As filed with the Securities and Exchange Commission on February 6, 1998
Registration No. 333-42427
=================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
AMENDMENT NO.1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
J. Crew Group, Inc.
(Exact name of registrant as specified in its charter)
New York 6719 22-2894486
(State or other jurisdiction (Primary standard (I.R.S. employer
incorporation or organization) industrial classification identification
code number) number)
770 Broadway
New York, New York 10003
(212) 209-2500
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
________________________
Michael P. McHugh
Vice President
J. Crew Group, Inc.
770 Broadway
New York, New York 10003
(212) 209-2500
________________________
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of correspondence to:
Paul J. Shim, Esq.
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
________________________
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the Registration Statement
becomes effective.
If the securities being registered on this Form are being
offered in connection with the formation of a holding company and
there is compliance with General Instruction G, check the
following box: |_|
________________________
CALCULATION OF REGISTRATION FEE
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
J. CREW GROUP, INC.
Registration Statement on Form S-4
(Cross Reference Sheet Furnished Pursuant to Item 501(b) of Regulation S-K )
Item Location in Prospectus
---- ----------------------
1. Forepart of the
Registration Statement
and Outside Front Cover
Page of Prospectus ............. Facing Page of the Registration
Statement; Cross Reference Sheet;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside
Back Cover Pages of
Prospectus ..................... Available Information; Incorporation
of Certain Documents by
Reference; Outside Back Cover
Page of Prospectus
3. Risk Factors, Ratio of
Earnings to Fixed
Charges and Other
Information .................... Prospectus Summary; Risk Factors;
Selected Financial Data
4. Terms of the Transaction ......... Prospectus Summary; Risk Factors;
The Exchange Offer; Description of
the New Debentures; Plan of
Distribution; Certain U.S. Federal
Considerations Tax
5. Pro Forma Financial
Information ..................... Pro Forma Capitalization; Unaudited
Pro Forma Consolidated Financial
Data
6. Material Contracts With
the Company Being Acquired ..... Not Applicable
7. Additional Information
Required for Reoffering by
Persons and Parties
Deemed to be Underwriters ...... Not Applicable
8. Interests of Named Experts
and Counsel .................... Not Applicable
9. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities .................... Not Applicable
10. Information with
Respect to S-3
Registrants .................... Not Applicable
11. Incorporation of Certain
Information by
Reference ...................... Not Applicable
12. Information with Respect
to S-2 or S-3
Registrants .................... Not Applicable
13. Incorporation of Certain
Information by
Reference ...................... Not Applicable
14. Information with
Respect to Registrants
Other Than S-3 or S-2
Registrants .................... Outside Front Cover of Prospectus;
Prospectus Summary; Selected
Consolidated Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Consolidated
Financial Statements
15. Information with Respect
to S-3 Companies ............. Not Applicable
16. Information with Respect
to S-2 or S-3
Companies ...................... Not Applicable
17. Information with Respect
to Companies Other Than
S-3 or S-2 Companies ........... Not Applicable
18. Information if Proxies,
Consents or Authorizations
Are To Be Solicited ............ Not Applicable
19. Information if Proxies,
Consents or Authorizations
Are Not To Be
Solicited or in an
Exchange Offer ................. Prospectus Summary; Management;
Capital Stock of Holdings and
Operating Corp; Certain Relationships
and Related Transactions
X----------------------------------------------------------------- X
X Information contained herein is subject to completion or X
X amendment. A registration statement relating to these securities X
X has been filed with the Securities and Exchange Commission. These X
X securities may not be sold nor may offers to buy be accepted X
X prior to the time the registration statement becomes effective. X
X This prospectus shall not constitute an offer to sell or the X
X solicitation of an offer to buy nor shall there be any sale of X
X these securities in any State in which such offer, solicitation X
X or sale would be unlawful prior to registration or qualification X
X under the securities laws of any such State X
X----------------------------------------------------------------- X
SUBJECT TO COMPLETION-DATED FEBRUARY 6, 1998
PROSPECTUS
J. Crew Group, Inc.
Offer to Exchange Series B 13 1/8% Senior Discount Debentures due
2008, which have been registered under the Securities Act of
1933, as amended,for any and all outstanding Series A 13 1/8%
Senior Discount Debentures due 2008
The Exchange Offer will expire at 5:00 p.m., New York
City time, on __________, 1998, unless extended. J. Crew Group,
Inc., a New York corporation (the "Issuer" or "Holdings"), hereby
offers, upon the terms and subject to the conditions set forth in
this Prospectus and the accompanying letter of transmittal (the
"Letter of Transmittal" and such offer being the "Exchange
Offer"), to exchange Series B 13 1/8% Senior Discount Debentures
due 2008 of the Issuer (the "New Debentures"), which have been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which
this Prospectus is a part, for an equal principal amount of
outstanding Series A 13 1/8% Senior Discount Debentures due 2008
of the Issuer (the "Old Debentures"), of which $142,000,000
aggregate principal amount at maturity is outstanding as of the
date hereof. The New Debentures and the Old Debentures are
collectively referred to herein as the "Debentures."
Any and all Old Debentures that are validly tendered and
not withdrawn on or prior to 5:00 P.M., New York City time, on
the date the Exchange Offer expires, which will be _________,
1998 (30 calendar days following the commencement of the Exchange
Offer) unless the Exchange Offer is extended (such date,
including as extended, the "Expiration Date"), will be accepted
for exchange. Tenders of Old Debentures may be withdrawn at any
time prior to 5:00 P.M., New York City time on the Expiration
Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Debentures being tendered for exchange.
However, the Exchange Offer is subject to certain customary
conditions, which may be waived by the Issuer, and to the terms
of the Registration Rights Agreement, dated as of October 17,
1997, by and among the Issuer and Donaldson, Lufkin & Jenrette
Securities Corporation and Chase Securities Inc. (the "Initial
Purchasers") (the "Registration Rights Agreement"). Old
Debentures may only be tendered in integral multiples of $1,000
of principal amount at maturity. See "The Exchange Offer."
The New Debentures will be entitled to the benefits of the
same Indenture (as defined herein) that governs the Old
Debentures and that will govern the New Debentures. The form and
terms of the New Debentures are the same in all material respects
as the form and terms of the Old Debentures, except that the New
Debentures have been registered under the Securities Act and
therefore will not bear legends restricting the transfer thereof.
See "The Exchange Offer" and "Description of the New Debentures."
The New Debentures will be represented by permanent global
debentures in fully registered form and will be deposited with,
or on behalf of, The Depository Trust Company ("DTC") and
registered in the name of a nominee of DTC. Beneficial interests
in the permanent global debentures will be shown on, and
transfers thereof will be effected through, records maintained by
DTC and its participants.
Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission"), as set forth in no-action
letters issued to third parties, including Exxon Capital Holdings
Corporation, SEC No-Action Letter (available May 13, 1988),
Morgan Stanley & Co. Incorporated, SEC No-Action Letter
(available June 5, 1991) and Shearman & Sterling, SEC No-Action
Letter (available July 2, 1993) (collectively, the "Exchange
Offer No-Action Letters"), the Issuer believes that the New
Debentures issued pursuant to the Exchange Offer may be offered
for resale, resold or otherwise transferred by each holder (other
than a broker-dealer who acquires such New Debentures directly
from the Issuer for resale pursuant to Rule 144A under the
Securities Act or any other available exemption under the
Securities Act and other than any holder that is an "affiliate"
(as defined in Rule 405 under the Securities Act) of the Issuer)
without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New
Debentures are acquired in the ordinary course of such holder's
business and such holder is not engaged in, and does not intend
to engage in, a distribution of such New Debentures and has no
arrangement with any person to participate in a distribution of
such New Debentures. By tendering Old Debentures in exchange for
New Debentures, each holder, other than a broker-dealer, will
represent to the Issuer that: (i) it is not an affiliate (as
defined in Rule 405 under the Securities Act) of the Issuer; (ii)
it is not a broker-dealer tendering Old Debentures acquired for
its own account directly from the Issuer; (iii) any New
Debentures to be received by it will be acquired in the ordinary
course of its business; and (iv) it is not engaged in, and does
not intend to engage in, a distribution of such New Debentures
and has no arrangement or understanding to participate in a
distribution of New Debentures. If a holder of Old Debentures is
engaged in or intends to engage in a distribution of New
Debentures or has any arrangement or understanding with respect
to the distribution of New Debentures to be acquired pursuant to
the Exchange Offer, such holder may not rely on the applicable
interpretations of the staff of the Commission and must comply
with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale
transaction.
(continued on next page)
__________________________
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER, SEE "RISK
FACTORS" BEGINNING ON PAGE 16 OF THIS PROSPECTUS.
__________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
__________________________
[GRAPHIC OMITTED]The date of this Prospectus is _________, 1998
__________________________
(continued from cover page)
Each broker-dealer that receives New Debentures for its own
account pursuant to the Exchange Offer (a "Participating Broker-
Dealer") must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with
any resale of such New Debentures. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in
connection with resales of New Debentures received in exchange
for Old Debentures where such Old Debentures were acquired by
such Participating Broker-Dealer as a result of market-making
activities or other trading activities. Pursuant to the
Registration Rights Agreement, the Issuer has agreed that it will
make this Prospectus available to any Participating Broker-Dealer
for a period of time not to exceed one year after the date on
which the Exchange Offer is consummated for use in connection
with any such resale. See "Plan of Distribution."
The Issuer will not receive any proceeds from this
offering. The Issuer has agreed to pay the expenses of the
Exchange Offer. No underwriter is being utilized in connection
with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE
ISSUER ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD
DEBENTURES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE
ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES
AND BLUE SKY LAWS OF SUCH JURISDICTION.
The Old Debentures have been designated as eligible for
trading in the Private Offerings, Resale and Trading through
Automated Linkages ("PORTAL") market. Prior to this Exchange
Offer, there has been no public market for the New Debentures. If
such a market were to develop, the New Debentures could trade at
prices that may be higher or lower than their principal amount.
The Issuer does not intend to apply for listing of the New
Debentures on any securities exchange or for quotation of the New
Debentures on The Nasdaq Stock Market's National Market or
otherwise. The Initial Purchasers have previously made a market
in the Old Debentures, and the Issuer has been advised that the
Initial Purchasers currently intend to make a market in the New
Debentures, as permitted by applicable laws and regulations,
after consummation of the Exchange Offer. The Initial Purchasers
are not obligated, however, to make a market in the Old
Debentures or the New Debentures and any such market making
activity may be discontinued at any time without notice at the
sole discretion of the Initial Purchasers. There can be no
assurance as to the liquidity of the public market for the New
Debentures or that any active public market for the New
Debentures will develop or continue. If an active public market
does not develop or continue, the market price and liquidity of
the New Debentures may be adversely affected. See "Risk
Factors--Absence of a Public Market."
AVAILABLE INFORMATION
The Issuer is not currently subject to the periodic
reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Issuer
will become subject to such requirements upon the effectiveness
of the Registration Statement (as defined herein). Pursuant to
the indenture by and among the Issuer and State Street Bank and
Trust Company (as trustee), dated as of October 17, 1997 (the
"Indenture"), the Issuer has agreed to file with the Commission
and provide to the holders of the Old Debentures annual reports
and the information, documents and other reports which are
required to be delivered pursuant to Sections 13 and 15(d) of the
Exchange Act.
This Prospectus constitutes a part of a registration
statement on Form S-4 (together with all amendments and exhibits,
the "Registration Statement") filed by the Issuer with the
Commission, through the Electronic Data Gathering, Analysis and
Retrieval System ("EDGAR"), under the Securities Act, with
respect to the New Debentures offered hereby. This Prospectus
omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration
Statement for further information with respect to the Issuer and
the securities offered hereby. Although statements concerning and
summaries of certain documents are included herein, reference is
made to the copies of such documents filed as exhibits to the
Registration Statement or otherwise filed with the Commission.
These documents may be inspected without charge at the office of
the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies may be obtained at fees and
charges prescribed by the Commission. Copies of such materials
may also be obtained from the Web site that the Commission
maintains at http://www.sec.gov.
-----------------------------
i
PROSPECTUS SUMMARY
Prior to the Recapitalization (as defined herein), Holdings
owned all of the stock, directly or indirectly, of the various
subsidiaries that had carried on the businesses described herein.
In connection with the Recapitalization, Holdings organized J.
Crew Operating Corp., a Delaware corporation ("Operating Corp"),
and immediately prior to the consummation of the
Recapitalization, Holdings transferred substantially all of its
assets and liabilities to Operating Corp. Holdings' current
operations are, and future operations are expected to be, limited
to owning the stock of the Operating Corp. Holdings and its
subsidiaries are collectively referred to herein
as the "Company." The following summary is qualified in its
entirety by the more detailed information and financial
statements and the Unaudited Pro Forma Consolidated Financial
Data of the Issuer, including the notes thereto, appearing
elsewhere in this Prospectus. Except as otherwise set forth
herein, references herein to "pro forma" financial data of the
Issuer are to financial data of the Issuer which gives effect to
the Recapitalization, including the issuance of the Debentures,
the issuance of the Holdings Preferred Stock (as defined herein),
the Holdings Common Equity Contribution (as defined herein) and
the Operating Corp Distribution (as defined herein). References
herein to fiscal years are to the fiscal years of Holdings, which
end on the Friday closest to January 31 in the following calendar
year. Accordingly, fiscal years 1992, 1993, 1994, 1995 and 1996
ended on January 29, 1993, January 28, 1994, February 3, 1995,
February 2, 1996 and January 31, 1997. All fiscal years for which
financial information is included in this Prospectus had 52
weeks, except fiscal 1994 which had 53 weeks.
The Company
Overview
The Company is a leading mail order and store retailer of
women's and men's apparel, shoes and accessories operating
primarily under the J. Crew(R) brand name. Under the direction of
Emily Woods and Arthur Cinader (co-founders of the J. Crew brand
and father and daughter), the Company has built a strong and
widely recognized brand name known for its timeless styles at
price points that the Company believes represent exceptional
product value. The J. Crew image has been built and reinforced
over its 14-year history through the circulation of more than
one-half billion catalogs that use magazine-quality photography
to portray a classic American perspective and aspirational
lifestyle. Many of the original items introduced by the Company
in the early 1980s (such as the rollneck sweater, weathered
chino, barn jacket and pocket tee) were instrumental in
establishing the J. Crew brand and continue to be core product
offerings. The Company has capitalized on the strength of the J.
Crew brand to provide customers with clothing to meet more of
their lifestyle needs, including casual, career and sport. The
strength of the J. Crew brand is demonstrated by a compound
annual growth rate of 15.4% in J. Crew brand revenues between
fiscal 1992 and fiscal 1996.
The J. Crew merchandising strategy emphasizes timeless
styles and a broad assortment of high-quality products designed
to provide customers with one-stop shopping opportunities at
attractive prices. J. Crew catalogs and retail stores offer a
full line of men's and women's basic durables (casual weekend
wear), sport, swimwear, accessories and shoes, as well as the
more tailored men's sportswear and women's "Classics" lines.
Approximately 60% of the Company's J. Crew brand sales are
derived from its core offerings of durables and sport clothing,
the demand for which the Company believes is stable and resistant
to changing fashion trends. The Company believes that the J. Crew
image and merchandising strategy appeal to college-educated,
professional and affluent customers who, in the Company's
experience, have demonstrated strong brand loyalty and a tendency
to make repeat purchases.
J. Crew products are distributed exclusively through the
Company's catalog and store distribution channels. The Company
currently circulates over 76 million J. Crew catalogs per annum
and owns and operates 49 J. Crew retail stores and 42 J. Crew
factory outlets. In addition, J. Crew products are distributed
through 67 free-standing and shop-in-shop stores in Japan under a
licensing agreement with Itochu Corporation and Itochu Fashion
System Co., Ltd. (collectively "Itochu").
In addition to the Company's J. Crew operations, the Company
operates Clifford & Wills, Inc. ("C&W"), a mail order and factory
store women's apparel business that targets older, more
conservative customers, and Popular Club Plan, Inc. ("PCP"), a
direct selling catalog merchandiser of consumer branded goods
through a "club" concept that provides credit sales to
lower-income customers. During the twelve-month period ended
November 7, 1997, the Company generated total revenues of $836.7
million, of which $583.1 million or approximately 70% was
attributable to the J. Crew brand, and total Adjusted EBITDA of
$47.6 million. See "--Summary Unaudited Pro Forma Consolidated
Financial Data" for a description of Adjusted EBITDA.
Business Strengths
Since its inception, the Company has pursued a consistent
operating strategy which has resulted in the following key
strengths and distinguishing characteristics:
- Strong, Recognizable Brand. The Company has created a
recognizable, differentiated brand image reflecting an
American aspirational lifestyle. The J. Crew image is
consistently communicated through all aspects of the
Company's business including its merchandise design,
distinctive catalogs and retail store environment. The
Company's high-quality products, strong brand image and
customer loyalty have resulted in strong gross margins and
retail sales productivity.
- Premium Quality Products and Distinctive Designs at
Attractive Price Points. The Company offers premium quality
products reflecting a classic, clean aesthetic with a
consistent design philosophy. All J. Crew products are
designed by an in-house team of 15 designers led by Emily
Woods. The Company believes that its in-house design
capabilities ensure a coherent set of product offerings from
season to season and year to year that provides significant
value to its customers through attractive price points.
- Proven Retail Store Concept. J. Crew retail stores
historically have generated strong and stable operating
results. The Company believes that its sales per gross
square foot are among the highest in its industry
segment. J. Crew retail stores open during all of
fiscal 1996 generated the following key operating
statistics:
Fiscal 1996
-----------
Average
-------
Sales per gross square foot .................... $575
Store contribution margin ...................... 25.9%
Approximately 81% of the J. Crew retail stores that were
open during all of 1996 had store contribution margins above 20%.
All of the Company's J. Crew retail stores are profitable and
have generated positive store contribution within the first
twelve months of operation. In addition, J. Crew retail stores
opened since fiscal 1992 have averaged approximately $550 in
sales per gross square foot and 23.0% store contribution margin
during the first twelve months of operation.
- Broad and Stable Product Offering. The Company's J. Crew
product offering includes a broad array of items which appeal
to a diverse customer base, spanning gender and age segments.
A substantial portion of the J. Crew product line consists of
basic durables, such as chinos, jeans and sweaters, which are
not significantly modified from year to year and, in the
Company's opinion, are resistant to shifting fashion trends.
In 1996, sales of durables and sport clothing represented
approximately 60% of total J. Crew brand revenues, having
increased at a compound annual growth rate of approximately
15% since 1992.
- Synergistic Distribution Channels. The Company believes
that the concurrent operation of the J. Crew mail
order business and J. Crew retail stores provides a
distinct advantage in the development of the J. Crew
brand. Visibility and exposure of the brand are enhanced
by the broad circulation of catalogs, aiding the
expansion of the retail concept. In addition, the Company
believes that the retail operations help attract first-
2
time "walk-by" customers to the catalog and improve the
salability of fit-critical items through the catalog. The
Company further believes that diversified distribution
channels help insulate the Company against circumstances and
events uniquely affecting one distribution channel or the
other.
- Tightly Controlled Distribution. By selling products
exclusively through J. Crew catalogs, J. Crew retail stores
and J. Crew factory outlets, the Company is able to present
and maintain a consistent brand image, control the
presentation and pricing of its merchandise, provide a higher
level of customer service, and closely monitor retail
sell-through. The Company believes that tight control over
the distribution of its products provides competitive
advantages over other branded apparel retailers that
distribute their goods through department stores.
Opportunities
The Company believes that substantial opportunities exist
to enhance revenue and profitability by increasing efficiencies
in the J. Crew mail order business and by expanding the J. Crew
retail business.
- Implement Tactical Cost Savings Opportunities. While the
Company believes that gross margins in the J. Crew mail order
business have been strong, overall catalog profitability has
been depressed by unnecessarily high operating expenses. The
Company has identified a number of tactical cost savings that
could be realized without affecting the Company's franchise
or brand image. Included in Adjusted EBITDA are $7.5 million in
estimated annual savings resulting from actions implemented
prior to the Recapitalization, including the recent renegotiation
of its catalog vendor contract, selected headcount and net
payroll reductions and the insourcing of certain photography
functions. The Company has identified approximately $7
million of further potential annual savings that are not
reflected in Adjusted EBITDA, including process efficiencies
currently under review, reduction of the Base Book trim size,
installation of automatic sorting equipment and consolidation
of the J. Crew and C&W New York corporate offices. The
Company believes these additional cost savings could be
implemented by mid-1998.
- Realize Cash Flow Increases Through J. Crew Mail Order SKU
Rationalization. The Company's J. Crew mail order product
offerings have increased from 33,000 stock-keeping units
("SKUs") in 1992 to 66,000 SKUs in 1996, partly as a result
of a proliferation in colors and sizes offered. In recent
season-to-season testing on the Company's swimwear and chino
lines, the Company reduced SKUs by 33% and 45%, respectively,
while posting category revenue increases. By eliminating
slower-selling colors and sizes from its core offering, the
Company believes it will be better able to forecast demand,
increase fill rates and increase inventory turns, resulting
in enhanced operating cash flow.
- Increase J. Crew Catalog Productivity Through Increased
Segmentation. The Company believes that it circulates fewer
and less-targeted catalog editions than its competitors, and
that catalog productivity (as measured by initial demand per
page circulated) could be enhanced by more precise targeting
of catalog mailings through further customer segmentation.
For example, in 1996 the Company introduced a Women's catalog
which to date has achieved 20% higher initial demand per page
circulated than that of the Company's primary mailing, the
Base Book. To further enhance its segmentation efforts, the
Company has recently introduced a College catalog and plans
to introduce a Swimwear catalog in 1998. From 1997 to 1998,
the increased segmentation is expected to result in an
approximately 5% increase in the number of catalogs
circulated, but an approximately 8% decrease in total pages
circulated. Reductions in total pages circulated should
result in a decrease in paper and postage expenses.
- Expand J. Crew Retail Operations. The Company's J. Crew
retail store expansion strategy is to continue to increase
its market share in its existing markets and to penetrate
new markets. The Company expects to open a total of 12
stores in fiscal 1997, ten of which were open as of November
7, 1997. The Company currently intends to open 12 to 20
stores annually, funded primarily by cash flow generated
from operations, resulting in approximately 100 stores in
operation by the end of fiscal 2000. Historically, new stores
have cost the
3
Company an average of $1.5 million in building improvements and
working capital expenditures and have experienced a pay-back
period of approximately 20 months. The Company has
established an administrative infrastructure that it
believes is sufficient to accommodate the retail expansion
plan, providing the Company with additional margin
improvement through overhead leverage. In addition, the
Company believes, with a store base of only 49 stores, its
markets are underpenetrated relative to its competitors and
enough suitable locations exist nationwide to accommodate
its expansion plan.
Holdings was incorporated under the laws of the State of
New York in 1988 as a successor to Popular Services, Inc.
Holdings maintains its principal executive office at 770
Broadway, New York, New York, 10003, and its telephone number is
(212) 209-2500.
J. Crew (R) is a registered trademark of a wholly-owned
subsidiary of the Company.
The Recapitalization
Holdings, its shareholders (the "Shareholders") and TPG
Partners II, L.P. ("TPG Partners II") entered into a
Recapitalization Agreement dated as of July 22, 1997, as amended
as of October 17, 1997 (the "Recapitalization Agreement") which
provided for the recapitalization of Holdings (the
"Recapitalization"). Pursuant to the Recapitalization Agreement,
Holdings purchased from the Shareholders all outstanding shares
of Holdings' capital stock, other than shares having an implied
value of $11.1 million, almost all of which continues to be held
by Emily Woods, and which represented 14.8% of the outstanding
shares of common stock, par value $.01 per share, of Holdings
("Holdings Common Stock") immediately following the transaction.
In connection with the Recapitalization, Holdings organized
Operating Corp and immediately prior to the consummation of the
Recapitalization, Holdings transferred substantially all of its
assets and liabilities to Operating Corp. Holdings' current
operations are, and future operations are expected to continue to
be, limited to owning the stock of Operating Corp. Operating Corp
has repaid substantially all of the Company's funded debt
obligations existing immediately before the consummation of the
Recapitalization (the "Debt Retirement"). At October 17, 1997,
the aggregate principal amount of the Company's funded
indebtedness was $186.0 million, consisting of $85.0 million
aggregate principal amount of Senior Notes (the "Retired Senior
Notes"), $99.0 million outstanding under a seasonal revolving
credit facility (the "Retired Bank Credit Facility") and $2.0
million outstanding under an industrial revenue bond (the
"Industrial Revenue Bond").
Cash funding requirements for the Recapitalization (which
was consummated on October 17, 1997) totalled $559.7 million
(including $99.0 million in seasonal borrowings) and were
satisfied through the purchase by TPG Partners II and investors
of an aggregate $188.9 million in Holdings' equity securities
together with an aggregate $330.8 million in borrowings and $40.0
million in proceeds from the securitization of certain of the
Company's accounts receivable, as follows: (i) the purchase by
TPG Partners II, its affiliates and other investors of shares of
Holdings' Common Stock (representing 85.2% of the outstanding
shares) for $63.9 million (the "Holdings Common Equity
Contribution"); (ii) the purchase by TPG Partners II, its
affiliates and other investors of $125.0 million in liquidation
value of preferred stock issued by Holdings (the "Holdings
Preferred Stock"); (iii) gross proceeds of $75.3 million from the
issuance and sale by Holdings of the Old Debentures (the
"Offering"); (iv) $150.0 million from the gross proceeds of the
offering by Operating Corp of the 10 3/8% Senior Subordinated
Notes due 2007 (the "Operating Corp Senior Subordinated Notes")
in a separate offering in which the Initial Purchasers acted as
initial purchasers; (v) $40.0 million in proceeds from the
securitization of certain of the Company's accounts receivable
(the "Securitization"); (vi) $70.0 million of borrowings under a
senior secured term loan facility among Operating Corp, Holdings,
the several lenders from time to time parties thereto
(collectively, the "Banks"), The Chase Manhattan Bank, as
administrative and collateral agent ("Chase"), and Donaldson,
Lufkin & Jenrette Securities Corporation, as syndication agent
("DLJ"), (the "Term Loan Facility"); and (vii) $35.6 million of
borrowings under a senior secured revolving credit facility among
the Operating Corp, Holdings, the Banks, Chase and DLJ (the
"Revolving Credit Facility" and, together with the Term Loan
Facility, the "Bank Facilities"). See "Management's Discussion
and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital
4
Resources," "Description of the New Debentures," "Description of
Operating Corp Indebtedness" and "Capital Stock of Holdings and
Operating Corp."
The Recapitalization was accounted for as a
recapitalization transaction for accounting purposes. The
repurchase of shares from the Shareholders, the Debt Retirement,
the Holdings Common Equity Contribution, the issuance and sale by
Holdings of the Holdings Preferred Stock and the Old Debentures,
the borrowing by Operating Corp of funds under the Bank
Facilities and the Securitization and the issuance and sale by
Operating Corp of the Operating Corp Senior Subordinated Notes
were effected in connection with the "Recapitalization."
The following table sets forth the sources and uses of
funds in connection with the Recapitalization as it occurred on
October 17, 1997:
(dollars in
thousands)
Sources:
Revolving Credit Facility (1)............. $ 35,559
Term Loan Facility........................ 70,000
Securitization (2)........................ 40,000
Operating Corp Senior Subordinated Notes.. 150,000
Debentures issued in the Offering......... 75,257
Holdings Preferred Stock.................. 125,000
Holdings Common Equity Contribution....... 63,891
- ------------------------------------------ ------
Total Sources........................... $ 559,707
=======
Uses:
Repurchase of Holdings' Capital Stock..... $ 316,688
Repayment of Retired Bank Credit
Facility (3) ............................. 99,212
Repayment of Retired Senior Notes (4)..... 93,104
Retirement of Industrial Revenue Bond..... 1,963
Transaction Fees and Expenses and
Other Transacayments(5) ................ 48,740
---------------------------------------- ------
Total Uses.............................. $ 559,707
=======
(1) Reflects borrowings to partially refinance seasonal
borrowings outstanding under the Retired Bank Credit Facility.
Giving effect to the Recapitalization, average outstanding
borrowings under the Revolving Credit Facility would have been
$12.2 million during the twelve months ended November 7, 1997.
Excludes letters of credit issued to facilitate international
merchandise purchases, which had an aggregate outstanding
balance of $37.4 million as of November 7, 1997. See the notes
to the "Unaudited Pro Forma Statements of Operations" included
herein.
(2) The Company securitized approximately $40 million of PCP
consumer loan installment receivables off-balance sheet
simultaneously with the consummation of the Recapitalization
pursuant to a facility arranged by affiliates of the Initial
Purchasers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of Other Issuer
Indebtedness--Receivables Facility."
(3) Includes $0.2 million of accrued interest.
(4) Includes a $5.8 million make-whole premium in connection
with the prepayment of the Retired Senior Notes and $2.3
million of accrued interest.
(5) Includes Holdings' expenses, management bonuses,
financial advisory, consulting and other professional
fees and deferred financing costs. See "Certain Relationships
and Related Transactions."
5
Texas Pacific Group
Texas Pacific Group ("TPG") was founded by David
Bonderman, James G. Coulter and William S. Price, III in 1992 to
pursue public and private investment opportunities through a
variety of methods, including leveraged buyouts,
recapitalizations, joint ventures, restructurings and strategic
public securities investments. The principals of TPG operate TPG
Partners, L.P. and TPG Partners II, both Delaware limited
partnerships with aggregate committed capital of over $3.2
billion. Among TPG's investments are branded consumer products
companies Beringer Wine Estates, Del Monte Foods Company and
Ducati Motor. Other TPG portfolio companies include America West
Airlines, Belden & Blake Corporation, Favorite Brands
International, Paradyne, Virgin Entertainment and Vivra Specialty
Partners. In addition, the principals of TPG led the $9 billion
reorganization of Continental Airlines in 1993.
The Exchange Offer
Registration Rights The Old Debentures were issued
Agreement.................... on October 17, 1997 to the
Initial Purchasers. The Initial
Purchasers placed the Old
Debentures with institutional
investors. In connection therewith,
the Issuer and the Initial
Purchasers entered into the
Registration Rights Agreement,
providing, among other things, for
the Exchange Offer. See "The
Exchange Offer."
The Exchange Offer........... New Debentures are being offered in exchange
For an equal principal amount of Old
Debentures. As of the date hereof,
$142,000,000 aggregate principal amount
at maturity of Old Debentures is
outstanding. Old Debentures may be
tendered only in integral multiples
of $1,000 of principal amount at
maturity.
Resale of New Debentures..... Based on interpretations by the staff
of the Commission, as set forth in
no-action letters issued to third
parties, including the Exchange
Offer No-Action Letters, the Issuer
believes that the New Debentures
issued pursuant to the Exchange
Offer may be offered for resale,
resold or otherwise transferred by
each holder thereof (other than a
broker-dealer who acquires such New
Debentures directly from the Issuer
for resale pursuant to Rule 144A
under the Securities Act or any
other available exemption under the
Securities Act and other than any
holder that is an "affiliate" (as
defined under Rule 405 of the
Securities Act) of the Issuer)
without compliance with the
registration and prospectus
delivery provisions of the
Securities Act, provided that such
New Debentures are acquired in the
ordinary course of such holder's
business and such holder is not
engaged in, and does not intend to
engage in, a distribution of such
New Debentures and has no
arrangement with any person to
participate in a distribution of
such New Debentures. By tendering
the Old Debentures in exchange for
New Debentures, each holder, other
than a broker-dealer, will
represent to the Issuer that: (i)
it is not an affiliate (as defined
in Rule 405 under the Securities
Act) of the Issuer; (ii) it is not
a broker-dealer tendering Old
Debentures acquired for its own
account directly from the Issuer;
(iii) any New Debentures to be
received by it were acquired in the
ordinary course of its business;
and (iv) it is not engaged in, and
does not intend to engage in, a
distribution of such New Debentures
and has no
6
arrangement or understanding to
participate in a distribution of
the New Debentures. If a holder of
Old Debentures is engaged in or
intends to engage in a distribution
of the New Debentures or has any
arrangement or understanding with
respect to the distribution of the
New Debentures to be acquired
pursuant to the Exchange Offer,
such holder may not rely on the
applicable interpretations of the
staff of the Commission and must
comply with the registration and
prospectus delivery requirements of
the Securities Act in connection with
any secondary resale transaction. Each
Participating Broker-Dealer that
receives New Debentures for its own
account pursuant to the Exchange
Offer must acknowledge that it will
deliver a prospectus meeting the
requirements of the Securities Act
in connection with any resale of
such New Debentures. The Letter of
Transmittal states that by so
acknowledging and by delivering a
prospectus, a Participating
Broker-Dealer will not be deemed to
admit that it is an "underwriter"
within the meaning of the
Securities Act. This Prospectus, as
it may be amended or supplemented
from time to time, may be used by a
Participating Broker-Dealer in
connection with resales of New
Debentures received in exchange for
Old Debentures where such Old
Debentures were acquired by such
Participating Broker-Dealer as a
result of market-making activities
or other trading activities. The
Issuer has agreed that it will make
this Prospectus available to any
Participating Broker-Dealer for a
period of time not to exceed one
year after the date on which the
Exchange Offer is consummated for
use in connection with any such
resale. See "Plan of Distribution."
To comply with the securities laws
of certain jurisdictions, it may be
necessary to qualify for sale or
register the New Debentures prior
to offering or selling such New
Debentures. The Issuer has agreed,
pursuant to the Registration Rights
Agreement and subject to certain
specified limitations therein, to
register or qualify the New
Debentures for offer or sale under
the securities or "blue sky" laws
of such jurisdictions as may be
necessary to permit consummation of
the Exchange Offer.
Consequences of
Failure to Exchange Old
Debentures................... Upon consummation of the Exchange
Offer, subject to certain exceptions,
holders of Old Debentures who do not
exchange their Old Debentures for
New Debentures in the Exchange Offer will
no longer be entitled to registration
rights and will not be able to
offer or sell their Old Debentures,
unless such Old Debentures are
subsequently registered under the
Securities Act (which, subject to
certain limited exceptions, the Issuer
will have no obligation to do), except
pursuant to an exemption from,
or in a transaction not subject
to, the Securities Act and
applicable state securities laws.
See "Risk Factors--Risk Factors Relating
to the Debentures--Consequences of
Failure to Exchange" and "The Exchange
Offer--Terms of the Exchange Offer."
7
Expiration Date.............. 5:00 p.m., New York City time, on _________,
1998 (30 calendar
days following the commencement of the
Exchange Offer), unless the Exchange
Offer is extended, in which case
the term "Expiration Date"
means the latest date and
time to which the
Exchange Offer is extended.
Yield and Interest on
the New Debentures............13 1/8% (computed on a semi-annual
bond equivalent basis) calculated
from October 17, 1997. The New
Debentures will accrete at a rate
of 13 1/8%, compounded semi-
annually, to an aggregate
principal amount of $142.0 million
by October 15, 2002. Cash interest
will not accrue on the New
Debentures prior to October 15, 2002.
Commencing October 15, 2002, cash
interest on the New Debentures will
accrue and be payable, at a rate of
13 1/8% per annum, semi-annually in
arrears on each April 15 and October 15.
Conditions to the The Exchange Offer is not conditioned
Exchange Offer upon any minimum principal amount of
Old Debentures being tendered for
exchange. However, the Exchange
Offer is subject to certain
customary conditions, which may,
under certain circumstances, be
waived by the Issuer. See "The
Exchange Offer--Conditions." Except
for the requirements of applicable
federal and state securities laws,
there are no federal or state
regulatory requirements to be
complied with or obtained by the
Issuer connection in with the
Exchange Offer.
Procedures for Tendering
Old Debentures .............. Each holder of Old Debentures
wishing to accept the Exchange Offer
must complete, sign and date
the Letter of Transmittal,
in accordance with the
instructions contained herein and
therein, and mail or otherwise
deliver such Letter of Transmittal,
together with the Old Debentures to
be exchanged and any other required
documentation to the Exchange Agent
(as defined herein) at the address
set forth herein or effect a tender
of Old Debentures pursuant to the
procedures for book-entry transfer
as provided for herein. See "The
Exchange Offer--Procedures for
Tendering" and "--Book Entry
Transfer."
Guaranteed Delivery Holders of Old Debentures who wish to
Procedures....................tender their Old Debentures and whose
Old Debentures are not immediately
available or who cannot deliver
their Old Debentures and a properly
completed Letter of Transmittal or
any other documents required by the
Letter of Transmittal to the
Exchange Agent prior to the
Expiration Date may tender their
Old Debentures according to the
guaranteed delivery procedures set
forth in "The Exchange
Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights............ Tenders of Old Debentures may be
withdrawn at any time prior to
5:00 p.m., New York City time, on
the Expiration Date. To withdraw a tender
of Old Debentures, a written notice of
withdrawal must be received by the
Exchange Agent at its address
set forth herein under "The Exchange
Offer--Exchange Agent" prior to 5:00 p.m.,
New York City time, on the Expiration Date.
8
Acceptance of Old
Debentures and
Delivery of
New Debentures .............. Subject to certain conditions, any and
all Old Debentures that are properly
tendered in the Exchange Offer
prior to 5:00 p.m., New York City
time, on the Expiration Date will
be accepted for exchange. The New
Debentures issued pursuant to the
Exchange Offer will be delivered
promptly following the Expiration
Date. See "The Exchange
Offer--Terms of the Exchange
Offer."
Certain Tax Considerations... The exchange of New Debentures for
Old Debentures should not
be considered a sale or exchange
or otherwise a taxable event for
Federal income tax purposes. See
"Certain U.S. Federal Tax
Considerations."
Exchange Agent............... State Street Bank and Trust Company
is serving as exchange agent (the "Exchange
Agent") in connection with the Exchange
Offer.
Fees and Expenses............ All expenses incident to consummation
of the Exchange Offer and compliance with the
Registration Rights Agreement will be borne
by the Issuer. See "The Exchange Offer--Fees
and Expenses."
Use of Proceeds.............. There will be no cash proceeds
payable to the Issuer from the
issuance of the New Debentures
pursuant to the Exchange Offer.
See "Use of Proceeds."
9
Summary of Terms of New Debentures
The Exchange Offer relates to the exchange of up to
$142,000,000 aggregate principal amount at maturity of Old
Debentures for up to an equal aggregate principal amount of New
Debentures. The New Debentures will be entitled to the benefits
of the same Indenture that governs the Old Debentures and that
will govern the New Debentures. The form and terms of the New
Debentures are the same in all material respects as the form and
terms of the Old Debentures, except that the New Debentures have
been registered under the Securities Act and therefore will not
bear legends restricting the transfer thereof. See "Description
of the New Debentures."
Maturity Date............. October 15, 2008.
Yield and Interest Rate and 13 1/8% (computed on a semi-annual
Payment Dates............. bond equivalent basis) calculated
from October 17, 1997. The New
Debentures will accrete at a rate
of 13 1/8%, compounded semi-annually,
to an aggregate principal amount of
$142.0 million by October 15, 2002.
Cash interest will not accrue on the
New Debentures prior to October 15,
2002. Commencing October 15, 2002,
cash interest on the New Debentures
will accrue and be payable, at a
rate of 13 1/8% per annum,
semi-annually in arrears on each
April 15 and October 15.
Optional Redemption....... The New Debentures will be
redeemable at the option of Holdings,
in whole or in part, at any time
on or after October 15, 2002, in
cash at the redemption prices set
forth herein, plus accrued and
unpaid interest and Liquidated Damages
(as defined herein), if any,
thereon to the redemption date.
In addition, at any time prior to
October 15, 2000, Holdings may,
at its option, on any one or more
occasions, redeem up to 35% of the
aggregate principal amount at
maturity of the New Debentures
originally issued at a redemption
price equal to 113.125% of the
Accreted Value (as defined herein)
thereof, plus Liquidated Damages,
if any, with the net cash
proceeds of one or more Equity
Offerings (as defined herein);
provided that at least 65% of
the original aggregate principal
amount at maturity of the New
Debentures will remain outstanding
immediately following each such
redemption. See "Description of
the New Debentures--Optional Redemption."
Repurchase at the Option
of Holders................ Upon the occurrence of a Change of
Control (as defined herein) each holder
of New Debentures will have the right
to require Holdings to repurchase
all or any part of such holder's
New Debentures at a price in cash
equal to 101% of the Accreted Value
thereof plus Liquidated Damages, if
any, thereon to the date of
repurchase in the case of any such
purchase on or after October 15,
2002. Holdings does not have, and
may not in the future have, any
assets other than common stock of
Operating Corp (which will be
pledged to secure Operating Corp's
obligations under the Bank
Facilities). As a result, Holdings'
ability to repurchase all or any
part of the New Debentures upon the
occurrence of a Change of Control
will be dependent upon the receipt
of dividends or other distributions
from its direct and indirect
subsidiaries. The Bank Facilities
and the Operating Corp Senior
Subordinated Notes restrict
Operating Corp from paying
dividends and making any
10
other distributions to Holdings. If
Holdings is unable to obtain
dividends from Operating Corp
sufficient to permit the repurchase
of the New Debentures or does not
refinance such indebtedness,
Holdings will likely not have the
financial resources to purchase New
Debentures upon the occurrence of a
Change of Control. In any event,
there can be no assurance that
Holdings' subsidiaries will have
the resources available to pay any
such dividend or make any such
distribution. Furthermore, the Bank
Facilities provide that certain
change of control events will
constitute a default thereunder and
the Operating Corp Senior
Subordinated Notes provide that, in
the event of a Change of Control,
Operating Corp will be required to
offer to repurchase the Operating
Corp Senior Subordinated Notes at
the price specified therefore.
Holdings' failure to make a Change
of Control Offer (as defined
herein) when required or to
purchase tendered New Debentures
when tendered would constitute an
Event of Default (as defined
herein) under the Indenture. See
"Description of the New
Debentures--Repurchase at the
Option of Holders."
Ranking...................... The New Debentures will be senior
obligations of Holdings. The
New Debentures will rank pari passu
in right of payment with all
future senior indebtedness of Holdings
and will rank senior in right
of payment to all future subordinated
indebtedness of Holdings.
The New Debentures will be effectively
subordinated to all liabilities of Holdings'
subsidiaries. See "Description of the New
Debentures."
Covenants................... The Indenture contains certain
covenants that, among other things,
will limit the ability of Holdings
and its Restricted Subsidiaries (as
defined herein) to: incur indebtedness
and issue preferred stock,
repurchase Capital Stock (as defined herein)
and certain indebtedness, engage in
transactions with affiliates, incur or suffer
to exist certain liens, pay dividends or
other distributions, make certain investments,
sell assets and engage in certain mergers and
consolidations. See "Description of
the New Debentures--Certain
Covenants."
Use of Proceeds
There will be no cash proceeds payable to the Issuer from
the issuance of the New Debentures pursuant to the Exchange
Offer. The proceeds from the sale of the Old Debentures were used
to fund the Recapitalization. See "Use of Proceeds" and "The
Recapitalization."
Risk Factors
See "Risk Factors" for a discussion of certain factors that
should be considered in evaluating an investment in the
Debentures.
11
Summary Unaudited Pro Forma Consolidated Financial Data
The following table sets forth summary unaudited pro forma
consolidated statement of operations data of Holdings for the
fiscal year ended January 31, 1997, for the forty weeks ended
November 8, 1996 and November 7, 1997 and for the twelve months
ended November 7, 1997 and summary unaudited historical and pro
forma consolidated balance sheet data at November 7, 1997. The pro
forma consolidated statement of operations data for the fiscal
year ended January 31, 1997, for the forty weeks ended November
8, 1996 and November 7, 1997, and for the twelve months ended
November 7, 1997 give effect to the Recapitalization as if it had
occurred at February 3, 1996. The data presented below should be
read in conjunction with the Consolidated Financial Statements,
including the related Notes thereto, included herein, the other
financial information included herein, "Unaudited Pro Forma
Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Fiscal Year Ended Forty Weeks Ended Twelve Months
----------------- ----------------- -------------
November Ended
-------- -----
January 31, 1997 8, 1996 7, 1997 November 7, 1997
---------------- ------- ------- ----------------
(dollars in thousands)
Statement of
Operations Data:
Revenues (1) .......... $ 806,193 $ 536,743 $ 564,958 $ 834,408
Gross profit .......... 377,474 244,687 254,093 386,880
Selling, general and
administrative
expenses .............. 350,105 241,582 254,544 363,067
Income from
operations ............ 27,369 3,105 (451) 23,813
Net income (loss)(2)... (4,301) (13,691) (40,138) (30,748)
Other Data:
Depreciation and
amortization .......... $ 10,541 $ 7,625 $ 10,191 $ 13,107
Net capital
expenditures (3)
New store openings .. 10,894 6,903 15,253 19,244
Other ............... 11,587 8,044 13,012 16,555
---------- -------- --------- ---------
Total net capital
expenditures ........ $ 22,481 $ 14,947 $ 28,265 $ 35,799
Ratio of earnings to
fixed charges (7)...... - - - -
Credit Ratios:
Total average
debt (6) .............. $ 307,494
Adjusted EBITDA (4) ... 47,590
Cash interest
expense (5) ........... 22,941
Total interest
expense (5) ........... 36,304
Adjusted EBITDA/cash
interest expense ...... 2.1
Adjusted EBITDA/total
interest expense ...... 1.3
Total average
debt/Adjusted
EBITDA (6) ............ 6.5
Cash flows from
operating activities... $ (1,837)
Cash flows from
investing activities... $(35,799)
Cash flows from
financing activities... $ 39,990
_________________
(1) Revenues include the pro forma effect of the Securitization
of accounts receivable. See "Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and
"Description of Other Issuer Indebtedness-- Receivables
Facility."
(2) In the forty weeks ended November 7, 1997, the Company
recognized an extraordinary loss of $4.5 million, net
of income tax benefit, related to the early retirement of
debt. The Company also recognized expenses of $19.9 million
in connection with the Recapitalization.
(3) Capital expenditures are net of proceeds from construction
allowances.
(4) EBITDA represents income (loss) before extraordinary item
and cumulative effect of accounting changes, income taxes,
interest expense, depreciation and amortization and expenses
of $19.9 million incurred in connection with the
Recapitalization. The Issuer believes that EBITDA provides
useful information regarding the Company's ability to
service its debt; however, holders tendering Old Debentures in
12
the Exchange Offer should consider the following factors
in evaluating such measures: EBITDA and related measures (i)
should not be considered in isolation, (ii) are not measures
of performance calculated in accordance with generally
accepted accounting principles ("GAAP"), (iii) should not be
construed as alternatives or substitutes for income from
operations, net income or cash flows from operating
activities in analyzing the Company's operating performance,
financial position or cash flows (in each case, as
determined in accordance with GAAP) and (iv) should not be
used as indicators of the Company's operating performance or
measures of its liquidity. Additionally, because all
companies do not calculate EBITDA and related measures in a
uniform fashion, the calculations presented in this
Prospectus may not be comparable to other similarly titled
measures of other companies.
Adjusted EBITDA is defined as EBITDA, as defined above,
revised to reflect management's estimate of certain cost
savings and cost eliminations implemented prior to the
Recapitalization. Holders tendering Old Debentures in the
Exchange Offer should consider that Adjusted EBITDA (i)
should not be considered in isolation, (ii) is not a measure
of performance calculated in accordance with GAAP, (iii)
should not be construed as alternatives or substitutes for
income from operations, net income or cash flows from
operating activities in analyzing the Company's operating
performance, financial position or cash flows (in each case,
as determined in accordance with GAAP) and (iv) should not
be used as indicators of the Company's operating performance
or measures of its liquidity. See notes to "Unaudited Pro
Forma Statements of Operations" included herein. This
information should be read in conjunction with the Unaudited
Pro Forma Consolidated Financial Data and the related Notes
thereto included herein.
Twelve Months Ended
-------------------
November 7, 1997
----------------
(dollars in thousands)
Historical EBITDA ....................... $40,970
Recapitalization pro forma
adjustments:
Loss on Securitization of
accounts receivable ................... (2,250)
Cost savings and cost eliminations
implemented prior to the Recapitalization:
Renegotiation of catalog
vendor contract(a) .................... 2,100
Headcount and net payroll
reductions(b) ......................... 4,550
Insourcing of photography
shop(c) ............................... 820
Non-recurring
severance(d) ........................... 1,400
---------
Total adjustments .................... 6,620
---------
Adjusted EBITDA .......................... $47,590
========
(a) Reflects the recent renegotiation of the Company's catalog
vendor contract. The adjustment represents the difference
between the amounts previously expensed for such items and
the amounts which are expected to be expensed under the
terms of the new contract.
(b) Represents compensation savings as a result of the termination
of certain positions.
(c) Represents the estimated cost savings from bringing
in-house certain photography functions that were previously
performed by outside vendors.
(d) Reflects non-recurring severance associated with the termination
of certain managers.
(5) Cash interest expense excludes, and total interest expense
includes, non-cash interest in respect of the Debentures.
(6) For purposes of computing the ratio of total average debt to
Adjusted EBITDA, total average debt on a pro forma basis as of
November 7, 1997 reflects average outstanding balances under
the Revolving Credit Facility of $12.2 million during the
twelve months ended November 7, 1997 (giving effect to the
Recapitalization), $70.0 million in aggregate principal amount
of indebtedness under the Term Loan Facility and $150.0
million in aggregate principal amount of the Operating Corp
Senior Subordinated Notes and $75.3 million in initial
aggregate principal amount of the Debentures issued in the
Offering. See the notes to "Unaudited Pro Forma Statements of
Operations" included herein.
(7) For purposes of computing the pro forma ratio of earnings to
fixed charges, pro forma earnings include income before income
taxes (adjusted for pro forma interest expense), extraordinary
items, cumulative effect of accounting changes and non-recurring
expenses incurred in connection with the Recapitalization of $19.9
million in the periods ended November 7, 1997, plus pro
forma fixed charges. Pro forma fixed charges consist of pro
forma interest expense and one-third of rental expense (deemed
by management to be representative of the interest factor of
rental payments). Pro forma earnings were inadequate to cover
pro forma fixed charges by $8,441 and $2,452 for the twelve
months ended November 7, 1997 and January 31, 1997,
respectively, and by $25,589 and $19,600 for the forty weeks
ended November 7, 1997 and November 8, 1996, respectively.
13
Summary Consolidated Financial And Operating Data
The following table sets forth summary consolidated
historical financial, operating and other data of Holdings. The
summary financial data for each of the five fiscal years ended
January 31, 1997 are derived from the Consolidated Financial
Statements of Holdings, which have been audited by Deloitte &
Touche LLP, independent auditors. The summary financial data for
the forty weeks ended November 8, 1996 and November 7, 1997 have
been derived from the Unaudited Condensed Consolidated Financial
Statements of the Company and include, in the opinion of
management, all adjustments necessary to present fairly the data
for such periods. The results for the forty weeks ended November
7, 1997 are not necessarily indicative of the results to be
expected for the fiscal year ending January 30, 1998 or for any
future period. The data presented below should be read in
conjunction with the Consolidated Financial Statements, including
the related Notes thereto included herein, the other financial
information included herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Fiscal Year Ended Forty Weeks Ended
-------------------------------------------------------------------- -----------------
January 29, January 28, February 3, February 2, January 31, Nov. 8, Nov. 7,
----------- ----------- ----------- ----------- ----------- ------- -------
1993 1994 1995 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ----
(dollars in thousands, except per square foot data) (unaudited)
Financial Data:
Revenues ............... $ 571,047 $ 646,972 $ 737,725 $ 745,909 $ 808,843 $538,781 $566,596
Gross profit ........... 267,120 292,083 343,652 346,241 380,124 246,725 255,731
Selling, general
and administrative
expenses ............... 238,730 265,857 311,468 327,672 348,305 240,197 253,159
Income
from operations ........ 28,390 26,226 32,184 18,569 31,819 6,528 2,572
Net income (loss) (1) .. 14,019 12,019 14,919 6,450 12,549 (573) (28,598)
Operating Data:
Revenues:
J. Crew mail order ... $ 201,463 $ 199,954 $ 247,272 $ 274,653 $ 289,772 $165,936 $157,840
J. Crew retail ....... 72,906 108,650 135,726 134,959 167,957 110,399 140,574
J. Crew factory ...... 38,563 49,253 62,626 79,203 94,579 70,266 75,965
J. Crew licensing .... -- 1,900 3,269 3,975 3,817 3,729 2,968
------- ------- ------- -------- -------- -------- -------
Total J. Crew brand .. 312,932 359,757 448,893 492,790 556,125 350,330 377,347
Other divisions (2) .. 258,115 287,215 288,832 253,119 252,718 188,451 189,249
------- ------- -------- --------
Total ................ $ 571,047 $ 646,972 $ 737,725 $ 745,909 $ 808,843 $538,781 $566,596
========= ========== ========== ========== ========= ======= ========
EBITDA(3):
J. Crew mail order ... $ 12,840 $ 11,980 $ 24,345 $ 16,831 $ 17,524 $ (1,924) $ (8,225)
J. Crew retail ....... 6,720 5,055 13,333 15,194 16,847 8,800 8,177
J. Crew factory. ..... 3,660 1,797 1,653 (66) 2,876 3,395 3,244
J. Crew licensing .... (51) 1,239 2,422 2,820 2,467 2,797 2,285
Total J. Crew brand .. 23,169 20,071 41,753 34,779 39,714 13,068 5,481
Other divisions (2) .. 11,611 12,941 (1,459) (5,938) 2,646 1,085 7,282
-------- -------- -------- -------- ------ ------- --------
Total ............... $ 34,780 $ 33,012 $ 40,294 $ 28,841 $ 42,360 $ 14,153 $ 12,763
========= ======== ======== ======== ========= ======= ========
14
Other Data:
Cash flows from
operating activities ..... $22,400 $1,467 $1,774 $(7,849) $16,497 $(42,766) $(61,110)
Cash flows from
investing activities ..... $(14,965) $(11,086) $(13,467) $(14,640) $(22,481) $(14,947) $(28,265)
Cash flows from
financing activities ..... $638 $5,020 $6,763 $17,763 $(413) $54,822 $95,255
J. Crew Mail Order:
Number of catalogs
circulated
(in thousand$) ........ $ 56,983 62,547 $ 61,187 $ 67,519 $ 76,087 $ 53,942 $ 53,977
Number of pages
circulated
(in millions) ......... 6,576 6,965 8,277 10,198 9,827 6,341 6,293
J. Crew Retail:
Sales per gross
square foot (4) ...... $ 622 $ 559 $ 594 $ 533 $ 551 NM NM
Store contribution
margin (5) ........... 24.0% 18.7% 22.7% 25.5% 25.4% NM NM
Number of stores
open at end of
period ............. 18 28 29 31 39 39 49
Comparable store
sales change (6) 22.0% (8.0)% 6.9% (6.0)% 4.5% 4.0% (6.1)%
Depreciation and
amortization .......... $ 6,390 $ 6,786 $ 8,110 $ 10,272 $ 10,541 $ 7,625 $ 10,191
Net capital
expenditures (7)
New store openings .. 5,519 2,789 2,804 6,009 10,894 6,903 15,253
Other ............... 9,446 8,297 10,663 8,631 11,587 8,044 13,012
------- ------- -------- -------- ------- --------
Total net capital
expenditures ....... $14,965 $11,086 $ 13,467 $ 14,640 $ 22,481 $14,947 $ 28,265
======= ======= ======== ======== ======== ======= ========
(1) In fiscal 1995, Holdings changed its method of accounting for
catalog costs and for merchandise inventories and recognized
an increase in net income from the aggregate cumulative effect
of such accounting changes, net of income taxes, of $2.6
million. In the same year, Holdings recognized an
extraordinary loss of $1.7 million, net of income tax benefit,
related to the early retirement of debt. See Notes 11 and 12
of Notes to Consolidated Financial Statements.
During the forty weeks ended November 7, 1997, the Company
recognized an extraordinary loss of $4.5 million, net of
income tax benefit, related to the early retirement of debt
and incurred other expenses of $19.9 million in connection
with the Recapitalization.
(2) Includes the Company's PCP and C&W divisions and finance
charge income derived from PCP installment sales.
(3) EBITDA represents income (loss) before extraordinary items
and cumulative effect of accounting changes plus income
taxes, interest expense, depreciation and amortization and
expenses of $19.9 million incurred in connection with the
Recapitalization. The Company believes that EBITDA provides
useful information regarding the Company's ability to
service its debt; however, EBITDA does not represent cash
flow from operations as defined by generally accepted
accounting principles and should not be considered as a
substitute for net income as an indicator of the Company's
operating performance or cash flow as a measure of
liquidity. Holders tendering Old Debentures in the Exchange Offer
should consider the following factors in evaluating such
measures: EBITDA and related measures (i) should not be
considered in isolation, (ii) are not measures of
performance calculated in accordance with GAAP, (iii) should
not be construed as alternatives or substitutes for income
from operations, net income or cash flows from operating
activities in analyzing the Company's operating performance,
financial position or cash flows (in each case, as
determined in accordance with GAAP) and (iv) should not be
used as indicators of the Issuer's operating performance or
measures of its liquidity. Additionally, because all
companies do not calculate EBITDA and related measures in a
uniform fashion, the calculations presented in this
Prospectus may not be comparable to other similarly titled
measures of other companies.
(4) Sales per gross square foot is the result of dividing
annualized net retail sales for the period (reflecting
adjustments based on management estimates of the impact of
opening stores in different periods during the year) by gross
square footage at the end of each fiscal period.
(5) Store contribution margin is computed as gross profit less
in-store operating expenses divided by sales.
(6) Comparable store sales includes stores that have been open
for one full twelve-month period.
(7) Capital expenditures are net of proceeds from construction allowances.
15
RISK FACTORS
Prospective holders of the New Debentures should carefully
review the information contained and incorporated by reference in
this Prospectus and should particularly consider the following
matters:
Risk Factors Relating to the Company
Substantial Leverage; Liquidity; Stockholders' Deficit
In connection with the Recapitalization, the Company
incurred a significant amount of additional indebtedness, the
debt service obligations of which could, under certain
circumstances, have material consequences to security holders of
Holdings, including holders of New Debentures. The Company had
$342.3 million of indebtedness and its stockholders' deficit was
$194.7 million as of November 7, 1997, as compared to
indebtedness of $142.2 million and stockholders' equity of $89.1
million as of November 8, 1996. In addition, subject to the
restrictions in the Bank Facilities, the Operating Corp Senior
Subordinated Notes and the Debentures, the Company may incur
additional senior or other indebtedness from time to time to
finance acquisitions or capital expenditures or for other general
corporate purposes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and
Capital Resources." On a pro forma basis for the forty week
period ended November 7, 1997, Holdings has estimated the
increase in cash interest expense from borrowings used to finance
the Recapitalization to be $7.0 million and the increase in
non-cash interest expense from the amortization of original issue
discount of the Debentures and debt issuance costs relating to
such borrowings to be $9.3 million. See "Unaudited Pro Forma
Consolidated Financial Data." The Bank Facilities and the Senior
Subordinated Note Indenture restrict, but do not prohibit, the
payment of dividends by Operating Corp to Holdings to finance the
payment of interest on the Debentures. See "Description of
Operating Corp Indebtedness" and "Description of the New
Debentures."
The level of the Company's indebtedness could have
important consequences to the holders of the Debentures,
including, but not limited to, the following: (i) the Company's
ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate
purposes or other purposes may be impaired; (ii) a significant
portion of the Company's cash flow from operations must be
dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to the Company
for its operations; (iii) significant amounts of the Company's
borrowings will bear interest at variable rates, which could
result in higher interest expense in the event of increases in
interest rates; (iv) the Indenture, the Senior Subordinated Note
Indenture (as defined herein) and the Bank Facilities contain
financial and restrictive covenants, the failure to comply with
which may result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company; (v)
the indebtedness outstanding under the Bank Facilities is secured
and matures prior to the maturity of the Debentures; (vi) the
Company may be substantially more leveraged than certain of its
competitors, which may place the Company at a competitive
disadvantage; and (vii) the Company's substantial degree of
leverage may limit its flexibility to adjust to changing market
conditions, reduce its ability to withstand competitive pressures
and make it more vulnerable to a downturn in general economic
conditions or its business. See "Description of the New
Debentures" and "Description of Other Issuer Indebtedness."
The Company's ability to make scheduled payments or to
refinance its debt obligations will depend upon its future
financial and operating performance, which will be affected by
prevailing economic conditions and financial, business and other
factors, certain of which are beyond its control. There can be no
assurance that the Company's operating results, cash flow and
capital resources will be sufficient for payment of its
indebtedness in the future. In the absence of such operating
results and resources, the Company could face substantial
liquidity problems and might be required to dispose of material
assets or operations to meet its debt service and other
obligations, and there can be no assurance as to the timing of
such sales or the proceeds that the Company could realize
therefrom. In addition, because significant amounts of the
Company's borrowings will bear interest at variable rates, an
increase in interest rates could adversely affect, among other
things, the Company's ability to meet its debt service
obligations. If the Company is unable to service its
indebtedness, it may take actions such as
16
reducing or delaying planned expansion and capital expenditures,
selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital. There can be no assurance that
any of these actions could be effected on satisfactory terms, if
at all.
Dependence on Key Personnel
Emily Woods' leadership in the areas of design,
merchandising and operations has been a significant factor in the
Company's success. The loss of Ms. Woods' services could have a
material adverse affect on the Company. The Company also depends
on the services of key members of its design and merchandising
teams and other key officers and employees. While the Company
believes that it has developed depth and experience among its key
personnel, there can be no assurance that the Company's business
would not be affected if one or more of these individuals left
the Company.
The Company has entered into an employment agreement with
Ms. Woods and has employment agreements with certain other
employees. See "Management--Employment Agreements and Other
Compensation Arrangements." The Company maintains key person life
insurance on Ms. Woods.
Fashion and Apparel Industry Risks
The Company believes that its success depends in
substantial part on its ability to originate and define product
and fashion trends as well as to anticipate, gauge and react to
changing consumer demands in a timely manner. There can be no
assurance that the Company will continue to be successful in this
regard. The Company attempts to reduce the risks of changing
fashion trends and product acceptance by devoting a substantial
portion of its product line to basic durables which are not
significantly modified from year to year. Nevertheless, if the
Company misjudges the market for its products, it may be faced
with significant excess inventories for some products and missed
opportunities with others.
The industry in which the Company operates is cyclical.
Purchases of apparel and related merchandise tend to decline
during recessionary periods and also may decline at other times.
There can be no assurance that the Company will be able to
maintain its historical growth in revenues or earnings, or remain
profitable in the future. Further, a recession in the general
economy or uncertainties regarding future economic prospects
could affect consumer spending habits and have an adverse effect
on the Company's results of operations.
Increases in Costs of Mailing, Paper and Printing
Postal rate increases and paper and printing costs affect
the cost of the Company's catalog and promotional mailings. The
Company relies on discounts from the basic postal rate structure,
such as discounts for bulk mailings and sorting by zip code and
carrier routes. The Company is not a party to any long-term
contracts for the supply of paper. The Company's cost of paper
has fluctuated significantly during the past three fiscal years,
and its future paper costs are subject to supply and demand
forces external to its business. The Company's average cost per
hundred-pound weight of paper was $39, $58 and $52 during fiscal
1994, 1995 and 1996, respectively, and $52 and $41 during the
forty weeks ended November 8, 1996 and November 7, 1997,
respectively. Consequently, there can be no assurance that the
Company will not be subject to an increase in paper costs.
Although the Company has recently entered into a new four-year
contract for the printing of its catalogs, the contract offers no
assurance that the Company's printing costs will not increase
following expiration of the contract. Future increases in postal
rates or paper or printing costs would have a negative impact on
the Company's earnings to the extent that the Company is unable
to pass such increases on directly to customers or offset such
increases by raising selling prices or by implementing more
efficient mailings. See "Business--J. Crew Brand--J. Crew Mail
Order--Catalog Creation and Production."
Reliance on Foreign Sourcing
In 1996, approximately 50% of the J. Crew brand and
Clifford & Wills merchandise was sourced from independent foreign
factories located primarily in the Far East, and many of the
Company's domestic vendors import a substantial portion of their
merchandise from abroad. The Company has no long-term merchandise
supply
17
contracts and many of its imports are subject to existing
or potential duties, tariffs or quotas that may limit the
quantity of certain types of goods which may be imported into the
United States from countries in those regions. The Company
competes with other companies for production facilities and
import quota capacity. The Company's business is also subject to
a variety of other risks generally associated with doing business
abroad, such as political instability (including issues
concerning the future of Hong Kong following the transfer of Hong
Kong to The People's Republic of China on July 1, 1997), currency
and exchange risks and potential local issues. The Company's
future performance will be subject to such factors, which are
beyond its control, and there can be no assurance that such
factors would not have a material adverse effect on the Company's
results of operations. See "Business--General--Sourcing,
Production and Quality."
The Company requires its licensing partners and independent
manufacturers to operate in compliance with applicable laws and
regulations. While the Company's internal and vendor operating
guidelines promote ethical business practices, the Company does
not control such manufacturers or their labor practices. The
violation of labor or other laws by an independent manufacturer
of the Company or by one of the Company's licensing partners, or
the divergence of an independent manufacturer's or licensing
partner's labor practices from those generally accepted as
ethical in the United States, could have a material adverse
effect on the Company's financial condition and results of
operations.
Uncertainty Relating to Ability to Implement J. Crew Retail
Growth Strategy
The Company intends to expand its base of J. Crew retail
stores as part of its growth strategy. There can be no assurance
that this strategy will be successful. The actual number and type
of such stores to be opened and their success will be dependent
upon a number of factors, including, among other things, the
ability of the Company to manage such expansion and hire and
train qualified associates, the availability of suitable store
locations and the negotiation of acceptable lease terms for new
locations and upon lease renewals for existing locations. There
is no assurance that the Company will be able to open and operate
new stores on a timely or profitable basis. In 1996, net of
construction allowances, the Company spent $10.9 million for new
stores and remodeling and anticipates spending approximately
$16.2 million in 1997 and $23.0 million in 1998 for such capital
expenditures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--J.
Crew Brand--J. Crew Retail--New Store Expansion." The Company
believes that the opening of J. Crew retail stores has diverted
some customer revenues from the J. Crew mail order operations.
There can be no assurance that future store openings will not
continue to have such an effect.
Seasonality
The Company experiences seasonal fluctuations in its
revenues and operating income, with a disproportionate amount of
the Company's revenues and a majority of its income from
operations typically realized during the fourth quarter of its
fiscal year. Revenues and income from operations are generally
weakest during the first and second quarters of the Company's
fiscal year. The Company's quarterly results of operations may
also fluctuate significantly as a result of a variety of other
factors, including the timing of new store openings and of
catalog mailings, and the revenues contributed by new stores,
merchandise mix and the timing and level of markdowns. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Seasonality."
Competition
All aspects of the Company's businesses are highly
competitive. The Company competes primarily with other catalog
operations, specialty brand retailers, department stores, and
mass merchandisers engaged in the retail sale of men's and
women's apparel, accessories, footwear and general merchandise.
The Company believes that the principal bases upon which it
competes are quality, design, efficient service, selection and
price. However, certain of the Company's competitors are larger
and have greater financial, marketing and other resources than
the Company, and there can be no assurance that the Company will
be able to compete successfully with them in the future.
18
Cautionary Statement Concerning Ability to Achieve Anticipated
Cost Savings and Forward-Looking Statements
Management of the Company estimates that approximately $7
million of annualized net cost savings (in addition to the $7.5
million in estimated annual savings included in Adjusted EBITDA)
could be achieved by mid- 1998, including process efficiencies,
reduction of the Base Book trim size, installation of an
automated sortation system at the Company's Lynchburg, Virginia
distribution center and relocation of C&W to the J. Crew
corporate headquarters office. See "Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Overview," "Business--Overview" and
"--Opportunities." The cost savings estimates were prepared
solely by members of the management of the Company. The estimates
necessarily reflect numerous assumptions as to future sales
levels and other operating results, the availability of funds for
capital expenditures as well as general industry and business
conditions and other matters, many of which are beyond the
control of the Company. Other estimates were based on a
management consensus as to what levels of purchasing and similar
efficiencies should be achievable by an entity the size of the
Company. All of these forward-looking statements are based on
estimates and assumptions made by management of the Company,
which although believed to be reasonable, are inherently
uncertain and difficult to predict. There can be no assurance
that the savings anticipated in these forward-looking statements
will be achieved. In addition, there can be no assurance that
unforeseen costs and expenses or other factors will not offset
the estimated cost savings or other components or the Company's
plan in whole or in part.
