
been exercised, the shares of Common Stock covered by such Option or Restricted
Stock shall again be available for Grant under the Plan.
Unless the Board determines otherwise, of the maximum number of shares
of Common Stock:
(a) 1,115,812 shares of Common Stock shall be reserved for the issuance
of Options with an Exercise Price of $6.82, provided that if the Fair Market
Value of a share of Common Stock is greater than $6.82, such Exercise Price may
be greater than $6.82;
(b) 1,115,812 shares of Common Stock shall be reserved for the issuance
of Options with an Exercise Price of $25.00, provided that if the Fair Market
Value of a share of Common Stock is greater than $25.00, such Exercise Price may
be greater than $25.00;
(c) 1,115,812 shares of Common Stock shall be reserved for the issuance
of Options with an Exercise Price of $35.00, provided that if the Fair Market
Value of a share of Common Stock is greater than $35.00, such Exercise Price may
be greater than $35.00; and
(d) 1,450,724 shares of Common Stock shall be reserved for the issuance
of shares of Restricted Stock.
7
5. Options
5.1 Identification of Options. The Options granted under the Plan shall
be clearly identified in the Stock Option Grant Agreement as Non-Qualified Stock
Options.
5.2 Exercise Price. The Exercise Price of any Option granted under the
Plan shall be such price as the Committee shall determine (which may be equal
to, less than or greater than the Fair Market Value of a share of Common Stock
on the Grant Date for such Options) and which shall be specified in the Stock
Option Grant Agreement; provided that such price may not be less than the
minimum price required by law or provided in Section 4 herein.
5.3 Grant Date. The Grant Date of the Options shall be the date
designated by the Committee and specified in the Stock Option Grant Agreement as
the date the Option is granted.
5.4 Vesting Date of Options. Each Stock Option Grant Agreement shall
indicate the date or conditions under which such Option shall become
exercisable; provided, however, that, unless otherwise provided in a
Participant's Stock Option Grant Agreement, if during the one-year period after
a Change in Control the Participant's Employment is terminated by the Company or
its Affiliate without Cause or by the Participant for Good Reason, all
outstanding Options held by such Participant shall become immediately
exercisable as of the effective date of the termination of such Participant's
Employment.
5.5 Expiration of Options. With respect to each Participant, such
Participant's Option(s), or portion thereof, which have not become exercisable
shall expire on the date such Participant's Employment is terminated for any
reason. With respect to each Participant, each Participant's Option(s), or any
portion thereof, which have become exercisable shall expire on the earlier of
(i) the commencement of business on the date the Participant's Employment is
terminated for Cause; (ii) 90 days after the date the Participant's Employment
is terminated for any reason other than Cause, Retirement, death or Disability;
(iii) one year after the date the Participant's Employment is terminated by
reason of death, Retirement or Disability; or (iv) the 10th anniversary of the
Grant Date for such Option(s). Notwithstanding the foregoing, the Committee may
specify in the Stock Option Grant Agreement a different expiration date or
period for any Option granted hereunder, and such expiration date or period
shall supersede the foregoing expiration period.
5.6 Limitation on Transfer. During the lifetime of a Participant, each
Option shall be exercisable only by such Participant unless the Participant
obtains written consent from the Company to Transfer such Option to a specified
Transferee (a "Permitted Transferee") or the Participant's Stock Option Grant
Agreement provides otherwise.
5.7 Condition Precedent to Transfer of Any Option. It shall be a
condition precedent to any Transfer of any Option by any Participant that the
Transferee, if not already a Participant in the Plan, shall agree prior to the
Transfer in writing with the Company to be bound by the terms of the Plan and
the Stock Option Grant Agreement as if he had been an original signatory
thereto.
8
5.8 Effect of Void Transfers. In the event of any purported Transfer
of any Options in violation of the provisions of the Plan, such purported
Transfer shall, to the extent permitted by applicable law, be void and of no
effect.
5.9 Exercise of Options. A Participant may exercise any or all of his
vested Options by serving an Exercise Notice on the Company as provided in
Section 5.10 herein.
5.10 Method of Exercise. The Option shall be exercised by delivery of
written notice to the Company's principal office (the "Exercise Notice"), to the
attention of its Secretary, no less than five business days in advance of the
effective date of the proposed exercise (the "Exercise Date"). Such notice shall
(a) specify the number of shares of Common Stock with respect to which the
Option is being exercised, the Grant Date of such Option and the Exercise Date,
(b) be signed by the Participant, and (c) prior to the existence of a Public
Market for the Common Stock, indicate in writing that the Participant agrees to
be bound by the Stockholders' Agreement, and (d) if the Option is being
exercised by the Participant's Permitted Transferee(s), such Permitted
Transferee(s) shall indicate in writing that they agree to and shall be bound by
the Plan and Stock Option Grant Agreement as if they had been original
signatories thereto. The Exercise Notice shall include (i) payment in cash for
an amount equal to the Exercise Price multiplied by the number of shares of
Common Stock specified in such Exercise Notice, (ii) a certificate representing
the number of shares of Common Stock with a Fair Market Value equal to the
Exercise Price (provided the Participant has owned such shares at least six
months prior to the Exercise Date) multiplied by the number of shares of Common
Stock specified in such Exercise Notice, or (iii) a combination of (i) and (ii)
or any method otherwise approved by the Committee. In addition, the Exercise
Notice shall include payment either in cash or previously-owned shares of Common
Stock in an amount equal to the applicable withholding taxes based on the Option
Spread for each share of Common Stock specified in the Exercise Notice as of the
most recent Valuation Date unless the Participant requests, in writing, that the
Company withhold a portion of the shares that are to be distributed to the
Participant to satisfy the minimum applicable federal, state and local
withholding taxes incurred in connection with the exercise of the Option (the
"Withholding Request"). The Committee, in its sole discretion, will either grant
or deny the Withholding Request and shall notify the Participant of its
determination prior to the Exercise Date. If the Withholding Request is denied,
the Participant shall pay an amount equal to the applicable withholding taxes
based on the Option Spread for each share of Common Stock specified in the
Exercise Notice as of the most recent Valuation Date on or before such Exercise
Date. The partial exercise of the Option, alone, shall not cause the expiration,
termination or cancellation of the remaining Options.
5.11 Certificates of Shares. Upon the exercise of the Options in
accordance with Section 5.10 and, prior to the existence of a Public Market for
the Common Stock, execution of the Stockholders' Agreement, certificates of
shares of Common Stock shall be issued in the name of the Participant and
delivered to such Participant as soon as practicable following the Exercise
Date. Each certificate shall contain such legends as the Committee deems
appropriate. Prior to the existence of a Public Market, no shares of Common
Stock shall be issued to any Participant until such Participant agrees to be
bound by and executes the Stockholders' Agreement. In addition, prior to the
existence of a Public Market for the Common Stock, the
9
Committee may require that the certificate evidencing any shares of Common Stock
be held in custody by the Company.
5.12 Termination of the Options. The Committee may, at any time, in its
absolute discretion, without amendment to the Plan or any relevant Stock Option
Grant Agreement, terminate the Options then outstanding, whether or not
exercisable, provided, however, that the Company, in full consideration of such
termination, shall pay (a) with respect to any Option, or portion thereof, then
outstanding, an amount equal to the Option Spread determined as of the Valuation
Date coincident with or next succeeding the date of termination. Such payment
shall be made as soon as practicable after the payment amounts are determined,
provided, however, that the Company shall have the option to make payments to
the Participants by issuing a note to the Participant bearing a reasonable rate
of interest as determined by the Committee in its absolute discretion.
6. Restricted Stock
6.1 Grant of Restricted Stock. The Committee may, in its sole
discretion, Grant Awards of Restricted Stock to Eligible Employees at such
times, in such amounts and subject to such terms and conditions as the Committee
may determine, but not inconsistent with the Plan. The Committee shall send
written notice to each Eligible Employee selected to receive an Award of
Restricted Stock, which shall include a Restricted Stock Grant Agreement. In
order to accept the Award of Restricted Stock, such Eligible Employee must
execute the Restricted Stock Grant Agreement and, prior to the existence of a
Public Market for the Common Stock, such Eligible Employee must also execute the
Stockholders' Agreement.
6.2 Grant Date. The Grant Date of a share of Restricted Stock shall be
the date designated by the Committee and specified in the Restricted Stock Grant
Agreement as the date the share of Restricted Stock is granted.
6.3 Vesting Date of Restricted Stock. Each Restricted Stock Grant
Agreement shall indicate the date or dates under which such the shares of
Restricted Stock shall become vested; provided, however, that, unless otherwise
provided in a Participant's Restricted Stock Grant Agreement, if during the
one-year period after a Change in Control the Participant's Employment is
terminated by the Company or its Affiliate without Cause or by the Participant
for Good Reason, all unvested shares of Restricted Stock held by such
Participant shall become immediately vested as of the effective date of the
termination of such Participant's Employment.
6.4 Limitation of Transfer of Restricted Stock. Prior to the existence
of a Public Market for Common Shares, each share of Restricted Stock shall not
be Transferred unless the Participant obtains written consent from the Company
to Transfer such share of Restricted Stock to a specified Permitted Transferee
or the Participant's Restricted Stock Grant Agreement provides otherwise. It
shall be a condition precedent to any Transfer of any share of Restricted Stock
by any Participant that the Transferee, if not already a Participant in the
Plan, shall agree prior to the Transfer in writing with the Company to be bound
by the terms of the Plan and the Restricted Stock Grant Agreement as if he had
been an original signatory thereto. In the event of
10
any purported Transfer of any share of Restricted Stock in violation of the
provisions of the Plan, such purported Transfer shall, to the extent permitted
by applicable law, be void and of no effect.
6.5 Issuance of Certificates. Reasonably promptly after the receipt by
the Company of the Restricted Stock Grant Agreement and Stockholders' Agreement
executed by the Participant with respect to the shares of Restricted Stock
granted by the Restricted Stock Grant Agreement, the Company shall cause to be
issued stock certificates, registered in the name of the Participant, evidencing
the shares of Common Stock granted by the Restricted Stock Grant Agreement. Each
certificate shall contain such legends as the Committee deems appropriate. Prior
to the existence of a Public Market for the Common Stock, the Committee may
require that the certificate evidencing any shares of Common Stock be held in
custody by the Company, and that, as a condition of any Award, the Committee may
require that the Participant deliver to the Company a stock power, endorsed in
blank, relating to the share of Restricted Stock covered by such Award.
6.6 Termination of Restricted Stock. The Committee may, at any time, in
its sole discretion, terminate any Award of shares of Restricted Stock then
outstanding, whether vested or not, provided, however, that the Company, in full
consideration of such termination shall pay with respect to each share of Common
Stock, whether or not vested on the date of such termination, an amount equal to
the Fair Market Value of a share of Common Stock, determined as of the Valuation
Date coincident with or next succeeding the date of termination. Such payment
shall be made as soon as practicable after the payment amounts are determined.
6.7 Expiration of Restricted Stock. Subject to Section 6.3 above, with
respect to each Participant, such Participant's shares of Restricted Stock which
have not become vested on the date such Participant's Employment is terminated
for any reason shall be immediately forfeited unless otherwise specified in the
Restricted Stock Grant Agreement.
6.8 Other Restrictions. At the time of an Award, the Committee may
impose such additional restrictions on the Restricted Stock awarded as it, in
its sole discretion, deems appropriate.
6.9 Rights as Shareholders.
(a) Dividends. Unless otherwise provided in the Restricted Stock
Grant Agreement, ordinary and routine dividends paid in cash with respect to
shares of Restricted Stock that are outstanding as of the relevant record date
for such dividends shall be distributed to the Participant at such time and in
the manner paid to holders of shares of Common Stock. Stock dividends issued
with respect to shares of Restricted Stock covered by the Award shall be treated
as additional shares under the Award and shall be subject to the same
restrictions and terms and conditions that apply to the shares of Restricted
Stock with respect to which such dividends are issued.
(b) Voting. To the extent that the holders of shares of Common
Stock are entitled to vote, the Participant shall be entitled to vote his shares
of Common Stock, or in the
11
case of Restricted Stock held in custody by the Company, direct the Company as
to the manner as to which the shares of Common Stock underlying the Award shall
be voted.
7. Adjustment Upon Changes in Company Stock.
7.1 Increase or Decrease in Issued Shares Without Consideration.
Subject to any required action by the stockholders of the Company, in the event
of any increase or decrease in the number of issued shares of Common Stock
resulting from a subdivision or consolidation of shares of Common Stock or the
payment of a stock dividend (but only on the shares of Common Stock), or any
other increase or decrease in the number of such shares effected without receipt
of consideration by the Company, the Committee shall, make such adjustments with
respect to the number of shares of Common Stock subject to the Awards, or in the
case of Options, the exercise price per share of Common Stock of each such
Option, as the Committee may consider appropriate to prevent the enlargement or
dilution of rights.
7.2 Certain Mergers. Subject to any required action by the stockholders
of the Company, in the event that the Company shall be the surviving corporation
in any merger or consolidation (except a merger or consolidation as a result of
which the holders of shares of Common Stock receive securities of another
corporation), the Awards outstanding on the date of such merger or consolidation
shall pertain to and apply to the securities which a holder of the number of
shares of Common Stock subject to any such Award would have received in such
merger or consolidation (it being understood that if, in connection with such
transaction, the stockholders of the Company retain their shares of Common Stock
and are not entitled to any additional or other consideration, the Awards shall
not be affected by such transaction).
7.3 Certain Other Transactions. In the event of (i) a dissolution or
liquidation of the Company, (ii) a sale of all or substantially all of the
Company's assets, (iii) a merger or consolidation involving the Company in which
the Company is not the surviving corporation or (iv) a merger or consolidation
involving the Company in which the Company is the surviving corporation but the
holders of shares of Common Stock receive securities of another corporation
and/or other property, including cash, the Committee shall, in its absolute
discretion, have the power to:
(a) provide for the exchange of any Award outstanding immediately
prior to such event (whether or not then exercisable or vested) for an award
with respect to, as appropriate, some or all of the property for which the stock
underlying such Award is exchanged and, incident thereto, make an equitable
adjustment, as determined by the Committee, in the Exercise Price of the
Options, if applicable, or the number of shares or amount of property subject to
the Award or, if appropriate, provide a cash payment to the Participants in
partial consideration for the exchange of Awards as the Committee may consider
appropriate to prevent dilution or enlargement of rights;
(b) cancel, effective immediately prior to the occurrence of such
event, any Award outstanding immediately prior to such event (whether or not
then exercisable or vested), and in full consideration of such cancellation, pay
to the Participant to whom such Award was granted an amount in cash, for each
share of Common Stock subject to such Award, equal to (A)
12
with respect to an Option, the excess of (x) the value, as determined by the
Committee in its sole discretion, of securities and property (including cash)
received by the holders of shares of Common Stock as a result of such event over
(y) the Exercise Price of such Option or (B) with respect to Restricted Stock ,
the value, as determined by the Committee in its sole discretion, of securities
and property (including cash) received by the holders of the shares of Common
Stock as a result of such event; or
(c) provide for any combination of (a) or (b).
7.4 Other Changes. In the event of any change in the capitalization of
the Company or a corporate change other than those specifically referred to in
Sections 7.1, 7.2 or 7.3 hereof, the Committee may make such adjustments in the
number and class of shares subject to the Awards outstanding on the date on
which such change occurs and, in the case of Options, in the per-share Exercise
Price of each such Option, as the Committee may consider appropriate to prevent
dilution or enlargement of rights.
7.5 Consideration Received on Unvested Restricted Stock.
Notwithstanding the foregoing and unless otherwise determined by the Committee
or provided in a Restricted Stock Grant Agreement, in respect of any unvested
shares of Restricted Stock underlying an Award, in the event of a Change in
Control in connection with which the holders of shares of Common Stock receive
cash or any other property as consideration, the Company shall hold such
consideration paid (cash or otherwise) in respect of such shares in escrow and
such consideration shall be subject to the same restrictions and terms and
conditions, including vesting schedule, that applied to the shares of Restricted
Stock with respect to which such consideration was paid and except with respect
to cash consideration, the terms and conditions of the Plan and Restricted Stock
Grant Agreement shall apply to such consideration in the same manner as it
applies to the Restricted Stock. With respect to any cash consideration, within
a reasonable time following any applicable Vesting Date, the Company shall
release to the Participant that portion of the cash consideration paid in
respect of his shares of Restricted Stock, provided, that the Participant is
continuously Employed by the Company or any of its Affiliates through such
Vesting Date.
7.6 No Other Rights. Except as expressly provided in the Plan or the
Grant Agreements evidencing the Awards, the Participants shall not have any
rights by reason of any subdivision or consolidation of shares of Common Stock
or shares of stock of any class, the payment of any dividend, any increase or
decrease in the number of shares of Common Stock or shares of stock of any class
or any dissolution, liquidation, merger or consolidation of the Company or any
other corporation. Except as expressly provided in the Plan or the Grant
Agreements evidencing the Awards, no issuance by the Company of shares of Common
Stock or shares of stock of any class, or securities convertible into shares of
Common Stock or shares of stock of any class, shall affect, and no adjustment by
reason thereof shall be made with respect to, the number of shares of Common
Stock subject to the Awards or, in the case of Options, the Exercise Price of
such Options.
13
8. Amendment of the Plan or Awards
The Committee may, in its absolute discretion, amend the Plan or terms
of any Award, provided, however, that any such amendment shall not impair or
adversely affect the Participants' rights under the Plan or such Award without
such Participant's written consent.
9. Miscellaneous
9.1 Rights as Stockholders. The Participants shall not have any rights
as stockholders with respect to any shares of Common Stock covered by or
relating to the Awards granted pursuant to the Plan until the date the
Participants become the registered owners of such shares. Except as otherwise
expressly provided herein, no adjustment to the Awards shall be made for
dividends or other rights for which the record date occurs prior to the date
such stock certificate is issued.
9.2 No Special Employment Rights. Nothing contained in the Plan shall
confer upon the Participants any right with respect to the continuation of their
Employment or interfere in any way with the right of the Company or an
Affiliate, subject to the terms of any separate Employment agreements to the
contrary, at any time to terminate such Employment or to increase or decrease
the compensation of the Participants from the rate in existence at the time of
the Grant of any Award.
9.3 No Obligation to Exercise. The Grant to the Participants of the
Options shall impose no obligation upon the Participants to exercise such
Options.
9.4 Restrictions on Common Stock. Prior to the existence of a Public
Market for the Common Stock, the rights and obligations of the Participants with
respect to Common Stock obtained through the Grant of Restricted Stock or upon
the exercise of any Option provided in the Plan shall be governed by the terms
and conditions of the Stockholders' Agreement.
9.5 Withholding Taxes. Whenever shares of Restricted Stock are to be
issued hereunder or shares of Common Stock are to be issued upon the exercise of
an Option, the Company shall have the right to require the Participant to remit
to the Company in cash an amount sufficient to satisfy federal, state and local
withholding tax requirements, if any, attributable to such issuance prior to the
delivery of any certificate or certificates for such shares.
9.5 Notices. All notices and other communications hereunder shall be in
writing and shall be given and shall be deemed to have been duly given if
delivered in person, by cable, telegram, telex or facsimile transmission, to the
parties as follows:
If to the Participant:
To the address shown on the Grant Agreement.
If to the Company:
14
J. Crew Group Inc.
770 Broadway, 12th Floor
New York, NY 10003
Attention: General Counsel
or to such other address as any party may have furnished to the other
in writing in accordance herewith, except that notices of change of address
shall only be effective upon receipt.
9.6 Descriptive Headings. The headings in the Plan are for convenience
of reference only and shall not limit or otherwise affect the meaning of the
terms contained herein.
9.7 Severability. In the event that any one or more of the provisions,
subdivisions, words, clauses, phrases or sentences contained herein, or the
application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision, subdivision, word, clause, phrase or
sentence in every other respect and of the remaining provisions, subdivisions,
words, clauses, phrases or sentences hereof shall not in any way be impaired, it
being intended that all rights, powers and privileges of the Company and
Participants shall be enforceable to the fullest extent permitted by law.
9.8 Governing Law. The Plan shall be governed by and construed and
enforced in accordance with the laws of the State of New York, without regard to
the provisions governing conflict of laws.
15
EXHIBIT A
RESTRICTED STOCK GRANT AGREEMENT
THIS AGREEMENT, made as of this [___] day of [_____], 200[__] between
J.CREW GROUP INC. (the "Company") and [___________] (the "Participant").
WHEREAS, the Company has adopted and maintains the J. Crew Group, Inc.
2003 Equity Incentive Plan (the "Plan") to promote the interests of the Company
and its stockholders by providing the Company's key employees and others 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;
WHEREAS, the Plan provides for the Grant to Participants in the Plan of
restricted shares of Common Stock of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto hereby agree as follows:
1. Investment. The Participant represents that the shares of Restricted
Stock (as defined herein) are being acquired for investment and not with a view
toward the distribution thereof.
2. Grant of Restricted Stock. Pursuant to, and subject to, the terms
and conditions set forth herein and in the Plan, the Company hereby Grants to
the Participant an Award of [______] shares of Common Stock of the Company
(collectively, the "Restricted Stock").
3. Grant Date. The Grant Date of the Restricted Stock hereby granted is
[________].
4. Incorporation of Plan. All terms, conditions and restrictions of the
Plan are incorporated herein and made part hereof as if stated herein. If there
is any conflict between the terms and conditions of the Plan and this Agreement,
the terms and conditions of this Agreement, as interpreted by the Committee,
shall govern. All capitalized terms used herein shall have the meanings given to
such terms in the Plan.
5. Vesting Date. The Restricted Stock shall become vested as follows:
[vesting schedule]. Notwithstanding the foregoing, if within the one-year period
after a Change in Control the Participant's Employment is terminated by the
Company or its Affiliate without Cause or by the Participant for Good Reason,
all shares of Restricted Stock underlying this Award shall become immediately
vested as of the effective date of the termination of such Participant's
Employment.
6. Forfeiture. Subject to the provisions of the Plan, with respect to
the shares of Restricted Stock which have not become vested on the date the
Participant's Employment is terminated for any reason, the Award of Restricted
Stock shall expire and such unvested shares of Restricted Stock shall
immediately be forfeited on such date.
A-1
7. Delays or Omissions. No delay or omission to exercise any right,
power, or remedy accruing to any party hereto upon any breach or default of any
party under this Agreement, shall impair any such right, power or remedy of such
party nor shall it be construed to be a waiver of any such breach or default, or
an acquiescence therein, or of or in any similar breach or default thereafter
occurring nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
party of any breach or default under this Agreement, or any waiver on the part
of any party or any provisions or conditions of this Agreement, shall be in
writing and shall be effective only to the extent specifically set forth in such
writing.
8. Limitation on Transfer. All shares of Restricted Stock granted
hereunder shall be subject to the terms and conditions of the Stockholders'
Agreement, dated as of __________, 200__, between the Company, the Participant
and TPG Partners II, L.P. (the "Stockholders' Agreement"). Prior to the
existence of a Public Market for Common Shares, each share of Restricted Stock
shall not be Transferred unless the Participant obtains written consent from the
Company to Transfer such share of Restricted Stock to a specified Permitted
Transferee or the Participant's Restricted Stock Grant Agreement provides
otherwise. It shall be a condition precedent to any Transfer of any share of
Restricted Stock by the Participant that the Transferee, if not already a
Participant in the Plan, shall agree prior to the Transfer in writing with the
Company to be bound by the terms of the Plan and this Agreement as if he had
been an original signatory thereto. In the event of any purported Transfer of
any share of Restricted Stock in violation of the provisions of the Plan and
this Agreement, such purported Transfer shall, to the extent permitted by
applicable law, be void and of no effect.
9. Integration. This Agreement, the Plan and the Stockholders'
Agreement contain the entire understanding of the parties with respect to its
subject matter. There are no restrictions, agreements, promises,
representations, warranties, covenants or undertakings with respect to the
subject matter hereof other than those expressly set forth herein, the Plan and
the Stockholders' Agreement. This Agreement, the Plan and the Stockholders'
Agreement supersede all prior agreements and understandings between the parties
with respect to its subject matter.
10. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
11. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of NEW YORK, without
regard to the provisions governing conflict of laws.
12. Participant Acknowledgment. The Participant hereby acknowledges
receipt of a copy of the Plan. The Participant hereby acknowledges that all
decisions, determinations and interpretations of the Committee in respect of the
Plan, this Agreement and this Award of Restricted Stock shall be final and
conclusive.
A-2
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its duly authorized officer and said Participant has hereunto signed
this Agreement on the Participant's own behalf, thereby representing that the
Participant has carefully read and understands this Agreement and the Plan as of
the day and year first written above.
J.CREW GROUP INC.
___________________________
By: [____________]
Title: [____________]
___________________________
[Insert Participant's Name]
A-3
EXHIBIT B
STOCK OPTION GRANT AGREEMENT
THIS AGREEMENT, made as of this [___] day of [_____], 200[__] between
J.CREW GROUP INC. (the "Company") and [___________] (the "Participant").
WHEREAS, the Company has adopted and maintains the J. Crew Group, Inc.
2003 Equity Incentive Plan (the "Plan") to promote the interests of the Company
and its stockholders by providing the Company's key employees and others 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;
WHEREAS, the Plan provides for the Grant to Participants in the Plan of
Non-Qualified Stock Options to purchase shares of Common Stock of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto hereby agree as follows:
1. Grant of Options. Pursuant to, and subject to, the terms and
conditions set forth herein and in the Plan, the Company hereby Grants to the
Participant a NON-QUALIFIED STOCK OPTION (the "Option") with respect to
[________] shares of Common Stock of the Company.
2. Grant Date. The Grant Date of the Option hereby granted is
[________].
3. Incorporation of Plan. All terms, conditions and restrictions of the
Plan are incorporated herein and made part hereof as if stated herein. If there
is any conflict between the terms and conditions of the Plan and this Agreement,
the terms and conditions of this Agreement, as interpreted by the Committee,
shall govern. All capitalized terms used herein shall have the meanings given to
such terms in the Plan.
4. Exercise Price. The exercise price of each share underlying the
Option hereby granted is [____________].
5. Vesting Date. The Option shall become exercisable as follows:
[vesting schedule]. Notwithstanding the foregoing, if within the one-year period
after a Change in Control the Participant's Employment is terminated by the
Company or its Affiliate without Cause or by the Participant for Good Reason,
all outstanding Options held by such Participant shall become immediately
exercisable as of the effective date of the termination of such Participant's
Employment.
6. Expiration Date. Subject to the provisions of the Plan, with respect
to the Option or any portion thereof which has not become exercisable, the
Option shall expire on the date the Participant's Employment is terminated for
any reason, and with respect to any Option or any portion thereof which has
become exercisable, the Option shall expire on the earlier of (i) 90
B-1
days after the Participant's termination of Employment other than for Cause,
Retirement, death, or Disability; (ii) one year after termination of the
Participant's Employment by reason of death, Retirement or Disability; (iii) the
commencement of business on the date the Participant's Employment is, or is
deemed to have been, terminated for Cause; or (iv) the tenth anniversary of the
Grant Date.
7. Delays or Omissions. No delay or omission to exercise any right,
power, or remedy accruing to any party hereto upon any breach or default of any
party under this Agreement, shall impair any such right, power or remedy of such
party nor shall it be construed to be a waiver of any such breach or default, or
an acquiescence therein, or of or in any similar breach or default thereafter
occurring nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
party of any breach or default under this Agreement, or any waiver on the part
of any party or any provisions or conditions of this Agreement, shall be in
writing and shall be effective only to the extent specifically set forth in such
writing.
8. Limitation on Transfer. During the lifetime of the Participant, the
Option shall be exercisable only by the Participant. The Option shall not be
assignable or transferable otherwise than by will or by the laws of descent and
distribution. Notwithstanding the foregoing, the Participant may request
authorization from the Committee to assign the Participant's rights with respect
to the Option granted herein to a trust or custodianship, the beneficiaries of
which may include only the Participant, the Participant's spouse or the
Participant's lineal descendants (by blood or adoption), and, if the Committee
Grants such authorization, the Participant may assign the Participant's rights
accordingly. In the event of any such assignment, such trust or custodianship
shall be subject to all the restrictions, obligations, and responsibilities as
apply to the Participant under the Plan and this Stock Option Grant Agreement
and shall be entitled to all the rights of the Participant under the Plan. All
shares of Common Stock obtained pursuant to the Option granted herein shall not
be transferred except as provided in the Plan and, where applicable, the
Stockholders' Agreement.
9. Integration. This Agreement, the Plan and the Stockholders'
Agreement contain the entire understanding of the parties with respect to its
subject matter. There are no restrictions, agreements, promises,
representations, warranties, covenants or undertakings with respect to the
subject matter hereof other than those expressly set forth herein, the Plan and
the Stockholders' Agreement. This Agreement, the Plan and the Stockholders'
Agreement supersede all prior agreements and understandings between the parties
with respect to its subject matter.
10. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
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11. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of NEW YORK, without
regard to the provisions governing conflict of laws.
12. Participant Acknowledgment. The Participant hereby acknowledges
receipt of a copy of the Plan. The Participant hereby acknowledges that all
decisions, determinations and interpretations of the Committee in respect of the
Plan, this Agreement and the Option shall be final and conclusive.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its duly authorized officer and said Participant has hereunto signed
this Agreement on the Participant's own behalf, thereby representing that the
Participant has carefully read and understands this Agreement and the Plan as of
the day and year first written above.
J.CREW GROUP INC.
___________________________
By: [____________]
Title: [____________]
___________________________
[Insert Participant's Name]
B-3
EXHIBIT C
STOCKHOLDERS' AGREEMENT
STOCKHOLDERS' AGREEMENT (this "Agreement"), dated as of ________,
200__, between J. Crew Group, Inc. (the "Company"), TPG Partners II, L.P.
("TPG") and ___________________ (the "Stockholder").
WHEREAS, the Stockholder is an employee of the Company and in such
capacity was granted [an option (the "Option") to purchase shares] [an Award of
restricted shares] of common stock of the Company, $.01 par value per share
("Common Stock"), pursuant to the Company's 2003 Equity Incentive Plan (the
"2003 Plan");
WHEREAS, as a condition to the issuance of [shares of Common Stock
pursuant to the exercise of an Option] [restricted shares of Common Stock], the
Stockholder is required under the 2003 Plan to execute this Agreement;
[WHEREAS, the Stockholder desires to exercise the Option to purchase
__________ shares of Common Stock]; and
WHEREAS, the Stockholder and the Company desire to enter this Agreement
and to have this Agreement apply to the shares to be acquired pursuant to the
2003 Plan and to any shares of Common Stock acquired after the date hereof by
the Stockholder from whatever source, subject to any future agreement between
the Company and the Stockholder to the contrary (in the aggregate, the
"Shares").
NOW THEREFORE, in consideration of the premises hereinafter set forth,
and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows.
1. Investment. The Stockholder represents that the Shares are being
acquired for investment and not with a view toward the distribution thereof.
2. Issuance of Shares. The Stockholder acknowledges and agrees that the
certificate for the Shares shall bear the following legends (except that the
second paragraph of this legend shall not be required after the Shares have been
registered and except that the first paragraph of this legend shall not be
required after the termination of this Agreement):
The shares represented by this certificate are subject to the terms and
conditions of a Stockholders' Agreement dated as of ______________, 200_
and may not be sold, transferred, hypothecated, assigned or encumbered,
except as may be permitted by the aforesaid Agreement. A copy of the
Stockholders' Agreement may be obtained from the Secretary of the Company.
The shares represented by this certificate have not been registered under
the Securities Act of 1933. The shares have been acquired for investment
and may not be sold, transferred, pledged or hypothecated in the absence of
an effective
C-1
registration statement for the shares under the Securities Act of 1933 or
an opinion of counsel for the Company that registration is not required
under said Act.
Upon the termination of this Agreement, or upon registration of the
Shares under the Securities Act of 1933 (the "Securities Act"), the Stockholder
shall have the right to exchange any Shares containing the above legend (i) in
the case of the registration of the Shares, for Shares legended only with the
first paragraph described above and (ii) in the case of the termination of this
Agreement, for Shares legended only with the second paragraph described above.
3. Transfer of Shares; Call Rights.
(a) The Stockholder agrees that he will not cause or permit the Shares
or his interest in the Shares to be sold, transferred, hypothecated, assigned or
encumbered except as expressly permitted by this Section 3; provided, however,
that the Shares or any such interest may be transferred (i) on the Stockholder's
death by bequest or inheritance to the Stockholder's executors, administrators,
testamentary trustees, legatees or beneficiaries, (ii) to a trust or
custodianship the beneficiaries of which may include only the Stockholder, the
Stockholder's spouse, or the Stockholder's lineal descendants (by blood or
adoption) and (iii) in accordance with Section 4 of this Agreement, subject in
any such case to the agreement by each transferee (other than the Company) in
writing to be bound by the terms of this Agreement and provided in any such case
that no such transfer that would cause the Company to be required to register
the Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), shall be permitted.
(b) The Company (or its designated assignee) shall have the right
commencing on the later of (x) the termination of the Stockholder's employment
with the Company for any reason and (y) one-hundred-eighty-one (181) days
following the date of the acquisition by the Stockholder of any Shares, to
purchase from the Stockholder, and upon the exercise of such right the
Stockholder shall sell to the Company (or its designated assignee), all or any
portion of the Shares held by the Stockholder as of the date as of which such
right, is exercised at a per Share price equal to the Fair Market Value (as
defined in the 2003 Plan) of a share of Common Stock determined as of the date
as of which such right is exercised. The Company (or its designated assignee)
shall exercise such right by delivering to the Stockholder a written notice
specifying its intent to purchase Shares held by the Stockholder, the date as of
which such right is to be exercised and the number of Shares to be purchased.
Such purchase and sale shall occur on such date as the Company (or its
designated assignee) shall specify which date shall not be later than ninety
(90) days after the fiscal quarter-end immediately following the date as of
which the Company's right is exercised.
C-2
4. Certain Rights.
(a) Drag Along Rights. If TPG desires to sell all or substantially
all of its shares of Common Stock to a good faith independent purchaser (a
"Purchaser") (other than any other investment partnership, limited liability
company or other entity established for investment purposes and controlled by
the principals of TPG or any of its affiliates and other than any employees of
TPG or any of its affiliates, hereinafter referred to as a "Permitted
Transferee") and said Purchaser desires to acquire all or substantially all of
the issued and outstanding shares of Common Stock (or all or substantially all
of the assets of the Company) upon such terms and conditions as agreed to with
TPG, the Stockholder agrees to sell all of his Shares to said Purchaser (or to
vote all of his Shares in favor of any merger or other transaction which would
effect a sale of such shares of Common Stock or assets of the Company) at the
same price per share of Common Stock and pursuant to the same terms and
conditions with respect to payment for the shares of Common Stock as agreed to
by TPG. In such case, TPG shall give written notice of such sale to the
Stockholder at least 30 days prior to the consummation of such sale, setting
forth (i) the consideration to be received by the holders of shares of Common
Stock, (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.
(b) Tag Along Rights. (i) Subject to paragraph ( iv) of this
Section 4(b), if TPG or its affiliates proposes to transfer any of its shares of
Common Stock to a Purchaser (other than a Permitted Transferee), then TPG or
such Permitted Transferee (hereinafter referred to as a "Selling Stockholder")
shall give written notice of such proposed transfer to the Stockholder (the
"Selling Stockholder's Notice") at least 30 days prior to the consummation of
such proposed transfer, and shall provide notice to all other stockholders of
the Company to whom TPG has granted similar "tag-along" rights (such
stockholders together with the Stockholder, referred to herein as the "Other
Stockholders") setting forth (A) the number of shares of Common Stock offered,
(B) the consideration to be received by such Selling Stockholder, (C) the
identity of the Purchaser, (D) any other material items and conditions of the
proposed transfer and (E) the date of the proposed transfer.
(ii) Upon delivery of the Selling Stockholder's Notice, the
Stockholder may elect to sell up to the sum of (A) the Pro Rata Portion (as
hereinafter defined) and (B) the Excess Pro Rata Portion (as hereinafter
defined) of his Shares, at the same price per share of Common Stock and pursuant
to the same terms and conditions with respect to payment for the shares of
Common Stock as agreed to by the Selling Stockholder, by sending written notice
to the Selling Stockholder within 15 days of the date of the Selling
Stockholder's Notice, indicating his election to sell up to the sum of the Pro
Rata Portion plus the Excess Pro Rata Portion of his Shares in the same
transaction. Following such 15 day period, the Selling Stockholder and each
Other Stockholder shall be permitted to sell to the Purchaser on the terms and
conditions set forth in the Selling Stockholder's Notice the sum of (X) the Pro
Rata Portion and (Y) the Excess Pro Rata Portion of its Shares.
C-3
(iii) For purposes of Section 4(b) hereof, "Pro Rata Portion" shall
mean, with respect to shares of Common Stock held by the Stockholder or Selling
Stockholder, as the case may be, a number equal to the product of (x) the total
number of such shares then owned by the Stockholder or the Selling Stockholder,
as the case may be, and (y) a fraction, the numerator of which shall be the
total number of such shares proposed to be sold to the Purchaser as set forth in
the Selling Stockholder's Notice and the denominator of which shall be the total
number of such shares then outstanding (including such shares proposed to be
sold by the Selling Stockholder); provided, however, that any fraction of a
share resulting from such calculation shall be disregarded for purposes of
determining the Pro Rata Portion. For purposes of Section 4(b), "Excess Pro Rata
Portion" shall mean, with respect to shares of Common Stock held by the
Stockholder or the Selling Stockholder, as the case may be, 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 shares of Common Stock
of all of the Other Stockholders that have elected to exercise their rights to
sell their Pro Rata Portion of shares of Common Stock, and (2) the Selling
Stockholder's Pro Rata Portion of shares of Common Stock (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 shares of Common Stock, proposed to be sold to a
Purchaser as set forth in a Selling Stockholder's Notice less the amount of
Elected Shares.
(iv) Notwithstanding anything to the contrary contained herein, the
provisions of this Section 4(b) shall not apply to any sale or transfer by TPG
of shares of Common Stock unless and until TPG, 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 Stock, representing 7.5%
of shares of Common Stock owned by TPG on the date hereof.
5. Termination. This Agreement shall terminate immediately
following the existence of a Public Market for the Common Stock except that (i)
the requirements contained in Section 2 hereof shall survive the termination of
this Agreement and (ii) the provisions contained in Section 3 hereof shall
continue with respect to each Share during such period of time, if any, as the
Stockholder is precluded from selling such Shares pursuant to Rule 144 of the
Securities Act. For this purpose, a "Public Market" for the Common Stock shall
be deemed to exist if the Common Stock is registered under Section 12(b) or
12(g) of the Exchange Act and trading regularly occurs in such Common Stock in,
on or through the facilities of securities exchanges and/or inter-dealer
quotation systems in the United States (within the meaning of Section 902(j) of
the Securities Act) or any designated offshore securities market (within the
meaning of Rule 902(b) of the Securities Act).
6. Distributions With Respect To Shares. As used herein, the term
"Shares" includes securities of any kind whatsoever distributed with respect to
the Common Stock acquired by the Stockholder pursuant to the 2003 Plan or any
such securities resulting from a stock split or consolidation involving such
Common Stock.
C-4
7. Amendment; Assignment. This Agreement may be amended,
superseded, canceled, renewed or extended, and the terms hereof may be waived,
only by a written instrument signed by authorized representatives of the parties
or, in the case of a waiver, by an authorized representative of the party
waiving compliance. No such written instrument shall be effective unless it
expressly recites that it is intended to amend, supersede, cancel, renew or
extend this Agreement or to waive compliance with one or more of the terms
hereof, as the case may be. Except for the Stockholder's right to assign his or
her rights under Section 3(a) or the Company's right to assign its rights under
Section 3(b), no party to this Agreement may assign any of its rights or
obligations under this Agreement without the prior written consent of the other
parties hereto.
8. Notices. All notices and other communications hereunder shall be
in writing, shall be deemed to have been given if delivered in person or by
certified mail, return receipt requested, and shall be deemed to have been given
when personally delivered or three (3) days after mailing to the following
address:
If to the Stockholder:
If to the Company:
If to TPG:
or to such other address as any party may have furnished to the
others in writing in accordance herewith, except that notices of change of
address shall only be effective upon receipt.
9. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but each of which
together shall constitute one and the same document.
10. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of NEW YORK, without reference to its
principles of conflicts of law.
11. Binding Effect. This Agreement shall be binding upon, inure to
the benefit of, and be enforceable by the heirs, personal representatives,
successors and permitted assigns of the parties hereto. Nothing expressed or
referred to in this Agreement is intended or shall be construed to give any
person other than the parties to this Agreement, or their respective
C-5
heirs, personal representatives, successors or assigns, any legal or equitable
rights, remedy or claim under or in respect of this Agreement or any provision
contained herein.
12. Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof.
13. Severability. If any term, provision, covenant or restriction of
this Agreement, is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
14. Miscellaneous. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
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:
Title:
TPG PARTNERS II, L.P.
_____________________________
By:
Title:
___________________________
[Stockholder]
C-6
Exhibit 10.5(d)
April 29, 2002
Mark Sarvary
7 Fox Run
Purchase, NY 10577
Dear Mark:
This letter will confirm our understanding of the arrangements under
which your Employment Agreement ("Employment Agreement"), dated May 3, 1999,
with the Company (as modified by your letter agreement ("Letter Agreement"),
dated January 15, 2002, with the Company) is terminated. The terms and
conditions of the termination of your employment with the Company are set out
below.
1. The parties hereby acknowledge and confirm that your employment
with the Company is terminated effective as of April 30, 2002
(the "Termination Date") and that such termination shall
constitute a Qualifying Termination (as defined in the Letter
Agreement). In addition, the parties hereby acknowledge and
confirm that your resignation as a Director of J. Crew Group,
Inc. ("Parent") is also effective as of the Termination Date.
2. Subject to this Agreement becoming effective (as described in
Paragraph 18 hereof), the Company will pay you a lump-sum amount
equal to two (2) times your base salary on the Termination Date.
You will also be entitled to receive the following benefits. The
Company shall continue to provide medical plan coverage
substantially similar to the medical plan coverage that it
provides its active employees, as it may be amended from time to
time, until the earlier of (i) the second anniversary of the
Termination Date (i.e. April 30, 2004), (ii) the date that you
become employed as a full-time employee with a new employer or
(iii) the date that you become eligible to be covered by
comparable plan of a subsequent employer, provided that the
Company shall provide such coverage by paying your COBRA
continuation coverage for the COBRA coverage period and
thereafter, the Company shall only provide such coverage to the
extent that the monthly cost of such coverage does not exceed
the cost of your monthly COBRA premiums as in effect on the last
month of your COBRA continuation period. In order to receive the
foregoing medical coverage you shall cooperate with the
reasonable requests of the Company, including without limitation
any request to submit to medical examinations and elect COBRA
continuation coverage. The Company shall also provide you with
life insurance coverage equivalent to the coverage provided
immediately prior to the Termination Date (namely two-times your
base salary as of the Termination Date) under the same terms as
it provides such coverage to its active employees under its life
insurance plan, as it may be amended from time to time, until
the earlier of (i) the twenty-four month anniversary of the date
of the Letter Agreement (i.e. January
15, 2004), (ii) the date that you become employed as a full-time
employee with a new employer or (iii) the date that you become
eligible to be covered by comparable plan of a subsequent
employer. The foregoing payments shall be reduced by any
required tax withholdings and shall not be taken into account as
compensation and no service credit shall be given after the
Termination Date for purposes of determining the benefits
payable under any other plan, program, agreement or arrangement
of the Company. You acknowledge that, except for the foregoing
payments, you are not entitled to any payment by the Company in
the nature of either severance or termination pay.
3. As of the Termination Date, you have vested options to purchase
108,800 shares of Common Stock of Parent ("Common Stock") at
$10.00 per share. In addition, the Company hereby agrees that
options to purchase an additional 54,400 shares of Common Stock
at $10.00 per share shall vest and become exercisable on May 10,
2002 (such additional options together with the options vested
as of the Termination Date are collectively referred to as the
"Vested Options"). Notwithstanding anything to the contrary, all
of the Vested Options shall remain exercisable until the third
anniversary of the Termination Date (i.e. April 30, 2005),
subject in all other respects to the provisions of your stock
option agreement with Parent and the J. Crew Group, Inc. 1997
Stock Option Plan ("Option Plan"). All other unvested options
(totaling 108,800 options to purchase Common Stock at $10.00 per
share) shall terminate effective as of the Termination Date. All
shares of Common Stock acquired by you pursuant to the Vested
Options shall be subject to the Stockholders' Agreement attached
to the Option Plan as Exhibit B and Section 2(f) of the
Employment Agreement relating to your put right.
In consideration of the extension relating to the Vested Options
described above and notwithstanding anything in the
Stockholders' Agreement to the contrary, however, you hereby
agree that the Company (or its designated assignee) shall have
the right, during the 120 day period immediately following the
expiration of the six month period after any shares of Common
Stock are acquired by you, to purchase from you all or any
portion of such shares at a per share price equal to the Fair
Market Value (as defined in the Option Plan) of a share of
Common Stock determined as of the date as of which such right is
exercised.
4. The parties acknowledge and agree that you shall repay in full
the principal amount of the Company Loan (as defined in the
Letter Agreement) (currently $850,000 principal balance still
outstanding) on the earliest of (i) June 1, 2005, (ii) the date
that you sell or otherwise dispose of your primary residence
located at 7 Fox Run, Purchase, New York, and (iii) the one year
anniversary of the date that you commence full time continuous
employment with any subsequent employer. Notwithstanding the
foregoing, you agree that any and all proceeds generated from
the sale or disposition of all or any portion of your shares of
Common Stock (less the amount you paid to the Company for such
shares) shall be immediately applied to the payment of the
outstanding principal amount of the Company Loan. In the event
of a repurchase of Common Stock by the Company, you authorize
the Company to withhold any payments for such Common Stock and
apply such proceeds to the repayment of the Company Loan.
2
5. By signing this Agreement, you agree that in exchange for the
additional consideration set forth herein, you hereby
voluntarily, fully and unconditionally release and forever
discharge the Company, Parent, their present and former parent
corporation(s), subsidiaries, divisions, affiliates and
otherwise related entities and their respective incumbent and
former employees, directors, plan administrators, officers and
agents, individually and in their official capacities
(collectively, the "Releasees"), from any and all charges,
actions, causes of action, demands, debts, dues, bonds,
accounts, covenants, contracts, liabilities, or damages of any
nature whatsoever, whether now known or claimed, to whomever
made, which you have or may have against any or all of the
Releasees for or by reason of any cause, nature or thing
whatsoever, up to the present time, arising out of or related to
your employment with the Company or the termination of such
employment, including, by way of examples and without limiting
the broadest application of the foregoing, any actions, causes
of action, or claims under any contract or federal, state or
local decisional law, statues, regulations or constitutions, any
claims for notice, pay in lieu of notice, wrongful dismissal,
breach of contract, defamation or other tortious conduct,
discrimination on the basis of actual or perceived disability,
age, sex, race or any other factor (including, without
limitation, any claim pursuant to Title VII of the Civil Rights
Act of 1964, Americans with Disabilities Act of 1990, the Age
Discrimination in Employment Act of 1967, as amended, the Family
and Medical Act of 1993, the Equal Pay Act of 1963, the Fair
Labor Standards Act, the State, City and local laws of New York,
and the equal employment law or laws of the state and/or city in
which you work), any claim pursuant to any other applicable
employment standards or human rights legislation or for
severance pay, salary, bonus, incentive or additional
compensation, vacation pay, insurance, other benefits, interest,
and/or attorney's fees. You acknowledge that this general
release is not made in connection with an exit incentive or
other employment termination program offered to a group or class
of employees.