The information contained herein contains forward-looking
statements that involve a number of risks and uncertainties. A
number of factors could cause actual results, performance,
achievements of the Company, or industry results to be materially
different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These
factors include, but are not limited to, the competitive
environment in the apparel industry in general and in the
Company's specific market areas; changes in prevailing interest
rates and the availability of and terms of financing to fund the
anticipated growth of the Company's business; inflation; changes
in costs of goods and services; economic conditions in general
and in the Company's specific market areas; demographic changes;
changes in or failure to comply with federal, state and/or local
government regulations; liability and other claims asserted
against the Company; changes in operating strategy or development
plans; the ability to attract and retain qualified personnel; the
ability to control inventory levels; the significant indebtedness
of the Company; labor disturbances; the ability to negotiate
agreements with suppliers on favorable terms; changes in the
Company's capital expenditure plan; and other factors referenced
herein. In addition, such forward-looking statements are
necessarily dependent upon assumptions, estimates and dates that
may be incorrect or imprecise and involve known and unknown
risks, uncertainties and other factors. Forward-looking
statements regarding revenues and EBITDA are particularly subject
to a variety of assumptions, some or all of which may not be
realized. Accordingly, any forward-looking statements included
herein do not purport to be predictions of future events or
circumstances and may not be realized. Forward-looking statements
can be identified by, among other things, the use of
forward-looking terminology such as "believes," "expects," "may,"
"will," "should," "seeks," "pro forma," "anticipates" or
"intends" or the negative of any thereof, or other variations
thereon or comparable terminology, or by discussions of strategy
or intentions. Given these uncertainties, prospective purchasers
of New Debentures are cautioned not to place undue reliance on
such forward-looking statements. The Company disclaims any
obligations to update any such factors or to publicly announce
the results of any revisions to any of the forward-looking
statements contained herein to reflect future events or
developments.
Risk Factors Relating to the Debentures
Limitation on Access to Cash Flow of Subsidiaries; Holding Company Structure
Holdings is a holding company, and its ability to pay
interest on the Debentures is dependent upon the receipt of
dividends from its direct and indirect subsidiaries. Holdings
does not have and may not in the future have, any assets other
than the common stock of Operating Corp. Operating Corp and its
subsidiaries are parties to the Bank Facilities and an indenture
relating to the Operating Corp Senior Subordinated Notes (the
"Senior Subordinated Note Indenture"), each of which imposes
substantial restrictions on Operating Corp's ability to pay
dividends to Holdings. Any payment of dividends will be subject
to the satisfaction of certain financial conditions set forth in
the Senior Subordinated Note Indenture and the Bank Facilities.
The ability of Operating Corp and its subsidiaries to comply with
such conditions in the Senior Subordinated Note Indenture may be
affected by events
19
that are beyond the control of Holdings. The breach of any such
conditions could result in a default under the Senior
Subordinated Note Indenture, the Term Loan Facility and/or the
Revolving Credit Facility, and in the event of any such default,
the holders of the Operating Corp Senior Subordinated Notes or
the lenders under the Bank Facilities could elect to accelerate
the maturity of all the Operating Corp Senior Subordinated Notes
or the loans under such facilities. If the maturity of the
Operating Corp Senior Subordinated Notes or the loans under the
Bank Facilities were to be accelerated, all such outstanding debt
would be required to be paid in full before Operating Corp or its
subsidiaries would be permitted to distribute any assets or cash
to Holdings. There can be no assurance that the assets of
Holdings would be sufficient to repay all of such outstanding
debt and to meet its obligations under the Indenture. Future
borrowings by Operating Corp can be expected to contain
restrictions or prohibitions on the payment of dividends by
Operating Corp and its subsidiaries to Holdings. In addition,
under Delaware law, a subsidiary of a company is permitted to pay
dividends on its capital stock, only out of its surplus or, in
the event that it has no surplus, out of its net profits for the
year in which a dividend is declared or for the immediately
preceding fiscal year. Surplus is defined as the excess of a
company's total assets over the sum of its total liabilities plus
the par value of its outstanding capital stock. In order to pay
dividends in cash, Operating Corp must have surplus or net
profits equal to the full amount of the cash dividend at the time
such dividend is declared. In determining Operating Corp's
ability to pay dividends, Delaware law permits the Board of
Directors of Operating Corp to revalue its assets and liabilities
from time to time to their fair market values in order to create
surplus. Holdings cannot predict what the value of its
subsidiaries' assets or the amounts of their liabilities will be
in the future and, accordingly, there can be no assurance that
Holdings will be able to pay its debt service obligations on the
Debentures. In addition, indebtedness outstanding under the Bank
Facilities will be secured by substantially all of the assets of
the Company (including the common stock of Operating Corp).
As a result of the holding company structure of Holdings,
the Holders of the Debentures will be structurally junior to all
creditors of the Holdings' subsidiaries, except to the extent
that Holdings is itself recognized as a creditor of any such
subsidiary, in which case the claims of Holdings would still be
subordinate to any security in the assets of such subsidiary and
any indebtedness of such subsidiary senior to that held by
Holdings. In the event of insolvency, liquidation,
reorganization, dissolution or other winding-up of the Holdings'
subsidiaries, Holdings will not receive any funds available to
pay to creditors of the subsidiaries. As of November 7, 1997, the
aggregate amount of indebtedness and other obligations of
Holdings' subsidiaries (including trade payables and other
accrued liabilities) was $508.3 million.
Restrictive Debt Covenants
The Indenture, the Senior Subordinated Note Indenture and
the Bank Facilities contain a number of significant covenants
that, among other things, restrict the ability of the Company to
dispose of assets, incur additional indebtedness, prepay other
indebtedness (including the Debentures) or amend certain debt
instruments pay dividends, create liens on assets, enter into
sale and leaseback transactions, make investments, loans or
advances, make acquisitions, engage in mergers or consolidations,
change the business conducted by the Issuer or its subsidiaries,
make capital expenditures or engage in certain transactions with
affiliates and otherwise restrict certain corporate activities.
In addition, under the Bank Facilities, Operating Corp is
required to comply with specified financial ratios and tests,
including minimum interest coverage ratios, leverage ratios below
a specified maximum, minimum net worth levels and minimum ratios
of inventory to senior debt. See "Description of the New
Debentures" and "Description of Operating Corp Indebtedness."
The Company's ability to comply with such agreements may be
affected by events beyond its control, including prevailing
economic, financial and industry conditions. The breach of any of
such covenants or restrictions could result in a default under
the Bank Facilities, the Senior Subordinated Note Indenture
and/or the Indenture, which would permit the senior lenders, or
the holders of the Operating Corp Senior Subordinated Notes
and/or the Debentures, or both, as the case may be, to declare
all amounts borrowed thereunder to be due and payable, together
with accrued and unpaid interest, and the commitments of the
senior lenders to make further extensions of credit under the
Bank Facilities could be terminated. If the Company were unable
to repay its indebtedness to its senior lenders, such lenders
could proceed against the collateral securing such indebtedness
as described under "Description of Operating Corp Indebtedness."
20
Fraudulent Transfer Statutes
Under federal or state fraudulent transfer laws, if a court
were to find that, at the time the Debentures were issued, the
Issuer (i) issued the Debentures with the intent of hindering,
delaying or defrauding current or future creditors or (ii) (A)
received less than fair consideration or reasonably equivalent
value for incurring the indebtedness represented by the
Debentures, and (B)(1) was insolvent or was rendered insolvent by
reason of the issuance of the Debentures, (2) was engaged, or
about to engage, in a business or transaction for which its
assets were unreasonably small or (3) intended to incur, or
believed (or should have believed) it would incur, debts beyond
its ability to pay as such debts mature (as all of the foregoing
terms are defined in or interpreted under such fraudulent
transfer statutes), such court could avoid all or a portion of
the Issuer's obligations to the holders of Debentures,
subordinate the Issuer's obligations to the holders of the
Debentures to other existing and future indebtedness of the
Issuer, the effect of which would be to entitle such other
creditors to be paid in full before any payment could be made on
the Debentures, and take other action detrimental to the holders
of the Debentures, including in certain circumstances,
invalidating the Debentures. In that event, there would be no
assurance that any repayment on the Debentures would ever be
recovered by the holders of the Debentures.
The definition of insolvency for purposes of the foregoing
considerations varies among jurisdictions depending upon the
federal or state law that is being applied in any such
proceeding. However, the Issuer generally would be considered
insolvent at the time it incurs the indebtedness constituting the
Debentures if (i) the fair market value (or fair saleable value)
of its assets is less than the amount required to pay its total
existing debts and liabilities (including the probable liability
on contingent liabilities) as they become absolute or matured or
(ii) it is incurring debts beyond its ability to pay as such
debts mature. There can be no assurance as to what standard a
court would apply in order to determine whether the Issuer was
"insolvent" as of the date the Debentures were issued, or that,
regardless of the method of valuation, a court would not
determine that the Issuer was insolvent on that date. Nor can
there be any assurance that a court would not determine,
regardless of whether the Issuer was insolvent on the date the
Debentures were issued, that the payments constituted fraudulent
transfers on another ground. To the extent that proceeds from the
sale of the Debentures are used to make a distribution to a
stockholder on account of the ownership of capital stock, a court
may find that the Issuer did not receive fair consideration or
reasonably equivalent value for the incurrence of the
indebtedness represented by the Debentures.
Based upon financial and other information currently
available to it, management of the Issuer believes that the
Debentures are being incurred for proper purposes and in good
faith and that the Issuer (i) is solvent and will continue to be
solvent after issuing the Debentures, (ii) will have sufficient
capital for carrying on its business after such issuance, and
(iii) will be able to pay its debts as they mature. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Possible Inability to Repurchase Debentures upon Change of Control
In the event of a Change of Control, each holder of
Debentures will have the right to require Holdings to repurchase
all or any part of such holder's Debentures at the offer price
specified therefore in the Indenture. Holdings does not have, and
may not in the future have, any assets other than common stock of
Operating Corp (which is pledged to secure Operating Corp's
obligations under the Bank Facilities). As a result, Holdings'
ability to repurchase all or any part of the Debentures upon the
occurrence of a Change of Control will be dependent upon the
receipt of dividends or other distributions from its direct and
indirect subsidiaries. The Bank Facilities and the Operating Corp
Senior Subordinated Notes restrict Operating Corp from paying
dividends and making any other distributions to Holdings. If
Holdings does not obtain dividends from Operating Corp sufficient
to permit the repurchase of the Debentures or does not refinance
such indebtedness, Holdings will likely not have the financial
resources to purchase Debentures upon the occurrence of a Change
of Control. In any event, there can be no assurance that
Holdings' subsidiaries will have the resources available to pay
such dividend or make any such distribution. Furthermore, the
Bank Facilities provide that certain change of control events
will constitute a default thereunder, and the Operating Corp
Senior Subordinated Notes provide that, in the event of a Change
of Control, Operating Corp will be required to offer to
repurchase the Operating Corp Senior Subordinated Notes at the
price specified therefore. Holdings' failure to make a Change of
Control offer when required or to purchase tendered
21
Debentures when tendered would constitute an Event of Default
under the Indenture. See "Description of the New Debentures" and
"Description of Other Issuer Indebtedness."
Original Issue Discount; Limitations on Holders' Claims
Under the Indenture, in the event of an acceleration of the
maturity of the Debentures upon the occurrence of an Event of
Default, the holders of the Debentures, which have been (in the
case of Old Debentures) or will be (in the case of New
Debentures) issued at a substantial original issue discount from
their principal amount at maturity, may be entitled to recover
only the amount which may be declared due and payable pursuant to
the Indenture, which will be less than the principal amount at
maturity of such Debentures. See "Description of the Debentures--
Events of Default and Remedies."
If a bankruptcy case is commenced by or against Holdings
under the Bankruptcy Code (as defined herein), the claim of a
holder of Debentures with respect to the principal amount thereof
may be limited to an amount equal to the sum of (i) the issue
price of the Debentures and (ii) that portion of the original
issue discount (as determined on the basis of such issue price)
which is not deemed to constitute "unmature interest" for
purposes of the Bankruptcy Code. Accordingly, holders of the
Debentures under such circumstances may, even if sufficient funds
are available, receive a lesser amount than they would be
entitled to under the express terms of the Indenture. In
addition, the same rules as those used for the calculation of
original issue discount under federal income tax law and,
accordingly, a holder might be required to recognize gain or loss
in the event of a distribution related to such a bankruptcy case.
Consequences of Failure to Exchange
Holders of Old Debentures who do not exchange their Old
Debentures for New Debentures pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer of such
Old Debentures as set forth in the legend thereon as a
consequence of the issuance of the Old Debentures pursuant to
exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable
state securities laws. In general, the Old Debentures may not be
offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities
laws. The Issuer does not currently anticipate that it will
register the Old Debentures under the Securities Act. To the
extent that Old Debentures are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Debentures could be adversely affected.
Absence of Public Market
The Old Debentures have been designated as eligible for
trading in the PORTAL market. Prior to this Exchange Offer, there
has been no public market for the New Debentures. If such a
market were to develop, the New Debentures could trade at prices
that may be higher or lower than their principal amount. The
Issuer does not intend to apply for listing of the New Debentures
on any securities exchange or for quotation of the New Debentures
on The Nasdaq Stock Market's National Market or otherwise. The
Initial Purchasers have previously made a market in the Old
Debentures, and the Issuer has been advised that the Initial
Purchasers currently intend to make a market in the New
Debentures, as permitted by applicable laws and regulations,
after consummation of the Exchange Offer. The Initial Purchasers
are not obligated, however, to make a market in the Old
Debentures or the New Debentures and any such market making
activity may be discontinued at any time without notice at the
sole discretion of the Initial Purchasers. There can be no
assurance as to the liquidity of the public market for the New
Debentures or that any active public market for the New
Debentures will develop or continue. If an active public market
does not develop or continue, the market price and liquidity of
the New Debentures may be adversely affected.
22
THE RECAPITALIZATION
The Shareholders, Holdings and TPG Partners II are parties
to the Recapitalization Agreement which provided for the
recapitalization of Holdings. Pursuant to the Recapitalization
Agreement, Holdings purchased from the Shareholders all
outstanding shares of Holdings' capital stock, other than shares
having an implied value of $11.1 million, almost all of which
continues to be held by Emily Woods, and which represented 14.8%
of the outstanding shares of Holdings' Common Stock immediately
following the transaction.
In connection with the Recapitalization, Holdings organized
Operating Corp and immediately prior to the consummation of the
Recapitalization, Holdings transferred substantially all of its
assets and liabilities to Operating Corp. Holdings' current
operations are, and future operations are expected to be, limited
to owning the stock of Operating Corp. Operating Corp repaid
substantially all of the Company's funded debt obligations
existing immediately before the consummation of the
Recapitalization. At October 17, 1997, the aggregate principal
amount of the Company's funded indebtedness was $186.0 million,
consisting of the Retired Senior Notes, the Retired Bank Credit
Facility and the Industrial Revenue Bond.
Cash funding requirements for the Recapitalization (which
was consummated on October 17, 1997) totalled $559.7 million
(including $99.0 million in seasonal borrowings) and were
satisfied through the purchase by TPG Partners II and investors
of an aggregate $188.9 million in Holdings' equity securities
together with an aggregate $330.8 million in borrowings and $40.0
million in proceeds from the Securitization, as follows: (i) the
purchase by TPG Partners II, its affiliates and other investors
of shares of Holdings' Common Stock (representing 85.2% of the
outstanding shares) for $63.9 million; (ii) the purchase by TPG
Partners II, its affiliates and other investors of $125.0 million
in liquidation value of Holdings Preferred Stock; (iii) gross
proceeds of $75.3 million from the issuance and sale by Holdings
of Holdings Senior Discount Debentures; (iv) $150.0 million from
the gross proceeds of the Offering; (v) $40.0 million in proceeds
from the Securitization; (vi) $70.0 million of borrowings under
the Term Loan Facility; and (vii) $35.6 million of borrowings
under the Revolving Credit Facility. See "Management's Discussion
and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Description of the
New Debentures," "Description of Operating Corp Indebtedness" and
"Capital Stock of Holdings and Operating Corp."
The Recapitalization was accounted for as a
recapitalization transaction for accounting purposes. The
repurchase of shares from the Shareholders, the Debt Retirement,
the Holdings Common Equity Contribution, the issuance and sale by
Holdings of the Holdings Preferred Stock and the Holdings Senior
Discount Debentures, the borrowing by Operating Corp of funds
under the Bank Facilities and the Securitization and the issuance
and sale by Operating Corp of the Operating Corp Senior
Subordinated Notes were effected in connection with the
Recapitalization.
23
The following table summarizes the sources and uses of funds in
the Recapitalization:
(dollars in
thousands)
Sources:
Revolving Credit Facility (1)............. $ 35,559
Term Loan Facility........................ 70,000
Securitization (2)........................ 40,000
Operating Corp Senior Subordinated Notes.. 150,000
Debentures issued in the Offering......... 75,257
Holdings Preferred Stock.................. 125,000
Holdings Common Equity Contribution....... 63,891
Total Sources........................... $559,707
========
Uses:
Repurchase of Holdings' Capital Stock..... $ 316,688
Repayment of Retired Bank
Credit Facility (99,212)
Repayment of Retired Senior Notes (4)..... 93,104
Retirement of Industrial Revenue Bond (5) 1,963
Transaction Fees and Expenses
and Other Transaction Payments (6)....... 48,740
Total Uses.............................. $559,707
========
(1) Reflects borrowings to partially refinance seasonal
borrowings outstanding under the Retired Bank Credit Facility.
Giving effect to the Recapitalization, average outstanding
borrowings under the Revolving Credit Facility would have been
$12.2 million during the twelve months ended November 7, 1997.
Excludes letters of credit issued to facilitate international
merchandise purchases, which had an aggregate outstanding
balance of $37.4 million as of November 7, 1997. See the notes
to the "Unaudited Pro Forma Statements of Operations" included
herein.
(2) The Company securitized approximately $40 million of PCP
consumer loan installment receivables off-balance sheet
simultaneously with the consummation of the Recapitalization
pursuant to a facility arranged by affiliates of the Initial
Purchasers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of Other Issuer
Indebtedness--Receivables Facility."
(3) The Retired Bank Credit Facility was in an aggregate
principal amount of up to $200.0 million, of which up to
$120.0 million was available for direct borrowings. Borrowings
under the Retired Bank Credit Facility were prepaid in whole
without penalty or premium and included accrued interest of
$0.2 million.
(4) The Retired Senior Notes were prepaid in connection with the
Recapitalization. The prepayment required the Issuer to pay a
make-whole premium in the amount of $5.8 million. Also included
is $2.3 million of accrued interest.
(5) The industrial revenue bond was prepaid in whole without
penalty or premium.
(6) Includes Holdings' expenses, management bonuses, financial
advisory, consulting and other professional fees and deferred
financing costs. See "Certain Relationships and Related Transactions."
24
TEXAS PACIFIC GROUP
TPG was founded by David Bonderman, James G. Coulter and
William S. Price, III in 1992 to pursue public and private
investment opportunities through a variety of methods, including
leveraged buyouts, recapitalizations, joint ventures,
restructurings and strategic public securities investments. The
principals of TPG operate TPG Partners, L.P. and TPG Partners II,
both Delaware limited partnerships with aggregate committed
capital of over $3.2 billion. Among TPG's investments are branded
consumer products companies Beringer Wine Estates, Del Monte
Foods Company and Ducati Motor. Other TPG portfolio companies
include America West Airlines, Belden & Blake Corporation,
Favorite Brands International, Paradyne, Virgin Entertainment and
Vivra Specialty Partners. In addition, the principals of TPG led
the $9 billion reorganization of Continental Airlines in 1993.
The principal executive office of TPG is located at 201 Main
Street, Suite 2420, Fort Worth, Texas 76102 and its telephone
number is (817) 871-4000.
USE OF PROCEEDS
There will be no cash proceeds payable to the Issuer from
the issuance of the New Debentures pursuant to the Exchange
Offer. The proceeds from the sale of the Old Debentures were used
by Holdings to finance the Recapitalization.
CAPITALIZATION
The following table sets forth as of November 7, 1997 the
actual unaudited capitalization of the Company. See "The
Recapitalization," "Use of Proceeds," "Description of the New
Debentures," "Description of Operating Corp Indebtedness" and
"Capital Stock of Holdings and Operating Corp." This table should
be read in conjunction with the "Selected Consolidated Financial
Data" and "Unaudited Pro Forma Consolidated Financial Data"
included elsewhere in this Prospectus.
As of November 7, 1997
Actual
(dollars in thousands)
Cash and cash equivalents....... $12,992
=======
Debt:
Revolving Credit Facility(1) .................... $47,000
Term Loan Facility .............................. 70,000
10-3/8% Senior Subordinated Notes due 2007 ...... 150,000
13-1/8% Senior Discount Debentures .............. 75,257
Total debt ..................................... 342,257
14-1/2% Preferred Stock ........................... 125,000
Stockholders' deficit (194,712)
Total capitalization .......................... $272,545
=======
(1) Excludes letters of credit issued to facilitate international
merchandise purchases, which had an aggregate outstanding
balance of $37.4 million as of November 7, 1997.
25
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial
data with respect to the Company (the "Unaudited Pro Forma
Financial Data") is based on the historical Consolidated
Financial Statements of the Company included elsewhere in this
Prospectus adjusted to give effect to the Recapitalization. The
Unaudited Pro Forma Statements of Operations give effect to the
Recapitalization as if it had occurred on February 3, 1996. The
Recapitalization and the related adjustments are described in the
accompanying notes. The pro forma adjustments are based upon
preliminary estimates and certain assumptions that management of
the Company believes are reasonable in the circumstances. In the
opinion of management, all adjustments have been made that are
necessary to present fairly the pro forma data. Actual amounts
could differ from those set forth below.
The Unaudited Pro Forma Financial Data should be read in
conjunction with the notes included herewith, the Company's
Consolidated Financial Statements and notes thereto as of
February 2, 1996 and January 31, 1997 and for each of the fiscal
years in the three-year period ended January 31, 1997, the
Company's Unaudited Condensed Consolidated Financial Data as of
November 7, 1997 and for the forty week periods ended November 7,
1997 and November 8, 1996, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The Unaudited Pro Forma
Financial Data do not purport to represent what the Company's
results of operations would have been had the Recapitalization
occurred on the dates specified, or to project the Company's
results of operations for any future period or date.
The unaudited supplemental data reflect (i) certain pro
forma adjustments and (ii) management's estimates of certain cost
savings and cost eliminations which management believes will be
attained. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
26
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
Twelve Months Ended November 7, 1997
Pro Forma Adjustments
---------------------
Historical Operating Holdings Pro Forma
---------- --------- -------- ---------
Corp
----
(dollars in thousands)
Revenues..................... $836,658 $ (2,250)(1) $ -- $834,408
Cost of sales................ 447,528 -- -- 447,528
------- ------------ ------ -------
Gross profit................. 389,130 (2,250)(1) -- 386,880
Selling, general and
administrative
expensess ................... 361,267 1,800(5) -- 363,067
------- ---------- ------ -------
Income (loss) from
operations .................. 27,863 (4,050) -- 23,813
Interest expense:
Non-cash
interest expense ......... 1,052 1,397(2) 10,914(7) 13,363
Cash interest expense..... 13,736 9,205(3) -- 22,941
Expenses incurred in
connection with the
Recapitalization ............ 19,851 -- -- (8) 19,851
Provision (benefit)
for income taxes ............ 4,200 (6,007)(4) (4,487)(4) (6,904)
Extraordinary loss (net of
income benefit) ............. 4,500 -- -- (8) 4,500
- --------------- ------ --------- ---------- --------
Net income (loss)............ $(15,476) $(8,645) $(6,627) $(30,748)
========= ========== ============ ==========
Pro Forma and
-------------
Supplemental
------------
Historical Adjustments Adjusted
---------- ----------- --------
(dollars in thousands)
Supplemental Data:
Depreciation and
amortization ................ $13,107 $ -- $13,107
EBITDA....................... 40,970 6,620(8) 47,590
Ratio of Adjusted
EBITDA/cash
interest expense (6) ........ 2.1x
Ratio of Adjusted
EBITDA/total
interest expense (6) ........ 1.3x
Ratio of total
average debt/Adjusted
EBITDA (9) .................. 6.5x
Cash flows from
operating activities........ $(1,837)
Cash flows from
investing activities........ $(35,799)
Cash flows from
financing activities........ $ 39,990
Fiscal Year Ended January 31, 1997
Pro Forma Adjustments
---------------------
Historical Operating Corp Holdings ProForma
---------- -------------- -------- --------
(dollars in thousands)
Revenues.................... $808,843 (2,650)(1) -- $806,193
Cost of sales............... 428,719 -- -- 428,719
Gross profit................ 380,124 (2,650)(1) -- 377,474
Selling, general and
administrative expenses .... 348,305 1,800 (5) -- 350,105
Income (loss) from
operations ................. 31,819 (4,450) -- 27,369
Interest expense:
Non-cash
interest expense ........ 401 1,485 (2) 10,422 12,308
Cash interest expense.... 10,069 11,894 (3) -- 21,963
Provision (benefit) for
income taxes ............... 8,800 (7,310)(4) (4,091)(4) (2,601)
Net income (loss)........... $12,549 (10,519) $(6,331) (4,301)
See accompanying notes to the unaudited pro forma statements of
operations.
27
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
Forty Weeks Ended November 7, 1997
Pro Forma Adjustments
---------------------
Historical Operating Holdings Pro Forma
---------- --------- -------- ---------
Corp
----
(dollars in thousands)
Revenues.................... $566,596 $(1,638)(1) $ -- $564,958
Cost of sales............... 310,865 -- -- 310,865
------- ------- ------- -------
Gross profit................ 255,731 (1,638)(1) -- 254,093
Selling, general
and administrative
expenses ................... 253,159 1,385 (5) -- 254,544
------- ------- ------- -------
Income (loss)
from operations ............ 2,572 (3,023) -- (451)
Interest expense:
Non-cash
interest expense ......... 962 1,052 (2) 8,274(7) 10,288
Cash interest expense.... 10,907 6,966 (3) -- 17,873
Expenses incurred in
connection with the
Recapitalization............ 19,851 -- -- 19,851
Provision (benefit)
for income taxes ........... (5,050) (4,527)(4) (3,248)(4) (12,825)
Extraordinary
loss (net of
income benefit) ..... 4,500 -- -- 4,500
------- ------- ------- -------
Net income (loss)........... $(28,598) (6,514) $(5,026) $(40,138)
======== ======= ======= ========
Forty Weeks Ended November 8, 1996
Pro Forma Adjustments
Historical Operating Corp Holdings Pro Forma
(dollars in thousands)
Revenues.................... $538,781 $(2,038)(1) $-- 536,743
Cost of sales............... 292,056 -- -- 292,056
------- ------- ------- -------
Gross profit................ 246,725 (2,038)(1) -- 244,687
Selling, general and
administrative expenses 240,197 1,385 (5) -- 241,582
------- ------- ------- -------
Income (loss) from
operations ................. 6,528 (3,423) -- 3,105
Interest expense:
Non-cash interest
expense ................. 311 1,140 (2) 7,782(7) 9,233
Cash interest expense.... 7,240 9,655 (3) -- 16,895
Provision (benefit) for
income taxes ............... (450) (5,829) (3,053)(4) (9,332)
------- ------- ------- -------
Net income (loss)........... $ (573) $(8,389)(5) $(4,729) (13,691)
See accompanying notes to the unaudited pro forma statements of
operations.
28
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(1) Represents the estimated loss on the Securitization of
accounts receivable. See "Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and
"Description of Operating Corp Indebtedness--Receivables
Facility."
(2) Represents the net increase in non-cash interest expense
relating to the amortization of debt issuance costs of
Operating Corp of $13.0 million relating to debt issued in
connection with the Recapitalization.
(3) Gives effect to the increase in estimated cash interest
expense from the use of borrowings to finance the
Recapitalization and future working capital requirements of
Operating Corp:
Fiscal Year Forty Weeks Ended Twelve Months
Ended ------------------- Ended
January November November November
31, 8, 7, 7,
1997 1996 1997 1997
---- ---- ---- ----
(dollars in thousands)
Interest on the Operating
Corp Senior Subordinated
Notes(a) .................... $15,563 $11,972 $11,972 $15,563
Interest on the Bank
Facilities:
Term Loan Facility(b) ..... 5,600 4,308 4,308 5,600
Revolving Credit
Facility(b) ............... -- -- 978 978
Other ........................ 800 615 615 800
----- ----- ----- ------
Total ..................... 21,963 16,895 17,873 22,941
Less: amounts in historical
statement of operations ...... 10,069 7,240 10,907 13,736
------ ----- ------ ------
Adjustment to interest
expense ...................... $11,894 $9,655 $6,966 $ 9,205
====== ====== ====== =======
(a) Interest is calculated at an effective interest rate of
10.375% for the period indicated.
(b) Interest is calculated at an estimated weighted average
effective interest rate of 8.0%.
(c) Interest is based on the average of historical daily
outstanding borrowings under the revolving credit facility
during the period, reduced (without giving effect to any
negative average daily balances) by $63.5 million,
reflecting the application of the proceeds of the
Recapitalization. No interest income was assumed.
(4) Estimated income tax effects of the pro forma adjustments at
an effective tax rate of 41%.
(5) Reflects non-cash compensation expense in connection with a
grant of restricted stock.
(6) Cash interest expense excludes, and total interest expense
includes, non-cash interest in respect of the Debentures.
(7) Represents the increase in non-cash interest expense
relating to the amortization of original issue discount of
the Debentures at an annual rate of 13.125%, compounded
semi-annually, and amortization of debt issuance costs of
Holdings of $2.4 million.
(8) Historical EBITDA is defined as income before extraordinary
items and cumulative effect of accounting changes, interest
expense, income tax expense, depreciation and amortization
and expenses of $19.9 million incurred in connection with
the Recapitalization. The Issuer believes that EBITDA
provides useful information regarding the Company's ability
to service its debt; however holders tendering Old
Debentures in the Exchange Offer should consider the
following factors in evaluating such measures: EBITDA and
related measures (i) should not be considered in isolation,
(ii) are not measures of performance calculated in
accordance with GAAP, (iii) should not be construed as
alternatives or substitutes for income from operations, net
income or cash flows from operating activities in analyzing
the Company's operating performance, financial position or
cash flows (in each case, as determined in accordance with
GAAP) and (iv) should not be used as indicators of the
Company's operating performance or measures of its
liquidity. Additionally, because
29
all companies do not calculate EBITDA and related measures
in a uniform fashion, the calculations presented in this
Prospectus may not be comparable to other similarly titled
measures of other companies.
Adjusted EBITDA is defined as EBITDA, revised to reflect
management's estimate of certain cost savings and cost
eliminations implemented prior to the Recapitalization.
The Issuer believes that EBITDA provides useful information
regarding the Company's ability to service its debt;
however, Adjusted EBITDA (i) should not be considered in
isolation, (ii) is not a measure of performance calculated
in accordance with GAAP, (iii) should not be construed as
alternatives or substitutes for income from operations, net
income or cash flows from operating activities in analyzing
the Company's operating performance, financial position or
cash flows (in each case, as determined in accordance with
GAAP) and (iv) should not be used as indicators of the
Company's operating performance or measures of its
liquidity. The management estimates of cost savings and cost
eliminations which are anticipated on a going-forward basis
and which are reflected in Adjusted EBITDA are as set forth
below:
Twelve Months Ended
-------------------
November 7, 1997
----------------
(dollars in thousands)
Historical EBITDA ...................... $40,970
Recapitalization pro forma
adjustments:
Loss on Securitization of
accounts receivable .................. (2,250)
Cost savings and cost eliminations
implemented prior to the Recapitalization:
Renegotiation of catalog vendor
contract(a) .......................... 2,100
Headcount and net payroll
reductions(b) ........................ 4,550
Insourcing of photography shop(c) .... 820
Non-recurring severance(d) ........... 1,400
-------
Total adjustments ................... 6,620
-------
Adjusted EBITDA ........................ $47,590
=======
(a) Reflects the recent renegotiation of the Company's catalog
vendor contract. The adjustment represents the difference
between the amounts previously expensed for such items and
the amounts which are expected to be expensed under the
terms of the new contract.
(b) Represents compensation savings as a result of the termination
of certain positions.
(c) Represents the estimated cost savings from bringing
in-house certain photography functions that were previously
performed by outside vendors.
(d) Reflects non-recurring severance associated with the
termination of certain managers.
(9) For purposes of computing the ratio of total average debt to
Adjusted EBITDA, total average debt on a pro forma basis as
of November 7, 1997 reflects average outstanding balances
under the Revolving Credit Facility of $12.2 million during
the twelve months ended November 7, 1997 (giving effect to
the Recapitalization), $70.0 million in aggregate principal
amount of indebtedness under the Term Loan Facility, $150.0
million in aggregate principal amount of Operating Corp
Senior Subordinated Notes and $75.3 million in initial
aggregate principal amount of the Old Debentures. Actual
daily outstanding borrowings under the revolving credit
facility were reduced (without giving effect to any negative
average daily balances) by $63.5 million, reflecting the
application of the proceeds of the Recapitalization, in
computing average outstanding borrowings.
30
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated
historical financial, operating, other and balance sheet data of
Holdings. The selected financial and balance sheet data for each
of the five fiscal years ended January 31, 1997 are derived from
the Consolidated Financial Statements of Holdings, which have
been audited by Deloitte & Touche LLP, independent auditors. The
selected financial data for the forty weeks ended November 8,
1996 and November 7, 1997 have been derived from the Holdings'
Unaudited Condensed Consolidated Financial Statements and
include, in the opinion of management, all adjustments necessary
to present fairly the data for such periods. The results for the
forty weeks ended November 7, 1997 are not necessarily indicative
of the results to be expected for the fiscal year ending January
30, 1998 or for any future period. The data presented below
should be read in conjunction with the Consolidated Financial
Statements, including the related Notes thereto, included herein,
the other financial information included herein, and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Fiscal Year Ended Forty Weeks Ended
--------------------------------------------------------------- ---------------------------
January 29, January 28, February 3, February 2, January 31, November 8, November 7,
----------- ----------- ----------- ----------- ----------- ---------- -----------
1993 1994 1995 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ----
(dollars in thousands, except per square foot data) (unaudited)
Financial Data:
Revenues.................. $ 571,047 $ 646,972 $ 737,725 $ 745,909 $ 808,843 $ 538,781 $ 566,596
Cost of goods sold(1)..... 303,927 354,889 394,073 399,668 428,719 292,056 310,865
------- ------- ------- ------- ------- ------- -------
Gross profit............ 267,120 292,083 343,652 346,241 380,124 246,725 255,731
Selling, general and
administrative expenses .. 238,730 265,857 311,468 327,672 348,305 240,197 253,159
------- ------- ------- ------- ------- ------- -------
Income
from operations ........ 28,390 26,226 32,184 18,569 31,819 6,528 2,572
Interest expense-net...... 5,241 6,107 6,965 9,350 10,470 7,551 11,869
Expenses incurred-
Recapitalization ......... -- -- -- -- -- -- 19,851
for income taxes ......... 9,130 8,100 10,300 3,700 8,800 (450) (5,050)
Extraordinary item
and cumulative effect of
accounting changes(2)..... -- -- -- 931 -- -- (4,500)
------- ------- ------- ------- ------- ------- -------
Net income (loss)(2)...... $ 14,019 $ 12,019 $ 14,919 $ 6,450 $ 12,549 $ (573) $(28,598)
======= ======== ======= ======== ======== ======= ========
Operating Data:
Revenues:
J. Crew mail order...... $ 201,463 $ 199,954 $ 247,272 $ 274,653 $ 289,772 $ 165,936 $ 157,840
J. Crew retail.......... 72,906 108,650 135,726 134,959 167,957 110,399 140,574
J. Crew factory......... 38,563 49,253 62,626 79,203 94,579 70,266 75,965
J. Crew licensing....... -- 1,900 3,269 3,975 3,817 3,729 2,968
------- ------- ------- ------- ------- ------- -------
Total J. Crew brand....... 312,932 359,757 448,893 492,790 556,125 350,330 377,347
Other divisions(3)........ 258,115 287,215 288,832 253,119 252,718 188,451 189,249
------- ------- ------- ------- ------- ------- -------
Total................... $ 571,047 $ 646,972 $ 737,725 $ 745,909 $ 808,843 $ 538,781 $ 566,596
======= ======== ======= ======== ======= ======= =======
EBITDA(4):
J. Crew mail order...... $ 12,840 $ 11,980 $ 24,345 $ 16,831 $ 17,524 $ (1,924) $ (8,225)
J. Crew retail.......... 6,720 5,055 13,333 15,194 16,847 8,800 8,177
J. Crew factory......... 3,660 1,797 1,653 (66) 2,876 3,395 3,244
J. Crew licensing....... (51) 1,239 2,422 2,820 2,467 2,797 2,285
------- ------- ------- ------- ------- ------- -------
Total J. Crew brand..... 23,169 20,071 41,753 34,779 39,714 13,068 5,481
Other divisions(3)...... 11,611 12,941 (1,459) (5,938) 2,646 1,085 7,282
------- ------- ------- ------- ------- ------- -------
Total..................... $ 34,780 $ 33,012 $ 40,294 $ 28,841 $ 42,360 $ 14,153 $ 12,763
======= ======== ======= ======== ======== ======= ========
Other Data:
Cash flows from
operating activities $22,400 $1,467 $1,774 $(7,849) $16,497 $(42,766) $(61,100)
Cash flows from
investing activities $(14,965) $(11,086) $(13,467) $(14,640) $(22,481) $(14,947) $(28,265)
Cash flows from
financing activities $638 $5,020 $6,763 $17,763 $(413) $54,822 $ 95,225
J. Crew Mail Order:
Number of catalogs
circulated
(in thousands) ......... 56,983 62,547 61,187 67,519 76,087 53,942 53,977
Number of pages
circulated
(in millions) .......... 6,576 6,965 8,277 10,198 9,827 6,341 6,293
31
J. Crew Retail:
Sales per gross
square foot(5) ......... $ 622 $ 559 $ 594 $ 533 $ 551 NM NM
Store contribution
margin(6) .............. 24.0% 18.7% 22.7% 25.5% 25.4% NM NM
Number of stores
open at end of period ... 18 28 29 31 39 39 49
Comparable store
sales change(7) ......... 22.0% (8.0)% 6.9% (6.0)% 4.5% 4.0% (6.1)%
Depreciation and
amortization .............. $ 6,390 $ 6,786 $ 8,110 $ 10,272 $ 10,541 $ 7,625 $ 10,191
Net capital expenditures(8)
New store openings. ..... 5,519 2,789 2,804 6,009 10,894 6,903 15,253
Other ................... 9,446 8,297 10,663 8,631 11,587 8,044 13,012
------- ------- ------- ------- ------- ------- -------
Total net capital
expenditures ............ 14,965 11,086 13,467 14,640 22,481 14,947 28,265
Ratio of earnings
to fixed charges(9) ....... 3.1x 2.5x 2.6x 1.5x 2.0x - -
Balance Sheet Data
(at period end):
Cash and cash equivalents . $ 27,784 $ 23,185 $18,255 $ 13,529 $ 7,132 $ 10,638 $ 12,992
Working capital(10) ....... 56,864 75,391 96,437 118,964 125,327 167,908 173,341
Total assets .............. 232,582 287,233 324,795 355,249 410,821 454,177 439,391
Total debt ................ 56,783 61,803 69,566 87,329 87,092 142,151 342,257
Stockholders' equity
(deficit) ................. 53,584 66,221 82,041 89,633 102,006 89,060 (194,712)
(1) Includes buying and occupancy costs.
(2) In fiscal 1995, Holdings changed its method of accounting
for catalog costs and for merchandise inventories and
recognized an increase in net income from the aggregate
cumulative effect of such accounting changes, net of income
taxes, of $2.6 million. In the same year, Holdings
recognized extraordinary losses of $1.7 million, net of
income tax benefit, related to the early retirement of debt.
See Notes 11 and 12 of Notes to Consolidated Financial
Statements. In the forty weeks ended November 7, 1997,
Holdings recognized an extraordinary loss of $4.5 million
net of income tax benefit related to the early retirement of
debt.
(3) Includes the Company's PCP and C&W divisions and finance
charge income derived from PCP installment sales.
(4) EBITDA represents income (loss) before extraordinary items
and cumulative effect of accounting changes plus income
taxes, interest expense, depreciation and amortization and
expenses of $19.9 million incurred in connection with the
Recapitalization. The Company believes that EBITDA provides
useful information regarding the Company's ability to
service its debt; however, EBITDA does not represent cash
flow from operations as defined by generally accepted
accounting principles and should not be considered as a
substitute for net income as an indicator of the Company's
operating performance or cash flow as a measure of
liquidity. Holders tendering Old Debentures in the Exchange
Offer should consider the following factors in evaluating
such measures: EBITDA and related measures (i) should not be
considered in isolation, (ii) are not measures of
performance calculated in accordance with GAAP, (iii) should
not be construed as alternatives or substitutes for income
from operations, net income or cash flows from operating
activities in analyzing the Company's operating performance,
financial position or cash flows (in each case, as
determined in accordance with GAAP) and (iv) should not be
used as indicators of the Issuer's operating performance or
measures of its liquidity. Additionally, because all
companies do not calculate EBITDA and related measures in a
uniform fashion, the calculations presented in this
Prospectus may not be comparable to other similarly titled
measures of other companies.
(5) Sales per gross square foot is the result of dividing
annualized net retail sales for the period (reflecting
adjustments based on management estimates of the impact of
opening stores in different periods during the year) by
gross square footage at the end of each fiscal period.
(6) Store contribution margin is computed as gross profit less
in-store operating expenses divided by sales.
(7) Comparable store sales includes stores that have been open
for one full twelve-month period.
(8) Capital expenditures are net of proceeds from construction
allowances.
(9) For purposes of computing the ratio of earnings to fixed
charges, earnings include income before income taxes,
extraordinary items and cumulative effect of accounting
changes and expenses incurred in connection with the
Recapitalization of $19.9 million in the forty weeks ended
November 7, 1997, plus fixed charges. Fixed charges consist
of interest expense and one-third of rental expense (deemed
by management to be representative of the interest factor of
rental payments). Earnings were inadequate to cover fixed
charges by $9,297 and $1,023 during the forty weeks ended
November 7, 1997 and November 8, 1996, respectively.
(10) Working capital is computed as current assets less current
liabilities, excluding cash and cash equivalents, current
portion of long-term debt and borrowings under the revolving
credit facility.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with the Selected Consolidated Financial Data and the
Consolidated Financial Statements of Holdings and the related
notes thereto which are included elsewhere in this Prospectus.
The Company's fiscal year ends on the Friday closest to January
31. Accordingly, fiscal years 1992, 1993, 1994, 1995 and 1996
ended on January 29, 1993, January 28, 1994, February 3, 1995,
February 2, 1996 and January 31, 1997. All fiscal years for which
financial information is included in this Prospectus had 52
weeks, except fiscal 1994 which had 53 weeks.
Overview
The Company's origins date back to the 1947 founding of
Popular Merchandising Co. which operated PCP, a direct selling
catalog merchandiser of consumer branded goods. In 1983, drawing
upon their family's 35- year experience in catalog retailing,
Arthur Cinader and Emily Woods, the son and granddaughter of
PCP's founder, founded the J. Crew brand with innovative durables
products (including the rollneck sweater, weathered chino, barn
jacket and pocket tee) that continue to be core J. Crew brand
product offerings today. In 1984, C&W was founded as a mail order
women's apparel business targeting an older, more conservative
customer than J. Crew. Capitalizing on the strength of its J.
Crew brand franchise, the Company began developing select retail
store locations in 1989. Today, the Company is a leading mail
order and store retailer of women's and men's apparel, shoes and
accessories operating primarily under the J. Crew brand name.
Since the introduction of the J. Crew brand in 1983, the Company
has mailed more than one-half billion J. Crew catalogs, opened 49
J. Crew retail stores and 42 J. Crew Factory Outlet stores. In
addition, J. Crew products are distributed through 67
free-standing and shop-in- shop stores in Japan under a licensing
agreement with Itochu. The Company's J. Crew brand revenues have
increased from $312.9 million in fiscal 1992 to $556.1 million in
fiscal 1996, representing a compound annual growth rate of 15.4%.
33
The following table sets forth, for the periods indicated,
revenues and EBITDA for the Company's major operating divisions:
Forty Twelve
Fiscal Year Weeks Ended Months
----------- ----------- ------
Ended
Nov. 8, Nov. 7, Nov. 7,
------- ------- -------
1992 1993 1994 1995 1996 1996 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
(dollars in millions)
Revenues:
J. Crew
mail order .$201.5 $200.0 $247.3 $274.6 $289.8 $166.0 $157.8 $281.6
J. Crew
retail ..... 72.9 108.7 135.7 135.0 168.0 110.4 140.6 198.2
J. Crew
factory .... 38.5 49.2 62.6 79.2 94.5 70.2 76.0 100.3
J. Crew
licensing .. -- 1.9 3.3 4.0 3.8 3.7 2.9 3.0
-- --- --- --- --- --- --- ---
Total J.
Crew
brand .... 312.9 359.8 448.9 492.8 556.1 350.3 377.3 583.1
Other
divisions (1) 258.1 287.2 288.8 253.1 252.7 188.4 189.3 253.6
----- ----- ----- ----- ----- ----- ----- -----
Total
revenues . $571.0 $647.0 $737.7 $745.9 $808.8 $538.7 $566.6 $836.7
===== ===== ==== ===== ===== ===== ===== =====
EBITDA (2):
J. Crew
mail order . $ 12.8 $ 12.0 $ 24.4 $ 16.8 $ 17.5 $ (1.9) $ (8.2) $ 11.2
J. Crew
retail ..... 6.7 5.1 13.3 15.2 16.8 8.8 8.2 16.2
J. Crew
factory .... 3.7 1.8 1.7 -- 2.9 3.4 3.2 2.7
J. Crew
licensing .. -- 1.2 2.4 2.8 2.5 2.8 2.3 2.0
-- --- --- --- --- --- --- ---
Total J.
Crew
brand .... 23.2 20.1 41.8 34.8 39.7 13.1 5.5 32.1
Other
divisions (3) 11.6 12.9 (1.5) (5.9) 2.6 1.0 7.3 8.9
---- ---- ----- ----- --- --- --- ---
Total
EBITDA ... $34.8 $33.0 $40.3 $28.9 $42.3 $14.1 $12.8 $41.0
==== ==== ==== ==== ==== ==== ==== ====
Cash flow
from
operating
activities .. $22.4 $1.5 $1.8 $(7.8) $16.5 $(42.8) $(61.1) $(1.8)
Cash flow
from
investing
activities ..$(15.0) $(11.1) $(13.5) $(14.6 $(22.5) $(14.9) $(28.3) $(35.8)
Cash flow
from
financing
activities .. $0.6 $5.0 $6.8 $17.8 $(0.4) $54.8 $ 95.2 $(40.0)
(1) Includes net sales from the Company's PCP and C&W divisions
and finance charge income derived from PCP installment
sales.
(2) EBITDA represents income (loss) before extraordinary items
and cumulative effect of accounting changes plus income
taxes, interest expense, depreciation and amortization and
expenses of $19.9 million incurred in connection with the
Recapitalization. The Company believes that EBITDA provides
useful information regarding the Company's ability to
service its debt; however, EBITDA does not represent cash
flow from operations as defined by generally accepted
accounting principles and should not be considered as a
substitute for net income as an indicator of the Company's
operating performance or cash flow as a measure of
liquidity. Holders tendering Old Debentures in the Exchange Offer
should consider the following factors in evaluating such
measures: EBITDA and related measures (i) should not be
considered in isolation, (ii) are not measures of
performance calculated in accordance with GAAP, (iii) should
not be construed as alternatives or substitutes for income
from operations, net income or cash flows from operating
activities in analyzing the Company's operating performance,
financial position or cash flows (in each case, as
determined in accordance with GAAP) and (iv) should not be
used as indicators of the Issuer's operating performance or
measures of its liquidity. Additionally, because all
companies do not calculate EBITDA and related measures in a
uniform fashion, the calculations presented in this
Prospectus may not be comparable to other similarly titled
measures of other companies.
(3) Includes EBITDA from the Company's PCP and C&W divisions.
34
The following sets forth, for the periods indicated, the
percentage relationship to revenues of certain items in the
Company's consolidated statements of operations for the fiscal
periods shown below:
Fiscal Year Forty Weeks Ended
1994 1995 1996 Nov. 8, 1996 Nov. 7, 1997
------ ------ ------- ------------ ------------
Revenues ........... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods
sold, including
buying and
occupancy
costs .............. 53.4 53.6 53.0 54.2 54.9
---- ---- ---- ---- ----
Gross
profit ........... 46.6 46.4 47.0 45.8 45.1
Selling, general
and administrative
expenses ........... 42.2 43.9 43.1 44.6 44.7
---- ---- ---- ---- ----
Income
from
operations ...... 4.4 2.5 3.9 1.2 0.4
Interest
expense, net ...... 1.0 1.3 1.3 1.4 2.1
Expenses incurred-
recapitalization .. -- -- -- -- 3.5
-- ----- ---- ---- ------
Income (loss)
before provision
for income taxes,
extraordinary
item and cumulative
effect of accounting
changes ......... 3.4 1.2 2.6 (0.2) (5.2)
Provision
(benefit)
for income taxes .. 1.4 0.5 1.0 (0.1) (0.9)
--- --- ---- ---- ----
Income (loss)
before extraordinary
item and
cumulative effect
of accounting
changes ......... 2.0% 0.7% 1.6% (0.1)% (4.3)%
==== ==== ==== ==== ====
The Company's revenues include sales of the Company's
merchandise offered through the J. Crew, C&W and PCP catalogs, as
well as through the C&W Factory stores, the retail stores
operated through Grace Holmes, Inc. ("J. Crew Retail") and the
factory outlet stores operated through H.F.D. No. 55, Inc. ("J.
Crew Factory Outlet"). Also included in revenues are J. Crew
brand licensing royalties and finance charge income derived from
PCP installment sales. Cost of goods sold includes the cost of
products purchased for sale, design, purchasing and
warehousing costs, as well as occupancy costs of the Company's
retail and factory stores. Selling, general and administrative
expenses include all other operating expenses, principally
catalog and other selling costs, payroll, depreciation and
corporate expenses.
In fiscal 1995, the Company operations were affected by:
(i) an increase in selling, general and administrative expenses
tied to a spike in paper prices to levels never before
experienced in the Company's history coupled with an increase in
catalog circulation; (ii) the unsuccessful repositioning of C&W
from targeting more mature, conservative customers to targeting
younger, more urban customers; and (iii) negative comparable
store sales in the J. Crew Retail and J. Crew Factory Outlet
operations, primarily as a result of severe weather conditions
during the holiday season and weak menswear performance. Since
1995, paper prices have declined in each period indicated and C&W
has been reoriented toward its traditional conservative,
career-oriented customer base and its operating results have
stabilized.
The Company has identified a number of tactical cost
savings that could be realized without affecting the Company's
franchise or brand image. The Company implemented actions prior to
the Recapitalization which management believes will result in
estimated annual savings of $7.5 million. These actions include the
recent renegotiation of its new catalog vendor contract, selected
headcount and net payroll reductions and insourcing of certain
photography functions. The Company has identified approximately
$7 million of further potential savings through process
efficiencies, reduction of the Base Book trim size, installation
of automatic sorting equipment and consolidation of J. Crew and
C&W New York corporate offices. The Company believes these
additional cost savings could be implemented by mid-1998. See
"Risk Factors--Cautionary Statement Concerning Ability to Achieve
Anticipated Cost Savings and Forward-Looking Statements."
In August 1997, United Parcel Service ("UPS"), which had
traditionally shipped approximately 60% of merchandise orders for
J. Crew Mail Order and C&W, experienced a two-week strike. In
anticipation of the strike, J. Crew Mail Order, C&W and PCP made
alternative arrangements with the United States Postal Service to
ensure uninterrupted delivery service for the same volume of
shipments as ordinarily made during the affected period. However,
under the perception that orders would not be filled in a timely
manner, many consumers hesitated to place orders for catalog
merchandise during the strike, adversely affecting operations of
J. Crew Mail Order, C&W and PCP. The Company also delayed, by
approximately three weeks of the "back-to-school" season mailing
of its J. Crew College catalog during the pendency of the strike.
35
Results of Operations
The Forty Weeks Ended November 7, 1997 Compared to the
Forty Weeks Ended November 8, 1996
Revenues
Revenues increased 5.2% to $566.6 million in the forty
weeks ended November 7, 1997 from $538.7 million in the forty
weeks ended November 8, 1996, as a result of increased sales of
J. Crew brand merchandise. J. Crew brand revenues increased by
7.7% to $377.3 million in the forty weeks ended November 7, 1997
from $350.3 million in the comparable 1996 period. Other
divisions contributed $189.3 million of revenues during the forty
weeks ended November 7, 1997 as compared to $188.4 million in the
same period in 1996.
J. Crew Mail Order revenues decreased 4.9% to $157.8 million
in the forty weeks ended November 7, 1997 from $166.0 million in
the forty weeks ended November 8, 1996. The percentage of the
Company's total revenues derived from J. Crew Mail Order
decreased to 27.9% in the forty weeks ended November 7, 1997 from
30.8% in the forty weeks ended November 8, 1996. The decrease in
J.Crew Mail Order revenues was primarily the result of the UPS
strike. Gross sales were down 19% from July 18, 1997 to the end
of the UPS strike on August 23, 1997 compared to the same period
in 1996. Additionally, weak performance in menswear sales and
unseasonably warm weather on the east coast in the first part of
the fall season also contributed to the decreased sales. The
number of catalogs mailed were at the same approximate level of
54 million as in the same forty week period in the prior year.
J. Crew Retail revenues increased by 27.4% to $140.6
million in the forty weeks ended November 7, 1997 from $110.4
million in the forty weeks ended November 8 ,1996. The percentage
of the Company's total revenues derived from its J. Crew Retail
stores increased to 24.8% in the forty weeks ended November 7,
1997 from 20.5% in the forty weeks ended November 8, 1996. The
increase in J. Crew Retail revenues is the result of opening 10
new stores since the comparable period in 1996. Comparable store
sales decreased 6.1% as the result of the opening of new stores
in proximity to existing store locations and weak performance in
menswear sales. Unseasonably warm weather in the first part of
the fall season also contributed to a decreased sales of fall and
winter clothing.
J. Crew Factory Outlet revenues increased by 8.1% to $76.0
million in the forty weeks ended November 7, 1997 from $70.2
million in the forty weeks ended November 8, 1996. The percentage
of the Company's total revenue derived from J. Crew Factory
Outlet remained at approximately 13.0% in the forty weeks ended
November 7, 1997 as compared to the forty weeks ended November 8,
1996. J. Crew Factory stores comparable store sales increased 6%
in the forty weeks ending November 7, 1997. The comparable store
sales increase was principally due to the overall improvement in
store merchandising under the direction of a new factory outlet
merchandising Vice President. J. Crew Factory Outlet opened two
new stores and closed one store.
PCP revenues increased 2.0% to $136.7 million in the forty
weeks ended November 7, 1997 compared to $134.0 million in the
forty weeks ended November 8, 1996. The percentage of the
Company's total revenues derived from PCP decreased to 24.1% in
the forty weeks ended November 7, 1997 from 24.9% in the forty
weeks ended November 8, 1996. The number of catalogs mailed
remained at the same approximate level of 7 million and the
number of selling agents remained unchanged at approximately
106,000 during the forty weeks ended November 7, 1997 compared to
the same period in 1996. The increased sales in the forty week
period ended November 7, 1997 over the same period in the prior
year is attributable to better performance in ready-to-wear and
specifically in the new branded merchandise.
C&W revenues decreased 3.3% to $52.6 million in the forty
weeks ended November 7, 1997 from $54.4 million in the forty
weeks ended November 8, 1996. The percentage of the Company's
revenues derived from C&W decreased to 9.3% in the forty weeks
ended November 7, 1997 from 10.1% in the forty weeks ended
November 8, 1996. The number of catalogs mailed increased to
approximately 27.9 million in the forty weeks ended November 7,
1997 from approximately 24.8 million in the forty weeks ended
November 8, 1996. The decrease in sales is the
36
result of unseasonably warm weather on the east coast in the first
part of the fall season affecting the sales of fall and winter
clothing.
Gross Profit
Gross profit as a percentage of revenues was 45.1% for the
forty weeks ended November 7, 1997 as compared to 45.8% in the
same period in 1996. The slight decrease in gross profit was
primarily due to an increase in J. Crew Retail buying and
occupancy costs, reflecting the higher cost associated with
opening new stores in urban areas such as New York City.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a
percentage of revenues increased to 44.7% in the forty weeks
ended November 7, 1997 from 44.6% in the forty weeks ended
November 8, 1996. The increase as a percentage of revenues is a
result of increased general and administration expenses of 2.2%
of revenues primarily in J. Crew Mail Order, which was partially
offset by decreases in selling expenses in J. Crew Mail Order,
C&W and PCP of 2.1% of revenues. The increase in general and
administrative expenses was primarily a result of increased
staffing and the decrease in selling expenses was principally a
result of decreased paper costs.
Interest Expense
Interest expense increased to $11.9 million or 2.1% of
revenues in the forty weeks ended November 7, 1997 from $7.6
million or 1.4% of revenues in the forty weeks ended November 8,
1996. This increase was due to an over 90% increase in average
borrowing to $66.7 million in the forty weeks ended November 7,
1997 compared to average borrowings of $34.5 million in the same
period last year. The borrowings were required to fund the
increased inventory levels and the increased capital
expenditures. Additionally, the issuance of the Old Notes in the
Offering in aggregate principal amount of $150 million
contributed approximately $0.9 million to the increased interest
and the issuance of Senior Discount Debentures of $75.3 million
contributed approximately $0.6 million to the increased interest.
Fiscal 1996 Compared to Fiscal 1995
Revenues
Revenues increased 8.4% to $808.8 million in fiscal 1996
from $745.9 million in fiscal 1995, as the result of increased
sales of J. Crew brand merchandise. J. Crew brand revenues
increased 12.8% to $556.1 million in fiscal 1996 from $492.8
million in fiscal 1995. Other divisions contributed $252.7
million in revenues in fiscal 1996 as compared to $253.1 million
in fiscal 1995.
J. Crew Mail Order revenues increased 5.5% to $289.8
million in fiscal 1996 from $274.6 million in fiscal 1995. The
percentage of the Company's total revenues derived from J. Crew
Mail Order decreased to 35.8% in fiscal 1996 from 36.8% in fiscal
1995. The increase in J. Crew Mail Order revenues principally
resulted from the introduction of the Women's Book and the
related increase in overall J. Crew catalog circulation to
approximately 76 million in 1996 from approximately 68 million in
1995.
J. Crew Retail revenues increased by 24.4% to $168.0
million in fiscal 1996 from $135.0 million in fiscal 1995. The
percentage of the Company's total revenues derived from its J.
Crew Retail stores increased to 20.8% in 1996 from 18.1% in 1995.
The increase in revenues was principally the result of the
opening of eight new stores and a 4.5% increase in comparable
store sales in fiscal 1996. The increase in comparable store
sales was principally due to strong performance in the J. Crew
womenswear lines, including Durables, Classics and Collection.
37
J. Crew Factory Outlet revenues increased by 19.3% to $94.5
million in fiscal 1996 from $79.2 million in fiscal 1995. The
percentage of the Company's total revenues derived from its J.
Crew Factory Outlet stores increased to 11.7% in fiscal 1996 from
10.6% in fiscal 1995. The increase in J. Crew Factory Outlet
revenues was principally the result of a 7.0% increase in
comparable store sales. During fiscal 1996, J. Crew Factory
Outlets opened three stores and closed four stores. Similar to J.
Crew Retail, the increase in comparable store sales for J. Crew
Factory Outlets was principally due to strong performance in the
J. Crew womenswear lines.
PCP revenues decreased by 2.4% to $177.7 million in fiscal
1996 from $182.1 million in fiscal 1995. The percentage of the
Company's total revenues derived from PCP decreased to 22.0% in
fiscal 1996 from 24.4% in fiscal 1995. The decrease in revenues
primarily resulted from competitive discounting in the
northeastern market which was partially offset by revenues from
the introduction of brand-name apparel. During fiscal 1996, the
number of catalogs mailed remained flat at approximately seven
million and the number of selling agents remained unchanged at
approximately 106,000.
C&W revenues increased by 5.6% to $75.0 million in fiscal
1996 from $71.0 million in fiscal 1995. The percentage of the
Company's revenues derived from C&W decreased slightly to 9.3% in
fiscal 1996 from 9.5% in fiscal 1995. The increase in C&W
revenues during fiscal 1996 reflected: (i) the return to its
original merchandising strategy of providing conservative
career-oriented clothing, see "--Overview;" and (ii) the
introduction of a value pricing strategy. In addition, the
Company reduced the catalog circulation of C&W in fiscal 1996 to
38 million from 40 million in fiscal 1995. The Company believes
that C&W's return to its original focus is in place and currently
plans to increase its C&W catalog mailings.
Gross Profit
Gross profit increased to 47.0% of revenues in 1996 as
compared to 46.4% of revenues in 1995. This increase primarily
resulted from an increase in merchandise margins in J. Crew Mail
Order.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to
43.1% of revenues in fiscal 1996 from 43.9% of revenues in 1995.
The decline in selling, general and administrative expenses as a
percentage of revenues principally reflects a decrease in catalog
circulation costs (consisting primarily of paper, postage and
printing). These costs declined to 15.9% of revenues in fiscal
1996 from 16.9% of revenues in fiscal 1995, principally as a
result of a decrease in paper costs to 3.2% of revenues in fiscal
1996 from 3.9% of revenues in fiscal 1995, and a decrease in
number of pages circulated by J. Crew Mail Order from 10.2
billion in fiscal 1995 to 9.8 billion in fiscal 1996 as a result
of the J. Crew Mail Order customer segmentation strategy.
Circulation at C&W also decreased. This decrease was partially
offset by an increase in general and administrative expenses
related to payroll for new J. Crew retail stores opened during
the period. Absolute dollar amounts of selling, general and
administrative expenses increased to $348.3 million in fiscal
1996 from $327.7 million in fiscal 1995, primarily reflecting
volume related costs.
Interest Expense
Interest expense increased to $10.5 million or 1.3% of
revenues in fiscal 1996 from $9.4 million or 1.3% of revenues in
fiscal 1995. This increase was due primarily to higher average
borrowings under the revolving credit agreement.
Fiscal 1995 Compared to Fiscal 1994
Revenues. Revenues increased 1.1% to $745.9 million in
fiscal 1995 from $737.7 million in fiscal 1994, reflecting
increased sales of J. Crew brand merchandise, which more than
offset declines in other divisions. J. Crew brand revenues
increased by 9.8% to $492.8 million in fiscal 1995 from $448.9
million in fiscal 1994. Other
38
divisions contributed $253.1 million in revenues in fiscal 1995
compared to $288.8 million in fiscal 1994, a decrease of 12.4%.
J. Crew Mail Order revenues increased 11.0% to $274.6
million in fiscal 1995 from $247.3 million in fiscal 1994. The
percentage of the Company's total revenues derived from J. Crew
Mail Order increased to 36.8% in fiscal 1995 from 33.5% in fiscal
1994. The revenue improvement was primarily due to an increase in
the number of catalogs mailed to approximately 68 million in
fiscal 1995 from approximately 61 million in fiscal in 1994 as a
result of growth in the 12-month buyer file.
J. Crew Retail revenues were $135.0 million in fiscal 1995
compared to $135.7 million in fiscal 1994. The percentage of the
Company's total revenues derived from its J. Crew Retail stores
decreased to 18.1% in fiscal 1995 from 18.4% in fiscal 1994. The
sales performance was primarily the result of a 6.3% decrease in
comparable store sales which was partially offset by the opening
of two new stores in November, 1995. The decrease in comparable
store sales was principally a result of: (i) severe weather
conditions in the Northeast, which negatively affected sales
during the holiday season; and (ii) weak performance in menswear
as a result of competitive pressures from men's sport offerings
by the Company's principal competitors.
J. Crew Factory Outlet revenues increased by 26.5% to $79.2
million in fiscal 1995 from $62.6 million in fiscal 1994. The
percentage of the Company's total revenues derived from its J.
Crew Factory Outlet stores increased to 10.6% in fiscal 1995 from
8.5% in fiscal 1994. J. Crew Factory Outlet revenue improvement
primarily reflected the opening of 12 new stores (and the closing
of two underperforming stores) in fiscal 1995, partially offset
by a 9.9% decrease in comparable store sales. The decrease in
comparable store sales was principally due to the lack of key
products in the merchandise assortment in the stores and poor
weather in the Northeast which negatively affected the holiday
retail season.
PCP revenues decreased by 4.0% to $182.1 million in fiscal
1995 from $189.7 million in fiscal 1994. The percentage of the
Company's total revenues derived from PCP decreased to 24.4% in
fiscal 1995 from 25.7% in fiscal 1994. The decrease in revenues
principally resulted from fulfillment disruptions during PCP's
relocation to its new distribution center in Edison, New Jersey.
During fiscal 1995, the number of catalogs mailed remained flat
at approximately seven million and the number of selling agents
remained unchanged at approximately 106,000.
C&W revenues decreased by 28.4% to $71.0 million in fiscal
1995 from $99.1 million in fiscal 1994. The percentage of the
Company's revenues derived from C&W decreased to 9.5% in fiscal
1995 from 13.4% in fiscal 1994. The decrease in revenues
reflected the unsuccessful attempt at repositioning C&W as a
retailer of urban- oriented clothing. See "--Overview." The
number of C&W catalogs circulated remained at 40 million during
fiscal 1995 compared to fiscal 1994.
Gross Profit
In 1995, gross profit was 46.4% of revenues as compared to
46.6% of revenues in 1994. The decrease was primarily
attributable to an increase in buying and occupancy costs, which
was offset by improved merchandise margins in J. Crew Mail Order.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 43.9% of
revenues in fiscal 1995 as compared to 42.2% of revenues in 1994.
The increase primarily reflects a substantial increase in catalog
circulation costs (consisting primarily of paper, postage and
printing) to 16.9% of revenues in fiscal 1995 from 14.5% of
revenues in fiscal 1994. Paper costs increased from 2.7% of
revenues in fiscal 1994 to 3.9% of revenues in fiscal 1995,
reflecting a spike in paper prices to levels not previously
experienced in the Company's history. Postage costs increased
sharply, as a result of an approximately 14% postal rate increase
that occurred in January, 1995. Increased catalog circulation
costs also reflected an approximately 10% increase in catalogs
circulated by J. Crew Mail Order, from 61 million in
39
fiscal 1994 to 68 million in fiscal 1995 and an approximately 23%
increase in pages circulated from 8.3 billion in fiscal 1994 to 10.2
billion in fiscal 1995. C&W circulation was unchanged. These factors
more than offset a decrease in general and administrative expenses and
a decrease in J. Crew Retail store operating expenses.
Interest Expense
Interest expense increased to $9.4 million or 1.3% of
revenues in fiscal 1995 from $7.0 million or 1.0% of revenues in
fiscal 1994. This increase was due primarily to higher average
borrowings under the revolving credit agreement and the issuance
of an additional $15.0 million of long-term debt.
Seasonality
The Company's retail and mail order businesses experience
two distinct selling seasons, spring and fall. The spring season
is comprised of the first and second quarters, consisting of
twelve and sixteen weeks, respectively, and the fall season is
comprised of the third and fourth quarters, each consisting of
twelve weeks. J. Crew Retail stores, J. Crew Factory Outlet
stores, C&W Factory stores and PCP are stronger in the third and
fourth quarters and the J. Crew and C&W Mail Order businesses are
strongest in the fourth quarter. In addition, the Company's
working capital requirements fluctuate throughout the year,
increasing substantially in September and October in anticipation
of the holiday season inventory requirements. The Company funds
its working capital requirements primarily through a revolving
credit facility, which historically has been paid down in full at
the end of the Company's fiscal year.
The following table sets forth certain unaudited quarterly
information for fiscal 1995 and 1996:
Fiscal Year 1995 Fiscal Year 1996
---------------- ----------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-- -- -- -- -- -- -- --
(dollars in millions)
Revenues:
J. Crew
mail order .. $ 45.5 $ 57.5 $ 61.8 $109.8 $ 46.1 $ 54.1 $ 65.6 $124.0
J. Crew
retail ...... 23.3 35.3 33.1 43.3 27.3 40.8 42.3 57.6
J. Crew
factory ..... 13.0 25.3 21.2 19.7 15.4 30.9 24.0 24.2
J. Crew
licensing ... 1.2 1.2 1.2 0.4 1.2 1.2 1.3 0.1
--- --- --- --- --- --- --- ---
Total J.
Crew
brand .... 83.0 119.3 117.3 173.2 90.0 127.0 133.2 205.9
Other
divisions ... 57.8 61.0 72.2 62.1 56.5 60.8 71.0 64.4
---- ---- ---- ---- ---- ---- ---- ----
Total
revenues . $140.8 $180.3 $189.5 $235.3 $146.5 $187.8 $204.2 $270.3
====== ====== ====== ====== ====== ====== ====== ======
% of
full
year ..... 18.9% 24.2% 25.4% 31.5% 18.1% 23.3% 25.2% 33.4%
Gross
profit ...... $ 66.5 $ 87.3 $ 82.9 $109.5 $ 68.9 $ 83.6 $ 94.2 $133.4
% of
full
year ..... 19.2% 25.2% 23.9% 31.7% 18.1% 22.0% 24.8% 35.1%
Operating
income
(loss) ...... $ (2.3) $ (3.1) $ 11.3 $ 12.7 $ (4.5) $ (9.6) $ 20.7 $ 25.2
% of
full
year ..... (12.4)% (16.7)% 60.8% 68.3% (14.2)% (30.2)% 65.1% 79.3%
Liquidity and Capital Resources
Historical
The Company's primary cash needs have been for opening new
stores, warehouse expansion and working capital. The Company's
sources of liquidity have been cash flow from operations,
proceeds from the private placement of long-term debt and
borrowings under a revolving credit facility.
In April 1997, the Company entered into the Retired Bank
Credit Facility with a group of twelve banks with Morgan Guaranty
Trust Company of New York as agent. The Retired Bank Credit
Facility provided for commitments in an aggregate amount of up to
$200.0 million of which up to $120.0 million was available for
direct borrowings. The Retired Bank Credit Facility replaced the
Company's previous revolving credit agreement which provided for
commitments in an aggregate amount of up to $125.0 million, of
which up to $75.0 million was available for direct borrowings.
Borrowings under the Retired Bank Credit Facility were unsecured
and bore
40
interest, at the Company's option, at the base rate (defined as
the higher of the bank's prime rate or the Federal Funds rate
plus 0.5%) or the London Interbank Offering Rate ("LIBOR") plus
0.625%. The Retired Bank Credit Facility was to expire on April
17, 2000. There were no borrowings outstanding under the
Company's revolving credit agreements at January 31, 1997 and
February 2, 1996. Average borrowings under the Company's
revolving credit agreements were $25.5 million and $31.2 million
for the years ended on February 2, 1996 and January 31, 1997,
respectively. Outstanding letters of credit issued to facilitate
international merchandise purchases were $25.9 million and $37.8
million on February 2, 1996 and January 31, 1997, respectively.
Borrowings under the Retired Bank Credit Facility on October
17, 1997, prior to the Recapitalization, were $99.0 million and
letters of credit outstanding were $38.7 million. Average
borrowings under the credit agreement were $68.8 million for the
period ended on October 17, 1997.
In June 1995, the Company issued $85.0 million of the
Retired Senior Notes to institutional investors in a private
placement. At October 17, 1997 the Retired Senior Notes were
retired by the Company at a cost of $93.1 million that included
accrued interest on the Retired Senior Notes and a make-whole
premium.
In the first forty weeks of fiscal 1997, cash used in
operating activities was $61.1 million compared to $42.8 million
in the comparable period in 1996, an increase of $18.3 million.
This increase resulted primarily from an increase in the net loss
of $28.0 million and is primarily attributable to $25.6 million
of cash paid relating to expenses incurred in connection with the
Recapitalization and an extraordinary item of $4.5 million
relating to the early retirement of debt.
Net cash provided by (used in) operating activities was
$16.5 million, ($7.8) million and $1.8 million for fiscal years
1996, 1995 and 1994, respectively. The improvement in cash flow
from operations in 1996 was primarily attributable to the
increase in net income and the timing of income tax
payments/refunds for fiscal years 1995 and 1996. In 1995, the
decrease in cash flow from operations was attributable to the
decrease in net income.
Net cash used in investing activities included capital
expenditures, primarily for the Company's J. Crew Retail
expansion strategy, net of construction allowances. Net capital
expenditures increased from $14.9 million in the forty weeks
ended November 8, 1996 to $28.3 million in the comparable period
in 1997. Capital expenditures in the 1996 period resulted from
the opening of eight J. Crew Retail stores and the $6.0 million
relocation of the retail warehouse to Asheville, North Carolina.
Capital expenditures in the 1997 period included the opening of
ten J. Crew Retail stores and the $6.0 million relocation of
the Company's headquarters office in New York City.
Net capital expenditures totaled $22.5 million, $14.6
million and $13.5 million in fiscal years 1996, 1995 and 1994.
Capital expenditures included the opening of eight J. Crew Retail
stores and three J. Crew Factory Outlet stores in 1996, two J.
Crew Retail stores and 12 J. Crew Factory Outlet stores in 1995
and one J. Crew Retail store and seven J. Crew Factory Outlet
stores in 1994. In fiscal 1994, $4.2 million was expended for the
PCP distribution facility in Edison, New Jersey and $2.2 million
was used to expand the Lynchburg, Virginia telemarketing and
distribution center.
Net cash provided by (used in) financing activities totaled
($0.4) million, $17.8 million and $6.8 million in fiscal years
1996, 1995 and 1994. In fiscal 1995, the Company borrowed $85.0
million in private placement debt of which $67.0 million was used
to repay then outstanding long-term debt. In fiscal 1994, $15.0
million of additional long-term debt was offset by required
payments of $7.0 million for outstanding long-term debt and a
$1.0 million dividend.
After the Recapitalization
Since consummating the Recapitalization, the Company's
primary sources of liquidity have been cash flow from operations
and borrowings under the Revolving Credit Facility. The Company's
primary uses of cash have been debt service requirements, capital
expenditures and working capital. The Company expects that
ongoing
41
requirements for debt service, capital expenditures and
working capital will be funded from operating cash flow and
borrowings under the Revolving Credit Facility.
The Company has incurred substantial indebtedness in
connection with the Recapitalization. After giving effect to the
Recapitalization and application of the proceeds of the Old
Debentures, the Holdings Preferred Stock, the Holdings Common
Equity contribution and the distribution by Operating Corp to
Holdings of the net proceeds of the issuance of the Operating
Corp Senior Subordinated Notes, the Securitization and borrowings
under the Bank Facilities (less the repayment of the Retired Bank
Credit Facility, the Retired Senior Notes and other indebtedness
and transaction expenses), the Company had $342.3 million of
indebtedness outstanding and $194.7 million of stockholders'
deficit, in each case as of November 7, 1997. The Company's
significant debt service obligations following the
Recapitalization could, under certain circumstances, have
material consequences to security holders of the Company,
including holders of the New Debentures. See "Risk Factors."
Concurrent with the Recapitalization, Operating Corp issued
the Operating Corp Senior Subordinated Notes for $150.0 million
in gross proceeds, entered into the Term Loan Facility and the
Revolving Credit Facility and consummated the Securitization. The
Term Loan Facility is a single tranche term loan in the aggregate
principal amount of $70.0 million. The Revolving Credit Facility
provides revolving loans in an aggregate amount of up to $200.0
million. Upon closing of the Recapitalization, Operating Corp
borrowed the full amount available under the Term Loan Facility
and approximately $35.6 million under the Revolving Credit
Facility. Borrowings under the Revolving Credit Facility were
used to partially refinance seasonal borrowings outstanding under
the Retired Bank Credit Facility. The amount remaining available
under the Revolving Credit Facility is available to fund the
working capital requirements of Operating Corp. The
Securitization generated approximately $40 million in proceeds.
Proceeds to Operating Corp from the issuance of the Operating
Corp Senior Subordinated Notes, the Securitization and from
initial borrowings under the Bank Facilities, less the repayment
of the Retired Bank Credit Facility, the Retired Senior Notes and
other indebtedness and transaction expenses, were distributed to
Holdings to finance the Recapitalization and the fees and
expenses in connection therewith (the "Operating Corp
Distribution"). To provide additional financing to fund the
Recapitalization, Holdings raised $264.2 million through (i) the
sale to TPG Partners II, its affiliates and other investors of
approximately 46,853 shares of Holdings Common Stock
(representing 85.2% of the outstanding shares) for $63.9 million,
(ii) gross proceeds of $75.3 million from the issuance of the Old
Debentures and (iii) the issuance of $125.0 million in
liquidation value of Holdings Preferred Stock.
The proceeds of the Operating Corp Senior Subordinated
Notes, the Securitization, the Holdings Senior Discount
Debentures, the Holdings Preferred Stock, the purchase of
Holdings Common Stock by TPG Partners II, its affiliates and
other investors and the initial borrowings under the Bank
Facilities were used to finance the repurchase from the
Shareholders of all outstanding shares of Holdings' capital stock
(other than shares of Holdings Common Stock having an implied
value of $11.1 million, almost all of which continues to be held
by Emily Woods, and which represented 14.8% of the shares of
Holdings Common Stock immediately following the transaction) to
refinance outstanding indebtedness of Holdings and to pay fees
and expenses incurred in connection with the Recapitalization.
Borrowings under the Bank Facilities bear interest at a
rate per annum equal (at Operating Corp's option) to a margin
over either a base rate or LIBOR. The Bank Facilities will mature
six years after the closing date of the Recapitalization.
Operating Corp's obligations under the Bank Facilities are
guaranteed by each of Operating Corp's direct and indirect
subsidiaries. The Bank Facilities and the guarantees thereof are
secured by substantially all assets of Holdings and its direct
and indirect subsidiaries (other than any receivables subsidiary)
and a pledge of the capital stock of Operating Corp and all
direct and indirect subsidiaries of Holdings, subject to certain
limitations with respect to foreign subsidiaries. The Bank
Facilities contain customary covenants and events of default,
including substantial restrictions on Operating Corp's ability to
make dividends or distributions to Holdings. See "Description of
Operating Corp Indebtedness."
42
Simultaneously with the consummation of the
Recapitalization, the Company entered into an agreement with
affiliates of the Initial Purchasers establishing a revolving
securitization facility in which the initial transaction was the
securitization of approximately $40 million of PCP consumer loan
installment receivables. The Securitization involved the transfer
of receivables to a trust in exchange for cash and subordinated
interests in the pool of receivables, and the subsequent sale by
the trust of certificates of beneficial interest to third party
investors. Although the Company remains obligated to repurchase
receivables in the event of return of the related merchandise and
under certain other limited circumstances, the Company has no
obligation to reimburse the trust or the purchasers of beneficial
interests for credit losses. The trust is held by PCP Receivables
Corp. ("Receivables Sub"), a special-purpose, bankruptcy remote
subsidiary ("SPV") established by PCP. At November 7, 1997, the
SPV had net assets of approximately $17.5 million. The SPV is not
a guarantor of the Operating Corp Senior Subordinated Notes or
the Bank Facilities. See "Description of Operating Corp
Indebtedness--Receivables Facility." The Securitization was
accounted for as a sale of receivables, and resulted in a charge
to earnings of approximately $0.4 million million for the period
ended November 7, 1997.
The Operating Corp Senior Subordinated Notes are
guaranteed by each subsidiary of Operating Corp (other than
Receivables Sub) but are not guaranteed by Holdings. The
Operating Corp Senior Subordinated Notes mature in 2007. Interest
on the Operating Corp Senior Subordinated Notes is payable
semi-annually in cash. The Operating Corp Senior Subordinated
Notes contain customary covenants and events of default,
including covenants that limit the ability of Operating Corp and
its subsidiaries to incur debt, pay dividends and make certain
investments.
The Holdings Preferred Stock bears cumulative dividends at
the rate of 14.50% per annum (payable quarterly) for all periods
ending on or prior to October 17, 2009 and 16.50% per annum
thereafter. Dividends compound to the extent not paid in cash.
Subject to restrictions imposed by the Operating Corp Senior
Subordinated Notes, the Bank Facilities, the Debentures and other
documents relating to the Company's indebtedness, Holdings may
redeem the Holdings Preferred Stock at any time, at the
then-applicable redemption price and, in certain circumstances
(including the occurrence of a change of control of Holdings),
may be required to repurchase shares of Holdings Preferred Stock
at liquidation value plus accumulated and unpaid dividends to the
date of repurchase. See "Capital Stock of Holdings and Operating
Corp."
The New Debentures will mature on October 15, 2008. Cash
interest will not accrue on the New Debentures prior to October
15, 2002. Thereafter, interest on the New Debentures will be
payable semiannually in cash. See "Description of the New
Debentures."
The Company expects that capital expenditures, net of
construction allowances, during fiscal 1997 will be approximately
$34 million, primarily to fund the opening of 12 retail stores,
the relocation of the Company's headquarters office in New York
City and the consolidation of J. Crew and C&W corporate offices.
Capital expenditures are expected to be funded from internally
generated cash flows and by borrowing from available financing
sources. See "Business--J. Crew Brand--J. Crew Retail--New Store
Expansion."
Borrowings outstanding under the Revolving Credit Facility
on November 7, 1997 were $47.0 million and letters of credit
outstanding as of November 7, 1997 were $37.4 million.
Management believes that cash flow from operations and
availability under the Revolving Credit Facility will provide
adequate funds for the Company's foreseeable working capital
needs, planned capital expenditures and debt service obligations.
The Company's ability to fund its operations and make planned
capital expenditures, to make scheduled debt payments, to
refinance indebtedness and to remain in compliance with all of
the financial covenants under its debt agreements depends on its
future operating performance and cash flow, which in turn, are
subject to prevailing economic conditions and to financial,
business and other factors, some of which are beyond its control.
See "Risk Factors."
43
Recapitalization Expenses
The recapitalization expenses of $19.9 million consisted of
management bonuses of $12.1 million, TPG financial advisory fee
of $5.6 million, legal and accounting fees of $1.0 million,
consulting fee of $1.0 million and other expenses of $0.2
million. The Company's results of operations were negatively
impacted by these recapitalization expenses. The loss before
income taxes and extraordinary item of $29.1 million for the
forty week period ended November 7, 1997 includes the $19.9
million of non-recurring recapitalization expenses, all of which
were paid before January 31, 1998.
The Year 2000 Issue
The effect of Year 2000 issues on the Company's operations
are being addressed by the Company's Information Technology
Department. A plan has been developed which identifies the
systems and related programs which must be upgraded and a
timetable has been established for the completion of these
upgrades.
This plan contemplates the use of internal programming
resources, outside consulting services, system upgrades from
existing vendors and the replacement of existing packages with
packages that are Year 2000 compliant. The designed plan
estimates that the Company will be in compliance with Year 2000
issues by the Fall of 1999.
The estimated cost of the Year 2000 upgrade is not expected
to be material to the Company's results of operations.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No.
131, Disclosures about Segments of an Enterprise and Related
Information, which will be effective for financial statements
beginning after December 15, 1997. SFAS No. 131 redefines how
operating segments are determined and requires expanded
quantitative and qualitative disclosures relating to a company's
operating segments. The Company has not yet completed its
analysis of how it will be affected.
Impact of Inflation
The Company's results of operations and financial condition
are presented based upon historical cost. While it is difficult
to accurately measure the impact of inflation due to the
imprecise nature of the estimates required, the Company believes
that the effects of inflation, if any, on its results of
operations and financial condition have been minor. However,
there can be no assurance that during a period of significant
inflation, the Company's results of operations would not be
adversely affected.
44
BUSINESS
Overview
The Company is a leading mail order and store retailer of
women's and men's apparel, shoes and accessories operating
primarily under the J. Crew(R) brand name. Under the direction of
Emily Woods and Arthur Cinader (co-founders of the J. Crew brand
and father and daughter), the Company has built a strong and
widely recognized brand name known for its timeless styles at
price points that the Company believes represent exceptional
product value. The J. Crew image has been built and reinforced
over its 14-year history through the circulation of more than
one-half billion catalogs that use magazine-quality photography
to portray a classic American perspective and aspirational
lifestyle. Many of the original items introduced by the Company
in the early 1980s (such as the rollneck sweater, weathered
chino, barn jacket and pocket tee) were instrumental in
establishing the J. Crew brand and continue to be core product
offerings. The Company has capitalized on the strength of the J.
Crew brand to provide customers with clothing to meet more of
their lifestyle needs, including casual, career and sport. The
strength of the J. Crew brand is demonstrated by a compound
annual growth rate of 15.4% in J. Crew brand revenues between
fiscal 1992 and fiscal 1996.
The J. Crew merchandising strategy emphasizes timeless
styles and a broad assortment of high-quality products designed
to provide customers with one-stop shopping opportunities at
attractive prices. J. Crew catalogs and retail stores offer a
full line of men's and women's basic durables (casual weekend
wear), sport, swimwear, accessories and shoes, as well as the
more tailored men's sportswear and women's "Classics" lines.
Approximately 60% of the Company's J. Crew brand sales are
derived from its core offerings of durables and sport clothing,
the demand for which the Company believes is stable and resistant
to changing fashion trends. The Company believes that the J. Crew
image and merchandising strategy appeal to college-educated,
professional and affluent customers who, in the Company's
experience, have demonstrated strong brand loyalty and a tendency
to make repeat purchases.
J. Crew products are distributed exclusively through the
Company's catalog and store distribution channels. The Company
currently circulates over 76 million J. Crew catalogs per annum
and owns and operates 49 J. Crew retail stores and 42 J. Crew
factory outlets. In addition, J. Crew products are distributed
through 67 free-standing and shop-in-shop stores in Japan under a
licensing agreement with Itochu.
In addition to the Company's J. Crew operations, the
Company operates C&W, a mail order and factory store women's
apparel business that targets older, more conservative customers,
and PCP, a direct selling catalog merchandiser of consumer
branded goods through a "club" concept that provides credit sales
to lower-income customers. During the twelve-month period ended
November 7, 1997, the Company generated total revenues of $836.7
million, of which $583.1 million or approximately 70% was
attributable to the J. Crew brand, and total Adjusted EBITDA of
$47.6 million. See "Summary--Summary Unaudited Pro Forma
Consolidated Financial Data" for a description of Adjusted
EBITDA.
Business Strengths
Since its inception, the Company has pursued a consistent
operating strategy which has resulted in the following key
strengths and distinguishing characteristics:
- Strong, Recognizable Brand. The Company has created a
recognizable, differentiated brand image reflecting an
American aspirational lifestyle. The J. Crew image is
consistently communicated through all aspects of the
Company's business including its merchandise design,
distinctive catalogs and retail store environment. The
Company's high-quality products, strong brand image and
customer loyalty have resulted in strong gross margins and
retail sales productivity.
45
- Premium Quality Products and Distinctive Designs at
Attractive Price Points. The Company offers premium quality
products reflecting a classic, clean aesthetic with a
consistent design philosophy. All J. Crew products are
designed by an in-house team of 15 designers led by Emily
Woods. The Company believes that its in-house design
capabilities ensure a coherent set of product offerings from
season to season and year to year that provides significant
value to its customers through attractive price points.
- Proven Retail Store Concept. J. Crew Retail stores
historically have generated strong and stable operating
results. The Company believes that its sales per gross
square foot are among the highest in its industry segment.
J. Crew Retail stores open during all of fiscal 1996
generated the following key operating statistics:
Fiscal 1996
Average
Sales per gross square foot ....... $575
Store contribution margin ......... 25.9
Approximately 81% of the J. Crew Retail stores that were
open during all of 1996 had store contribution margins above
20%. All of the Company's J. Crew Retail stores are
profitable and have generated positive store contribution
within the first twelve months of operation. In addition, J.
Crew Retail stores opened since fiscal 1992 have averaged
approximately $550 in sales per gross square foot and 23.0%
store contribution margin during the first twelve months of
operation.
- Broad and Stable Product Offering. The Company's J. Crew
product offering includes a broad array of items which appeal
to a diverse customer base, spanning gender and age segments.
A substantial portion of the J. Crew product line consists of
basic durables, such as chinos, jeans and sweaters, which are
not significantly modified from year to year and, in the
Company's opinion, are resistant to shifting fashion trends.
In 1996, sales of durables and sport clothing represented
approximately 60% of total J. Crew brand revenues, having
increased at a compound annual growth rate of approximately
15% since 1992.
- Synergistic Distribution Channels. The Company believes that
the concurrent operation of the J. Crew Mail Order business
and J. Crew Retail stores provides a distinct advantage in
the development of the J. Crew brand. Visibility and exposure
of the brand are enhanced by the broad circulation of
catalogs, aiding the expansion of the retail concept. In
addition, the Company believes that the retail operations
help attract first-time "walk-by" customers to the catalog
and improve the salability of fit-critical items through the
catalog. The Company further believes that diversified
distribution channels help insulate the Company against
circumstances and events uniquely affecting one distribution
channel or the other.
- Tightly Controlled Distribution. By selling products
exclusively through J. Crew catalogs, J. Crew Retail stores
and J. Crew Factory Outlets, the Company is able to present
and maintain a consistent brand image, control the
presentation and pricing of its merchandise, provide a higher
level of customer service, and closely monitor retail
sell-through. The Company believes that tight control over
the distribution of its products provides competitive
advantages over other branded apparel retailers that
distribute their goods through department stores.
Opportunities
The Company believes that substantial opportunities exist
to enhance revenue and profitability by increasing efficiencies
in the J. Crew Mail Order business and by expanding the J. Crew
Retail business.
- Implement Tactical Cost Savings Opportunities--While the
Company believes that gross margins in the J. Crew Mail Order
business have been strong, overall catalog profitability has
been depressed by unnecessarily high operating expenses. The
Company has identified a number of tactical cost savings that
could be realized
46
without affecting the Company's franchise or brand image.
Included in Adjusted EBITDA are $7.5 million in estimated
annual savings resulting from actions implemented prior to the
Recapitalization, including negotiation of a new catalog vendor
contract, selected headcount and net payroll reductions and
the insourcing of certain photography functions. The Company
has identified approximately $7 million of further potential
annual savings that are not reflected in Adjusted EBITDA,
including process efficiencies currently under review,
reduction of the Base Book trim size, installation of
automatic sorting equipment and consolidation of the J. Crew
and C&W New York corporate offices. The Company believes
these additional cost savings could be implemented by
mid-1998.
- Realize Cash Flow Increases Through J. Crew Mail Order SKU
Rationalization--The Company's J. Crew Mail Order product
offerings have increased from 33,000 SKUs in 1992 to 66,000
SKUs in 1996, partly as a result of a proliferation in colors
and sizes offered. In recent season-to-season testing on the
Company's swimwear and chino lines, the Company reduced SKUs
by 33% and 45%, respectively, while posting category revenue
increases. By eliminating slower-selling colors and sizes
from its core offering, the Company believes it will be
better able to forecast demand, increase fill rates and
increase inventory turns, resulting in enhanced operating
cash flow.
- Increase J. Crew Catalog Productivity Through Increased
Segmentation--The Company believes that it circulates fewer
and less-targeted catalog editions than its competitors, and
that catalog productivity (as measured by initial demand per
page circulated) could be enhanced by more precise targeting
of catalog mailings through further customer segmentation.
For example, in 1996 the Company introduced a Women's catalog
which to date has achieved 20% higher initial demand per page
circulated than that of the Company's primary mailing, the
Base Book. To further enhance its segmentation efforts, the
Company has recently introduced a College catalog and plans
to introduce a Swimwear catalog in 1998. From 1997 to 1998,
the increased segmentation is expected to result in an
approximately 5% increase in the number of catalogs
circulated, but an approximately 8% decrease in total pages
circulated. Reductions in total pages circulated should
result in a decrease in paper and postage expenses.
- Expand J. Crew Retail Operations--The Company's J. Crew
Retail store expansion strategy is to continue to increase
its market share in its existing markets and to penetrate new
markets. The Company expects to open a total of 12 stores in
fiscal 1997, ten of which were open as of November 7, 1997.
The Company currently intends to open 12 to 20 stores
annually, funded primarily by cash flow generated from
operations, resulting in approximately 100 stores in
operation by the end of fiscal 2000. Historically, new stores
have cost the Company an average of $1.5 million in building
improvements and working capital expenditures and have
experienced a pay-back period of approximately 20 months. The
Company has established an administrative infrastructure that
it believes is sufficient to accommodate the retail expansion
plan, providing the Company with additional margin
improvement through overhead leverage. In addition, the
Company believes, with a store base of only 49 stores, its
markets are underpenetrated relative to its competitors and
enough suitable locations exist nationwide to accommodate its
expansion plan.
The Company has five major operating divisions: J. Crew Mail
Order, J. Crew Retail, J. Crew Factory Outlets, PCP and C&W. J.
Crew Mail Order, J. Crew Retail and J. Crew Factory Outlets each
operate under the J. Crew brand name. In 1996, products sold
under the J. Crew brand contributed $556.1 million in revenues
(including licensing revenues) or 68.8% of the Company's total
revenues. J. Crew brand revenues in 1996 were comprised of $289.8
million (52.1%) from J. Crew Mail Order, $168.0 million (30.2%)
from J. Crew Retail and $94.5 million (17.0%) from J. Crew
Factory Outlets. In fiscal 1996, PCP and C&W contributed revenues
of $177.7 million and $75.0 million, respectively, representing
approximately 22.0% and 9.3%, respectively, of the Company's
total revenues.
47
J. Crew Brand
Merchandising and Design Strategy
The J. Crew merchandising strategy focuses on creating and
delivering a broad assortment of high-quality products in
timeless styles intended to provide customers with one-stop
shopping opportunities at attractive prices. Many of the original
items introduced by the Company in the early 1980s (such as the
rollneck sweater, weathered chino, barn jacket and pocket tee)
were instrumental in establishing the J. Crew brand, and continue
to be core product offerings. The Company has capitalized on the
strength of the J. Crew brand image to provide its customers with
clothing to meet more of their lifestyle needs, including casual,
career and sport.
Over time, the J. Crew merchandising strategy has evolved
from providing unisex products to creating full lines of men's
and women's clothing, shoes and accessories. This has had the
effect of increasing overall J. Crew brand sales volume, and
significantly increasing revenues from sales of women's apparel
as a percentage of total J. Crew brand sales. J. Crew Mail Order
sales in 1996 were approximately 55% women's and 45% men's, while
sales in the J. Crew Retail stores were approximately 60% women's
and 40% men's. The following table sets forth the J. Crew
merchandise mix as a percentage of total J. Crew Mail Order and
Retail revenues for the years 1992 through 1996. (J. Crew brand
sales statistics throughout this section exclude sales in J. Crew
Factory Outlets.)
FY 1992 FY 1993 FY 1994 FY 1995 FY 1996
Women's ...... 38% 42% 47% 53% 56%
Men's ........ 62 58 53 47 44
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
J. Crew Womenswear
The ready-to-wear women's apparel market is divided by
price point into five segments ranging from lowest to highest as
follows: Budget, Moderate, Better, Bridge and Designer. J. Crew
womenswear competes primarily in the Better and Bridge segments
of the market. J. Crew womenswear comprises the Durables, Sport,
Classics, Collection, Swim, Shoes, Accessories and Intimates
lines. The Durables and Sport lines consist of casual apparel and
comprised 52.5% of J. Crew womenswear sales in 1996. The Durables
line includes core items such as jeans, knits and sweaters that
retail between $20 to $100, while the Sport line includes basic
outerwear and knits that retail between $40 to $200. Revenues
from the Durables and Sport lines have increased from $44.2
million in 1992 to $135.6 million in 1996, representing a
compound annual growth rate of 32.3%. The Company has capitalized
on the strength of these lines with the successful extension of
its womenswear offering through its Classics and Collection
lines. The Classics line features women's suits, dresses, jackets
and trousers that retail between $50 to $300. Women's Collection
is positioned as a designer line at substantially lower price
points than other designer lines, and features suits, dresses,
jackets and trousers made of fine Italian fabrics that retail
between $250 to $1,800. Women's Accessories includes sunglasses,
hats, scarves, gloves, belts, bags, hosiery, hair products and
small leather goods.
J. Crew catalogs provide a broader selection of the
Durables and Sport lines than the retail stores, while the retail
stores provide a broader selection of the Classics line than the
catalogs. The Collection line is featured exclusively in select
retail stores, and Classics are sold primarily through retail
stores, to reinforce a high-end brand image and to accommodate
customer fit, fabric and price considerations before purchase.
J. Crew Menswear
J. Crew menswear comprises the Durables, Sport, Sportswear,
Swim, Shoes, Accessories and Underwear/Loungewear lines. The
Durables and Sport lines consist of casual apparel and comprised
78.2% of J. Crew menswear sales in 1996. The Durables line
includes casual jeans and chinos, sweaters and outerwear that
retail between $40 and $400. The Company recently introduced the
Sport line to meet growing consumer demand for sport and outdoor
apparel that combines designer styling with technical
authenticity. Revenues from the Durables and Sport lines have
increased from $121.8 million in 1992 to $155.8 million in 1996,
representing a compound
48
annual growth rate of 6.3%. The Sportswear line includes men's
sportscoats, shirts and trousers that retail between $50 and $500.
J. Crew catalogs feature a broader selection of men's
casual Durables and Sport merchandise than in the retail stores.
Men's Sportswear is featured exclusively in the retail stores to
reinforce a high-end brand image and to accommodate customer fit,
fabric and price considerations before purchase.
Design
Every J. Crew product is designed by Emily Woods and her
in-house design staff of 15 designers to reflect a classic, clean
aesthetic that is consistent with the brand's American lifestyle
image. Design teams are formed around J. Crew product lines and
categories to develop concepts, themes and products for each of
the Company's J. Crew businesses. Members of the J. Crew
technical design team develop construction and fit specifications
for every product to ensure quality workmanship and consistency
across product lines. These teams work in close collaboration
with the merchandising and production staff in order to gain
market and other input. Product merchandisers provide designers
with market trend and other information at initial stages of the
design process. J. Crew designers and merchants source globally
for fabrics, yarns and finishing products to ensure quality and
value, while manufacturing teams research and develop key vendors
worldwide to identify and maintain the essential characteristics
for every style.
J. Crew Mail Order
Since its inception in 1983, J. Crew Mail Order has
distinguished itself from other catalog retailers by its
award-winning catalog, which utilizes magazine-quality "real
moment" pictures to depict an aspirational lifestyle image.
During fiscal 1996, J. Crew Mail Order distributed 30 catalog
editions with a combined circulation of more than 76 million,
generating $289.8 million in revenues or 52.1% of the Company's
total J. Crew brand revenues.
Circulation Strategy
J. Crew Mail Order's circulation strategy focuses on
continually improving the segmentation of customer files and the
acquisition of additional customer names. In 1996, approximately
60% of J. Crew Mail Order revenues were from customers in the
12-month buyer file (buyers who have made a purchase from any J.
Crew catalog in the prior 12 months). Between 1992 and 1996 the
J. Crew Mail Order 12-month buyer file grew at a compound annual
growth rate of 10.0%.
Customer Segmentation. In 1996, the Company began
segmenting its customer file and tailoring its catalog offerings
to address the different product needs of its customer segments.
To increase core catalog productivity and improve the
effectiveness of marginal and prospecting circulation, each
customer segment is offered different catalog editions. The
Company currently circulates Base, Women's, Prospect and Sale
catalogs to targeted customer segments, has recently introduced a
College catalog and intends to introduce a Swimwear catalog in
1998.
Descriptions of the Company's current catalogs follow:
- Base Books. These catalogs contain the entire mail order
product offering and are sent primarily to 12-month buyers.
- Women's Books. Introduced in the spring of 1996, the Women's
books feature women's merchandise and are sent to buyers who
purchase primarily women's merchandise. These books represent
an additional customer contact potentially generating
incremental revenue from women customers.
- Prospect Books. Introduced in late 1995, these editions are
abridged versions of the Base Books and are sent to less
active and prospective customers in order to cost-effectively
reactivate old customers and acquire new customers.
49
- Sale Books. These catalogs contain overstock merchandise to
be sold at reduced prices without adversely affecting the J.
Crew brand image.
The following are descriptions of the recently introduced
College book and the Swimwear book planned for 1998:
- College Books. College books present a merchandise mix
(primarily men's and women's Durables, Sport and Swimwear)
that is most often purchased by and for students. These
catalogs consist of a new creative presentation involving a
lifestyle setting appealing to the youth market. The Company
believes that these new catalogs will also be effective as
prospecting vehicles: the page counts are relatively low (68
pages) and the product lines offered are of above average
productivity.
- Swimwear Books. The Company plans to offer its full swimwear
line together with selected casual weekend clothing in a
special catalog edition to be mailed to its most productive
women customers as well as to prospective customers. The
Company's analysis of buyer performance indicates that
swimwear is the most productive category for existing buyers
and the product classification most frequently purchased by
first-time buyers.
The Company believes that it circulates fewer and
less-targeted catalog editions than its competitors, and that
segmentation will improve the productivity (as measured by
initial demand per page circulated) of its circulation by: (i)
increasing its offers to its most productive customers and
decreasing its offers to its less productive customers, and (ii)
reducing both the page count and number of mailings of its Base
Books. For example, in 1996, the Company introduced the Women's
catalog which to date has achieved 20% higher initial demand per
page circulated than that of the Base Book. The overall effect of
increased segmentation is expected to be an increase in books
circulated (and customer contacts made) and a decrease in pages
circulated. In 1996, total circulation increased to approximately
76 million from approximately 68 million in 1995, primarily as a
result of the introduction of Prospect and Women's catalogs,
while pages circulated during this period decreased to 9.8
billion from 10.2 billion. From 1997 to 1998, the increased
segmentation is expected to result in an approximately 5%
increase in the number of catalogs circulated, but an
approximately 8% decrease in total pages circulated. Reductions
in total pages circulated should result in a decrease in paper
and postage expenses.
Customer Acquisition and List Management. J. Crew Mail
Order's name acquisition programs are designed to attract new
customers in a cost-effective manner. The Company acquires new
names from various sources, including list rentals, exchanges
with other catalog and credit card companies, "friends' name"
card inserts and, recently, through J. Crew Retail stores which
represent an increasingly significant resource in prospecting for
new names. Names and addresses of 25% to 30% of the customers
making credit card purchases at J. Crew Retail stores are
automatically captured at the point of sale. Customers are also
asked to fill out cards at the cash register when they make
purchases. In addition, the Company is exploring the feasibility
of placing telephones in its J. Crew Retail stores with direct
access to the J. Crew Mail Order telemarketing center to allow
customers in the stores to order catalog-specific or out-of-stock
items.
The Company believes that circulation planning based on
more sophisticated statistical circulation models will increase
the effectiveness of catalog mailings and maximize the
productivity of its buyer file. As a result, the Company is
testing increasingly sophisticated statistical circulation
planning models to improve its ability to predict customer
purchase behavior based on a wide range of variables. The Company
plans to use these analyses to enhance its circulation
efficiencies.
Catalog Creation and Production
The Company is distinguished from other catalog retailers
by its award-winning catalog, which utilizes magazine-quality
"real moment" pictures to depict an aspirational lifestyle image.
All creative work on the catalogs is coordinated by J. Crew
personnel to maintain and reinforce the J. Crew brand image.
Photography is executed both on location and in studios, and
creative design and copy writing are executed on a desk-top
publishing system.
50
Digital images are transmitted directly to outside printers, thereby
reducing lead times and improving reproduction quality. The Company
believes that appropriate page presentation of its merchandise
stimulates demand and therefore places great emphasis on page layout.
J. Crew Mail Order does not have long-term contracts with
paper mills and, instead, purchases paper from paper mills at a
two and one-half month specified rate. Projected paper
requirements are communicated on an annual basis to paper mills
to ensure the availability of an adequate supply. Management
believes that the Company's long-standing relationships with a
number of the largest coated paper mills in the United States
allow it to purchase paper at favorable prices commensurate with
the Company's size and payment terms. See "Risk
Factors--Increases in Costs of Mailing, Paper and Printing."
Telemarketing and Customer Service
J. Crew Mail Order's primary telemarketing and fulfillment
facilities are located in Lynchburg, Virginia. Telemarketing
operations are open 24 hours a day, seven days a week and handled
over 7.5 million calls in fiscal 1996. Orders for merchandise may
be received by telephone, facsimile, mail and the Company's
website, although orders through the toll-free telephone service
accounted for 90% of orders in fiscal 1996. The telemarketing
center is staffed by a total of 900 full-time telemarketing
associates, and up to 2,500 associates during peak periods, who
are trained to assist customers in determining the customer's
correct size and to describe merchandise fabric, texture and
function. Each telemarketing associate utilizes a terminal with
access to an IBM mainframe computer which houses complete and
up-to-date product and order information. The fulfillment
operations are designed to process and ship customer orders in a
quick and cost-effective manner. Orders placed before 9:00 p.m.
are shipped the following day. Same-day shipping is available for
orders placed before noon. During non-peak periods, approximately
11,000 packages are shipped daily, and during peak periods,
25,000 daily.
J. Crew Retail
An important aspect of the Company's business strategy is
an expansion program designed to reach new and existing customers
through the opening of J. Crew Retail stores. In addition to
generating sales of J. Crew products, J. Crew Retail stores help
set and reinforce the J. Crew brand image. The stores are
designed in-house and fixtured to create a distinctive J. Crew
environment and store associates are trained to maintain high
standards of visual presentation and customer service. The result
is a complete statement of J. Crew's timeless American style,
classic design and attractive product value. During fiscal 1996,
J. Crew Retail generated revenues of $168.0 million, representing
30.2% of the Company's total J. Crew brand revenues.
The Company believes that J. Crew Retail derives
significant benefits from the concurrent operation of J. Crew
Mail Order. The broad circulation of J. Crew catalogs performs an
advertising function, enhancing the visibility and exposure of
the brand, aiding the expansion of the retail concept and
increasing the profitability of the stores.
J. Crew Retail maintains a uniform appearance throughout
its store base, in terms of merchandise display and location on
the selling floor. Store managers receive detailed store plans
that dictate fixture and merchandise placement to ensure uniform
execution of the merchandising strategy at the store level.
Standardization of store design and merchandise presentation also
maximizes usage and productivity of selling space and lowers the
cost of store furnishings allowing J. Crew Retail to
cost-effectively open new stores and refurbish existing ones.
Store Economics
The Company believes that its J. Crew Retail stores are
among the most productive in its industry segment. All of the
Company's J. Crew Retail stores are profitable and have generated
positive store contribution within the first 12 months of
opening. J. Crew Retail stores that were open during all of
fiscal 1996 averaged $4.8 million per store in sales, produced
sales per gross square foot of approximately $575 and generated
store contribution margins of approximately 25.9%. The Company
believes that these results compare favorably to the average
among retailers that the Company believes to be its primary
competitors. J. Crew Retail stores have an average size of 8,300
gross
51
square feet. The Company's historical average cost for leasehold
improvements, furniture and fixtures for new stores was
approximately $950,000 per store, after giving effect to
construction allowances. The Company anticipates that the cost of
these improvements will increase as it targets more urban,
high-traffic areas for its stores. Average pre-opening costs per
store, which are expensed as incurred, were $87,000. In addition,
working capital requirements, consisting almost entirely of
inventory purchases, averaged approximately $550,000 per store.
Current Stores
As of November 7, 1997 J. Crew Retail operated 49 retail
stores nationwide, having expanded from 18 stores in 1993. The
Company intends to open 12 stores in fiscal 1997, ten of which
were open as of November 7, 1997. The stores are located in
upscale shopping malls and in retail areas within major
metropolitan markets that have an established higher-end retail
business.
The table below highlights certain information regarding J.
Crew Retail stores opened through fiscal 1996.
Average
Store
Stores Total
Open at Stores Stores Stores Square
Beginning Opened Closed at Total Footage
of During During End of Square at
Fiscal Fiscal Fiscal Fiscal Footage End of
Year Year Year Year (000's) Year
--------- ------ ------- ------ ------- -------
1992 ... 9 9 -- 18 140 7,778
1993 ... 18 10 -- 28 226 8,071
1994 ... 28 1 -- 29 235 8,103
1995 ... 29 2 -- 31 266 8,581
1996 ... 31 8 -- 39 338 8,667
New Store Expansion
J. Crew Retail plans to expand its store base to 51 in 1997
and currently intends to increase the number of stores in
operation by 12 to 20 stores annually, resulting in approximately
100 stores in operation by the end of fiscal 2000. The retail
expansion plan will initially focus on markets in which J. Crew
Mail Order has been successful and, more generally, in areas
within major metropolitan markets with affluent and well educated
populations. The Company will continue to cluster stores in
markets which provide the greatest sales potential, such as New
York, New Jersey, Massachusetts, California and Florida.
Historically, new stores have cost the Company an average of $1.5
million in building and working capital expenditures and have
experienced a pay-back period of approximately 20 months. The
Company believes, with a base of 49 stores, its markets are
underpenetrated relative to its competitors and enough suitable
locations exist nationwide to accommodate its expansion plan.
52
The following is a summary of the stores opened as of
November 7, 1997 and those expected to be opened in 1997 after
November 7, 1997:
Total
Opening Square
Location Date Footage
-------- ---- -------
Opened: 91 Fifth Avenue, New York, NY 3/4 5,875
Boca Town Center, Boca Raton, FL 4/16 7,099
Copley Place, Boston, MA 5/9 6,792
Short Hills Mall, Short Hills, NJ 6/4 10,000
South Park, Charlotte, NC 6/18 8,402
Danbury Fair (Durables), Danbury, CT 7/16 5,398
Century City, Los Angeles, CA 7/30 6,497
Westfarms, West Hartford, CT 8/1 8,000
Beachwood, Cleveland, OH 9/19 7,900
Fashion Valley, San Diego, CA 10/8 8,312
Expected: South Shore Mall, Braintree, MA 11/12 7,600
Aventura Mall, Miami, FL 11/30 7,749
J. Crew Factory Outlets
The Company extends its reach to additional consumer groups
through its 42 J. Crew Factory Outlets. Offering J. Crew products
at an average of 30% below full retail prices, J. Crew Factory
Outlets target value-oriented consumers. The factory outlet
stores also serve to liquidate excess, irregular or out-of-season
J. Crew products outside of the Company's two primary
distribution channels. During fiscal 1996, J. Crew Factory
Outlets generated revenues of $94.5 million, representing 17.0%
of the Company's total J. Crew brand revenues.
J. Crew Factory Outlets offer selections of J. Crew
menswear and womenswear. Ranging in size from 3,800 to 10,000
square feet with an average of 6,500 square feet, the stores are
generally located in major outlet centers in 25 states across the
United States. The Company believes that the outlet stores, which
are designed in-house, maintain fixturing, visual presentation
and service standards superior to those typically associated with
outlet stores.
Popular Club Plan
PCP is a direct selling catalog business offering a broad
range of department store merchandise on proprietary, in-house
credit plans to the lower and lower-middle income market. PCP
markets its catalog products primarily in eleven states in the
northeastern United States. PCP offers two distinct product
categories: Home Store (53% of 1996 sales) and Ready-to-Wear (47%
of 1996 sales). Home Store products include textiles, home
furnishings, housewares and electronics. Ready-to-Wear includes
men's and women's sportswear, coats, lingerie, juniors,
accessories, jewelry, shoes, children's wear, infants, special
size and swimwear. During fiscal 1996, Popular Club Plan's annual
circulation of 7.3 million catalogs generated revenues of $177.7
million, representing 22.0% of total Company revenues.
PCP markets products through an extensive network of over
100,000 local independent sales representatives ("Secretaries"),
using a unique combination of mail order and direct selling
methods. In contrast to a retail store sales associate, a
Secretary is a lead shopper who solicits his or her own circle of
friends, relatives, and co-workers to shop from the catalog.
Secretaries are compensated through commission reward credits
which can be redeemed for free merchandise. This provides them
with both a sales and collection incentive. All Secretary
applicants are screened and scored with proprietary behavior
models in conjunction with national credit bureau information.
Only 60% of applicants are set up as new accounts.
53
PCP offers customers a 22-week payment plan and a 44-week
payment plan for payment of merchandise ordered from PCP. Sales
through these proprietary credit products accounted for 96.3% of
PCP revenues in 1996. PCP performs ongoing credit analysis on
each Secretary and his or her club. Although Secretaries do not
guarantee payment of members they recruit, reward credits of club
Secretaries may be withheld to offset poor credit performance.
PCP monitors collections through its approximately 70-person
credit and collection department. While the primary dunning
process is done through club Secretaries, if an individual is
delinquent more than ten weeks, credit collectors will also take
on the responsibility of contacting the customer directly. Over
the last five years, PCP's annual credit losses have averaged
approximately 4% of net credit sales.
Clifford & Wills
C&W is a direct mail order and factory store business which
offers a broad range of women's updated apparel covering career
to casual as well as accessories and shoes. The typical customer
is a 36 to 55 year old upper-moderate to better-priced women's
apparel customer, parallel to that of a full-price department
store.
The brand is positioned to offer bridge level clothing at
prices which are 20% to 30% below the prices offered in better
departments of department stores, thereby satisfying the target
customer's desire for updated apparel at a compelling price
advantage. The Company also operates nine C&W outlet stores in
Pennsylvania, Florida, Wisconsin, Indiana, Texas, Georgia and
Connecticut. During 1996, C&W had revenues of $75.0 million
representing 9.3% of total Company revenues.
General
Sourcing, Production and Quality
The Company maintains separate merchandising, design,
manufacturing and quality assurance teams for the production of
J. Crew and C&W merchandise. The Company's products are designed
exclusively by in-house design and product development teams
which support each line and class of product. These teams provide
individual attention and expertise to every style, ensuring that
these styles fit the respective J. Crew and C&W brand images. PCP
primarily purchases merchandise from manufacturers and
distributors.
The Company's merchandise is produced for the Company by a
variety of manufacturers, both domestically and outside the
United States. The Company does not own or operate any
manufacturing facilities, instead contracting with third party
vendors for the production of its products. Manufacturing teams
research and develop products and source from vendors across 38
countries to identify and maintain essential quality and value
for every product. In 1996, approximately 60% of the Company's J.
Crew brand products were sourced in the Far East, 20% were
sourced domestically and 20% were from Europe and other regions.
PCP and C&W source the majority of their products through
domestic vendors. Rarely does the Company represent the majority
of any one vendor's business and no one vendor supplies more than
10% of the Company's merchandise.
The Company employs independent buying agents to conduct
in-line and final quality inspections at each manufacturing site.
Random inspections of all incoming J. Crew and C&W merchandise at
the Lynchburg and Asheville distribution facilities further
assure that the Company's products are of a consistently high
quality. PCP primarily sells consumer goods which have been
subjected to the manufacturer's own quality control processes
prior to receipt by PCP.
Due to the high concentration of foreign suppliers of J.
Crew brand merchandise, the Company estimates 10-month lead times
for its products. Currently, the Company must make commitments on
its piece goods eight to nine months prior to the issuance of the
respective catalog and must decide on SKU color buys within six
months of issuance. The Company is working to establish, either
through the use of more domestic vendors or through strategic
partnerships, a core group of long-term suppliers that provide
quicker response times. The Company
54
believes that the implementation of shorter lead times will
improve fill rates, reduce the overall complexity in inventory
management and improve its ability to more accurately forecast
demand, all of which should provide substantial savings to the
Company.
Distribution
The Company operates three main telemarketing and
distribution facilities for its operations. Order fulfillment for
J. Crew Mail Order and C&W takes place at the 406,500 square foot
telemarketing and distribution center located in Lynchburg,
Virginia. The Lynchburg facility processes approximately 3.8
million orders per year and employs approximately 1,800 full- and
part-time employees during its peak season.
The 192,500 square foot telemarketing and distribution
facility in Asheville, North Carolina was recently converted into
the main distribution center to service the retail and outlet
store operations and also houses a J. Crew Mail Order
telemarketing center. This facility employs approximately 700
full- and part-time employees during its non-peak season and an
additional 1,100 employees during the peak holiday season. PCP
conducts its fulfillment operations from a 369,000 square foot
distribution facility located in Edison, New Jersey. The Edison
facility employs approximately 300 and 600 full- and part-time
employees during the non-peak and peak seasons, respectively.
Each fulfillment center is designed to process and ship
customer orders in a quick and cost-efficient manner. Same-day
shipping is available for orders placed before noon; and orders
placed before 9:00 p.m. are shipped the following day. The
Company ships merchandise via the UPS, the United States Postal
Service and FedEx. To enhance efficiency, each facility is fully
equipped with a highly advanced telephone system, an automated
warehouse locator system and an inventory bar coding system. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Developments."
Management Information Systems
The Company's management information systems are designed
to provide, among other things, comprehensive order processing,
production, accounting and management information for the
marketing, manufacturing, importing and distribution functions of
the Company's business. The Company has installed sophisticated
point-of-sale registers in its J. Crew Retail and Factory Outlet
stores that enable it to track inventory from store receipt to
final sale on a real-time basis. The Company believes its
merchandising and financial system, coupled with its
point-of-sale registers and software programs, allow for rapid
stock replenishment, concise merchandise planning and real-time
inventory accounting practices. J. Crew Mail Order and C&W share
the same management information system and each of the Company's
business units has its own information system that is customized
to the needs of that particular business.
The Company's telephone and telemarketing systems,
warehouse package sorting systems, automated warehouse locators
and inventory bar coding systems utilize advanced technology.
These systems have provided the Company with a number of benefits
in the form of enhanced customer service, improved operational
efficiency and increased management control and reporting. The
Company's IBM 3990 system stores data, such as customer list
segmentation and analysis of market trends, and rapidly transfers
the information throughout the Company. In addition, the
Company's real-time inventory computer systems provide inventory
management on a per SKU basis and allow for a more efficient
fulfillment process. J. Crew's management information systems
also produce daily and weekly sales and performance reports.
Trademarks and International Licensing
J. Crew International, Inc., an indirect subsidiary of
Holdings, currently owns all of the trademarks for the J. Crew
name that the Company holds in the United States and
internationally, as well as its international licensing
55
contracts with third parties. Trademarks related to the J. Crew
name are registered in the United States Patent and Trademark
Office.
The Company derives revenues from the international
licensing of its trademarks in the J. Crew name and the know-how
it has developed. The Company has entered into a licensing
agreement with Itochu in Japan which gives the Company the right
to receive payments of percentage royalty fees in exchange for
the exclusive right to use the Company's trademarks in Japan. In
1996, licensee sales at retail stores in Japan were approximately
$100 million through 67 free-standing and shop-in-shop stores.
Under the license agreement the Company retains a high degree of
control over the manufacture, design, marketing and sale of
merchandise under the J. Crew trademarks. The Company is
currently negotiating a five-year renewal of this agreement which
otherwise expires in January, 1998.
The Company believes there is significant growth potential
in international markets as the Company can leverage off its base
in Japan into other key Asian markets. The Company is in the
process of exploring licensing agreements covering Hong Kong,
China, Singapore, Thailand and Malaysia. In 1996, licensing
revenues totaled $3.8 million.
Employees
The Company focuses significant resources on the selection
and training of sales associates in both its mail order, retail
and factory operations. Sales associates are required to be
familiar with the full range of merchandise of the business in
which they are working and have the ability to assist customers
with merchandise selection. Both retail and factory store
management are compensated in a combination of annual salary plus
performance-based bonuses. Retail, telemarketing and factory
associates are compensated on an hourly basis and may earn
team-based performance incentives.
At November 7, 1997, the Company had approximately 6,300
associates, of whom approximately 4,300 were full-time associates
and 2,000 were part-time associates. In addition, approximately
3,000 associates are hired on a seasonal basis to meet demand
during the peak holiday buying season. None of the associates
employed by J. Crew Mail Order, J. Crew Retail, J. Crew Factory
Outlets or C&W are represented by a union. Approximately 240
warehouse employees at PCP are represented by the Teamsters under
a collective bargaining agreement which expires in June 1999. The
Company believes that its relationship with its associates is
good.
Properties
The Company is headquartered in New York City, although PCP
maintains a separate main office in Garfield, New Jersey. Both
the New York City headquarters offices and PCP's Garfield office
are leased from third parties. The Company owns two telemarketing
and distribution facilities: a 406,500-square-foot telemarketing
and distribution center for J. Crew and C&W mail order in
Lynchburg, Virginia and a 192,500-square-foot distribution center
in Asheville, North Carolina servicing the J. Crew Retail and J.
Crew and C&W outlet store operations. The Company also leases
from a third party a 369,000-square-foot distribution facility
located in Edison, New Jersey dedicated to PCP's fulfillment
operations.
As of November 7, 1997, the Company operated 100 retail and
factory outlet stores. All of the retail and factory outlet
stores are leased from third parties, and the leases in most
cases have terms of 10 to 12 years, not including renewal
options. As a general matter, the leases contain standard
provisions concerning the payment of rent, events of default and
the rights and obligations of each party. Rent due under the
leases is comprised of annual base rent plus a contingent rent
payment based on the store's sales in excess of a specified
threshold. Substantially all the leases are guaranteed by
Holdings.
56
The table below sets forth the number of stores by state
operated by the Company in the United States as of November 7,
1997:
Total
Retail Outlet Number
Stores Stores(1) of Stores
------ ------ ---------
Alabama ............... -- 1 1
Arizona ............... 1 -- 1
California ............ 8 3 11
Colorado .............. 1 2 3
Connecticut ........... 3 2 5
Delaware .............. -- 1 1
Florida ............... 2 5 7
Georgia ............... 1 3 4
Illinois .............. 4 -- 4
Indiana ............... 1 3 4
Kansas ................ -- 1 1
Maine ................. -- 2 2
Maryland .............. 1 -- 1
Massachusetts ......... 4 1 5
Michigan .............. 1 1 2
Minnesota ............. 1 -- 1
Missouri .............. 1 1 2
New Hampshire ......... -- 2 2
New Jersey ............ 2 1 3
New Mexico ............ 1 -- 1
New York .............. 4 4 8
North Carolina ........ 2 -- 2
Ohio .................. 2 -- 2
Oregon ................ 1 -- 1
Pennsylvania .......... 2 5 7
South Carolina ........ -- 1 1
Tennessee ............. -- 1 1
Texas ................. 3 5 8
Utah .................. -- 1 1
Vermont ............... -- 1 1
Virginia .............. 1 1 2
Washington ............ 1 1 2
Wisconsin ............. -- 2 2
District of Columbia .. 1 -- 1
--- --- ---
Total ............ 49 51 100
=== === ===
(1) Includes nine C&W outlet stores.
Competition
All aspects of the Company's businesses are highly
competitive. The Company competes primarily with other catalog
operations, specialty brand retailers, department stores, and
mass merchandisers engaged in the retail sale of men's and
women's apparel, accessories, footwear and general merchandise.
The Company believes that the principal bases upon which it
competes are quality, design, efficient service, selection and
price.
57
The Company believes that it has significant competitive
strength because of its strong brand name, distinctive designs,
premium quality products, controlled distribution and strong
catalog and retail market positions. However, certain of the
Company's competitors are larger and have greater financial,
marketing and other resources than the Company, and there can be
no assurance that the Company will be able to compete
successfully with them in the future.
Legal and Regulatory Matters
The Company is a defendant in several lawsuits arising in
the ordinary course of business. Although the amount of any
liability that could arise with respect to any such lawsuit
cannot be accurately predicted, in the opinion of management, the
resolution of these matters is not expected to have a material
adverse effect on the financial position or results of operations
of the Company.
A 1992 Supreme Court decision confirmed that the Commerce
Clause of the United States Constitution prevents a state from
requiring the collection of its use tax by a mail order company
unless the company has a physical presence in the state. However,
there continues to be some uncertainty in this area due to
inconsistent application of the Supreme Court decision by state
and federal courts. The Company attempts to conduct its
operations in compliance with its interpretation of the
applicable legal standard, but there can be no assurance that
this compliance will not be challenged. From time to time,
various states have sought to require companies to begin
collection of use taxes and/or pay taxes from previous sales. The
Company has not received assessments from any state in which it
is not currently collecting sales taxes since the 1992 Supreme
Court decision.
The Supreme Court decision also established that Congress
has the power to enact legislation that would permit states to
require collection of use taxes by mail order companies. Congress
has from time to time considered proposals for such legislation.
The Company anticipates that any legislative change, if adopted,
would be applied only on a prospective basis.
58
MANAGEMENT
Directors and Executive Officers
The following table sets forth the name, age and position
of individuals who are serving as directors of Holdings and
executive officers of the Company. TPG Partners II anticipates
that it will cause to be elected additional individuals,
including individuals unaffiliated with either TPG Partners II or
the Company, to serve as directors of Holdings. Each director of
Holdings will hold office until the next annual meeting of
shareholders or until his or her successor has been elected and
qualified. Officers of the Company are elected by their
respective Boards of Directors and serve at the discretion of
such Board.
Name Age Position
- ---- --- --------
Emily Woods ....... 35 Director--J. Crew Group, Inc.
Chairman and Chief Executive Officer--
J. Crew Group, Inc.
Chief Executive Officer--J. Crew Operating
Corp.
President--J. Crew, Inc.
David Bonderman ... 54 Director--J. Crew Group, Inc.
James G. Coulter .. 37 Director--J. Crew Group, Inc.
Richard W. Boyce .. 43 Director--J. Crew Group, Inc.
Michael P. McHugh . 58 Vice President--Finance - CFO--J. Crew
Group, Inc.
Vice President--Finance - CFO--J. Crew
Operating Corp.
President--J. Crew International, Inc. and J.
Crew Services, Inc.
Matthew E. Rubel .. 39 President--Popular Club Plan, Inc.
David M. DeMattei . 41 President--Grace Holmes, Inc.; H.F.D. No. 55,
Inc.
Nicholas Lamberti . 55 Vice President--J. Crew Operating Corp.
Emily Woods
Chairman and Chief Executive Officer--J. Crew Group, Inc.; Chief
Executive Officer and President--J. Crew Operating Corp.;
President--J. Crew, Inc.
Ms. Woods became Chairman of the Board of Directors and
Chief Executive Officer of Holdings upon consummation of the
Recapitalization. Ms. Woods is also currently the Chief Executive
Officer and a director of Operating Corp and the President of J.
Crew, Inc., a wholly owned subsidiary of Operating Corp. Ms.
Woods co-founded the J. Crew brand in 1983 and is currently its
designer. Ms. Woods has also served as Vice-Chairman of J. Crew
Group, Inc.
David Bonderman
Director--J. Crew Group, Inc.
Mr. Bonderman became a director of Holdings upon
consummation of the Recapitalization. Mr. Bonderman is also
currently serving as a director of Operating Corp. Mr. Bonderman
is a principal and founding partner of TPG. Prior to forming TPG,
Mr. Bonderman was Chief Operating Officer and Chief Investment
Officer of Keystone Inc. ("Keystone"), the private investment
firm, from 1983 to August 1992. Mr. Bonderman serves on the
Boards of Directors of Continental Airlines, Inc., Bell & Howell
Company, Virgin Entertainment, Beringer Wine Estates, Inc.,
Denbury Resources, Inc., Ducati Motor Holdings, S.p.A.,
Washington Mutual, Inc., Ryanair, Ltd., and Credicom Asia, N.V.
Mr. Bonderman also serves in general partner advisory board roles
for Acadia Partners, L.P., Newbridge Investment Partners, L.P.,
Newbridge Latin America, L.P. and Aqua International, L.P.
59
James G. Coulter
Director--J. Crew Group, Inc.
Mr. Coulter became a director of Holdings upon consummation
of the Recapitalization. Mr. Coulter is also currently serving as
a director of Operating Corp. Mr. Coulter is a principal and
founding partner of TPG. Prior to forming TPG, Mr. Coulter was a
Vice President of Keystone from 1986 to 1992. Mr. Coulter serves
on the Boards of Directors of America West Airlines, Inc., Virgin
Entertainment, Beringer Wine Estates, Inc. and Paradyne Partners,
L.P. and was formerly on the Board of Directors of Allied Waste
Industries Inc. and Continental Airlines, Inc.
Richard W. Boyce
Director--J. Crew Group, Inc.
Mr. Boyce became a director of Holdings upon consummation of
the Recapitalization. Mr. Boyce is also currently serving as a
director of Operating Corp and J. Crew Operating Corp., C&W
Outlet, Inc., Clifford & Wills, Inc., J. Crew Retail, J. Crew
Factory Outlet, J. Crew, Inc, J. Crew International, Inc., J.
Crew Services, Inc. and Popular Club Plan, Inc., each of which is
a wholly owned subsidiary of Operating Corp. Mr. Boyce is the
President of CAF, Inc., a management consulting firm which
advises various companies controlled by TPG. Prior to founding
CAF, Inc. in 1997, Mr. Boyce served as Senior Vice President of
Operations for Pepsi-Cola North America ("PCNA") from 1996 to
1997, and Chief Financial Officer of PCNA from 1994 to 1996. From
1992 to 1994, Mr. Boyce served as Senior Vice President-Strategic
Planning for PepsiCo. Prior to joining PepsiCo., Mr. Boyce was a
Director at the management consulting firm of Bain & Company
where he was employed from 1980 to 1992.
Michael P. McHugh
Vice President Finance - CFO--J. Crew Group, Inc.; Vice President
Finance - CFO--J. Crew Operating Corp.; President--J. Crew
International, Inc. and J. Crew Services, Inc.
Mr. McHugh is the Vice President Finance and Chief Financial
Officer of Holdings. Mr. McHugh has been with the Company since
September 1986 and is also currently the Vice President Finance
and Chief Financial Officer of Operating Corp and the President
of J. Crew International, Inc. and J. Crew Services, Inc. Prior
to joining the Company, Mr. McHugh was the Vice President of
Finance and Director of the Regina Company from 1983 to 1986,
served as the Controller of Operations for Revlon, Inc. from 1977
to 1983, was the U.S. Controller for Canada Dry Corp. from 1975
to 1977 and was a Division Controller and Division Vice President
of Finance and Administration at Borden, Inc. from 1968 to 1975.
David M. DeMattei
President--Grace Holmes, Inc.; H.F.D. No. 55, Inc.
Mr. DeMattei became President of J. Crew Factory Outlet
upon consummation of the Recapitalization. Mr. DeMattei joined
the Company in 1995 and has served as President of J. Crew Retail
since June 1995. From 1993 to 1994, Mr. DeMattei served as
President of Banana Republic, a division of The Gap, Inc., and
from 1983 to 1993, Mr. DeMattei worked in various other executive
level positions at The Gap, Inc., including Executive Vice
President-Chief Financial Officer from April 1992 to May 1995 and
Senior Vice President-Chief Financial Officer from February 1991
to March 1992.
Matthew E. Rubel
President--Popular Club Plan, Inc.
Mr. Rubel joined the Company in September 1994 as the
President of PCP. Prior to joining the Company, Mr. Rubel served
as the President, CEO, and a member of the Board of Directors at
Pepe Jeans USA in 1994, and from 1987 to 1993, he was the
President of Specialty Division at Revlon, Inc. From 1984 to
1987, Mr. Rubel served as an Executive Vice President of Murjani
International and from 1980 to 1984, he was employed by Bonwit
Teller.
Nicholas Lamberti
Vice President--J. Crew Operating Corp.
Mr. Lamberti joined the Company in January 1991 as Vice
President - Corporate Controller. Prior to joining the Company,
Mr. Lamerti was with Deloitte & Touche from 1966 to 1991.
60
Employment Agreements and Other Compensation Arrangements
Holdings and Operating Corp (the "Employers") and Ms. Woods
entered into an employment agreement, which provides that, for a
period of five years commencing on the closing of the
Recapitalization, she will serve as Chairman of the Board of
Directors and Chief Executive Officer of Holdings and as Chief
Executive Officer of Operating Corp. The employment agreement
provides for an annual base salary of $1.0 million, and provides
an annual target bonus of up to $1.0 million based on achievement
of earnings objectives to be determined each year. The employment
agreement also provides for the grant of 3,308 shares of Holdings
Common Stock (the "Restricted Shares") on January 1, 1998. The
Restricted Shares will vest as follows: (i) 393 shares
immediately upon grant; (ii) 972 shares on each of the third and
fourth anniversaries of the Recapitalization and (iii) 971 shares
on the fifth anniversary of the Recapitalization. In connection
with the grant of the Restricted Shares, the Employers will pay
Ms. Woods an amount equal to the federal, state and local income
and payroll taxes incurred by Ms. Woods in 1998 as a result of
the grant of the Restricted Shares and any federal, state and
local income and payroll taxes incurred as a result of such
payment. Ms. Woods is also entitled to various executive benefits
and perquisites under the employment agreement.
In connection with the Recapitalization, Ms. Woods retained
shares of Holdings Common Stock representing approximately 14.8%
of the total outstanding shares of Holdings Common Stock
determined immediately after the closing of the Recapitalization,
such retention effected using an implied purchase price for the
retained shares equal to the price that TPG Partners II paid for
shares of Holdings Common Stock in connection with the
Recapitalization (the "TPG Partners II Price"). Ms. Woods also
purchased approximately $3.0 million of Preferred Stock issued in
connection with the Recapitalization.
Under the Option Plan (as defined herein), Holdings has
granted Ms. Woods an option to purchase 1,641 shares of Holdings
Common Stock at an exercise price equal to the TPG Partners II
Price, 20% of which shall become exercisable following the end of
each of fiscal years 1998 through 2002, provided that the Company
attains certain earnings targets; however, all unvested options
shall become exercisable (i) if Ms. Woods' employment is
terminated by Holdings without cause, by Ms. Woods for good
reason or by reason of death or disability, (ii) in the event of
a change in control of Holdings, or (iii) if Ms. Woods is still
employed by Holdings, on the seventh anniversary of the closing
of the Recapitalization.
Also under the Option Plan, Holdings has granted Ms. Woods
the option to purchase 820 shares of Holdings Common Stock. Under
this option, Ms. Woods has the right to exercise 20% of the
option after each of the first through the fifth anniversaries of
the grant date at an exercise price equal to 125%, 156.25%,
195.31%, 244.14% and 305.18% of the TPG Partners II Price,
respectively. The exercise of this option may require Ms. Woods
to purchase a proportional amount of Preferred Stock issued in
connection with the Recapitalization. In addition, all options
shall become exercisable (i) if Ms. Woods' employment is
terminated by Holdings without cause, by Ms. Woods for good
reason or by reason of her death or disability or (ii) in the
event of a change in control of Holdings.
All options granted to Ms. Woods are generally governed by
and subject to the J. Crew Group, Inc. Stock Option Plan
described below.
The shares of Holdings Common Stock acquired by Ms. Woods
pursuant to the foregoing are subject to a shareholders'
agreement providing for certain transfer restrictions,
registration rights and customary tag-along and drag-along
rights.
Operating Corp and Mr. DeMattei are parties to an employment
agreement which provides that Mr. DeMattei will be employed as
president of J. Crew Retail Division with an annual salary of
$525,000, which increases by $25,000 on each of June 1, 1998 and
June 1, 1999. In addition, the agreement provides that Mr.
DeMattei is eligible for an annual bonus for fiscal year 1997 of
up to approximately $350,000 and a long-term incentive bonus if
certain performance objectives are satisfied. Annual bonuses for
subsequent years will be
61
determined on a year to year basis. Mr. DeMattei is
also entitled to various executive benefits and perquisites under
the agreement. The agreement provides for continuation of salary
and medical benefits for a period one year if Mr. DeMattei's
employment is terminated without cause (as defined in the
agreement) and otherwise provides that Mr. DeMattei's
relationship with Operating Corp and Holdings is one of
employment at will.