If you have made or should hereafter make any complaint, charge,
claim, allegation or demand, or commence or threaten to commence
any action, complaint, charge, claim or proceeding, against any
or all of the Releasees for or by reason of any cause, matter or
thing whatsoever existing up to the present time, this Agreement
may be raised as and shall constitute a complete bar to any such
action, complaint, charge, claim, allegation or proceeding, and,
subject to a favorable ruling by a tribunal of final
jurisdiction, the Releasees shall recover from you, and you
shall pay to the Releasees, all costs incurred by them,
including their attorneys' fees, as a consequence of any such
action, complaint charge, claim, allegation or proceeding;
provided, however, that this is not intended to interfere with
your right to file a charge with the Equal Employment
Opportunity Commission ("EEOC") in connection with any claim you
believe you may have against any Releasee. However, by signing
this Agreement, you agree to waive any right to recover in any
proceeding you may bring before the EEOC (or any state human
rights commission) or in any proceeding brought by the EEOC (or
any state human rights commission) on your behalf.
You specifically release all claims under the Age Discrimination
in Employment Act ("ADEA") relating to your employment and its
termination.
3
This release shall not apply to any claims you may have relating
to the Company's performance of its obligations under this
Agreement or under the Ancillary Documents (as defined in
Section 13). In the event any action is commenced to enforce
your rights under this Agreement or under any Ancillary
Document, each party shall bear its own legal fees and expenses.
6. You acknowledge that the payments and other considerations
described in Sections 2, 3 and 4 above that you are receiving in
connection with the foregoing release is in addition to anything
of value to which you already are entitled from the Company.
7. You hereby agree and acknowledge that you shall be bound by and
comply with the restrictive covenants provided in Sections 7, 8
(as modified by clause (e) of the Letter Agreement), 9 and 10 of
the Employment Agreement (the "Restrictive Covenants"), and that
such Restrictive Covenants are hereby made part of this
Agreement as if specifically restated herein and that the
payments and other considerations described in Sections 2, 3 and
4 above that you are receiving are subject to and contingent
upon your compliance with Restrictive Covenants. You also
acknowledge that your receipt of certain benefits hereunder are
affected by you obtaining subsequent employment and therefore
you agree to notify the Executive Vice President of Human
Resources in writing prior to the effective date of any
full-time employment with a new employer or, if earlier, the
effective date you become eligible to be covered by a comparable
plans of a subsequent employer, as described in Section 2.
8. You acknowledge and agree that, notwithstanding any other
provision of this Agreement, if you breach any of your
obligations under this Agreement or a Restrictive Covenant, (a)
you will forfeit your right to receive the payment and other
considerations described in Sections 2, 3 and 4 above (to the
extent the payment was not theretofore paid) and the Company
shall be entitled to recover any payments made to you or on your
behalf, (b) the Vested Options shall expire as of the date of
such breach to the extent not theretofore exercised and, if
exercised as of the date of such breach, you shall immediately
reimburse the Company for the profit upon exercise (such profit
calculated as the difference between the (i) greater of either
the Fair Market Value (as defined in the Option Plan) of a share
of Common Stock on the date of exercise or the amount paid by
the Company to you per share of Common Stock for the purchase of
the shares acquired upon exercise, and (ii) exercise price,
times the number of options exercised).
9. You hereby agree that the breach of a Restrictive Covenant may
cause the Company to suffer irreparable harm for which money
damages would not be an adequate remedy and therefore, if you
breach a Restrictive Covenant, the Company would be entitled to
temporary and permanent injunctive relief in any court of
competent jurisdiction (without the need to post any bond)
without prejudice to any other remedies under this Agreement or
otherwise.
4
10. The Company affirms its obligation to indemnify, defend and hold
you harmless, to the extent permitted by law, from and against
all claims made by third parties against you arising out of
actions taken by you in your capacity as an officer and director
of the Company. You also agree to cooperate fully with the
Company and the Releasees in connection with any existing or
future litigation or proceedings involving the Company or any
Releasee to the extent necessary and to notify the Company
promptly upon receipt of any legal process or other request
requiring you to testify, plead, respond, defend and/or produce
documents relating to the Company or any Releasee.
The Company represents that, as of the date of this Agreement,
the Board of Directors is not aware of any claims that it has
against you arising out of your employment with the Company;
provided, however, that this shall not bar the Company from
making any claims, charges or demands against you at any time in
the future based on facts, circumstances or matters of which it
may hereafter become aware regardless of when they occurred or
to what time period they relate.
11. This Agreement does not constitute an admission of liability or
wrongdoing of any kind by you or the Company or its affiliates.
12. The terms of this Agreement shall be binding on the parties
hereto and their respective successors, assigns, heirs and
representatives.
13. This Agreement, together with the documents relating to the
Vested Options and the Company Loan (collectively referred to as
the "Ancillary Documents"), constitute the entire understanding
of the Company and you with respect to the subject matter hereof
and supersedes all prior understandings, written or oral. The
terms of this Agreement may be changed, modified or discharged
only by an instrument in writing signed by the parties hereto. A
failure of the Company or you to insist on strict compliance
with any provision of this Agreement shall not be deemed a
waiver of such provision or any other provision hereof. If any
provision of this Agreement is determined to be so broad as to
be unenforceable, such provision shall be interpreted to be only
so broad as is enforceable.
14. This Agreement shall be construed, enforced and interpreted in
accordance with and governed by the laws of the State of New
York.
15. The parties hereto acknowledge and agree that each party has
reviewed and negotiated the terms and provisions of this
Agreement and has contributed to its revision. Accordingly, the
rule of construction to the effect that ambiguities are resolved
against the drafting party shall not be employed in the
interpretation of this Agreement. Rather, the terms of this
Agreement shall be construed fairly as to both parties hereto
and not in favor or against either party.
16. This Agreement may be executed in any number of counterparts and
by different parties on separate counterparts, each of which
counterpart, when so executed and delivered, shall be deemed to
be an original and all of which counterparts, taken together,
shall constitute but one and the same Agreement.
5
17. You acknowledge that, by your free and voluntary act of signing
below, you agree to all of the terms of this Agreement and
intend to be legally bound thereby.
18. You acknowledge that you have received this Agreement on or
before April 30, 2002. You understand that you may consider
whether to agree to the terms contained herein for a period of
twenty-one (21) days after the date hereof. However, the
operation of the provisions of Sections 2 through 5 above may be
delayed until you execute this Agreement and return it to the
Company and it becomes effective as provided below. You
acknowledge that you have consulted with an attorney prior to
your execution of this Agreement or have determined by your own
free will not to consult with an attorney.
19. This Agreement will become effective, enforceable and
irrevocable seven days after the date on which it is executed by
you (the "Effective Date"). During the seven-day period prior to
the Effective Date, you may revoke your agreement to accept the
terms hereof by indicating in writing to the Executive Vice
President of Human Resources your intention to revoke. If you
exercise your right to revoke hereunder, you shall forfeit your
right to receive any of the payments and other considerations
provided for herein, and to the extent such payments have
already been made, you agree that you will immediately reimburse
the Company for the amounts of such payments.
6
If the foregoing correctly reflects our understanding, please sign the
enclosed copy of this letter agreement, whereupon it will become a binding
agreement between us.
J. CREW OPERATING CORP.
By: _____________________
Name:
Title:
Agreed to and accepted:
By:_______________________
Mark Sarvary
Dated: _________, 2002
Acknowledgment
STATE OF _________________)
ss:
COUNTY OF _______________)
On the __ day of _______, 2002, before me personally came Mark Savary who, being
by me duly sworn, did depose and say that he resides at 7 Fox Run, Purchase, New
York, and did acknowledge and represent that he has had an opportunity to
consult with attorneys and other advisers of his choosing regarding the
Agreement set forth above, that he has reviewed all of the terms of the
Agreement and that he fully understands all of its provisions, including without
limitation, the general release and waiver set forth therein.
_________________________
Notary Public
Date:____________________
7
Exhibit 10.6(b)
October 17, 2002
Mr. Michael Scandiffio
3 Smith Ridge Lane
New Canaan, CT 06840
Dear Michael:
This letter will confirm our understanding of the arrangements under which
your Employment Agreement, dated May 17, 2001, with the Company ("Employment
Agreement") is terminated. The terms and conditions of the termination of your
employment with the Company are set out below.
1. The parties hereby acknowledge and confirm that your employment
with the Company is terminated effective as of October 17, 2002
(the "Termination Date").
2. Subject to this Agreement becoming effective (as described in
Paragraph 18 hereof), the Company will continue to pay you your
base salary of $480,000 per annum for the twelve (12) month
period beginning on the day immediately following the Termination
Date ("Severance Period"), payable in accordance with the
Company's regular payroll practices for its employees. You will
also continue to have medical coverage during the Severance
Period on the same terms and conditions as medical coverage is
then made available to the employees of the Company. The
foregoing payments shall be reduced by any required tax
withholdings and shall not be taken into account as compensation
and no service credit shall be given after the Termination Date
for purposes of determining the benefits payable under any other
plan, program, agreement or arrangement of the Company. You
acknowledge that, except for the foregoing payments, you are not
entitled to any payment by the Company in the nature of either
severance or termination pay or other compensation of any kind.
3. As of the Termination Date, you have vested options to purchase
8,000 shares of Common Stock ("Common Stock") of J. Crew Group,
Inc. ("Parent") at $19.18 per share (collectively, the "Vested
Options"). You acknowledge that (i) your right to exercise the
Vested Options shall expire 90 days immediately following the
Termination Date (i.e. January 15, 2003) and (ii) all of your
other options which have not yet vested (totaling 32,000 options
to purchase Common Stock at $19.18 per share) terminate effective
immediately, in accordance with the provisions of your stock
option agreements with Parent and the J. Crew Group, Inc. 1997
Stock Option Plan, as amended (the "Option Plan").
4. By signing this Agreement, you agree that in exchange for the
consideration set forth herein, you hereby voluntarily, fully and
unconditionally release and forever discharge the Company,
Parent, their present and former parent corporation(s),
subsidiaries, divisions, affiliates and otherwise related
entities and their respective incumbent and former employees,
directors, plan administrators, officers and agents, individually
and in their official capacities (collectively, the "Releasees"),
from any and all charges, actions, causes of action, demands,
debts, dues, bonds, accounts, covenants, contracts, liabilities,
or damages of any nature whatsoever, whether now known or
claimed, to whomever made, which you have or may have against any
or all of the Releasees for or by reason of any cause, nature or
thing whatsoever, up to the present time, arising out of or
related to your employment with the Company or the termination of
such employment, including, by way of examples and without
limiting the broadest application of the foregoing, any actions,
causes of action, or claims under any contract or federal, state
or local decisional law, statues, regulations or constitutions,
any claims for notice, pay in lieu of notice, wrongful dismissal,
breach of contract, defamation or other tortious conduct,
discrimination on the basis of actual or perceived disability,
age, sex, race or any other factor (including, without
limitation, any claim pursuant to Title VII of the Civil Rights
Act of 1964, Americans with Disabilities Act of 1990, the Age
Discrimination in Employment Act of 1967, as amended, the Family
and Medical Act of 1993, the Equal Pay Act of 1963, the Fair
Labor Standards Act, the State, City and local laws of New York,
and the equal employment law or laws of the state and/or city in
which you work), any claim pursuant to any other applicable
employment standards or human rights legislation or for severance
pay, salary, bonus, incentive or additional compensation,
vacation pay, insurance, other benefits, interest, and/or
attorney's fees. You acknowledge that this general release is not
made in connection with an exit incentive or other employment
termination program offered to a group or class of employees.
If you have made or should hereafter make any complaint, charge,
claim, allegation or demand, or commence or threaten to commence
any action, complaint, charge, claim or proceeding, against any
or all of the Releasees for or by reason of any cause, matter or
thing whatsoever existing up to the present time, this Agreement
may be raised as and shall constitute a complete bar to any such
action, complaint, charge, claim, allegation or proceeding, and,
subject to a favorable ruling by a tribunal of final
jurisdiction, the Releasees shall recover from you, and you shall
pay to the Releasees, all costs incurred by them, including their
attorneys' fees, as a consequence of any such action, complaint
charge, claim, allegation or proceeding; provided, however, that
this shall not limit you from enforcing your rights under this
Agreement, your rights under your stock option agreement with
Parent and the Option Plan or any rights to indemnification you
may have under the Company's or Parent's certificates of
incorporation and by-laws (including without limitation pursuant
to their directors' and officers' liability insurance) with
respect to claims relating to or arising out of your employment
with the Company, and in the event any action is commenced to
enforce your rights under this Agreement, each party shall bear
its own legal fees and expenses; and provided further, however,
that this is not intended to interfere with your right to file a
charge with the Equal Employment Opportunity Commission ("EEOC")
in connection with any claim you believe you may have
2
against any Releasee. However, by signing this Agreement, you
agree to waive any right to recover in any proceeding you may
bring before the EEOC (or any state human rights commission) or
in any proceeding brought by the EEOC (or any state human rights
commission) on your behalf.
You specifically release all claims under the Age Discrimination
in Employment Act ("ADEA") relating to your employment and its
termination.
5. You acknowledge that the payments described in Section 2 above
that you are receiving in connection with the foregoing release
are in accordance with your Employment Agreement.
6. You hereby agree and acknowledge that you shall be bound by and
comply with the restrictive covenants provided in Section 4 of
the Employment Agreement (the "Restrictive Covenants"), and that
such Restrictive Covenants are hereby made part of this Agreement
as if specifically restated herein and that the payments
described in Section 2 above that you are receiving are subject
to and contingent upon your compliance with Restrictive
Covenants.
7. You acknowledge and agree that, notwithstanding any other
provision of this Agreement, if you breach any of your
obligations under this Agreement or any Restrictive Covenant, (a)
you will forfeit your right to receive the payments and benefits
described in Section 2 above (to the extent the payments were not
theretofore paid) and the Company shall be entitled to recover
any payments already made to you or on your behalf, (b) the
Vested Options shall expire as of the date of such breach to the
extent not theretofore exercised and, if exercised as of the date
of such breach, you shall immediately reimburse the Company for
the profit upon exercise (such profit calculated as the
difference between the (i) greater of either the Fair Market
Value (as defined in the Option Plan) of a share of Common Stock
on the date of exercise or the amount paid by the Company to you
per share of Common Stock for the purchase of the shares acquired
upon exercise, and (ii) exercise price, times the number of
options exercised).
8. You hereby agree that the breach of any Restrictive Covenant may
cause the Company to suffer irreparable harm for which money
damages would not be an adequate remedy and therefore, if you
breach a Restrictive Covenant, the Company would be entitled to
temporary and permanent injunctive relief in any court of
competent jurisdiction (without the need to post any bond)
without prejudice to any other remedies under this Agreement or
otherwise.
9. You agree that you will hold in strict confidence proprietary or
Confidential Information (as defined in the Employment
Agreement). It shall not be a violation of this Agreement if you
are compelled to disclose such information pursuant to a
subpoena, court order or similar process; provided that you agree
that, in the event that you are served with legal process or
other request purporting to require you to testify, plead,
respond or defend and/or produce documents at a legal proceeding,
threatened proceeding, investigation or inquiry involving the
Releasees, you will: (1) refuse to provide testimony or documents
absent a subpoena, court order or similar process from a
regulatory agency: (2) within three (3) business days or as soon
thereafter as practical, provide oral notification to the
Company's Executive Vice-President of Human Resources of
3
your receipt of such process or request to testify or produce
documents; and (3) provide to the Company's Executive
Vice-President of Human Resources by overnight delivery service a
copy of all legal papers and documents served upon you. You
further agree that in the event you are served with such process,
you will meet and confer with the Company's designee(s) in
advance of giving such testimony or information. You also agree
to cooperate, taking into account your own schedule, fully with
the Releasees in connection with any existing or future
litigation against the Releasees, whether administrative, civil
or criminal in nature, in which and to the extent the Releasees
deem your cooperation necessary. The Company agrees to reimburse
you for your reasonable out-of-pocket expenses incurred in
connection with the performance of your obligations under this
Section 9.
10. This Agreement does not constitute an admission of liability or
wrongdoing of any kind by you or the Company or its affiliates.
11. The terms of this Agreement shall be binding on the parties
hereto and their respective successors, assigns, heirs and
representatives.
12. This Agreement, together with your stock option agreements with
Parent and the Option Plan, constitute the entire understanding
of the Company and you with respect to the subject matter hereof
and supersedes all prior understandings, written or oral. The
terms of this Agreement may be changed, modified or discharged
only by an instrument in writing signed by the parties hereto. A
failure of the Company or you to insist on strict compliance with
any provision of this Agreement shall not be deemed a waiver of
such provision or any other provision hereof. If any provision of
this Agreement is determined to be so broad as to be
unenforceable, such provision shall be interpreted to be only so
broad as is enforceable.
13. This Agreement shall be construed, enforced and interpreted in
accordance with and governed by the laws of the State of New
York.
14. The parties hereto acknowledge and agree that each party has
reviewed and negotiated the terms and provisions of this
Agreement and has contributed to its revision. Accordingly, the
rule of construction to the effect that ambiguities are resolved
against the drafting party shall not be employed in the
interpretation of this Agreement. Rather, the terms of this
Agreement shall be construed fairly as to both parties hereto and
not in favor or against either party.
15. This Agreement may be executed in any number of counterparts and
by different parties on separate counterparts, each of which
counterpart, when so executed and delivered, shall be deemed to
be an original and all of which counterparts, taken together,
shall constitute but one and the same Agreement.
16. You acknowledge that, by your free and voluntary act of signing
below, you agree to all of the terms of this Agreement and intend
to be legally bound thereby.
17. You acknowledge that you have received this Agreement on or
before October 17, 2002. You understand that you may consider
whether to agree to the terms
4
contained herein for a period of twenty-one (21) days after the
date hereof. However, the operation of the provisions of Sections
2 through 4 above may be delayed until you execute this Agreement
and return it to the Company and it becomes effective as provided
below. You acknowledge that you have consulted with an attorney
prior to your execution of this Agreement or have determined by
your own free will not to consult with an attorney.
5
18. This Agreement will become effective, enforceable and irrevocable
seven days after the date on which it is executed by you (the
"Effective Date"). During the seven-day period prior to the
Effective Date, you may revoke your agreement to accept the terms
hereof by indicating in writing to the Executive Vice-President
of Human Resources your intention to revoke. If you exercise your
right to revoke hereunder, you shall forfeit your right to
receive any of the payments and other benefits provided for
herein, and to the extent such payments or benefits have already
been made, you agree that you will immediately reimburse the
Company for the value of such payments and benefits.
6
If the foregoing correctly reflects our understanding, please sign the
enclosed copy of this letter agreement, whereupon it will become a binding
agreement between us.
J. CREW OPERATING CORP.
By: _____________________
David F. Kozel
Executive Vice-President,
Human Resources
AGREED TO AND ACCEPTED:
By:_________________________
Michael Scandiffio
Dated: _________, 2002
Acknowledgment
STATE OF _________________)
ss:
COUNTY OF _______________)
On the __ day of _______, 2002, before me personally came Michael Scandiffio
who, being by me duly sworn, did depose and say that he resides at 3 Smith Ridge
Lane, New Canaan, CT 06840, and did acknowledge and represent that he has had an
opportunity to consult with attorneys and other advisers of his choosing
regarding the Agreement set forth above, that he has reviewed all of the terms
of the Agreement and that he fully understands all of its provisions, including
without limitation, the general release and waiver set forth therein.
__________________________
Notary Public
Date:_____________________
7
Exhibit 10.7(b)
January 30, 2003
Mr. Blair Gordon
359 West 20/th/ Street, #4
New York, NY 10011
Dear Blair:
This letter will confirm our understanding of the arrangements under
which your Employment Agreement, dated December 12, 2001, with the Company
("Employment Agreement") is terminated. The terms and conditions of the
termination of your employment with the Company are set out below.
1. The parties hereby acknowledge and confirm that your employment
with the Company is terminated effective as of January 30, 2003
(the "Termination Date").
2. Subject to this Agreement becoming effective (as described in
Paragraph 18 hereof), the Company will continue to pay you your
base salary of $400,000 per annum for the twelve (12) month
period beginning on the day immediately following the
Termination Date ("Severance Period"), payable in accordance
with the Company's regular payroll practices for its employees.
You will also continue to have medical coverage during the
Severance Period on the same terms and conditions as medical
coverage is then made available to the employees of the Company.
The foregoing payments shall be reduced by any required tax
withholdings and shall not be taken into account as compensation
and no service credit shall be given after the Termination Date
for purposes of determining the benefits payable under any other
plan, program, agreement or arrangement of the Company. You
acknowledge that, except for the foregoing payments, you are not
entitled to any payment by the Company in the nature of either
severance or termination pay or other compensation of any kind.
3. As of the Termination Date, you have no vested options to
purchase shares of Common Stock ("Common Stock") of J. Crew
Group, Inc. ("Parent") and 30,000 unvested options to purchase
Common Stock at $10.00 per share. You acknowledge that all of
your unvested options terminate effective immediately, in
accordance with the provisions of your stock option agreements
with Parent and the J. Crew Group, Inc. 1997 Stock Option Plan,
as amended (the "Option Plan").
4. By signing this Agreement, you agree that in exchange for the
consideration set forth herein, you hereby voluntarily, fully
and unconditionally release and forever discharge the Company,
Parent, their present and former parent corporation(s),
subsidiaries, divisions, affiliates and otherwise related
entities and their respective incumbent and former employees,
directors, plan administrators, officers and agents,
individually and in their official capacities (collectively, the
"Releasees"), from any and all charges, actions, causes of
action, demands, debts, dues, bonds, accounts, covenants,
contracts, liabilities, or damages of any
nature whatsoever, whether now known or claimed, to whomever
made, which you have or may have against any or all of the
Releasees for or by reason of any cause, nature or thing
whatsoever, up to the present time, arising out of or related to
your employment with the Company or the termination of such
employment, including, by way of examples and without limiting
the broadest application of the foregoing, any actions, causes
of action, or claims under any contract or federal, state or
local decisional law, statues, regulations or constitutions, any
claims for notice, pay in lieu of notice, wrongful dismissal,
breach of contract, defamation or other tortious conduct,
discrimination on the basis of actual or perceived disability,
age, sex, race or any other factor (including, without
limitation, any claim pursuant to Title VII of the Civil Rights
Act of 1964, Americans with Disabilities Act of 1990, the Age
Discrimination in Employment Act of 1967, as amended, the Family
and Medical Act of 1993, the Equal Pay Act of 1963, the Fair
Labor Standards Act, the State, City and local laws of New York,
and the equal employment law or laws of the state and/or city in
which you work), any claim pursuant to any other applicable
employment standards or human rights legislation or for
severance pay, salary, bonus, incentive or additional
compensation, vacation pay, insurance, other benefits, interest,
and/or attorney's fees. You acknowledge that this general
release is not made in connection with an exit incentive or
other employment termination program offered to a group or class
of employees.
If you have made or should hereafter make any complaint, charge,
claim, allegation or demand, or commence or threaten to commence
any action, complaint, charge, claim or proceeding, against any
or all of the Releasees for or by reason of any cause, matter or
thing whatsoever existing up to the present time, this Agreement
may be raised as and shall constitute a complete bar to any such
action, complaint, charge, claim, allegation or proceeding, and,
subject to a favorable ruling by a tribunal of final
jurisdiction, the Releasees shall recover from you, and you
shall pay to the Releasees, all costs incurred by them,
including their attorneys' fees, as a consequence of any such
action, complaint charge, claim, allegation or proceeding;
provided, however, that this shall not limit you from enforcing
your rights under this Agreement, and in the event any action is
commenced to enforce your rights under this Agreement, each
party shall bear its own legal fees and expenses; and provided
further, however, that this is not intended to interfere with
your right to file a charge with the Equal Employment
Opportunity Commission ("EEOC") in connection with any claim you
believe you may have against any Releasee. However, by signing
this Agreement, you agree to waive any right to recover in any
proceeding you may bring before the EEOC (or any state human
rights commission) or in any proceeding brought by the EEOC (or
any state human rights commission) on your behalf.