Operating Corp and Mr. Rubel are parties to an employment
agreement which provides that Mr. Rubel will be employed as
president of PCP with an annual salary of $475,000. The agreement
provides that Mr. Rubel is eligible for annual bonus and
long-term incentive bonus based on the performance of PCP. The
agreement expires on January 31, 1999.
Holdings has adopted, the J. Crew Group Inc. Stock Option Plan
(the "Option Plan") in order to promote the interests of the
Company and its shareholders by providing the Company's key
employees and consultants with an appropriate incentive to
encourage them to continue in the employ of the Company and to
improve the growth and profitability of the Company. Under the
Option Plan, the Board of Directors of Holdings will appoint a
committee to administer the Option Plan and to grant options to
purchase shares of Holdings Common Stock to certain key employees
and consultants of the Company. Currently, there is an aggregate
of 7,388 shares of Holdings Common Stock available for grants to
key employees and consultants under the Option Plan (including
the 2,461 shares underlying the options granted to Ms. Woods as
described above). The options granted under the Option Plan may
be subject to various vesting conditions, including, under some
circumstances, the achievement of certain performance objectives.
All shares of Holdings Common Stock acquired by key employees or
consultants pursuant to the foregoing shall be subject to a
shareholders' agreement providing for certain transfer
restrictions, registration rights and customary tag-along and
drag-along rights.
62
Executive Compensation
The following table sets forth compensation paid by the
Company for fiscal years 1994, 1995 and 1996 to each individual
serving as its chief executive officer during fiscal 1996 and to
each of the four other most highly compensated executive officers
of the Company as of the end of fiscal 1996.
Long Term
Compensation
------------
Other Annual LTIP All Other
Name and Principal Fiscal Salary Bonus Comp. Payouts Comp.
Positions Year ($) ($) ($) ($) ($)
- ------------------ ------ ------- ----- ----------- ------------ ---------
Arthur Cinader (1) 1996 307,692 -- -- -- --
Chief Executive Officer 1995 700,000 109,000 -- -- --
1994 700,000 83,000 -- -- --
Emily Woods (2) 1996 700,000 -- -- -- --
President 1995 700,000 1,327,700(3) 1,079,713(4) -- --
1994 700,000 1,970,040(5) 1,816,811(6) -- --
David DeMattei (7) 1996 475,771 100,000 -- -- --
President, J. Crew 1995 352,661 100,000 -- -- --
Retail
Matthew Rubel 1996 422,418 150,000 -- -- --
President, Popular 1995 391,346 50,000 -- -- --
Club Plan 1994 112,500 -- -- -- --
Paul Raffin (8) (9) 1996 426,663 75,000 -- -- --
President, J. Crew 1995 304,200 50,000 -- -- --
Catalogue
Robert Bernard (10) 1996 650,000 136,500 752,500(11) -- --
1995 650,000 350,000 -- -- --
1994 581,930 -- -- -- --
- ----------------------
(1) Mr. Cinader was replaced as Chief Executive Officer on
October 17, 1997.
(2) Ms. Woods became Chief Executive Officer on October 17,
1997.
(3) Of this amount, $1,139,000 represents the value of a grant
to the executive of Holdings Common Stock.
(4) This amount was paid as reimbursement for income taxes
incurred as a result of the grant of Holdings Common Stock.
(5) Of this amount, $1,884,240 represents the value of a grant
to the executive of Holdings Common Stock.
(6) This amount was paid as reimbursement for income taxes
incurred as a result of the grant of Holdings Common Stock.
(7) Mr. DeMattei was not employed by the Company in 1994.
(8) Mr. Raffin resigned from the Company as of November 13,
1997.
(9) Mr. Raffin was not employed by the Company in 1994.
(10) Mr. Bernard resigned from the Company as of October 28,
1996.
(11) This amount represents a severance payment to the executive.
63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As part of arrangements made prior to the negotiation and
execution of the Recapitalization Agreement, Holdings agreed to
make bonus payments to certain of its executive officers upon
consummation of any merger, acquisition, recapitalization or
other transaction resulting in a change of control of Holdings.
Thus, Holdings made bonus payments in the amount of (i) $10.0
million to Emily Woods, (ii) $0.3 million to Matthew Rubel, (iii)
$0.3 million to Michael McHugh and (iv) $1.2 million to other
employees.
In addition, effective on the closing of the
Recapitalization, the Company and Arthur Cinader entered into an
Employment/Consulting and Non-Compete Agreement, under which Mr.
Cinader agreed to serve as an employee and/or consultant for
twelve months following the closing of the Recapitalization.
Under the agreement, Mr. Cinader agreed, for a period of five
years from the closing of the Recapitalization, not to compete,
directly or indirectly, in association with or as a stockholder,
director, officer, consultant, employee, partner, joint venturer,
member or otherwise through any person or entity work for, act as
a consultant to, or own any interest in, any competitor of the
Company or its affiliates. In consideration of Mr. Cinader's
non-compete, employment and consulting undertakings, the Company
paid Mr. Cinader a total of $4.2 million. In addition, during
this five-year period, Mr. Cinader is entitled to coverage under
the Company's health and welfare plans.
In connection with the Recapitalization, the Company paid
TPG a financial advisory fee in the amount of $5.5 million.
Holdings and its subsidiaries also entered into a tax
sharing agreement providing (among other things) that each of the
subsidiaries will reimburse Holdings for its share of income
taxes determined as if such subsidiary had filed its tax returns
separately from Holdings.
CAPITAL STOCK OF HOLDINGS AND OPERATING CORP
General
Operating Corp is authorized by the terms of its
certificate of incorporation to issue 1,000 shares of common
stock and 1,000 shares of preferred stock. Operating Corp has
issued and outstanding 100 shares of common stock, each share of
which is entitled to one vote. Holdings owns all of the issued
and outstanding stock of Operating Corp. Holdings does not have
any material assets other than the common stock of Operating
Corp.
Holdings' restated certificate of incorporation authorizes
Holdings to issue capital stock consisting of 100,000,000 shares
of common stock, par value $.01 per share, 1,000,000 shares of
Series A cumulative preferred stock, par value $.01 per share
("Series A Preferred Stock"), and 1,000,000 shares of Series B
cumulative preferred stock, par value $.01 per share ("Series B
Preferred Stock"). Holdings currently has outstanding 55,000
shares of common stock, 92,500 shares of Series A Preferred Stock
and 32,500 shares of Series B Preferred Stock.
The Series A Preferred Stock and Series B Preferred Stock
(collectively, the "Holdings Preferred Stock") will accumulate
dividends at the rate of 14.50% per annum (payable quarterly) for
periods ending on or prior to October 17, 2009. Thereafter, the
Series A Preferred Stock will accumulate dividends at the rate of
16.50% per annum. Dividends on the Holdings Preferred Stock will
compound to the extent not paid. The Holdings Preferred Stock had
an initial liquidation preference of $1,000 per share. Holdings
will be required on October 17, 2009 to redeem shares of Series B
Preferred Stock and to pay all accumulated dividends that have
been applied, if any, to increase liquidation value of the Series
A Preferred Stock (the "clean-down"). Shares of Holdings
Preferred Stock may be redeemed at the option of Holdings, in
whole or in part, at the redemption prices set forth below
(expressed as percentages of liquidation preference), together
with all accumulated and unpaid dividends to the redemption date,
if redeemed during the six month period beginning on the dates
indicated below:
64
October 17, 1997 ........... 103.0%
April 17, 1998 ............. 102.5%
October 17, 1998 ........... 102.0%
April 17, 1999 ............. 101.5%
October 17, 1999 ........... 101.0%
April 17, 2000 ............. 100.5%
October 17, 2000 and
thereafter ................. 100.0%
Optional redemption of the Holdings Preferred Stock is
subject to, and expressly conditioned upon, certain limitations
under the Senior Subordinated Note Indenture, the Bank
Facilities, the Debentures and other documents relating to the
Company's indebtedness. Holdings may also be required to redeem
shares of Holdings Preferred Stock in certain other
circumstances, including the occurrence of a change of control of
Holdings, in each case subject to the terms of the Senior
Subordinated Note Indenture, the Bank Facilities, the Debentures
and other documents relating to the Company's indebtedness.
Holders of Holdings Preferred Stock do not have any voting rights
with respect thereto, except for such rights as are provided
under applicable law, the right to elect, as a class, two
directors of Holdings in the event that Holdings fails to comply
with its redemption and clean-down obligations and class voting
rights with respect to transactions adversely affecting the
rights, preferences or powers of the Holdings Preferred Stock.
Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Beneficial Owners of More Than 5%
of the Issuer's Voting Securities
(1) (2) (3) (4)
Title of Class Name and Address Amount and Nature of Percent of
of Beneficial Owner Beneficial Ownership Class
- --------------------------------------------------------------------------
Holdings Common TPG Partners II, L.P. 31,566.779 shares 57.39%
Stock 201 Main Street,
Suite 2420
Fort Worth, TX 76102
Holdings Common Emily Woods 8,017.883 shares 14.58%
Stock Chairman and Chief
Executive Officer
J. Crew Group, Inc.
770 Broadway
New York, NY 10003
Security Ownership of Management
(1) (2) (3) (4)
Title of Class Name of Beneficial Amount and Nature of Percent of
Owner Beneficial Ownership Class
- --------------------------------------------------------------------------
Holdings Common Emily Woods 8,017.883 14.58%
Stock
Holdings Series A Emily Woods 2,978.505 3.22%
Preferred Stock
65
DESCRIPTION OF OPERATING CORP INDEBTEDNESS
Bank Facilities
On the closing date of the Recapitalization, Operating Corp
entered into the Bank Facilities among Operating Corp, Holdings,
the several lenders from time to time parties thereto
(collectively, the "Banks"), Chase, as administrative and
collateral agent (the "Administrative Agent") and DLJ as
syndication agent (collectively, the "Agents"). The following is
a summary description of the principal terms of the Bank
Facilities and the other loan documents. The description set
forth below does not purport to be complete and is qualified in
its entirety by reference to certain agreements setting forth the
principal terms and conditions of the Bank Facilities, which are
available upon request from the Issuer.
Structure. The Bank Facilities provide Operating Corp with:
(i) a senior secured term loan facility of up to $70.0 million;
and (ii) a senior secured revolving credit facility of up to
$200.0 million.
The full amount of the Term Loan Facility and approximately
$35.6 million of Revolving Credit Facility were borrowed on the
closing date under the Bank Facilities (i) to partially finance
the Recapitalization, (ii) to repay certain existing outstanding
indebtedness of Operating Corp and (iii) to pay certain fees and
expenses related to the Recapitalization. See "The
Recapitalization." The Bank Facilities may be utilized to fund
Operating Corp's working capital requirements, including issuance
of stand-by and trade letters of credit, bankers' acceptances and
for other general corporate purposes.
The Term Loan Facility is a single tranche term facility of
$70.0 million which has a maturity of six years. Loans, letters
of credit and bankers' acceptances under the Revolving Credit
Facility will be available at any time during its six-year term
subject to the fulfillment of customary conditions precedent
including the absence of a default under the Bank Facilities;
provided, that at least once during each fiscal year, for a
period of 30 consecutive days, Operating Corp must repay all
loans outstanding under the Revolving Credit Facility in excess
of the amounts set forth below:
Amount
Fiscal Year (in millions)
----------- -------------
1998 ........................ $ 25.0
1999 ........................ $ 20.0
2000 ........................ $ 15.0
2001 ........................ $ 10.0
2002 and thereafter ......... $ 0.0
Security; Guaranty. Operating Corp's obligations under the
Bank Facilities are guaranteed by each of its direct and indirect
domestic and, to the extent no adverse tax consequences would
result, foreign subsidiaries, other than any receivables
subsidiary. The Bank Facilities and the guarantees thereof are
secured by a perfected first priority security interest in
substantially all assets of Operating Corp and its direct and
indirect domestic and, to the extent no adverse tax consequences
would result, foreign subsidiaries including: (i) all real
property; (ii) all accounts receivable (but excluding the
accounts receivable of PCP), inventory and intangibles; and (iii)
all of the capital stock of Operating Corp and its direct and
indirect domestic and, to the extent no adverse tax consequences
would result, foreign subsidiaries.
Interest; Maturity. Borrowings under the Bank Facilities
bear interest at a rate per annum equal (at Operating Corp's
option) to: (i) the Administrative Agent's Eurodollar rate plus
an applicable margin or (ii) an alternate base rate equal to the
highest of the Administrative Agent's prime rate, a certificate
of deposit rate plus 1%, or the Federal Funds effective rate plus
1/2 of 1% plus, in each case, an applicable margin. Initially, the
66
applicable margin is 2.25% per annum for Eurodollar rate loans
and 1.25% per annum for alternate base rate loans. The Bank
Facilities will mature October 17, 2003.
Fees. Operating Corp is required to pay the Banks, on a
quarterly basis, a commitment fee on the undrawn portion of the
Bank Facilities at a rate equal to 1/2 of 1% per annum. Operating
Corp is also obligated to pay (i) a per annum letter of credit
fee on the aggregate amount of outstanding letters of credit;
(ii) a fronting bank fee for the letter of credit issuing bank;
(iii) certain fees in connection with the issuance of bankers'
acceptances; and (iv) customary agent, arrangement and other
similar fees.
Covenants. The Bank Facilities contain a number of
covenants that, among other things, restrict the ability of
Operating Corp and its subsidiaries to dispose of assets, incur
additional indebtedness, prepay other indebtedness or amend
certain debt instruments, pay dividends, create liens on assets,
enter into sale and leaseback transactions, make investments,
loans or advances, make acquisitions, engage in mergers or
consolidations, change the business conducted by Operating Corp
or its subsidiaries, or engage in certain transactions with
affiliates and otherwise restrict certain corporate activities.
In addition, under the Bank Facilities, Operating Corp is
required to maintain specified financial ratios and tests,
including minimum interest coverage ratios, leverage ratios below
a specified maximum, minimum net worth levels and minimum ratios
of inventory to senior debt.
Events of Default. The Bank Facilities contain customary
events of default, including nonpayment of principal, interest or
fees, material inaccuracy of representations and warranties,
violation of covenants, cross- default and cross-acceleration to
certain other indebtedness, certain events of bankruptcy and
insolvency, material judgments against Operating Corp, invalidity
of any guarantee or security interest and a change of control of
Operating Corp in certain circumstances as set forth therein.
Receivables Facility
In connection with the Recapitalization, affiliates of the
Initial Purchasers (the "Receivables Lenders") arranged a
facility to securitize certain PCP consumer loan installment
receivables (the "Receivables") on a revolving basis under a
receivables program (the "Receivables Facility"). The
Securitization involved the transfer of the Receivables through a
special purpose, bankruptcy-remote subsidiary to a trust in
exchange for cash and subordinated certificates representing
undivided interests in the pool of Receivables, and the
subsequent sale by the trust of certificates of beneficial
interests, also representing undivided interests in the
Receivables, to third party investors. The Securitization
provided approximately $40 million of proceeds. The Company is
obligated to repurchase Receivables related to customer credits
such as merchandise returns and other Receivables defects, and to
make payments in circumstances where the Company has breached its
representations or covenants with respect to the Receivables
Facility. The Company has no obligation to reimburse the trust or
the purchasers of beneficial interests for credit losses.
The Receivables Facility is contemplated to be an interim
agreement pending the consummation of a private placement of
Receivables-based securities or such other refinancing as the
parties may agree to, proceeds of which will be used to prepay
the Receivables Facility. If the Receivables Facility is not
refinanced within two months of the date of closing, the interest
rates thereunder will increase.
67
THE EXCHANGE OFFER
The summary herein of certain provisions of the
Registration Rights Agreement does not purport to be complete and
reference is made to the provisions of the Registration Rights
Agreement, which has been filed as an exhibit to the Registration
Statement and a copy of which is available as set forth under the
heading "Available Information."
Terms of the Exchange Offer
In connection with the issuance of the Old Debentures
pursuant to a Purchase Agreement dated as of October 14, 1997, by
and among the Issuer and the Initial Purchasers, the Initial
Purchasers and their respective assignees became entitled to the
benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Issuer is
required to file within 60 days after October 17, 1997 (the date
the Registration Rights Agreement was entered into (the "Closing
Date")) a registration statement (the "Exchange Offer
Registration Statement") for a registered exchange offer with
respect to an issue of new debentures identical in all material
respects to the Old Debentures except that the new debentures
shall contain no restrictive legend thereon. Under the
Registration Rights Agreement, the Issuer is required to (i)
cause the Exchange Offer Registration Statement to be filed with
the Commission no later than 60 days after the Closing Date, (ii)
use its best efforts to cause such Exchange Offer Registration
Statement to become effective within 135 days after the Closing
Date, (iii) use its best efforts to keep the Exchange Offer open
for at least 20 Business Days (or longer if required by
applicable law), (iv) use its best efforts to consummate the
Exchange Offer on or prior to the 30th Business Day following the
date on which the Exchange Offer Registration Statement is
declared effective by the Commission and (v) cause the Exchange
Offer to comply with all applicable federal and state securities
laws. The Exchange Offer being made hereby, if commenced and
consummated within the time periods described in this paragraph,
will satisfy those requirements under the Registration Rights
Agreement.
Upon the terms and subject to the conditions set forth in
this Prospectus and in the Letter of Transmittal, all Old
Debentures validly tendered and not withdrawn prior to 5:00 p.m.,
New York City time, on the Expiration Date will be accepted for
exchange. New Debentures of the same class will be issued in
exchange for an equal principal amount of outstanding Old
Debentures accepted in the Exchange Offer. Old Debentures may be
tendered only in integral multiples of $1,000 of principal amount
at maturity. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders as of
_______ __, 1998. The Exchange Offer is not conditioned upon any
minimum principal amount of Old Debentures being tendered in
exchange. However, the obligation to accept Old Debentures for
exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth herein under "--Conditions."
Old Debentures shall be deemed to have been accepted as
validly tendered when, as and if the Trustee has given oral or
written notice thereof to the Exchange Agent. The Exchange Agent
will act as agent for the tendering holders of Old Debentures for
the purposes of receiving the New Debentures and delivering New
Debentures to such holders.
Based on interpretations by the staff of the Commission, as
set forth in no-action letters issued to third parties, including
the Exchange Offer No-Action Letters, the Issuer believes that
the New Debentures issued pursuant to the Exchange Offer may be
offered for resale, resold or otherwise transferred by each
holder thereof (other than a broker-dealer who acquires such New
Debentures directly from the Issuer for resale pursuant to Rule
144A under the Securities Act or any other available exemption
under the Securities Act and other than any holder that is an
"affiliate" (as defined in Rule 405 under the Securities Act) of
the Issuer without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided
that such New Debentures are acquired in the ordinary course of
such holder's business and such holder is not engaged in, and
does not intend to engage in, a distribution of such New
Debentures and has no arrangement with any person to participate
in a
68
distribution of such New Debentures. By tendering the Old
Debentures in exchange for New Debentures, each holder, other
than a broker-dealer, will represent to the Issuer that: (i) it
is not an affiliate (as defined in Rule 405 under the Securities
Act) of the Issuer; (ii) it is not a broker-dealer tendering Old
Debentures acquired for its own account directly from the Issuer;
(iii) any New Debentures to be received by it will be acquired in
the ordinary course of its business; and (iv) it is not engaged
in, and does not intend to engage in, a distribution of such New
Debentures and has no arrangement or understanding to participate
in a distribution of the New Debentures. If a holder of Old
Debentures is engaged in or intends to engage in a distribution
of the New Debentures or has any arrangement or understanding
with respect to the distribution of the New Debentures to be
acquired pursuant to the Exchange Offer, such holder may not rely
on the applicable interpretations of the staff of the Commission
and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any
secondary resale transaction. Each Participating Broker-Dealer
that receives New Debentures for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus
in connection with any resale of such New Debentures. The Letter
of Transmittal states that by so acknowledging and by delivering
a prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Debentures
received in exchange for Old Debentures where such Old Debentures
were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities. The Issuer
has agreed that it will make this Prospectus available to any
Participating Broker-Dealer for a period of time not to exceed
one year after the date on which the Exchange Offer is
consummated for use in connection with any such resale. See "Plan
of Distribution."
In the event that (i) any changes in law or the applicable
interpretations of the staff of the Commission do not permit the
Issuer to effect the Exchange Offer, or (ii) if any holder of Old
Debentures shall notify the Issuer within 20 business days
following the consummation of the Exchange Offer that (A) such
holder was prohibited by law or Commission policy from
participating in the Exchange Offer or (B) such holder may not
resell the New Debentures acquired by it in the Exchange Offer to
the public without delivering a prospectus and the prospectus
contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales by such holder or (C)
such holder is a broker-dealer and holds Old Debentures acquired
directly from the Issuer or one of its affiliates, then the
Issuer shall (x) cause to be filed a shelf registration statement
pursuant to Rule 415 under the Act (the "Shelf Registration
Statement") on or prior to 30 days after the date on which the
Issuer determines that it is not required to file the Exchange
Offer Registration Statement pursuant to clause (i) above or 60
days after the date on which the Issuer receives the notice
specified in clause (ii) above and shall (y) use its best efforts
to cause such Shelf Registration Statement to become effective
within 135 days after the date on which the Issuer becomes
obligated to file such Shelf Registration Statement. If, after
the Issuer has filed an Exchange Offer Registration Statement,
the Issuer is required to file and make effective a Shelf
Registration Statement solely because the Exchange Offer shall
not be permitted under applicable federal law, then the filing of
the Exchange Offer Registration Statement shall be deemed to
satisfy the requirements of clause (x) above. Such an event shall
have no effect on the requirements of clause (y) above. The
Issuer shall use its best efforts to keep the Shelf Registration
Statement continuously effective, supplemented and amended to the
extent necessary to ensure that it is available for sales of
Transfer Restricted Securities (as defined below) by the holders
thereof for a period of at least two years following the date on
which such Shelf Registration Statement first becomes effective
under the Securities Act. The term "Transfer Restricted
Securities" means each Debenture, until the earliest to occur of
(a) the date on which such Debenture is exchanged in the Exchange
Offer and entitled to be resold to the public by the holder
thereof without complying with the prospectus delivery
requirements of the Act, (b) the date on which such Debenture has
been disposed of in accordance with a Shelf Registration
Statement, (c) the date on which such Debenture is disposed of by
a broker-dealer pursuant to the "Plan of Distribution"
contemplated by the Exchange Offer Registration Statement
(including delivery of the prospectus contained therein) or (d)
the date on which such Debenture is distributed to the public
pursuant to Rule 144 under the Act.
If (i) the Exchange Offer Registration Statement or the
Shelf Registration Statement is not filed with the Commission on
or prior to the date specified in the Registration Rights
Agreement, (ii) any such Registration Statement has not been
declared effective by the Commission on or prior to the date
specified for such effectiveness
69
in the Registration Rights Agreement, (iii) the Exchange Offer
has not been consummated within 180 days after the Closing Date
or (iv) any Registration Statement required by the Registration
Rights Agreement is filed and declared effective but shall
thereafter cease to be effective or fail to be usable for its
intended purpose without being succeeded immediately by a
post-effective amendment to such Registration Statement that
cures such failure and that is itself declared effective
immediately (each such event referred to in clauses (i) through
(iv), a "Registration Default"), then the Issuer has agreed to
pay liquidated damages to each holder of Transfer Restricted
Securities. With respect to the first 90-day period immediately
following the occurrence of such Registration Default the
liquidated damages shall equal $.05 per week per $1,000 principal
amount of Transfer Restricted Securities held by such holder for
each week or portion thereof that the Registration Default
continues. The amount of the liquidated damages shall increase by
an additional $.05 per week per $1,000 in principal amount of
Transfer Restricted Securities with respect to each subsequent
90-day period until all Registration Defaults have been cured, up
to a maximum amount of liquidated damages of $.25 per week per
$1,000 principal amount of Transfer Restricted Securities.
Notwithstanding anything to the contrary set forth herein, (1)
upon filing of the Exchange Offer Registration Statement (and/or,
if applicable, the Shelf Registration Statement), in the case of
(i) above, (2) upon the effectiveness of the Exchange Offer
Registration Statement (and/or, if applicable, the Shelf
Registration Statement), in the case of (ii) above, (3) upon
consummation of the Exchange Offer, in the case of (iii) above,
or (4) upon the filing of a post-effective amendment to the
Registration Statement or an additional Registration Statement
that causes the Exchange Offer Registration Statement (and/or, if
applicable, the Shelf Registration Statement) to again be
declared effective or made usable in the case of (iv) above, the
liquidated damages payable with respect to the Transfer
Restricted Securities a result of such clause (i), (ii), (iii) or
(iv), as applicable, shall cease.
All accrued liquidated damages shall be paid to the holder
of the global debenture representing the Old Debentures by wire
transfer of immediately available funds or by federal funds check
and to holders of certificated securities by mailing checks to
their registered addresses on each April 15 and October 15. All
obligations of the Issuer set forth in the preceding paragraph
that are outstanding with respect to any Transfer Restricted
Security at the time such security ceases to be a Transfer
Restricted Security shall survive until such time as all such
obligations with respect to such security shall have been
satisfied in full.
Upon consummation of the Exchange Offer, subject to certain
exceptions, holders of Old Debentures who do not exchange their
Old Debentures for New Debentures in the Exchange Offer will no
longer be entitled to registration rights and will not be able to
offer or sell their Old Debentures, unless such Old Debentures
are subsequently registered under the Securities Act (which,
subject to certain limited exceptions, the Issuer will have no
obligation to do), except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable
state securities laws. See "Risk Factors--Risk Factors Relating
to the Debentures--Consequences of Failure to Exchange."
Expiration Date; Extensions; Amendments; Termination
The term "Expiration Date" shall mean _________, 1998 (30
calendar days following the commencement of the Exchange Offer),
unless the Exchange Offer is extended, if and as required by
applicable law, in which case the term "Expiration Date" shall
mean the latest date to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Issuer will
notify the Exchange Agent of any extension by oral or written
notice and will notify the holders of the Old Debentures by means
of a press release or other public announcement prior to 9:00
A.M., New York City time, on the next business day after the
previously scheduled Expiration Date.
The Issuer reserves the right (i) to delay acceptance of
any Old Debentures, to extend the Exchange Offer or to terminate
the Exchange Offer and not permit acceptance of Old Debentures
not previously accepted if any of the conditions set forth herein
under "--Conditions" shall have occurred and shall not have been
waived by the Issuer, by giving oral or written notice of such
delay, extension or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner deemed by it
to be advantageous to the holders of the Old
70
Debentures. Any such delay in acceptance, extension, termination
or amendment will be followed as promptly as practicable by oral
or written notice thereof to the Exchange Agent. If the Exchange
Offer is amended in a manner determined by the Issuer to
constitute a material change, the Issuer will promptly disclose
such amendment in a manner reasonably calculated to inform the
holders of the Old Debentures of such amendment.
Yield Interest on the New Debentures
The New Debentures will accrete at a rate of 13 1/8%,
compounded semi-annually, to an aggregate principal amount of
$142.0 million by October 15, 2002. Cash interest will not accrue
on the New Debentures prior to October 15, 2002. Commencing
October 15, 2002, cash interest on the New Debentures will accrue
and be payable, at a rate of 13 1/8% per annum, semi-annually in
arrears on each April 15 and October 15.
Procedures for Tendering
To tender in the Exchange Offer, a holder must complete,
sign and date the Letter of Transmittal, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal, together
with any other required documents, to the Exchange Agent prior to
5:00 p.m., New York City time, on the Expiration Date. In
addition, either (i) certificates for such Old Debentures must be
received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer
(a "Book-Entry Confirmation") of such Old Debentures, if such
procedure is available, into the Exchange Agent's account at DTC
(the "Book-Entry Transfer Facility") pursuant to the procedure
for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the holder
must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF OLD DEBENTURES, LETTERS OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION
AND RISK OF THE HOLDERS OF THE DEBENTURES. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF
TRANSMITTAL OR OLD DEBENTURES SHOULD BE SENT TO THE ISSUER.
Delivery of all documents must be made to the Exchange Agent at
its address set forth below. Holders of Debentures may also
request their respective brokers, dealers, commercial banks,
trust companies or nominees to effect such tender for such
holders.
The tender by a holder of Old Debentures will constitute an
agreement between such holder and the Issuer in accordance with
the terms and subject to the conditions set forth herein and in
the Letter of Transmittal.
Only a holder of Old Debentures may tender such Old
Debentures in the Exchange Offer. The term "holder" with respect
to the Exchange Offer means any person in whose name Old
Debentures are registered on the books of the Issuer or any other
person who has obtained a properly completed bond power from the
registered holder.
Any beneficial owner whose Old Debentures are registered in
the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact such
registered holder promptly and instruct such registered holder to
tender on his behalf. If such beneficial owner wishes to tender
on his own behalf, such beneficial owner must, prior to
completing and executing the Letter of Transmittal and delivering
his Old Debentures, either make appropriate arrangements to
register ownership of the Old Debentures in such owner's name or
obtain a properly completed bond power from the registered
holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, must be guaranteed by any member
firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial
bank or trust company having an office or correspondent in the
United States or an "eligible guarantor" institution within the
meaning of Rule 17Ad-15 under the Exchange Act (each an "Eligible
Institution") unless the Old Debentures tendered pursuant thereto
are tendered (i) by a registered holder who has not completed
71
the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution.
If the Letter of Transmittal is signed by a person other
than the registered holder of any Old Debentures listed therein,
such Old Debentures must be endorsed or accompanied by bond
powers and a proxy which authorizes such person to tender the Old
Debentures on behalf of the registered holder, in each case as
the name of the registered holder or holders appears on the Old
Debentures.
If the Letter of Transmittal or any Old Debentures or bond
powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons
should so indicate when signing, and unless waived by the Issuer,
evidence satisfactory to the Issuer of their authority to so act
must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility
(including time of receipt) and withdrawal of the tendered Old
Debentures will be determined by the Issuer in its sole
discretion, which determination will be final and binding. The
Issuer reserves the absolute right to reject any and all Old
Debentures not properly tendered or any Old Debentures which, if
accepted, would, in the opinion of counsel for the Issuer, be
unlawful. The Issuer also reserves the absolute right to waive
any irregularities or conditions of tender as to particular Old
Debentures. The Issuer's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in
the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in
connection with tenders of Old Debentures must be cured within
such time as the Issuer shall determine. Neither the Issuer, the
Exchange Agent nor any other person shall be under any duty to
give notification of defects or irregularities with respect to
tenders of Old Debentures, nor shall any of them incur any
liability for failure to give such notification. Tenders of Old
Debentures will not be deemed to have been made until such
irregularities have been cured or waived. Any Old Debentures
received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or
waived will be returned without cost to such holder by the
Exchange Agent to the tendering holders of Old Debentures, unless
otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
In addition, the Issuer reserves the right in its sole
discretion, subject to the provisions of the Indenture, to (i)
purchase or make offers for any Old Debentures that remain
outstanding subsequent to the Expiration Date or, as set forth
under "--Conditions", (ii) to terminate the Exchange Offer in
accordance with the terms of the Registration Rights Agreement
and (iii) to the extent permitted by applicable law, purchase Old
Debentures in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or
offers could differ from the terms of the Exchange Offer.
Acceptance of Old Debentures for Exchange; Delivery of New Debentures
Upon satisfaction or waiver of all of the conditions to the
Exchange Offer, all Old Debentures properly tendered will be
accepted, promptly after the Expiration Date, and the New
Debentures will be issued promptly after acceptance of the Old
Debentures. See "-- Conditions" below. For purposes of the
Exchange Offer, Old Debentures shall be deemed to have been
accepted as validly tendered for exchange when, as and if the
Issuer has given oral or written notice thereof to the Exchange
Agent.
In all cases, issuance of New Debentures for Old Debentures
that are accepted for exchange pursuant to the Exchange Offer
will be made only after timely receipt by the Exchange Agent of
certificates for such Old Debentures or a timely Book-Entry
Confirmation of such Old Debentures into the Exchange Agent's
account at the Book-Entry Transfer Facility, a properly completed
and duly executed Letter of Transmittal and all other required
documents. If any tendered Old Debentures are not accepted for
any reason set forth in the terms and conditions of the Exchange
Offer or if Old Debentures are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or
nonexchanged Old Debentures will be returned without expense to
the tendering holder thereof (or, in the case of Old Debentures
tendered by book-entry transfer procedures described below, such
72
nonexchanged Old Debentures will be credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange
Offer.
Book-Entry Transfer
The Exchange Agent will make a request to establish an
account with respect to the Old Debentures at the Book-Entry
Transfer Facility for purposes of the Exchange Offer within two
business days after the date of this Prospectus. Any financial
institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Debentures
by causing the Book-Entry Transfer Facility to transfer such Old
Debentures into the Exchange Agent's account at the Book-Entry
Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for transfer. However, although delivery of
Old Debentures may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal with any
required signature guarantees and any other required documents
must, in any case, be transmitted to and received by the Exchange
Agent at one of the addresses set forth below under "--Exchange
Agent" on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
Guaranteed Delivery Procedures
If a registered holder of the Old Debentures desires to
tender such Old Debentures, and the Old Debentures are not
immediately available, or time will not permit such holder's Old
Debentures or other required documents to reach the Exchange
Agent before the Expiration Date, or the procedures for
book-entry transfer cannot be completed on a timely basis, a
tender may be effected if (i) the tender is made through an
Eligible Institution, (ii) prior to the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly
completed and duly executed Letter of Transmittal and Notice of
Guaranteed Delivery, substantially in the form provided by the
Issuer (by mail or hand delivery), setting forth the name and
address of the holder of Old Debentures and the amount of Old
Debentures tendered, stating that the tender is being made
thereby and guaranteeing that within three New York Stock
Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all
physically tendered Old Debentures, in proper form for transfer,
or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited
by the Eligible Institution with the Exchange Agent and (iii) the
certificates for all physically tendered Old Debentures, in
proper form for transfer, or a Book-Entry Confirmation, as the
case may be, and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within three NYSE
trading days after the date of execution of the Notice of
Guaranteed Delivery.
Withdrawal of Tenders
Tenders of Old Debentures may be withdrawn at any time
prior to 5:00 p.m., New York City time on the Expiration Date.
For a withdrawal to be effective, a written notice of
withdrawal must be received by the Exchange Agent prior to 5:00
p.m., New York City time on the Expiration Date at one of the
addresses set forth below under "--Exchange Agent." Any such
notice of withdrawal must specify the name of the person having
tendered the Old Debentures to be withdrawn, identify the Old
Debentures to be withdrawn (including the principal amount of
such Old Debentures) and (where certificates for Old Debentures
have been transmitted) specify the name in which such Old
Debentures are registered, if different from that of the
withdrawing holder. If certificates for Old Debentures have been
delivered or otherwise identified to the Exchange Agent, then,
prior to the release of such certificates, the withdrawing holder
must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal
with signatures guaranteed by an Eligible Institution unless such
holder is an Eligible Institution. If Old Debentures have been
tendered pursuant to the procedure for book-entry transfer
described above, any notice of withdrawal must specify the name
and number of the account at the Book-Entry Transfer Facility to
be credited with the withdrawn Old Debentures and otherwise
comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of
such notices will be
73
determined by the Issuer, whose determination shall be final and
binding on all parties. Any Old Debentures so withdrawn will be
deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Debentures which have
been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to
such holder (or, in the case of Old Debentures tendered by
book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Debentures will be credited
to an account maintained with such Book-Entry Transfer Facility
for the Old Debentures) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Debentures may be retendered by following
one of the procedures described under "--Procedures for
Tendering" and "--Book-Entry Transfer" above at any time on or
prior to the Expiration Date.
Conditions
Notwithstanding any other term of the Exchange Offer, Old
Debentures will not be required to be accepted for exchange, nor
will New Debentures be issued in exchange for any Old Debentures,
and the Issuer may terminate or amend the Exchange Offer as
provided herein before the acceptance of such Old Debentures, if
because of any change in law, or applicable interpretations
thereof by the Commission, the Issuer determines that they are
not permitted to effect the Exchange Offer. The Issuer has no
obligation to, and will not knowingly, permit acceptance of
tenders of Old Debentures from affiliates (within the meaning of
Rule 405 under the Securities Act) of the Issuer or from any
other holder or holders who are not eligible to participate in
the Exchange Offer under applicable law or interpretations
thereof by the Commission, or if the New Debentures to be
received by such holder or holders of Old Debentures in the
Exchange Offer, upon receipt, will not be tradable by such holder
without restriction under the Securities Act and the Exchange Act
and without material restrictions under the "blue sky" or
securities laws of substantially all of the states of the United
States.
Exchange Agent
State Street Bank & Trust Company has been appointed as
Exchange Agent for the Exchange Offer. Questions and requests for
assistance and requests for additional copies of this Prospectus
or of the Letter of Transmittal should be directed to the
Exchange Agent addressed as follows:
By Mail: By Overnight Mail or Courier:
P.O. Box 778 Two International Place
Boston, Massachusetts 02102 Boston, Massachusetts 02102
Attention: Corporate Trust Department Attention: Corporate Trust Department
Kellie Mullen Kellie Mullen
By Hand in New York to 5:00 p.m. By Hand in Boston to 5:00 p.m.:
(as drop agent): Two International Place
61 Broadway Fourth Floor
15th Floor Corporation Trust
Corporate Trust Window Boston, Massachusetts 02110
New York, New York 10006
For information call:
(617) 664-5587
Fees and Expenses
The expenses of soliciting tenders pursuant to the Exchange
Offer will be borne by the Issuer. The principal solicitation for
tenders pursuant to the Exchange Offer is being made by mail;
however, additional solicitations may be made by telegraph,
telephone, telecopy or in person by officers and regular
employees of the Company.
74
The Issuer will not make any payments to brokers, dealers
or other persons soliciting acceptances of the Exchange Offer.
The Issuer, however, will pay the Exchange Agent reasonable and
customary fees for its services and will reimburse the Exchange
Agent for its reasonable out-of-pocket expenses in connection
therewith. The Issuer may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of the Prospectus
and related documents to the beneficial owners of the Old
Debentures, and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange
Offer will be paid by the Issuer, including fees and expenses of
the Exchange Agent and Trustee and accounting, legal, printing
and related fees and expenses.
The Issuer will pay all transfer taxes, if any, applicable
to the exchange of Old Debentures pursuant to the Exchange Offer.
If, however, certificates representing New Debentures or Old
Debentures for principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered
holder of the Old Debentures tendered, or if tendered Old
Debentures are registered in the name of any person other than
the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of Old
Debentures pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the
amount of such transfer taxes will be billed directly to such
tendering holder.
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DESCRIPTION OF THE NEW DEBENTURES
General
The Old Debentures were issued, and the New Debentures will
be, issued pursuant to the Indenture which is dated as of October
17, 1997 and is between the Company and State Street Bank and
Trust Company, as trustee (the "Trustee"). The terms of the New
Debentures will include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture
Act of 1939 (the "Trust Indenture Act"). The New Debentures will
be subject to all such terms, and prospective holders of New
Debentures are referred to the Indenture and the Trust Indenture
Act for a statement thereof. The following summary of the
material provisions of the Indenture does not purport to be
complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms
used below. Copies of the proposed form of Indenture and
Registration Rights Agreement are available as set forth below
under "--Additional Information." The definitions of certain
terms used in the following summary are set forth below under
"--Certain Definitions."
The New Debentures will be general unsecured obligations of
the Issuer and will be pari passu in right of payment to all
current and future unsubordinated Indebtedness of the Issuer and
senior in right of payment to all subordinated Indebtedness of
the Issuer. The operations of the Issuer are conducted entirely
through its Subsidiaries and, therefore, the Issuer is dependent
in part upon the cash flow of its Subsidiaries to meet its
obligations, including its obligations under the New Debentures.
See "Risk Factors--Limitation on Access to Cash Flow of
Subsidiaries; Holding Company Structure." The New Credit Facility
and the Operating Corp Senior Subordinated Notes restrict
Operating Corp. from paying any dividends or making any other
distributions to the Issuer. The ability of Operating Corp to
comply with the conditions in the Operating Corp Senior
Subordinated Notes may be affected by certain events that are
beyond the Issuer's control. The New Debentures will be
effectively subordinated to all Indebtedness and other
liabilities (including, without limitation, to Operating Corp's
obligations under the New Credit Facility and the Operating Corp
Senior Subordinated Notes). Any right of the Issuer to receive
assets of any of its Subsidiaries upon such Subsidiary's
liquidation or reorganization (and the consequent right of
holders of the Operating Corp Senior Subordinated Notes to
participate in those assets) will be effectively subordinated to
the claims of that Subsidiary's creditors except to the extent
that the Issuer itself is recognized as a creditor of such
Subsidiary, in which case the claims of the Issuer would still be
subordinate to the claims of such creditors who hold security in
the assets of such Subsidiary and to the claims of such creditors
who hold Indebtedness of such Subsidiary senior to that held by
the Issuer. As of November 7, 1997, the Issuer had Indebtedness
of $75.3 million (all of which was attributable to the Old
Debentures) and the Issuer's Subsidiaries had $508.3 million of
outstanding liabilities, including Indebtedness under the
Operating Corp Senior Subordinated Notes and the Bank Facilities
and including trade payables and other accrued liabilities. The
Indenture will permit the incurrence of certain additional
Indebtedness of the Issuer and the Issuer's Subsidiaries in the
future. See "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock."
As of the Issue Date, all of the Issuer's subsidiaries
other than any Receivables Subsidiary were Restricted
Subsidiaries. However, under certain circumstances, the Issuer
will be able to designate current or future Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be
subject to many of the restrictive covenants set forth in the
Indenture.
Principal, Maturity and Interest
New Debentures in an aggregate principal amount at maturity
of up to $142.0 million will be issued in the Exchange Offer. The
New Debentures will mature on October 15, 2008. The New
Debentures will be issued at a substantial discount from their
principal amount at maturity. Until October 15, 2002, no interest
will accrue on the New Debentures, but the Accreted Value will
increase (representing amortization of original issue discount)
between the date of original issuance and October 15, 2002, on a
semi-annual bond equivalent basis using a 360-day year comprised
of twelve 30-day months, such that the Accreted Value shall be
equal to the full principal amount at maturity of the New
Debentures on October 15, 2002. Beginning on October 15, 2002,
interest on the New
76
Debentures will accrue at the rate of 13-1/8% per annum and will
be payable semi-annually in arrears on April 15 and October 15,
commencing on April 15, 2003, to holders of record on the
immediately preceding April 1 and October 1, respectively.
Interest on the New Debentures will accrue from the most recent
date to which interest has been paid or, if no interest has been
paid, from October 15, 2002. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest and Liquidated Damages
on the New Debentures will be payable at the office or agency
(the "Paying Agent") of the Issuer maintained for such purpose
within the City and State of New York or, at the option of the
Issuer, payment of principal, premium, interest, and Liquidated
Damages may be made by check mailed to the holders of the New
Debentures at their respective addresses set forth in the
register of holders of Debentures; provided that all payments of
principal, premium, interest and Liquidated Damages with respect
to New Debentures represented by one or more permanent global
debentures ("Global Debentures") will be required to be made by
wire transfer of immediately available funds to the accounts of
DTC or any successor thereto. Until otherwise designated by the
Issuer, the Issuer's office or agency in New York will be the
office of the Trustee maintained for such purpose. The New
Debentures will be issued in denominations of $1,000 and integral
multiples thereof.
Optional Redemption
Except as described below, the New Debentures will not be
redeemable at the Issuer's option prior to October 15, 2002.
Thereafter, the New Debentures will be subject to redemption at
any time at the option of the Issuer, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest and Liquidated Damages
thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on October 15 of the years
indicated below:
Year Percentage
---- ----------
2002 ........ 106.563
2003 ........ 104.375
2004 ........ 102.188
2005 and
thereafter ... 100.000
Notwithstanding the foregoing, at any time on or prior to
October 15 , 2000, the Issuer may (but shall not have the
obligation to) redeem, on one or more occasions, up to an
aggregate of 35% of the principal amount of New Debentures
originally issued at a redemption price equal to 113.125% of the
Accreted Value thereof, plus Liquidated Damages thereon, if any,
to the redemption date, with the net cash proceeds of one or more
Equity Offerings; provided that at least 65% of the aggregate
principal amount at maturity of the New Debentures originally
issued remain outstanding immediately after the occurrence of
such redemption; and provided further, that such redemption shall
occur within 90 days of the date of the closing of such Equity
Offering.
Mandatory Redemption
Except as set forth under "--Repurchase at the Option of
Holders," the Issuer is not required to make mandatory redemption
or sinking fund payments with respect to the New Debentures.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each holder of
New Debentures will have the right to require the Issuer to
repurchase all or any part (equal to $1,000 or an integral
multiple thereof) of such holder's New Debentures pursuant to the
offer described below (the "Change of Control Offer") at an offer
price in cash equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest and Liquidated Damages
thereon,
77
if any, to the date of purchase or, in the case of repurchases of
New Debentures prior to October 15, 2002 at a purchase price
equal to 101% of the Accreted Value thereof as of the date of
repurchase (the "Change of Control Payment"). Within 65 days
following any Change of Control, the Issuer will mail a notice to
each holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase New
Debentures on the date specified in such notice, which date shall
be no earlier than 30 days (or such shorter time period as may be
permitted under applicable law, rules and regulations) and no
later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures
required by the Indenture and described in such notice. The
Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable
in connection with the repurchase of the New Debentures as a
result of a Change of Control. To the extent that the provisions
of any securities laws or regulations conflict with the
provisions of the Indenture relating to such Change of Control
Offer, the Issuer will comply with the applicable securities laws
and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
On the Change of Control Payment Date, the Issuer will, to
the extent lawful, (1) accept for payment all New Debentures or
portions thereof properly tendered pursuant to the Change of
Control Offer, (2) deposit with the Paying Agent an amount equal
to the Change of Control Payment in respect of all New Debentures
or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the New Debentures so accepted together
with an officers' certificate stating the aggregate principal
amount of New Debentures or portions thereof being purchased by
the Issuer. The Paying Agent will promptly mail to each holder of
New Debentures so tendered the Change of Control Payment for such
New Debentures, and the Trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each holder a
new New Debenture equal in principal amount to any unpurchased
portion of the New Debentures surrendered, if any; provided that
each such new New Debenture will be in a principal amount of
$1,000 or an integral multiple thereof. The Issuer will publicly
announce the results of the Change of Control Offer on or as soon
as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be
applicable whether or not any other provisions of the Indenture
are applicable. Except as described above with respect to a
Change of Control, the Indenture does not contain provisions that
permit the holders of the New Debentures to require that the
Issuer repurchase or redeem the New Debentures in the event of a
takeover, recapitalization or similar transaction.
The New Credit Facility and the Operating Corp Senior
Subordinated Notes restrict Operating Corp from paying any
dividends or making any other distributions to the Issuer. If the
Issuer is unable to obtain dividends from Operating Corp
sufficient to permit the repurchase of the New Debentures or does
not refinance such Indebtedness, the Issuer will likely not have
the financial resources to purchase New Debentures. In any event,
there can be no assurance that the Issuer's Subsidiaries will
have the resources available to pay any such dividend or make any
such distribution. Prior to complying with the provisions of the
preceding paragraphs, but in any event within 90 days following a
Change of Control, the Issuer will either repay all outstanding
Indebtedness of its Subsidiaries or obtain the requisite
consents, if any, under the New Credit Facility and the Operating
Corp Senior Subordinated Notes to permit the repurchase of the
New Debentures required by this covenant. The Issuer will not be
required to purchase any New Debentures until it has complied
with the preceding sentence, but the Issuer's failure to make a
Change of Control Offer when required or to purchase tendered New
Debentures when tendered would constitute an Event of Default
under the Indenture. See "Risk Factors--Substantial Leverage;
Liquidity; Stockholders' Deficit" and "--Limitation on Access to
Cash Flow of Subsidiaries; Holding Company Structure."
The Issuer will not be required to make a Change of Control
Offer upon a Change of Control if a third party makes the Change
of Control Offer in the manner, at the times and otherwise in
compliance with the requirements set forth in the Indenture
applicable to a Change of Control Offer made by the Issuer and
purchases all New Debentures validly tendered and not withdrawn
under such Change of Control Offer.
The definition of Change of Control includes a phrase
relating to the sale, lease, transfer, conveyance or other
disposition of "all or substantially all" of the assets of the
Issuer and its Subsidiaries taken as a whole.
78
Although there is a developing body of case law interpreting the
phrase 'substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the
ability of a holder of New Debentures to require the Issuer to
repurchase such New Debentures as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the
assets of the Issuer and its Subsidiaries taken as a whole to
another Person or group may be uncertain.
Asset Sales
The Indenture provides that the Issuer will not, and will
not permit any of its Restricted Subsidiaries to, consummate an
Asset Sale unless (i) the Issuer (or the Restricted Subsidiary,
as the case may be) receives consideration at the time of such
Asset Sale at least equal to the fair market value (evidenced by
a resolution of the Board of Directors set forth in an officers'
certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at
least 75% of the consideration therefor received by the Issuer or
such Restricted Subsidiary is in the form of (A) cash or Cash
Equivalents or (B) Qualified Proceeds; provided that the
aggregate fair market value of Qualified Proceeds (other than
cash or Cash Equivalents), which may be received in consideration
for asset sales pursuant to this clause (ii) (B) shall not exceed
$7.5 million since the Issue Date; provided further that the
amount of (x) any liabilities (as shown on the Issuer's or such
Restricted Subsidiary's most recent balance sheet), of the Issuer
or any Restricted Subsidiary (other than contingent liabilities
and liabilities that are by their terms subordinated to the New
Debentures) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the
Issuer or such Restricted Subsidiary from further liability and
(y) any securities, notes or other obligations received by the
Issuer or any such Restricted Subsidiary from such transferee
that are converted by the Issuer or such Restricted Subsidiary
into cash (to extent of the cash received) within 180 days
following the closing of such Asset Sale, shall be deemed to be
cash for purposes of this provision.
Within 395 days after the receipt of any Net Proceeds from
an Asset Sale, the Issuer or its Restricted Subsidiaries may
apply such Net Proceeds, at its option, (a) to repay Indebtedness
of a Restricted Subsidiary of the Issuer, or (b) to the
investment in, or the making of a capital expenditure or the
acquisition of other property or assets in each case used or
useable in a Permitted Business, or Capital Stock of any Person
primarily engaged in a Permitted Business if, as a result of the
acquisition by the Issuer or any Restricted Subsidiary thereof,
such Person becomes a Restricted Subsidiary, or (c) as
combination of the uses described in clauses (a) and (b). Pending
the final application of any such Net Proceeds, the Issuer or its
Restricted Subsidiaries may temporarily reduce Indebtedness of a
Restricted Subsidiary of the Issuer or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture.
Any Net Proceeds from Asset Sales, other than 20% of the net
proceeds from any sale of all or substantially all of the Capital
Stock or assets of the Company's Popular Club Plan business or
Clifford & Wills business (as each such business is constituted
on the Issue Date) which have been utilized to repay, redeem,
repurchase or otherwise retire outstanding New Debentures, that
are not applied or invested as provided in the first sentence of
this paragraph will be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0
million, the Issuer will be required to make an offer to all
holders of New Debentures and, to the extent required by the
terms of any Pari Passu Indebtedness to all holders of such Pari
Passu Indebtedness (an "Asset Sale Offer"), to purchase the
maximum principal amount of New Debentures and any such Pari
Passu Indebtedness that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100% of
the principal amount thereof plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of purchase (or,
in the case of repurchases of New Debentures prior to October 15,
2002, at a purchase price equal to 100% of the Accreted Value
thereof plus Liquidated Damages, as of the date of repurchase),
in accordance with the procedures set forth in the Indenture or
such Pari Passu Indebtedness, as applicable. To the extent that
the aggregate principal amount at maturity of New Debentures (or
Accreted Value, as the case may be) and any such Pari Passu
Indebtedness tendered pursuant to an Asset Sale Offer is less
than the Excess Proceeds, the Issuer or its Restricted
Subsidiaries may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount at maturity
(or Accreted Value, as the case may be) of New Debentures and any
such Pari Passu Indebtedness surrendered by holders thereof exceeds
the amount of Excess Proceeds, the Trustee shall
79
select the New Debentures to be purchased on a pro rata basis.
Upon completion of such Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
The New Credit Facility and the Senior Subordinated Notes
restrict J. Crew Corp. from paying any dividends or making any
other distributions to the Issuer. If the Issuer is unable to
obtain dividends from J. Crew Corp. sufficient to permit the
repurchase of the New Debentures or does not refinance such
Indebtedness, the Issuer will likely not have the financial
resources to purchase New Debentures. In any event, there can be
no assurance that the Issuer's Subsidiaries will have the
resources available to pay any such dividend or make any such
distribution. The Issuer's failure to make an Asset Sale Offer
when required or to purchase tendered New Debentures when
tendered would constitute an Event of Default under the New
Debenture Indenture. See "Risk Factors--Substantial Leverage;
Liquidity; Stockholders' Deficit" and "--Limitation on Access to
Cash Flow of Subsidiaries; Holding Company Structure."
Selection and Notice
If less than all of the New Debentures are to be redeemed
or repurchased in an offer to purchase at any time, selection of
New Debentures for redemption or repurchase will be made by the
Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the New Debentures
are listed, or, if the New Debentures are not so listed, on a pro
rata basis, by lot or by such other method as the Trustee deems
fair and appropriate; provided that Notes to be redeemed with the
proceeds of an Equity Offering shall be selected on a pro rata
basis; provided further that no Notes of $1,000 or less shall be
redeemed or repurchased in part. Notices of redemption may not be
conditional. Notices of redemption or repurchase shall be mailed
by first class mail at least 30 but not more than 60 days before
the redemption date or repurchase date to each holder of New
Debentures to be redeemed or repurchased at its registered
address. If any New Debenture is to be redeemed or repurchased in
part only, the notice of redemption or repurchase that relates to
such New Debenture shall state the portion of the principal
amount thereof to be redeemed or repurchased. A new New Debenture
in principal amount equal to the unredeemed or unrepurchased
portion thereof will be issued in the name of the holder thereof
upon cancellation of the original New Debenture. On and after the
redemption or repurchase date, interest and Liquidated Damages
will cease to accrue on New Debentures or portions of them called
for redemption or repurchase.
Certain Covenants
Restricted Payments
The Indenture provides that the Issuer will not, and will
not permit any of its Restricted Subsidiaries to, directly or
indirectly: (i) declare or pay any dividend or make any other
payment or distribution on account of the Issuer's or any of its
Restricted Subsidiaries' Equity Interests (including, without
limitation, any such dividend, distribution or other payment made
as a payment in connection with any merger or consolidation
involving the Issuer), other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of
the Issuer or dividends or distributions payable to the Issuer or
any Wholly Owned Subsidiary of the Issuer; (ii) purchase, redeem
or otherwise acquire or retire for value (including, without
limitation, any such purchase, redemption or other acquisition or
retirement for value made as a payment in connection with any
merger or consolidation involving the Issuer) any Equity
Interests of the Issuer or any Restricted Subsidiary (other than
any such Equity Interests owned by the Issuer or any Restricted
Subsidiary of the Issuer); (iii) make any payment on or with
respect to, or purchase, redeem, defease or otherwise acquire or
retire for value any Indebtedness that is subordinated to the New
Debentures, except a payment of interest or a payment of
principal at Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in
clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and immediately
after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred
and be continuing; and
80
(b) the Issuer would, at the time of such Restricted
Payment and after giving pro forma effect thereto, have
been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant
described below under caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the
aggregate amount of all other Restricted Payments made by
the Issuer and its Restricted Subsidiaries after the date
of the Indenture (excluding Restricted Payments permitted
by clauses (ii), (iii), (iv), and (vi) of the next
succeeding paragraph), is less than the sum (without
duplication) of (i) 50% of the Consolidated Net Income of
the Issuer for the period (taken as one accounting period)
from the beginning of the first fiscal quarter commencing
after the date of the Indenture to the end of the Issuer's
most recently ended fiscal quarter for which internal
financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for
such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate Qualified Proceeds received by
the Issuer from contributions to the Issuer's capital or
the issue or sale subsequent to the date of the Indenture
of Equity Interests of the Issuer (other than Disqualified
Stock) or of Disqualified Stock or debt securities of the
Issuer that have been converted into such Equity Interests
(other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the
Issuer and other than Disqualified Stock or convertible
debt securities that have been converted into Disqualified
Stock), plus (iii) to the extent that any Restricted
Investment that was made after the date of the Indenture is
sold for Qualified Proceeds or otherwise liquidated or
repaid (including, without limitation, by way of a dividend
or other distribution, a repayment of a loan or advance or
other transfer of assets) for in whole or in part, the
lesser of (A) the Qualified Proceeds with respect to such
Restricted Investment, (less the cost of disposition, if
any) and (B) the initial amount of such Restricted
Investment, plus (iv) upon the redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary, the
lesser of (x) the fair market value of such Subsidiary or
(y) the aggregate amount of all Investments made in such
Subsidiary subsequent to the Issue Date by the Issuer and
its Restricted Subsidiaries, plus (v) $15.0 million.
The foregoing provisions will not prohibit (i) the payment
of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture; (ii) the
redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests
of the Issuer in exchange for, or out of the net cash proceeds of
the substantially concurrent sale (other than to a Restricted
Subsidiary of the Issuer) of, other Equity Interests of the
Issuer (other than any Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other
acquisition shall be excluded from clause (c) (ii) of the
preceding paragraph; (iii) the defeasance, redemption,
repurchase, retirement or other acquisition of subordinated
Indebtedness in exchange for, or with the net cash proceeds from,
an incurrence of Permitted Refinancing Indebtedness; (iv) the
payment of any dividend (or the making of a similar distribution
or redemption) by a Restricted Subsidiary of the Issuer to the
holders of its common Equity Interests on a pro rata basis; (v)
so long as no Default or Event of Default shall have occurred and
is continuing, the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Issuer, or
any Restricted Subsidiary of the Issuer, held by any member of
the Issuer's (or any of its Restricted Subsidiaries') management,
employees or consultants pursuant to any management, employee or
consultant equity subscription agreement or stock option
agreement in effect as of the date of the Indenture; provided
that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed the sum of
(A) $10.0 million and (B) the aggregate cash proceeds received by
the Issuer from any reissuance of Equity Interests by the Issuer
to members of management of the Issuer and its Restricted
Subsidiaries (provided that the cash proceeds referred to in this
clause (B) shall be excluded from clause (c)(ii) of the preceding
paragraph); (vi) distributions made by the Issuer on the date of
the Indenture, the proceeds of which are utilized solely to
consummate the Recapitalization; and (vii) so long as no Default
or Event of Default has occurred and is continuing, the
declaration and payment of dividends to holders of any class or
series of Disqualified Stock of the Issuer issued after the date
of the Indenture in accordance with the covenant described below
under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock."
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The Board of Directors may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation
would not cause a Default or an Event of Default. For purposes of
making such determination, all outstanding Investments by the
Issuer and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated will be deemed to
be Restricted Payments at the time of such designation and will
reduce the amount available for Restricted Payments under the
first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount
equal to the greater of (i) the net book value of such
Investments at the time of such designation and (ii) the fair
market value of such Investments at the time of such designation.
Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of (i) all Restricted Payments (other than cash)
shall be the fair market value on the date of the Restricted
Payment of the asset(s) or securities proposed to be transferred
or issued by the Issuer or such Restricted Subsidiary, as the
case may be, pursuant to the Restricted Payment and (ii)
Qualified Proceeds (other than cash) shall be the fair market
value on the date of receipt thereof by the Issuer of such
Qualified Proceeds. The fair market value of any non-cash
Restricted Payment and Qualified Proceeds shall be determined by
the Board of Directors whose resolution with respect thereto
shall be delivered to the Trustee, such determination to be based
upon an opinion or appraisal issued by an accounting, appraisal
or investment banking firm of national standing if such fair
market value exceeds $10.0 million. Not later than the date of
making any Restricted Payment, the Issuer shall deliver to the
Trustee an officers' certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were
computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Issuer will not, and will
not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness
(including Acquired Debt) and that the Issuer will not issue any
Disqualified Stock and will not permit any of its Restricted
Subsidiaries to issue any shares of preferred stock; provided,
however, that the Issuer or any of its Restricted Subsidiaries
may incur Indebtedness (including Acquired Debt) or issue shares
of Disqualified Stock if the Fixed Charge Coverage Ratio for the
Issuer's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding
the date on which such additional Indebtedness is incurred or
such Disqualified Stock is issued would have been at least 1.75
to 1.0, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had
been issued, as the case may be, at the beginning of such
four-quarter period.
The Indenture also provides that the Issuer will not incur
any Indebtedness that is contractually subordinated in right of
payment to any other Indebtedness of the Issuer unless such
Indebtedness is also contractually subordinated in right of
payment to the New Debentures on substantially identical terms;
provided, however, that no Indebtedness of the Issuer shall be
deemed to be contractually subordinated in right of payment to
any other Indebtedness of the Issuer solely by virtue of being
unsecured.
The provisions of the first paragraph of this covenant will
not apply to the incurrence of any of the following items of
Indebtedness (collectively, "Permitted Debt"):
(i) Indebtedness of the Issuer and its Restricted
Subsidiaries under Credit Facilities; provided that the
aggregate principal amount of all Indebtedness (with
letters of credit being deemed to have a principal amount
equal to the maximum potential liability of the Issuer and
its Restricted Subsidiaries thereunder) outstanding under
all Credit Facilities after giving effect to such
incurrence, including all Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to
this clause (i), does not exceed an amount equal to $270.0
million less the aggregate principal of all principal
payments thereunder
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constituting permanent reductions of such Indebtedness
pursuant to and in accordance with the covenant described
under "--Repurchase at the Option of Holders--Asset Sales;"
(ii) the incurrence by the Issuer of Indebtedness
represented by the New Debentures and the incurrence by J.
Crew Corp. and its Subsidiaries of Indebtedness represented
by the Senior Subordinated Notes and any guarantee thereof;
(iii) the incurrence by the Issuer or any of its
Restricted Subsidiaries of Indebtedness represented by
Capital Lease Obligations, mortgage financings or purchase
money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of
construction or improvements of property used in the
business of the Issuer or such Restricted Subsidiary, in an
aggregate principal amount not to exceed $25.0 million at
any time outstanding;
(iv) other Indebtedness of the Issuer and its
Restricted Subsidiaries outstanding on the Issue Date;
(v) the incurrence by the Issuer or any of its
Restricted Subsidiaries of Permitted Refinancing
Indebtedness in exchange for, or the net proceeds of which
are used to refund, refinance or replace Indebtedness
(other than intercompany Indebtedness) that was permitted
by the Indenture to exist or be incurred;
(vi) the incurrence of intercompany Indebtedness (A)
between or among the Issuer and any Wholly Owned Restricted
Subsidiaries of the Issuer or (B) by a Restricted
Subsidiary that is not a Wholly Owned Restricted Subsidiary
of the Issuer or a Wholly Owned Subsidiary; provided,
however, that (i) if the Issuer is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated
to the prior payment in full in cash of all Obligations
with respect to the New Debentures and (ii)(A) any
subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person
other than the Issuer or a Wholly Owned Restricted
Subsidiary of the Issuer and (B) any sale or other transfer
of any such Indebtedness to a Person that is not either the
Issuer or a Wholly Owned Restricted Subsidiary of the
Issuer shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Issuer or such
Subsidiary, as the case may be;
(vii) the incurrence by the Issuer or any of the
Guarantors of Hedging Obligations that are incurred for the
purpose of fixing or hedging (i) interest rate risk with
respect to any floating rate Indebtedness that is permitted
by the terms of this Indenture to be outstanding or (ii)
the value of foreign currencies purchased or received by
the Issuer in the ordinary course of business;
(viii) Indebtedness incurred in respect of workers'
compensation claims, self-insurance obligations,
performance, surety and similar bonds and completion
guarantees provided by the Issuer or a Restricted
Subsidiary in the ordinary course of business;
(ix) Indebtedness arising from guarantees of
Indebtedness of the Issuer or any Subsidiary or the
agreements of the Issuer or a Restricted Subsidiary
providing for indemnification, adjustment of purchase price
or similar obligations, in each case, incurred or assumed
in connection with the disposition of any business, assets
or Capital Stock of a Restricted Subsidiary, or other
guarantees of Indebtedness incurred by any person acquiring
all or any portion of such business, assets or Capital
Stock of a Restricted Subsidiary for the purpose of
financing such acquisition, provided that the maximum
aggregate liability in respect of all such Indebtedness
shall at no time exceed the gross proceeds actually
received by the Issuer and its Restricted Subsidiaries in
connection with such disposition;
(x) Indebtedness of a Receivables Subsidiary that is
not recourse to the Issuer or any other Restricted
Subsidiary of the Issuer (other than Standard
Securitization Undertakings) incurred in connection with a
Qualified Receivables Transaction;
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(xi) the guarantee by any Restricted Subsidiary of the
Issuer of Indebtedness of any Restricted Subsidiary of the
Issuer that was permitted to be incurred by another
provision of this covenant;
(xii) the incurrence by the Issuer or any of its
Restricted Subsidiaries of Acquired Debt in an aggregate
principal amount at any time outstanding not to exceed
$20.0 million;
(xiii) Indebtedness arising from the honoring by a
bank or other financial institution of a check, draft or
similar instrument inadvertently (except in the case of
daylight overdrafts) drawn against insufficient funds in
the ordinary course of business; provided, however, that
such Indebtedness is extinguished within five business days
of incurrence; and
(xiv) the incurrence by the Issuer or any Restricted
Subsidiary of additional Indebtedness in an aggregate
principal amount (or accreted value, as applicable) at any
time outstanding, including all indebtedness incurred to
refund, refinance or replace any Indebtedness incurred
pursuant to this clause (xiv), not to exceed $30.0 million.
For purposes of determining compliance with this covenant,
in the event that an item of Indebtedness meets the criteria of
more than one of the categories of Permitted Debt described in
clauses (i) through (xiv) above or is entitled to be incurred
pursuant to the first paragraph of this covenant, the Issuer
shall, in its sole discretion, classify such item of Indebtedness
in any manner that complies with this covenant and such item of
Indebtedness will be treated as having been incurred pursuant to
only one of such clauses or pursuant to the first paragraph
hereof. Accrual of interest, the accretion of accreted value and
the payment of interest in the form of additional Indebtedness
will not be deemed to be an incurrence of Indebtedness for
purposes of this covenant.
Liens
The Indenture provides that the Issuer will not, and will
not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume or suffer to exist any Lien
securing Indebtedness or trade payables on any asset now owned or
hereafter acquired, or any income or profits therefrom or assign
or convey any right to receive income therefrom for purposes of
security, except Permitted Liens, unless (i) in the case of Liens
securing Indebtedness that is expressly subordinate or junior in
right of payment to the New Debentures, the New Debentures are
secured by a Lien on such property, assets or proceeds that is
senior in priority to such Liens, (with the same relative
priority as such subordinate or junior Indebtedness shall have
with respect to the New Debentures) and (ii) in all other cases,
the New Debentures are secured by such Lien on an equal and
ratable basis.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Issuer will not, and will
not permit any of its Restricted Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of
any Restricted Subsidiary to (i)(A) pay dividends or make any
other distributions to the Issuer or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits,
or (B) pay any Indebtedness owed to the Issuer or any of its
Restricted Subsidiaries, (ii) make loans or advances to the
Issuer or any of its Restricted Subsidiaries or (iii) transfer
any of its properties or assets to the Issuer or any of its
Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (A) the New Credit
Facility and the Senior Subordinated Notes, as in effect as of
the date of the Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, provided that such
amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are no more
restrictive with respect to such dividend and other payment
restrictions than those contained in the New Credit Facility or
the Senior Subordinated Notes, as the case may be, as in effect
on the date of the Indenture, (B) the Indenture and the Notes,
(C) applicable law or any applicable rule, regulation or order,
(D) any agreement or instrument governing Indebtedness or Capital
Stock of a Person acquired by the Issuer or any of its Restricted
Subsidiaries as in effect at the time of such
84
acquisition (except to the extent such agreement or instrument
was created or entered into in connection with or in
contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or
assets of the Person, so acquired, (E) by reason of customary
non-assignment provisions in leases, licenses, encumbrances,
contracts or similar assets entered into or acquired in the
ordinary course of business and consistent with past practices,
(F) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so
acquired, (G) any Purchase Money Note, or other Indebtedness or
contractual requirements incurred with respect to a Qualified
Receivables Transaction relating to a Receivables Subsidiary, (H)
Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those
contained in the agreements governing the Indebtedness being
refinanced and (I) contracts for the sale of assets containing
customary restrictions with respect to a Subsidiary pursuant to
an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or
assets of such Subsidiary.