You specifically release all claims under the Age Discrimination
in Employment Act ("ADEA") relating to your employment and its
termination.
5. You acknowledge that the payments described in Section 2 above
that you are receiving in connection with the foregoing release
are in accordance with your Employment Agreement.
2
6. You hereby agree and acknowledge that you shall be bound by and
comply with the restrictive covenants provided in Section 4 of
the Employment Agreement (the "Restrictive Covenants"), and that
such Restrictive Covenants are hereby made part of this
Agreement as if specifically restated herein and that the
payments described in Section 2 above that you are receiving are
subject to and contingent upon your compliance with Restrictive
Covenants.
7. You acknowledge and agree that, notwithstanding any other
provision of this Agreement, if you breach any of your
obligations under this Agreement or any Restrictive Covenant,
(a) you will forfeit your right to receive the payments and
benefits described in Section 2 above (to the extent the
payments were not theretofore paid) and the Company shall be
entitled to recover any payments already made to you or on your
behalf, (b) the Vested Options shall expire as of the date of
such breach to the extent not theretofore exercised and, if
exercised as of the date of such breach, you shall immediately
reimburse the Company for the profit upon exercise (such profit
calculated as the difference between the (i) greater of either
the Fair Market Value (as defined in the Option Plan) of a share
of Common Stock on the date of exercise or the amount paid by
the Company to you per share of Common Stock for the purchase of
the shares acquired upon exercise, and (ii) exercise price,
times the number of options exercised).
8. You hereby agree that the breach of any Restrictive Covenant may
cause the Company to suffer irreparable harm for which money
damages would not be an adequate remedy and therefore, if you
breach a Restrictive Covenant, the Company would be entitled to
temporary and permanent injunctive relief in any court of
competent jurisdiction (without the need to post any bond)
without prejudice to any other remedies under this Agreement or
otherwise.
9. You agree that, in the event that you are served with legal
process or other request purporting to require you to testify,
plead, respond or defend and/or produce documents at a legal
proceeding, threatened proceeding, investigation or inquiry
involving the Releasees, you will: (1) refuse to provide
testimony or documents absent a subpoena, court order or similar
process from a regulatory agency: (2) within three (3) business
days or as soon thereafter as practical, provide oral
notification to the Company's Executive Vice-President of Human
Resources of your receipt of such process or request to testify
or produce documents; and (3) provide to the Company's Executive
Vice-President of Human Resources by overnight delivery service
a copy of all legal papers and documents served upon you. You
further agree that in the event you are served with such
process, you will meet and confer with the Company's designee(s)
in advance of giving such testimony or information. You also
agree to cooperate fully with the Releasees in connection with
any existing or future litigation against the Releasees, whether
administrative, civil or criminal in nature, in which and to the
extent the Releasees deem your cooperation necessary. The
Company agrees to reimburse you for your reasonable
out-of-pocket expenses incurred in connection with the
performance of your obligations under this Section 9.
10. This Agreement does not constitute an admission of liability or
wrongdoing of any kind by you or the Company or its affiliates.
3
11. The terms of this Agreement shall be binding on the parties
hereto and their respective successors, assigns, heirs and
representatives.
12. This Agreement constitutes the entire understanding of the
Company and you with respect to the subject matter hereof and
supersedes all prior understandings, written or oral. The terms
of this Agreement may be changed, modified or discharged only by
an instrument in writing signed by the parties hereto. A failure
of the Company or you to insist on strict compliance with any
provision of this Agreement shall not be deemed a waiver of such
provision or any other provision hereof. If any provision of
this Agreement is determined to be so broad as to be
unenforceable, such provision shall be interpreted to be only so
broad as is enforceable.
13. This Agreement shall be construed, enforced and interpreted in
accordance with and governed by the laws of the State of New
York.
14. The parties hereto acknowledge and agree that each party has
reviewed and negotiated the terms and provisions of this
Agreement and has contributed to its revision. Accordingly, the
rule of construction to the effect that ambiguities are resolved
against the drafting party shall not be employed in the
interpretation of this Agreement. Rather, the terms of this
Agreement shall be construed fairly as to both parties hereto
and not in favor or against either party.
15. This Agreement may be executed in any number of counterparts and
by different parties on separate counterparts, each of which
counterpart, when so executed and delivered, shall be deemed to
be an original and all of which counterparts, taken together,
shall constitute but one and the same Agreement.
16. You acknowledge that, by your free and voluntary act of signing
below, you agree to all of the terms of this Agreement and
intend to be legally bound thereby.
17. You acknowledge that you have received this Agreement on or
before January 30, 2003. You understand that you may consider
whether to agree to the terms contained herein for a period of
twenty-one (21) days after the date hereof. However, the
operation of the provisions of Sections 2 through 4 above may be
delayed until you execute this Agreement and return it to the
Company and it becomes effective as provided below. You
acknowledge that you have consulted with an attorney prior to
your execution of this Agreement or have determined by your own
free will not to consult with an attorney.
18. This Agreement will become effective, enforceable and
irrevocable seven days after the date on which it is executed by
you (the "Effective Date"). During the seven-day period prior to
the Effective Date, you may revoke your agreement to accept the
terms hereof by indicating in writing to the Executive
Vice-President of Human Resources your intention to revoke. If
you exercise your right to revoke hereunder, you shall forfeit
your right to receive any of the payments and other benefits
provided for herein, and to the extent such payments or benefits
have already been made, you agree that you will immediately
reimburse the Company for the value of such payments and
benefits.
4
If the foregoing correctly reflects our understanding, please sign the
enclosed copy of this letter agreement, whereupon it will become a binding
agreement between us.
J. CREW OPERATING CORP.
By: _________________________
David F. Kozel
Executive Vice-President,
Human Resources
Agreed to and accepted:
By:_______________________
Blair Gordon
Dated: _____________, 2003
Acknowledgment
STATE OF _________________)
ss:
COUNTY OF _______________)
On the __ day of _______, 2003, before me personally came Blair Gordon who,
being by me duly sworn, did depose and say that he resides at
_________________________________, and did acknowledge and represent that he has
had an opportunity to consult with attorneys and other advisers of his choosing
regarding the Agreement set forth above, that he has reviewed all of the terms
of the Agreement and that he fully understands all of its provisions, including
without limitation, the general release and waiver set forth therein.
_________________________
Notary Public
Date:____________________
5
Exhibit 10.8(b)
Execution Copy
SEPARATION AGREEMENT AND GENERAL RELEASE AND WAIVER
This Separation Agreement and General Release and Waiver (this
"Agreement") is made as of January 29, 2003, among J. Crew Group, Inc., a New
York corporation (the "Parent") and its operating subsidiary J. Crew Operating
Corp. (the "Employer," and together with the Parent, "Crew"), with offices at
770 Broadway, New York, NY, and Kenneth S. Pilot (the "Employee").
WHEREAS, Crew engaged the Employee to be the Chief Executive Officer of
the Employer and the Parent;
WHEREAS, the Employee, the Parent and the Employer are parties to an
Employment Agreement dated August 26, 2002 (the "Employment Agreement");
WHEREAS, Section 5(a) of the Employment Agreement provides that, as a
condition to the receipt of certain benefits described therein, the Employee
shall be required to execute a general release of claims in the form appended to
the Employment Agreement;
WHEREAS, the parties wish to confirm the termination of the Employee's
employment with Crew and set forth their agreement as to the manner in which the
Employee's employment with Crew will be closed out;
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein and for other good and valuable consideration, receipt of which is hereby
acknowledged, Crew and the Employee agree as follows:
1. Termination of Employment. The parties hereto hereby agree that the
Employee's employment with Crew terminated as of January 29, 2003 (the "Date of
Termination"). The Employee hereby resigns, effective as of the Date of
Termination, all positions, titles, duties, authorities and responsibilities
with, arising out of or relating to his employment with Crew and its affiliates
and agrees to execute all additional documents and takes such further steps as
may be required to effectuate such resignation.
2. Certain Payments and Benefits.
(a) Pursuant to Section 5(a) of the Employment Agreement, Crew shall
pay the Employee the lump-sum amount of $2,494,500, which represents the sum of
(i) $1,400,000 (two times the Employee's current base salary of $700,000), (ii)
$546,000 (the Employee's guaranteed 2002 and 2003 Bonus), (iii) $530,000
(transition services and relocation reimbursement), (iv) $13,500 (1 week of
accrued vacation), and (v) $5,000 (tax adviser fees). In addition to the
foregoing, (x) the Employee shall become fully vested in the Restricted Shares
granted to him in accordance with Sections 2(f)(ii) of the Employment Agreement,
(y) the Company agrees not to exercise the call rights provided under Section
3(b) of the Stockholders' Agreement, dated September 9, 2002, between the
Parent, the Employee and TPG Partners II, L.P., with respect to the Granted
Shares and Restricted Shares granted pursuant to Sections 2(f)(i) and (ii) of
the Employment Agreement and waives the right of it and its designated assignee
to do so, and (z) the Company shall pay the premiums in connection with
providing COBRA coverage for the Employee until the earlier of (A) eighteen
months from the Date of
Termination, or (B) such time as the Employee shall become entitled to coverage
under any welfare benefit plan of another employer. The payments and benefits
provided in this Section 2(a) shall be referred to herein as the "Termination
Payment."
(b) In addition to the Termination Payment, Crew shall (i) pay for the
Employee's reasonable legal fees incurred in connection with this Agreement in
an amount not to exceed $7,500, (ii) provide a lump-sum payment to the Employee
for executive outplacement services for the Employee and miscellaneous
publications in an amount not to exceed $15,000 (iii) reimburse the Employee's
reasonable business expenses upon presentation to Crew by the Employee of
statements of such expenses no later than thirty days after the Date of
Termination, (iv) permit the Employee to keep for his personal use the laptop
computer and fax machine issued to the Employee by Crew, and (v) continue to pay
the Employee's current Base Salary and provide benefits as if the Employee
remained employed through January 31, 2003.
(c) The Termination Payment shall be reduced by any required tax
withholding. The Termination Payment shall not be taken into account as
compensation and no service credit shall be given after the Date of Termination
for purposes of determining the benefits payable to the Employee or the
Employee's family under any plan, program, agreement or arrangement of Crew. The
Employee acknowledges that, except for the Termination Payment, he is not
entitled to any payment in the nature of severance or termination pay from Crew.
(d) The Employee shall be entitled to any benefit to which the Employee
may be entitled under any tax qualified pension plan of Crew or its affiliates,
continuation of health insurance benefits, as provided above, to the extent
provided in Section 4980B of the Internal Revenue Code of 1986 and Section 601
of the Employee Retirement Income Security Act of 1974, as amended (which
provisions are commonly known as "COBRA") and any other similar benefits
required to be provided by law.
3. General Release and Waiver
(a) The Employee hereby releases, remises and acquits the Employer, the
Parent and all of their respective affiliates, and their respective officers,
directors, shareholders, members, agents, employees, consultants, independent
contractors, attorneys, advisers, successors and assigns, jointly and severally,
from any and all claims, known or unknown, which the Employee or the Employee's
heirs, successors or assigns have or may have against any of such parties
arising on or prior to the date this Agreement is executed by the Employee and
any and all liability which any of such parties may have to the Employee,
whether denominated claims, demands, causes of action, obligations, damages or
liabilities arising from any and all bases, however, denominated, including but
not limited to, the Age Discrimination in Employment Act, the Americans with
Disabilities Act of 1990, the Family and Medical Leave Act of 1993, Title VII of
the United States Civil Rights Act of 1964, 42 U.S.C. ss. 1981, the New York
Human Rights Law, N.Y. Exec. Law Article 15 et seq., New York Executive Law ss.
296, ss. 8-107 of the Administrative Code and Charter of New York City, or any
other federal, state or local law and any workers' compensation or disability
claims under any such laws or claims under any contract (including without
limitation the Employment Agreement). This release relates to any and all
claims, including without limitation claims arising from and during the
2
Employee's employment relationship with the Employer, the Parent and their
respective affiliates or as a result of the termination of such relationship.
The Employee further agrees that the Employee will not file or permit to be
filed on the Employee's behalf any such claim. Notwithstanding the preceding
sentence or any other provision of this Agreement, this release is not intended
to interfere with the Employee's right to file a charge with the Equal
Employment Opportunity Commission (the "EEOC") in connection with any claim he
believes he may have against the Employer, the Parent or their respective
affiliates. However, by executing this Agreement, the Employee hereby waives the
right to recover in any proceeding the Employee may bring before the EEOC or any
state human rights commission or in any proceeding brought by the EEOC or any
state human rights commission on the Employee's behalf. This release is for any
relief, no matter how denominated, including, but not limited to, injunctive
relief, wages, back pay, front pay, compensatory damages, or punitive damages.
This release shall not apply to any obligation of the Employer, the Parent or
their respective affiliates pursuant to this Agreement or any rights in the
nature of indemnification (including without limitation pursuant to Crew's
directors' and officer's liability insurance policy) which the Employee may have
with respect to claims against the Employee relating to or arising out of his
employment with the Employer, the Parent or their respective affiliates.
(b) The Employee acknowledges that the Termination Payment constitutes
good and valuable consideration for the release contained in this Section 3.
4. Confidentiality of Agreement. The Employee and Crew shall keep the
terms of this Agreement confidential and shall not directly or indirectly
disseminate any information (in any form) regarding this Agreement to any person
or entity except as may be agreed to in writing by the other party.
Notwithstanding the foregoing, either party may disclose the information
described herein, to the extent compelled to do so by lawful service of process,
subpoena, court order, or as otherwise compelled to do by law, including full
and complete disclosure in response thereto, in which event such party agrees to
provide the other party with a copy of the document(s) seeking disclosures of
such information promptly upon receipt of such document(s) and prior to
disclosure of any such information, so that the other party may, upon notice to
the first party, take such action as it deems to be necessary or appropriate in
relation to such subpoena or request. The obligations under this Section 4 shall
cease for both parties at such time that this document (once executed by both
parties) is filed publicly with the Securities and Exchange Commission.
5. Incorporation by Reference. The following sections of the
Employment Agreement are hereby incorporated by reference as if repeated herein:
Section 2(n) (relating to indemnification); Section 6 ("Non-Solicitation"), as
agreed by the parties; Section 8 ("Confidentiality; Non-Disclosure;
Non-Disparagement"); Section 9 ("Injunctive Relief"); and Section 11(j)
(relating to arbitration). Crew hereby expressly waives the Non-Compete
provisions contained in Section 7 of the Employment Agreement.
6. Certain Forfeitures in Event of Breach. The Employee acknowledges
and agrees that, notwithstanding any other provision of this Agreement, in the
event the Employee materially breaches any of his obligations under Section 3 of
this Agreement, the Employee will forfeit his right to receive the Termination
Payment to the extent not theretofore paid to him as of
3
the date of such breach and, if already made as of the time of breach, the
Employee agrees that he will reimburse Crew, immediately, for the amount of such
payment.
7. No Admission. This Agreement does not constitute an admission of
liability or wrongdoing of any kind by Crew or its affiliates.
8. Heirs and Assigns. The terms of this Agreement shall be binding on
the parties hereto and their respective successors and assigns.
9. General Provisions
(a) Integration. This Agreement constitutes the entire understanding of
Crew and the Employee with respect to the subject matter hereof and supersedes
all prior understandings, written or oral, including without limitation the
Employment Agreement. The terms of this Agreement may be changed, modified or
discharged only by an instrument in writing signed by the parties hereto. A
failure of Crew or the Employee to insist on strict compliance with any
provision of this Agreement shall not be deemed a waiver of such provision or
any other provision hereof. In the event that any provision of this Agreement is
determined to be so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
(b) Choice of Law. This Agreement shall be construed, enforced and
interpreted in accordance with and governed by the laws of the State of New
York, without regard to its choice of law provisions.
(c) Construction of Agreement. The parties hereto acknowledge and agree
that each party has reviewed and negotiated the terms and provisions of this
Agreement and has had the opportunity to contribute to its revision.
Accordingly, the rule of construction to the effect that ambiguities are
resolved against the drafting party shall not be employed in the interpretation
of this Agreement. Rather, the terms of this Agreement shall be construed fairly
as to both parties hereto and not in favor or against either party.
(d) Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which
counterpart, when so executed and delivered, shall be deemed to be an original
and all of which counterparts, taken together, shall constitute but one and the
same Agreement.
(e) Notice. Any notice or other communication required or permitted
under this Agreement shall be effective only if it is in writing and shall be
deemed to be given when delivered personally or four days after it is mailed by
registered or certified mail, postage prepaid, return receipt requested or one
day after it is sent by a reputable overnight courier service and, in each case,
addressed as follows (or if it is sent through any other method agreed upon by
the parties):
If to Crew:
J. Crew Group, Inc.
770 Broadway, Twelfth Floor
4
New York, New York 10003
Attention: Board of Directors and Secretary
with a copy to:
Paul Shim, Esq.
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006
If to the Employee, to the address on record with Crew; or, for either party, to
such other address as any party hereto may designate by notice to the others,
and shall be deemed to have been given upon receipt.
10. Knowing and Voluntary Waiver. The Employee acknowledges that, by
the Employee's free and voluntary act of signing below, the Employee agrees to
all of the terms of this Agreement and intends to be legally bound thereby.
The Employee understands that he may consider whether to agree to the
terms contained herein for a period of twenty-one days after the date hereof.
Accordingly, the Employee may execute this Agreement by February 19, 2003, to
acknowledge his understanding of and agreement with the foregoing. However, the
Termination Payment provided herein will be delayed until this Agreement is
executed and returned to Crew. The Employee acknowledges that he has been
advised to consult with an attorney prior to executing this Agreement.
This Agreement will become effective, enforceable and irrevocable on
the eighth day after the date on which it is executed by the Employee (the
"Effective Date"). During the seven-day period prior to the Effective Date, the
Employee may revoke his agreement to accept the terms hereof by indicating in
writing to Crew his intention to revoke. If the Employee exercises his right to
revoke hereunder, he shall forfeit his right to receive any of the benefits
provided for herein, and to the extent such payments have already been made, the
Employee agrees that he will immediately reimburse Crew for the amounts of such
payment.
The Employee acknowledges that, by his free and voluntary act of
signing below, he agrees to all of the terms of this Release and intends to be
legally bound thereby.
5
IN WITNESS WHEREOF, the Employer and the Parent have caused this
Agreement to be signed by their duly authorized representatives and the Employee
has signed this Agreement has of the day and year first above written.
J. CREW GROUP, INC.
___________________________________________
Name: Scott M. Rosen
Title: Executive Vice President and Chief
Financial Officer
J. CREW OPERATING CORP.
___________________________________________
Name: Scott M. Rosen
Title: Executive Vice President and Chief
Financial Officer
___________________________________________
Kenneth S. Pilot
6
Acknowledgment
STATE OF ___________________)
ss:
COUNTY OF___________________)
On the ____ day of __________, ____, before me personally came ______________
who, being by me duly sworn, did depose and say that he resides at
___________________________; and did acknowledge and represent that he has had
an opportunity to consult with attorneys and other advisers of his choosing
regarding the Separation Agreement and General Release and Waiver attached
hereto, that he has reviewed all of the terms of the Separation Agreement and
General Release and Waiver and that he fully understands all of its provisions,
including, without limitation, the general release and waiver set forth therein.
_________________________
Notary Public
Date: __________________
7
Exhibit 10.9
SERVICES AGREEMENT
AGREEMENT, dated this 24/th/ day of January, 2003 (this "Agreement"),
among J. Crew Group, Inc., a New York Corporation (the "Parent") and its
operating subsidiary J. Crew Operating Corp. (collectively with the Parent, the
"Company"), with offices at 770 Broadway, New York, New York, 10003 Millard S.
Drexler, Inc. (the "Service Company") and Millard S. Drexler (the "Principal").
l. Term; Position and Responsibilities; Company Headquarters and
Principal Work Location.
(a) Term. Unless the Service Period (as defined below) is terminated
earlier pursuant to Section 4 hereof, the Company shall engage the Service
Company and the Principal on the terms and subject to the conditions of this
Agreement for a five year term commencing on January 27, 2003 (the "Commencement
Date") and ending on the day immediately preceding the fifth anniversary of the
Commencement Date (the "Service Period").
(b) Position and Responsibilities. During the Service Period, the
Company hereby agrees to cause the Principal to be elected as Chairman of the
Board of Directors of the Company (the "Board") and to employ the Principal,
both directly and through the Service Company, as the Company's Chief Executive
Officer and such other position or positions with the Company as the Board and
the Principal may agree from time to time, provided that following the third
anniversary of the Commencement Date, the Principal may step down as Chief
Executive Officer, serve as the Company's Executive Chairman and delegate his
duties and responsibilities to the appropriate executive officers of the
Company, including to any newly-appointed or, if appropriate to hire such
officer, newly-hired Chief Executive Officer. During the Service Period, the
Principal, on behalf of the Service Company, shall perform the duties and
responsibilities that are customarily assigned to individuals serving in such
position or positions and such other duties and responsibilities commensurate
with such positions as the Board may reasonably specify from time to time,
including but not limited to recruitment and retention of key personnel of the
Company, hiring and terminating senior executives of the Company, establishment
and execution of brand vision, and direct responsibility for assembling and
guiding product, merchandising and marketing functions, and oversight of and
accountability for the financial and strategic performance of the Company (the
"Services"). The Principal shall report to the Board.
(c) During the Service Period, excluding any periods of vacation and
sick leave to which the Principal is entitled, (i) the Principal shall devote
substantially all of his working time and attention to the performance of his
duties and responsibilities hereunder, provided that following the third
anniversary of the Commencement Date if the Principal elects to step down as
Chief Executive Officer and serve as the Executive Chairman of the Company, he
shall no longer be required to devote substantially all of his working time to
the performance of his duties hereunder. Following the Principal's resignation
as Chief Executive Officer, he shall provide such oversight, direction and
assistance as he deems appropriate and, in either case, he shall faithfully and
diligently endeavor to promote the business and best interests of the
Company, and (ii) the Principal may not, without the prior written consent of
the Company, operate, participate in the management, operations or control of,
or act as an employee, officer, consultant, agent or representative of, any type
of business or service (other than as an Chairman and Chief Executive Officer of
the Company), provided that it shall not be a violation of the foregoing for the
Principal to (A) act or serve as a director, trustee, committee member or
principal of any type of business or civic or charitable organization, (B)
manage his personal, financial and legal affairs, and (C) pursue a very limited
number of small retail and other consumer brand building ventures without TPG
and TPG Ventures (provided that the activities described in clauses (A), (B) and
(C) do not interfere with the performance of his duties and responsibilities to
the Company as provided hereunder). Notwithstanding anything to the contrary in
this Section 1(c), the Principal may pursue emerging retail and other consumer
brand building opportunities with TPG and TPG Ventures and their affiliates.
(d) Company Headquarters; Principal Work Location. Unless otherwise
mutually agreed upon, the Company's headquarters shall be the New York
metropolitan area. The Company intends to establish a West Coast merchandising
office at the Principal's reasonable direction, which will be the Principal's
principal work location,. The Principal shall travel as reasonably required to
carry out his duties and obligations hereunder, including to New York.
2. Compensation; Expenses; Benefits and Perquisites. During the
Service Period, as compensation for the performance of the Services, the Service
Company and the Principal, as applicable shall be entitled to the following
compensation from the Company, which subsections (a), (b) and (c) below shall
not exceed an aggregate of $700,000 per annum:
(a) Base Salary. The Company shall pay the Principal, not less than
once a month pursuant to the Company's normal and customary payroll procedures,
a base salary at the rate of $200,000 per annum (the "Base Salary"). The Board
shall annually reevaluate the Principal's salary and bonus opportunities for
increase based on the Company's performance and the Principal's contributions to
the Company for the preceding fiscal year.
(b) Annual Bonus. In addition to the Base Salary, the Service Company
shall have an opportunity to earn an annual bonus (the "Bonus") in respect of
each fiscal year in accordance with the terms of the J. Crew Operating Corp.