Merger, Consolidation or Sale of Assets
The Indenture provides that the Issuer may not consolidate
or merge with or into (whether or not the Issuer is the surviving
corporation), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties
or assets in one or more related transactions, to another Person
unless (i) the Issuer is the surviving corporation or the Person
formed by or surviving any such consolidation or merger (if other
than the Issuer) or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made is a
corporation or limited liability company organized or existing
under the laws of the United States, any state thereof or the
District of Columbia; (ii) the Person formed by or surviving any
such consolidation or merger (if other than the Issuer) or the
Person to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made assumes all
the obligations of the Issuer under the New Debentures and the
Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (iii) immediately after
such transaction no Default or Event of Default exists; and (iv)
except in the case of a merger of the Issuer with or into a
Wholly Owned Restricted Subsidiary of the Issuer (other than a
Receivables Subsidiary), the Issuer or the entity or Person
formed by or surviving any such consolidation or merger (if other
than the Issuer), or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made at
the time of such transaction and after giving pro forma effect
thereto as if such transaction had occurred at the beginning of
the applicable four-quarter period, be permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of
the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock." For purposes of
this covenant, the sale, lease, conveyance, assignment, transfer,
or other disposition of all or substantially all of the
properties and assets of one or more Subsidiaries of the Issuer,
which properties and assets, if held by the Issuer instead of
such Subsidiaries, would constitute all or substantially all of
the properties and assets of the Issuer on a consolidated basis,
shall be deemed to be the transfer of all or substantially all of
the properties and assets of the Issuer. The foregoing clause
(iv) will not prohibit (a) a merger between the Issuer and a
Wholly Owned Subsidiary of the Issuer created for the purpose of
holding the Capital Stock of the Issuer, (b) a merger between the
Issuer and a Wholly Owned Restricted Subsidiary of the Issuer or
(c) a merger between the Issuer and an Affiliate incorporated
solely for the purpose of reincorporating the Issuer in another
State of the United States so long as, in the case of each of
clause (a), (b) and (c), the amount of Indebtedness of the Issuer
and its Restricted Subsidiaries is not increased thereby.
Transactions with Affiliates
The Indenture provides that the Issuer will not, and will
not permit any of its Restricted Subsidiaries to, make any
payment to or Investment in, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or
amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate
(each of the foregoing, an "Affiliate Transaction"), unless (i)
such Affiliate Transaction is on terms that are no less favorable
to the Issuer or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the
85
Issuer or such Restricted Subsidiary with an unrelated Person and
(ii) the Issuer delivers to the Trustee (A) with respect to any
Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an officers'
certificate certifying that such Affiliate Transaction complies
with clause (i) above and that such Affiliate Transaction has
been approved by a majority of the disinterested members of the
Board of Directors and (B) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $10.0 million, an opinion as
to the fairness to the holders of such Affiliate Transaction from
a financial point of view issued by an accounting, appraisal or
investment banking firm of national standing; provided that (v)
transactions with suppliers or other purchasers or sales of goods
or services, in each case in the ordinary course of business
(including, without limitation, pursuant to joint venture
agreements) and otherwise in accordance with the terms of the
Indenture which are fair to the Issuer, in the good faith
determination of the Board of Directors of the Issuer or the
senior management of the Issuer and are on terms at least as
favorable as might reasonably have been obtained at such time
from an unaffiliated party, (w) any employment agreements, stock
option or other compensation agreements or plans (and the payment
of amounts or the issuance of securities thereunder) and other
reasonable fees, compensation, benefits and indemnities paid or
entered into by the Issuer or any of its Restricted Subsidiaries
in the ordinary course of business of the Issuer or such
Restricted Subsidiary to or with the officers, directors or
employees of the Issuer or its Restricted Subsidiaries, (x)
transactions between or among the Issuer and/or its Restricted
Subsidiaries, (y) sales or other transfers or dispositions of
accounts receivable and other related assets customarily
transferred in an asset securitization transaction involving
accounts receivable to a Receivables Subsidiary in a Qualified
Receivables Transaction, and acquisitions of Permitted
Investments in connection with a Qualified Receivables
Transaction and (z) Restricted Payments (other than Restricted
Investments) that are permitted by the provisions of the
Indenture described above under the caption "--Restricted
Payments," in each case, shall not be deemed Affiliate
Transactions.
Business Activities
The Issuer will not, and will not permit any Restricted
Subsidiary to, engage in any business other than Permitted
Businesses.
Reports
The Indenture provides that, whether or not required by the
rules and regulations of the Commission, so long as any New
Debentures are outstanding, the Issuer will furnish to the
holders of New Debentures (i) all quarterly and annual financial
information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Issuer were
required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
that describes the financial condition and results of operations
of the Issuer and its consolidated Subsidiaries and, with respect
to the annual information only, a report thereon by the Issuer's
certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form
8-K if the Issuer were required to file such reports, in each
case within the time periods set forth in the Commission's rules
and regulations. In addition, whether or not required by the
rules and regulations of the Commission, at any time after the
consummation of the Exchange Offer contemplated by the
Registration Rights Agreement, the Issuer will file a copy of all
such information and reports with the Commission for public
availability within the time periods set forth in the
Commission's rules and regulations (unless the Commission will
not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In
addition, at all times that the Commission does not accept the
filings provided for in the preceding sentence, the Issuer has
agreed that, for so long as any New Debentures remain
outstanding, they will furnish to the holders and to securities
analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
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Events of Default and Remedies
The Indenture provides that each of the following
constitutes an Event of Default (each an "Event of Default"): (i)
default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the New Debentures; (ii)
default in payment when due of the principal of or premium, if
any, on the New Debentures; (iii) failure by the Issuer or any of
its Restricted Subsidiaries for 30 days after notice by the
Trustee or by the holders of at least 25% in principal amount of
New Debentures then outstanding to comply with the provisions
described under the captions "--Repurchase at the Option of
Holders--Change of Control" or "--Asset Sales" or "--Certain
Covenants--Restricted Payments" or "--Incurrence of Indebtedness
and Issuance of Preferred Stock;" (iv) failure by the Issuer or
any of its Restricted Subsidiaries for 60 days after notice by
the Trustee or by the holders of at least 25% in principal amount
of New Debentures then outstanding to comply with any of its
other agreements in the Indenture or the New Debentures; (v)
default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Issuer or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by
the Issuer or any of its Restricted Subsidiaries) whether such
Indebtedness or guarantee now exists, or is created after the
date of the Indenture, which default (a) is caused by a failure
to pay principal of such Indebtedness after giving effect to any
grace period provided in such Indebtedness (a "Payment Default")
or (b) results in the acceleration of such Indebtedness prior to
its stated maturity and, in each case, the principal amount of
any such Indebtedness, together with the principal amount of any
other such Indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated,
aggregates $20 million or more; (vi) failure by the Issuer or any
of its Restricted Subsidiaries to pay final judgments aggregating
in excess of $20 million (net of any amounts with respect to
which a reputable and creditworthy insurance company has
acknowledged liability in writing), which judgments are not paid,
discharged or stayed for a period of 60 days; and (vii) certain
events of bankruptcy or insolvency with respect to the Issuer or
any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the
Trustee or the holders of at least 25% in principal amount of the
then outstanding New Debentures may declare all the New
Debentures to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the
Issuer, all outstanding New Debentures will become due and
payable without further action or notice. Upon any acceleration
of maturity of the New Debentures, all principal of and accrued
interest and Liquidated Damages, if any, on (if on or after
October 15, 2002) or Accreted Value of and Liquidated Damages, if
any, on (if prior to October 15, 2002) the New Debentures shall
be due and payable immediately. Holders of the New Debentures may
not enforce the Indenture or the New Debentures except as
provided in the Indenture. Subject to certain limitations,
holders of a majority in principal amount of the then outstanding
New Debentures may direct the Trustee in its exercise of any
trust or power. The Trustee may withhold from holders of the New
Debentures notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice
is in their interest. In the event of a declaration of
acceleration of the New Debentures because an Event of Default
has occurred and is continuing as a result of the acceleration of
any Indebtedness described in clause (v) of the preceding
paragraph, the declaration of acceleration of the New Debentures
shall be automatically annulled if the holders of any
Indebtedness described in clause (v) of the preceding paragraph
have rescinded the declaration of acceleration in respect of such
Indebtedness within 30 days of the date of such declaration and
if (a) the annulment of the acceleration of New Debentures would
not conflict with any judgment or decree of a court of competent
jurisdiction and (b) all existing Events of Default, except
nonpayment of principal or interest on the New Debentures that
became due solely because of the acceleration of the New
Debentures, have been cured or waived.
The holders of a majority in aggregate principal amount of
the New Debentures then outstanding by notice to the Trustee may
on behalf of the holders of all of the New Debentures waive any
existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in
the payment of interest on, or the principal of, the New
Debentures.
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The Issuer is required to deliver to the Trustee annually a
statement regarding compliance with the Indenture, and the Issuer
is required upon becoming aware of any Default or Event of
Default, to deliver to the Trustee a statement specifying such
Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder
of the Issuer, as such, shall have any liability for any
obligations of the Issuer under the New Debentures or the
Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder of New
Debentures by accepting a New Debenture waives and releases all
such liability. The waiver and release are part of the
consideration for issuance of the New Debentures. Such waiver may
not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a
waiver is against public policy.
Legal Defeasance and Covenant Defeasance
The Issuer may, at its option and at any time, elect to
have all of its obligations discharged with respect to the
outstanding New Debentures ("Legal Defeasance") except for (i)
the rights of holders of outstanding New Debentures to receive
payments in respect of the principal of, premium, if any, and
interest and Liquidated Damages on such New Debentures when such
payments are due from the trust referred to below, (ii) the
Issuer's obligations with respect to the New Debentures
concerning issuing temporary New Debentures, registration of New
Debentures, mutilated, destroyed, lost or stolen New Debentures
and the maintenance of an office or agency for payment and money
for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and the Issuer's
obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Issuer may, at its
option and at any time, elect to have the obligations of the
Issuer released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter
any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the New Debentures.
In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation
and insolvency events) described under "--Events of Default and
Remedies" will no longer constitute an Event of Default with
respect to the New Debentures.
In order to exercise either Legal Defeasance or Covenant
Defeasance, (i) the Issuer must irrevocably deposit with the
Trustee, in trust, for the benefit of the holders of the New
Debentures, cash in U.S. dollars, non-callable government
securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal amount at
maturity of or Accreted Value (as applicable) of, premium, if
any, and interest and Liquidated Damages on the outstanding New
Debentures on the stated maturity or on the applicable redemption
date, as the case may be, and the Issuer must specify whether the
New Debentures are being defeased to maturity or to a particular
redemption date; (ii) in the case of Legal Defeasance, the Issuer
shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming
that (A) the Issuer has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since
the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm
that, subject to customary assumptions and exclusions, the
holders of the outstanding New Debentures will not recognize
income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Issuer
shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming
that, subject to customary assumptions and exclusions, the
holders of the outstanding New Debentures will not recognize
income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times
as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred
and be continuing on the date of such deposit (other than a
Default or Event of Default resulting from the financing of
amounts to be applied to such deposit) or insofar as Events of
Default from bankruptcy or insolvency events are
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concerned, at any time in the period ending on the 91st day after
the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or
constitute a default under any material agreement or instrument
(other than the Indenture) to which the Issuer or any of its
Subsidiaries is a party or by which the Issuer or any of its
Subsidiaries is bound; (vi) the Issuer must have delivered to the
Trustee an opinion of counsel to the effect that, subject to
customary assumptions and exclusions (which assumptions and
exclusions shall not relate to the operation of Section 547 of
the United States Bankruptcy Code or any analogous New York State
law provision), after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) the Issuer must deliver to the
Trustee an officers' certificate stating that the deposit was not
made by the Issuer with the intent of preferring the holders of
New Debentures over the other creditors of the Issuer with the
intent of defeating, hindering, delaying or defrauding creditors
of the Issuer or others; and (viii) the Issuer must deliver to
the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent provided for relating
to the Legal Defeasance or the Covenant Defeasance have been
complied with.
Transfer and Exchange
A holder may transfer or exchange New Debentures in
accordance with the Indenture. The Registrar and the Trustee may
require a holder, among other things, to furnish appropriate
endorsements and transfer documents and the Issuer may require a
holder to pay any taxes and fees required by law or permitted by
the Indenture. The Issuer is not required to transfer or exchange
any New Debentures selected for redemption. Also, the Issuer is
not required to transfer or exchange any New Debentures for a
period of 15 days before a selection of New Debentures to be
redeemed.
The registered holder of a New Debentures will be treated
as the owner of it for all purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs,
the Indenture or the New Debentures may be amended or
supplemented with the consent of the holders of at least a
majority in principal amount at maturity of the New Debentures
then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or
exchange offer for, New Debentures), and any existing default or
compliance with any provision of the Indenture or the New
Debentures may be waived with the consent of the holders of a
majority in principal amount of the then outstanding New
Debentures (including consents obtained in connection with a
purchase of, or tender offer or exchange offer for, New
Debentures).
Without the consent of each holder affected, an amendment
or waiver may not (with respect to any New Debentures held by a
non-consenting holder): (i) reduce the principal amount of New
Debentures whose holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed
maturity of any New Debentures or alter the provisions with
respect to the redemption of the New Debentures (other than
provisions relating to the covenants described above under the
caption "--Repurchase at the Option of Holders") or amend or
modify the calculation of the Accreted Value so as to reduce the
amount of the Accreted Value of the New Debentures, (iii) reduce
the rate of or change the time for payment of interest on any New
Debenture, (iv) waive a Default or Event of Default in the
payment of principal of or premium, if any, or interest on the
New Debentures (except a rescission of acceleration of the New
Debentures by the holders of at least a majority in aggregate
principal amount at maturity of the New Debentures and a waiver
of the payment default that resulted from such acceleration), (v)
make any New Debenture payable in money other than that stated in
the New Debentures, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of
holders of New Debentures to receive payments of principal of or
premium, if any, or interest on the New Debentures, (vii) waive a
redemption payment with respect to any New Debenture (other than
a payment required by one of the covenants described above under
the caption "--Repurchase at the Option of Holders"), or (viii)
make any change in the foregoing amendment and waiver provisions.
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Notwithstanding the foregoing, without the consent of any
holder of New Debentures, the Issuer and the Trustee may amend or
supplement the Indenture or the New Debentures to cure any
ambiguity, defect or inconsistency, to provide for uncertificated
New Debentures in addition to or in place of certificated New
Debentures, to provide for the assumption of the Issuer's
obligations to holders of New Debentures in the case of a merger
or consolidation, to make any change that would provide any
additional rights or benefits to the holders of New Debentures or
that does not adversely affect the legal rights under the
Indenture of any such holder, to comply with requirements of the
Commission in order to effect or maintain the qualification of
the Indenture under the Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of
the Trustee, should it become a creditor of the Issuer, to obtain
payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or
otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the
Commission for permission to continue or resign.
The holders of a majority in principal amount at maturity
of the then outstanding New Debentures will have the right to
direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event
of Default shall occur (which shall not be cured), the Trustee
will be required, in the exercise of its power, to use the degree
of care of a prudent man in the conduct of his own affairs.
Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of New Debentures, unless
such holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or
expense.
Book-Entry, Delivery and Form
The Old Debentures were offered and sold to qualified
institutional buyers in reliance on Rule 144A ("Rule 144A New
Debentures"). New Debentures will be issued in registered, global
form in minimum denominations of $1,000 and integral multiples of
$1,000 in excess thereof. The Global Debentures will be deposited
upon issuance with the Trustee as custodian for DTC in New York,
New York, and registered in the name of DTC or its nominee, in
each case for credit to an account of a direct or indirect
participant in DTC as described below.
Except as set forth below, the Global Debentures may be
transferred, in whole and not in part, only to another nominee of
DTC or to a successor of DTC or its nominee. Beneficial interests
in the Global Debentures may not be exchanged for New Debentures
in certificated form except in the limited circumstances
described below. See "--Exchange of Book-Entry Debentures for
Certificated Debentures." In addition, transfer of beneficial
interests in the Global Debentures will be subject to the
applicable rules and procedures of DTC and its direct or indirect
participants (including, if applicable, those of Euroclear and
CEDEL), which may change from time to time.
Initially, the Trustee will act as Paying Agent and
Registrar with respect to the New Debentures. The New Debentures
may be presented for registration of transfer and exchange at the
offices of the Registrar.
Depository Procedures
DTC has advised the Issuer that DTC is a limited-purpose
trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to
facilitate the clearance and settlement of transactions in those
securities between Participants through electronic book-entry
changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial
Purchasers), banks, trust companies, clearing corporations and
certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial
relationship
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with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants
may beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The
ownership interests and transfer of ownership interests of each
actual purchaser of each security held by or on behalf of DTC are
recorded on the records of the Participants and Indirect
Participants.
DTC has also advised the Issuer that, pursuant to
procedures established by it, (i) upon deposit of the Global
Debentures, DTC will credit the accounts of Participants
tendering Old Debentures with portions of the applicable Global
Debentures and (ii) ownership of such interests in the Global
Debentures will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC
(with respect to the Participants) or by the Participants and the
Indirect Participants (with respect to other owners of beneficial
interest in the Global Debentures).
Investors in the Global Debentures may hold their interests
therein directly through DTC, if they are participants in such
system, or indirectly through organizations (including Euroclear
and CEDEL) which are participants in such system. Euroclear or
CEDEL will hold interests in the Global Debentures on behalf of
their participants through customers' securities accounts in
their respective names on the books of their respective
depositaries, which are Morgan Guaranty Trust Company of New
York, Brussels office, as operator of Euroclear, and Citibank,
N.A., as operator of CEDEL. The depositaries, in turn, will hold
such interests in the Global Debentures in customers' securities
accounts in the depositaries' names on the books of DTC. All
interests in a Global Debenture, including those held through
Euroclear or CEDEL, may be subject to the procedures and
requirements of DTC. Those interests held through Euroclear or
CEDEL may also be subject to the procedures and requirements of
such systems. The laws of some states require that certain
persons take physical delivery in definitive form of securities
that they own. Consequently, the ability to transfer beneficial
interests in a Global Debenture to such persons will be limited
to that extent. Because DTC can act only on behalf of
Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having
beneficial interests in a Global Debenture to pledge such
interests to persons or entities that do not participate in the
DTC system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate
evidencing such interests. For certain other restrictions on the
transferability of the New Debentures, see "--Exchange of Book-
Entry Debentures for Certificated Debentures" and "--Exchange of
Certificated Debentures for Book-Entry Debentures."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE
GLOBAL DEBENTURES WILL NOT HAVE NEW DEBENTURES REGISTERED IN
THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF NEW DEBENTURES
IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED
OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, premium, if any,
interest and Liquidated Damages, if any, on a Global Debenture
registered in the name of DTC or its nominee will be payable by
the Trustee to DTC in its capacity as the registered holder under
the Indenture. Under the terms of the Indenture, the Issuer and
the Trustee will treat the persons in whose names the New
Debentures, including the Global Debentures, are registered as
the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither
the Issuer nor the Trustee has or will have any responsibility or
liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or
payments made on account of beneficial ownership interest in the
Global Debentures, or for maintaining, supervising or reviewing
any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership
interests in the Global Debentures or (ii) any other matter
relating to the actions and practices of DTC or any of its
Participants or Indirect Participants. DTC has advised the Issuer
that its current practice, upon receipt of any payment in respect
of securities such as the New Debentures (including principal and
interest), is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial
interest in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on
such payment date. Payments by the Participants and the Indirect
Participants to the beneficial owners of New Debentures will be
governed by standing instructions and customary
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practices and will be the responsibility of the Participants or
the Indirect Participants and will not be the responsibility of
DTC, the Trustee or the Issuer. Neither the Issuer nor the
Trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the New
Debentures, and the Issuer and the Trustee may conclusively rely
on and will be protected in relying on instructions from DTC or
its nominee for all purposes.
Except for trades involving only Euroclear and CEDEL
participants, interests in the Global Debentures are expected to
be eligible to trade in DTC's Same-Day Funds Settlement System
and secondary market trading activity in such interests will
therefore settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its participants.
See "--Same-Day Settlement and Payment."
Transfers between Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in same-day
funds, and transfers between participants in Euroclear and CEDEL
will be effected in the ordinary way in accordance with their
respective rules and operating procedures.
Cross-market transfers between the Participants in DTC, on
the one hand, and Euroclear or CEDEL participants, on the other
hand, will be effected through DTC in accordance with DTC's rules
on behalf of Euroclear or CEDEL, as the case may be, by its
respective depositary; however, such cross-market transactions
will require delivery of instructions to Euroclear or CEDEL, as
the case may be, by the counterparty in such system in accordance
with the rules and procedures and within the established
deadlines (Brussels time) of such system. Euroclear or CEDEL, as
the case may be, will, if the transaction meets its settlement
requirements, deliver instructions to its respective depositary
to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global
Debentures in DTC, and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable
to DTC. Euroclear participants and CEDEL participants may not
deliver instructions directly to the depositaries for Euroclear
or CEDEL.
Because of time zone differences, the securities account of
a Euroclear or CEDEL participant purchasing an interest in Global
Debentures from a Participant in DTC will be credited, and any
such crediting will be reported to the relevant Euroclear or
CEDEL participant, during the securities settlement processing
day (which must be a business day for Euroclear and CEDEL)
immediately following the settlement date of DTC. DTC has advised
the Issuer that cash received in Euroclear or CEDEL as a result
of sales of interests in a Global Debenture by or through a
Euroclear or CEDEL participant to a Participant in DTC will be
received with value on the settlement date of DTC but will be
available in the relevant Euroclear or CEDEL cash account only as
of the business day for Euroclear or CEDEL following DTC's
settlement date.
DTC has advised the Issuer that it will take any action
permitted to be taken by a holder of New Debentures only at the
direction of one or more Participants to whose account with DTC
interests in the Global Debentures are credited and only in
respect of such portion of the aggregate principal amount of the
New Debentures as to which such Participant or Participants has
or have given such direction. However, if there is an Event of
Default under the New Debentures, DTC reserves the right to
exchange the Global Debentures for legended New Debentures in
certificated form, and to distribute such New Debentures to its
Participants.
The information in this section concerning DTC, Euroclear
and CEDEL and their book-entry systems has been obtained from
sources that the Issuer believes to be reliable, but the Issuer
takes no responsibility for the accuracy thereof.
Although DTC, Euroclear and CEDEL have agreed to the
foregoing procedures to facilitate transfers of interests in the
Global Debentures among Participants in DTC, Euroclear and CEDEL,
they are under no obligation to perform or to continue to perform
such procedures, and such procedures may be discontinued at any
time. Neither the Issuer nor the Trustee will have any
responsibility for the performance by DTC, Euroclear or CEDEL or
their respective participants or indirect participants of their
respective obligations under the rules and procedures governing
their operations.
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Exchange of Book-Entry Debentures for Certificated Debentures
A Global Debenture is exchangeable for definitive New
Debentures in registered certificated form if (i) DTC (x)
notifies the Issuer that it is unwilling or unable to continue as
depositary for the Global Debentures and the Issuer thereupon
fails to appoint a successor depositary or (y) has ceased to be a
clearing agency registered under the Exchange Act, (ii) the
Issuer, at its option, notifies the Trustee, in writing that it
elects to cause the issuance of the New Debentures in
certificated form or (iii) there shall have occurred and be
continuing an Event of Default or any event which after notice or
lapse of time or both would be an Event of Default with respect
to the New Debentures. In addition, beneficial interests in a
Global Debenture may be exchanged for certificated New Debentures
upon request but only upon at least 20 days prior written notice
given to the Trustee by or on behalf of DTC in accordance with
its customary procedures. In all cases, certificated New
Debentures delivered in exchange for any Global Debenture or
beneficial interests therein will be registered in the names, and
issued in any approved denominations, requested by or on behalf
of the depositary (in accordance with its customary procedures)
and will bear the applicable restrictive legend referred to in
"Notice to Investors," unless the Issuer determines otherwise in
compliance with applicable law.
Same-Day Settlement and Payment
The Indenture requires that payments in respect of the New
Debentures represented by the Global Debentures (including
principal, premium, if any, and interest and Liquidated Damages,
if any) be made by wire transfer of immediately available funds
to the accounts specified by the Global Debentures holder. With
respect to New Debentures in certificated form, the Issuer will
make all payments of principal, premium, if any, interest and
Liquidated Damages, if any, by wire transfer of immediately
available funds to the accounts specified by the holders thereof
or, if no such account is specified, by mailing a check to each
such holder's registered address. The New Debentures represented
by the Global Debentures are expected to be eligible to trade in
the PORTAL market and to trade in the Depositary's Same-Day Funds
Settlement System, and any permitted secondary market trading
activity in such New Debentures will, therefore, be required by
the Depositary to be settled in immediately available funds. The
Issuer expects that secondary trading in any certificated New
Debentures will also be settled in immediately available funds.
Because of time zone differences, the securities account of
a Euroclear or CEDEL participant purchasing an interest in a
Global Debenture from a Participant in DTC will be credited, and
any such crediting will be reported to the relevant Euroclear or
CEDEL participant, during the securities settlement processing
day (which must be a business day for Euroclear and CEDEL)
immediately following the settlement date of DTC. DTC has advised
the Issuer that cash received in Euroclear or CEDEL as a result
of sales of interests in a Global Debenture by or through a
Euroclear or CEDEL participant to a Participant in DTC will be
received with value on the settlement date of DTC but will be
available in the relevant Euroclear or CEDEL cash account only as
of the business day for Euroclear or CEDEL following DTC's
settlement date.
Registration Rights; Liquidated Damages
Pursuant to the Registration Rights Agreement, the Issuer
agreed to file with the Commission the Exchange Offer
Registration Statement on the appropriate form under the
Securities Act with respect to the New Debentures. Upon the
effectiveness of the Exchange Offer Registration Statement, the
Issuer will offer to the holders of Transfer Restricted
Securities pursuant to the Exchange Offer who are able to make
certain representations the opportunity to exchange their
Transfer Restricted Securities for New Debentures. If (i) the
Issuer is not required to file the Exchange Offer Registration
Statement or permitted to consummate the Exchange Offer because
the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any holder of Transfer Restricted
Securities notifies the Issuer within the specified time period
that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer (other than due solely to the
status of such holder as an affiliate of the Issuer within the
meaning of the Securities Act) or (B) that it may not resell the
New Debentures acquired by it in the Exchange Offer to the public
without delivering a prospectus and the prospectus contained in
the Exchange Offer
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Registration Statement is not appropriate or available for such
resales or (C) that it is a broker-dealer and owns Debentures
acquired directly from the Issuer or an affiliate of the Issuer,
the Issuer will file with the Commission a Shelf Registration
Statement to cover resales of the Debentures by the holders
thereof who satisfy certain conditions relating to the provision
of information in connection with the Shelf Registration
Statement. The Issuer will use its best efforts to cause the
applicable registration statement to be declared effective as
promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Securities" means each Debenture
until (i) the date on which such Debenture has been exchanged by
a person other than a broker-dealer for a New Debenture in the
Exchange Offer, (ii) following the exchange by a broker-dealer in
the Exchange Offer of a Debenture for a New Debenture, the date
on which such New Debenture is sold to a purchaser who receives
from such broker-dealer on or prior to the date of such sale a
copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Debenture
has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement
or (iv) the date on which such Debenture is distributed to the
public pursuant to Rule 144 under the Act.
The Registration Rights Agreement will provide that (i) the
Issuer will file an Exchange Offer Registration Statement with
the Commission on or prior to 60 days after the Closing Date,
(ii) the Issuer will use its best efforts to have the Exchange
Offer Registration Statement declared effective by the Commission
on or prior to 135 days after the Closing Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or
Commission policy, the Issuer will commence the Exchange Offer
and use its best efforts to issue within 180 days after the Issue
Date New Debentures in exchange for all Debentures tendered prior
thereto in the Exchange Offer and (iv) if obligated to file the
Shelf Registration Statement, the Issuer will use its best
efforts to file the Shelf Registration Statement with the
Commission on or prior to 60 days after such filing obligation
arises and to cause the Shelf Registration to be declared
effective by the Commission on or prior to 135 days after such
obligation arises. If (a) the Issuer fails to file any of the
Registration Statements required by the Registration Rights
Agreement on or before the date specified for such filing, (b)
any of such Registration Statements is not declared effective by
the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), or (c) the
Issuer fails to consummate the Exchange Offer within 180 days
after the Issue Date, or (d) the Shelf Registration Statement or
the Exchange Offer Registration Statement is declared effective
but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Securities during the periods
specified in the Registration Rights Agreement (each such event
referred to in clauses (a) through (d) above a "Registration
Default"), then the Issuer will pay liquidated damages
("Liquidated Damages") determined as follows: to each holder of
Debentures, with respect to such 90-day period immediately
following the occurrence of the first Registration Default in an
amount equal to $0.05 per week per $1,000 principal amount of
Debentures held by such holder. The amount of the Liquidated
Damages will increase by an additional $0.05 per week per $1,000
principal amount of Debentures with respect to each subsequent
90-day period until all Registration Defaults have been cured, up
to a maximum amount of Liquidated Damages of $0.25 per week per
$1,000 principal amount of Debentures. All accrued Liquidated
Damages will be paid by the Issuer to the Global Debenture holder
by wire transfer of immediately available funds or by federal
funds check and to holders of Certificated Debentures by wire
transfer to the accounts specified by them or by mailing checks
to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the
accrual of Liquidated Damages will cease.
Holders of Debentures will be required to make certain
representations to the Issuer (as described in the Registration
Rights Agreement) in order to participate in the Exchange Offer
and will be required to deliver information to be used in
connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time
periods set forth in the Registration Rights Agreement in order
to have their Debentures included in the Shelf Registration
Statement and benefit from the provisions regarding Liquidated
Damages set forth above.
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Certain Definitions
Set forth below are certain defined terms used in the
Indenture. Reference is made to the Indenture for a full
disclosure of all such terms, as well as any other capitalized
terms used herein for which no definition is provided.
"Accreted Value" means, as of any date of determination
prior to October 15, 2002, with respect to any Debenture, the sum
of (a) the initial offering price (which shall be calculated by
discounting the aggregate principal amount at maturity of such
Debenture at a rate of 13-1/8% per annum, compounded semi-annually
on each April 15 and October 15 from October 15, 2002 to the date
of issuance) of such Debenture and (b) the portion of the excess
of the principal amount of such Debenture over such initial
offering price which shall have been accreted thereon through
such date, such amount to be so accreted on a daily basis at a
rate of 13-1/8% per annum of the initial offering price of such
Debenture, compounded semi-annually on each April 15 and October
15 from the date of issuance of the Debentures through the date
of determination, computed on the basis of a 360-day year of
twelve 30-day months.
"Acquired Debt" means, with respect to any specified
Person, (i) Indebtedness of any other Person existing at the time
such other Person is merged with or into or became a Subsidiary
of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person or
assumed in connection with the acquisition of any asset used or
useful in a Permitted Business acquired by such specified Person;
provided that such Indebtedness was not incurred in connection
with, or in contemplation of, such other Person merging with or
into or becoming a Subsidiary of such specified Person, or such
acquisition, as the case may be.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under
direct or indirect common control with such specified Person. For
purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting
securities, by agreement or otherwise; provided that beneficial
ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.
"Asset Sale" means (i) the sale, lease (other than an
operating lease), conveyance or other disposition of any assets
or rights (including, without limitation, by way of a sale and
leaseback) other than in the ordinary course of business
consistent with past practices (provided that the sale, lease
(other than an operating lease), conveyance or other disposition
of all or substantially all of the assets of the Issuer and its
Restricted Subsidiaries taken as a whole will be governed by the
provisions of the Indenture described above under the caption
"--Repurchase at the Option of Holders--Change of Control" and/or
the provisions described above under the caption "--Certain
Covenants--Merger, Consolidation or Sale of Assets" and not by
the provisions of the Asset Sale covenant), and (ii) the sale by
the Issuer and the issue or sale by any of the Restricted
Subsidiaries of the Issuer of Equity Interests of any of the
Issuer's Subsidiaries, in the case of either clause (i) or (ii),
whether in a single transaction or a series of related
transactions that have a fair market value (as determined in good
faith by the Board of Directors) in excess of $1.0 million or for
net cash proceeds in excess of $1.0 million. Notwithstanding the
foregoing: (i) a transfer of assets by the Issuer to a Wholly
Owned Restricted Subsidiary of the Issuer (other than a
Receivables Subsidiary) or by a Wholly Owned Restricted
Subsidiary of the Issuer (other than a Receivables Subsidiary) to
the Issuer or to a Wholly Owned Restricted Subsidiary of the
Issuer (other than a Receivables Subsidiary), (ii) an issuance of
Equity Interests by a Restricted Subsidiary of the Issuer to the
Issuer or to a Wholly Owned Restricted Subsidiary of the Issuer
(other than a Receivables Subsidiary), (iii) a Restricted Payment
that is permitted by the covenant described above under the
caption "--Restricted Payments," (iv) the sale and leaseback of
any assets within 90 days of the acquisition of such assets, (v)
foreclosures on assets, (vi) the clearance of inventory and (vii)
the sale, conveyance or other disposition of accounts receivables
and related assets customarily transferred in an asset
securitization transaction involving accounts receivable to a
Receivables Subsidiary or by a Receivables Subsidiary, in
connection with a Qualified Receivables Transaction, in each
case, will not be deemed to be Asset Sales.
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"Capital Lease Obligation" means, at the time any determination
thereof is to be made, the amount of the liability in respect of
a capital lease that would at such time be required to be
capitalized on a balance sheet in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business
entity, any and all shares, interests, participation, rights or
other equivalents (however designated) of corporate stock, (iii)
in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited)
and (iv) any other interest or participation that confers on a
Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) securities issued or
unconditionally and fully guaranteed or insured by the full faith
and credit of the United States government or any agency or
instrumentality thereof having maturities of not more than one
year from the date of acquisition, (ii) obligations issued or
fully guaranteed by any state of the United States of America or
any political subdivision of any such state or any public
instrumentality thereof
maturing within one year from the date
of acquisition thereof and, at the time of acquisition, having
one of the two highest ratings obtainable from either Standard &
Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's"), (iii) certificates of deposit and eurodollar time
deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding
one year and overnight bank deposits, in each case with any
lender party to the New Credit Facility or with any domestic
commercial bank having capital and surplus in excess of $250.0
million, (iv) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in
clauses (i) and (iii), above entered into with any financial
institution meeting the qualifications specified in clause (iii)
above, (v) commercial paper having one of the two of the highest
ratings obtainable from either Moody's or S&P and in each case
maturing within one year after the date of acquisition and (vi)
investments in funds investing exclusively in investments of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of any of the
following: (i) the sale, lease, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in
one or a series of related transactions, of all or substantially
all of the assets of the Issuer and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3)
of the Exchange Act), other than the Principals and their Related
Parties (ii) the adoption of a plan relating to the liquidation
or dissolution of the Issuer, (iii) the consummation of any
transaction (including, without limitation, any merger or
consolidation) the result of which is that (A) any "person" (as
defined above), other than the Principal and their Related
Parties, becomes the "beneficial owner" (as such term is defined
in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly, of 40% or more of the Voting Stock of the Issuer
(measured by voting power rather than number of shares) and (B)
the Principals and their Related Parties beneficially own,
directly or indirectly, in the aggregate a lesser percentage of
the Voting Stock of the Issuer than such other "person", (iv) the
first day on which a majority of the members of the Board of
Directors of the Issuer are not Continuing Directors or (v) the
Issuer consolidates with, or merges with or into, any Person, or
any Person consolidates with, or merges with or into, the Issuer,
in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of the Issuer is converted into or
exchanged for cash, securities or other property, other than any
such transaction where (A) the Voting Stock of the Issuer
outstanding immediately prior to such transaction is converted
into or exchanged for Voting Stock (other than Disqualified
Stock) of the surviving or transferee Person and (B) the
"beneficial owners" (as defined above) of the Voting Stock of the
Issuer immediately prior to such transaction own, directly or
indirectly through one or more subsidiaries, not less than a
majority of the total Voting Stock of the surviving or transferee
corporation immediately after such transaction.
"Consolidated Cash Flow" means, with respect to any Person
for any period, the Consolidated Net Income of such Person for
such period plus (i) an amount equal to any extraordinary loss
plus any net loss realized in connection with an Asset Sale (to
the extent such losses were deducted in computing such
Consolidated Net Income of such Person and its Restricted
Subsidiaries), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such
period, to the extent that such provision for taxes was included
in computing such Consolidated Net Income, plus (iii)
consolidated interest expense of such Person and its Restricted
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Subsidiaries for such period, whether paid or accrued and whether
or not capitalized (including, without limitation, amortization
of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated
with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any)
pursuant to Hedging Obligations), to the extent that any such
expense was deducted in computing such Consolidated Net Income,
plus (iv) depreciation and amortization (including amortization
of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other
non-cash charges (excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash
charges in any future period or amortization of a prepaid cash
charge that was paid in a prior period) of such Person and its
Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, plus (v) any
interest expense on Indebtedness of another Person that is
Guaranteed by such Person or any of its Restricted Subsidiaries
or secured by a Lien on assets of such Person or any of its
Restricted Subsidiaries, in each case, to the extent that such
interest expense is deducted in computing such Consolidated Net
Income, minus (vi) non-cash items increasing such Consolidated
Net Income for such period, in each case, on a consolidated basis
and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes based on the income or profits
of, and the depreciation and amortization and other non-cash
charges of, a Restricted Subsidiary of a Person shall be added to
Consolidated Net Income to compute Consolidated Cash Flow only to
the extent (and in the same proportion) that the Net Income of
such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person.
"Consolidated Net Income" means, with respect to any Person
for any period, the aggregate of the Net Income of such Person
and its Subsidiaries for such period, on a consolidated basis,
determined in accordance with GAAP, provided that (i) the Net
Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of
dividends or distributions paid in cash to the referent Person or
a Restricted Subsidiary thereof, (ii) the Net Income of any
Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded,
and (iii) the cumulative effect of a change in accounting
principles shall be excluded.
"Continuing Directors" means, as of any date of
determination, any member of the Board of Directors of the Issuer
or any Holding Company of the Issuer who (i) was a member of such
Board of Directors on the date of the Indenture immediately after
consummation of the Recapitalization or (ii) was nominated for
election or elected to such Board of Directors with the approval
of a majority of the Continuing Directors who were either members
of such Board at the time of such nomination or election or are
successor Continuing Directors appointed by such Continuing
Directors (or their successors).
"Credit Facilities" means, with respect to the Issuer, one
or more debt facilities (including, without limitation, the New
Credit Facility) or commercial paper facilities with banks or
other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed
to borrow from such lenders against such receivables) or letters
of credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to
time. Indebtedness under Credit Facilities outstanding on the
Issue Date shall be deemed to have been incurred on such date in
reliance on the exceptions provided by clauses (i) and (ii) of
the definition of Permitted Debt.
"Default" means any event that is or with the passage of
time or the giving of notice or both would be an Event of
Default.
"Disqualified Stock" means any Capital Stock that, by its
terms (or by the terms of any security into which it is
convertible or for which it is exchangeable at the option of the
holder thereof), or upon the happening of any event, matures or
is mandatorily redeemable, pursuant to a sinking fund obligation
or otherwise, or redeemable at the option of the holder thereof,
in whole or in part, on or prior to the date on which the
Debentures mature;
97
provided, however, that a class of Capital Stock shall not be
Disqualified Stock hereunder solely as the result of any maturity
or redemption that is conditioned upon, and subject to,
compliance with the covenant described above under the caption
"--Certain Covenants--Restricted Payments;" and provided further,
that Capital Stock issued to any plan for the benefit of
employees of the Issuer or its subsidiaries or by any such plan
to such employees shall not constitute Disqualified Stock solely
because it may be required to be repurchased by the Issuer in
order to satisfy applicable statutory or regulatory obligations.
"Equity Interests" means Capital Stock and all warrants,
options or other rights to acquire Capital Stock (but excluding
any debt security that is convertible into, or exchangeable for,
Capital Stock).
"Equity Offering" means an offering of common stock (other
than Disqualified Stock) of the Issuer, pursuant to an effective
registration statement filed with the Commission in accordance
with the Securities Act, other than an offering pursuant to Form
S-8 (or any successor thereto).
"Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) the consolidated
interest expense of such Person and its Restricted Subsidiaries
for such period, whether paid or accrued (including, without
limitation, amortization of debt issuance costs and original
issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging
Obligations; provided, however, that in no event shall any
amortization of deferred financing costs incurred in connection
with the Recapitalization be included in Fixed Charges) and (ii)
the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period,
and (iii) any interest expense on Indebtedness of another Person
that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one
of its Restricted Subsidiaries (whether or not such Guarantee or
Lien is called upon) and (iv) the product of (a) (without
duplication) (1) all dividends paid or accrued in respect of
Disqualified Stock which are not included in the interest expense
of such Person for tax purposes for such period and (2) all cash
dividend payments on any series of preferred stock of such Person
or any of its Restricted Subsidiaries, other than dividend
payments on Equity Interests payable solely in Equity Interests
(other than Disqualified Stock) of the Issuer, times (b) a
fraction, the numerator of which is one and the denominator of
which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal,
in each case, on a consolidated basis and in accordance with
GAAP.
"Fixed Charge Coverage Ratio" means with respect to any
Person for any period, the ratio of the Consolidated Cash Flow of
such Person and its Restricted Subsidiaries for such period to
the Fixed Charges of such Person and its Restricted Subsidiaries
for such period. In the event that the Issuer or any of its
Restricted Subsidiaries incurs, assumes, Guarantees, repays or
redeems any Indebtedness (other than revolving credit borrowings)
or issues or redeems preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the
event for which the calculation of the Fixed Charge Coverage
Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to
such incurrence, assumption, Guarantee, repayment or redemption
of Indebtedness, or such issuance or redemption of preferred
stock, as if the same had occurred at the beginning of the
applicable four-quarter reference period. In addition, for
purposes of making the computation referred to above, (i)
acquisitions that have been made by the Issuer or any of its
Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be
deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow and Fixed Charges for
such reference period shall be calculated without giving effect
to clause (ii) of the proviso set forth in the definition of
Consolidated Net Income and shall reflect any pro forma expense
and cost reductions attributable to such acquisitions (to the
extent such expense and cost reduction would be permitted by the
Commission to be reflected in pro forma financial statements
included in a registration statement filed with the Commission),
and (ii) the Consolidated Cash Flow and Fixed Charges
attributable to discontinued operations, as determined in
accordance
98
with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded and Consolidated Cash Flow
shall reflect any pro forma expense or cost reductions relating
to such discontinuance or disposition (to the extent such expense
or cost reductions would be permitted by the Commission to be
reflected in pro forma financial statements included in a
registration statement filed with the Commission), and (iii) the
Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the referent Person or any of
its Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of
the accounting profession, which are in effect on the date of the
Indenture provided, however, that all reports and other financial
information provided by the Issuer to the holders, the Trustee
and/or the Commission shall be prepared in accordance with GAAP,
as in effect on the date of such report or other financial
information.
"Guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of
business), direct or indirect, in any manner (including, without
limitation, letters of credit and reimbursement agreements in
respect thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person,
the obligations of such Person under (i) interest rate swap
agreements, interest rate cap agreements and interest rate collar
agreements and (ii) other agreements or arrangements designed to
protect such Person against fluctuations in interest rates or the
value of foreign currencies.
"Indebtedness" means, with respect to any Person, any
indebtedness of such Person, whether or not contingent, in
respect of borrowed money or evidenced by bonds, notes,
debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the
balance deferred and unpaid of the purchase price of any property
or representing any Hedging Obligations, except any such balance
that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters
of credit and Hedging Obligations) would appear as a liability
upon a balance sheet of such Person prepared in accordance with
GAAP, as well as all indebtedness of others secured by a Lien on
any asset of such Person (whether or not such indebtedness is
assumed by such Person) and, to the extent not otherwise
included, the Guarantee by such Person of any indebtedness of any
other Person. The amount of any Indebtedness outstanding as of
any date shall be (i) the accreted value thereof, in the case of
any Indebtedness that does not require current payments of
interest, and (ii) the principal amount thereof, together with
any interest thereon that is more than 30 days past due, in the
case of any other Indebtedness.
"Investments" means, with respect to any Person, all
investments by such Person in other Persons (including
Affiliates) in the forms of direct or indirect loans (including
guarantees of Indebtedness or other obligations), advances or
capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with
all items that are or would be classified as investments on a
balance sheet prepared in accordance with GAAP. If the Issuer or
any Restricted Subsidiary of the Issuer sells or otherwise
disposes of any Equity Interests of any direct or indirect
Restricted Subsidiary of the Issuer such that, after giving
effect to any such sale or disposition, such Person is no longer
a Restricted Subsidiary of the Issuer, the Issuer shall be deemed
to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity
Interests of such Restricted Subsidiary not sold or disposed of
in an amount determined as provided in the final paragraph of the
covenant described above under the caption "--Certain
Covenants--Restricted Payments."
"Issue Date" means the date on which notes are first issued
and authenticated under the Indenture.
99
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in
respect of such asset, whether or not filed, recorded or
otherwise perfected under applicable law (including any
conditional sale or other title retention agreement, any lease in
the nature thereof, and any option or other agreement to sell or
give a security interest therein).
"Net Income" means, with respect to any Person, the net
income (loss) of such Person, determined in accordance with GAAP
and before any reduction in respect of preferred stock dividends,
excluding, however, (i) any gain (but not loss), together with
any related provision for taxes on such gain (but not loss),
realized in connection with (a) any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback
transactions) or (b) the extinguishment of any Indebtedness of
such Person or any of its Subsidiaries and (ii) any extraordinary
or nonrecurring gain (but not loss), together with any related
provision for taxes on such extraordinary or nonrecurring gain
(but not loss).
"Net Proceeds" means the aggregate cash proceeds received
by the Issuer or any of its Restricted Subsidiaries in respect of
any Asset Sale (including, without limitation, any cash received
upon the sale or other disposition of any non-cash consideration
received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or
payable as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of
Indebtedness (other than Indebtedness under the Credit
Facilities) secured by a Lien on the asset or assets that were
the subject of such Asset Sale and any reserve for adjustment in
respect of the sale price of such asset or assets established in
accordance with GAAP.
"New Credit Facility" means that certain credit facility,
dated as of October 17, 1997, by and among the J. Crew Corp.,
Holdings, Chase, DLJ and DLJ Capital Funding, as agents and
lenders, providing for up to $70.0 million of term borrowings and
$200.0 million of revolving credit borrowings, including any
related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as
amended, extended, modified, renewed, refunded, replaced or
refinanced from time to time.
"Non-Recourse Debt" means Indebtedness (i) as to which
neither the Issuer nor any of its Restricted Subsidiaries (a)
provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness), or
(b) is directly or indirectly liable (as a guarantor or
otherwise), and (ii) as to which the lenders have been notified
in writing that they will not have any recourse to the stock or
assets of the Issuer or any of its Restricted Subsidiaries,
including the stock of such Unrestricted Subsidiary.
"Obligations" means, with respect to any Indebtedness, any
principal, interest, penalties, fees, indemnifications,
reimbursements, damages and other liabilities payable under the
documentation governing any Indebtedness.
"Permitted Business" means the design, manufacture,
importing, exporting, distribution, marketing, licensing and
wholesale and retail sale of apparel, housewares, home
furnishings and related items, and businesses reasonably related
thereto.
"Permitted Investments" means (a) any Investment in the
Issuer or in a Restricted Subsidiary of the Issuer (other than a
Receivables Subsidiary) (b) any Investment in Cash and Cash
Equivalents; (c) any Investment by the Issuer or any Restricted
Subsidiary in a Person, if as a result of such Investment (i)
such Person becomes a Restricted Subsidiary of the Issuer (other
than a Receivables Subsidiary) or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the
Issuer or a Restricted Subsidiary of the Issuer (other than a
Receivables Subsidiary); (d) any Restricted Investment made as a
result of the receipt of non-cash consideration from an Asset
Sale that was made pursuant to and in compliance with the
covenant described above under the caption "--Repurchase at the
Option of Holders--Asset Sales" or any transaction not
constituting an Asset Sale by reason of the $1.0 million
threshhold contained in the definition
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thereof; (e) any acquisition of assets solely in exchange for the
issuance of Equity Interests (other than Disqualified Stock) of
the Issuer; (f) Hedging Obligations entered into in the ordinary
course of the Issuer's or its Restricted Subsidiaries' Businesses
and otherwise in compliance with the Indenture; (g) loans and
advances to employees and officers of the Issuer and its
Restricted Subsidiaries in the ordinary course of business for
bona fide business purposes not in excess of $5 million at any
one time outstanding; (h) additional Investments not to exceed
$25 million at any one time outstanding; (i) Investments in
securities of trade creditors or customers received in settlement
of obligations or pursuant to any plan of reorganization or
similar arrangement upon the bankruptcy or insolvency of such
trade creditors or customers; and (j) Investments by the Issuer
or a Restricted Subsidiary in a Receivables Subsidiary or any
Investment by a Receivables Subsidiary in any other Person, in
each case, in connection with a Qualified Receivables
Transaction, provided, that any Investment in any such Person is
in the form of a Purchase Money Note, any equity interest or
interests in accounts receivable and related assets generated by
the Issuer or a Restricted Subsidiary and transferred to any
Person in connection with a Qualified Receivables Transaction or
any such Person owning such accounts receivable.
"Permitted Liens" means (i) Liens existing as of the Issue
Date to the extent and in the manner such Liens are in effect on
the Issue Date; (ii) Liens on assets of Restricted Subsidiaries
securing Indebtedness of Restricted Subsidiaries permitted to be
incurred under the Indenture; (iii) Liens securing the
Debentures; (iv) Liens securing the Issuer's obligations under
the New Credit Facility; (v) Liens of the Issuer or a Wholly
Owned Restricted Subsidiary on assets of any Restricted
Subsidiary of the Issuer; (vi) Liens securing Permitted
Refinancing Indebtedness which is incurred to refinance any
Indebtedness which has been secured by a Lien permitted under the
Indenture and which has been incurred in accordance with the
provisions of the Indenture, provided, however, that such Liens
(A) are not materially less favorable to the holders and are not
materially more favorable to the lienholders with respect to such
Liens than the Liens in respect of the Indebtedness being
refinanced and (B) do not extend to or cover any property or
assets of the Issuer or any of its Restricted Subsidiaries not
securing the Indebtedness so refinanced; (vii) Liens for taxes,
assessments or governmental charges or claims either (A) not
delinquent or (B) contested in good faith by appropriate
proceedings and as to which the Issuer or its Restricted
Subsidiaries shall have set aside on its books such reserves as
may be required pursuant to GAAP; (viii) statutory Liens of
landlords and Liens of carriers, warehousemen, mechanics,
supplies, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet
delinquent for a period of more than 60 days or being contested
in good faith, if such reserve or other appropriate provision, if
any, as shall be required by GAAP shall have been made in respect
thereof; (ix) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation,
unemployment insurance an other types of social security or
similar obligations, including any Lien securing letters of
credit issued in the ordinary course of business consistent with
past practice in connection therewith, or to secure the
performance of tenders, statutory obligations, surety and appeal
bonds, bids, leases, government contracts, performance and
return-of-money bonds and other similar obligations (exclusive of
obligations for the payment of borrowed money); (x) judgment
Liens not giving rise to an Event of Default so long as such Lien
is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgement
shall not have been finally terminated or the period
within which such proceedings may be initiated shall not have
expired; (xi) easements, rights-of-way, zoning restrictions and
other similar charges or encumbrances in respect of real property
not interfering in any material respect with the ordinary conduct
of the business of the Issuer or any of its Restricted
Subsidiaries; (xii) any interest or title of a lessor under any
lease, whether or not characterized as capital or operating;
provided that such Liens do not extend to any property or assets
which is not leased property subject to such lease; (xiii) Liens
securing Capital Lease Obligations and purchase money
Indebtedness incurred in accordance with the covenant described
under "-- Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock;" provided, however, that (A) the
Indebtedness shall not exceed the cost of such property or assets
being acquired or constructed and shall not be secured by any
property or assets of the Issuer or any Restricted Subsidiary of
the Issuer other than the property or assets of the Issuer or any
Restricted Subsidiary of the Issuer other than the property and
assets being acquired or constructed and (B) the Lien securing
such Indebtedness shall be created within 90 days of such
acquisition or construction; (xiv) Liens upon specific items of
inventory or other goods and proceeds of any Person securing such
Person's obligations in respect of bankers' acceptances issued or
created for the account of such Person to facilitate the
purchase, shipment or storage of such inventory or other goods;
(xv) Liens securing reimbursement obligations
101
with respect to letters of credit which encumber documents and
other property relating to such letters of credit and products
and proceeds thereof; (xvi) Liens encumbering deposits made to
secure obligations arising from statutory, regulatory,
contractual, or warranty requirements of the Issuer or any of its
Restricted Subsidiaries, including rights of offset an set-off;
(xvii) Liens securing Hedging Obligations which Hedging
Obligations relate to Indebtedness that is otherwise permitted
under the Indenture; (xviii) Liens securing Acquired Debt
incurred in accordance with the covenant described under
"--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock;" provided that (A) such Liens secured such
Acquired Debt at the time of and prior to the incurrence of such
Acquired Debt by the Issuer or a Restricted Subsidiary of the
Issuer and were not granted in connection with, or in
anticipation of, the incurrence of such Acquired Debt by the
Issuer or a Restricted Subsidiary of the Issuer and (B) such
Liens do not extend to or cover any property or assets of the
Issuer or any of its Restricted Subsidiaries other than the
property or assets that secured the Acquired Debt prior to the
time such Indebtedness became Acquired Debt of the Issuer or a
Restricted Subsidiary of the Issuer and are not more favorable to
the lienholders than those securing the Acquired Debt prior to
the incurrence of such Acquired Debt by the Issuer or a
Restricted Subsidiary of the Issuer; (xix) leases or subleases
granted to others not interfering in any material respect with
the business of the Issuer or its Restricted Subsidiaries; (xx)
Liens arising out of consignment or similar arrangements for the
sale of goods entered into by the Issuer or any Restricted
Subsidiary in the ordinary course of business; and (xxi) Liens or
assets of a Receivables Subsidiary arising in connection with a
Qualified Receivables Transaction.
"Permitted Refinancing Indebtedness" means any Indebtedness
of the Issuer or any of its Subsidiaries issued in exchange for,
or the net proceeds of which are used to extend, refinance,
prepay, retire, renew, replace, defease or refund Indebtedness of
the Issuer or any of its Subsidiaries (other than such
Indebtedness described in clauses (i), (vi), (vii), (viii), (ix),
(x), (xi), (xiii) and (xiv) of the covenant described above under
the caption "-- Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock"); provided that: (i) the principal
amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the
Indebtedness so extended, refinanced, renewed, prepaid, retired,
replaced, defeased or refunded (plus the amount of reasonable
expenses incurred in connection therewith including premiums
paid, if any, to the holders thereof); (ii) such Permitted
Refinancing Indebtedness has a final maturity date at or later
than the final maturity date of, and has a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced,
renewed, prepaid, retired, replaced, defeased or refunded; (iii)
if the Indebtedness being extended, refinanced, renewed, prepaid,
retired, replaced, defeased or refunded is subordinated in right
of payment to the Debentures, such Permitted Refinancing
Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the
Notes on terms at least as favorable to the holders of Debentures
as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred
either by the Issuer or by the Restricted Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"Person" means an individual, partnership, corporation,
limited liability company, unincorporated organization, trust or
joint venture, or a governmental agency or political subdivision
thereof.
"Principals" means TPG Partners II, L.P., a Delaware
limited partnership.
"Purchase Money Note" means a promissory note evidencing a
line of credit, or evidencing other Indebtedness owed to the
Issuer or any Restricted Subsidiary in connection with a
Qualified Receivables Transaction, which note shall be repaid
from cash available to the maker of such note, other than amounts
required to be established as reserves pursuant to agreement,
amounts paid to investors in respect of interest, principal and
other amounts owing to such investors and amounts paid in
connection with the purchase of newly generated receivables.
"Qualified Proceeds" means any of the following or any
combination of the following: (i) cash, (ii) Cash Equivalents,
(iii) long-term assets that are used or useful in a Permitted
Business and (iv) the Capital Stock of any Person engaged
primarily in a Permitted Business if, in connection with the
receipt by the Issuer or any Restricted
102
Subsidiary of the Issuer of such Capital Stock, (a) such Person
becomes a Wholly-Owned Restricted Subsidiary and a Guarantor or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to,
or is liquidated into, the Issuer or any Wholly-Owned Restricted
Subsidiary of the Issuer that is a Guarantor.
"Qualified Receivables Transaction" means any transaction
or series of transactions that may be entered into by the Issuer
or any Restricted Subsidiary pursuant to which the Issuer or any
Restricted Subsidiary may sell, convey or otherwise transfer to
(a) a Receivables Subsidiary (in the case of a transfer by the
Issuer or any Restricted Subsidiary) and (b) any other Person (in
the case of a transfer by a Receivables Subsidiary), or may grant
a security interest in, any accounts receivable (whether now
existing or arising in the future) of the Issuer or any
Restricted Subsidiary and any asset related thereto including,
without limitation, all collateral securing such accounts
receivable, all contracts and all guarantees or other obligations
in respect of such accounts receivable, proceeds of such accounts
receivable and other assets which are customarily transferred, or
in respect of which security interests are customarily granted,
in connection with asset securitization transactions involving
accounts receivable.
"Receivables Subsidiary" means a Wholly Owned Restricted
Subsidiary which engages in no activities other than in
connection with the financing of accounts receivables and which
is designated by the Board of Directors of the Issuer (as
provided below) as a Receivables Subsidiary (a) no portion of the
Indebtedness or any other Obligations (contingent or otherwise)
of which (i) is guaranteed by the Issuer or any other Restricted
Subsidiary (excluding guarantees of obligations (other than the
principal of, and interest on, Indebtedness) pursuant to Standard
Securitization Undertakings), (ii) is recourse to or obligates
the Issuer or any other Restricted Subsidiary in any way other
than pursuant to Standard Securitization Undertakings or (iii)
subjects any property or asset of the Issuer or any other
Restricted Subsidiary, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to
Standard Securitization Undertakings, (b) with which neither the
Issuer nor any other Restricted Subsidiary has any material
contract, agreement, arrangement or understanding (except in
connection with a Purchase Money Note or Qualified Receivables
Transaction) other than on terms no less favorable to the Issuer
or such other Restricted Subsidiary than those that might be
obtained at the time from persons that are not Affiliates of the
Issuer, other than fees payable in the ordinary course of
business in connection with servicing accounts receivable, and
(c) to which neither the Issuer nor any other Restricted
Subsidiary has any obligation to maintain or preserve such
entity's financial condition or cause such entity to achieve
certain levels of operating results. Any such designation by the
Board of Directors of the Issuer shall be evidenced by the
Trustee by filing with the Trustee a certified copy of the
resolution of the Board of Directors of the Issuer giving effect
to such designation and an officers' certificate certifying, to
the best of such officer's knowledge and belief after consulting
with counsel, that such designation complied with the foregoing
conditions.
"Related Party" with respect to any Principal means (A) any
controlling stockholder or a majority of (or more) owned
Subsidiary of such Principal or, in the case of an individual,
any spouse or immediate family member of such Principal, or (B)
any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons
beneficially holding a majority (or more) controlling interest of
which consist of such Principal and/or such other Persons
referred to in the immediately preceding clause (A).
"Restricted Investment" means an Investment other than a
Permitted Investment.
"Restricted Subsidiary" means any Subsidiary of the Issuer
other than an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be
a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated pursuant to the Act, as such
Regulation is in effect on the date hereof of the Indenture.
"Standard Securitization Undertakings" means
representations, warranties, covenants and indemnities entered
into by the Issuer or any Restricted Subsidiary which are
reasonably customary in an accounts receivable transaction.
103
"Stated Maturity" means, with respect to any installment of
interest or principal on any series of Indebtedness, the date on
which such payment of interest or principal was scheduled to be
paid in the original documentation governing such Indebtedness,
and shall not include any contingent obligations to repay, redeem
or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any
corporation, association or other business entity of which more
than 50% of the total Voting Stock thereof is at the time owned
or controlled, directly or indirectly, by such Person or one or
more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of
which are such Person or of one or more Subsidiaries of such
Person (or any combination thereof).
"Unrestricted Subsidiary" means any Subsidiary of the
Issuer that is designated by the Board of Directors as an
Unrestricted Subsidiary pursuant to a Board Resolution; but only
to the extent that such Subsidiary: (a) is not party to any
agreement, contract, arrangement or understanding with the Issuer
or any Restricted Subsidiary unless the terms of any such
agreement, contract, arrangement or understanding are no less
favorable to the Issuer or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not
Affiliates of the Issuer; (b) is a Person with respect to which
neither the Issuer nor any of its Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional
Equity Interests or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any
specified levels of operating results; and (c) has not guaranteed
or otherwise directly or indirectly provided credit support for
any Indebtedness of the Issuer or any of its Restricted
Subsidiaries. Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing with a Trustee a
certified copy of the Board Resolution giving effect to such
designation and an officers' certificate certifying that such
designation complied with the foregoing conditions and was
permitted by the covenant described above under the caption
"--Certain Covenants--Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter
cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Indebtedness of such Subsidiary shall be deemed
to be incurred by a Restricted Subsidiary of the Issuer as of
such date. The Board of Directors of the Issuer may at any time
designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be
an incurrence of Indebtedness and issuance of preferred stock by
a Restricted Subsidiary of the Issuer of any outstanding
Indebtedness or outstanding issue of preferred stock of such
Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness and preferred stock is
permitted under the covenant described under the caption
"--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock," and (ii) no Default or Event of Default would
exist following such designation.
"Voting Stock" of any Person as of any date means the
Capital Stock of such Person that is at the time entitled to vote
in the election of the Board of Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to
any Indebtedness at any date, the number of years obtained by
dividing (i) the sum of the products obtained by multiplying (a)
the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof, by (b)
the number of years (calculated to the nearest one-twelfth) that
will elapse between such date and the making of such payment, by
(ii) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors'
qualifying shares) shall at the time be owned by such Person or
by one or more Wholly Owned Restricted Subsidiaries of such
Person or by such Person and one or more Wholly Owned
Subsidiaries of such Person.
104
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
Exchange of Old Debentures for New Debentures
The following summary describes the principal U.S. federal
income tax consequences of the exchange of the Old Debentures for
New Debentures (the "Exchange") that may be relevant to a
beneficial owner of Debentures that will hold the New Debentures
as capital assets and that is a citizen or resident of the United
States, or that is a corporation, partnership or other entity
created or organized in or under the laws of the United States or
any political subdivision thereof, an estate the income of which
is subject to U.S. federal income taxation regardless of its
source or a trust if (i) a U.S. court is able to exercise primary
supervision over the trust's administration and (ii) one or more
U.S. fiduciaries have the authority to control all of the trust's
substantial decisions.
The Exchange pursuant to the Exchange Offer will not be a
taxable event for U.S. federal income tax purposes. As a result,
a holder of an Old Debenture whose Old Debenture is accepted in
an Exchange Offer will not recognize gain on the Exchange. A
tendering holder's tax basis in the New Debentures will be the
same as such holder's tax basis in its Old Debentures. A
tendering holder's holding period for the New Debentures received
pursuant to the Exchange Offer will include its holding period
for the Old Debentures surrendered therefor.
ALL HOLDERS OF OLD DEBENTURES ARE ADVISED TO CONSULT THEIR
OWN TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES OF THE EXCHANGE OF OLD DEBENTURES FOR NEW DEBENTURES
AND OF THE OWNERSHIP AND DISPOSITION OF NEW DEBENTURES RECEIVED
IN THE EXCHANGE OFFER IN VIEW OF THEIR OWN PARTICULAR
CIRCUMSTANCES.
Tax Considerations for Non-United States Holders
The following is a general discussion of certain United
States federal income and estate tax consequences of the
acquisition, ownership and disposition of Debentures by an
initial beneficial owner of Debentures that, for United States
federal income tax purposes, is not a "United States person" (a
"Non-United States Holder"), but does not purport to be a
comprehensive description of all the tax considerations that may
be relevant to a decision to purchase the Debentures. This
discussion is based upon the United States federal tax law now in
effect, which is subject to change, possibly retroactively, which
could affect the continued validity of this summary. For purposes
of this discussion, a "United States person" means a holder of a
Debenture who is a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in
the United States or under the laws of the United States or of
any political subdivision thereof, an estate whose income is
includable in gross income for United States federal income tax
purposes regardless of its source or a trust, if a U.S. court is
able to exercise primary supervision over the administration of
the trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust. The tax treatment
of the holders of the Debentures may vary depending upon their
particular situations. U.S. persons acquiring the Debentures are
subject to different rules than those discussed below. In
addition, certain other holders (including insurance companies,
tax exempt organizations, financial institutions, subsequent
purchasers of Debentures and broker-dealers) may be subject to
special rules not discussed below. In addition, this summary does
not describe any tax consequences arising under the laws of any
state, locality or taxing jurisdiction other than the United
States federal government. In general, the summary assumes that a
Non-U.S. Holder acquires a Debenture at original issuance and
holds such Debenture as a capital asset and not as part of a
"hedge," "straddle," "conversion transaction," "synthetic
security" or other integrated investment. Prospective investors
are urged to consult their tax advisors regarding the United
States federal tax consequences of acquiring, holding and
disposing of Debentures, as well as any tax consequences that may
arise under the laws of any foreign, state, local or other taxing
jurisdiction.
105
Interest
Interest paid by the Issuer to a Non-United States Holder
will not be subject to United States federal income or
withholding tax if such interest is not effectively connected
with the conduct of a trade or business within the United States
by such Non-United States Holder and Non-United States Holder (i)
does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Issuer; (ii)
is not a controlled foreign corporation with respect to which the
Issuer is a "related person" within the meaning of the United
States Internal Revenue Code of 1986 (the "Code") and (iii)
certifies, under penalties of perjury, that such holder is not a
United States person and provides such holder's name and address.
Gain on Disposition
A Non-United States Holder will generally not be subject to
United States federal income tax on gain recognized on a sale,
redemption or other disposition of a Debenture unless (i) the
gain is effectively connected with the conduct of a trade or
business within the United States by the Non-United States Holder
or (ii) in the case of a Non-United States Holder who is a
nonresident alien individual and holds the Debenture as a capital
asset, such holder is present in the United States for 183 or
more days in the taxable year and certain other requirements are
met.
Federal Estate Taxes
If interest on the Debentures is exempt from withholding of
United States federal income tax under the rules described above,
the Debentures will not be included in the estate of a deceased
Non-United States Holder for United States federal estate tax
purposes.
Information Reporting and Backup Withholding
The Issuer will, where required, report to the holders of
Debentures and the Internal Revenue Service the amount of any
interest paid on the Debentures in each calendar year and the
amounts of tax withheld, if any, with respect to such payments.
In the case of payments of interest to Non-United States
Holders, temporary Treasury regulations provide that the 31%
backup withholding tax and certain information reporting will not
apply to such payments with respect to which either the requisite
certification, as described above, has been received or an
exemption has otherwise been established; provided that neither
the Issuer nor its payment agent has actual knowledge that the
holder is a United States person or that the conditions of any
other exemption are not in fact satisfied. Under temporary
Treasury regulations, these information reporting and backup
withholding requirements will apply, however, to the gross
proceeds paid to a Non-United States Holder on the disposition of
the Debentures by or through a United States office of a United
States or foreign broker, unless the holder certifies to the
broker under penalties of perjury as to its name, address and
status as a foreign person or the holder otherwise establishes an
exemption. Information reporting requirements, but not backup
withholding, will also apply to a payment of the proceeds of a
disposition of the Debentures by or through a foreign office of a
United States broker or foreign brokers with certain types of
relationships to the United States unless such broker has
documentary evidence in its file that the holder of the
Debentures is not a United States person, and such broker has no
actual knowledge to the contrary, or the holder establishes an
exception. Neither information reporting nor backup withholding
generally will apply to payment of the proceeds of a disposition
of the Debentures by or through a foreign office of a foreign
broker not subject to the preceding sentence.
On October 14, 1997, the Treasury Department published
final regulations regarding the withholding and information
reporting rules discussed above. In general, the final
regulations do not alter the substantive withholding and
information reporting requirements but unify current
certification procedures and forms and clarify reliance
standards. The final regulations will generally be effective for
payments made after December 31, 1998 subject to certain
transition rules.
106
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules may be refunded or
credited against the Non-United States Holder's United States
federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Debentures for its own
account pursuant to the Exchange Offer must acknowledge that it
will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New
Debentures. This Prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer in connection
with resales of New Debentures received in exchange for Old
Debentures where such Old Debentures were acquired as a result of
market-making activities or other trading activities. The Issuer
and the Guarantors have agreed that they will make this
Prospectus available to any Participating Broker- Dealer for a
period of time not to exceed one year after the date on which the
Exchange Offer is consummated for use in connection with any such
resale. In addition, until such date, all broker-dealers
effecting transactions in the New Debentures may be required to
deliver a prospectus.
Neither the Issuer nor the Guarantors will receive any
proceeds from any sale of New Debentures by broker-dealers. New
Debentures received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in
one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the
New Debentures or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related
to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the
purchasers of any such New Debentures. Any broker-dealer that
resells New Debentures that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer
that participates in a distribution of such New Debentures may be
deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New
Debentures and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
Starting on the Expiration Date, the Issuer and the
Guarantors will promptly send additional copies of this
Prospectus and any amendment or supplement to this Prospectus to
any broker-dealer that requests such documents in the Letter of
Transmittal. The Issuer has agreed to pay all expenses incident
to the Exchange Offer (including the expenses of one counsel for
the holders of the Old Debentures) other than commissions or
concessions of any brokers or dealers and will indemnify the
holders of the Old Debentures (including any broker-dealers)
against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the New Debentures have been passed upon
for the Issuer by Cleary, Gottlieb, Steen & Hamilton, New York,
New York. Certain legal matters relating to the New Debentures
have been passed upon for the Initial Purchasers by Latham &
Watkins, New York, New York.
107
EXPERTS
The consolidated financial statements of J. Crew Group, Inc.
and subsidiaries, as of January 31, 1997 and February 2, 1996,
and for the fiscal years ended February 3, 1995, February 2, 1996
and January 31, 1997, appearing in this Prospectus and the related
financial statement schedules included elsewhere in the Registration
Statement have been audited by Deloitte & Touche LLP, independent
auditors as stated in their reports appearing herein and elsewhere in
the Registration Statement, and have been so included in reliance
upon the reports of such firm given upon their authority
as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
At a meeting held on October 9, 1997, the Board of
Directors of the Company approved the engagement of KPMG Peat
Marwick LLP as its independent auditors for the fiscal year
ending January 1998 to replace the firm of Deloitte & Touche LLP,
effective October 9, 1997.
The reports of Deloitte & Touche LLP on the financial of J.
Crew Group, Inc. statements for the past two fiscal years did not
contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope, or
accounting principles.
In connection with the audits of the financial statements of
J. Crew Group, Inc. for each of the two fiscal years ended
January 31, 1997 and in the subsequent interim period, there were
no disagreements with Deloitte & Touche LLP on any matters of
accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of Deloitte & Touche LLP would have
caused Deloitte & Touche LLP to make reference to the matter in
their report.
The Issuer has requested Deloitte & Touche LLP to furnish it
a letter addressed to the Commission stating whether it agrees
with the above statements. A copy of that letter, dated February
6, 1998 is filed as Exhibit 16.1 to this Registration Statement.
108
J. CREW GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
INDEPENDENT AUDITORS' REPORT ................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS AS OF FEBRUARY 2, 1996 AND
JANUARY 31, 1997 AND FOR EACH OF THE THREE FISCAL YEARS IN THE
PERIOD ENDED JANUARY 31, 1997:
Consolidated Balance Sheets as of February 2, 1996
and Januar 31, 1997 .......................................... F-3
Consolidated Statements of Income for the Fiscal Years
Ended February 3, 1995, February 2, 1996 and
January 31, 1997 ............................................. F-4
Consolidated Statements of Cash Flows for the Fiscal
Years Ended February 3, 1995, February 2, 1996
and January 31, 1997 ......................................... F-5
Consolidated Statements of Stockholders' Equity for
the Fiscal Years Ended February 3, 1995,
February 2, 1996 and January 31, 1997 ........................ F-6
Notes to Consolidated Financial Statements ................... F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF
NOVEMBER 7, 1997 AND FOR THE FORTY WEEK PERIODS ENDED
NOVEMBER 8, 1996 AND NOVEMBER 7, 1997:
Condensed Consolidated Balance Sheets as of
January 31, 1997 and November 7, 1997 ........................ F-14
Condensed Consolidated Statements of Operations for
the Forty Week Periods Ended November 8, 1996
and November 7, 1997 ......................................... F-15
Condensed Consolidated Statements of Cash Flows for
the Forty Week Periods Ended November 8,
1996 and November 7, 1997 .................................... F-16
Notes to Unaudited Condensed Consolidated Financial
Statements ................................................... F-17
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
J. Crew Group, Inc.
We have audited the accompanying consolidated balance
sheets of J. Crew Group, Inc. and subsidiaries as of February 2,
1996 and January 31, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for
each of the three fiscal years in the period ended January 31,
1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position
of J. Crew Group, Inc. and subsidiaries as of February 2, 1996
and January 31, 1997, and the results of their operations and
their cash flows for each of the three fiscal years in the period
ended January 31, 1997 in conformity with generally accepted
accounting principles.
As discussed in Note 12 to the consolidated financial
statements, in 1995, the Company changed its method of accounting
for catalog costs to conform with the provisions of Statement of
Position 93-7, "Reporting on Advertising Costs," and changed its
method of accounting for merchandise inventories.
Deloitte & Touche LLP
New York, New York
March 31, 1997
F-2
J. CREW GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 2, January 31,
1996 1997
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 13,529 $ 7,132
Accounts receivable (net of allowance for
doubtful accounts of $4,824 and $4,357,
respectively)................................... 58,280 58,079
Merchandise inventories........................... 148,055 197,657
Prepaid expenses and other current assets.......... 54,311 58,318
Refundable income taxes............................ 4,900 --
------- -------
Total current assets.............................. 279,075 321,186
------- -------
PROPERTY AND EQUIPMENT--at cost:
Land 1,405 1,405
Buildings and improvements......................... 11,360 11,167
Furniture, fixtures and equipment.................. 38,703 43,537
Leasehold improvements............................. 60,218 75,378
Construction in progress........................... 2,128 4,063
------- -------
113,814 135,550
Less accumulated depreciation and amortization.... 41,005 49,121
------- -------
72,809 86,429
------- -------
OTHER ASSETS......................................... 3,365 3,206
------- -------
TOTAL ASSETS......................................... $355,249 $410,821
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................... $ 71,415 $103,279
Other current liabilities.......................... 59,243 62,938
Deferred income taxes.............................. 13,739 12,555
Federal and state income taxes payable............. 2,185 9,955
Current portion of long-term debt.................. 237 237
------- -------
Total current liabilities......................... 146,819 188,964
------- -------
LONG-TERM DEBT....................................... 87,092 86,855
------- -------
DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES..... 31,705 32,996
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
6% noncumulative preferred stock................... 1,579 1,579
8% cumulative preferred stock...................... 500 500
Common stock....................................... 263 263
Additional paid-in capital......................... 3,710 3,710
Retained earnings.................................. 89,477 101,850
Treasury stock, at cost............................ (5,896) (5,896)
------- -------
Total stockholders' equity........................ 89,633 102,006
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $355,249 $410,821
======== ========
See notes to consolidated financial statements.
F-3
J. CREW GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended
---------------------------------------
February 3, February 2, January 31,
1995 1996 1997
---- ----- ----
(In thousands)
Net sales....................... $724,756 $732,580 $795,931
Other revenues.................. 12,969 13,329 12,912
------- ------- -------
Revenues.................... 737,725 745,909 808,843
Cost of goods sold,
including buying and
occupancy costs................. 394,073 399,668 428,719
------- ------- -------
Gross profit................ 343,652 346,241 380,124
Selling, general and
administrative expenses......... 311,468 327,672 348,305
------- ------- -------
Income from operations...... 32,184 18,569 31,819
Interest expense--net........... 6,965 9,350 10,470
------- ------- -------
Income before
provision for
income taxes,
extraordinary item
and cumulative
effect of accounting
changes.................... 25,219 9,219 21,349
Provision for
income taxes.................... 10,300 3,700 8,800
------- ------- -------
Income before
extraordinary item
and cumulative
effect of
accounting changes.......... 14,919 5,519 12,549
Extraordinary item--loss
on early retirement
of debt (net of income
tax benefit of $1,200).......... -- (1,679) --
Cumulative effect
of accounting changes
(net of income
taxes of $1,800)................ -- 2,610 --
------- ------- -------
Net income.................. $14,919 $6,450 $12,549
======= ======= =======
See notes to consolidated financial statements.
F-4
J. CREW GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
---------------------------------------
February 3, February 2, January 31,
1995 1996 1997
---- ----- ----
(In thousands)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income.................. $14,919 $6,450 $12,549
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Depreciation and
amortization............. 8,110 10,272 10,541
Amortization of
deferred financing
costs.................... 249 1,186 401
Deferred incomes
taxes.................... (987) 10,131 (1,184)
Provision for losses
on accounts receivable... 7,956 7,277 6,945
Noncash compensation
expense.................. 1,901 1,142 --
Changes in operating assets
and liabilities:
Accounts receivable...... (7,041) (7,708) (6,744)
Merchandise
inventories.............. (35,409) (10,417) (49,602)
Prepaid expenses
and other current
assets................... (4,349) (12,444) (4,007)
Other assets............. (1,244) (2,031) (375)
Accounts payable......... 7,876 6,318 31,864
Other liabilities........ 2,504 (5,351) 3,439
Federal and state
income taxes payable..... 7,289 (12,674) 12,670
------- ------- -------
Net cash provided
by (used in)
operating activities... 1,774 (7,849) 16,497
------- ------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures........ (14,595) (18,466) (27,462)
Proceeds from
construction allowances..... 1,128 3,826 4,981
------- ------- -------
Net cash used in
investing activities... (13,467) (14,640) (22,481)
------- ------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Issuance of
long-term debt.............. 15,000 85,000 --
Repayment of
long-term debt.............. (7,237) (67,237) (237)
Dividends paid.............. (1,000) -- (176)
------- ------- -------
Net cash provided
by (used in)
financing
activities............ 6,763 17,763 (413)
------- ------- -------
DECREASE IN CASH
AND CASH EQUIVALENTS............ (4,930) (4,726) (6,397)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF YEAR..................... 23,185 18,255 13,529
------- ------- -------
CASH AND CASH
EQUIVALENTS, END
OF YEAR..................... $18,255 $13,529 $7,132
======= ======= =======
SUPPLEMENTARY CASH
FLOW INFORMATION:
Income taxes paid
(refunded).................. $4,063 $7,000 $(3,600)
======= ======= =======
Interest paid............... $6,520 $9,601 $9,880
======= ======= =======
See notes to consolidated financial statements.
F-5
J. CREW GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
6% 8% Total
Noncumulative Cumulative Additional Stock-
Preferred Stock Preferred Stock Common Stock Paid-in Retained Treasury holders'
Issued Issued Issued Capital Earnings Stock Equity
Shares Amount Shares Amount Shares Amount
(In thousands, except shares)
BALANCE,
JANUARY 28, 1994..........15,794 $1,579 5,000 $500 262,912 $263 $1,827 $69,108 $(7,056) $66,221
Net income.............. -- -- -- -- -- -- -- 14,919 -- 14,919
Issuance of 5,033
shares of common
stock from treasury
under stock bonus
agreement............... -- -- -- -- -- -- 1,166 -- 735 1,901
Dividends............... -- -- -- -- -- -- -- (1,000) -- (1,000)
------- ------ ----- ---- ------- ---- ------ -------- ------- --------
BALANCE,
FEBRUARY 3, 1995..........15,794 1,579 5,000 500 262,912 263 2,993 83,027 (6,321) 82,041
Net income.............. -- -- -- -- -- -- -- 6,450 -- 6,450
Issuance of 2,898
shares of common
stock from treasury
under stock bonus
agreement............... -- -- -- -- -- -- 717 -- 425 1,142
------- ------ ----- ---- ------- ---- ------ -------- ------- --------
BALANCE,
FEBRUARY 2, 1996..........15,794 1,579 5,000 500 262,912 263 3,710 89,477 (5,896) 89,633
Net income.............. -- -- -- -- -- -- -- 12,549 -- 12,549
Dividends............... -- -- -- -- -- -- -- (176) -- (176)
------- ------ ----- ---- ------- ---- ------ -------- ------- --------
BALANCE,
JANUARY 31, 1997..........15,794 $1,579 5,000 $500 262,912 $263 $3,710 $101,850 $(5,896) $102,006
======= ====== ===== ==== ======= ==== ====== ======== ======= ========
See notes to consolidated financial statements.
F-6
J. CREW GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED FEBRUARY 3, 1995, FEBRUARY 2, 1996 AND JANUARY 31, 1997
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation--The accompanying
consolidated financial statements include the accounts of J. Crew
Group, Inc. and its wholly-owned subsidiaries (the "Company").
All significant intercompany balances and transactions have been
eliminated in consolidation.
b. Business--The Company, which operates in one business
segment, designs, contracts for the manufacture of, markets and
distributes men's, women's and children's apparel, accessories
and home furnishings. The Company's products are marketed through
catalogs and retail stores primarily in the United States. The
Company is also party to a licensing agreement which grant the
licensees exclusive rights to use the Company's trademarks in
connection with the manufacture and sale of products in Japan.
The license agreement provides for payments based on specified
percentages of net sales.
The Company is subject to seasonal fluctuations in its
merchandise sales and results of operations. The Company expects
its sales and operating results generally to be lower in the
first, and second quarters than in the third and fourth quarters
(which include the back-to-school and holiday season) of each
fiscal year.
A significant amount of the Company's products are produced
in the Far East through arrangements with independent
contractors. As a result, the Company's operations could be
adversely affected by political instability resulting in the
disruption of trade from the countries in which these contractors
are located or by the imposition of additional duties or
regulations relating to imports or by the contractor's inability
to meet the Company's production requirements.
c. Fiscal Year--The Company's fiscal year ends on the
Friday closest to January 31. The fiscal years 1994, 1995 and
1996 ended on February 3, 1995 (53 weeks), February 2, 1996 (52
weeks) and January 31, 1997 (52 weeks).
d. Cash Equivalents--For purposes of the consolidated
statements of cash flows, the Company considers all highly liquid
debt instruments, with maturities of 90 days or less when
purchased, to be cash equivalents. Cash equivalents, which were
$9,700,000 and $1,968,000 at February 2, 1996 and January 31,
1997, are stated at cost, which approximates market value.
e. Accounts Receivable--Accounts receivable consists of
installment receivables resulting from the sale of merchandise of
Popular Club Plan, Inc. Concentrations of credit risk with
respect to trade accounts receivable are limited due to the large
number of customers comprising the accounts receivable base.
Finance charge income, which is included in other revenues, for
the fiscal years 1994, 1995 and 1996 was $9,700,000, $9,354,000
and $9,095,000.
f. Merchandise Inventories--Merchandise inventories are
stated at the lower of cost (determined on a first-in, first-out
basis) or market. The Company capitalizes certain design,
purchasing and warehousing costs into inventory. (See Note 12.)
g. Catalog Costs--Catalog costs, which primarily consist of
catalog production and mailing costs, are capitalized and
amortized over the expected future revenue stream, which is
principally from three to five months from the date catalogs are
mailed. The Company accounts for catalog costs in accordance with
the AICPA Statement of Position ("SOP") 93-7, "Reporting on Advertising
Costs." SOP 93-7 requires that the amortization of capitalized
advertising costs should be the amount computed using the ratio
that current period revenues for the
F-7
catalog cost pool bear to the total of current and estimated
future period revenues for that catalog cost pool. Deferred
catalog costs, included in prepaid expenses and other current
assets, as of February 2, 1996 and January 31, 1997 were
$40,743,000 and $41,191,000. Catalog costs, which are reflected
in selling and administrative expenses, for the fiscal years
1994, 1995 and 1996 were $112,979,000, $132,566,000, and
$135,633,000. (See Note 12).
h. Property and Equipment--Property and equipment are
stated at cost. Buildings and improvements are depreciated by the
straight-line method over the estimated useful lives of the
respective assets of twenty years. Furniture, fixtures and
equipment are depreciated by the straight-line method over the
estimated useful lives of the respective assets, ranging from
three to ten years. Leasehold improvements are amortized over the
shorter of their useful lives or related lease terms.
The Company receives construction allowances upon entering
into certain store leases. These construction allowances are
recorded as deferred credits and are amortized over the term of
the related lease.
i. Other Assets--Other assets consist primarily of debt
issuance costs which are amortized over the term of the related
debt agreements.
j. Income Taxes--The provision for income taxes includes
taxes currently payable and deferred taxes resulting from the tax
effects of temporary differences between the financial statement
and tax bases of assets and liabilities, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes."
k. Revenue Recognition--Revenue is recognized when
merchandise is shipped to customers. The Company accrues a sales
return allowance in accordance with its return policy for
estimated returns of merchandise subsequent to the balance sheet
date that relate to sales prior to the balance sheet date.
l. Store Preopening Costs--Costs associated with the opening
of new retail and outlet stores are expensed as incurred.
m. Financial Instruments--The following disclosure about
the fair value of financial instruments is made in accordance
with the requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments." The fair value of the Company's
long-term debt, including current portion, is estimated to be
approximately $93,500,000 and $89,100,000 at February 2, 1996 and
January 31, 1997, and is based on management's estimate of the
present value of future cash flows discounted at the current
market rate for financial instruments with similar
characteristics and maturity. The carrying amounts of long-term
debt are $87,329,000 and $87,092,000 at February 2, 1996 and
January 31, 1997. The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents,
accounts receivable and accounts payable approximate fair value
because of the short-term maturity of those financial
instruments. The estimates presented herein are not necessarily
indicative of amounts the Company could realize in a current
market exchange.
The Company from time to time enters into forward foreign
exchange contracts as hedges relating to identifiable currency
positions to reduce the risk from exchange rate fluctuations.
Gains and losses on these contracts are deferred and recognized
as adjustments to the bases of those assets. Such gains and
losses were not material.
At February 2, 1996, the Company had a forward foreign
exchange contract outstanding with J. P. Morgan to deliver 230
million yen on March 29, 1996. At January 31, 1997, the Company
had a forward foreign exchange contract outstanding with J. P.
Morgan to deliver 235 million yen on March 31, 1997. These
contracts are hedges relating to foreign licensing revenues. The
fair value of these contracts approximated carrying value due to
their short-term maturities.
F-8
The Company is exposed to credit losses in the event of
nonperformance by the counterparties to the forward foreign
exchange contract, but it does not expect any counterparties to
fail to meet their obligation given their high-credit rating.
n. Use of Estimates in the Preparation of Financial
Statements--The preparation of financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
o. Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of--In March 1995, the Financial Accounting
Standards Board (the "FASB") issued SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable, and is effective for fiscal years beginning
after December 15, 1995. The adoption of SFAS No. 121 did not
have an effect on the Company's financial position or results of
operations.
p. Reclassifications--Certain items in prior years in
specific captions of the consolidated financial statements and
notes to financial statements have been reclassed for comparative
purposes.
2. OTHER CURRENT LIABILITIES
Other current liabilities consist of:
February 2, January 31,
1996 1997
Customer liabilities....... $18,827,000 $22,968,000
Accrued catalog and
marketing costs............ 9,191,000 10,734,000
Taxes, other than
income taxes............... 7,235,000 9,093,000
Other...................... 23,990,000 20,143,000
---------- ----------
Total................... $59,243,000 $62,938,000
=========== ===========
3. LONG-TERM DEBT
February 2, January 31,
1996 1997
Senior Notes(a).............................. $85,000,000 $85,000,000
Industrial Development Revenue Bond,
bearing interest at 73.33% of
prime rate (8.25% at January 31,
1997); due in monthly principal
payments of $19,737 from January 1,
1987 through December 1, 2005(b)........ 2,329,000 2,092,000
----------- -----------
............................................. 87,329,000 87,092,000
----------- -----------
Less payments due within one year............ (237,000) (237,000)
Total.................................. $87,092,000 $86,855,000
=========== ===========
(a) In June 1995, the Company issued privately to institutional
investors $85,000,000 of 8.1% Senior Notes (the "Senior
Notes") due December 15, 2004. Interest on the Senior Notes
is payable semiannually on June 15 and December 15. The
Senior Notes are payable in annual installments of
$4,000,000 in December 1998 and $13,500,000 from December
1999 through December 2004. The proceeds of this private
placement were used to prepay $58,000,000 principal amount
of senior notes then outstanding and for general corporate
purposes.
F-9
The provisions of the note agreement and the credit
agreement (see Note 4) include (i) requirements that the
Company maintain minimum levels of tangible net worth, fixed
charges coverage, current ratio and funded debt as a
percentage of tangible net worth; and (ii) limitations on
liens, sale and leaseback transactions, funded debt, payment
of dividends and repurchases of capital stock, acquisitions,
investments and sales of assets, among others.
(b) Property with a net carrying value of approximately
$3,400,000 is encumbered as collateral under the Industrial
Development Revenue Bond as of January 31, 1997 and February
2, 1996.
The maturities of long-term debt required during the next five
fiscal years are:
Fiscal Year Amount
1997................ $ 237,000
1998................ 4,237,000
1999................ 13,737,000
2000................ 13,737,000
2001................ 13,737,000
4. LINES OF CREDIT
In March 1995, the Company entered into a $125 million
syndicated revolving credit agreement (the "Credit Agreement")
with a group of seven banks with J. P. Morgan as agent. The
Credit Agreement provides for commitments for direct borrowings
of up to $75 million and letters of credit of up to $125 million.
Borrowings under the Credit Agreement are unsecured and bear
interest, at the Company's option, at the base rate (defined as
the higher of the bank's prime rate or the Federal funds rate
plus .5%) or the London Interbank Offering Rate plus .5%. The
Credit Agreement expires on March 31, 1998.
During fiscal 1994, 1995 and 1996, maximum borrowings under
revolving credit agreements were $25,900,000, $49,000,000 and
$55,000,000, and average borrowings were $6,600,000, $25,500,000
and $31,200,000. There were no borrowings outstanding under the
Credit Agreement at February 2, 1996 or January 31, 1997.
Outstanding letters of credit issued to facilitate
international merchandise purchases at February 2, 1996 and
January 31, 1997 amounted to $25,850,000 and $37,800,000.
5. STOCKHOLDERS' EQUITY
The Company has authorized 1,000,000 shares of common
stock, $1 par value; 20,000 shares of 6% noncumulative preferred
stock, $100 par value; and 10,000 shares of 8% cumulative
preferred stock, $100 par value. The common and preferred stock
have the right to vote, with each share entitled to one vote.
The holders of the 8% cumulative preferred stock shall be
entitled to receive cash dividends when, as and if declared by
the Board of Directors, at the rate of 8% per annum on its par
value in priority to the payment of any dividends for other
classes of stock during any year. Such dividends shall be
cumulative from the date of issue, so that if applicable
dividends for any past dividend period shall not have been paid
thereon or declared and a sum sufficient for payment not set
apart, the deficiency shall be fully paid or set apart, without
interest, before any dividend shall be paid or set apart for any
other class of stock.
The Company has agreements with its stockholders requiring
the stockholders to offer preferred or common shares to the
Company at prices computed in accordance with the agreements
before disposing of these shares to others. The Company may, at
its option, redeem shares of preferred stock at a price equal to
the par value of the preferred stock.
F-10
At January 31, 1997, the Company had 34,925 shares of
common stock, 6,455 shares of 6% noncumulative preferred stock
and 2,495 shares of 8% cumulative preferred stock held in
treasury.
6. COMMITMENTS AND CONTINGENCIES
a. Operating Leases--As of January 31, 1997, the Company
was obligated under various long-term operating leases for retail
and outlet stores, warehouses and office space and equipment
requiring minimum annual rentals. These operating leases expire
on varying dates to 2012. At January 31, 1997 aggregate minimum
rentals in future periods are as follows:
Fiscal Year Amount
----------- -------
1997.............. $27,949,000
1998.............. 28,766,000
1999.............. 26,591,000
2000.............. 24,000,000
2001.............. 22,003,000
Thereafter........ 116,438,000
Certain of these leases include renewal options and provide
for contingent rentals based upon sales and require the lessee to
pay taxes, insurance and other occupancy costs.
Rent expense for fiscal 1994, 1995 and 1996 was
$25,902,000, $27,366,000 and $29,852,000, including percentage
rent of $2,470,000, $2,197,000 and $2,850,000.
b. Employment Agreements--The Company is party to
employment agreements with certain executives which provide for
compensation and certain other benefits. The agreements also
provide for severance payments under certain circumstances.
In connection with an employment agreement, the Company was
obligated to pay to an employee a bonus based upon a
predetermined formula, payable in shares of common stock at fair
value and cash. In connection with the agreement, the Company
issued 5,033 and 2,898 treasury shares during fiscal 1994 and
1995.
c. Litigation--The Company is involved in various legal
proceedings, both as plaintiff and as defendant, which are
routine litigations incidental to the conduct of its business.
The Company believes that the ultimate resolution of these
matters will not have a material effect on its financial position
or results of operations.
7. EMPLOYEE BENEFIT PLAN
The Company has a thrift/savings plan pursuant to Section
401 of the Internal Revenue Code whereby all eligible employees
may contribute up to 15% of their annual base salaries subject to
certain limitations. The Company's contribution is based on a
percentage formula set forth in the plan agreement. Company
contributions to the thrift/savings plan for fiscal 1994, 1995
and 1996 were $1,325,000, $1,478,000 and $1,680,000.
8. LICENSE AGREEMENTS
The Company has a licensing agreement through January 1998
with Itochu, a Japanese trading company. The agreement permits
Itochu to distribute J. Crew merchandise in Japan. The Company
earns royalty payments under the agreement based on the sales of
its merchandise. Royalty income, which is included in other
revenues, for fiscal 1994, 1995 and 1996 was $3,269,000,
$3,975,000 and $3,817,000.
F-11
9. INTEREST EXPENSE--NET
Interest expense, net consists of the following:
Fiscal Fiscal Fiscal
1994 1995 1996
------- ------- ----
Interest expense........ $7,145,000 $9,548,000 $10,613,000
Interest income......... (180,000) (198,000) (143,000)
---------- ---------- -----------
Interest expense--net... $6,965,000 $9,350,000 $10,470,000
========== ========== ===========
10. INCOME TAXES
The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes". This statement
requires the use of the liability method of accounting for income
taxes. Under the liability method, deferred taxes are determined
based on the difference between the financial reporting and tax
bases of assets and liabilities using enacted tax rates in effect
in the years in which the differences are expected to reverse.
Deferred tax expense represents the change in the deferred tax
asset/liability balance.
The provision for income taxes consists of:
Fiscal Fiscal Fiscal
1994 1995 1996
------- ------- ----
Current:
Federal ................... $9,100,000 $(5,131,0000) $9,384,000
State and local ........... 2,187,000 500,000 600,000
----------- ---------- ----------
11,287,000 (4,631,000) 9,984,000
Deferred ..................... (987,000) 8,331,000 (1,184,000)
----------- ---------- ----------
Income taxes before tax
effect of extraordinary
item and cumulative effect
of accounting changes ..... 10,300,000 3,700,000 8,800,000
Extraordinary item--current -- (1,200,000) --
Cumulative effect of
accounting changes--deferred . -- 1,800,000 --
----------- ---------- ----------
Total provision for income
taxes ........................ $10,300,000 $4,300,000 $8,800,000
=========== ========== ==========
The difference between the provision for income taxes based
on the U.S. Federal statutory rate and the Company's effective
rate is due primarily to state income taxes.
Fiscal Fiscal Fiscal
1994 1995 1996
------ ------ ----
Federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal benefit 5.8 5.1 6.2
---- ---- ----
Effective tax rate 40.8% 40.1% 41.2%
==== ==== ====
The tax effect of temporary differences which give rise to
deferred tax assets and liabilities are:
February 2 January 31,
1996 1997
Deferred tax assets:
Allowance for doubtful accounts... $1,979,000 $1,769,000
State net operating loss
carryforwards .................... 1,100,000 1,300,000
Other 1,177,000 3,155,000
--------- ---------
4,256,000 6,224,000
Deferred tax liabilities:
Prepaid catalog costs
and other prepaid costs (17,995,000) (18,779,000)
----------- -----------
Net deferred income taxes $(13,739,000) $(12,555,000)
============ ============
F-12
11. EXTRAORDINARY ITEM
In June 1995, the Company prepaid $58 million principal
amount of senior notes and recorded an extraordinary loss of
$1,679,000 (net of an income tax benefit of $1,200,000),
consisting of the write-off of deferred financing costs and
redemption premiums related to the early retirement of debt.
12. ACCOUNTING CHANGES
Effective February 4, 1995, the Company changed its method
of accounting for catalog costs to conform with the provisions of
the SOP 93-7. SOP 93-7 requires that the amortization of
capitalized advertising costs should be the amount computed using
the ratio that current period revenues for the catalog cost pool
bear to the total of current and estimated future period revenues
for that catalog cost pool. Prior to fiscal 1995, such costs were
amortized on a straight-line basis over the estimated productive
life of the catalog. The cumulative effect of applying this
change in accounting on prior periods was a decrease in net
income of $1,600,000 (net of an income tax benefit of
$1,000,000).
Effective February 4, 1995, the Company modified its
inventory accounting practices to include the capitalization of
certain design, purchasing and warehousing costs. Prior to this
change, these costs were charged to expense in the period
incurred rather than in the period in which the inventories were
sold. The Company believes this change is preferable because it
provides a better matching of revenues and costs and improves the
comparability of operating results and financial position with
those of other companies. The cumulative effect of applying this
change in accounting on prior periods was an increase in net
income of $4,210,000 (net of income taxes of $2,800,000).
The effect of these changes on fiscal 1995's results,
excluding the cumulative effect, was to increase net income by
$1,000,000. The pro forma effect of these changes on net income
in fiscal 1994 would not have been material.
F-13
J. CREW GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, November 7, 1997
1997 (unaudited)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents............. $7,132 $12,992
Accounts receivable (net of allowance
for doubtful accounts of $4,357 and
$4,670, respectively) 58,079 17,493
Merchandise inventories............... 197,657 260,506
Prepaid expenses and other current
assets ............................ 58,318 69,467
Refundable income taxes............... -- 4,481
-------- --------
Total current assets................. 321,186 364,939
Property and equipment--at cost: 135,550 171,976
Less accumulated depreciation
and amortization...................... (49,121) (61,485)
-------- --------
86,429 110,491
-------- --------
Other assets............................ 3,206 17,961
-------- --------
Total assets............................ $410,821 $493,391
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable--bank.................... $ -- $47,000
Accounts payable...................... 103,279 115,648
Other current liabilities............. 62,938 50,403
Federal and state income taxes payable 9,955 --
Deferred income taxes................. 12,555 12,555
Current portion of long-term debt..... 237
-------- --------
Total current liabilities............ 188,964 225,606
Long-term debt.......................... 86,855 295,257
Deferred credits and other long-term
liabilities............................. 32,996 42,240
-------- --------
Total liabilities.................... 308,815 563,103
Redeemable preferred stock ............. -- 125,000
Stockholders' equity (deficit).......... 102,006 (194,712)
-------- --------
Total liabilities, redeemable
preferred stock and stockholders'
equity (deficit)........................ $410,821 $493,391
======== ========
See notes to unaudited condensed consolidated financial
statements.
F-14
J. CREW GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Forty Week Period Ended
November 8, November 7,
1996 1997
(Unaudited) (Unaudited)
(In thousands)
Net sales............................ $528,351 $556,993
Other revenues....................... 10,430 9,603
-------- -------
Revenues........................... 538,781 566,596
Cost of goods sold, including
buying and occupancy costs 292,056 310,865
Gross profit...................... 246,725 255,731
Selling, general and administrative
expenses............................ 240,197 253,159
-------- -------
Income from operations............ 6,258 2,572
Interest expense--net................ 7,551 11,869
Expenses incurred in connection
with recapitalization -- 19,851
-------- -------
Loss before income taxes and
extraordinary items (1,023) (29,148)
Income tax benefit................... 450 5,050
-------- -------
Net loss before extraordinary item $ (573) $(24,098)
Extraordinary item--loss on
refinancing of debt ($7,627 net of
income tax benefit of $3,127)...... -- (4,500)
-------- -------
Net loss........................... $ (573) $(28,598)
======== ========
See notes to unaudited condensed consolidated financial
statements.
F-15
J. CREW GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Forty Week Period Ended
November 8, November 7,
1996 1997
(Unaudited) (Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................. $(573) $(28,598)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and amortization ............ 7,625 10,191
Amortization of deferred financing
costs..................................... 311 2,268
Provision for losses on accounts
receivable .............................. 4,921 4,946
Changes in assets and liabilities
providing/(using) cash:
Accounts receivable ...................... (3,204) 35,640
Merchandise inventories .................. (79,203) (62,849)
Prepaid expenses and other current
assets ................................... (18,927) (11,149)
Other assets ............................. (590) (464)
Accounts payable ......................... 55,853 12,369
Other liabilities ........................ (11,134) (9,018)
Income taxes payable ..................... 2,155 (14,436)
------- -------
Net cash used in operating activities .... (42,766) (61,100)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ..................... (19,826) (37,010)
Proceeds from construction allowances .... 4,879 8,745
------- -------
Net cash used in investing activities .... (14,947) (28,265)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit
agreement ................................ 55,000 47,000
Issuance of long-term debt ............... -- 295,257
Costs incurred in connection with
issuance of debt ......................... -- (16,820)
Repayment of long-term debt .............. (178) (87,092)
Issuance of preferred stock............... -- 125,000
Issuance of common stock.................. -- 63,891
Repurchase of capital stock............... -- (316,688)
Preferred stock dividends................. -- (1,005)
Costs incurred in connection with
the repurchase of capital stock........... -- (14,318)
------- -------
Net cash provided by financing
activities ............................... 54,822 95,225
------- -------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS .............................. (2,891) 5,860
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ..................................... 13,529 7,132
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...... $10,638 $12,992
======= =======
See notes to unaudited condensed consolidated financial
statements.
F-16
J. CREW GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FORTY WEEK PERIODS ENDED NOVEMBER 8, 1996 AND NOVEMBER 7, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements include the accounts of J. Crew Group, Inc.
("Holdings") and its wholly-owned subsidiaries (the "Company").
All significant intercompany balances and transactions have been
eliminated in consolidation.
Prior to the Recapitalization, Holdings owned all of the
stock, directly or indirectly, of its various operating
subsidiaries. In connection with the Recapitalization, Holdings
formed J. Crew Operating Corp. and immediately prior to the
consummation of the Recapitalization, Holdings transferred
substantially all of its assets and liabilities to J. Crew
Operating Corp.
The consolidated balance sheet as of November 7, 1997 and
the consolidated statements of operations and cash flows for the
forty week periods ended November 8, 1996 and November 7, 1997
have been prepared by the Company and have not been audited. In
the opinion of management, all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation
of the financial position of the Company, the results of its
operations and cash flows have been made.
Certain information and footnote disclosure normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the
Consolidated Financial Statements of Holdings for the fiscal year
ended January 31, 1997.
The results of operations for the forty week period ended
November 7, 1997 are not necessarily indicative of the operating
results for the full fiscal year.
2. RECAPITALIZATION TRANSACTION
Holdings, its shareholders (the "Shareholders") and TPG
Partners II, L.P. ("TPG") are parties to a Recapitalization
Agreement dated July 22, 1997 as amended as of October 17, 1997
(the "Recapitalization Agreement") which provided for the
recapitalization of Holdings (the "Recapitalization"). Pursuant
to the terms of the Recapitalization Agreement, Holdings
purchased from the Shareholders for an aggregate purchase price
of approximately $316,688,000 all of the outstanding shares of
Holdings' capital stock, other than a certain number of shares of
Holdings' common stock held by existing shareholders which
represented 14.8% of the outstanding shares of Holdings' common
stock immediately following consummation of the Recapitalization.
The purchase of such outstanding shares of capital stock was
financed by, among other things, (a) issuing to TPG, its
affiliates and other investors shares of common stock of Holdings
for approximately $63,891,000 and shares of preferred stock of
Holdings for $125,000,000 and (b) consummating the transactions
described below in Notes 4 and 5.
The Recapitalization Agreement was accounted for as a
recapitalization transaction for accounting purposes.
F-17
The following costs incurred in connection with the
Recapitalization have been expensed in the forty week period
ended November 7, 1997:
Management bonuses $ 12,084,000
TPG financial
advisory fee 5,550,000
Legal and accounting fees 1,028,000
Consulting Fee 1,000,000
Other 189,000
Total $ 19,851,000
=============
3. LINES OF CREDIT
On October 17, 1997, in connection with the
Recapitalization (as defined below), the Company entered into a
syndicated revolving credit agreement of up to $200.0 million
(the "Revolving Credit Agreement") with a group of banks with The
Chase Manhattan Bank, as administrative and collateral agent (the
"Administrative Agent"), and Donaldson, Lufkin & Jenrette
Securities Corporation, as syndication agent. The Bank Facilities
may be utilized to fund the working capital requirements of the
Company's subsidiaries, including issuance of stand-by and trade
letters of credit and bankers' acceptances. Borrowings under the
Bank Facilities are secured by a perfected first priority
security interest in all assets (except for the accounts
receivable of Popular Club Plan, Inc.) of the Company's direct
and indirect domestic, and to the extent no adverse tax
consequences would result, foreign subsidiaries and bear
interest, at the Company's option at a base rate equal to the
Administrative Agent's Eurodollar rate plus an applicable margin
or an alternate base rate equal to the highest of the
Administrative Agent's prime rate, a certificate of deposit rate
plus 1% or the Federal Funds effective rate plus one-half of 1%
plus, in each case, an applicable margin. The Revolving Credit
Agreement matures on October 17, 2003. The Revolving Credit
Agreement replaced the Company's previous revolving credit
agreement which provided for commitments in an aggregate amount
of up to $200.0 million, of which up to $120.0 million was
available for direct borrowings.
During the forty week periods ended November 8, 1996 and
November 7, 1997, maximum borrowings under the revolving credit
agreements were $55,000,000 and $104,000,000, and average
borrowings were $34,500,000 and $66,700,000. Borrowings
outstanding under the Revolving Credit Agreement were $47,000,000
at November 7, 1997.
Outstanding letters of credit issued to facilitate
international merchandise purchases at November 7, 1997 amounted
to $37,400,000 million.
4. LONG TERM DEBT
The $70.0 million term loan is subject to the same interest
rates and security terms as the Revolving Credit Agreement. The
term loan is repayable in quarterly installments of $4.0 million
from February 2001 through November 2001 and $6.75 million from
February 2002 through November 2003. See Note 3, "Lines of
Credit."
F-18
The $150.0 million Senior Subordinated Notes are unsecured
general obligations of J. Crew Operating Corp. and are
subordinated in right of payment to all senior debt. Interest on
the notes will accrue at the rate of 10-3/8% per annum and will
be payable semi-annually in arrears on April 15 and October 15.
The notes will mature on October 15, 2007 and may be redeemed at
the option of the issuer subsequent to October 15, 2002 at prices
ranging from 105.188% in 2002 to 100% in 2005 and thereafter.
The Senior Discount Debentures were issued in aggregate
principal amount of $142.0 million at maturity and will mature on
October 15, 2008. These debentures are senior unsecured
obligations of Holdings. Cash interest will not accrue prior to
October 15, 2002 and the principal amount of the debentures will
accrete at a rate of 13- 1/8% per annum and will be payable in
arrears on April 15 and October 15 of each year. The Senior
Discount Debentures may be redeemed at the option of Holdings on
or after October 15, 2002 at prices ranging from 106.563% to 100%
in 2005 and thereafter.
5. SECURITIZATION
In connection with the Recapitalization, a facility was
entered into to securitize certain consumer loan installment
receivables of Popular Club Plan, Inc. on a revolving basis. This
securitization involved the transfer of receivables through a
special purpose bankruptcy remote subsidiary to a trust in
exchange for cash and subordinated certificates representing
undivided interests in the pool of receivables and the subsequent
sale by the trust of certificates of beneficial interest to third
party investors. The Company has no obligation to reimburse the
trust or the purchasers of beneficial interests for credit
losses. This transaction has been accounted for as a sale in
accordance with the provisions of Statement of Financial
Accounting Standards No. 125 and accordingly the accounts
receivable and the corresponding obligations are not reflected in
the consolidated financial statements as of November 7, 1997. At
November 7, 1997, $42.0 million of proceeds were received from
the sale of accounts receivable and a loss on sale of $400,000
has been recognized in the statement of operations.
6. CAPITAL STOCK
Holdings' restated certificate of incorporation authorizes
Holdings to issue capital stock consisting of:
(a) 100,000,000 shares of common stock; par
value $.01 per share;
(b) 1,000,000 shares of Series A cumulative
preferred stock; par value $.01 per share (the
"Series A Preferred Stock"); and
(c) 1,000,000 shares of Series B cumulative
preferred stock; par value $.01 per share (the
"Series B Preferred Stock" and together with
the Series A Preferred Stock," the "Preferred
Stock").
In connection with the Recapitalization, Holdings issued
55,000 shares of common stock, 92,500 shares of Series A
Preferred Stock and 32,500 shares of Series B Preferred Stock.
The Preferred Stock has an initial liquidation value of
$1,000 per share. The Preferred Stock accumulates dividends at
the rate of 14.5% per annum (payable quarterly) for periods ending
on or prior to October 17, 2009. Dividends compound to the extent
not paid in cash. On October 17, 2009, Holdings is required to
redeem the Series B Preferred Stock and to pay all accumulated
but unpaid dividends on the Series A Preferred Stock. Thereafter,
the Series A Preferred Stock will accumulate dividends at the
rate of 16.5% per annum. Subject to restrictions imposed by
certain indebtedness of the Company, Holdings may redeem shares
of the Preferred Stock at any time at redemption prices ranging
from 103% of liquidation value plus accumulated and unpaid
dividends at October 17, 1997 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.
F-19
7. STOCKHOLDERS' EQUITY (DEFICIT)
Stockholders' equity (deficit) decreased by $296,718,000 from
$102,006,000 at January 31, 1997 to $(194,712,000) at November 7,
1997. A reconciliation of this decrease is as follows:
Balance as of January 31, 1997 $ 102,006,000
Net loss for the forty
weeks ended November 7, 1997 (28,598,000)
Proceeds from the issuance
of common stock 63,891,000
Preferred stock dividends (1,005,000)
Costs incurred in connection with
the repurchase of capital stock (14,318,000)
Repurchase of capital stock (316,688,000)
--------------
Balance as of November 7, 1997 $(194,712,000)
==============
* * * * * *
F-20
=================================================================
No person has been authorized to give any information or to make
any representations other than those contained or incorporated by
reference in this Prospectus and the accompanying Letter of
Transmittal and, if given or made, such information or
representations must not be relied upon as having been authorized
by the Company or the Exchange Agent. Neither this Prospectus nor
the accompanying Letter of Transmittal, or both together,
constitute an offer to sell or the solicitation of an offer to
buy securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation. Neither the delivery
of this Prospectus, nor the accompanying Letter of Transmittal,
or both together, nor any sale made hereunder shall, under any
circumstances, create an implication that there has been no
change in the affairs of the Company since the date hereof or
thereof or that the information contained herein is correct at
any time subsequent to the date hereof or thereof.
Until , 1998 (90 days after the date of this Prospectus), all
dealers effecting transactions in the New Debentures, whether or
not participating in this distribution, may be required to
deliver a Prospectus. This is in addition to the obligation of
the dealers to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
Page
Available Information .................................... i
Prospectus Summary ....................................... 1
Risk Factors ............................................. 16
The Recapitalization ..................................... 23
Texas Pacific Group ...................................... 25
Use of Proceeds .......................................... 25
Capitalization ........................................... 25
Unaudited Pro Forma Consolidated Financial Data .......... 26
Selected Consolidated Financial Data ..................... 31
Management's Discussion and Analysis of
Financial Condition and Results of Operations ....... 33
Business ................................................. 45
Management ............................................... 59
Certain Relationships and Related Transactions ........... 64
Capital Stock of Holdings and Operating Corp ............. 64
Description of Operating Corp Indebtedness ............... 66
The Exchange Offer ....................................... 68
Description of the New Debentures ........................ 76
Certain U.S. Federal Tax Considerations .................. 105
Plan of Distribution ..................................... 107
Legal Matters ............................................ 107
Experts .................................................. 108
Change in Accountants..................................... 108
onsolidated Financial Statements ......................... F-1
=================================================================
=================================================================
J. Crew Group, Inc.
Offer to Exchange
Series B 13-1/8% Senior Discount Debentures due 2008,
which have been registered under the
Securities Act of 1933, as amended,
for any and all outstanding
13-1/8% Senior Discount Debentures due 2008
PROSPECTUS
_________ __, 1998
=================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Issuer's Articles of Incorporation provide that a
person who is or was a director of the Issuer shall not have any
personal liability to the corporation or its shareholders for
damages for any breach of duty in such capacity, provided that
the foregoing shall not eliminate or limit liability where such
liability is imposed under the New York Business Corporation Law
(the "NYBCL"). The By-Laws of the Issuer provide that except to
the extent expressly prohibited by the NYBCL, the Issuer shall
indemnify each person made or threatened to be made a party to or
called as a witness in or asked to provide information in
connection with any pending or threatened action, proceeding,
hearing or investigation, whether civil or criminal, and whether
judicial, quasi-judicial, administrative, or legislative, and
whether or not for or in the right of the Issuer or any other
enterprise, by reason of the fact that such person or such
persons testator or intestate is or was a director or officer of
the Issuer, or is or was a director or officer of the Issuer who
also serves or served at the request of the Issuer any other
corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise in any capacity, against judgments,
fines, penalties, amounts paid in settlement and reasonable
expenses, including attorneys' fees, incurred in connection with
such action or proceeding, or any appeal therein, provided that
no such indemnification shall be made if a judgment or other
final adjudication adverse to such person establishes that his or
her acts were committed in bad faith or were the result of active
and deliberate dishonesty and were material to the cause of
action so adjudicated, or that he or she personally gained in
fact a financial profit or other advantage to which he or she was
not legally entitled, and provided further that no such
indemnification shall be required with respect to any settlement
or other nonadjudicated disposition of any threatened or pending
action or proceeding unless the Issuer has given its prior
consent to such settlement or other disposition.
In case any provision in the By-Laws of the Issuer relating
to indemnification shall be determined at any time to be
unenforceable in any respect, the affected provision shall be
given the fullest possible enforcement in the circumstances, it
being the intention of the Issuer to afford indemnification and
advancement of expenses to its directors and officers, acting in
such capacities or in the other capacities mentioned herein, to
the fullest extent permitted by law. Section 722 of the NYBCL
provides as follows:
Authorization for indemnification of directors and officers
(a) A corporation may indemnify any person made, or
threatened to be made, a party to an action or proceeding
(other than one by or in the right of the corporation to
procure a judgment in its favor), whether civil or
criminal, including an action by or in the right of any
other corporation of any type or kind, domestic or foreign,
or any partnership, joint venture, trust, employee benefit
plan or other enterprise, which any director or officer of
the corporation served in any capacity at the request of the
corporation, by reason of the fact that he, his testator or
intestate, was a director or officer of the corporation, or
served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any
capacity, against judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys'
fees actually and necessarily incurred as a result of such
action or proceeding, or any appeal therein, if such
director or officer acted, in good faith, for a purpose
which he resonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint
venture, trust, employee benefit plan or other enterprise,
not opposed to, the best interests of the corporation and,
in criminal actions or proceedings, in addition, had no
reasonable cause to believe that his conduct was unlawful.
(b) The termination of any such civil or criminal
action or proceedings by judgment, settlement, conviction
or upon a plea of nolo contendere, or its equivalent, shall
not in itself create a presumption that any such director
or officer did not act, in good faith, for a purpose which
he reasonably believed to be in, or, in the case of service
for any other corporation or any partnership, joint
venture, trust,
II-1
employee benefit plan or other enterprise, not opposed to,
the best interests of the corporation or that he had
reasonable cause to believe that his conduct was unlawful.
(c) A corporation may indemnify any person made, or
threatened to be made, a party to an action by or in the
right of the corporation to procure a judgment in its favor
by reason of the fact that he, his testator or intestate,
is or was a director or officer of the corporation, or is
or was serving at the request of the corporation as a
director or officer of any other corporation of any type or
kind, domestic or foreign, of any partnership, joint
venture, trust, employee benefit plan or other enterprise,
against amounts paid in settlement and reasonable expenses,
including attorneys' fees, actually and necessarily
incurred by him in connection with the defense or
settlement of such actions, or in connection with an appeal
therein, if such director or officer acted, in good faith,
for a purpose which he reasonably believed to be in, or, in
the case of service for any other corporation or any
partnership, joint venture, trust, employee benefit plan or
other enterprise, not opposed to, the best interests of the
corporation, except that no indemnification under this
paragraph shall be made in respect of (1) a threatened
action, or a pending action which is settled or otherwise
disposed of, or (2) any claim, issue or matter as to which
such person shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court
in which the action was brought, or, if no action was
brought, any court of competent jurisdiction, determines
upon application that, in view of all the circumstances of
the case, the person is fairly and reasonably entitled to
indemnify for such portion of the settlement amount and
expenses as the court deems proper.
(d) For the purposes of this section, a corporation
shall be deemed to have requested a person to serve an
employee benefit plan where the performance by such person
of his duties to the corporation also imposes duties on, or
otherwise involves services by, such person to the plan or
participants or beneficiaries of the plan; excise taxes
assessed on a person with respect to an employee benefit
plan pursuant to applicable law shall be considered fines;
and action taken or omitted by a person with respect to an
employee benefit plan in the performance of such person's
duties for a purpose reasonably believed by such person to
be in the interest of the participants and beneficiaries of
the plan shall be deemed to be for a purpose which is not
opposed to the best interests of the corporation.
The Issuer maintains directors' and officers' liability
insurance.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits. A list of exhibits included as part of
this Registration Statement is set forth in the Exhibit Index
which immediately precedes such exhibits and is hereby
incorporated by reference herein.
(b) Financial Statement Schedules. Schedules, other than
Schedule II set forth below, have been omitted since the required
information is not present, or not present in amounts sufficient to
require submission of the schedule, or because the information is
included in the financial statements or notes thereto.
II-2
INDENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
J. Crew Group, Inc.
We have audited the consolidated financial statements of J. Crew
Group, Inc. as of February 2, 1996 and January 31, 1997, and for
each of the three fiscal years in the period ended January 31,
1997, and have issued our report thereon dated March 31, 1997
(included elsewhere in this Registration Statement). Our audits
also included the financial statement schedules listed in Item 21
of this Registration Statement. These financial statement
schedules are the responsibility of the Corporation's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, such financial statement schedules, when
considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information
set forth therein.
DELOITTE & TOUCHE LLP
New York, New York
March 31, 1997
II-3
Schedule II - Valuation and Qualifying Accounts
additions
----------------------------------
beginning charged to cost charged to
Description balance and expenses other accounts deductions ending balance
- ---------------------------------- --------- --------------- -------------- ---------- --------------
Allowance for doubtful accounts
- -------------------------------
(deducted from accounts
receivable) fiscal year ended:
January 31, 1997 $4,824 $6,945 $ ___ $(7,412)(a) $4,357
February 2, 1996 6,518 7,277 ___ (8,971)(a) 4,824
February 3, 1995 4,681 7,956 ___ (6,119)(a) 6,518
Inventory impairment reserve
- ----------------------------
(deducted from inventories)
fiscal year ended:
January 31, 1997 $5,226 $(1,937)(b) $ ___ $ ___ $3,289
February 2, 1996 9,074 (3,848)(b) ___ ___ 5,226
February 3, 1995 9,146 (72)(b) ___ ___ 9,074
Allowance for sales returns
- ---------------------------
(included in other current
liabilities)
- --------------------------
fiscal year ended:
January 31, 1997 $2,384 $ 22(b) $ ___ $ ___ $2,406
February 2, 1996 1,935 449(b) ___ ___ 2,384
February 3, 1995 2,365 (430)(b) ___ ___ 1,935
(a) accounts deemed to be uncollectible
(b) The inventory impairment 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 writedowns and sales returns are
charged to the statement of operations as incurred.
II-4
Item 22. Undertakings.
The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plans
annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant, pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by any such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
whether or not such indemnification is against public policy as
expressed in the Securities Act of 1933 and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into
the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form,
within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration
statement through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration
statement when it became effective.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in
the information set forth in the registration
statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with
respect to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and
the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of the
offering.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, the registrant has duly caused this Amendment No. 1 to the
registration statement to be signed on its behalf, thereunto duly
authorized, in the City of New York, State of New York, on
February 6, 1998.
J. CREW GROUP, INC.
By: /s/ Emily Woods
-----------------------------
Name: Emily Woods*
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of
1933, this Amendment No. 1 to the registration statement has been
signed by the following persons in the capacities indicated, on
February 6, 1998.
Signature Title
--------- -----
/s/ Emily Woods Director and Chief Executive
- ---------------------------- Officer
Emily Woods*
/s/ David Bonderman Director
- ----------------------------
David Bonderman*
/s/ James G. Coulter Director
- ----------------------------
James G. Coulter*
/s/ Richard W. Boyce Director
- ----------------------------
Richard W. Boyce*
*By /s/ Michael P. McHugh
----------------------------
Michael P. McHugh
Vice President Finance
S-1
Signature Title
--------- -----
/s/ Michael P. McHugh Vice President Finance and
- ---------------------------- Chief Financial Officer
Michael P. McHugh
/s/ Nicholas Lamberti Vice President and Chief
- ---------------------------- Accounting Officer
Nicholas Lamberti*
*By /s/ Michael P. McHugh
----------------------------
Michael P. McHugh
Vice President Finance
S-2
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
2.1+ Recapitalization Agreement, dated as of July 22, 1997
between TPG Partners II, L.P. and J. Crew Group, Inc. (the
"Recapitalization Agreement")
NOTE: Pursuant to the provisions of paragraph (b)(2) of Item
601 of Regulation S-K, the Registrant hereby undertakes to
furnish to the Commission upon request copies of any
schedule to the Recapitalization Agreement.
2.2+ Amendment to Recapitalization Agreement, dated as of October
17, 1997 between TPG Partners II, L.P. and J. Crew Group,
Inc. (the "Amendment")
NOTE: Pursuant to the provisions of paragraph (b)(2) of Item
601 of Regulation S-K, the Registrant hereby undertakes to
furnish to the Commission upon request copies of any
schedule to the Amendment.
3.1+ Restated Certificate of Incorporation of J. Crew Group, Inc.
3.2+ By-laws of J. Crew Group, Inc.
4.1+ Stockholders' Agreement, dated as of October 17, 1997, among
J. Crew Group, Inc. and the Stockholder signatories thereto
4.2+ Stockholders' Agreement, dated as of October 17, 1997, among
J. Crew Group, Inc., TPG Partners II, L.P. and Emily Woods
(included as Exhibit B to the Woods Employment Agreement filed
as Exhibit 10.1)
4.3+ Indenture, dated as of October 17, 1997, between J. Crew
Group, Inc. as issuer, and State Street Bank and Trust
Company, as trustee, relating to the Debentures (the
"Indenture")
4.4+ Form of Series B 13-1/8% Senior Discount Debenture due 2008
of J. Crew Group, Inc. (the "New Debentures") (included as
Exhibit B of the Indenture filed as Exhibit 4.2)
4.5 Credit Agreement, dated as of October 17, 1997, among J.
Crew Group, Inc., J. Crew Operating Corp., the Lenders Party
thereto, the Chase Manhattan Bank, as Administrative Agent,
and Donaldson, Lufkin & Jenrette Securities Corporation, as
Syndication Agent
4.6+ Guarantee Agreement dated as of October 17, among J. Crew
Group, Inc., the subsidiary guarantors of J. Crew Operating
Corp. that are signatories thereto and The Chase Manhattan
Bank
- --------
+ previously filed
X-1
Exhibit
No. Description
- ------- -----------
4.7+ Indemnity, Subrogation and Contribution Agreement dated as
of October 17, 1997, amonhg J. Crew Operating Corp., the
subsidiary guarantors of J. Crew Operating Corp. that are
signatories thereto and The Chase Manhattan Bank
4.8+ Pledge Agreement, dated as of October 17, among J. Crew
Operating Corp., J. Crew Group, Inc., the subsidiary
guarantors of J. Crew Operating Corp. that are signatories
thereto and The Chase Manhattan Bank
4.9+ Security Agreement, dated as of October 17, among J. Crew
Operating Corp., J. Crew Group, Inc., the subsidiary
guarantors of J. Crew Operating Corp. that are signatories
thereto and The Chase Manhattan Bank
4.10+ Registration Rights Agreement, dated as of October 17, 1997
by and among J. Crew Group, Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Chase Securities Inc.
NOTE: Pursuant to the provisions of paragraph (b)(4)(iii) of
Item 601 of Regulation S-K, the Registrant hereby undertakes
to furnish to the Commission upon request copies of the
instruments pursuant to which various entities hold
long-term debt of the Company or its subsidiaries,
none of which instruments govern indebtedness exceeding 10
percent of the total assets of the Company and its
subsidiaries on a consolidated basis.
5.1+ Opinion of Cleary, Gottlieb, Steen & Hamilton regarding
legality of the New Debentures
10.1+ Employment Agreement, dated October 17, 1997, among J. Crew
Group, Inc., J. Crew Operating Corp., TPG Partners II, L.P.
(only with respect to Section 2(c) therein) and Emily Woods
(the "Woods Employment Agreement")
10.2+ J. Crew Operating Corp. Senior Executive Bonus Plan (included
as Exhibit A to the Woods Employment Agreement filed as
Exhibit 10.1)
10.3+ Stock Option Grant Agreement, made as of October 17, 1997
between J. Crew Group Inc. and Emily Woods (time based)
10.4+ Stock Option Grant Agreement, made as of October 17, 1997
between J. Crew Group Inc. and Emily Woods (performance
based)
10.5# Letter Agreement between Matthew Rubel and J. Crew Group, Inc.
- --------------
+ previously filed
# to be filed by amendment
X-2
Exhibit
No. Description
10.6+ Contract Carrier Agreement, between J. Crew Group, Inc. and
United Parcel Service, Inc.
10.7+ Custom Pricing Agreement, made November 15, 1996 between
Federal Express Corporation and J Crew Group, Inc.
10.8+ Lease dated as of October 21, 1981 between Vornado, Inc.
and Popular Services, Inc.
10.9+ Agreement of Sublease dated November 4, 1993 between Revlon
Holdings Inc., as Sublessor, and Popular Club Plan, Inc., as
Sublessee
10.10+ Letter Agreement, dated July 29, 1996, between World Color
and Clifford & Wills, Inc.
10.11+ Agreement dated August 14, 1997 between R.R. Donnelley & Sons
Company and J. Crew Inc.
10.12 Letter Agreement between David DeMattei and J. Crew Group, Inc.
10.13+ J. Crew Group, Inc. 1997 Stock Option Plan
16.1 Letter re Change in Certifying Accountant
21.1 Subsidiaries of J. Crew Group, Inc.
23.1 Consent of Deloitte & Touche LLP
23.2+ Consent of Cleary, Gottlieb, Steen & Hamilton (included in
its opinion filed as Exhibit 5.1)
25.1+ Form T-1 with respect to the eligibility of State Street
Bank and Trust Company with respect to the Indenture
27.1+ Financial Data Schedule
99.1+ Form of Letter of Transmittal
99.2+ Form of Notice of Guaranteed Delivery
99.3+ Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees
99.4+ Form of Letter to Clients
- --------------
+ previously filed
X-3
CONFORMED COPY
====================================================================
CREDIT AGREEMENT
dated as of
October 17, 1997
among
J. CREW OPERATING CORP., as Borrower,
J. CREW GROUP, INC.,
The Lenders Party Hereto,
THE CHASE MANHATTAN BANK,
as Administrative Agent
and
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION,
as Syndication Agent
====================================================================
[6700-529]
TABLE OF CONTENTS
Page
----
ARTICLE I
Definitions
SECTION 1.01. Defined Terms...............................1
SECTION 1.02. Classification of Loans and Borrowings.....25
SECTION 1.03. Terms Generally............................25
SECTION 1.04. Accounting Terms; GAAP.....................25
SECTION 1.05. Interim Financial Calculations.............26
ARTICLE II
The Credits
SECTION 2.01. Commitments................................27
SECTION 2.02. Loans and Borrowings.......................27
SECTION 2.03. Requests for Borrowings....................27
SECTION 2.04. Acceptances................................28
SECTION 2.05. Letters of Credit..........................31
SECTION 2.06. Funding of Borrowings......................37
SECTION 2.07. Interest Elections.........................37
SECTION 2.08. Termination and Reduction of Commitments...39
SECTION 2.09. Repayment of Loans; Evidence of Debt.......40
SECTION 2.10. Amortization of Term Loans.................40
SECTION 2.11. Prepayment of Loans........................41
SECTION 2.12. Fees.......................................43
SECTION 2.13. Interest...................................44
SECTION 2.14. Alternate Rate of Interest.................45
SECTION 2.15. Increased Costs............................45
SECTION 2.16. Break Funding Payments.....................47
SECTION 2.17. Taxes......................................47
SECTION 2.18. Payments Generally; Pro Rata
Treatment; Sharing of Set-offs.............48
SECTION 2.19. Mitigation Obligations; Replacement
of Lenders.................................50
ARTICLE III
Representations and Warranties
SECTION 3.01. Organization; Powers.......................51
SECTION 3.02. Authorization; Enforceability..............51
SECTION 3.03. Governmental Approvals; No Conflicts.......51
SECTION 3.04. Financial Condition; No Material
Adverse Change.............................52
i
SECTION 3.05. Properties.................................52
SECTION 3.06. Litigation and Environmental Matters.......53
SECTION 3.07. Compliance with Laws and Agreements........53
SECTION 3.08. Investment and Holding Company Status......54
SECTION 3.09. Taxes......................................54
SECTION 3.10. ERISA......................................54
SECTION 3.11. Disclosure.................................54
SECTION 3.12. Subsidiaries...............................54
SECTION 3.13. Insurance..................................55
SECTION 3.14. Labor Matters..............................55
SECTION 3.15. Solvency...................................55
SECTION 3.16. Senior Indebtedness........................55
SECTION 3.17. Security Documents.........................55
SECTION 3.18. Federal Reserve Regulations................56
ARTICLE IV
Conditions
SECTION 4.01. Effective Date.............................56
SECTION 4.02. Each Credit Event..........................61
ARTICLE V
Affirmative Covenants
SECTION 5.01. Financial Statements and Other
Information................................61
SECTION 5.02. Notices of Material Events.................63
SECTION 5.03. Information Regarding Collateral...........64
SECTION 5.04. Existence; Conduct of Business.............64
SECTION 5.05. Payment of Obligations.....................65
SECTION 5.06. Maintenance of Properties..................65
SECTION 5.07. Insurance..................................65
SECTION 5.08. Casualty and Condemnation..................66
SECTION 5.09. Books and Records; Inspection and
Audit Rights...............................67
SECTION 5.10. Compliance with Laws.......................67
SECTION 5.11. Use of Proceeds and Letters of Credit
and Acceptances............................67
SECTION 5.12. Additional Subsidiaries....................68
SECTION 5.13. Further Assurances.........................68
SECTION 5.14. Interest Rate Protection...................68
SECTION 5.15. Change of Fiscal Year......................69
ARTICLE VI
Negative Covenants
SECTION 6.01. Indebtedness; Certain Equity Securities....69
ii
SECTION 6.02. Liens......................................71
SECTION 6.03. Fundamental Changes........................72
SECTION 6.04. Investments, Loans, Advances,
Guarantees and Acquisitions................72
SECTION 6.05. Asset Sales................................74
SECTION 6.06. Hedging Agreements.........................75
SECTION 6.07. Restricted Payments; Certain
Payments of Indebtedness...................75
SECTION 6.08. Transactions with Affiliates...............77
SECTION 6.09. Restrictive Agreements.....................77
SECTION 6.10. Amendment of Material Documents............78
SECTION 6.11. Sale and Lease-Back Transactions...........78
SECTION 6.12. Capital Expenditures.......................78
SECTION 6.13. Leverage Ratio.............................79
SECTION 6.14. Interest Coverage Ratio....................79
SECTION 6.15. Net Worth..................................80
SECTION 6.16. Inventory Coverage Ratio...................80
ARTICLE VII
Events of Default
SECTION 7.01. Events of Default..........................80
SECTION 7.02. Exclusion of Immaterial Subsidiaries.......83
ARTICLE VIII
The Administrative Agent..................................83
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices....................................85
SECTION 9.02. Waivers; Amendments........................86
SECTION 9.03. Expenses; Indemnity; Damage Waiver.........87
SECTION 9.04. Successors and Assigns.....................89
SECTION 9.05. Survival...................................91
SECTION 9.06. Counterparts; Integration; Effectiveness...91
SECTION 9.07. Severability...............................92
SECTION 9.08. Right of Setoff............................92
SECTION 9.09. Governing Law; Jurisdiction; Consent
to Service of Process......................92
SECTION 9.10. WAIVER OF JURY TRIAL.......................93
SECTION 9.11. Headings...................................93
SECTION 9.12. Confidentiality............................93
SECTION 9.13. Interest Rate Limitation...................94
iii
SCHEDULES:
- ----------
Schedule 1.01(a) -- Mortgaged Property
Schedule 2.01 -- Commitments
Schedule 3.05 -- Real Property
Schedule 3.06 -- Disclosed Matters
Schedule 3.12 -- Subsidiaries
Schedule 3.13 -- Insurance
Schedule 3.17 -- Mortgage Filing Office
Schedule 6.02 -- Existing Liens
Schedule 6.04 -- Investments
Schedule 6.09 -- Existing Restrictions
EXHIBITS:
- ---------
Exhibit A -- Form of Assignment and Acceptance
Exhibit B -- Forms of Opinions of Borrower's Counsel
Exhibit C -- Form of Indemnity, Subrogation and Contribution Agreement
Exhibit D -- Form of Guarantee Agreement
Exhibit E -- Form of Pledge Agreement
Exhibit F -- Form of Security Agreement
Exhibit G -- Form of Intercreditor Agreement
iv
CREDIT AGREEMENT dated as of October 17,
1997, among J. CREW OPERATING CORP., J. CREW
GROUP, INC., the LENDERS party hereto, DONALDSON,
LUFKIN & JENRETTE SECURITIES CORPORATION, as
Syndication Agent and THE CHASE MANHATTAN BANK,
as Administrative Agent.
The parties hereto agree as follows:
ARTICLE I
Definitions
-----------
SECTION 1.01. Defined Terms. As used in this Agreement,
the following terms have the meanings specified below:
"ABR", when used in reference to any Loan or
Borrowing, refers to whether such Loan, or the Loans comprising
such Borrowing, are bearing interest at a rate determined by
reference to the Alternate Base Rate.