Performance Incentive Plan then existing for such fiscal year based on the
achievement of performance objectives as may be established from time to time by
the Board or a committee thereof; provided, however, that the Bonus for any
fiscal year shall be payable to the Service Company only if the Principal,
through the Service Company, is employed by the Company on the date on which
such Bonus is paid. The actual Bonus that may become payable shall be determined
by the Board, in its sole discretion.
(c) Business Expenses. The Company shall promptly reimburse the
Service Company for all reasonable business expenses incurred by the Service
Company in connection with the performance of the Services, including without
limitation airfare, upon the presentation of statements of such expenses in
accordance with the Company's policies and procedures now
2
in force or as such policies and procedures may be modified with respect to all
senior executive officers of the Company.
(d) Employee Benefits. During the Service Period, the Principal shall
be eligible to participate in the employee benefit plans and programs maintained
by the Company from time to time and generally available to senior executives of
the Company, including, to the extent maintained by the Company, medical,
dental, accidental and disability insurance plans and profit sharing, pension,
retirement, deferred compensation and savings plans, to the extent permitted by
and in accordance with the terms and conditions of the applicable plan and
applicable law in effect from time to time.
(e) Vacation. During the Service Period, the Principal shall be
entitled to twenty-five days of paid time off per annum pursuant to the
Company's Paid Time Off Policy, without carryover accumulation, which may be
taken at the Principal's sole discretion.
3. Grant of Stock Options and Restricted Stock.
(a) Initial Stock Options. As soon as reasonably practicable after the
Commencement Date, the Company shall cause the Board or a committee thereof to
grant to the Principal a non-qualified option to purchase 557,926 shares of
common stock of the Parent (the "Common Stock") at an exercise price per share
equal to $6.82 per share (the "Initial Option") in exchange for consideration
paid by the Principal to the Company, within three business days after
shareholder approval of such grant, in the amount of $200,000. The terms and
conditions of the Initial Option shall be evidenced by a separate stock option
agreement executed by the Company and the Principal (the "Initial Option
Agreement") which shall contain terms consistent with the Company's 2003 Equity
Incentive Plan as it may be amended from time to time (the "Equity Plan"), this
Section 3(a) and other customary terms. The Initial Option Agreement shall
provide, among other things, for the following:
(i) The Initial Option shall vest in equal installments on the
second, third, fourth and fifth anniversaries of the Commencement
Date; provided that the Service Period is not terminated prior to any
such applicable anniversary date;
(ii) Notwithstanding the foregoing, (A) in the event that the
Company terminates the Service Period without Cause (as defined below)
or the Principal terminates the Service Period for Good Reason (as
defined below) prior to the consummation of a Change in Control (as
defined in the Equity Plan), that portion of the Initial Option that
would have become vested and exercisable on the anniversary of the
Commencement Date immediately following the Date of Termination (as
defined below) shall vest and become immediately exercisable and any
remaining portion of the Initial Option that has not become vested and
exercisable shall immediately expire and be forfeited, (B) in the
event that, within the two-year period following the consummation of a
Change in Control, the Company terminates the Service Period without
Cause or the Principal terminates the Service Period for Good Reason,
all or any portion of the Initial Option that has not yet become
3
exercisable shall vest and become immediately exercisable, or (C) if
the Service Period terminates for any other reason, any portion of the
Initial Option which has not become exercisable on such Date of
Termination shall immediately expire and be forfeited; and
(iii) Any portion of the Initial Option which has become vested
and exercisable shall expire on the earlier of (A) the tenth
anniversary of the date of grant, (B) the commencement of business on
the date the Service Period is terminated for Cause, (C) ninety days
after the Service Period is terminated by the Principal without Good
Reason, or (D) the second anniversary of the date the Service Period
is terminated (x) on account of the Principal's death or Disability,
(as defined below), (y) by the Company without Cause, or (z) by the
Principal for Good Reason.
(b) Premium Stock Options. As soon as reasonably practicable after
the Commencement Date, the Company shall cause the Board or a committee thereof
to grant to the Principal a non-qualified option to purchase 836,889 shares of
Common Stock at an exercise price per share equal to $25.00 per share (the
"Premium Option Tranche 1") and an additional non-qualified option to purchase
836,889 shares of Common Stock at an exercise price per share equal to $35.00
per share (the "Premium Option Tranche 2" and, collectively with Premium Option
Tranche 1, the "Premium Options") . The terms and conditions of the Premium
Options shall be evidenced by a separate stock option agreement executed by the
Company and the Principal (the "Premium Option Agreement") which shall contain
terms consistent with the Equity Plan, this Section 3(b) and other customary
terms. The Premium Option Agreement shall provide, among other things, for the
following:
(i) The Premium Options shall vest in equal installments on the
second, third, fourth and fifth anniversaries of the Commencement
Date; provided that the Service Period is not terminated prior to any
such applicable anniversary date;
(ii) Notwithstanding the foregoing, (A) in the event that the
Company terminates the Service Period without Cause or the Principal
terminates the Service Period for Good Reason prior to the
consummation of a Change in Control, that portion of the Premium
Option that would have become vested and exercisable on the
anniversary of the Commencement Date immediately following the Date of
Termination shall vest and become immediately exercisable and any
remaining portion of the Premium Option that has not become vested and
exercisable shall immediately expire and be forfeited, (B) in the
event that, within the two-year period following the consummation of a
Change in Control, the Company terminates the Service Period without
Cause or the Principal terminates the Service Period for Good Reason,
all or any portion of the Premium Option that has not yet become
exercisable shall vest and become immediately exercisable, or (C) if
the Service Period terminates for any other reason, any portion of the
Premium Option which has not become exercisable on such Date of
Termination shall immediately expire and be forfeited; and
4
(iii) Any portion of the Premium Option which has become vested
and exercisable shall expire on the earlier of (A) the tenth
anniversary of the date of grant, (B) the commencement of business on
the date the Service Period is terminated for Cause, (C) ninety days
after the Service Period is terminated by the Principal without Good
Reason, or (D) the second anniversary of the date the Service Period
is terminated (x) on account of the Principal's death or Disability,
(y) by the Company without Cause, or (z) by the Principal for Good
Reason.
(c) Restricted Stock. As soon as reasonably practicable following the
Commencement Date, the Principal shall purchase from the Company 725,303
restricted shares (the "Restricted Shares") of Common Stock under the Equity
Plan in exchange for consideration paid by the Principal to the Company, within
three business days after shareholder approval of such grant, in the amount of
$800,000. The terms and conditions of the Restricted Shares shall be evidenced
by a separate restricted stock agreement executed by the Company, the Service
Company and the Principal (the "Restricted Stock Agreement") which shall contain
terms consistent with this Section 3(c) and other customary terms. The
Restricted Stock Agreement shall provide, among other things, that the
Restricted Shares shall vest in equal installments on the first, second, third
and fourth anniversaries of the Commencement Date; provided that (i) in the
event that the Company terminates the Service Period without Cause or the
Principal terminates the Service Period for Good Reason, all or any portion of
the Restricted Shares not previously forfeited shall vest, or (ii) in the event
that the Service Period terminates for any other reason, the Restricted Shares
which have not vested on such Date of Termination shall be immediately forfeited
by the Principal (or Service Company in the event of their assignment) and
returned to the Company. The Company shall use its reasonable efforts to
cooperate with the Principal, provide the necessary information and make or
assist in making the necessary filings for the Principal or the Service Company,
as applicable, to make an election to include an amount equal to the difference,
if any, between the value of the Restricted Shares and the purchase price in
current income under Section 83(b) of the Internal Revenue Code of 1986, as
amended (the "Code").
In addition to the Restricted Shares described above, as soon as
reasonably practicable after the date hereof, the Company shall grant the
Service Company 55,793 restricted shares (the "Additional Restricted Shares") of
Common Stock under the Equity Plan. The terms and conditions of the Restricted
Shares shall be evidenced by a separate restricted stock agreement executed by
the Company, the Service Company and the Principal which shall contain terms
consistent with this Section 3(c) and other customary terms and shall be
immediately vested upon grant.
(d) Special Shareholders' Meeting. As soon as reasonably practicable
after the date hereof (but no later than thirty days after approval of this
Agreement by the Board) and prior to the grant of the foregoing equity awards,
the Company shall hold a special shareholders' meeting for the purpose of
approving the Equity Plan and shall use its reasonable efforts to provide
disclosure to the shareholders that would satisfy the provisions of Section 280G
of the Code and obtain shareholder approval of the equity awards provided in
Sections 3(a), (b) and (c) herein.
5
(e) Stockholders' Agreement. Unless otherwise specified, all shares of
Common Stock and all other securities issued in connection with this Agreement
or acquired by the Service Company and/or the Principal under this Agreement or
otherwise on or after the date hereof shall be subject to the Stockholders'
Agreement attached hereto as Exhibit A.
4. Termination of Services.
The Service Period may be terminated prior to the fifth anniversary of
the Commencement Date (the "Scheduled Termination Date") upon the earliest to
occur of the following events (at which time the Services provided hereunder
shall be terminated):
(a) Death. The Services hereunder shall terminate upon the Principal's
death.
(b) Disability. The Company shall be entitled to terminate the
Services hereunder by reason of the Principal's "Disability" if, as a result of
the Principal's incapacity due to physical or mental illness, the Principal
shall have been unable to perform his duties hereunder for a period of six (6)
consecutive months or for 180 days within any 365-day period, and within 30 days
after written Notice of Termination (as defined below) for Disability is given
following such 6-month or 180-day period, as the case may be, the Principal
shall not have returned to the performance of his duties in accordance with this
Agreement.
(c) Cause. The Company may terminate the Services hereunder for Cause.
For purposes of this Agreement, the term "Cause" shall mean: (1) the willful and
continued failure of the Principal substantially to perform the Principal's
duties under this Agreement (other than as a result of physical or mental
illness or injury), after the Board delivers to the Principal a written demand
for substantial performance that specifically identifies the manner in which the
Board believes that the Principal has not substantially performed the
Principal's duties; (2) the willful engaging by the Principal in illegal conduct
or gross misconduct which is materially and demonstrably injurious to the
Company; and (3) a breach of any of the obligations under Sections 9, 10 and 11
or any of the representations and covenants contained in Section 13 hereof. Any
act or failure to act that is based upon authority given pursuant to a
resolution duly adopted by the Board, or the advice of counsel for the Company,
shall not constitute Cause. Cause shall not exist unless and until the Company
has delivered to the Principal a copy of a resolution duly adopted by a majority
of the Board at a meeting of the Board called and held for such purpose (after
reasonable but in no event less than thirty (30) days' notice to the Principal
and an opportunity for the Principal, together with his counsel, to be heard
before the Board), finding that, in the good faith opinion of the Board, the
Principal was guilty of the conduct set forth above and specifying the
particulars thereof in detail. This Section 4(c) shall not prevent the Principal
from challenging in any court of competent jurisdiction the Board's
determination that Cause exists or that the Principal has failed to cure any act
(or failure to act) that purportedly formed the basis for the Board's
determination.
(d) Good Reason. The Principal may cause the Service Company to
terminate the Services hereunder for "Good Reason," for any of the following
reasons enumerated in this Section 4(d): (i) the diminution of, or appointment
of anyone other than the Principal to serve in
6
or handle, the Principal's positions, authority, duties or responsibilities from
the positions, authority, duties or responsibilities set forth in Section 1 of
this Agreement without the Principal's consent, provided that any diminution or
delegation of the Principal's duties in connection with the Principal ceasing to
act as the Chief Executive Officer of the Company in accordance with Section
1(b) shall not constitute Good Reason; (ii) any purported termination of the
Service Period by the Company for a reason or in a manner not expressly
permitted by this Agreement; (iii) relocation of the Principal's principal work
location to more than fifty (50) miles from the Principal's principal work
location, (iv) any failure by the Company to comply with Sections 2 or 3 of this
Agreement, including any failure to obtain the shareholder approval described in
Section 3(d) above, or any other material breach of this Agreement, including
without limitation Section 14(e)(ii), or (v) the removal of the Principal or any
of the Principal's nominees as directors under Section 4(d) of the Stockholders'
Agreement. Termination of the Services by the Principal, on behalf of himself
and the Service Company, pursuant to this Section 4(d) shall not be effective
until the Principal delivers to the Board a written notice specifically
identifying the conduct of the Company which he believes constitutes a reason
enumerated in this Section 4(d) and the Principal provides the Board at least
thirty (30) days to remedy such conduct and then provides an additional Notice
of Termination in the event the Company does not cure such conduct.
(e) Without Cause. The Company may terminate the Services hereunder
without Cause.
(f) Without Good Reason. The Principal may cause the Service Company
to terminate the Services hereunder without Good Reason, provided that the
Principal provides the Company with notice of intent to terminate without Good
Reason at least three months in advance of the Date of Termination. The
Principal and the Company shall mutually agree on the time, method and content
of any public announcement regarding the termination of the Services hereunder
and neither the Principal nor the Company shall make any public statements which
are inconsistent with the information mutually agreed upon by the Company and
the Principal and the parties hereto shall cooperate with each other in refuting
any public statements made by other persons, which are inconsistent with the
information mutually agreed upon between the Principal and Company as described
above.
5. Termination Procedure.
(a) Notice of Termination. Any termination of the Services hereunder
by the Company or by the Principal, on behalf of himself and the Service
Company, during the Service Period (other than termination pursuant to Section
4(a)) shall be communicated by written notice of termination ("Notice of
Termination") to the other party hereto in accordance with Section 14(a).
(b) Date of Termination. "Date of Termination" shall mean (i) if the
Services are terminated by reason of the Principal's death, the date of his
death, (ii) if the Services are terminated pursuant to Section 4(b), thirty (30)
days after Notice of Termination (provided that the Principal shall not have
returned to the substantial performance of his duties in accordance with this
Agreement during such thirty (30) day period), (iii) if the Services are
terminated
7
pursuant to Section 4(f), a date specified in the Notice of Termination which is
at least three months from the date of such notice as specified in such Section
4(f); and (iv) if the Services are terminated for any other reason, the date on
which a Notice of Termination is given or any later date (within thirty (30)
days (or any alternative time period agreed upon by the parties) after the
giving of such notice) set forth in such Notice of Termination.
6. Termination Payments.
(a) Without Cause or for Good Reason. In the event of the termination
of the Services during the Service Period by the Company without Cause or by the
Principal, on behalf of himself and the Service Company, for Good Reason, the
Service Company and the Principal, as applicable, shall be entitled to (i) a
payment, within ten (10) days following the Date of Termination, of Base Salary
through the Date of Termination (to the extent not theretofore paid), any
accrued vacation pay, and any unreimbursed expenses under Sections 2(c) and (d)
(the "Accrued Obligations") and (ii) subject to the effectiveness of the Service
Company's and the Principal's execution of a general release and waiver of all
claims against the Company, its affiliates and their respective officers and
directors related to the Services and the related arrangements including without
limitation, certain related investments in the Company, but excluding his rights
to receive the benefits provided under this Agreement or under any agreement
entered into in connection herewith and to be indemnified in accordance with the
provisions of the Company's charter and bylaws and Section 8 hereof, in a form
reasonably satisfactory to the Company and subject to the Service Company's and
the Principal's compliance with the terms and conditions contained in this
Agreement, (A) the continued payment of Base Salary for the one year period
following the Date of Termination; (B) the immediate vesting of any portion of
the Restricted Shares that have not yet become vested as of the Date of
Termination and (C) that portion of the Initial Option and the Premium Options
that would have become vested and exercisable on the anniversary of the date of
grant immediately following the Date of Termination shall vest and become
immediately exercisable and any remaining portion of the Initial Option and
Premium Options that has not become vested and exercisable shall immediately
expire and be forfeited, provided that if such termination occurs after the
consummation of a Change in Control, any portion of the Initial Option and
Premium Option that has not become exercisable shall become immediately
exercisable on such Date of Termination. The Company shall have no additional
obligations under this Agreement.
In no event shall the Principal be obligated to seek other employment
or take any other action by way of mitigation of the amounts payable to the
Principal under any of the provisions of this Agreement, and such amounts shall
not be reduced, regardless of whether the Principal obtains other employment.
(b) Cause, Death, Disability or Without Good Reason. If the Services
are terminated during the Service Period by the Company for Cause, by the
Principal, on behalf of himself and the Service Company, without Good Reason, or
as a result of the Principal's death or Disability, the Company shall pay the
Accrued Obligations to the Service Company within thirty (30) days following the
Date of Termination. The Company shall have no additional obligations under this
Agreement.
8
(c) Other Rights and Benefits. In the event of the termination of
the Service Period for any reason, the Principal shall retain his rights under
all employee benefit plans, including the Equity Plan, in accordance with the
terms and conditions of such plans, provided that in no event will the Principal
be entitled to any payments in the nature of severance or termination payments
except as specifically provided herein.
8. Indemnification.
The Company agrees that if the Principal is made a party or
threatened to be made a party to any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "Proceeding"), other than any
Proceeding related to any contest or dispute between the Principal and the
Company or any of its affiliates with respect to this Agreement or the Services
of the Principal hereunder, by reason of the fact that the Principal is or was a
director or officer of the Company, or any subsidiary of the Company or is or
was serving at the request of the Company, as a director, officer, member,
employee or agent of another corporation or a partnership, joint venture, trust
or other enterprise, the Principal shall be indemnified and held harmless by the
Company to the fullest extent authorized by applicable law. In addition, the
Principal has represented that he has no applicable non-solicit, non-compete, or
other restriction that could adversely affect his ability to perform the
Services contemplated by this Agreement. Based on this representation, the
Company agrees to pay, promptly and contemporaneously, all losses, including
without limitation, reasonable legal fees and legal expenses, incurred by the
Principal in connection with any action brought by his former employer related
to his commencement of employment with or the performance of services for the
Company.
9. Non-Solicitation.
During the Service Period and for a period of two years following
the Date of Termination, the Principal hereby agrees not to, directly or
indirectly, for his own account or for the account of any other person or
entity, (i) solicit or hire or assist any other person or entity in soliciting
or hiring any employee of the Company or any of its subsidiaries or affiliates
to perform any services for any entity (other than the Company or their
respective subsidiaries or affiliates), attempt to induce any such employee to
leave the employ of the Company or any affiliates of the Company, or otherwise
interfere with or adversely modify such employee's relationship with the Company
or any of its subsidiaries or affiliates, or (ii) induce any employee of the
Company who is a member of management to engage in any activity which the
Principal is prohibited from engaging in under any of Sections 9, 10 or 11 of
this Agreement. For purposes of this Agreement, "employee" shall mean any
natural person anywhere in the world who is employed by or otherwise engaged to
perform services for the Company or any of its affiliates on the Date of
Termination or during the one-year period preceding the Date of Termination.
10. Non-Compete.
In connection with the Services of the Principal performed under
this Agreement and in recognition that the Principal shall be a significant
stockholder in the Company, and except as specifically provided in Section 1(c)
above, the Principal hereby agrees that, during the
9
Service Period and for the one year period following any termination of the
Services of the Principal (other than a termination without Cause or for Good
Reason as described in Sections 4(d) and 4(e) above), the Principal shall not
become associated with any entity, whether as a principal, partner, employee,
consultant or shareholder (other than as a holder of a passive investment of not
in excess of 5% of the outstanding voting shares of any publicly traded
company), that is actively engaged in retail apparel business in any geographic
area in which the Company or any of its subsidiaries or affiliates are engaged
in such business.
11. Confidentiality; Non-Disclosure.
(a) The Principal hereby agrees that, during the Service Period and
thereafter, he will hold in strict confidence any proprietary or Confidential
Information related to the Company and its affiliates. For purposes of this
Agreement, the term "Confidential Information" shall mean all information of the
Company or any of its affiliates (in whatever form) which is not generally known
to the public, including without limitation any inventions, processes, methods
of distribution or customers' or trade secrets.
(b) The Principal hereby agrees that, upon the termination of the
Service Period, he shall not take, without the prior written consent of the
Company, any drawing, blueprint, specification or other document (in whatever
form) of the Company or its affiliates, which is of a confidential nature
relating to the Company or its affiliates, or, without limitation, relating to
its or their methods of distribution, or any description of any formulas or
secret processes and will return any such information (in whatever form) then in
his possession.
12. Injunctive Relief.
It is impossible to measure in money the damages that will accrue
to the Company in the event that the Principal breaches any of the restrictive
covenants provided in Sections 9, 10 or 11 hereof. In the event that the
Principal breaches any such restrictive covenant, the Company shall be entitled
to an injunction restraining the Principal from violating such restrictive
covenant. If the Company shall institute any action or proceeding to enforce any
such restrictive covenant, the Principal hereby waives the claim or defense that
the Company has an adequate remedy at law and agrees not to assert in any such
action or proceeding the claim or defense that the Company has an adequate
remedy at law. The foregoing shall not prejudice the Company's right to require
the Principal to account for and pay over to the Company, and the Principal
hereby agrees to account for and pay over, the compensation, profits, monies,
accruals or other benefits derived or received by the Principal, directly or
indirectly, as a result of any transaction constituting a breach of any of the
restrictive covenants provided in Sections 9, 10 or 11 of this Agreement.
13. Representations and Covenants; Certain Reimbursements.
(a) The Principal and the Company hereby represent to each other
that they have full power and authority to enter into this Agreement on behalf
of themselves and with respect to the Principal, the Service Company, and that
the execution of, and performance of duties or obligations under, this Agreement
shall not constitute a breach of or otherwise violate
10
any other agreement to which the Principal or the Company, as applicable, is a
party. Notwithstanding the foregoing, the parties hereto understand that the
Company intends and is required to have the Equity Plan approved by the
shareholders of the Company and that such grants are subject to such shareholder
approval.
(b) The Principal hereby represents to the Company that he will not
utilize or disclose any confidential information obtained by the Principal in
connection with his former employment with respect to his duties and
responsibilities hereunder, and the Company covenants that it will not ask the
Principal to do so.
(c) The Principal represents and warrants that all of the capital
stock of the Service Company are and will be throughout the Service Period owned
by him, his immediate family members and no more than ten percent (10%) by
employees of or service providers to the Service Company.
(d) The Principal agrees that he will not cause any person other
than the Principal to perform the Services or any other obligations of the
Service Company under this Agreement.
(e) The Principal agrees that he shall not sell, transfer,
hypothecate, assign, transfer or otherwise dispose of his interest in the
Service Company (other than to his immediate family members, upon his death to
his heirs, and up to 10% of the Service Company to employees of or service
providers to the Service Company) during the Service Period.
(f) The Company represents to the Principal that the Company is in
material compliance with all financial reporting requirements under the
securities laws and is not aware of any material misstatement, or of any other
issue that may potentially result in an accounting restatement, in any financial
document that has been publicly issued or filed with the U.S. Securities and
Exchange Commission prior to the Commencement Date.
14. Miscellaneous.
(a) Any notice or other communication required or permitted under
this Agreement shall be effective only if it is in writing and delivered
personally or sent by registered or certified mail, postage prepaid, addressed
as follows (or if it is sent through any other method agreed upon by the
parties):
If to the Company:
J. Crew Group, Inc.
770 Broadway
New York, NY 10003
Attention: Board of Directors and Secretary
11
with a copy to:
Paul Shim, Esq.
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006
If to the Service Company:
To the Principal,
with a copy to:
Stephen T. Lindo, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, NY 10019-6099
If to the Principal:
To the address on file with the Company,
with a copy to:
Stephen T. Lindo, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, NY 10019-6099
or to such other address as any party hereto may designate by notice to the
others, and shall be deemed to have been given upon receipt.
(b) The Company shall reimburse the Service Company and the
Principal for reasonable legal fees incurred by the Service Company and/or the
Principal in connection with the negotiation of this Agreement and the related
agreements.
(c) This Agreement constitutes the entire agreement among the
parties hereto with respect to the employment of the Principal, directly and
through the Service Company, and supersedes and is in full substitution for any
and all prior understandings or agreements with respect to such employment.