"Acceptance" means a signed promise of the Issuing
Bank to honor an Acceptance Draft presented by the Borrower for
signature and acceptance by the Issuing Bank for subsequent
payment by the Issuing Bank in accordance with the terms of this
Agreement.
"Acceptance Disbursement" means a payment made by the
Issuing Bank pursuant to an Acceptance Draft.
"Acceptance Draft" means a draft for the payment of
money accepted or to be accepted by the Issuing Bank in
accordance with Section 2.04.
"Acceptance Obligation" means the obligation of the
Borrower to pay the face amount of any Acceptance issued by the
Issuing Bank in accordance with the terms of this Agreement on or
before the maturity date of such Acceptance.
"Acceptance Rate" means, at any time with respect to
any Acceptance Draft, the discount rate for bankers' acceptances
in a comparable amount and of comparable maturity generally
available from the Issuing Bank at such time, as determined by
the Issuing Bank in its sole discretion.
"Adjusted LIBO Rate" means, with respect to any
Eurodollar Borrowing for any Interest Period, an interest rate
per annum (rounded upwards, if necessary, to the next 1/16 of 1%)
equal to (a) the LIBO Rate for such Interest Period multiplied by
(b) the Statutory Reserve Rate.
"Administrative Agent" means The Chase Manhattan Bank,
in its capacity as administrative agent for the Lenders
hereunder.
"Administrative Questionnaire" means an Administrative
Questionnaire in a form supplied by the Administrative Agent.
"Affiliate" means, with respect to a specified Person,
another Person that directly, or indirectly through one or more
intermediaries, Controls or is Controlled by or is under common
Control with the Person specified. Notwithstanding the foregoing,
no individual shall be deemed to be an Affiliate of a Person
solely by reason of his or her being an officer or director of
such Person.
"Alternate Base Rate" means, for any day, a rate per
annum equal to the greatest of (a) the Prime Rate in effect on
such day, (b) the Base CD Rate in effect on such day plus 1% and
(c) the Federal Funds Effective Rate in effect on such day plus
1/2 of 1%. Any change in the Alternate Base Rate due to a change
in the Prime Rate, the Base CD Rate or the Federal Funds
Effective Rate shall be effective from and including the
effective date of such change in the Prime Rate, the Base CD Rate
or the Federal Funds Effective Rate, respectively.
"Alternative Currency" means any currency other than
dollars which is freely transferable and convertible into
dollars.
"Applicable Percentage" means, with respect to any
Revolving Lender, the percentage of the total Revolving
Commitments represented by such Lender's Revolving Commitment. If
the Revolving Commitments have terminated or expired, the
Applicable Percentages shall be determined based upon the
Revolving Commitments most recently in effect, giving effect to
any assignments.
"Applicable Rate" means, for any day with respect to
any ABR Loan, Eurodollar Loan or Acceptance, the applicable rate
per annum set forth below under the caption "ABR Spread",
"Eurodollar Spread" or "Acceptance Spread", as the case may be,
based upon the Leverage Ratio as of the most recent determination
date; provided that until the delivery of the Borrower's
financial statements pursuant to Section 5.01 for the first full
fiscal quarter commencing after the date that is six months after
the Effective Date the "Applicable Rate" shall be the applicable
rate per annum set forth below in Category 1:
======================================================================
ABR Eurodollar Acceptance
Leverage Ratio: Spread Spread Spread
- ----------------------------------------------------------------------
Category 1
----------
greater than 4.50 to 1.00 1.25% 2.25% 2.25%
- ----------------------------------------------------------------------
Category 2
----------
greater than 4.00 to 1.00 and 1.00% 2.00% 2.00%
less than or equal to 4.50 to
1.00
- ----------------------------------------------------------------------
Category 3
----------
greater than 3.50 to 1.00 and 0 .75% 1.75% 1.75%
less than or equal to 4.00 to
1.00
- ----------------------------------------------------------------------
Category 4
----------
less than or equal to 3.50 to 1.50% 1.50% 1.50%
1.00
======================================================================
For purposes of the foregoing, (i) the Leverage Ratio
shall be determined as of the end of each fiscal quarter of the
Borrower's fiscal year based upon the Borrower's consolidated
2
financial statements delivered pursuant to Section 5.01(a) or (b)
and (ii) each change in the Applicable Rate resulting from a
change in the Leverage Ratio shall be effective during the period
commencing on and including the date of delivery to the
Administrative Agent of such consolidated financial statements
indicating such change and ending on the date immediately
preceding the effective date of the next such change; provided
that the Leverage Ratio shall be deemed to be in Category 1 (A)
at any time that an Event of Default has occurred and is
continuing or (B) if the Borrower fails to deliver the
consolidated financial statements required to be delivered by it
pursuant to Section 5.01(a) or (b), during the period from the
expiration of the time for delivery thereof until such
consolidated financial statements are delivered.
"Assessment Rate" means, for any day, the annual
assessment rate in effect on such day that is payable by a member
of the Bank Insurance Fund classified as "well-capitalized" and
within supervisory subgroup "B" (or a comparable successor risk
classification) within the meaning of 12 C.F.R. Part 327 (or any
successor provision) to the Federal Deposit Insurance Corporation
for insurance by such Corporation of time deposits made in
dollars at the offices of such member in the United States;
provided that if, as a result of any change in any law, rule or
regulation, it is no longer possible to determine the Assessment
Rate as aforesaid, then the Assessment Rate shall be such annual
rate as shall be determined by the Administrative Agent to be
representative of the cost of such insurance to the Lenders.
"Assignment and Acceptance" means an assignment and
acceptance entered into by a Lender and an assignee (with the
consent of any party whose consent is required by Section 9.04),
and accepted by the Administrative Agent, in the form of Exhibit
A or any other form approved by the Administrative Agent.
"Base CD Rate" means the sum of (a) the Three-Month
Secondary CD Rate multiplied by the Statutory Reserve Rate plus
(b) the Assessment Rate.
"Board" means the Board of Governors of the Federal
Reserve System of the United States of America.
"Borrower" means J. Crew Operating Corp., a Delaware
corporation.
"Borrowing" means Loans of the same Class and Type,
made, converted or continued on the same date and, in the case of
Eurodollar Loans, as to which a single Interest Period is in
effect.
"Borrowing Request" means a request by the Borrower for a
Borrowing in accordance with Section 2.03.
"Business Day" means any day that is not a Saturday,
Sunday or other day on which commercial banks in New York City
are authorized or required by law to remain closed; provided that
(a) when used in connection with a Eurodollar Loan, the term
"Business Day" shall also exclude any day on which banks are not
open for dealings in dollar deposits in the London interbank
market and (b) when used in connection with any Letter of Credit
that provides for the payment of any drawing thereunder in an
Alternative Currency, or the determination of any Dollar Amount
or Equivalent Amount, the term "Business Day" means any Business
Day on
3
which commercial banks are open for international business
(including dealings in dollar deposits) in London, and, where
funds are to be paid or made available in an Alternative
Currency, on which commercial banks are open for domestic and
international business (including dealings in deposits in such
Alternative Currency) in both London and the place where such
funds are paid or made available.
"C&W" means Clifford & Wills, Inc., a New Jersey
corporation.
"Capital Expenditures" means, for any period, (a) the
additions to property, plant and equipment and other capital
expenditures of the Borrower and its consolidated Subsidiaries
that are (or would be) set forth in a consolidated statement of
cash flows of the Borrower for such period prepared in accordance
with GAAP and (b) Capital Lease Obligations incurred by the
Borrower and its consolidated Subsidiaries during such period;
provided that the term "Capital Expenditures" (i) shall be net of
landlord construction allowances, (ii) shall not include
expenditures made in connection with the repair or restoration of
assets with insurance or condemnation proceeds and (iii) shall
not include the purchase price of equipment to the extent
consideration therefor consists of used or surplus equipment
being traded in at such time or the proceeds of a concurrent sale
of such used or surplus equipment, in each case in the ordinary
course of business.
"Capital Lease" means any lease (or other arrangement
conveying the right to use) real or personal property, or a
combination thereof, which lease is required to be classified and
accounted for as a capital lease on a balance sheet of such
Person under GAAP.
"Capital Lease Obligations" of any Person means the
obligations of such Person to pay rent or other amounts under any
Capital Lease and the amount of such obligations shall be the
capitalized amount thereof determined in accordance with GAAP.
"Cash Dividend" means any dividend paid in cash on any
shares of stock of any class of the Borrower or any payment made
in cash (whether or not pursuant to a prior commitment which when
made was permitted by the terms of this Agreement) on account of,
or any commitment to make any payment on account of, the
purchase, redemption or other retirement of any shares of stock
of any class of the Borrower or any other distribution made in
cash in respect thereof, either directly or indirectly. For
purposes of this definition, "stock" shall include any and all
shares, interests, participations or other equivalents (however
designated) of corporate stock.
"Cash Interest Expense" means, for any period,
Consolidated Interest Expense for such period, excluding deferred
financing costs and net of cash interest income for such period,
determined on a consolidated basis in accordance with GAAP.
"Change in Control" means, at any time, (a) the
acquisition of ownership, directly or indirectly, beneficially
and of record, by any Person other than Holdings of any shares of
capital stock of the Borrower; (b) (i) TPG Partners shall cease
to own in the aggregate, directly or indirectly, beneficially and
of record, shares representing at least 40% of the aggregate
ordinary voting power represented by the issued and outstanding
capital stock of Holdings and/or (ii) any Person or group (within
the meaning of Rule 13d-5 under the United States Securities and
4
Exchange Act of 1934 as in effect on the date hereof), other than
TPG Partners, shall beneficially own, directly or indirectly,
shares of capital stock of Holdings representing more than the
percentage of the aggregate ordinary voting power represented by
the shares beneficially owned, directly or indirectly, by TPG
Partners at such time, unless, in the case of either clause (i)
or (ii), TPG Partners shall directly or indirectly, whether
through the ownership of voting securities, by contract or
otherwise, have the ability to elect a majority of the board of
directors of Holdings; (c) occupation of a majority of the seats
(other than vacant seats) on the board of directors of Holdings
by Persons who were neither (i) nominated by members of TPG
Partners or the board of directors of Holdings nor (ii) appointed
by directors so nominated; or (d) while any of the Subordinated
Debt is outstanding, a "Change of Control" (as defined in the
Subordinated Debt Documents) shall have occurred.
"Change in Law" means (a) the adoption of any law,
rule or regulation after the date of this Agreement, (b) any
change in any law, rule or regulation or in the interpretation or
application thereof by any Governmental Authority after the date
of this Agreement or (c) compliance by any Lender or the Issuing
Bank (or, for purposes of Section 2.15(b), by any lending office
of such Lender or by such Lender's or the Issuing Bank's holding
company, if any) with any request, guideline or directive
(whether or not having the force of law) of any Governmental
Authority made or issued after the date of this Agreement.
"Class", when used in reference to any Loan or
Borrowing, refers to whether such Loan, or the Loans comprising
such Borrowing, are Revolving Loans or Term Loans and, when used
in reference to any Commitment, refers to whether such Commitment
is a Revolving Commitment or Term Commitment.
"Clean-Down Period" means the "Clean-Down Period" as
defined in Section 2.11(e).
"Code" means the Internal Revenue Code of 1986, as
amended from time to time.
"Collateral" means any and all "Collateral", as
defined in any applicable Security Document.
"Collateral Agent" means the "Collateral Agent", as
defined in any applicable Security Document.
"Commitment" means a Revolving Commitment or Term
Commitment, or any combination thereof (as the context requires).
"Consolidated EBITDA" means, for any period,
Consolidated Net Income for such period (adjusted to exclude
gains and losses on non-ordinary course asset sales), plus,
without duplication and to the extent deducted from revenues in
determining Consolidated Net Income, the sum of (a) the aggregate
amount of Consolidated Interest Expense for such period, (b) the
aggregate amount of letter of credit fees accrued during such
period, (c) the aggregate amount of income tax expense for such
period, (d) all amounts attributable to depreciation and
amortization for such period, (e) all extraordinary charges
during such period, (f) non cash expenses resulting from the
grant of stock options to management personnel of the Borrower or
5
the Subsidiaries pursuant to a written plan or agreement, (g) the
aggregate amount of deferred financing expenses for such period,
(h) expenses related to the Transactions, (i) other non-cash
charges deducted in computing Consolidated Net Income for such
period and (j) Excluded Charges paid for such period, and minus,
without duplication and to the extent added to revenues in
determining Consolidated Net Income for such period, all
extraordinary gains during such period, all as determined on a
consolidated basis with respect to the Borrower and the
Subsidiaries in accordance with GAAP.
"Consolidated EBITDAR" means, for any period,
Consolidated EBITDA for such period, plus, without duplication,
rental expenses deducted in determining Consolidated Net Income
for such period.
"Consolidated Interest Expense" means, for any period,
the interest expense deducted in calculating Consolidated Net
Income for such period, including deferred financing costs,
determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, for any period, net
income or loss of the Borrower and the Subsidiaries for such
period determined on a consolidated basis in accordance with
GAAP.
"Consolidated Net Worth" means, as at any date of
determination, the consolidated stockholders' equity of the
Borrower and the Subsidiaries, as determined on a consolidated
basis in accordance with GAAP.
"Control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the
management or policies of a Person, whether through the ability
to exercise voting power, by contract or otherwise. "Controlling"
and "Controlled" have meanings correlative thereto.
"Control Group" means (a) Emily Woods, her spouse,
direct descendants, and their spouses, trusts solely for the
benefit of any of the foregoing individuals and any corporations
or partnerships owned solely by any of the foregoing individuals
and (b) TPG Partners.
"Default" means any event or condition which
constitutes an Event of Default or which upon notice, lapse of
time or both would, unless cured or waived, become an Event of
Default.
"Disclosed Matters" means the actions, suits and
proceedings and the environmental matters disclosed in Schedule
3.06.
"Dollar Amount" means in relation to any Letter of
Credit that provides for payment of any drawing thereunder in an
Alternative Currency, the amount determined as provided in
Section 2.05(k).
"dollars" or "$" refers to lawful money of the United
States of America.
6
"Effective Date" means the date on which the
conditions specified in Section 4.01 are satisfied (or waived in
accordance with Section 9.02).
"Effective Date Dividend" means a dividend by the
Borrower to Holdings on the Effective Date in an aggregate amount
of $68,429,749.
"Eligibility Certificate" means any legend stamped on
an Acceptance Draft by the Issuing Bank that sets forth the
character of the transaction giving rise to such Acceptance
Draft, and, in so doing, establishes that the related Acceptance
is eligible for discount by a Federal Reserve Bank pursuant to
Regulation A.
"Environmental Laws" means all laws, rules,
regulations, codes, ordinances, orders, decrees, judgments,
injunctions, notices or binding agreements issued, promulgated or
entered into by or with any Governmental Authority, relating in
any way to the environment, preservation or reclamation of
natural resources, or to worker health and safety matters.
"Environmental Liability" means any liability,
contingent or otherwise (including any liability for damages,
costs of environmental remediation, fines, penalties or
indemnities and reasonable attorneys' fees and costs), of
Holdings, the Borrower or any Subsidiary directly or indirectly
resulting from or based upon (a) violation of any Environmental
Law, (b) the generation, use, handling, transportation, storage,
treatment or disposal of any Hazardous Materials, (c) exposure to
any Hazardous Materials, (d) the release or threatened release of
any Hazardous Materials into the environment or (e) any contract,
agreement or other consensual arrangement pursuant to which
liability is assumed or imposed with respect to any of the
foregoing.
"Equity Financing" means the contribution by the
Initial Investors to Holdings of an aggregate amount of not less
than $66,000,000 in exchange for the issuance by Holdings to the
Initial Investors of shares of common stock of Holdings.
"Equivalent Amount" means in connection with the
determination of the amount of a LC Disbursement to be made in an
Alternative Currency in relation to the Dollar Amount of such LC
Disbursement, the amount of such Alternative Currency converted
from such Dollar Amount at the spot buying rate of the Issuing
Bank (based on the London interbank market rate then prevailing)
for dollars against such Alternative Currency as of approximately
9:00 a.m. (New York City time) three Business Days before such
date.
"ERISA" means the Employee Retirement Income Security
Act of 1974, as amended from time to time.
"ERISA Affiliate" means any trade or business (whether
or not incorporated) that, together with the Borrower, is treated
as a single employer under Section 414(b) or (c) of the Code or,
solely for purposes of Section 302 of ERISA and Section 412 of
the Code, is treated as a single employer under Section 414 of
the Code.
"ERISA Event" means (a) any "reportable event", as
defined in Section 4043 of ERISA or the regulations issued
thereunder with respect to a Plan (other than an event for which
7
the 30-day notice period is waived); (b) the existence with
respect to any Plan of an "accumulated funding deficiency" (as
defined in Section 412 of the Code or Section 302 of ERISA),
whether or not waived; (c) the filing pursuant to Section 412(d)
of the Code or Section 303(d) of ERISA of an application for a
waiver of the minimum funding standard with respect to any Plan;
(d) the incurrence by the Borrower or any of its ERISA Affiliates
of any liability under Title IV of ERISA with respect to the
termination of any Plan; (e) the receipt by the Borrower or any
ERISA Affiliate from the PBGC or a plan administrator of any
notice relating to an intention to terminate any Plan or Plans or
to appoint a trustee to administer any Plan under Section 4042 of
ERISA; (f) the incurrence by the Borrower or any of its ERISA
Affiliates of any liability with respect to the withdrawal or
partial withdrawal from any Plan or Multiemployer Plan; or (g)
the receipt by the Borrower or any ERISA Affiliate of any notice,
or the receipt by any Multiemployer Plan from the Borrower or any
ERISA Affiliate of any notice, concerning the imposition of
Withdrawal Liability or a determination that a Multiemployer Plan
is, or is expected to be, insolvent or in reorganization, within
the meaning of Title IV of ERISA.
"Eurodollar", when used in reference to any Loan or
Borrowing, refers to whether such Loan, or the Loans comprising
such Borrowing, are bearing interest at a rate determined by
reference to the Adjusted LIBO Rate.
"Event of Default" has the meaning assigned to such
term in Article VII.
"Excess Cash Flow" means, for any period, the sum
(without duplication) of:
(a) the Consolidated Net Income of the Borrower and
its consolidated Subsidiaries for such period, adjusted to
exclude any gains or losses attributable to Prepayment
Events; plus
(b) depreciation, amortization and other non-cash
charges or losses deducted in determining such Consolidated
Net Income for such period; plus
(c) the sum of (i) the amount, if any, by which Net
Working Capital decreased during such period plus (ii) the
amount, if any, by which the consolidated deferred revenues
of the Borrower and its consolidated Subsidiaries increased
during such period plus (iii) the aggregate principal
amount of Capital Lease Obligations and other Indebtedness
incurred during such period to finance Capital
Expenditures, to the extent that mandatory principal
payments in respect of such Indebtedness would not be
excluded from clause (f) below when made, plus (iv) the
amount of the excess, if any, of tax expense deducted in
determining Consolidated Net Income for such period over
cash taxes paid for such period; minus
(d) the sum of (i) any noncash gains included in
determining such Consolidated Net Income for such period
plus (ii) the amount, if any, by which Net Working Capital
increased during such period plus (iii) the amount, if any,
by which the consolidated deferred revenues of the Borrower
and its consolidated Subsidiaries decreased during such
period plus (iv) the amount of excess, if any, of cash
taxes paid for such period over tax expense deducted in
determining Consolidated Net Income for such period; minus
8
(e) Capital Expenditures for such period; minus
(f) the aggregate principal amount of Indebtedness
repaid or prepaid by the Borrower and its consolidated
Subsidiaries during such period, excluding (i) Indebtedness
in respect of Revolving Loans and Letters of Credit and
Acceptances, (ii) Term Loans prepaid pursuant to Section
2.11(b) or (d), (iii) repayments or prepayments of
Indebtedness financed by incurring other Indebtedness, to
the extent that mandatory principal payments in respect of
such other Indebtedness would not be excluded from this
clause (f) when made and (iv) Indebtedness referred to in
clauses (iv), (viii) and (ix) of Section 6.01(a); minus
(g) the aggregate amount of all prepayments of
Revolving Loans made during such period to the extent
accompanying reductions of the total Revolving Commitments;
minus
(h) payments by the Borrower and the Subsidiaries
during such period in respect of long-term liabilities of
the Borrower and the Subsidiaries other than (i)
Indebtedness and (ii) liabilities representing amounts
deducted in determining Consolidated Net Income for any
period subsequent to the Effective Date; minus
(i) the amount of dividends paid by the Borrower
during such period pursuant to Section 6.07.
"Excluded Charges" means non-recurring charges not
exceeding $8,000,000 in the aggregate for severance payments,
professional advisory fees, management bonuses for 1997, and
one-time payments in respect of the employment arrangements of
Emily Woods and David DeMattei.
"Excluded Taxes" means, with respect to the
Administrative Agent, any Lender, the Issuing Bank or any other
recipient of any payment to be made by or on account of any
obligation of the Borrower hereunder, (a) income or franchise
taxes imposed on (or measured by) its net income by the United
States of America, or by the jurisdiction under the laws of which
such recipient is organized or in which its principal office is
located or, in the case of any Lender, in which its applicable
lending office is located, (b) any branch profits taxes imposed
by the United States of America or any similar tax imposed by any
other jurisdiction in which the Borrower is located and (c) in
the case of a Foreign Lender, any withholding tax that is imposed
on amounts payable to such Foreign Lender (other than an assignee
pursuant to a request by the Borrower under Section 2.19(b)) at
the time such Foreign Lender becomes a party to this Agreement
(or designates a new lending office) or is attributable to such
Foreign Lender's failure to comply with Section 2.17(e), except
to the extent that such Foreign Lender (or its assignor, if any)
was entitled, at the time of designation of a new lending office
(or assignment), to receive additional amounts from the Borrower
with respect to such withholding tax pursuant to Section 2.17.
"Existing Credit Agreement" means the $200,000,000
Credit Agreement dated as of April 18, 1997, as amended and in
effect on the Effective Date, among Holdings, the several
9
banks and financial institutions from time to time party thereto
and Morgan Guaranty Trust Company, as Agent.
"Existing Letters of Credit" means all letters of
credit issued by The Chase Manhattan Bank under the Existing
Credit Agreement that are outstanding as of the Effective Date.
"Federal Funds Effective Rate" means, for any day, the
weighted average (rounded upwards, if necessary, to the next
1/100 of 1%) of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal
funds brokers, as published on the next succeeding Business Day
by the Federal Reserve Bank of New York, or, if such rate is not
so published for any day that is a Business Day, the average
(rounded upwards, if necessary, to the next 1/100 of 1%) of the
quotations for such day for such transactions received by the
Administrative Agent from three Federal funds brokers of
recognized standing selected by it.
"Financial Officer" means the chief financial officer,
principal accounting officer, treasurer or controller of the
Borrower.
"Financing Transactions" means (a) the execution,
delivery and performance by each Loan Party of the Loan Documents
to which it is to be a party, the borrowing of Loans, the use of
the proceeds thereof and the issuance of Letters of Credit and
Acceptances hereunder, (b) the execution, delivery and
performance by each Loan Party of the Subordinated Debt Documents
to which it is to be a party, the issuance of the Subordinated
Debt and the use of the proceeds thereof, (c) the Equity
Financing, (d) the issuance of the Holdings Senior Discount
Debentures, (e) the issuance of the Holdings Preferred Stock and
(f) the Qualified Receivables Transaction.
"Foreign Lender" means any Lender that is organized
under the laws of a jurisdiction other than that in which the
Borrower is located. For purposes of this definition, the United
States of America, each State thereof and the District of
Columbia shall be deemed to constitute a single jurisdiction.
"Foreign Subsidiary" means any Subsidiary that is
organized under the laws of a jurisdiction other than the United
States of America or any State thereof or the District of
Columbia.
"Funded Debt" means, as of any date, the sum of (a)
the aggregate principal amount of all indebtedness (other than
Revolving Loans) outstanding as of such date that would appear as
indebtedness on a consolidated balance sheet of the Borrower
prepared as of such date in accordance with GAAP, plus (b) the
aggregate principal amount of all indebtedness outstanding as of
such date of Persons other than the Borrower and its consolidated
Subsidiaries that would appear as indebtedness on a consolidated
balance sheet of such Persons prepared as of such date in
accordance with GAAP, to the extent Guaranteed by any of the
Borrower and its Subsidiaries, plus (c) the average daily
outstanding principal amount of Revolving Loans during the period
of four consecutive fiscal quarters of the Borrower most recently
ended as of such date, minus (d) the average daily amount of the
Borrower's cash balances during such period.
10
"GAAP" means generally accepted accounting principles
in the United States of America.
"Governmental Authority" means the government of the
United States of America, any other nation or any political
subdivision thereof, whether state or local, and any agency,
authority, instrumentality, regulatory body, court, central bank
or other entity exercising executive, legislative, judicial,
taxing, regulatory or administrative powers or functions of or
pertaining to government.
"Guarantee" of or by any Person (the "guarantor")
means any obligation, contingent or otherwise, of the guarantor
guaranteeing or having the economic effect of guaranteeing any
Indebtedness or other obligation of any other Person (the
"primary obligor") in any manner, whether directly or indirectly,
and including any obligation of the guarantor, direct or
indirect, (a) to purchase or pay (or advance or supply funds for
the purchase or payment of) such Indebtedness or other obligation
or to purchase (or to advance or supply funds for the purchase
of) any security for the payment thereof, (b) to purchase or
lease property, securities or services for the purpose of
assuring the owner of such Indebtedness or other obligation of
the payment thereof, (c) to maintain working capital, equity
capital or any other financial statement condition or liquidity
of the primary obligor so as to enable the primary obligor to pay
such Indebtedness or other obligation or (d) as an account party
in respect of any letter of credit or letter of guaranty issued
to support such Indebtedness or obligation; provided, that the
term "Guarantee" shall not include endorsements for collection or
deposit in the ordinary course of business.
"Guarantee Agreement" means the Guarantee Agreement,
substantially in the form of Exhibit D, made by Holdings and the
Subsidiary Loan Parties in favor of the Administrative Agent for
the benefit of the Secured Parties.
"Hazardous Materials" means all explosive or
radioactive substances or wastes, all hazardous or toxic
substances, wastes, pollutants or contaminants, including
petroleum or petroleum distillates, asbestos or
asbestos-containing materials, polychlorinated biphenyls ("PCBs")
and PCB-containing materials, radon gas, infectious or medical
wastes and all other substances or wastes of any nature regulated
pursuant to any Environmental Law.
"Hedging Agreement" means any interest rate protection
agreement, foreign currency exchange agreement, commodity price
protection agreement or other interest or currency exchange rate
or commodity price hedging arrangement.
"Holdings" means J. Crew Group, Inc., a New York
corporation.
"Holdings Preferred Stock" means (a) Holdings' 14.50%
Series A Preferred Stock and (b) Holdings' 14.50% payment-in-kind
Series B Redeemable Cumulative Preferred Stock.
"Holdings Senior Discount Debentures" means (i) up to
$142,000,000 principal amount at final maturity of 13 % Senior
Discount Debentures due 2008 of Holdings issued pursuant to the
Holdings Senior Discount Debt Documents and (ii) debentures
issued in exchange for such Holdings Senior Discount Debentures
in an equivalent aggregate principal
11
amount and having terms and conditions substantially identical to
those of such Holdings Senior Discount Debentures, pursuant to a
registered exchange offer.
"Holdings Senior Discount Debt Documents" means the
indenture under which the Holdings Senior Discount Debentures are
issued and all other instruments, agreements and other documents
evidencing or governing the Holdings Senior Discount Debentures
or providing for any Guarantee or other right in respect thereof.
"Inactive Subsidiary" means any subsidiary, direct or
indirect, that (a) has total assets not in excess of $50,000, (b)
conducts no business and (c) has no Indebtedness; provided that
if more than one subsidiary is deemed an Inactive Subsidiary
pursuant to this definition, all Inactive Subsidiaries shall be
considered to be a single consolidated subsidiary for purposes of
determining whether the conditions specified above are satisfied.
"Indebtedness" of any Person means, without
duplication, (a) all obligations of such Person for borrowed
money, (b) all obligations of such Person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of
such Person upon which interest charges are customarily paid, (d)
all obligations of such Person under conditional sale or other
title retention agreements relating to property acquired by such
Person, (e) all obligations of such Person in respect of the
deferred purchase price of property or services (excluding
current accounts payable incurred in the ordinary course of
business), (f) all Indebtedness of others secured by (or for
which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien on property
owned or acquired by such Person, whether or not the Indebtedness
secured thereby has been assumed, (g) all Guarantees by such
Person of Indebtedness of others, (h) all Capital Lease
Obligations of such Person, (i) all obligations, contingent or
otherwise, of such Person as an account party in respect of
letters of credit and letters of guaranty and (j) all
obligations, contingent or otherwise, of such Person in respect
of bankers' acceptances. The Indebtedness of any Person shall
include the Indebtedness of any other entity (including any
partnership in which such Person is a general partner) to the
extent such Person is liable therefor as a result of such
Person's ownership interest in or other relationship with such
entity, except to the extent the terms of such Indebtedness
provide that such Person is not liable therefor. Indebtedness
shall not include agreements providing for indemnification,
purchase price adjustments or similar obligations incurred or
assumed in connection with the acquisition or disposition of
assets or stock.
"Indemnified Taxes" means Taxes other than Excluded
Taxes.
"Indemnity, Subrogation and Contribution Agreement"
means the Indemnity, Subrogation and Contribution Agreement,
substantially in the form of Exhibit C, among the Borrower,
Holdings, the Subsidiary Loan Parties and the Administrative
Agent.
"Information Memorandum" means the Confidential
Information Memorandum dated September 17, 1997, relating to
Holdings, the Borrower and the Transactions, as the same has been
supplemented from time to time.
"Initial Investors" means TPG Partners and certain
investors arranged by TPG Partners.
12
"Intercreditor Agreement" means the Intercreditor
Agreement, substantially in the form of Exhibit G, among the
Receivables Trustee and the Collateral Agent.
"Interest Election Request" means a request by the
Borrower to convert or continue a Revolving Borrowing or Term
Borrowing in accordance with Section 2.07.
"Interest Payment Date" means (a) with respect to any
ABR Loan, the last day of each January, April, July and October
and (b) with respect to any Eurodollar Loan, the last day of the
Interest Period applicable to the Borrowing of which such Loan is
a part and, in the case of a Eurodollar Borrowing with an
Interest Period of more than three months' duration, each day
prior to the last day of such Interest Period that occurs at
intervals of three months' duration after the first day of such
Interest Period.
"Interest Period" means, with respect to any
Eurodollar Borrowing, the period commencing on the date of such
Borrowing and ending on the numerically corresponding day in the
calendar month that is one, two, three or six months thereafter,
as the Borrower may elect; provided, that (a) if any Interest
Period would end on a day other than a Business Day, such
Interest Period shall be extended to the next succeeding Business
Day unless such next succeeding Business Day would fall in the
next calendar month, in which case such Interest Period shall end
on the next preceding Business Day and (b) any Interest Period
that commences on the last Business Day of a calendar month (or
on a day for which there is no numerically corresponding day in
the last calendar month of such Interest Period) shall end on the
last Business Day of the last calendar month of such Interest
Period. For purposes hereof, the date of a Borrowing initially
shall be the date on which such Borrowing is made and thereafter
shall be the effective date of the most recent conversion or
continuation of such Borrowing.
"Inventory" means all goods owned by the Borrower and
its Subsidiaries and held for sale or as raw materials, work in
process (wherever located, including items in transit or in the
possession of third parties).
"Issuing Bank" means (a) The Chase Manhattan Bank, in
its capacity as the issuer of Letters of Credit and Acceptances
hereunder, and its successors in such capacity as provided in
Section 2.05(i) and (b) any other Lender approved by the
Administrative Agent and the Borrower; provided that, at any
time, there shall only be two Issuing Banks. The Issuing Bank
may, in its discretion, arrange for one or more Letters of Credit
or Acceptances to be issued by Affiliates of the Issuing Bank, in
which case the term "Issuing Bank" shall include any such
Affiliate with respect to Letters of Credit and Acceptances
issued by such Affiliate.
"LC Disbursement" means a payment made by the Issuing
Bank pursuant to a Letter of Credit.
"LC and Acceptance Exposure" means, at any time, the
sum of (a) the aggregate undrawn amount of all outstanding
Letters of Credit and the aggregate face amount of all
outstanding Acceptance Drafts at such time plus (b) the aggregate
amount of all LC Disbursements and Acceptance Disbursements that
have not yet been reimbursed by or on behalf of the Borrower at
such time. The LC and Acceptance Exposure shall be expressed in
dollars, determined as provided in Section 2.05(k) in the case of
any amount thereof denominated in an
13
Alternate Currency. The LC and Acceptance Exposure of any
Revolving Lender at any time shall be its Applicable Percentage
of the total LC and Acceptance Exposure at such time.
"Lenders" means the Persons listed on Schedule 2.01
and any other Person that shall have become a party hereto
pursuant to an Assignment and Acceptance, other than any such
Person that ceases to be a party hereto pursuant to an Assignment
and Acceptance.
"Letter of Credit" means any letter of credit
(including, without limitation, any Standby LC) issued pursuant
to this Agreement. Each Existing Letter of Credit will be deemed
to constitute a Letter of Credit for all purposes under the Loan
documents as though each Existing Letter of Credit had been
issued hereunder on the Effective Date.
"Leverage Ratio" means, on any date and subject to
Section 1.05, the ratio of (a) Funded Debt as of such date to (b)
Consolidated EBITDA for the period of four consecutive fiscal
quarters of the Borrower most recently ended as of such date (or,
if such date is not the last day of a fiscal quarter, then most
recently ended prior to such date), all determined on a
consolidated basis in accordance with GAAP.
"LIBO Rate" means, with respect to any Eurodollar
Borrowing for any Interest Period, the rate appearing on Page
3750 of the Telerate Service (or on any successor or substitute
page of such Service, or any successor to or substitute for such
Service, providing rate quotations comparable to those currently
provided on such page of such Service, as determined by the
Administrative Agent from time to time for purposes of providing
quotations of interest rates applicable to dollar deposits in the
London interbank market) at approximately 11:00 a.m., London
time, two Business Days prior to the commencement of such
Interest Period, as the rate for dollar deposits with a maturity
comparable to such Interest Period. In the event that such rate
is not available at such time for any reason, then the "LIBO
Rate" with respect to such Eurodollar Borrowing for such Interest
Period shall be the rate at which dollar deposits of $5,000,000
and for a maturity comparable to such Interest Period are offered
by the principal London office of the Administrative Agent in
immediately available funds in the London interbank market at
approximately 11:00 a.m., London time, two Business Days prior to
the commencement of such Interest Period.
"Lien" means, with respect to any asset, (a) any
mortgage, deed of trust, lien, pledge, hypothecation,
encumbrance, charge or security interest in, on or of such asset,
(b) the interest of a vendor or a lessor under any conditional
sale agreement, capital lease or title retention agreement (or
any financing lease having substantially the same economic effect
as any of the foregoing) relating to such asset and (c) in the
case of securities, any purchase option, call or similar right of
a third party with respect to such securities.
"Loan Documents" means this Agreement, the promissory
notes, if any, executed and delivered pursuant to Section
2.09(e), the Guarantee Agreement, the Indemnity, Subrogation and
Contribution Agreement and the Security Documents.
"Loan Parties" means Holdings, the Borrower and the
Subsidiary Loan Parties.
14
"Loans" means the loans made by the Lenders to the
Borrower pursuant to this Agreement.
"Margin Stock" shall have the meaning assigned to such
term under Regulation U.
"Material Adverse Effect" means a material adverse
effect on (a) the business, assets, operations, prospects or
condition, financial or otherwise, of Holdings, the Borrower and
the Subsidiaries taken as a whole, (b) the ability of the Loan
Parties to perform their obligations under the Loan Documents or
(c) any material rights of or benefits available to the Lenders
under the Loan Documents.
"Material Indebtedness" means Indebtedness (other than
the Loans, Letters of Credit and Acceptances), or obligations in
respect of one or more Hedging Agreements, of any one or more of
Holdings, the Borrower and its Subsidiaries in an aggregate
principal amount exceeding $5,000,000. For purposes of
determining Material Indebtedness, the "principal amount" of the
obligations of Holdings, the Borrower or any Subsidiary in
respect of any Hedging Agreement at any time shall be the maximum
aggregate amount (giving effect to any netting agreements) that
Holdings, the Borrower or such Subsidiary would be required to
pay if such Hedging Agreement were terminated at such time.
"Maturity Date" means October 17, 2003.
"Moody's" means Moody's Investors Service, Inc.
"Mortgage" means a mortgage, deed of trust, assignment
of leases and rents, leasehold mortgage or other security
document granting a Lien on any Mortgaged Property to secure the
Obligations. Each Mortgage shall be satisfactory in form and
substance to the Collateral Agent.
"Mortgaged Property" means, initially, each parcel of
real property and the improvements thereto owned by a Loan Party
and identified on Schedule 1.01(a), and includes each other
parcel of real property and improvements thereto with respect to
which a Mortgage is granted pursuant to Section 5.12 or 5.13.
"Multiemployer Plan" means a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
"Net Proceeds" means, with respect to any event (a)
the gross cash proceeds received in respect of such event
including (i) any cash received in respect of any noncash
proceeds, but only as and when received, (ii) in the case of a
casualty, insurance proceeds in excess of $250,000, and (iii) in
the case of a condemnation or similar event, condemnation awards
and similar payments, net of (b) the sum of (i) all reasonable
fees and out-of-pocket expenses (including underwriting discounts
and commissions and collection expenses) paid or payable by
Holdings, the Borrower and the Subsidiaries to third parties
(other than Affiliates) in connection with such event, (ii) in
the case of a sale, transfer or other disposition of an asset
(including pursuant to a sale and leaseback transaction or a
casualty or condemnation or similar
15
proceeding), the amount of all payments required to be made by
Holdings, the Borrower and the Subsidiaries as a result of such
event to repay Indebtedness (other than Loans) secured by such
asset or otherwise subject to mandatory prepayment as a result of
such event, and (iii) the amount of all taxes paid or payable) by
Holdings, the Borrower and the Subsidiaries, and the amount of
any reserves established by Holdings, the Borrower and the
Subsidiaries to fund contingent liabilities reasonably estimated
to be payable, in each case during the year that such event
occurred or the next succeeding year and that are directly
attributable to such event (as determined reasonably and in good
faith by the chief financial officer of the Borrower).
"Net Working Capital" means, at any date, (a) the
consolidated current assets of the Borrower and its consolidated
Subsidiaries as of such date (excluding cash and Permitted
Investments) minus (b) the consolidated current liabilities of
the Borrower and its consolidated Subsidiaries as of such date
(excluding Indebtedness). Net Working Capital at any date may be
a positive or negative number. Net Working Capital increases when
it becomes more positive or less negative and decreases when it
becomes less positive or more negative.
"Obligations" has the meaning assigned to such term in
the Security Agreement.
"Operating Lease" means any lease (including leases
that may be terminated by the lessee at any time) of any property
(whether real, personal or mixed) that is not a Capital Lease.
"Other Taxes" means any and all current or future
stamp or documentary taxes or any other excise or property taxes,
charges or similar levies arising from any payment made under any
Loan Document or from the execution, delivery or enforcement of,
or otherwise with respect to, any Loan Document.
"Outstanding Senior Notes" means the $85,000,000 of
8.1% Senior Notes of Holdings due December 15, 2004.
"PBGC" means the Pension Benefit Guaranty Corporation
referred to and defined in ERISA and any successor entity
performing similar functions.
"Perfection Certificate" means a certificate in the
form of Annex 1 to the Security Agreement or any other form
approved by the Collateral Agent.
"Permitted Encumbrances" means:
(a) Liens imposed by law for taxes, assessments and
governmental charges or claims that are not yet due or are
being contested in compliance with Section 5.05;
(b) carriers', warehousemen's, mechanics',
materialmen's, repairmen's and other like Liens imposed by
law, arising in the ordinary course of business and
securing obligations that are not overdue by more than 30
days or are being contested in compliance with Section
5.05;
16
(c) pledges and deposits made in the ordinary course of
business in compliance with workers' compensation,
unemployment insurance and other social security laws or
regulations;
(d) deposits to secure the performance of bids, trade
contracts, leases, statutory obligations, surety and appeal
bonds, customs bonds, performance bonds and other
obligations of a like nature, in each case in the ordinary
course of business;
(e) judgment liens in respect of judgments that do not
constitute an Event of Default under clause (k) of Article VII;
(f) easements, zoning restrictions, rights-of-way and
similar encumbrances on real property imposed by law or
arising in the ordinary course of business, and minor
defects or irregularities in title that do not secure any
monetary obligations and do not materially detract from the
value of the affected property or interfere in any material
respect with the ordinary conduct of business of the
Borrower or any Subsidiary;
(g) ground leases in respect of real property on which
facilities owned or leased by the Borrower or any of its
Subsidiaries are located;
(h) any interest or title of a lessor under any lease
permitted by this Agreement;
(i) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; and
(j) leases or subleases granted to others not interfering
in any material respect with the business of the Borrower and
its Subsidiaries, taken as a whole;
provided that the term "Permitted Encumbrances" shall not include
any Lien securing Indebtedness.
"Permitted Investments" means:
(a) direct obligations of, or obligations the
principal of and interest on which are unconditionally
guaranteed by, the United States of America (or by any
agency thereof to the extent such obligations are backed by
the full faith and credit of the United States of America),
in each case maturing within one year from the date of
acquisition thereof;
(b) investments in commercial paper maturing within
one year from the date of acquisition thereof and having,
at such date of acquisition, one of the two highest credit
ratings obtainable from S&P or from Moody's;
(c) investments in certificates of deposit, banker's
acceptances and time deposits maturing within one year from
the date of acquisition thereof issued or guaranteed by or
placed with, and money market deposit accounts issued or
offered by, any Lender or any other bank organized under
the laws of the United States of America
17
or any State thereof which has a combined capital and
surplus and undivided profits of not less than $250,000,000
or any domestic office of a foreign bank which has a
combined capital and surplus and undivided profits of not
less than $250,000,000; and
(d) fully collateralized repurchase agreements with a
term of not more than 30 days for securities described in
clauses (a) and (b) above and entered into with a financial
institution satisfying the criteria described in clause (c)
above;
(e) securities issued by any state of the United
States of America or any political subdivision of any such
state or any public instrumentality thereof or any
political subdivision of any such state or any public
instrumentality thereof having maturities of not more than
one year from the date of acquisition thereof and, at the
time of acquisition, having an investment grade rating
generally obtainable from either S&P or Moody's (or, if at
any time neither S&P nor Moody's shall be rating such
obligations, then from another nationally recognized rating
service); and
(f) shares of investment companies that are registered
under the Investment Company Act of 1940 and invest solely
in one or more of the types of securities described in
clauses (a) through (e) above.
"Person" means any natural person, corporation,
limited liability company, trust, joint venture, association,
company, partnership, Governmental Authority or other entity.
"Plan" means any employee pension benefit plan (other
than a Multiemployer Plan) subject to the provisions of Title IV
of ERISA or Section 412 of the Code or Section 302 of ERISA, and
in respect of which the Borrower or any ERISA Affiliate is (or,
if such plan were terminated, would under Section 4069 of ERISA
be deemed to be) an "employer" as defined in Section 3(5) of
ERISA.
"Pledge Agreement" means the Pledge Agreement,
substantially in the form of Exhibit E, among the Loan Parties
and the Collateral Agent for the benefit of the Secured Parties.
"Popular Club" means Popular Club Plan, Inc., a New
Jersey corporation and wholly owned subsidiary of the Borrower.
"Prepayment Event" means:
(a) any sale, transfer or other disposition (including
pursuant to a sale and leaseback transaction) of any
property or asset of Holdings, the Borrower or any
Subsidiary in excess of $100,000, other than dispositions
described in clauses (a), (b) and (e) of Section 6.05; or
(b) any casualty or other insured damage to, or any
taking under power of eminent domain or by condemnation or
similar proceeding of, any property or asset of Holdings,
the Borrower or any Subsidiary, but only to the extent that
the Net Proceeds therefrom have not been applied to repair,
restore or replace such property or asset within 180 days
after such event; or
18
(c) the issuance by Holdings, the Borrower or any
Subsidiary of any equity securities, or the receipt by
Holdings, the Borrower or any Subsidiary of any capital
contribution, other than any such issuance of equity
securities to, or receipt of any such capital contribution
from, Holdings, the Borrower or a Subsidiary; or
(d) the incurrence by Holdings, the Borrower or any
Subsidiary of any Indebtedness, other than Indebtedness
permitted under Section 6.01;
provided that, (i) with respect to any event described in clause
(a) above, if Holdings shall deliver a certificate of a Financial
Officer to the Administrative Agent at the time of such event
setting forth the Borrower's or a Subsidiary's intent to use the
Net Proceeds of such event to acquire other assets to be used in
the same line of business within 180 days of receipt of such Net
Proceeds and certifying that no Default has occurred and is
continuing, such event shall not constitute a Prepayment Event
except to the extent the Net Proceeds therefrom are not so used
at the end of such 180-day period, at which time such event shall
be deemed a Prepayment Event with Net Proceeds equal to the Net
Proceeds so remaining unused, (ii) with respect to clause (c)
above and the issuances of new preferred stock of Holdings or the
issuances of common stock of Holdings in a Rule 144A or other
private placement, if Holdings shall deliver a certificate of a
Financial Officer to the Administrative Agent at the time of such
issuance setting forth Holdings intent to use the Net Proceeds of
such issuance to redeem outstanding Holdings Preferred Stock
within 90 days of receipt of such Net Proceeds and certifying
that (A) no Default has occurred and is continuing and (B) the
terms of the new preferred stock are no less favorable to the
Lenders than the outstanding Holdings Preferred Stock, the Net
Proceeds from such event shall not be deemed Net Proceeds of a
Prepayment Event except to the extent such Net Proceeds therefrom
are not so used at the end of such 90-day period, at which time
such unused Net Proceeds shall be deemed Net Proceeds of a
Prepayment Event equal to the Net Proceeds so remaining unused
and (iii) with respect to clause (c) above and the issuance of
equity to a member of the Control Group, if Holdings shall
deliver a certificate of a Financial Officer to the
Administrative Agent at the time of such issuance setting forth
Holdings' intent to use up to $20,000,000 of the Net Proceeds of
such equity for investments permitted by Section 6.04(c) within
90 days of receipt of such Net Proceeds and certifying that no
Default has occurred and is continuing, the Net Proceeds from
such event shall not be deemed Net Proceeds of a Prepayment Event
except to the extent such Net Proceeds therefrom are not so used
at the end of such 90-day period, at which time such unused Net
Proceeds shall be deemed Net Proceeds of a Prepayment Event.
"Prime Rate" means the rate of interest per annum
publicly announced from time to time by The Chase Manhattan Bank
as its prime rate in effect at its principal office in New York
City; each change in the Prime Rate shall be effective from and
including the date such change is publicly announced as being
effective.
"Purchase Money Note" means a promissory note
evidencing a line of credit, or evidencing other Indebtedness
owed to the Borrower or any Subsidiary in connection with a
Qualified Receivables Transaction, which note shall be repaid
from cash available to the maker of such note, other than amounts
required to be established as reserves pursuant to the
Receivables Transaction Documents, amounts paid to investors in
respect of interest, principal
19
and other amounts owing to such investors and amounts paid in
connection with the purchase of newly generated receivables.
"Qualified Receivables Transaction" means any
transaction or series of transactions that may be entered into by
the Borrower or any Subsidiary pursuant to which the Borrower or
any Subsidiary may sell, convey or otherwise transfer to (i) a
Receivables Subsidiary (in the case of a transfer by the Borrower
or any Subsidiary) and (ii) any other Person (in the case of a
transfer by a Receivables Subsidiary), or may grant a security
interest in, any accounts receivable (whether now existing or
arising in the future) of the Borrower or any Subsidiary and any
asset related thereto including, without limitation, all
collateral securing such accounts receivable, all contracts and
all guarantees or other obligations in respect of such accounts
receivable, proceeds of such accounts receivable and other assets
which are customarily transferred, or in respect of which
security interests are customarily granted, in connection with
asset securitization transactions involving accounts receivable.
"Recapitalization" means the recapitalization of
Holdings pursuant to, and in accordance with the terms of, the
Recapitalization Documents, including (a) the transfer by
Holdings of all its assets to the Borrower, (b) the assumption by
the Borrower of all liabilities of Holdings and (c) the issuance
by the Borrower of all its common stock to Holdings.
"Recapitalization Agreement" means the
Recapitalization Agreement dated as of July 22, 1997, between
Holdings and TPG Partners, as amended.
"Recapitalization Documents" means the
Recapitalization Agreement and all other agreements and documents
relating to the transactions contemplated thereby.
"Receivables Pooling Agreement" means the Pooling
Agreement relating to a Qualified Receivables Transaction, among
the Receivables Subsidiary and the Receivables Trustee.
"Receivables Subsidiary" means a wholly owned
Subsidiary which engages in no activities other than in
connection with the financing of accounts receivables and which
is designated by the board of directors of the Borrower (as
provided below) as a Receivables Subsidiary (a) no portion of the
Indebtedness or any other Obligations (contingent or otherwise)
of which (i) is guaranteed by the Borrower or any other
Subsidiary (excluding guarantees of obligations (other than the
principal of, and interest on, Indebtedness) pursuant to Standard
Securitization Undertakings), (ii) is recourse to or obligates
the Borrower or any other Subsidiary in any way other than
pursuant to Standard Securitization Undertakings or (iii)
subjects any property or asset of the Borrower or any other
Subsidiary, directly or indirectly, contingently or otherwise, to
the satisfaction thereof, other than pursuant to Standard
Securitization Undertakings, (b) with which neither the Borrower
nor any other Subsidiary has any material contract, agreement,
arrangement or understanding (except in connection with a
Purchase Money Note or Qualified Receivables Transaction) other
than on terms no less favorable to the Borrower or such other
Subsidiary than those that might be obtained at the time from
persons that are not Affiliates of the Borrower, other than fees
payable in the ordinary course of business in connection with
servicing accounts receivable, and (c) to which neither the
Borrower nor any other Subsidiary has any obligation to maintain
or preserve such entity's financial condition or
20
cause such entity to achieve certain levels of operating results.
Any such designation by the board of directors of the Borrower
shall be evidenced by filing with the Receivables Trustee a
certified copy of the resolution of the board of directors of the
Borrower giving effect to such designation and an officers'
certificate certifying, to the best of such officer's knowledge
and belief after consulting with counsel, that such designation
complied with the foregoing conditions.
"Receivables Transaction Documents" means the
documents executed in connection with a Qualified Receivables
Transaction, including the Receivables Pooling Agreement.
"Receivables Trustee" means the trustee on behalf of
the holders of interests in the receivables and related assets
sold pursuant to a Qualified Receivables Transaction.
"Register" has the meaning set forth in Section 9.04.
"Regulation A" means Regulation A of the Board as from
time to time in effect and all official rulings and
interpretations thereunder or thereof.
"Regulation G" means Regulation G of the Board as from
time to time in effect and all official rulings and
interpretations thereunder or thereof.
"Regulation U" means Regulation U of the Board as from
time to time in effect and all official rulings and
interpretations thereunder or thereof.
"Regulation X" means Regulation X of the Board as from
time to time in effect and all official rulings and
interpretations thereunder or thereof.
"Related Parties" means, with respect to any specified
Person, such Person's Affiliates and the respective directors,
officers, employees, agents and advisors of such Person and such
Person's Affiliates.
"Release" means any spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping,
leaching, dumping, disposing, depositing, emanating or migrating
of any Hazardous Material in, into, onto or through the
environment.
"Required Lenders" means, at any time, Lenders having
Revolving Exposures, Term Loans and unused Commitments
representing more than 50% of the sum of the total Revolving
Exposures, outstanding Term Loans and unused Commitments at such
time.
"Restricted Payment" means any dividend or other
distribution (whether in cash, securities or other property) with
respect to any shares of any class of capital stock of Holdings,
the Borrower or any Subsidiary, or any payment (whether in cash,
securities or other property), including any sinking fund or
similar deposit, on account of the purchase, redemption,
retirement, acquisition, cancellation or termination of any such
shares of capital stock of Holdings, the Borrower or any
Subsidiary or any option, warrant or other right to acquire any
such shares of capital stock of Holdings, the Borrower or any
Subsidiary.
21
"Revolving Availability Period" means the period from
and including the Effective Date to but excluding the earlier of
the Maturity Date and the date of termination of the Revolving
Commitments.
"Revolving Commitment" means, with respect to each
Lender, the commitment, if any, of such Lender to make Revolving
Loans and to acquire participations in Letters of Credit and
Acceptances hereunder, expressed as an amount representing the
maximum aggregate amount of such Lender's Revolving Exposure
hereunder, as such commitment may be (a) reduced from time to
time pursuant to Section 2.08 and (b) reduced or increased from
time to time pursuant to assignments by or to such Lender
pursuant to Section 9.04. The initial amount of each Lender's
Revolving Commitment is set forth on Schedule 2.01, or in the
Assignment and Acceptance pursuant to which such Lender shall
have assumed its Revolving Commitment, as applicable. The initial
aggregate amount of the Lenders' Revolving Commitments is
$200,000,000.
"Revolving Exposure" means, with respect to any Lender
at any time, the sum of (a) the outstanding principal amount of
such Lender's Revolving Loans and (b) its LC and Acceptance
Exposure at such time.
"Revolving Lender" means a Lender with a Revolving
Commitment or, if the Revolving Commitments have terminated or
expired, a Lender with Revolving Exposure.
"Revolving Loan" means a Loan made pursuant to clause
(b) of Section 2.01.
"S&P" means Standard & Poor's.
"Secured Parties" has the meaning assigned to such
term in the Security Agreement.
"Security Agreement" means the Security Agreement,
substantially in the form of Exhibit F, among the Borrower, the
Subsidiary Loan Parties and the Collateral Agent for the benefit
of the Secured Parties.
"Security Documents" means the Security Agreement, the
Pledge Agreement, the Intercreditor Agreement, the Mortgages and
each other security agreement or other instrument or document
executed and delivered pursuant to Section 5.12 or 5.13 to secure
any of the Obligations.
"Senior Debt" means, with respect to the Borrower and
the Subsidiaries on a consolidated basis at any time, all
Indebtedness of the Borrower and the Subsidiaries (other than the
Subordinated Debt) which at such time would be required to be
reflected as a liability for borrowed money on a consolidated
balance sheet of the Borrower and its consolidated Subsidiaries
prepared in accordance with GAAP.
"Standby LC(s)" means any irrevocable standby letter
of credit in support of certain obligations of the Borrower
available against sight drafts and payable at sight, issued by
the Issuing Bank for the account of the Borrower pursuant to
Section 2.05 hereof.
22
"Standby LC Disbursement" means a payment made by the
Issuing Bank pursuant to a Standby LC.
"Standby LC Exposure" means, at any time, the sum of
(a) the aggregate undrawn and unexpired amount of all outstanding
Standby LCs at such time plus (b) the aggregate amount of all
Standby LC Disbursements that have not yet been reimbursed by or
on behalf of the Borrower at such time.
"Statutory Reserve Rate" means a fraction (expressed
as a decimal), the numerator of which is the number one and the
denominator of which is the number one minus the aggregate of the
maximum reserve percentages (including any marginal, special,
emergency or supplemental reserves) expressed as a decimal
established by the Board to which the Administrative Agent is
subject (a) with respect to the Base CD Rate, for new negotiable
nonpersonal time deposits in dollars of over $100,000 with
maturities approximately equal to and (b) with respect to the
Adjusted LIBO Rate, for eurocurrency funding (currently referred
to as "Eurocurrency Liabilities" in Regulation D of the Board).
Such reserve percentages shall include those imposed pursuant to
such Regulation D. Eurodollar Loans shall be deemed to constitute
eurocurrency funding and to be subject to such reserve
requirements without benefit of or credit for proration,
exemptions or offsets that may be available from time to time to
any Lender under such Regulation D or any comparable regulation.
The Statutory Reserve Rate shall be adjusted automatically on and
as of the effective date of any change in any reserve percentage.
"Standard Securitization Undertakings" means
representations, warranties, covenants and indemnities entered
into by the Borrower or any Subsidiary which are reasonably
customary in an accounts receivable transaction.
"Subordinated Debt" means (i) the Senior Subordinated
Notes to be issued by the Borrower on or prior to the Effective
Date in the aggregate principal amount of $150,000,000, (ii)
notes issued in exchange for such Senior Subordinated Notes in an
aggregate principal amount not to exceed $150,000,000 and having
terms and conditions substantially identical to those of such
Senior Subordinated Notes, pursuant to a registered exchange
offer and (iii) the Indebtedness represented thereby and the
Guarantees made by any Subsidiary Loan Party in connection
therewith.
"Subordinated Debt Documents" means the indenture
under which the Subordinated Debt is issued and all other
instruments, agreements and other documents evidencing or
governing the Subordinated Debt or providing for any Guarantee or
other right in respect thereof.
"subsidiary" means, with respect to any Person (the
"parent") at any date, any corporation, limited liability
company, partnership, association or other entity the accounts of
which would be consolidated with those of the parent in the
parent's consolidated financial statements if such financial
statements were prepared in accordance with GAAP as of such date,
as well as any other corporation, limited liability company,
partnership, association or other entity of which securities or
other ownership interests representing more than 50% of the
equity or more than 50% of the ordinary voting power or, in the
case of a partnership, more than 50% of
23
the general partnership interests are, as of such date, owned,
controlled or held by the parent or one or more subsidiaries of
the parent or by the parent and one or more subsidiaries of the
parent.
"Subsidiary" means any subsidiary of Holdings or the
Borrower, as the context requires, other than any Inactive
Subsidiary.
"Subsidiary Loan Party" means any Subsidiary of the
Borrower other than (a) any Foreign Subsidiary that, if it were
to Guarantee the Obligations, would result in adverse tax
consequences to Holdings or the Borrower and (b) the Receivables
Subsidiary.
"Tax Sharing Agreement" means the tax sharing
agreement between the Borrower and Holdings.
"Taxes" means any and all present or future taxes,
levies, imposts, duties, deductions, charges or withholdings
imposed by any Governmental Authority.
"Term Commitment" means, with respect to each Lender,
the commitment, if any, of such Lender to make a Term Loan
hereunder on the Effective Date, expressed as an amount
representing the maximum principal amount of the Term Loan to be
made by such Lender hereunder, as such commitment may be (a)
reduced from time to time pursuant to Section 2.08 and (b)
reduced or increased from time to time pursuant to assignments by
or to such Lender pursuant to Section 9.04. The initial amount of
each Lender's Term Commitment is set forth on Schedule 2.01, or
in the Assignment and Acceptance pursuant to which such Lender
shall have assumed its Term Commitment, as applicable. The
initial aggregate amount of the Lenders' Term Commitments is
$70,000,000.
"Term Lender" means a Lender with a Term Commitment or
an outstanding Term Loan.
"Term Loan" means a Loan made pursuant to clause (a)
of Section 2.01.
"Three-Month Secondary CD Rate" means, for any day,
the secondary market rate, expressed as a per annum rate, for
three-month certificates of deposit reported as being in effect
on such day (or, if such day is not a Business Day, the next
preceding Business Day) by the Board through the public
information telephone line of the Federal Reserve Bank of New
York (which rate will, under the current practices of the Board,
be published in Federal Reserve Statistical Release H.15(519)
during the week following such day) or, if such rate is not so
reported on such day or such next preceding Business Day, the
average of the secondary market quotations for three-month
certificates of deposit of major money center banks in New York
City received at approximately 10:00 a.m., New York City time, on
such day (or, if such day is not a Business Day, on the next
preceding Business Day) by the Administrative Agent from three
negotiable certificate of deposit dealers of recognized standing
selected by it.
"TPG Partners" means (a) TPG Partners II, L.P., (b)
the principals who Control TPG Partners II, L.P. as of the date
of this Agreement, and (c) any other investment funds Controlled
by such principals.
24
"Transactions" means the Recapitalization and the
Financing Transactions.
"Type", when used in reference to any Loan or
Borrowing, refers to whether the rate of interest on such Loan,
or on the Loans comprising such Borrowing, is determined by
reference to the Adjusted LIBO Rate or the Alternate Base Rate.
"Withdrawal Liability" means liability to a
Multiemployer Plan as a result of a complete or partial
withdrawal from such Multiemployer Plan, as such terms are
defined in Part I of Subtitle E of Title IV of ERISA.
SECTION 1.02. Classification of Loans and Borrowings.
For purposes of this Agreement, Loans may be classified and
referred to by Class (e.g., a "Revolving Loan") or by Type (e.g.,
a "Eurodollar Loan") or by Class and Type (e.g., a "Eurodollar
Revolving Loan"). Borrowings also may be classified and referred
to by Class (e.g., a "Revolving Borrowing") or by Type (e.g., a
"Eurodollar Borrowing") or by Class and Type (e.g., a "Eurodollar
Revolving Borrowing").
SECTION 1.03. Terms Generally. The definitions of
terms herein shall apply equally to the singular and plural forms
of the terms defined. Whenever the context may require, any
pronoun shall include the corresponding masculine, feminine and
neuter forms. The words "include", "includes" and "including"
shall be deemed to be followed by the phrase "without
limitation". The word "will" shall be construed to have the same
meaning and effect as the word "shall". Unless the context
requires otherwise (a) any definition of or reference to any
agreement, instrument or other document herein shall be construed
as referring to such agreement, instrument or other document as
from time to time amended, supplemented or otherwise modified
(subject to any restrictions on such amendments, supplements or
modifications set forth herein), (b) any reference herein to any
Person shall be construed to include such Person's successors and
assigns, (c) the words "herein", "hereof" and "hereunder", and
words of similar import, shall be construed to refer to this
Agreement in its entirety and not to any particular provision
hereof, (d) all references herein to Articles, Sections, Exhibits
and Schedules shall be construed to refer to Articles and
Sections of, and Exhibits and Schedules to, this Agreement and
(e) the words "asset" and "property" shall be construed to have
the same meaning and effect and to refer to any and all tangible
and intangible assets and properties, including cash, securities,
accounts and contract rights.
SECTION 1.04. Accounting Terms; GAAP. Except as
otherwise expressly provided herein, all terms of an accounting
or financial nature shall be construed in accordance with GAAP,
as in effect from time to time; provided that, if the Borrower
notifies the Administrative Agent that the Borrower requests an
amendment to any provision hereof to eliminate the effect of any
change occurring after the date hereof in GAAP or in the
application thereof on the operation of such provision (or if the
Administrative Agent notifies the Borrower that the Required
Lenders request an amendment to any provision hereof for such
purpose), regardless of whether any such notice is given before
or after such change in GAAP or in the application thereof, then
such provision shall be interpreted on the basis of GAAP as in
effect and applied immediately before such change shall have
become effective until such notice shall
25
have been withdrawn or such provision amended in accordance
herewith. References to fiscal years and fiscal quarters shall
be to such fiscal periods of the Borrower.
SECTION 1.05. Interim Financial Calculations. For
purposes of determining the Leverage Ratio and determining
compliance with Sections 6.13 and 6.14:
(a) for determinations made prior to the end of the
fiscal quarter ending August 1, 1998, Consolidated EBITDA
shall not be determined for periods of four fiscal quarters
but instead shall be determined (i) as of January 31, 1998,
for the period beginning August 16, 1997, and ended January
31, 1998, and (ii) as of May 2, 1998, for the period
beginning August 16, 1997, and ended May 2, 1998;
(b) the average daily outstanding principal amount of
Revolving Loans (referred to in clause (c) of the
definition "Funded Debt") shall be deemed to be equal to
$1,700,000 for each fiscal quarter ending prior to January
31, 1998;
(c) for determinations made prior to the end of the
fiscal quarter ending October 31, 1998, rental expense to
be added to Consolidated EBITDA for purposes of determining
Consolidated EBITDAR and for purposes of clause (b)(ii) of
Section 6.14 shall, in each case, be equal to (i) for
purposes of determining compliance with Section 6.14 as of
the end of the fiscal quarter ending January 31, 1998, an
amount equal to (A) rental expense deducted in determining
Consolidated Net Income for the fiscal quarter then ended
multiplied by (B) four, (ii) for purposes of determining
compliance with Section 6.14 as of the end of the fiscal
quarter ending May 2, 1998, an amount equal to (A) rental
expense deducted in determining Consolidated Net Income for
the two consecutive fiscal quarters then ended multiplied
by (B) two and (iii) for purposes of determining compliance
with Section 6.14 as of the end of the fiscal quarter
ending August 1, 1998, an amount equal to (A) rental
expense deducted in determining Consolidated Net Income for
the three consecutive fiscal quarters then ended multiplied
by (B) four-thirds; and
(d) for determinations made prior to the end of the
fiscal quarter ending October 31, 1998, Cash Interest
Expense for purposes of clause (b)(i) of Section 6.14 shall
be equal to (i) for purposes of determining compliance with
Section 6.14 as of the end of the fiscal quarter ending
January 31, 1998, an amount equal to (A) Cash Interest
Expense for the fiscal quarter then ended multiplied by (B)
four, (ii) for purposes of determining compliance with
Section 6.14 as of the end of the fiscal quarter ending May
2, 1998, an amount equal to (A) Cash Interest Expense for
the two consecutive fiscal quarters then ended multiplied
by (B) two and (iii) for purposes of determining compliance
with Section 6.14 as of the end of the fiscal quarter
ending August 1, 1998, an amount equal to (A) Cash Interest
Expense for the three consecutive fiscal quarters then
ended multiplied by (B) four-thirds.
26
ARTICLE II
The Credits
-----------
SECTION 2.01. Commitments. Subject to the terms and
conditions set forth herein, each Lender agrees (a) to make a
Term Loan to the Borrower on the Effective Date in a principal
amount not exceeding its Term Commitment and (b) to make
Revolving Loans to the Borrower from time to time during the
Revolving Availability Period in an aggregate principal amount
that will not result in such Lender's Revolving Exposure
exceeding such Lender's Revolving Commitment. Within the
foregoing limits and subject to the terms and conditions set
forth herein, the Borrower may borrow, prepay and reborrow
Revolving Loans. Amounts repaid in respect of Term Loans may not
be reborrowed.
SECTION 2.02. Loans and Borrowings. (a) Each Loan
shall be made as part of a Borrowing consisting of Loans of the
same Class and Type made by the Lenders ratably in accordance
with their respective Commitments of the applicable Class. The
failure of any Lender to make any Loan required to be made by it
shall not relieve any other Lender of its obligations hereunder;
provided that the Commitments of the Lenders are several and no
Lender shall be responsible for any other Lender's failure to
make Loans as required.
(b) Subject to Section 2.14, each Revolving Borrowing
and Term Borrowing shall be comprised entirely of ABR Loans or
Eurodollar Loans as the Borrower may request in accordance
herewith. Notwithstanding anything to the contrary contained
herein, all Borrowings made on the Effective Date shall be ABR
Borrowings. Each Lender at its option may make any Eurodollar
Loan by causing any domestic or foreign branch or Affiliate of
such Lender to make such Loan; provided that any exercise of such
option shall not affect the obligation of the Borrower to repay
such Loan in accordance with the terms of this Agreement.
(c) At the commencement of each Interest Period for
any Eurodollar Borrowing, such Borrowing shall be in an aggregate
amount that is an integral multiple of $1,000,000 and not less
than $5,000,000. At the time that each ABR Revolving Borrowing is
made, such Borrowing shall be in an aggregate amount that is an
integral multiple of $500,000 and not less than $1,000,000;
provided that an ABR Revolving Borrowing may be in an aggregate
amount that is equal to the entire unused balance of the total
Revolving Commitments or that is required to finance the
reimbursement of an LC Disbursement as contemplated by Section
2.05(e). Borrowings of more than one Type and Class may be
outstanding at the same time; provided that there shall not at
any time be more than a total of 20 Eurodollar Borrowings
outstanding.
(d) Notwithstanding any other provision of this
Agreement, the Borrower shall not be entitled to request, or to
elect to convert or continue, any Borrowing if the Interest
Period requested with respect thereto would end after the
Maturity Date.