(d) This Agreement may be amended only by an instrument in writing
signed by the parties hereto, and any provision hereof may be waived only by an
instrument in writing signed by the party or parties against whom or which
enforcement of such waiver is sought. The failure of any party hereto at any
time to require the performance by any other party hereto of any provision
hereof shall in no way affect the full right to require such performance at any
time
12
thereafter, nor shall the waiver by any party hereto of a breach of any
provision hereof be taken or held to be a waiver of any succeeding breach of
such provision or a waiver of the provision itself or a waiver of any other
provision of this Agreement.
(e) (i) This Agreement is binding on and is for the benefit of the
parties hereto and their respective successors, heirs, executors, administrators
and other legal representatives. Neither this Agreement nor any right or
obligation hereunder may be assigned by the Company, the Service Company or the
Principal.
(ii) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform it if no such
succession had taken place. As used in the Agreement, the "Company" shall mean
both the Company as defined above and any such successor that assumes and agrees
to perform this Agreement, by operation of law or otherwise.
(f) If any provision of this Agreement or portion thereof is so
broad, in scope or duration, so as to be unenforceable, such provision or
portion thereof shall be interpreted to be only so broad as is enforceable.
(g) The Company may withhold from any amounts payable to the
Service Company and/or the Principal hereunder all federal, state, city or other
taxes that the Company may reasonably determine are required to be withheld
pursuant to any applicable law or regulation.
(h) This Agreement shall be governed by and construed in
accordance with the laws of the State of NEW YORK, without reference to its
principles of conflicts of law.
(i) Any disagreement, dispute, controversy or claim arising out of
or relating to this Agreement or the interpretation hereof or any agreements
relating hereto or contemplated herein or the interpretation, breach,
termination, validity or invalidity hereof shall be settled exclusively and
finally by arbitration; provided that the Company shall not be required to
submit claims for injunctive relief to enforce the covenants contained in
Sections 9, 10 or 11 of this Agreement to arbitration. The arbitration shall be
conducted in accordance with the Commercial Arbitration Rules (the "Rules") of
the American Arbitration Association (the "AAA"), except as amplified or
otherwise varied hereby. The Company and the Principal jointly shall appoint one
individual to act as arbitrator within thirty (30) days of initiation of the
arbitration. If the parties shall fail to appoint such arbitrator as provided
above, such arbitrator shall be appointed by the President of the Association of
the Bar of the City of New York and shall be a person who maintains his or her
principal place of business in the New York metropolitan area and shall be an
attorney, accountant or other professional licensed to practice by the State of
New York who has substantial experience in employment and executive compensation
matters. All fees and expenses of such arbitrator shall be shared equally by the
Company and the Principal. The situs of the arbitration shall be New York City.
Any decision or
13
award of the arbitral tribunal shall be final and binding upon the parties to
the arbitration proceeding. The parties hereto hereby waive to the extent
permitted by law any rights to appeal or to seek review of such award by any
court or tribunal. The arbitration award shall be paid within thirty (30) days
after the award has been made. Judgment upon the award may be entered in any
federal or state court having jurisdiction over the parties and shall be final
and binding. Each party shall be required to keep all proceedings related to any
such arbitration and the final award and judgment strictly confidential;
provided that either party may disclose such award as necessary to enter the
award in a court of competent jurisdiction or to enforce the award, and to the
extent required by law, court order, regulation or similar order.
(j) This Agreement may be executed in several counterparts, each of
which shall be deemed an original, but all of which shall constitute one and the
same instrument.
(k) The headings in this Agreement are inserted for convenience of
reference only and shall not be a part of or control or affect the meaning of
any provision hereof.
14
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first written above.
J. CREW GROUP, INC.
_______________________________
Name:
Title:
J. CREW OPERATING CORP.
_______________________________
Name:
Title:
MILLARD S. DREXLER, INC.
________________________________
Name: Millard S. Drexler
Title: Principal
________________________________
Millard S. Drexler
15
Exhibit 10.10
EMPLOYMENT AGREEMENT
AGREEMENT, dated this 24th day of January, 2003 (this "Agreement"),
among J. Crew Group, Inc., a New York Corporation (the "Parent") and its
operating subsidiary J. Crew Operating Corp. (collectively with the Parent, the
"Company"), with offices at 770 Broadway, New York, New York, 10003 and Jeffrey
A. Pfeifle (the "Executive").
l. Term; Position and Responsibilities; Principal Work Location.
(a) Term. Unless the Employment Period (as defined below) is
terminated earlier pursuant to Section 4 hereof, the Company shall engage the
Executive on the terms and subject to the conditions of this Agreement for a
five year term commencing on the earliest date mutually agreeable between the
parties hereto (the "Commencement Date") and ending on the day immediately
preceding the fifth anniversary of the Commencement Date (the "Initial Term").
Effective upon the expiration of the Initial Term and of each Additional Term
(as defined below), the Employment Period hereunder shall be deemed to be
automatically extended, upon the same terms and conditions for an additional
period of one year (each, an "Additional Term"), in each such case, commencing
upon the expiration of the Initial Term or the then current Additional Term, as
the case may be, unless the Company or the Executive, at least three months
prior to the expiration of the Initial Term or such Additional Term, shall give
written notice to the other party of its intention not to extend the Employment
Period (as defined below) hereunder. The period during which the Executive is
employed by the Company pursuant to this Agreement, including any extension
thereof in accordance with the preceding sentence, shall be referred to as the
"Employment Period."
(b) Position and Responsibilities. During the Employment Period, the
Company hereby agrees to employ the Executive as the President and in such other
position or positions with the Company as the Chairman and Chief Executive
Officer of the Company (the "Chairman & CEO") may specify from time to time that
are consistent with the Executive's title and position. During the Employment
Period, the Executive shall perform the duties and responsibilities that are
customarily assigned to individuals serving in such position or positions and
such other duties and responsibilities as the Board may reasonably specify from
time to time that are consistent with the Executive's title and position. The
Executive shall report to the Chairman & CEO while the Chairman and CEO are the
same person and thereafter to the CEO.
(c) During the Employment Period, excluding any periods of vacation
and sick leave to which the Executive is entitled, (i) the Executive shall
devote all of his working time and attention to the performance of his duties
and responsibilities hereunder and shall faithfully and diligently endeavor to
promote the business and best interests of the Company, and (ii) the Executive
may not, without the prior written consent of the Company, operate, participate
in the management, operations or control of, or act as an employee, officer,
consultant, agent or representative of, any type of business or service (other
than as the President of the Company), provided that it shall not be a violation
of the foregoing for the Executive to (A) act or serve as a director, trustee,
committee member or principal of any type of business or civic or charitable
organization, or (B) manage his personal, financial and legal affairs (provided
that the activities described in clauses (A) and (B) do not interfere with the
performance of his duties and responsibilities to the Company as provided
hereunder).
(d) Principal Place of Employment. Unless otherwise mutually agreed
upon, the Executive's principal place of employment shall be the New York
metropolitan area and the Executive shall also travel as reasonably required to
carry out his duties and obligations hereunder.
2. Compensation; Expenses; Benefits and Perquisites. During the
Employment Period, as compensation for the performance of the services by the
Executive, the Executive shall be entitled to the following compensation from
the Company:
(a) Transition Bonus. Within a reasonable time after the date this
Agreement is executed, in order to assist the Executive in transitioning into
his new position and in partial consideration for lost compensation from his
former employer, the Company shall pay to the Executive a one-time transition
bonus of $1,000,000.
(b) Base Salary. The Company shall pay the Executive, not less than
once a month pursuant to the Company's normal and customary payroll procedures,
a base salary at the rate of $760,000 per annum (the "Base Salary"). The Company
shall review the Executive's Base Salary annually.
(c) Annual Bonus. In addition to the Base Salary, in respect of each
fiscal year during the Employment Period, the Executive shall have an
opportunity to earn an annual bonus (the "Bonus"), which shall be paid no later
than April 30 of the next succeeding fiscal year and which shall equal 25% of
Base Salary if "threshold performance objectives" are achieved, 50% of Base
Salary if the "target performance objectives" are achieved, and 100% of Base
Salary if "stretch performance objectives" are achieved, in accordance with the
terms of the J. Crew Operating Corp. Performance Incentive Plan then existing
for such fiscal year based on the achievement of performance objectives as may
be established from time to time by the Board of Directors of the Company (the
"Board") or a committee thereof; provided that, the Bonus for any fiscal year
shall be payable to the Executive only if the Executive is employed by the
Company on the date on which such Bonus is paid. Notwithstanding the foregoing,
in respect of fiscal year beginning in 2003, the Executive's Bonus shall equal
at least $400,000 (the "2003 Bonus"), which shall be payable as soon as
reasonably practicable following the Commencement Date; provided that, in the
event that the Executive's employment with the Company is terminated by the
Company for Cause or by the Executive without Good Reason prior to February 1,
2004, the Executive shall immediately pay the Company an amount equal to the
2003 Bonus; and further provided that, to the extent that the Executive fails to
pay back any portion of the 2003 Bonus as provided herein, the Company shall
have the right to offset any other payment(s) provided under this Agreement or
otherwise owed to the Executive. The actual Bonus that may become payable shall
be determined by the Board in accordance with the performance objectives
established by the Board.
(d) Long-Term Cash Incentive. The Executive shall be eligible to
receive a long-term cash incentive (the "Long-Term Incentive"), in an amount
between $800,000 and $1,200,000, with a target amount of $1,000,000, based on
the achievement of performance objectives established for the Company by the
Board, in its sole discretion. The Long-Term Incentive, if any, will be payable
as follows: (i) $400,000 on the last day of fiscal year beginning in 2003 (the
2
"2003 Long-Term Incentive"), and (ii) an amount between $400,000 and $800,000,
$400,000 of which shall be paid on the last day of the fiscal year beginning in
2004 provided that the Executive remains continuously employed by the Company
through the applicable payment date (the "2004 Long-Term Incentive") and the
remaining amount, if any, shall be paid at the same time annual bonuses are
paid, but in no event later than April 30, 2005, provided the Executive remains
continuously employed through the applicable payment date.
(e) Special Bonus. Within a reasonable time after the date this
Agreement is executed, as a special inducement to execute this Agreement and in
partial consideration for lost compensation from the Executive's former
employer, the Company shall pay to the Executive a one-time special bonus of
$1,000,000.
(e) Business Expenses. The Company shall promptly reimburse the
Executive for all reasonable business expenses incurred by the Executive in
connection with the performance of the services for the Company (including,
without limitation, first class airfare) upon the presentation of statements of
such expenses in accordance with the Company's policies and procedures now in
force or as such policies and procedures may be modified with respect to all
senior executive officers of the Company provided that such policies and
practices shall not affect the Executive's ability to fly first class on
business trips and the Company shall also provide the Executive with reasonable
car service as appropriate.
(f) Employee Benefits. During the Employment Period, the Executive
shall be eligible to participate in the employee benefit plans and programs
maintained by the Company from time to time and generally available to senior
executives of the Company, including, to the extent maintained by the Company,
medical, dental, accidental and disability insurance plans and profit sharing,
pension, retirement, deferred compensation and savings plans, in accordance with
the terms and conditions thereof in effect from time to time.
3. Grant of Stock Options and Restricted Stock.
(a) Initial Stock Options. Subject to shareholder approval, as soon
as reasonably practicable after the date of the Commencement Date, the Company
shall cause the Board or a committee thereof to grant to the Executive a
non-qualified option to purchase 167,378 shares of Common Stock, which
represents 0.75% of the total outstanding shares of Common Stock of the Company
as of the date hereof, at an exercise price per share equal to $6.82 per share
(the "Initial Option"). The terms and conditions of the Initial Option shall be
evidenced by a stock option agreement executed by the Company and the Executive
(the "Initial Option Agreement") which shall contain terms consistent with the
Equity Plan, this Section 3(a) and other customary terms. The Initial Option
Agreement shall provide, among other things, for the following:
(i) The Initial Option shall vest in equal installments on the
second, third, fourth and fifth anniversaries of the Commencement
Date; provided that the Executive is continuously employed by the
Company through each such applicable anniversary date;
(ii) Notwithstanding the foregoing, (A) in the event that (x) the
Company terminates the Executive's employment without Cause (as
defined below) or the Executive terminates his employment for Good
Reason (as defined below) prior to the consummation of a Change in
Control (as defined in the Equity Plan) or (y) the Executive's
3
employment is terminated on account of the Executive's death or
Disability (as defined below) at any time during the Employment
Period, that portion of the Initial Option that would have become
vested and exercisable on the anniversary of the Commencement Date
immediately following the Date of Termination (as defined below)
shall vest and become immediately exercisable and any remaining
portion of the Initial Option that has not become vested and
exercisable shall immediately expire and be forfeited, (B) in the
event that, within the two year period following the consummation of
a Change in Control or within six months prior to a Change in Control
if such termination is in contemplation of the Change in Control, the
Company terminates the Executive's employment without Cause or the
Executive terminates his employment for Good Reason, all shares of
Common Stock underlying the Initial Option shall become immediately
vested and exercisable; or (C) if the Executive's employment
terminates for any other reason, any portion of the Initial Option
which has not become exercisable on such Date of Termination shall
immediately expire and be forfeited; and
(iii) Any portion of the Initial Option which has become vested
and exercisable shall expire on the earlier of (A) the tenth
anniversary of the date of grant, (B) the commencement of business on
the date the Executive's employment is terminated by the Company for
Cause, (C) ninety days after the date the Executive's employment is
terminated by the Executive without Good Reason, or (D) the second
anniversary of the date the Executive's employment is terminated (x)
on account of the Executive's death or Disability, (y) by the Company
without Cause, or (z) by the Executive for Good Reason.
(b) Premium Stock Options. Subject to shareholder approval, as soon
as reasonably practicable after the Commencement Date, the Company shall cause
the Board or a committee thereof to grant to the Executive a non-qualified
option to purchase 111,585 shares of Common Stock, which represents 0.5% of the
total outstanding shares of Common Stock of the Company as of the date hereof,
at an exercise price per share equal to $25.00 per share (the "Premium Option
Tranche 1") and an additional non-qualified option to purchase 111,585 shares of
Common Stock, which represents 0.5% of the total outstanding shares of Common
Stock of the Company as of the date hereof, at an exercise price per share equal
to $35.00 per share (the "Premium Option Tranche 2" and, collectively with
Premium Option Tranche 1, the "Premium Options") . The terms and conditions of
the Premium Options shall be evidenced by a stock option agreement executed by
the Company and the Executive (the "Premium Option Agreement" and, collectively
with the Initial Option Agreement, the "Option Agreements") which shall contain
terms consistent with the Equity Plan, this Section 3(b) and other customary
terms. The Premium Option Agreement shall provide, among other things, for the
following:
(i) The Premium Options shall vest in equal installments on the
second, third, fourth and fifth anniversaries of the Commencement
Date; provided that the Executive is continuously employed by the
Company through each such applicable anniversary date;
(ii) Notwithstanding the foregoing, (A) in the event that (x)
the Company terminates the Executive's employment without Cause or
the Executive
4
terminates his employment for Good Reason prior to the consummation
of a Change in Control or (y) the Executive's employment is
terminated on account of the Executive's death or Disability at any
time during the Employment Period, that portion of the Premium
Options that would have become vested and exercisable on the
anniversary of the Commencement Date immediately following the Date
of Termination shall vest and become immediately exercisable and any
remaining portion of the Premium Options that have not become vested
and exercisable shall immediately expire and be forfeited, (B) in the
event that, within the two year period following the consummation of
a Change in Control or within six months prior to a Change in Control
if such termination is in contemplation of the Change in Control, the
Company terminates the Executive's employment without Cause or the
Executive terminates his employment for Good Reason, all shares of
Common Stock underlying the Premium Options shall become immediately
vested and exercisable; or (C) if the Executive's employment
terminates for any other reason, any portion of the Premium Options
which have not become exercisable on such Date of Termination shall
immediately expire and be forfeited; and
(iii) Any portion of the Premium Options which has become vested
and exercisable shall expire on the earlier of (A) the tenth
anniversary of the date of grant, (B) the commencement of business on
the date the Executive's employment is terminated by the Company for
Cause, (C) ninety days after the date the Executive's employment is
terminated by the Executive without Good Reason, or (D) the second
anniversary of the date the Executive's employment is terminated (x)
on account of the Executive's death or Disability, (y) by the Company
without Cause, or (z) by the Executive for Good Reason.
(c) Restricted Stock. Subject to shareholder approval, as soon as
reasonably practicable following the Commencement Date, the Company shall grant
the Executive 111,585 restricted shares (the "Restricted Shares") of Common
Stock, which represents 0.5% of the total outstanding shares of Common Stock of
the Company as of the date hereof. The terms and conditions of the Restricted
Shares shall be evidenced by a separate restricted stock agreement executed by
the Company and the Executive (the "Restricted Stock Agreement") which shall
contain terms consistent with the Equity Plan and this Section 3(c) and other
customary terms. The Restricted Stock Agreement shall provide, among other
things, that the Restricted Shares shall vest in equal installments on the
first, second, third and fourth anniversaries of the Commencement Date; provided
that the Executive is continuously employed by the Company through each such
applicable anniversary date; and further provided that, (i) in the event that
(x) the Company terminates the Executive's employment without Cause or the
Executive terminates his employment for Good Reason prior to the consummation of
a Change in Control or (y) the Executive's employment is terminated on account
of the Executive's death or Disability at any time during the Employment Period,
that portion of the Restricted Shares that would have become vested on the
anniversary of the Commencement Date immediately following the Date of
Termination shall vest, (ii) in the event that, within the two year period
following the consummation of a Change in Control or within six months prior to
a Change in Control if such termination is in contemplation of the Change in
Control, the Company terminates the Executive's employment without Cause or if
the Executive terminates his
5
employment for Good Reason, all or any portion of the Restricted Shares not
previously forfeited shall vest, or (iii) if the Employment Period terminates
for any other reason, the Restricted Shares which have not vested on such Date
of Termination shall be forfeited immediately by the Executive and returned to
the Company.
(d) Future Grants. During the Employment Period, the Executive will
be eligible to receive future grants of restricted shares of Common Stock or
options to purchase shares of Common Stock pursuant to the Equity Plan from time
to time in accordance with the terms and conditions of the Equity Plan.
(e) Stockholders' Agreement. All shares of Common Stock and all other
securities issued in connection with this Agreement or acquired by the Executive
under this Agreement or otherwise shall be subject to the Stockholders'
Agreement attached hereto as Exhibit A.
4. Termination of the Employment Period.
The Executive's employment with the Company hereunder may be
terminated during the Employment Period prior to the fifth anniversary of the
Commencement Date upon the earliest to occur of the following events (at which
time the Employment Period shall be terminated):
(a) Death. The Executive's employment hereunder shall terminate upon
the Executive's death.
(b) Disability. The Company shall be entitled to terminate the
Executive's employment hereunder by reason of the Executive's "Disability" if,
as a result of the Executive's incapacity due to physical or mental illness, the
Executive shall have been unable to perform his duties hereunder for a period of
six (6) consecutive months or for 180 days within any 365-day period, and within
30 days after written Notice of Termination (as defined below) for Disability is
given following such 6-month or 180-day period, as the case may be, the
Executive shall not have returned to the performance of his duties in accordance
with this Agreement.
(c) Cause. The Company may terminate the Executive's employment
hereunder for Cause. For purposes of this Agreement, the term "Cause" shall
mean: (i) the failure of the Executive to substantially perform his duties
hereunder (other than any such failure due to the Executive's Disability); (ii)
the Executive's dishonesty, gross negligence in the performance of his duties
hereunder or engaging in willful misconduct, which in the case of any such gross
negligence, has caused or is reasonably expected to result in direct or indirect
material injury (monetarily or otherwise) to the Company or any of its
affiliates; (iii) a material breach by the Executive of any provision of this
Agreement or of any other written agreement with the Company or any of its
affiliates or material violation of any Company policy applicable to the
Executive; or (iv) the Executive's indictment for a crime that constitutes a
felony or other crime of moral turpitude or fraud, provided that in the case of
clauses (i) and (iii) above, the Company shall provide written notice to the
Executive specifically identifying the conduct of the Executive which the
Company believes constitutes a reason enumerated in clause (i) or (iii) of this
Section 4(c) and, to the extent reasonably susceptible, provide the Executive a
reasonable opportunity
6
(not to exceed thirty days) to remedy such violation. If, subsequent to the
Executive's termination of employment hereunder for other than Cause, it is
determined in good faith by the Company that the Executive's employment could
have been terminated for Cause hereunder, the Executive's employment shall, at
the election of the Company, be deemed to have been terminated for Cause
retroactively to the date the events giving rise to Cause occurred.
(d) Good Reason. The Executive may terminate his employment hereunder
for "Good Reason," for any of the following reasons enumerated in this Section
4(d): (i) the assignment to the Executive of any duties materially inconsistent
with Section 1 hereof, or any other action by the Company that results in a
material diminution in the Executive's position, authority, duties or
responsibilities; (ii) any purported termination of the Executive's employment
by the Company for a reason or in a manner not expressly permitted by this
Agreement; (iii) relocation of the Executive's principal place of employment to
more than thirty-five (35) miles from the Executive's principal place of
employment, (iv) a material reduction in the Executive's total compensation
opportunity unless such reduction is part of a reduction applicable to a broad
class of management employees, or any other material breach of this Agreement;
or (v) while Millard Drexler is serving as the Company's Chairman and Chief
Executive Officer, requiring the executive to report to someone other than Mr.
Drexler and in the event Mr. Drexler is no longer serving as the Company's
Chairman and CEO, requiring the Executive to report to someone other than the
Company's Chief Executive Officer. Termination of the Executive's employment by
the Executive pursuant to this Section 4(d) shall not be effective until the
Executive delivers to the Board a written notice specifically identifying the
conduct of the Company which he believes constitutes a reason enumerated in this
Section 4(d) and, to the extent reasonably susceptible to cure the Executive,
provides the Board at least thirty (30) days to remedy such conduct.
(e) Without Cause. The Company may terminate the Executive's
employment hereunder without Cause.
(f) Without Good Reason. The Executive may terminate his employment
hereunder without Good Reason, provided that the Executive provides the Company
with notice of intent to terminate without Good Reason at least thirty (30) days
in advance of the Date of Termination. The Executive and the Company shall
mutually agree on the time, method and content of any public announcement
regarding the termination of the Executive's employment hereunder and neither
the Executive nor the Company shall make any public statements which are
inconsistent with the information mutually agreed upon by the Company and the
Executive and the parties hereto shall cooperate with each other in refuting any
public statements made by other persons, which are inconsistent with the
information mutually agreed upon between the Executive and Company as described
above.
5. Termination Procedure.
(a) Notice of Termination. Any termination of the Executive's
employment hereunder by the Company or by the Executive during the Employment
Period (other than termination pursuant to Section 4(a)) shall be communicated
by written notice of termination ("Notice of Termination") to the other party
hereto in accordance with Section 12(a).
7
(b) Date of Termination. "Date of Termination" shall mean (i) if the
Executive's employment is terminated by reason of the Executive's death, the
date of his death, (ii) if the Executive's employment is terminated pursuant to
Section 4(b), thirty (30) days after Notice of Termination (provided that the
Executive shall not have returned to the substantial performance of his duties
in accordance with this Agreement during such thirty (30) day period), (iii) if
the Executive's employment is terminated pursuant to Section 4(f), a date
specified in the Notice of Termination which is at thirty (30) days from the
date of such notice as specified in such Section 4(f); and (iv) if the
Executive's employment is terminated for any other reason, the date on which a
Notice of Termination is given or any later date (within thirty (30) days (or
any alternative time period agreed upon by the parties) after the giving of such
notice) set forth in such Notice of Termination.
6. Termination Payments.
(a) Without Cause; for Good Reason or Company's Failure to Renew. In
the event of the termination of the Executive's employment during the Employment
Period by the Company without Cause, as a result of the Company's providing
notice to the Executive of its intent not to renew the Employment Period (as
described in Section 1(a) herein) or by the Executive for Good Reason, the
Executive shall be entitled to (i) a payment, within ten (10) days following the
Date of Termination, of Base Salary through the Date of Termination (to the
extent not theretofore paid), any accrued vacation pay, any unreimbursed
business expenses, any Annual Bonus and/or Long-Term Incentive payment earned in
the fiscal year ending on or prior to the Date of Termination but not yet paid
(provided that such Annual Bonus and/or Long-Term Incentive payment shall be
paid on the date specified in Section 2(c) or Section 2(d), as applicable, if
such date is later than the tenth day following the Date of Termination)
(together, the "Accrued Obligations") and (ii) subject to the effectiveness of
the Executive's execution of a general release and waiver of all claims against
the Company, its affiliates and their respective officers and directors in a
form reasonably satisfactory to the Company and subject to the Executive's
compliance with the terms and conditions contained in this Agreement, (A) the
continued payment of Base Salary for the two year period following the Date of
Termination, (B) a lump sum amount equal to the product of (x) the Bonus, if
any, that he would have earned based on the performance objectives described in,
and in accordance with, Section 2(c) herein in the fiscal year which includes
the Date of Termination had his employment not been terminated and (y) a
fraction, the numerator of which is the number of days in the calendar year that
includes the Date of Termination through the Date of Termination and the
denominator of which is 365, and (C) the immediate vesting of that portion of
the Restricted Shares, Initial Options and Premium Options that would have
become vested on the anniversary of the Commencement Date immediately following
the Date of Termination, provided that if such termination occurs after the
consummation of a Change in Control or within six months prior to a Change in
Control if such termination is in contemplation of the Change in Control, all
Restricted Shares, Initial Options and Premium Options not previously vested
shall become immediately vested; provided that, for any such termination of the
Executive's employment prior to third anniversary of the Commencement Date, in
no event will the Executive receive less than $2,000,000 in cash severance. The
Company shall have no additional obligations under this Agreement.
(b) Cause, Death, Disability or Without Good Reason. If the
Executive's employment with the Company is terminated during the Employment
Period by the Company for Cause, by the Executive without Good Reason, or as a
result of the Executive's death or Disability, the Company shall pay the Accrued
Obligations to the Executive (or his estate in the event of his death) within
thirty (30) days following the Date of Termination and in the case of
8
(i) a termination on account of death or Disability, the Executive or the
Executive's estate, as applicable, shall be entitled to the additional vesting
of Options and Restricted Shares as provided in Sections 3(a), (b) and (c)
herein or (ii) a termination by the Executive without Good Reason after the
fifth anniversary of the Commencement Date, the Executive shall be entitled to
any Bonus earned in the fiscal year ended immediately prior to the Date of
Termination. The Company shall have no additional obligations under this
Agreement.
7. Indemnification.
The Company agrees that if the Executive is made a party or
threatened to be made a party to any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "Proceeding"), other than any
Proceeding related to any contest or dispute between the Executive and the
Company or any of its affiliates with respect to this Agreement or the
employment of the Executive hereunder, by reason of the fact that the Executive
is or was a director or officer of the Company, or any subsidiary of the Company
or is or was serving at the request of the Company, as a director, officer,
member, employee or agent of another corporation or a partnership, joint
venture, trust or other enterprise, the Executive shall be indemnified and held
harmless by the Company to the fullest extent authorized by applicable law.
8. Non-Solicitation.
During the Employment Period and for a period of one year following
the Date of Termination, the Executive hereby agrees not to, directly or
indirectly, for his own account or for the account of any other person or
entity, (i) solicit or hire or assist any other person or entity in soliciting
or hiring any employee of the Company or any of its subsidiaries or affiliates
to perform any services for any entity (other than the Company or its
subsidiaries or affiliates), attempt to induce any such employee to leave the
employ of the Company or any affiliates of the Company, or otherwise interfere
with or adversely modify such employee's relationship with the Company or any of
its subsidiaries or affiliates, (ii) induce any employee of the Company who is a
member of management to engage in any activity which the Executive is prohibited
from engaging in under any of Sections 8, 9 or 10 of this Agreement, or (iii)
solicit or assist any other person or entity in soliciting or attempting to
solicit any suppliers of the Company or any of its subsidiaries or affiliates to
terminate or otherwise adversely modify their relationship with the Company or
any of its subsidiaries or affiliates, provided that nothing herein shall
prohibit the Executive from recruiting his personal administrative assistant.
For purposes of this Agreement, "employee" shall mean any natural person any
where in the world who is employed by or otherwise engaged to perform services
for the Company or any of its subsidiaries or affiliates on the Date of
Termination or during the one-year period preceding the Date of Termination.
9. Non-Compete.
In connection with the services of the Executive performed under this
Agreement, the Executive hereby agrees that, during the Employment Period and
for the six-month period following any termination of the employment of the
Executive (other than a termination by the Company without Cause, by the
Executive for Good Reason or by the Executive for any reason following a Change
in Control), the Executive shall not become associated with any entity, whether
as a principal, partner, employee, consultant or shareholder (other than as a
holder of a
9
passive investment of not in excess of 5% of the outstanding voting shares of
any publicly traded company), that is actively engaged in the retail apparel
business in any geographic area in which the Company or its affiliates are
engaged in such business.
10. Confidentiality; Non-Disclosure.
(a) The Executive hereby agrees that, during the Employment Period
and thereafter, he will hold in strict confidence any proprietary or
Confidential Information related to the Company and its affiliates. For purposes
of this Agreement, the term "Confidential Information" shall mean all
information of the Company or any of its affiliates (in whatever form) which is
not generally known to the public, including without limitation any inventions,
processes, methods of distribution or customers' or trade secrets.
(b) The Executive hereby agrees that, upon the termination of the
Employment Period, he shall not take, without the prior written consent of the
Company, any drawing, blueprint, specification or other document (in whatever
form) of the Company or its affiliates, which is of a confidential nature
relating to the Company or its affiliates, or, without limitation, relating to
its or their methods of distribution, or any description of any formulas or
secret processes and will return any such information (in whatever form) then in
him possession.
11. Injunctive Relief.
It is impossible to measure in money the damages that will accrue to
the Company in the event that the Executive breaches any of the restrictive
covenants provided in Sections 8, 9 or 10 hereof. In the event that the
Executive breaches any such restrictive covenant, the Company shall be entitled
to an injunction restraining the Executive from violating such restrictive
covenant. If the Company shall institute any action or proceeding to enforce any
such restrictive covenant, the Executive hereby waives the claim or defense that
the Company has an adequate remedy at law and agrees not to assert in any such
action or proceeding the claim or defense that the Company has an adequate
remedy at law. The foregoing shall not prejudice the Company's right to require
the Executive to account for and pay over to the Company, and the Executive
hereby agrees to account for and pay over, the compensation, profits, monies,
accruals or other benefits derived or received by the Executive, directly or
indirectly, as a result of any transaction constituting a breach of any of the
restrictive covenants provided in Sections 8, 9 or 10 hereof.
12. Miscellaneous.
(a) Any notice or other communication required or permitted under
this Agreement shall be effective only if it is in writing and delivered
personally or sent by registered or certified mail, postage prepaid, addressed
as follows (or if it is sent through any other method agreed upon by the
parties):
If to the Company:
J. Crew Group, Inc.
770 Broadway
10
New York, NY 10003
Attention: Board of Directors and Secretary
with a copy to:
Paul Shim, Esq.
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006
If to the Executive:
To the address on file at the Company
with a copy to:
Lanny A. Oppenheim, Esq.
Salans
620 Fifth Avenue
New York, NY 10020
or to such other address as any party hereto may designate by notice to the
others, and shall be deemed to have been given upon receipt.
(b) This Agreement constitutes the entire agreement among the
parties hereto with respect to the employment of the Executive and supersedes
and is in full substitution for any and all prior understandings or agreements
with respect to such employment.
(c) This Agreement may be amended only by an instrument in writing
signed by the parties hereto, and any provision hereof may be waived only by an
instrument in writing signed by the party or parties against whom or which
enforcement of such waiver is sought. The failure of any party hereto at any
time to require the performance by any other party hereto of any provision
hereof shall in no way affect the full right to require such performance at any
time thereafter, nor shall the waiver by any party hereto of a breach of any
provision hereof be taken or held to be a waiver of any succeeding breach of
such provision or a waiver of the provision itself or a waiver of any other
provision of this Agreement.
(d) (i) This Agreement is binding on and is for the benefit of the
parties hereto and their respective successors, heirs, executors, administrators
and other legal representatives. Neither this Agreement nor any right or
obligation hereunder may be assigned by the Company or the Executive.
(ii) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform it if no
11
such succession had taken place. As used in the Agreement, the "Company" shall
mean both the Company as defined above and any such successor that assumes and
agrees to perform this Agreement, by operation of law or otherwise.
(e) If any provision of this Agreement or portion thereof is so
broad, in scope or duration, so as to be unenforceable, such provision or
portion thereof shall be interpreted to be only so broad as is enforceable.
(f) The Company may withhold from any amounts payable to the
Executive hereunder all federal, state, city or other taxes that the Company may
reasonably determine are required to be withheld pursuant to any applicable law
or regulation.
(g) This Agreement shall be governed by and construed in accordance
with the laws of the State of NEW YORK, without reference to its principles of
conflicts of law.
(h) The Executive hereby represents to the Company that he has full
power and authority to enter into this Agreement that the execution of, and
performance of duties under, this Agreement shall not constitute a breach of or
otherwise violate any other agreement to which the Executive is a party.
(i) The Executive hereby represents to the Company that he will not
utilize or disclose any confidential information obtained by the Executive in
connection with his former employment with respect to his duties and
responsibilities hereunder, and the Company will not ask the Executive to do so.
(j) This Agreement may be executed in several counterparts, each of
which shall be deemed an original, but all of which shall constitute one and the
same instrument.
(k) The headings in this Agreement are inserted for convenience of
reference only and shall not be a part of or control or affect the meaning of
any provision hereof.
12
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
J. CREW GROUP, INC.
_______________________________
Name:
Title:
J. CREW OPERATING CORP.
_______________________________
Name:
Title:
_______________________________
JEFFREY A. PFEIFLE
13
Exhibit 10.11
Execution Copy
EMPLOYMENT AGREEMENT
AGREEMENT, dated this 27th day of January, 2003 (this "Agreement"),
among J. Crew Group, Inc., a New York Corporation (the "Parent") and its
operating subsidiary J. Crew Operating Corp. (collectively with the Parent, the
"Company"), with offices at 770 Broadway, New York, New York, and Scott
Gilbertson (the "Executive").
l. Term; Position and Responsibilities; Principal Work Location.
(a) Term. Unless the Employment Period (as defined below) is terminated
earlier pursuant to Section 4 hereof, the Company shall engage the Executive on
the terms and subject to the conditions of this Agreement for a five-year term
commencing on January 27, 2003 (the "Commencement Date") and ending on the day
immediately preceding the fifth anniversary of the Commencement Date (the
"Initial Term"). Effective upon the expiration of the Initial Term and of each
Additional Term (as defined below), the Employment Period hereunder shall be
deemed to be automatically extended, upon the same terms and conditions for an
additional period of one year (each, an "Additional Term"), in each such case,
commencing upon the expiration of the Initial Term or the then-current
Additional Term, as the case may be, unless the Company or the Executive, at
least three months prior to the expiration of the Initial Term or such
Additional Term, shall give written notice to the other party of its intention
not to extend the Employment Period (as defined below) hereunder. The period
during which the Executive is employed by the Company pursuant to this
Agreement, including any extension thereof in accordance with the preceding
sentence, shall be referred to as the "Employment Period."
(b) Position and Responsibilities. During the Employment Period, the
Company hereby agrees to employ the Executive as the Chief Operating Officer and
in such other position or positions with the Company as the Chairman and Chief
Executive Officer of the Company (the "Chairman & CEO") may specify from time to
time. During the Employment Period, the Executive shall perform the duties and
responsibilities that are customarily assigned to individuals serving in such
position or positions and such other duties and responsibilities as the Chairman
& CEO may reasonably specify from time to time.
(c) During the Employment Period, excluding any periods of vacation and
sick leave to which the Executive is entitled, (i) the Executive shall devote
all of his working time and attention to the performance of his duties and
responsibilities hereunder and shall faithfully and diligently endeavor to
promote the business and best interests of the Company, and (ii) the Executive
may not, without the prior written consent of the Company, operate, participate
in the management, operations or control of, or act as an employee, officer,
consultant, agent or representative of, any type of business or service (other
than as the Chief Operating Officer of the Company), provided that it shall not
be a violation of the foregoing for the Executive to (A) act or serve as a
director, trustee, committee member or principal of any type of business or
civic or charitable organization, or (B) manage his personal, financial and
legal affairs (provided that the activities described in clauses (A) and (B) do
not interfere with the performance of his duties and responsibilities to the
Company as provided hereunder).
(d) Principal Place of Employment. Unless otherwise mutually agreed
upon, the Executive's principal place of employment shall be the New York
metropolitan area and the Executive shall also travel as reasonably required to
carry out his duties and obligations hereunder.
2. Compensation; Expenses; Benefits and Perquisites. During the
Employment Period, as compensation for the performance of the services by the
Executive, the Executive shall be entitled to the following compensation from
the Company:
(a) Base Salary. The Company shall pay the Executive, not less than
once a month pursuant to the Company's normal and customary payroll procedures,
a base salary at the rate of $450,000 per annum (the "Base Salary").
(b) Annual Bonus. In addition to the Base Salary, in respect of each
fiscal year during the Employment Period, the Executive shall have an
opportunity to earn an annual bonus (the "Bonus"), which shall equal 35% of Base
Salary if "threshold performance objectives" are achieved, 70% of Base Salary if
"target performance objectives" are achieved, and 140% of Base Salary if
"stretch performance objectives" are achieved, in accordance with the terms of
the J. Crew Operating Corp. Performance Incentive Plan then existing for such
fiscal year based on the achievement of performance objectives as may be
established from time to time by the Board or a committee thereof; provided that
the Bonus paid with respect to services provided by the Executive during
calendar year 2003 shall not be less than $250,000, of which $75,000 shall be
paid to the Executive as soon as practicable after the Commencement Date; and
provided further that the Bonus for any fiscal year shall be payable to the
Executive only if the Executive is employed by the Company on the date on which
such Bonus is paid. The actual Bonus that may become payable shall be determined
by the Board, in its sole discretion.
(c) Business Expenses. The Company shall promptly reimburse the
Executive for all reasonable business expenses incurred by the Executive in
connection with the performance of the services for the Company upon the
presentation of statements of such expenses in accordance with the Company's
policies and procedures now in force or as such policies and procedures may be
modified with respect to all senior executive officers of the Company.
(d) Employee Benefits. During the Employment Period, the Executive
shall be eligible to participate in the employee benefit plans and programs
maintained by the Company from time to time and generally available to senior
executives of the Company, including, to the extent maintained by the Company,
medical, dental, accidental and disability insurance plans and profit sharing,
pension, retirement, deferred compensation and savings plans, in accordance with
the terms and conditions thereof in effect from time to time.
(e) Relocation Expenses. The Executive shall be entitled to the
Company's standard relocation package pursuant to the Company's Relocation
Policy.
3. Grant of Stock Options and Restricted Stock.
(a) Initial Stock Options. As soon as reasonably practicable after the
date of the Commencement Date, the Company shall cause the Board or a committee
thereof to grant to
2
the Executive a non-qualified option to purchase 111,585 shares of Common Stock
at an exercise price per share equal to $6.82 per share (the "Initial Option").
The terms and conditions of the Initial Option shall be evidenced by a separate
stock option agreement executed by the Company and the Executive (the "Initial
Option Agreement") which shall contain terms consistent with the 2003 Equity
Incentive Plan, as may be amended from time to time (the "Equity Plan"), this
Section 3(a) and other customary terms. The Initial Option Agreement shall
provide, among other things, for the following:
(i) The Initial Option shall vest in equal installments on the
second, third, fourth and fifth anniversaries of the Commencement Date;
provided that the Executive is continuously employed by the Company
through each such applicable anniversary date;
(ii) Notwithstanding the foregoing, (A) in the event that the
Company terminates the Executive's employment without Cause or the
Executive terminates his employment for Good Reason prior to the
consummation of a Change in Control (as defined in the Equity Plan),
that portion of the Initial Option that would have become vested and
exercisable on the next applicable anniversary of the Commencement Date
following the Date of Termination (as defined below) shall vest and
become immediately exercisable and any remaining portion of the Initial
Option that has not become vested and exercisable shall immediately
expire and be forfeited, (B) in the event that, within the two year
period following the consummation of a Change in Control, the Company
terminates the Executive's employment without Cause or the Executive
terminates his employment for Good Reason, all shares of Common Stock
underlying the Initial Option shall become immediately vested and
exercisable; or (C) if the Executive's employment terminates for any
other reason, any portion of the Initial Option which has not become
exercisable on such Date of Termination shall immediately expire and be
forfeited; and
(iii) Any portion of the Initial Option which has become vested and
exercisable shall expire on the earlier of (A) the tenth anniversary of
the date of grant, (B) the commencement of business on the date the
Executive's employment is terminated by the Company for Cause, (C)
ninety days after the date the Executive's employment is terminated by
the Executive without Good Reason, or (D) the second anniversary of the
date the Executive's employment is terminated (x) on account of the
Executive's death or Disability, (y) by the Company without Cause, or
(z) by the Executive for Good Reason.
(b) Premium Stock Options. As soon as reasonably practicable after the
Commencement Date, the Company shall cause the Board or a committee thereof to
grant to the Executive a non-qualified option to purchase 66,951 shares of
Common Stock at an exercise price per share equal to $25.00 per share (the
"Premium Option Tranche 1") and an additional non-qualified option to purchase
66,951 shares of Common Stock at an exercise price per share equal to $35.00 per
share (the "Premium Option Tranche 2" and, collectively with Premium Option
Tranche 1, the "Premium Options") . The terms and conditions of the Premium
Options shall be evidenced by a separate stock option agreement executed by the
Company and the
3
Executive (the "Premium Option Agreement" and, collectively with the Initial
Option Agreement, the "Option Agreements") which shall contain terms consistent
with the Equity Plan, this Section 3(b) and other customary terms. The Premium
Option Agreement shall provide, among other things, for the following:
(i) The Premium Options shall vest in equal installments on the
second, third, fourth and fifth anniversaries of the Commencement Date;
provided that the Executive is continuously employed by the Company
through each such applicable anniversary date;
(ii) Notwithstanding the foregoing, (A) in the event that the
Company terminates the Executive's employment without Cause or the
Executive terminates his employment for Good Reason prior to the
consummation of a Change in Control (as defined in the Equity Plan),
that portion of the Premium Options that would have become vested and
exercisable on the next applicable anniversary of the Commencement Date
following the Date of Termination (as defined below) shall vest and
become immediately exercisable and any remaining portion of the Premium
Options that have not become vested and exercisable shall immediately
expire and be forfeited, (B) in the event that, within the two year
period following the consummation of a Change in Control, the Company
terminates the Executive's employment without Cause or the Executive
terminates his employment for Good Reason, all shares of Common Stock
underlying the Premium Options shall become immediately vested and
exercisable; or (C) if the Executive's employment terminates for any
other reason, any portion of the Premium Options which have not become
exercisable on such Date of Termination shall immediately expire and be
forfeited; and
(iii) Any portion of the Premium Options which has become vested
and exercisable shall expire on the earlier of (A) the tenth
anniversary of the date of grant, (B) the commencement of business on
the date the Executive's employment is terminated by the Company for
Cause, (C) ninety days after the date the Executive's employment is
terminated by the Executive without Good Reason, or (D) the second
anniversary of the date the Executive's employment is terminated (x) on
account of the Executive's death or Disability, (y) by the Company
without Cause, or (z) by the Executive for Good Reason.
(c) Restricted Stock. As soon as reasonably practicable following the
Commencement Date, the Company shall grant the Executive 111,585 restricted
shares (the "Restricted Shares") of Common Stock. The terms and conditions of
the Restricted Shares shall be evidenced by a separate restricted stock
agreement executed by the Company and the Executive (the "Restricted Stock
Agreement") which shall contain terms consistent with the Equity Plan and this
Section 3(c) and other customary terms. The Restricted Stock Agreement shall
provide, among other things, that the Restricted Shares shall vest in equal
installments on the first, second, third and fourth anniversaries of the date of
grant; provided that the Executive is continuously employed by the Company
through each such applicable anniversary date; and further provided that, (i) in
the event that the Company terminates the Executive's employment without Cause
or the Executive terminates his employment for Good Reason prior to the
4
consummation of a Change in Control, that portion of the Restricted Shares that
would have become vested on the next applicable anniversary date following the
Date of Termination shall vest, (ii) in the event that, within the two year
period following the consummation of a Change in Control, the Company terminates
the Executive's employment without Cause or the Executive terminates his
employment for Good Reason, all or any portion of the Restricted Shares not
previously forfeited shall vest, or (iii) if the Employment Period terminates
for any other reason, the Restricted Shares which have not vested on such Date
of Termination shall be forfeited immediately by the Executive and returned to
the Company.
(d) Stockholders' Agreement. All shares of Common Stock and all other
securities issued in connection with this Agreement or acquired by the Executive
under this Agreement or otherwise shall be subject to the Stockholders'
Agreement attached hereto as Exhibit A.
4. Termination of the Employment Period.
The Executive's employment with the Company hereunder may be terminated
during the Employment Period prior to the fifth anniversary of the Commencement
Date upon the earliest to occur of the following events (at which time the
Employment Period shall be terminated):
(a) Death. The Executive's employment hereunder shall terminate upon
the Executive's death.
(b) Disability. The Company shall be entitled to terminate the
Executive's employment hereunder by reason of the Executive's "Disability" if,
as a result of the Executive's incapacity due to physical or mental illness, the
Executive shall have been unable to perform his duties hereunder for a period of
6 consecutive months or for 180 days within any 365-day period, and within 30
days after written Notice of Termination (as defined below) for Disability is
given following such 6-month or 180-day period, as the case may be, the
Executive shall not have returned to the performance of his duties in accordance
with this Agreement.
(c) Cause. The Company may terminate the Executive's employment
hereunder for Cause. For purposes of this Agreement, the term "Cause" shall
mean: (i) the failure of the Executive to substantially perform his duties
hereunder (other than any such failure due to the Executive's Disability); (ii)
the Executive's dishonesty, gross negligence in the performance of his duties
hereunder or engaging in willful misconduct, which in the case of any such gross
negligence, has caused or is reasonably expected to result in direct or indirect
material injury (monetarily or otherwise) to the Company or any of its
affiliates; (iii) a material breach by the Executive of any provision of this
Agreement or of any other written agreement with the Company or any of its
affiliates or a material violation of any Company policy applicable to the
Executive; or (iv) the Executive's commission of a crime that constitutes a
felony or other crime of moral turpitude or fraud. If, subsequent to the
Executive's termination of employment hereunder for other than Cause, it is
determined in good faith by the Company that the Executive's employment could
have been terminated for Cause hereunder, the Executive's employment shall, at
the election of the Company, be deemed to have been terminated for Cause
retroactively to the date the events giving rise to Cause occurred.
5
(d) Good Reason. The Executive may terminate his employment hereunder
for "Good Reason," for any of the following reasons enumerated in this Section
4(d): (1) the assignment to the Executive of any duties materially inconsistent
with Section 1 hereof, or any other action by the Company that results in a
material diminution in the Executive's position, authority, duties or
responsibilities; (2) any purported termination of the Executive's employment by
the Company for a reason or in a manner not expressly permitted by this
Agreement; (3) relocation of the Executive's principal place of employment to
more than fifty (50) miles from the Executive's principal place of employment,
(4) a material reduction in the Executive's total compensation opportunity
unless such reduction is part of a reduction applicable to a broad class of
management employees, or any other material breach of this Agreement.
Termination of the Executive's employment by the Executive pursuant to this
Section 4(d) shall not be effective until the Executive delivers to the Board a
written notice specifically identifying the conduct of the Company which he
believes constitutes a reason enumerated in this Section 4(d) and the Executive
provides the Board at least thirty (30) days to remedy such conduct.
(e) Without Cause. The Company may terminate the Executive's employment
hereunder without Cause.
(f) Without Good Reason. The Executive may terminate his employment
hereunder without Good Reason, provided that the Executive provides the Company
with notice of intent to terminate without Good Reason at least three months in
advance of the Date of Termination. The Executive and the Company shall mutually
agree on the time, method and content of any public announcement regarding the
termination of the Executive's employment hereunder and neither the Executive
nor the Company shall make any public statements which are inconsistent with the
information mutually agreed upon by the Company and the Executive, and the
parties hereto shall cooperate with each other in refuting any public statements
made by other persons which are inconsistent with the information mutually
agreed upon between the Executive and Company as described above.
5. Termination Procedure.
(a) Notice of Termination. Any termination of the Executive's
employment hereunder by the Company or by the Executive during the Employment
Period (other than termination pursuant to Section 4(a)) shall be communicated
by written notice of termination ("Notice of Termination") to the other party
hereto in accordance with Section 12(a).
(b) Date of Termination. "Date of Termination" shall mean (i) if the
Executive's employment is terminated by reason of the Executive's death, the
date of his death, (ii) if the Executive's employment is terminated pursuant to
Section 4(b), thirty (30) days after Notice of Termination (provided that the
Executive shall not have returned to the substantial performance of his duties
in accordance with this Agreement during such thirty (30) day period), (iii) if
the Executive's employment is terminated pursuant to Section 4(f), a date
specified in the Notice of Termination which is at least three (3) months from
the date of such notice as specified in such Section 4(f); and (iv) if the
Executive's employment is terminated for any other reason, the date on which a
Notice of Termination is given or any later date (within thirty (30) days (or
6
any alternative time period agreed upon by the parties) after the giving of such
notice) set forth in such Notice of Termination.
6. Termination Payments.
(a) Without Cause or for Good Reason. In the event of the termination
of the Executive's employment during the Employment Period by the Company
without Cause or by the Executive for Good Reason prior to the consummation of a
Change in Control, the Executive shall be entitled to (i) a payment, within ten
(10) days following the Date of Termination, of Base Salary through the Date of
Termination (to the extent not theretofore paid), any accrued vacation pay, and
any unreimbursed expenses under Sections 2(c) and (d) (the "Accrued
Obligations") and (ii) subject to the effectiveness of the Executive's execution
of a general release and waiver of all claims against the Company, its
affiliates and their respective officers and directors in a form reasonably
satisfactory to the Company and subject to the Executive's compliance with the
terms and conditions contained in this Agreement, (A) the continued payment of
Base Salary for the eighteen-month period following the Date of Termination, (B)
a lump sum amount equal to the product of (x) the Bonus, if any, that he would
have earned in the calendar year which includes the Date of Termination had his
employment not been terminated and (y) a fraction, the numerator of which is the
number of days in the calendar year that includes the Date of Termination
through the Date of Termination and the denominator of which is 365, and (C) the
immediate vesting of that portion of the Restricted Shares, Initial Options and
Premium Options that would have become vested on the next applicable anniversary
of the Commencement Date following the Date of Termination on which the next
tranche of Initial Options, Premium Options and Restricted Shares would have
vested, provided that if such termination occurs after the consummation of a
Change in Control, all Restricted Shares, Initial Options and Premium Options
not previously vested shall become immediately vested. The Company shall have no
additional obligations under this Agreement.
(b) Cause, Death, Disability or Without Good Reason. If the Executive's
employment with the Company is terminated during the Employment Period by the
Company for Cause, by the Executive without Good Reason, or as a result of the
Executive's death or Disability, the Company shall pay the Accrued Obligations
to the Executive (or his estate in the event of his death) within thirty (30)
days following the Date of Termination. The Company shall have no additional
obligations under this Agreement.
7. Indemnification.
The Company agrees that if the Executive is made a party or threatened
to be made a party to any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "Proceeding"), other than any Proceeding
related to any contest or dispute between the Executive and the Company or any
of its affiliates with respect to this Agreement or the employment of the
Executive hereunder, by reason of the fact that the Executive is or was a
director or officer of the Company, or any subsidiary of the Company or is or
was serving at the request of the Company, as a director, officer, member,
employee or agent of another corporation or a partnership, joint venture, trust
or other enterprise, the Executive shall be indemnified and held harmless by the
Company to the fullest extent authorized by applicable law.
7
8. Non-Solicitation.
During the Employment Period and for a period of two years following
the Date of Termination, the Executive hereby agrees not to, directly or
indirectly, for his own account or for the account of any other person or
entity, (i) solicit or hire or assist any other person or entity in soliciting
or hiring any employee of the Company or any of its subsidiaries or affiliates
to perform any services for any entity (other than the Company or its
subsidiaries or affiliates), attempt to induce any such employee to leave the
employ of the Company or any affiliates of the Company, or otherwise interfere
with or adversely modify such employee's relationship with the Company or any of
its subsidiaries or affiliates, (ii) induce any employee of the Company who is a
member of management to engage in any activity in which the Executive is
prohibited from engaging under any of Sections 8, 9 or 10, or (iii) solicit or
assist any other person or entity in soliciting or attempting to solicit any
customers or suppliers of the Company or any of its subsidiaries or affiliates
to terminate or otherwise adversely modify their relationship with the Company
or any of its subsidiaries or affiliates. For purposes of this Agreement,
"employee" shall mean any natural person anywhere in the world who is employed
by or otherwise engaged to perform services for the Company or any of its
subsidiaries or affiliates on the Date of Termination or during the one-year
period preceding the Date of Termination.
9. Non-Compete.
In connection with the services of the Executive performed under this
Agreement, the Executive hereby agrees that, during the Employment Period and
for the one year period following any termination of the employment of the
Executive (other than a termination by the Company without Cause or by the
Executive for Good Reason), the Executive shall not become associated with any
entity, whether as a principal, partner, employee, consultant or shareholder
(other than as a holder of a passive investment not in excess of 5% of the
outstanding voting shares of any publicly traded company), that is actively
engaged in the retail apparel business in any geographic area in which the
Company or its affiliates are engaged in such business.
10. Confidentiality; Non-Disclosure.
(a) The Executive hereby agrees that, during the Employment Period and
thereafter, he will hold in strict confidence any proprietary or Confidential
Information related to the Company and its affiliates. For purposes of this
Agreement, the term "Confidential Information" shall mean all information of the
Company or any of its affiliates (in whatever form) which is not generally known
to the public, including without limitation any inventions, processes, methods
of distribution or customers' secrets or trade secrets.
(b) The Executive hereby agrees that, upon the termination of the
Employment Period, he shall not take, without the prior written consent of the
Company, any drawing, blueprint, specification or other document (in whatever
form) of the Company or its affiliates, which is of a confidential nature
relating to the Company or its affiliates, or, without limitation, relating to
its or their methods of distribution, or any description of any formulas or
secret processes and will return any such information (in whatever form) then in
his possession.
8
11. Injunctive Relief.
It is impossible to measure in money the damages that will accrue to
the Company in the event that the Executive breaches any of the restrictive
covenants provided in Sections 8, 9 or 10 hereof. In the event that the
Executive breaches any such restrictive covenant, the Company shall be entitled
to an injunction restraining the Executive from violating such restrictive
covenant. If the Company shall institute any action or proceeding to enforce any
such restrictive covenant, the Executive hereby waives the claim or defense that
the Company has an adequate remedy at law and agrees not to assert in any such
action or proceeding the claim or defense that the Company has an adequate
remedy at law. The foregoing shall not prejudice the Company's right to require
the Executive to account for and pay over to the Company, and the Executive
hereby agrees to account for and pay over, the compensation, profits, monies,
accruals or other benefits derived or received by the Executive, directly or
indirectly, as a result of any transaction constituting a breach of any of the
restrictive covenants provided in Sections 8, 9 or 10.
12. Miscellaneous.
(a) Any notice or other communication required or permitted under this
Agreement shall be effective only if it is in writing and delivered personally
or sent by registered or certified mail, postage prepaid, addressed as follows
(or if it is sent through any other method agreed upon by the parties):
If to the Company:
J. Crew Group, Inc.
770 Broadway
New York, NY 10003
Attention: Board of Directors and Secretary
with a copy to:
Paul Shim, Esq.
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006
If to the Executive:
At the address on file in the Company's files.
or to such other address as any party hereto may designate by notice to the
others, and shall be deemed to have been given upon receipt.
(b) This Agreement constitutes the entire agreement among the parties
hereto with respect to the employment of the Executive and supersedes and is in
full substitution for any and all prior understandings or agreements with
respect to such employment.
9
(c) This Agreement may be amended only by an instrument in writing
signed by the parties hereto, and any provision hereof may be waived only by an
instrument in writing signed by the party or parties against whom or which
enforcement of such waiver is sought. The failure of any party hereto at any
time to require the performance by any other party hereto of any provision
hereof shall in no way affect the full right to require such performance at any
time thereafter, nor shall the waiver by any party hereto of a breach of any
provision hereof be taken or held to be a waiver of any succeeding breach of
such provision or a waiver of the provision itself or a waiver of any other
provision of this Agreement.
(d) (i) This Agreement is binding on and is for the benefit of the
parties hereto and their respective successors, heirs, executors, administrators
and other legal representatives. Neither this Agreement nor any right or
obligation hereunder may be assigned by the Company or the Executive.
(ii) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform it if no such
succession had taken place. As used in the Agreement, the "Company" shall mean
both the Company as defined above and any such successor that assumes and agrees
to perform this Agreement, by operation of law or otherwise.
(e) If any provision of this Agreement or portion thereof is so broad,
in scope or duration, so as to be unenforceable, such provision or portion
thereof shall be interpreted to be only so broad as is enforceable.
(f) The Company may withhold from any amounts payable to the Executive
hereunder all federal, state, city or other taxes that the Company may
reasonably determine are required to be withheld pursuant to any applicable law
or regulation.
(g) This Agreement shall be governed by and construed in accordance
with the laws of the State of NEW YORK, without reference to its principles of
conflicts of law.
(h) This Agreement may be executed in several counterparts, each of
which shall be deemed an original, but all of which shall constitute one and the
same instrument.
(i) The headings in this Agreement are inserted for convenience of
reference only and shall not be a part of or control or affect the meaning of
any provision hereof.
10
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
J. CREW GROUP, INC.
_______________________________
Name:
Title:
J. CREW OPERATING CORP.
_______________________________
Name:
Title:
_______________________________
SCOTT GILBERTSON
11
Exhibit 10.12
March 7, 2003
Walter Killough
6 Garden Court
Mahwah, NJ 07430
Dear Walter:
This letter will confirm our understanding of the arrangements under which
your employment with J.Crew is terminated as set forth below:
1. The parties hereby acknowledge and confirm that your employment
with the Company is terminated effective as of March 14, 2003
(the "Termination Date").
2. Subject to this Agreement becoming effective (as described in
Paragraph 17 hereof), the Company will continue to pay you your
base salary of $390,000 per annum for the twelve (12) month
period beginning on the day immediately following the Termination
Date ("Severance Period"), payable in accordance with the
Company's regular payroll practices for its employees. At your
election, the Company will also reimburse you for Cobra premiums
paid by you during the Severance Period. The foregoing payments
shall be reduced by any required tax withholdings and shall not
be taken into account as compensation and no service credit shall
be given after the Termination Date for purposes of determining
the benefits payable under any other plan, program, agreement or
arrangement of the Company. Notwithstanding anything herein to
the contrary, your right to receive the foregoing payments shall
terminate effective immediately upon the date that you become
employed as a full-time employee with a new employer; provided
that if the base salary you receive pursuant to such new
employment ("New Salary") is less than $390,000 per annum, the
Company will continue to pay you an incremental amount during the
remaining Severance Period such that the New Salary payments you
receive together with such incremental amount will equal $390,000
on an annualized basis. In addition, upon request, outplacement
services will be provided in accordance with the Company's
policy. You acknowledge that, except for the foregoing payments,
you are not entitled to any payment by the Company in the nature
of either severance or termination pay or other compensation of
any kind.
3. As of the Termination Date, you have vested options to purchase
(i) 31,400 shares of Common Stock ("Common Stock") of J. Crew
Group, Inc. ("Parent") at $6.82 exercise price per share, (ii)
11,160 shares of Common Stock at a $10.00 exercise price per
share, and (iii) 5,000 shares of Common Stock at a $10.65
exercise price per share (collectively, the "Vested Options").
You acknowledge that (i) your right to exercise the Vested
Options shall expire 90 days immediately following the
Termination Date (i.e. June 12, 2003) and (ii) all of your other
options which have not yet vested (totaling options to purchase
27,400 shares of Common Stock) terminate effective immediately,
in accordance with the
provisions of your stock option agreements with Parent and the J.
Crew Group, Inc. 1997 Stock Option Plan, as amended (the "Option
Plan").
4. By signing this Agreement, you agree that in exchange for the
consideration set forth herein, you hereby voluntarily, fully and
unconditionally release and forever discharge the Company,
Parent, their present and former parent corporation(s),
subsidiaries, divisions, affiliates and otherwise related
entities and their respective incumbent and former employees,
directors, plan administrators, officers and agents, individually
and in their official capacities (collectively, the "Releasees"),
from any and all charges, actions, causes of action, demands,
debts, dues, bonds, accounts, covenants, contracts, liabilities,
or damages of any nature whatsoever, whether now known or
claimed, to whomever made, which you have or may have against any
or all of the Releasees for or by reason of any cause, nature or
thing whatsoever, up to the present time, arising out of or
related to your employment with the Company or the termination of
such employment, including, by way of examples and without
limiting the broadest application of the foregoing, any actions,
causes of action, or claims under any contract or federal, state
or local decisional law, statues, regulations or constitutions,
any claims for notice, pay in lieu of notice, wrongful dismissal,
breach of contract, defamation or other tortious conduct,
discrimination on the basis of actual or perceived disability,
age, sex, race or any other factor (including, without
limitation, any claim pursuant to Title VII of the Civil Rights
Act of 1964, Americans with Disabilities Act of 1990, the Age
Discrimination in Employment Act of 1967, as amended, the Family
and Medical Act of 1993, the Equal Pay Act of 1963, the Fair
Labor Standards Act, the State, City and local laws of New York,
and the equal employment law or laws of the state and/or city in
which you work), any claim pursuant to any other applicable
employment standards or human rights legislation or for severance
pay, salary, bonus, incentive or additional compensation,
vacation pay, insurance, other benefits, interest, and/or
attorney's fees.
If you have made or should hereafter make any complaint, charge,
claim, allegation or demand, or commence or threaten to commence
any action, complaint, charge, claim or proceeding, against any
or all of the Releasees for or by reason of any cause, matter or
thing whatsoever existing up to the present time, this Agreement
may be raised as and shall constitute a complete bar to any such
action, complaint, charge, claim, allegation or proceeding, and,
subject to a favorable ruling by a tribunal of final
jurisdiction, the Releasees shall recover from you, and you shall
pay to the Releasees, all costs incurred by them, including their
attorneys' fees, as a consequence of any such action, complaint
charge, claim, allegation or proceeding; provided, however, that
this shall not limit you from enforcing your rights under this
Agreement and in the event any action is commenced to enforce
your rights under this Agreement, each party shall bear its own
legal fees and expenses; and provided further, however, that this
is not intended to interfere with your right to file a charge
with the Equal Employment Opportunity Commission ("EEOC") in
connection with any claim you believe you may have against any
Releasee. However, by signing this Agreement, you agree to waive
any right to recover in any proceeding you may bring before the
EEOC (or any state human rights commission) or in any proceeding
brought by the EEOC (or any state human rights commission) on
your behalf.
2
You specifically release all claims under the Age Discrimination
in Employment Act ("ADEA") relating to your employment and its
termination.
5. You acknowledge that the payments and benefits described in
Section 2 above that you are receiving in connection with the
foregoing release is in accordance with the provisions of your
letter agreement, dated March 14, 2000 ("Letter Agreement").
6. You hereby agree and acknowledge that you shall be bound by and
comply with the restrictive covenants provided in the Letter
Agreement (the "Restrictive Covenants"), and that such
Restrictive Covenants are hereby made part of this Agreement as
if specifically restated herein and that the payments described
in Section 2 above that you are receiving are subject to and
contingent upon your compliance with Restrictive Covenants.
7. You acknowledge and agree that, notwithstanding any other
provision of this Agreement, if you breach any of your
obligations under this Agreement or any Restrictive Covenant, (a)
you will forfeit your right to receive the payments and benefits
described in Section 2 above (to the extent the payments were not
theretofore paid) and the Company shall be entitled to recover
any payments already made to you or on your behalf, (b) the
Vested Options shall expire as of the date of such breach to the
extent not theretofore exercised and, if exercised as of the date
of such breach, you shall immediately reimburse the Company for
the profit upon exercise (such profit calculated as the
difference between the (i) greater of either the Fair Market
Value (as defined in the Option Plan) of a share of Common Stock
on the date of exercise or the amount paid by the Company to you
per share of Common Stock for the purchase of the shares acquired
upon exercise, and (ii) exercise price, times the number of
options exercised).
8. You agree that, in the event that you are served with legal
process or other request purporting to require you to testify,
plead, respond or defend and/or produce documents at a legal
proceeding, threatened proceeding, investigation or inquiry
involving the Releasees, you will: (1) refuse to provide
testimony or documents absent a subpoena, court order or similar
process from a regulatory agency: (2) within three (3) business
days or as soon thereafter as practical, provide oral
notification to the Company's Executive Vice-President of Human
Resources of your receipt of such process or request to testify
or produce documents; and (3) provide to the Company's Executive
Vice-President of Human Resources by overnight delivery service a
copy of all legal papers and documents served upon you. You
further agree that in the event you are served with such process,
you will meet and confer with the Company's designee(s) in
advance of giving such testimony or information. You also agree
to cooperate fully with the Releasees in connection with any
existing or future litigation against the Releasees, whether
administrative, civil or criminal in nature, in which and to the
extent the Releasees deem your cooperation necessary. The Company
agrees to reimburse you for your reasonable out-of-pocket
expenses incurred in connection with the performance of your
obligations under this Section 8.
9. This Agreement does not constitute an admission of liability or
wrongdoing of any kind by you or the Company or its affiliates.
3
10. The terms of this Agreement shall be binding on the parties
hereto and their respective successors, assigns, heirs and
representatives.
11. This Agreement, together with your stock option agreements with
Parent and the Option Plan, constitute the entire understanding
of the Company and you with respect to the subject matter hereof
and supersedes all prior understandings, written or oral. The
terms of this Agreement may be changed, modified or discharged
only by an instrument in writing signed by the parties hereto. A
failure of the Company or you to insist on strict compliance with
any provision of this Agreement shall not be deemed a waiver of
such provision or any other provision hereof. If any provision of
this Agreement is determined to be so broad as to be
unenforceable, such provision shall be interpreted to be only so
broad as is enforceable.
12. This Agreement shall be construed, enforced and interpreted in
accordance with and governed by the laws of the State of New
York.
13. The parties hereto acknowledge and agree that each party has
reviewed and negotiated the terms and provisions of this
Agreement and has contributed to its revision. Accordingly, the
rule of construction to the effect that ambiguities are resolved
against the drafting party shall not be employed in the
interpretation of this Agreement. Rather, the terms of this
Agreement shall be construed fairly as to both parties hereto and
not in favor or against either party.
14. This Agreement may be executed in any number of counterparts and
by different parties on separate counterparts, each of which
counterpart, when so executed and delivered, shall be deemed to
be an original and all of which counterparts, taken together,
shall constitute but one and the same Agreement.
15. You acknowledge that, by your free and voluntary act of signing
below, you agree to all of the terms of this Agreement and intend
to be legally bound thereby.
16. You acknowledge that you have received this Agreement on or
before March 7, 2003. You understand that you may consider
whether to agree to the terms contained herein for a period of
forty-five (45) days after the date hereof. However, the
operation of the provisions of Sections 2 through 4 above may be
delayed until you execute this Agreement and return it to the
Company and it becomes effective as provided below. You
acknowledge that you have consulted with an attorney prior to
your execution of this Agreement or have determined by your own
free will not to consult with an attorney.
17. This Agreement will become effective, enforceable and irrevocable
seven days after the date on which it is executed by you (the
"Effective Date"). During the seven-day period prior to the
Effective Date, you may revoke your agreement to accept the terms
hereof by indicating in writing to the Executive Vice-President
of Human Resources your intention to revoke. If you exercise your
right to revoke hereunder, you shall forfeit your right to
receive any of the payments and other benefits provided for
herein, and to the extent such payments or benefits have already
been made, you agree that you will immediately reimburse the
Company for the value of such payments and benefits.
4
If the foregoing correctly reflects our understanding, please sign the
enclosed copy of this letter agreement, whereupon it will become a binding
agreement between us.
J. CREW OPERATING CORP.
By: _______________________
Name: David F. Kozel
Title: Executive Vice-President,
Human Resources
Agreed to and accepted:
By:__________________________
Walter Killough
Dated: _________, 2003
Acknowledgment
STATE OF _________________)
ss:
COUNTY OF _______________)
On the __ day of _______, 2003, before me personally came Walter Killough who,
being by me duly sworn, did depose and say that he resides at 6 Garden Court,
Mahwah, New Jersey 07430, and did acknowledge and represent that he has had an
opportunity to consult with attorneys and other advisers of his choosing
regarding the Agreement set forth above, that he has reviewed all of the terms
of the Agreement and that he fully understands all of its provisions, including
without limitation, the general release and waiver set forth therein.
__________________________
Notary Public
Date:_____________________
5
Exhibit 21.1
Subsidiaries of J. Crew Group, Inc.
Name Under Which
Name of Subsidiary State of Incorporation Subsidiary Does Business
- ------------------ ---------------------- ------------------------
J. Crew Operating Corp. Delaware J. Crew Operating Corp.
J. Crew Inc. New Jersey J. Crew Inc.
Grace Holmes, Inc. Delaware J. Crew Retail Stores
H.F.D. No. 55, Inc. Delaware J. Crew Factory Stores
J. Crew Virginia, Inc. Virginia J. Crew Virginia, Inc.
J. Crew International, Inc. Delaware J. Crew International, Inc.
J. Crew Intermediate LLC Delaware J. Crew Intermediate LLC
C & W Outlet, Inc.* New York C & W Outlet, Inc.
J. Crew Services, Inc.* Delaware J. Crew Services, Inc.
ERL, Inc.* New Jersey ERL, Inc.
____________
* Inactive subsidiary
Exhibit 23.1
The Board of Directors
J. Crew Group, Inc.:
We consent to incorporation by reference in the previously filed registration
statement on Form S-8 of J. Crew, Group Inc. 1997 Stock Option Plan of our
report dated March 25, 2003, except as to the note 18, which is dated April 4,
2003, relating to the consolidated balance sheets of J. Crew Group, Inc and
subsidiaries as of February 1, 2003 and February 2, 2002, and the related
consolidated statements of operations, cash flows, and changes in stockholders'
deficit for each of the years in the three-year period ended February 1, 2003,
and the related schedule, which report appears in the February 1, 2003 annual
report on Form 10-K of J. Crew Group, Inc.
/s/ KPMG LLP
New York, New York
April 15, 2003
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of J. Crew Group, Inc. and J. Crew
Operating Corp. (collectively, the "Company") on Form 10-K for the period ending
February 1, 2003 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Millard S. Drexler, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/ Millard S. Drexler
----------------------------
Millard S. Drexler
Chief Executive Officer
April 21, 2003
Exhibit 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of J. Crew Group, Inc. and J. Crew
Operating Corp. (collectively, the "Company") on Form 10-K for the period ending
February 1, 2003 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Scott M. Rosen, Executive Vice-President and
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/ Scott M. Rosen
----------------------------
Scott M. Rosen
Executive Vice-President and
Chief Financial Officer
April 21, 2003