SECTION 2.03. Requests for Borrowings. To request a
Revolving Borrowing or Term Borrowing, the Borrower shall notify
the Administrative Agent of such request by telephone (a) in the
case of a Eurodollar Borrowing, not later than 11:00 a.m., New
York City time, three Business Days before the date of the
proposed Borrowing, or (b) in the case of an ABR Borrowing, not
later than 11:00 a.m., New York City time, on the date of the
proposed Borrowing; provided that any such notice of an ABR
Revolving Borrowing to finance the reimbursement of an LC
Disbursement as contemplated by Section 2.05(e) may be given not
later than 11:00 a.m., New York City time, on the date of the
proposed
27
Borrowing. Each such telephonic Borrowing Request shall
be irrevocable and shall be confirmed promptly by hand delivery
or telecopy to the Administrative Agent of a written Borrowing
Request in a form approved by the Administrative Agent and signed
by the Borrower. Each such telephonic and written Borrowing
Request shall specify the following information in compliance
with Section 2.02:
(i) whether the requested Borrowing is to be a
Revolving Borrowing or Term Borrowing;
(ii) the aggregate amount of such Borrowing;
(iii) the date of such Borrowing, which shall be a
Business Day;
(iv) whether such Borrowing is to be an ABR Borrowing
or a Eurodollar Borrowing;
(v) in the case of a Eurodollar Borrowing, the initial
Interest Period to be applicable thereto, which shall be a
period contemplated by the definition of the term "Interest
Period"; and
(vi) the location and number of the Borrower's account
to which funds are to be disbursed, which shall comply with
the requirements of Section 2.06.
If no election as to the Type of Borrowing is specified, then the
requested Borrowing shall be an ABR Borrowing. If no Interest
Period is specified with respect to any requested Eurodollar
Borrowing, then the Borrower shall be deemed to have selected an
Interest Period of one month's duration. Promptly following
receipt of a Borrowing Request in accordance with this Section,
the Administrative Agent shall advise each Lender of the details
thereof and of the amount of such Lender's Loan to be made as
part of the requested Borrowing.
SECTION 2.04. Acceptances. (a) General.
(i) Upon the terms and subject to the conditions of
this Agreement, the Issuing Bank, upon request by the
Borrower, will issue one or more Acceptances denominated in
dollars for the account of the Borrower.
(ii) The Issuing Bank will not be required to issue
any Acceptance to the extent that such issuance would cause
the total Revolving Exposures to exceed the total Revolving
Commitments. Without limiting the provisions of the
immediately preceding sentence, the Issuing Bank will not
issue any Acceptance to the extent that the amount to be
paid under such Acceptance would exceed the Issuing Bank's
legal limit for the issuance of acceptances or if the
related Acceptance Draft does not have a fixed maturity
date occurring on a Business Day that is 30, 60, 90 or 180
days after the date of issuance
28
of such Acceptance Draft and in any event not later than the
date 30 days prior to the Maturity Date.
(iii) The Borrower (A) agrees that the Issuing Bank
may cause the Borrower to be joined as a party to any legal
proceeding brought against the Issuing Bank with respect to
any Acceptance, provided that such proceeding arises out of
an action taken by or an omission of the Issuing Bank at
the request of the Borrower or pursuant to court order, (B)
generally and unconditionally accepts the jurisdiction of
any court in which such legal proceeding is maintained and
(C) irrevocably consents to the service of process out of
any such court by the mailing of copies thereof by
registered or certified first class mail, postage prepaid,
to the Borrower, such service to become effective thirty
days after such mailing.
(b) Issuance. Each Acceptance shall be issued in accordance
with the following procedure:
(i) the Borrower shall submit a request for the
Acceptance and the terms of the related Acceptance Draft to
the Issuing Bank;
(ii) each request for such Acceptance shall relate to
an Acceptance Draft in an aggregate amount that is an
integral multiple of $500,000 and not less than $1,000,000;
(iii) within three Business Days of its receipt of a
request for Acceptance and presentation of the related
Acceptance Draft, the Issuing Bank shall issue such
Acceptance or shall indicate to the Borrower any additional
information necessary for review or corrections to be made
in the request for Acceptance, or shall issue to the
Borrower a rejection of the request for Acceptance and its
reasons for rejection; and
(iv) in the case of each Acceptance to be issued by
the Issuing Bank, not later than 12:00 (noon), New York
City time, on the date of issuance, the Issuing Bank will
complete the date, amount and maturity date of such
Acceptance, stamp and complete the Eligibility Certificate
on the related Acceptance Draft, and execute and accept
such Acceptance Draft.
(c) Discount; Payments. (i) On the date of issuance of
an Acceptance, the Issuing Bank shall discount the related
Acceptance Draft by deducting from the face amount thereof a
discount equal to the sum of (A) the Acceptance Rate determined
by the Issuing Bank with respect to such Acceptance Draft, and
(B) an origination fee in an amount equal to 1/4 of 1% per annum
on the face amount of such Acceptance Draft for the period from
and including such date of issuance to but excluding the
scheduled maturity date of such Acceptance Draft (computed on the
basis of a year of 360 days for the actual number of days
elapsed), and shall make the net amount available to the Borrower
in the same manner as Loans are to be made available to the
Borrower as provided herein; provided that the Issuing Bank may,
in its discretion, deduct from the net amount to be made
available to the Borrower the amount of acceptance fees payable
pursuant to Section 2.12(d), in which case the amount of such
fees so deducted shall be made available by the Issuing Bank to
the Administrative Agent for
29
distribution to the Revolving Lenders. The Issuing Bank shall
retain for its own account the amounts so deducted, except as
expressly provided above with respect to acceptance fees.
(ii) The Issuing Bank may, in its sole discretion,
either retain for its own account or re-discount to third
parties any Acceptance Draft. If the Issuing Bank
re-discounts an Acceptance Draft, the Issuing Bank shall
retain the proceeds thereof for its own account.
(iii) The Borrower shall be obligated, and hereby
agrees, to pay to the Administrative Agent, for the account
of the Issuing Bank, the face amount of each Acceptance
Draft not later than 2:00 p.m., New York City time, on the
stated maturity date thereof. If the Borrower fails to make
such payment when due, the Administrative Agent shall
notify each Revolving Lender of such failure, the payment
then due from the Borrower and such Lender's Applicable
Percentage thereof. Promptly following receipt of such
notice, each Revolving Lender shall pay to the
Administrative Agent its Applicable Percentage of the
payment then due from the Borrower, in the same manner as
provided in Section 2.06 with respect to Loans made by such
Lender (and Section 2.06 shall apply, mutatis mutandis, to
the payment obligations of the Revolving Lenders), and the
Administrative Agent shall promptly pay to the Issuing Bank
the amount so received by it from the Revolving Lenders.
Promptly following receipt by the Administrative Agent of
any payment from the Borrower pursuant to this paragraph,
the Administrative Agent shall distribute such payment to
the Issuing Bank or, to the extent that Revolving Lenders
have made payments pursuant to this paragraph, then to such
Lenders and the Issuing Bank as their interest may appear.
Any payment made by a Revolving Lender pursuant to this
paragraph shall not constitute a Loan and shall not relieve
the Borrower of its obligations in respect of the
applicable Acceptance Drafts.
(iv) The Borrower's obligations to make payments
pursuant to paragraph (iii) above shall be absolute,
unconditional and irrevocable, to the same extent as the
Borrower's reimbursement obligations in respect of LC
Disbursements (and Section 2.05(e) shall apply, mutatis
mutandis, to such obligations).
(v) The provisions of paragraphs (iii) and (iv) above
also shall apply to Acceptance Disbursements, which the
Borrower shall reimburse as provided in paragraphs (iii)
and (iv) above, without duplication.
(vi) If the Borrower fails to make any payment
required to be made by it pursuant to this Section, the
unpaid amount shall bear interest as provided in Section
2.13(c). Interest accrued pursuant to this paragraph shall
be for the account of the Issuing Bank, except that
interest accrued on and after the date of payment by any
Revolving Lender pursuant to paragraph (iii) of this
Section 2.04(c) shall be for the account of such Lender, to
the extent of such payment.
(d) Participations. By the issuance of an Acceptance
and without any further action on the part of the Issuing Bank or
the Lenders, the Issuing Bank hereby grants to each Revolving
Lender, and each Revolving Lender hereby acquires from the
Issuing Bank, a participation in such Acceptance equal to such
Lender's Applicable Percentage of the face amount of the related
Acceptance Draft. In consideration and in furtherance of the foregoing,
30
each Revolving Lender hereby absolutely and unconditionally
agrees to pay to the Administrative Agent for the account of the
Issuing Bank, such Lender's Applicable Percentage of each payment
that the Borrower is required to make pursuant to Section
2.04(c)(iii) above and fails to pay when due, as provided in such
Section. Each Revolving Lender acknowledges and agrees that its
obligation to acquire participations pursuant to this paragraph
is absolute and unconditional and shall not be affected by any
circumstance whatsoever, including the occurrence and continuance
of a Default or reduction or termination of the Commitments, and
that each such payment shall be made without any offset,
abatement, withholding or reduction whatsoever.
(e) Reporting. If the bank serving as Issuing Bank is
not the same as the bank serving as Administrative Agent, the
Issuing Bank shall notify the Administrative Agent of each
Acceptance and the amount and maturity date thereof.
(f) Additional Costs. If an Acceptance issued under
the provisions of this Agreement is not an acceptance eligible
for discount by a Federal Reserve Bank for a reason beyond the
control of the Issuing Bank, the Borrower shall pay to the
Issuing Bank upon demand such additional amounts as are necessary
to indemnify the Issuing Bank and the Revolving Lenders against
any additional costs incurred due to the lack of eligibility or
noncompliance, including reserve requirements, premium liability
to the Federal Deposit Insurance Corporation, and higher discount
rates. The obligations of the Borrower under this paragraph (f)
shall survive the termination of this Agreement and the other
Loan Documents and payment of the Loans.
(g) Fees. The Borrower shall pay to the Issuing Bank,
at the time of the issuance of each Acceptance, a processing or
minimum fee computed in accordance with the Issuing Bank's fee
schedule then in effect, as it may be amended from time to time.
SECTION 2.05. Letters of Credit. (a) General. Subject
to the terms and conditions set forth herein, the Borrower may
request the issuance of Letters of Credit for its own account, in
a form reasonably acceptable to the Administrative Agent and the
Issuing Bank, at any time and from time to time during the
Revolving Availability Period. In the event of any inconsistency
between the terms and conditions of this Agreement and the terms
and conditions of any form of letter of credit application or
other agreement submitted by the Borrower to, or entered into by
the Borrower with, the Issuing Bank relating to any Letter of
Credit, the terms and conditions of this Agreement shall control.
(b) Notice of Issuance, Amendment, Renewal, Extension;
Certain Conditions. To request the issuance of a Letter of Credit
(or the amendment, renewal or extension of an outstanding Letter
of Credit), the Borrower shall hand deliver or telecopy (or
transmit by electronic communication, if arrangements for doing
so have been approved by the Issuing Bank) to the Issuing Bank
and the Administrative Agent (reasonably in advance of the
requested date of issuance, amendment, renewal or extension) a
notice requesting the issuance of a Letter of Credit, or
identifying the Letter of Credit to be amended, renewed or
extended, and specifying the date of issuance, amendment, renewal
or extension (which shall be a Business Day), the date on which such
Letter of Credit is to expire (which shall comply with paragraph (c)
of this Section), the amount of such Letter of Credit, the name and
address of the beneficiary thereof
31
and such other information as shall be necessary to prepare,
amend, renew or extend such Letter of Credit. If requested by the
Issuing Bank, the Borrower also shall submit a letter of credit
application on the Issuing Bank's standard form in connection
with any request for a Letter of Credit. A Letter of Credit
(including, without limitation, any Standby LC) shall be issued,
amended, renewed or extended only if (and upon issuance,
amendment, renewal or extension of each Letter of Credit the
Borrower shall be deemed to represent and warrant that), after
giving effect to such issuance, amendment, renewal or extension,
the total Revolving Exposures shall not exceed the total
Revolving Commitments. A Standby LC shall be issued, amended,
renewed or extended only if (and upon issuance, amendment,
renewal or extension of such Standby LC the Borrower shall be
deemed to represent and warrant that), after giving effect to
such issuance, amendment, renewal or extension, the Standby LC
Exposure shall not exceed $5,000,000.
(c) Expiration Date. Each Letter of Credit shall
expire at or prior to the close of business on the earlier of (i)
the date one year after the date of the issuance of such Letter
of Credit (or, in the case of any renewal or extension thereof,
one year after such renewal or extension) and (ii) the date that
is five Business Days prior to the Maturity Date.
(d) Participations. By the issuance of a Letter of
Credit (or an amendment to a Letter of Credit increasing the
amount thereof) and without any further action on the part of the
Issuing Bank or the Lenders, the Issuing Bank hereby grants to
each Revolving Lender, and each Revolving Lender hereby acquires
from the Issuing Bank, a participation in such Letter of Credit
equal to such Lender's Applicable Percentage of the aggregate
amount available to be drawn under such Letter of Credit. In
consideration and in furtherance of the foregoing, each Revolving
Lender hereby absolutely and unconditionally agrees to pay to the
Administrative Agent, for the account of the Issuing Bank, such
Lender's Applicable Percentage of each LC Disbursement made by
the Issuing Bank and not reimbursed by the Borrower on the date
due as provided in paragraph (e) of this Section, or of any
reimbursement payment required to be refunded to the Borrower for
any reason. Each Lender acknowledges and agrees that its
obligation to acquire participations pursuant to this paragraph
in respect of Letters of Credit is absolute and unconditional and
shall not be affected by any circumstance whatsoever, including
any amendment, renewal or extension of any Letter of Credit or
the occurrence and continuance of a Default or reduction or
termination of the Commitments, and that each such payment shall
be made without any offset, abatement, withholding or reduction
whatsoever.
(e) Reimbursement. If the Issuing Bank shall make any
LC Disbursement in respect of a Letter of Credit, the Borrower
shall reimburse such LC Disbursement by paying to the
Administrative Agent an amount equal to such LC Disbursement not
later than 2:00 p.m., New York City time, on the date that such
LC Disbursement is made, if the Borrower shall have received
notice of such LC Disbursement prior to 10:00 a.m., New York City
time, on such date, or, if such notice has not been received by
the Borrower prior to such time on such date, then not later than
2:00 p.m., New York City time, on (i) the Business Day that the
Borrower receives such notice, if such notice is received prior
to 10:00 a.m., New York City time, on the day of receipt, or (ii)
the Business Day immediately following the day that the Borrower
receives such notice, if such notice is not received prior to
such time on the day of receipt; provided that, except in the case
of an LC Disbursement made in an Alternative Currency, the Borrower
may, in lieu of making such payment directly, request in accordance
with Section 2.03 that such
32
payment be financed with an ABR Revolving Borrowing in an
equivalent amount and each Revolving Lender shall be obligated to
fund its ratable share of such Borrowing regardless of whether
the conditions set forth in Section 4.02 are satisfied. If the
Borrower fails to make such payment when due, the Administrative
Agent shall notify each Revolving Lender of the applicable LC
Disbursement, the payment then due from the Borrower in respect
thereof and such Lender's Applicable Percentage thereof (and, if
the unreimbursed LC Disbursement was made in an Alternative
Currency, the Dollar Amount thereof). Promptly following receipt
of such notice, each Revolving Lender shall pay to the
Administrative Agent its Applicable Percentage of the payment
then due from the Borrower (in dollars, in the amount determined
as provided in Section 2.05(k), if such LC Disbursement was made
in an Alternative Currency), in the same manner as provided in
Section 2.06 with respect to Loans made by such Lender (and
Section 2.06 shall apply, mutatis mutandis, to the payment
obligations of the Revolving Lenders), and the Administrative
Agent shall promptly pay to the Issuing Bank the amounts so
received by it from the Revolving Lenders. Promptly following
receipt by the Administrative Agent of any payment from the
Borrower pursuant to this paragraph, the Administrative Agent
shall distribute such payment to the Issuing Bank or, to the
extent that Revolving Lenders have made payments pursuant to this
paragraph to reimburse the Issuing Bank, then to such Lenders and
the Issuing Bank as their interests may appear. Any payment made
by a Revolving Lender pursuant to this paragraph to reimburse the
Issuing Bank for any LC Disbursement (other than the funding of
ABR Revolving Loans as contemplated above) shall not constitute a
Loan and shall not relieve the Borrower of its obligation to
reimburse such LC Disbursement.
(f) Obligations Absolute. The Borrower's obligation to
reimburse LC Disbursements as provided in paragraph (e) of this
Section shall be absolute, unconditional and irrevocable, and
shall be performed strictly in accordance with the terms of this
Agreement under any and all circumstances whatsoever and
irrespective of (i) any lack of validity or enforceability of any
Letter of Credit or this Agreement, or any term or provision
therein, (ii) any draft or other document presented under a
Letter of Credit proving to be forged, fraudulent or invalid in
any respect or any statement therein being untrue or inaccurate
in any respect, (iii) payment by the Issuing Bank under a Letter
of Credit against presentation of a draft or other document that
does not comply with the terms of such Letter of Credit, or (iv)
any other event or circumstance whatsoever, whether or not
similar to any of the foregoing, that might, but for the
provisions of this Section, constitute a legal or equitable
discharge of, or provide a right of setoff against, the
Borrower's obligations hereunder. Neither the Administrative
Agent, the Lenders nor the Issuing Bank, nor any of their Related
Parties, shall have any liability or responsibility by reason of
or in connection with the issuance or transfer of any Letter of
Credit or any payment or failure to make any payment thereunder
(irrespective of any of the circumstances referred to in the
preceding sentence), or any error, omission, interruption, loss
or delay in transmission or delivery of any draft, notice or
other communication under or relating to any Letter of Credit
(including any document required to make a drawing thereunder),
any error in interpretation of technical terms or any consequence
arising from causes beyond the control of the Issuing Bank;
provided that the foregoing shall not be construed to excuse the
Issuing Bank from liability to the Borrower to the extent of any
direct damages (as opposed to consequential damages, claims in
respect of which are hereby waived by the Borrower to the extent
permitted by applicable law) suffered by the Borrower that are caused
by the Issuing Bank's failure to exercise care when determining whether
drafts and other documents presented under a Letter of Credit comply
with the terms
33
thereof. The parties hereto expressly agree that, in the absence of
gross negligence or wilful misconduct on the part of the Issuing Bank
(as finally determined by a court of competent jurisdiction), the
Issuing Bank shall be deemed to have exercised care in each such
determination. In furtherance of the foregoing and without
limiting the generality thereof, the parties agree that, with
respect to documents presented which appear on their face to be
in substantial compliance with the terms of a Letter of Credit,
the Issuing Bank may, in its sole discretion, either accept and
make payment upon such documents without responsibility for
further investigation, regardless of any notice or information to
the contrary unless any beneficiary (or a successor beneficiary
to whom such Letter of Credit has been transferred in accordance
with its terms) and the Borrower shall have notified the Issuing
Bank to not comply with the terms and conditions of such Letter
of Credit, or refuse to accept and make payment upon such
documents if such documents are not in strict compliance with the
terms of such Letter of Credit.
(g) Disbursement Procedures. The Issuing Bank shall,
promptly following its receipt thereof, examine all documents
purporting to represent a demand for payment under a Letter of
Credit. The Issuing Bank shall promptly notify the Administrative
Agent and the Borrower by telephone (confirmed by telecopy) of
such demand for payment and whether the Issuing Bank has made or
will make an LC Disbursement thereunder; provided that any
failure to give or delay in giving such notice shall not relieve
the Borrower of its obligation to reimburse the Issuing Bank and
the Revolving Lenders with respect to any such LC Disbursement.
(h) Interim Interest. If the Issuing Bank shall make
any LC Disbursement, then, unless the Borrower shall reimburse
such LC Disbursement in full on the date such LC Disbursement is
made, the unpaid amount thereof shall bear interest, for each day
from and including the date such LC Disbursement is made to but
excluding the date that the Borrower reimburses such LC
Disbursement, at the rate per annum then applicable to ABR
Revolving Loans; provided that, if the Borrower fails to
reimburse such LC Disbursement when due pursuant to paragraph (e)
of this Section, then Section 2.13(c) shall apply. Interest
accrued pursuant to this paragraph shall be for the account of
the Issuing Bank, except that interest accrued on and after the
date of payment by any Revolving Lender pursuant to paragraph (e)
of this Section to reimburse the Issuing Bank shall be for the
account of such Lender to the extent of such payment.
(i) Replacement of the Issuing Bank. The Issuing Bank
may be replaced at any time by written agreement among the
Borrower, the Administrative Agent, the replaced Issuing Bank and
the successor Issuing Bank. The Administrative Agent shall notify
the Lenders of any such replacement of the Issuing Bank. At the
time any such replacement shall become effective, the Borrower
shall pay all unpaid fees accrued for the account of the replaced
Issuing Bank pursuant to Section 2.12(b). From and after the
effective date of any such replacement, (i) the successor Issuing
Bank shall have all the rights and obligations of the Issuing
Bank under this Agreement with respect to Letters of Credit and
Acceptances to be issued thereafter and (ii) references herein to
the term "Issuing Bank" shall be deemed to refer to such
successor or to any previous Issuing Bank, or to such successor
and all previous Issuing Banks, as the context shall require.
After the replacement of an Issuing Bank hereunder, the replaced
Issuing Bank shall remain a party hereto and shall continue to
have all the rights and obligations of an Issuing
34
Bank under this Agreement with respect to Letters of Credit
and Acceptances issued by it prior to such replacement,
but shall not be required to issue additional Letters of Credit
or Acceptances.
(j) Cash Collateralization. If any Event of Default
shall occur and be continuing, on the Business Day that the
Borrower receives notice from the Administrative Agent or the
Required Lenders (or, if the maturity of the Loans has been
accelerated, Revolving Lenders with LC and Acceptance Exposure
representing greater than 50% of the total LC and Acceptance
Exposure) demanding the deposit of cash collateral pursuant to
this paragraph, the Borrower shall deposit in an account with the
Administrative Agent, in the name of the Administrative Agent and
for the benefit of the Lenders, an amount in cash equal to the LC
and Acceptance Exposure as of such date plus any accrued and
unpaid interest thereon; provided that the obligation to deposit
such cash collateral shall become effective immediately, and such
deposit shall become immediately due and payable, without demand
or other notice of any kind, upon the occurrence of any Event of
Default with respect to the Borrower described in clause (h) or
(i) of Article VII. Each such deposit shall be held by the
Administrative Agent as collateral for the payment and
performance of the obligations of the Borrower under this
Agreement. The Administrative Agent shall have exclusive dominion
and control, including the exclusive right of withdrawal, over
such account. Other than any interest earned on the investment of
such deposits, which investments shall be made at the option and
sole discretion of the Administrative Agent and at the Borrower's
risk and expense, such deposits shall not bear interest. Interest
or profits, if any, on such investments shall accumulate in such
account. Moneys in such account shall be applied by the
Administrative Agent to reimburse the Issuing Bank for LC
Disbursements and Acceptance Disbursements for which it has not
been reimbursed and, to the extent not so applied, shall be held
for the satisfaction of the reimbursement obligations of the
Borrower for the LC and Acceptance Exposure at such time or, if
the maturity of the Loans has been accelerated (but subject to
the consent of Revolving Lenders with LC and Acceptance Exposure
representing greater than 50% of the total LC and Acceptance
Exposure), be applied to satisfy other obligations of the
Borrower under this Agreement. If the Borrower is required to
provide an amount of cash collateral hereunder as a result of the
occurrence of an Event of Default, such amount (to the extent not
applied as aforesaid) shall be returned to the Borrower within
three Business Days after all Events of Default have been cured
or waived.
(k) The Borrower may request the issuance of a Letter
of Credit providing for the payment of drawings in an Alternative
Currency subject to the terms and conditions of this subsection
(k), in addition to the other conditions applicable to the
issuance of Letters of Credit hereunder; provided that the Dollar
Amount of the total LC and Acceptance Exposure in respect of all
such Letters of Credit shall not at any time exceed $15,000,000.
The issuance of any such Letter of Credit shall be subject to the
approval of the Issuing Bank. If any such Letter of Credit is
issued, the following provisions shall apply:
(i) For purposes of determining the LC and Acceptance
Exposure and for purposes of calculating fees payable under
Section 2.12(b), the amount of such Letter of Credit and of
any unreimbursed LC Disbursements in respect thereof shall
be deemed to be, as of any date of determination, the
Dollar Amount thereof at such date. The initial Dollar
Amount of any such Letter of Credit shall be determined by
the Issuing Bank on the date of issuance thereof and
adjusted from time to time thereafter as provided below.
35
The Dollar Amount of each such Letter of Credit outstanding
shall be adjusted by the Issuing Bank on the 15th day and
the last day of each calendar month (or, if any such day is
not a Business Day, on the next succeeding day that is a
Business Day). If a LC Disbursement is made under any such
Letter of Credit, the Dollar Amount of such LC Disbursement
shall be determined by the Issuing Bank on the date that
such LC Disbursement is made. The Issuing Bank shall make
each such determination to be made by it by calculating the
amount in Dollars that would be required in order for the
Issuing Bank to purchase an amount of the applicable
Alternative Currency equal to the amount of the relevant
Letter of Credit or unreimbursed LC Disbursement, as the
case may be, on the date of determination at the Issuing
Bank's spot buying rate for Dollars against such
Alternative Currency as of approximately 9:00 a.m. (New
York City time) on such date of determination. The Issuing
Bank shall notify the Borrower promptly of each such Dollar
Amount determined by it, on the date that such
determination is required to be made.
(ii) Subject to paragraph (iv) below, the obligation
of the Borrower to reimburse the Issuing Bank for any LC
Disbursement under any such Letter of Credit, and to pay
interest thereon, shall be payable only in the Alternative
Currency in which such LC Disbursement is made, and shall
not be discharged by paying an amount in dollars or any
other currency; provided that the Issuing Bank may agree,
in its sole discretion, to accept reimbursement in another
currency, but any such agreement shall not affect the
obligations of the Lenders or the Borrower under paragraphs
(iii) and (iv) below if such reimbursement is not actually
made to the Issuing Bank when due.
(iii) The obligations of each Lender under Sections
2.05(d) and 2.05(e) to pay its Applicable Percentage of any
unreimbursed LC Disbursement under any such Letter of
Credit shall be payable only in dollars and shall be in an
amount equal to such Applicable Percentage of the Dollar
Amount of such unreimbursed LC Disbursement determined as
provided in clause (i) above. Under no circumstances shall
the provisions hereof permitting the issuance of Letters of
Credit in an Alternative Currency be construed, by
implication or otherwise, as imposing any obligation upon
any Lender to make any Loan or other payment under any Loan
Document, or to accept any payment from the Borrower in
respect of any Obligations, in any currency other than
dollars, it being understood that the parties intend all
Obligations to be denominated and payable only in dollars
except as expressly provided in paragraph (ii) above.
(iv) If and to the extent that any Lender pays its
Applicable Percentage of any unreimbursed LC Disbursement
under any such Letter of Credit, then, notwithstanding
paragraph (ii) above, the obligation of the Borrower to
reimburse the portion of such LC Disbursement funded by
such Lender shall be converted to, and shall be payable
only in, dollars (in an amount equal to the dollar amount
funded by such Lender as provided above) and shall not be
discharged by paying an amount in any other currency.
Interest accrued on such unreimbursed LC Disbursement to
and excluding the date of such payment by such Lender shall
be for the account of the Issuing Bank and be payable in
the applicable Alternative Currency, but interest
thereafter shall accrue on the dollar amount owed to such
Lender and shall be payable in dollars.
36
(v) All payments to be made by the Borrower hereunder
in an Alternative Currency pursuant to this Section 2.05(k)
shall be made in such Alternative Currency in such funds as
may then be customary for the settlement of international
transactions in such Alternative Currency for the account
of the Issuing Bank at such time and at such place as shall
have been notified by the Issuing Bank to the Borrower by
not less than four Business Days' notice.
SECTION 2.06. Funding of Borrowings. (a) Each Lender
shall make each Loan to be made by it hereunder on the proposed
date thereof by wire transfer of immediately available funds by
2:00 p.m., New York City time, to the account of the
Administrative Agent most recently designated by it for such
purpose by notice to the Lenders. The Administrative Agent will
make such Loans available to the Borrower by promptly crediting
the amounts so received, in like funds, to an account of the
Borrower maintained with the Administrative Agent in New York
City and designated by the Borrower in the applicable Borrowing
Request; provided that ABR Revolving Loans made to finance the
reimbursement of an LC Disbursement as provided in Section
2.05(e) shall be remitted by the Administrative Agent to the
Issuing Bank.
(b) Unless the Administrative Agent shall have
received notice from a Lender prior to the proposed date of any
Borrowing that such Lender will not make available to the
Administrative Agent such Lender's share of such Borrowing, the
Administrative Agent may assume that such Lender has made such
share available on such date in accordance with paragraph (a) of
this Section and may, in reliance upon such assumption, make
available to the Borrower a corresponding amount. In such event,
if a Lender has not in fact made its share of the applicable
Borrowing available to the Administrative Agent, then the
applicable Lender and the Borrower severally agree to pay to the
Administrative Agent forthwith on demand such corresponding
amount with interest thereon, for each day from and including the
date such amount is made available to the Borrower to but
excluding the date of payment to the Administrative Agent, at (i)
in the case of such Lender, the greater of the Federal Funds
Effective Rate and a rate determined by the Administrative Agent
in accordance with banking industry rules on interbank
compensation or (ii) in the case of the Borrower, the interest
rate applicable to ABR Loans. If such Lender pays such amount to
the Administrative Agent, then such amount shall constitute such
Lender's Loan included in such Borrowing.
(c) Nothing in this Section 2.06 shall be deemed to
relieve any Lender from its obligation to fulfill its Commitments
hereunder or to prejudice any rights that the Borrower may have
against any Lender as a result of any default by any such Lender
hereunder (it being understood, however, that no Lender shall be
responsible for the failure of any other Lender to fulfill its
Commitments hereunder).
SECTION 2.07. Interest Elections. (a) Each Revolving
Borrowing and Term Borrowing initially shall be of the Type
specified in the applicable Borrowing Request and, in the case of
a Eurodollar Borrowing, shall have an initial Interest Period as
specified in such Borrowing Request. Thereafter, the Borrower may
elect to convert such Borrowing to a different Type or to
continue such Borrowing and, in the case of a Eurodollar
Borrowing, may elect Interest Periods therefor, all as provided
in this Section. The Borrower may elect different options with
respect to different portions of the affected Borrowing, in which
case each such
37
portion shall be allocated ratably among the Lenders holding the
Loans comprising such Borrowing, and the Loans comprising each such
portion shall be considered a separate Borrowing.
(b) To make an election pursuant to this Section, the
Borrower shall notify the Administrative Agent of such election
by telephone by the time that a Borrowing Request would be
required under Section 2.03 if the Borrower were requesting a
Revolving Borrowing of the Type resulting from such election to
be made on the effective date of such election. Each such
telephonic Interest Election Request shall be irrevocable and
shall be confirmed promptly by hand delivery or telecopy to the
Administrative Agent of a written Interest Election Request in a
form approved by the Administrative Agent and signed by the
Borrower.
(c) Each telephonic and written Interest Election
Request shall specify the following information in compliance
with Section 2.02 and paragraph (f) of this Section:
(i) the Borrowing to which such Interest Election
Request applies and, if different options are being elected
with respect to different portions thereof, the portions
thereof to be allocated to each resulting Borrowing (in
which case the information to be specified pursuant to
clauses (iii) and (iv) below shall be specified for each
resulting Borrowing);
(ii) the effective date of the election made pursuant
to such Interest Election Request, which shall be a
Business Day;
(iii) whether the resulting Borrowing is to be an ABR
Borrowing or a Eurodollar Borrowing; and
(iv) if the resulting Borrowing is a Eurodollar
Borrowing, the Interest Period to be applicable thereto
after giving effect to such election, which shall be a
period contemplated by the definition of the term "Interest
Period".
If any such Interest Election Request requests a Eurodollar
Borrowing but does not specify an Interest Period, then the
Borrower shall be deemed to have selected an Interest Period of
one month's duration.
(d) Promptly following receipt of an Interest Election
Request, the Administrative Agent shall advise each Lender of the
details thereof and of such Lender's portion of each resulting
Borrowing.
(e) If the Borrower fails to deliver a timely Interest
Election Request with respect to a Eurodollar Borrowing prior to
the end of the Interest Period applicable thereto, then, unless
such Borrowing is repaid as provided herein, at the end of such
Interest Period such Borrowing shall be converted to an ABR
Borrowing. Notwithstanding any contrary provision hereof, if an
Event of Default has occurred and is continuing and the
Administrative Agent, at the request of the Required Lenders, so
notifies the Borrower, then, so long as an Event of Default is
continuing (i) no outstanding Borrowing may be converted to or
continued as a Eurodollar
38
Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall
be converted to an ABR Borrowing at the end of the Interest
Period applicable thereto.
(f) A Borrowing of any Class may not be converted to
or continued as a Eurodollar Borrowing if after giving effect
thereto (i) the Interest Period therefor would commence before
and end after a date on which any principal of the Loans of such
Class is scheduled to be repaid and (ii) the sum of the aggregate
principal amount of outstanding Eurodollar Borrowings of such
Class with Interest Periods ending on or prior to such scheduled
repayment date plus the aggregate principal amount of outstanding
ABR Borrowings of such Class would be less than the aggregate
principal amount of Loans of such Class required to be repaid on
such scheduled repayment date.
SECTION 2.08. Termination and Reduction of
Commitments. (a) Unless previously terminated, (i) the Term
Commitments shall terminate at 5:00 p.m., New York City time, on
the Effective Date and (ii) the Revolving Commitments shall
terminate on the Maturity Date.
(b) The Borrower may at any time, without premium or
penalty, terminate, or from time to time reduce, the Commitments
of either Class; provided that (i) each reduction of the
Commitments of either Class shall be in an amount that is an
integral multiple of $1,000,000 and not less than $5,000,000 and
(ii) the Borrower shall not terminate or reduce the Revolving
Commitments if, after giving effect to any concurrent prepayment
of the Revolving Loans in accordance with Section 2.11, the sum
of the Revolving Exposures would exceed the total Revolving
Commitments.
(c) In the event that, on the date on which any
prepayment would be required pursuant to Section 2.11(b) or
2.11(d), no Term Borrowings remain outstanding or the amount of
the prepayment required by Section 2.11(b) or 2.11(d), as the
case may be, exceeds the aggregate principal amount of Term
Borrowings then outstanding, the Revolving Commitments shall be
reduced by an amount equal to the excess of the required
prepayment over the principal amount, if any, of Term Borrowings
actually prepaid.
(d) The Borrower shall notify the Administrative Agent
of any election to terminate or reduce the Commitments under
paragraph (b) of this Section, or any required reduction of the
Revolving Commitments under paragraph (c) of this Section, at
least three Business Days prior to the effective date of such
termination or reduction, specifying such election and the
effective date thereof. Promptly following receipt of any notice,
the Administrative Agent shall advise the Lenders of the contents
thereof. Each notice delivered by the Borrower pursuant to this
Section shall be irrevocable; provided that a notice of
termination of the Revolving Commitments delivered by the
Borrower may state that such notice is conditioned upon the
effectiveness of other credit facilities, in which case such
notice may be revoked by the Borrower (by notice to the
Administrative Agent on or prior to the specified effective date)
if such condition is not satisfied. Any termination or reduction
of the Commitments of either Class shall be permanent. Each
reduction of the Commitments of either Class shall be made
ratably among the Lenders in accordance with their respective
Commitments of such Class.
39
SECTION 2.09. Repayment of Loans; Evidence of Debt.
(a) The Borrower hereby unconditionally promises to pay (i) to
the Administrative Agent for the account of each Lender the then
unpaid principal amount of each Revolving Loan of such Lender on
the Maturity Date and (ii) to the Administrative Agent for the
account of each Lender the then unpaid principal amount of each
Term Loan of such Lender as provided in Section 2.10.
(b) Each Lender shall maintain in accordance with its
usual practice an account or accounts evidencing the indebtedness
of the Borrower to such Lender resulting from each Loan made by
such Lender, including the amounts of principal and interest
payable and paid to such Lender from time to time hereunder.
(c) The Administrative Agent shall maintain accounts
in which it shall record (i) the amount of each Loan made
hereunder, the Class and Type thereof and the Interest Period
applicable thereto, (ii) the amount of any principal or interest
due and payable or to become due and payable from the Borrower to
each Lender hereunder and (iii) the amount of any sum received by
the Administrative Agent hereunder for the account of the Lenders
and each Lender's share thereof, which accounts the
Administration agent will make available to the Borrower upon
request.
(d) The entries made in the accounts maintained
pursuant to paragraph (b) or (c) of this Section shall be prima
facie evidence of the existence and amounts of the obligations
recorded therein; provided that the failure of any Lender or the
Administrative Agent to maintain such accounts or any error
therein shall not in any manner affect the obligation of the
Borrower to repay the Loans in accordance with the terms of this
Agreement.
(e) Any Lender may request that Loans of any Class
made by it be evidenced by a promissory note. In such event, the
Borrower shall prepare, execute and deliver to such Lender a
promissory note payable to the order of such Lender (or, if
requested by such Lender, to such Lender and its registered
assigns) and in a form approved by the Administrative Agent.
Thereafter, the Loans evidenced by such promissory note and
interest thereon shall at all times (including after assignment
pursuant to Section 9.04) be represented by one or more
promissory notes in such form payable to the order of the payee
named therein (or, if such promissory note is a registered note,
to such payee and its registered assigns).
SECTION 2.10. Amortization of Term Loans. (a) Subject
to adjustment pursuant to paragraph (d) of this Section, the
Borrower shall repay Term Borrowings on each date set forth below
in the aggregate principal amount set forth opposite such date:
40
- --------------------------------------------------------------
Date Amount
---- ------
- --------------------------------------------------------------
February 3, 2001 $4,000,000
- --------------------------------------------------------------
May 5, 2001 4,000,000
- --------------------------------------------------------------
August 4, 2001 4,000,000
- --------------------------------------------------------------
November 3, 2001 4,000,000
- --------------------------------------------------------------
February 2, 2002 6,750,000
- --------------------------------------------------------------
May 4, 2002 6,750,000
- --------------------------------------------------------------
August 3, 2002 6,750,000
- --------------------------------------------------------------
November 2, 2002 6,750,000
- --------------------------------------------------------------
February 1, 2003 6,750,000
- --------------------------------------------------------------
May 5, 2003 6,750,000
- --------------------------------------------------------------
August 2, 2003 6,750,000
- --------------------------------------------------------------
October 10, 2003 6,750,000
- --------------------------------------------------------------
(b) To the extent not previously paid, all Term Loans
shall be due and payable on the Maturity Date.
(c) If the initial aggregate amount of the Lenders'
Term Commitments exceeds the aggregate principal amount of Term
Loans that are made on the Effective Date, then the scheduled
repayments of Term Borrowings to be made pursuant to this Section
shall be reduced ratably by an aggregate amount equal to such
excess. Any prepayment of a Term Borrowing shall be applied to
reduce the subsequent scheduled repayments of the Term Borrowings
to be made pursuant to this Section ratably; provided that any
prepayment made pursuant to Section 2.11(a) shall be applied,
first, to reduce the next scheduled repayment of the Term
Borrowings to be made pursuant to this Section unless and until
such next scheduled repayment has been eliminated as a result of
reductions hereunder and, second, ratably as provided above.
(d) Prior to any repayment of any Term Borrowings
hereunder, the Borrower shall select the Borrowing or Borrowings
to be repaid and shall notify the Administrative Agent by
telephone (confirmed by telecopy) of such selection not later
than 11:00 a.m., New York City time, three Business Days before
the scheduled date of such repayment. Each repayment of a
Borrowing shall be applied ratably to the Loans included in the
repaid Borrowing. Repayments of Term Borrowings shall be
accompanied by accrued and unpaid interest on the amount repaid.
SECTION 2.11. Prepayment of Loans. (a) The Borrower
shall have the right at any time and from time to time to prepay
any Borrowing in whole or in part, without premium or penalty but
subject to Section 2.16, subject to the requirements of this
Section.
(b) In the event and on each occasion that any Net
Proceeds are received by or on behalf of Holdings, the Borrower
or any Subsidiary in respect of any Prepayment Event, the
41
Borrower shall, within five Business Days after such Net Proceeds
are received, prepay Term Borrowings in an aggregate amount equal
to such Net Proceeds; provided that (i) with respect to the sale
of Popular Club or C&W, the Borrower shall only be required to
prepay Term Borrowings with respect to 80% of the Net Proceeds
from such sale and (ii) with respect to issuances of equity
securities of Holdings, the Borrower shall only be required to
prepay Term Borrowings with respect to 50% of the Net Proceeds
from such issuances. If instructed by the Borrower by written
notice, the Administration Agent, if the Administration Agent is
in possession of Net Proceeds pursuant to any Security Document,
shall apply such Net Proceeds toward any prepayment required
hereunder.
(c) In the event of any reduction of the Revolving
Commitments, if the Revolving Exposure would exceed the Revolving
Commitments after giving effect to such reduction, then the
Borrower shall, on the date of such reduction, repay or prepay
Revolving Borrowings in an amount sufficient to eliminate such
excess.
(d) Following the end of each fiscal year of the
Borrower, commencing with the fiscal year ending January 30,
1999, the Borrower shall prepay Term Borrowings in an aggregate
amount equal to 50% of Excess Cash Flow for such fiscal year.
Each prepayment pursuant to this paragraph shall be made on or
before the date on which financial statements are delivered
pursuant to Section 5.01 with respect to the fiscal year for
which Excess Cash Flow is being calculated (and in any event
within 90 days after the end of such fiscal year).
(e) The Borrower shall repay or prepay Revolving
Borrowings and shall refrain from making additional Revolving
Borrowings to the extent necessary in order that there shall be a
period of at least 30 consecutive days in each fiscal year during
which the Revolving Exposure shall not exceed the amount set
forth below opposite such fiscal year (each such 30-day period, a
"Clean-Down Period"):
Revolving Exposure
Fiscal Year as Reduced
----------- ------------------
1998 $25,000,000
1999 20,000,000
2000 15,000,000
2001 10,000,000
2002 and thereafter 0
(f) Prior to any optional or mandatory prepayment of
Borrowings hereunder, the Borrower shall select the Borrowing or
Borrowings to be prepaid and shall specify such selection in the
notice of such prepayment pursuant to paragraph (g) of this
Section.
(g) The Borrower shall notify the Administrative Agent
by telephone (confirmed by telecopy) of any prepayment hereunder
(i) in the case of prepayment of a Eurodollar Borrowing, not
later than 11:00 a.m., New York City time, three Business Days
before the date of prepayment or (ii) in the case of prepayment
of an ABR Borrowing, not later than 11:00 a.m.,
42
New York City time, on the date of prepayment. Each such notice
shall be irrevocable and shall specify the prepayment date, the
principal amount of each Borrowing or portion thereof to be
prepaid and, in the case of a mandatory prepayment, a reasonably
detailed calculation of the amount of such prepayment; provided
that, if a notice of optional prepayment is given in connection
with a conditional notice of termination of the Revolving
Commitments as contemplated by Section 2.08, then such notice of
prepayment may be revoked if such notice of termination is
revoked in accordance with Section 2.08. Promptly following
receipt of any such notice, the Administrative Agent shall advise
the Lenders of the contents thereof. Each partial prepayment of
any Borrowing shall be in an amount that would be permitted in
the case of an advance of a Borrowing of the same Type as
provided in Section 2.02, except as necessary to apply fully the
required amount of a mandatory prepayment. Each prepayment of a
Borrowing shall be applied ratably to the Loans included in the
prepaid Borrowing. Prepayments shall be accompanied by accrued
interest to the extent required by Section 2.13.
SECTION 2.12. Fees. (a) The Borrower agrees to pay to
the Administrative Agent for the account of each Revolving Lender
a commitment fee, which shall accrue at the rate of 1/2 of 1% per
annum on the average daily unused amount of each Revolving
Commitment of such Lender during the period from and including
the Effective Date to but excluding the date on which such
Revolving Commitment terminates. Accrued commitment fees shall be
payable in arrears on the 2nd day of February, May, August, and
November of each year and on the date on which the Revolving
Commitments terminate, commencing on the first such date to occur
after the Effective Date. All commitment fees shall be computed
on the basis of a year of 360 days and shall be payable for the
actual number of days elapsed (including the first day but
excluding the last day). For purposes of computing commitment
fees with respect to Revolving Commitments, a Revolving
Commitment of a Lender shall be deemed to be used to the extent
of the outstanding Revolving Loans and LC and Acceptance Exposure
of such Lender.
(b) The Borrower agrees to pay (i) to the
Administrative Agent for the account of each Revolving Lender a
participation fee with respect to its participations in Letters
of Credit, which shall accrue at the same Applicable Rate as
interest on Eurodollar Revolving Loans on the average daily
amount of such Lender's LC and Acceptance Exposure attributable
to Letters of Credit (excluding any portion thereof attributable
to unreimbursed LC Disbursements) during the period from and
including the Effective Date to but excluding the later of the
date on which such Lender's Revolving Commitment terminates and
the date on which such Lender ceases to have any LC and
Acceptance Exposure attributable to Letters of Credit, and (ii)
to the Issuing Bank a fronting fee, which shall accrue at the
rate of 1/4 of 1% per annum on the average daily amount of the LC
and Acceptance Exposure attributable to Letters of Credit
(excluding any portion thereof attributable to unreimbursed LC
Disbursements) during the period from and including the Effective
Date to but excluding the later of the date of termination of the
Revolving Commitments and the date on which there ceases to be
any LC and Acceptance Exposure attributable to Letters of Credit,
as well as the Issuing Bank's standard fees with respect to the
issuance, amendment, renewal or extension of any Letter of Credit
or processing of drawings thereunder. Participation fees and
fronting fees accrued through and including the last day of
January, April, July and October of each year shall be payable on
the third Business Day following such last day, commencing on the
first such date to occur after the Effective Date; provided that
all such fees shall be payable on the date on which the Revolving
Commitments
43
terminate and any such fees accruing after the date on which the
Revolving Commitments terminate shall be payable on demand. Any
other fees payable to the Issuing Bank pursuant to this paragraph
shall be payable within 10 days after demand. All participation
fees and fronting fees shall be computed on the basis of a year
of 360 days and shall be payable for the actual number of days
elapsed (including the first day but excluding the last day).
(c) The Borrower agrees to pay to the Administrative
Agent, for its own account, fees payable in the amounts and at
the times separately agreed upon between the Borrower and the
Administrative Agent.
(d) Upon the issuance of an Acceptance, the Borrower
agrees to pay to the Administrative Agent for the account of each
Revolving Lender an acceptance fee with respect to such
Acceptance in an amount equal to the Applicable Rate at the time
on the face amount of the related Acceptance Draft for the period
from and including such date of issuance to but excluding the
scheduled maturity date of such Acceptance Draft (computed on the
basis of a year of 360 days for the actual number of days
elapsed).
(e) All fees payable hereunder shall be paid on the
dates due, in immediately available funds, to the Administrative
Agent (or to the Issuing Bank, in the case of fees payable to it)
for distribution, in the case of commitment fees, acceptance
fees, and participation fees, to the Lenders entitled thereto.
Fees paid shall not be refundable under any circumstances.
SECTION 2.13. Interest. (a) The Loans comprising each
ABR Borrowing shall bear interest at the Alternate Base Rate plus
the Applicable Rate.
(b) The Loans comprising each Eurodollar Borrowing
shall bear interest at the Adjusted LIBO Rate for the Interest
Period in effect for such Borrowing plus the Applicable Rate.
(c) Notwithstanding the foregoing, if any principal of
or interest on any Loan or any fee or other amount payable by the
Borrower hereunder is not paid when due, whether at stated
maturity, upon acceleration or otherwise, such overdue amount
shall bear interest, after as well as before judgment, at a rate
per annum equal to (i) in the case of overdue principal of any
Loan, 2% plus the rate otherwise applicable to such Loan as
provided in the preceding paragraphs of this Section or (ii) in
the case of any other amount, 2% plus the rate applicable to ABR
Revolving Loans as provided in paragraph (a) of this Section.
(d) Accrued interest on each Loan shall be payable in
arrears on each Interest Payment Date for such Loan and, in the
case of Revolving Loans, upon termination of the
Revolving Commitments; provided that (i) interest accrued
pursuant to paragraph (c) of this Section shall be payable on
demand, (ii) in the event of any repayment or prepayment of any
Loan (other than a prepayment of an ABR Revolving Loan prior to
the end of the Revolving Availability Period), accrued interest
on the principal amount repaid or prepaid shall be payable
on the date of such repayment or prepayment and (iii) in the
event of any conversion of any Eurodollar Loan prior to the end
of the current Interest Period therefor, accrued interest on such
Loan shall be payable on the effective date of such conversion.
44
(e) All interest hereunder shall be computed on the
basis of a year of 360 days, except that interest computed by
reference to the Alternate Base Rate at times when the Alternate
Base Rate is based on the Prime Rate shall be computed on the
basis of a year of 365 days (or 366 days in a leap year), and in
each case shall be payable for the actual number of days elapsed
(including the first day but excluding the last day). The
applicable Alternate Base Rate or Adjusted LIBO Rate shall be
determined by the Administrative Agent, and such determination
shall be conclusive absent manifest error.
SECTION 2.14. Alternate Rate of Interest. If prior to
the commencement of any Interest Period for a Eurodollar
Borrowing:
(a) the Administrative Agent determines (which
determination shall be conclusive absent manifest error) that
adequate and reasonable means do not exist for ascertaining the
Adjusted LIBO Rate for such Interest Period;
(b) the Administrative Agent is advised by the
Required Lenders that the Adjusted LIBO Rate for such Interest
Period will not adequately and fairly reflect the cost to such
Lenders (or Lender) of making or maintaining their Loans (or its
Loan) included in such Borrowing for such Interest Period; or
(c) any Lender shall have reasonably determined (which
determination shall, absent clearly demonstrable error, be final
and conclusive and binding upon all parties hereto) at any time,
that the making or continuance of any Eurodollar Loan has become
unlawful by compliance by such Lender in good faith with any law,
governmental rule, regulation, guideline or order (or would
conflict with any such governmental rule, regulation, guideline
or order not having the force of law even though the failure to
comply therewith would not be unlawful), or has become
impracticable as a result of a contingency occurring after the
date hereof that materially and adversely affects the interbank
Eurodollar market;
then the Administrative Agent shall give notice thereof to the
Borrower and the Lenders by telephone or telecopy as promptly as
practicable thereafter and, until the Administrative Agent
notifies the Borrower and the Lenders that the circumstances
giving rise to such notice no longer exist, (i) any Interest
Election Request that requests the conversion of any Borrowing
to, or continuation of any Borrowing as, a Eurodollar Borrowing
shall be ineffective and (ii) if any Borrowing Request requests a
Eurodollar Borrowing, such Borrowing shall be made as an ABR
Borrowing.
SECTION 2.15. Increased Costs. (a) If any Change in
Law (except with respect to Taxes, which shall be governed by
Section 2.17) shall:
(i) impose, modify or deem applicable any reserve,
special deposit or similar requirement against assets of,
deposits with or for the account of, or credit extended by,
any Lender (except any such reserve requirement reflected
in the Adjusted LIBO Rate) or the Issuing Bank; or
45
(ii)] impose on any Lender or the Issuing Bank or the
London interbank market any other condition affecting this
Agreement or Eurodollar Loans made by such Lender or any
Letter of Credit or Acceptance or participation therein;
and the result of any of the foregoing shall be to increase the
cost to such Lender of making or maintaining any Eurodollar Loan
(or of maintaining its obligation to make any such Loan) or to
increase the cost to such Lender or the Issuing Bank of
participating in, issuing or maintaining any Letter of Credit or
Acceptance or to reduce the amount of any sum received or
receivable by such Lender or the Issuing Bank hereunder (whether
of principal, interest or otherwise), then the Borrower will pay
to such Lender or the Issuing Bank, as the case may be, such
additional amount or amounts as will compensate such Lender or
the Issuing Bank, as the case may be, for such additional costs
incurred or reduction suffered.
(b) If any Lender or the Issuing Bank determines that
any Change in Law regarding capital requirements has or would
have the effect of reducing the rate of return on such Lender's
or the Issuing Bank's capital or on the capital of such Lender's
or the Issuing Bank's holding company, if any, as a consequence
of this Agreement or the Loans made by, or participations in
Letters of Credit or Acceptances held by, such Lender, or the
Letters of Credit or Acceptances issued by the Issuing Bank, to a
level below that which such Lender or the Issuing Bank or such
Lender's or the Issuing Bank's holding company could have
achieved but for such Change in Law (taking into consideration
such Lender's or the Issuing Bank's policies and the policies of
such Lender's or the Issuing Bank's holding company with respect
to capital adequacy), then from time to time the Borrower will
pay to such Lender or the Issuing Bank, as the case may be, such
additional amount or amounts as will compensate such Lender or
the Issuing Bank or such Lender's or the Issuing Bank's holding
company for any such reduction suffered.
(c) A certificate of a Lender or the Issuing Bank
setting forth the amount or amounts necessary to compensate such
Lender or the Issuing Bank or its holding company, as the case
may be, as specified in paragraph (a) or (b) of this Section
shall be delivered to the Borrower and shall be conclusive absent
manifest error. The Borrower shall pay such Lender or the Issuing
Bank, as the case may be, the amount shown as due on any such
certificate within 10 days after receipt thereof.
(d) Failure or delay on the part of any Lender or the
Issuing Bank to demand compensation pursuant to this Section
shall not constitute a waiver of such Lender's or the Issuing
Bank's right to demand such compensation; provided that the
Borrower shall not be required to compensate a Lender or the
Issuing Bank pursuant to this Section for any increased costs or
reductions incurred more than 270 days prior to the date that
such Lender or the Issuing Bank, as the case may be, notifies the
Borrower of the Change in Law giving rise to such increased costs
or reductions and of such Lender's or the Issuing Bank's
intention to claim compensation therefor; provided further that,
if the Change in Law giving rise to such increased costs or
reductions is retroactive, then the 270-day period referred to
above shall be extended to include the period of retroactive
effect thereof.
46
SECTION 2.16. Break Funding Payments. In the event of
(a) the payment of any principal of any Eurodollar Loan other
than on the last day of an Interest Period applicable thereto
(including as a result of an Event of Default), (b) the
conversion of any Eurodollar Loan other than on the last day of
the Interest Period applicable thereto, (c) the failure to
borrow, convert, continue or prepay any Revolving Loan or Term
Loan on the date specified in any notice delivered pursuant
hereto (regardless of whether such notice may be revoked under
Section 2.11(g) and is revoked in accordance therewith), or (d)
the assignment of any Eurodollar Loan other than on the last day
of the Interest Period applicable thereto as a result of a
request by the Borrower pursuant to Section 2.19, then, in any
such event, the Borrower shall compensate each Lender for the
loss, cost and expense attributable to such event. In the case of
a Eurodollar Loan, such loss, cost or expense to any Lender shall
be deemed to include an amount determined by such Lender to be
the excess, if any, of (i) the amount of interest which would
have accrued on the principal amount of such Loan had such event
not occurred, at the Adjusted LIBO Rate that would have been
applicable to such Loan, for the period from the date of such
event to the last day of the then current Interest Period
therefor (or, in the case of a failure to borrow, convert or
continue, for the period that would have been the Interest Period
for such Loan), over (ii) the amount of interest which would
accrue on such principal amount for such period at the interest
rate which such Lender would bid were it to bid, at the
commencement of such period, for dollar deposits of a comparable
amount and period from other banks in the Eurodollar market. A
certificate of any Lender setting forth any amount or amounts
that such Lender is entitled to receive pursuant to this Section
shall be delivered to the Borrower and shall be conclusive absent
manifest error. The Borrower shall pay such Lender the amount
shown as due on any such certificate within 10 days after receipt
thereof.
SECTION 2.17. Taxes. (a) Any and all payments by or on
account of any obligation of the Borrower hereunder or under any
other Loan Document shall be made free and clear of and without
deduction for any Indemnified Taxes or Other Taxes; provided that
if the Borrower shall be required to deduct any Indemnified Taxes
or Other Taxes from such payments, then (i) the sum payable shall
be increased as necessary so that after making all required
deductions (including deductions applicable to additional sums
payable under this Section) the Administrative Agent, Lender or
Issuing Bank (as the case may be) receives an amount equal to the
sum it would have received had no such deductions been made, (ii)
the Borrower shall make such deductions and (iii) the Borrower
shall pay the full amount deducted to the relevant Governmental
Authority in accordance with applicable law.
(b) In addition, the Borrower shall pay any Other
Taxes to the relevant Governmental Authority in accordance with
applicable law.
(c) The Borrower shall indemnify the Administrative
Agent, each Lender and the Issuing Bank, within 10 days after
written demand therefor, for the full amount of any Indemnified
Taxes or Other Taxes paid by the Administrative Agent, such
Lender or the Issuing Bank, as the case may be, on or with
respect to any payment by or on account of any obligation of the
Borrower hereunder or under any other Loan Document (including
Indemnified Taxes or Other Taxes imposed or asserted on or
attributable to amounts payable under this Section) and any
penalties, interest and reasonable expenses arising therefrom or
with respect thereto, whether or not such Indemnified Taxes or
Other Taxes were correctly or legally imposed or asserted by
47
the relevant Governmental Authority. A certificate as to the
amount of such payment or liability delivered to the Borrower by
a Lender or the Issuing Bank, or by the Administrative Agent on
its own behalf or on behalf of a Lender or the Issuing Bank,
shall be conclusive absent manifest error.
(d) As soon as practicable after any payment of
Indemnified Taxes or Other Taxes by the Borrower to a
Governmental Authority, the Borrower shall deliver to the
Administrative Agent the original or a certified copy of a
receipt issued by such Governmental Authority evidencing such
payment, a copy of the return reporting such payment or other
evidence of such payment reasonably satisfactory to the
Administrative Agent.
(e) Any Foreign Lender that is entitled to an
exemption from or reduction of withholding tax under the law of
the jurisdiction in which the Borrower is located, or any treaty
to which such jurisdiction is a party, with respect to payments
under this Agreement shall deliver to the Borrower (with a copy
to the Administrative Agent), at the time or times prescribed by
applicable law, such properly completed and executed
documentation prescribed by applicable law or reasonably
requested by the Borrower as will permit such payments to be made
without withholding or at a reduced rate.
(f) If the Administrative Agent, Issuing Bank or a
Lender (or Transferee) receives a refund solely in respect of
Taxes or Other Taxes, it shall pay over such refund to the
Borrower to the extent that it has already received indemnity
payments or additional amounts pursuant to this Section 2.17 with
respect to such Taxes or Other Taxes giving rise to the refund,
net of all out-of-pocket expenses and without interest (other
than interest paid by the relevant Governmental Authority with
respect to such refund); provided, however, that the Borrower
shall, upon request of the Administrative Agent or Lender (or
Transferee), repay such refund (plus interest imposed by the
relevant Governmental Authority) to the Administrative Agent or
Lender (or Transferee) if the Administrative Agent or Lender (or
Transferee) is required to repay such refund to such Governmental
Authority. Nothing contained herein shall require the
Administrative Agent or Lender (or Transferee) to make its tax
returns (or any other information relating to its taxes which it
deems confidential) available to the Borrower or any other
person.
SECTION 2.18. Payments Generally; Pro Rata Treatment;
Sharing of Set-offs. (a) The Borrower shall make each payment
required to be made by it hereunder or under any other Loan
Document (whether of principal, interest, fees or reimbursement
of LC Disbursements or Acceptance Disbursements, or of amounts
payable under Section 2.15, 2.16 or 2.17, or otherwise) prior to
2:00 p.m., New York City time, on the date when due, in
immediately available funds, without set-off or counterclaim. Any
amounts received after such time on any date may, in the
discretion of the Administrative Agent, be deemed to have been
received on the next succeeding Business Day for purposes of
calculating interest thereon. All such payments shall be made to
the Administrative Agent at its offices at 270 Park Avenue, New
York, New York, except payments to be made directly to the
Issuing Bank as expressly provided herein and except that
payments pursuant to Sections 2.15, 2.16, 2.17 and 9.03 shall be
made directly to the Persons entitled thereto and payments
pursuant to other Loan Documents shall be made to the Persons
specified therein. The Administrative Agent shall distribute any
such payments received by it for the account of any other Person
to the appropriate recipient promptly
48
following receipt thereof. If any payment under any Loan Document
shall be due on a day that is not a Business Day, the date for
payment shall be extended to the next succeeding Business Day,
and, in the case of any payment accruing interest, interest
thereon shall be payable for the period of such extension. Except
as expressly provided in Section 2.05(k), all payments under each
Loan Document shall be made in dollars.
(b) If at any time insufficient funds are received by
and available to the Administrative Agent to pay fully all
amounts of principal, unreimbursed LC Disbursements and
Acceptance Disbursements, interest and fees then due hereunder,
such funds shall be applied (i) first, towards payment of
interest and fees then due hereunder, ratably among the parties
entitled thereto in accordance with the amounts of interest and
fees then due to such parties, and (ii) second, towards payment
of principal and unreimbursed LC Disbursements and Acceptance
Disbursements then due hereunder, ratably among the parties
entitled thereto in accordance with the amounts of principal and
unreimbursed LC Disbursements and Acceptance Disbursements then
due to such parties.
(c) If any Lender shall, by exercising any right of
set-off or counterclaim or otherwise, obtain payment in respect
of any principal of or interest on any of its Revolving Loans,
Term Loans or participations in LC Disbursements or Acceptance
Disbursements resulting in such Lender receiving payment of a
greater proportion of the aggregate amount of its Revolving
Loans, Term Loans and participations in LC Disbursements and
Acceptance Disbursements and accrued interest thereon than the
proportion received by any other Lender, then the Lender
receiving such greater proportion shall purchase (for cash at
face value) participations in the Revolving Loans, Term Loans and
participations in LC Disbursements and Acceptance Disbursements
of other Lenders to the extent necessary so that the benefit of
all such payments shall be shared by the Lenders ratably in
accordance with the aggregate amount of principal of and accrued
interest on their respective Revolving Loans, Term Loans and
participations in LC Disbursements and Acceptance Disbursements;
provided that (i) if any such participations are purchased and
all or any portion of the payment giving rise thereto is
recovered, such participations shall be rescinded and the
purchase price restored to the extent of such recovery, without
interest, and (ii) the provisions of this paragraph shall not be
construed to apply to any payment made by the Borrower pursuant
to and in accordance with the express terms of this Agreement or
any payment obtained by a Lender as consideration for the
assignment of or sale of a participation in any of its Loans or
participations in LC Disbursements or Acceptance Disbursements to
any assignee or participant, other than to the Borrower or any
Subsidiary or Affiliate thereof (as to which the provisions of
this paragraph shall apply). The Borrower consents to the
foregoing and agrees, to the extent it may effectively do so
under applicable law, that any Lender acquiring a participation
pursuant to the foregoing arrangements may exercise against the
Borrower rights of set-off and counterclaim with respect to such
participation as fully as if such Lender were a direct creditor
of the Borrower in the amount of such participation.
(d) Unless the Administrative Agent shall have
received notice from the Borrower prior to the date on which any
payment is due to the Administrative Agent for the account of the
Lenders or the Issuing Bank hereunder that the Borrower will not
make such payment, the Administrative Agent may assume that the
Borrower has made such payment on
49
such date in accordance herewith and may, in reliance upon such
assumption, distribute to the Lenders or the Issuing Bank, as the
case may be, the amount due. In such event, if the Borrower has
not in fact made such payment, then each of the Lenders or the
Issuing Bank, as the case may be, severally agrees to repay to
the Administrative Agent forthwith on demand the amount so
distributed to such Lender or Issuing Bank with interest thereon,
for each day from and including the date such amount is
distributed to it to but excluding the date of payment to the
Administrative Agent, at the greater of the Federal Funds
Effective Rate and a rate determined by the Administrative Agent
in accordance with banking industry rules on interbank
compensation.
(e) If any Lender shall fail to make any payment
required to be made by it pursuant to Section 2.04(c), 2.05(d) or
(e), 2.06(b), 2.18(d) or 9.03(c), then the Administrative Agent
may, in its discretion (notwithstanding any contrary provision
hereof), apply any amounts thereafter received by the
Administrative Agent for the account of such Lender to satisfy
such Lender's obligations under such Sections until all such
unsatisfied obligations are fully paid.
SECTION 2.19. Mitigation Obligations; Replacement of
Lenders. (a) If any Lender requests compensation under Section
2.15, or if the Borrower is required to pay any additional amount
to any Lender or any Governmental Authority for the account of
any Lender pursuant to Section 2.17, then such Lender shall use
reasonable efforts to designate a different lending office for
funding or booking its Loans hereunder or to assign its rights
and obligations hereunder to another of its offices, branches or
affiliates, if, in the judgment of such Lender, such designation
or assignment (i) would eliminate or reduce amounts payable
pursuant to Section 2.15 or 2.17, as the case may be, in the
future and (ii) would not subject such Lender to any unreimbursed
cost or expense and would not otherwise be disadvantageous to
such Lender. The Borrower hereby agrees to pay all reasonable
costs and expenses incurred by any Lender in connection with any
such designation or assignment.
(b) If any Lender requests compensation under Section
2.15, or if the Borrower is required to pay any additional amount
to any Lender or any Governmental Authority for the account of
any Lender pursuant to Section 2.17, or if any Lender defaults in
its obligation to fund Loans hereunder, then the Borrower may, at
its sole expense and effort, upon notice to such Lender and the
Administrative Agent, require such Lender to assign and delegate,
without recourse (in accordance with and subject to the
restrictions contained in Section 9.04), all its interests,
rights and obligations under this Agreement to an assignee that
shall assume such obligations (which assignee may be another
Lender, if a Lender accepts such assignment); provided that (i)
the Borrower shall have received the prior written consent of the
Administrative Agent (and, if a Revolving Commitment is being
assigned, the Issuing Bank), which consent shall not unreasonably
be withheld, (ii) such Lender shall have received payment of an
amount equal to the outstanding principal of its Loans and
participations in LC Disbursements and Acceptance Disbursements,
accrued interest thereon, accrued fees and all other amounts
payable to it hereunder, from the assignee (to the extent of such
outstanding principal and accrued interest and fees) or the
Borrower (in the case of all other amounts) and (iii) in the case
of any such assignment resulting from a claim for compensation
under Section 2.15 or payments required to be made pursuant to
Section 2.17, such assignment will result in a reduction in such
compensation or payments. A Lender shall not be required to make
any such assignment and
50
delegation if, prior thereto, as a result of a waiver by such
Lender or otherwise, the circumstances entitling the Borrower to
require such assignment and delegation cease to apply.
ARTICLE III
Representations and Warranties
------------------------------
Each of Holdings and the Borrower represents and
warrants to the Lenders that:
SECTION 3.01. Organization; Powers. Each of Holdings,
the Borrower and its Subsidiaries is duly organized, validly
existing and in good standing under the laws of the jurisdiction
of its organization, has all requisite corporate power and
authority to carry on its business as now conducted and, except
where the failure to do so, individually or in the aggregate,
could not reasonably be expected to result in a Material Adverse
Effect, is qualified to do business in, and is in good standing
in, every jurisdiction where such qualification is required.
SECTION 3.02. Authorization; Enforceability. The
Transactions to be entered into by each Loan Party are within
such Loan Party's corporate powers and have been duly authorized
by all necessary corporate and, if required, stockholder action.
This Agreement has been duly executed and delivered by each of
Holdings and the Borrower and constitutes, and each other Loan
Document to which any Loan Party is to be a party, when executed
and delivered by such Loan Party, will constitute, a legal, valid
and binding obligation of Holdings, the Borrower or such Loan
Party (as the case may be), enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors'
rights generally and subject to general principles of equity,
regardless of whether considered in a proceeding in equity or at
law.
SECTION 3.03. Governmental Approvals; No Conflicts.
The Transactions (a) do not require any consent or approval of,
registration or filing with, or any other action by, any
Governmental Authority, except (i) such as have been obtained or
made and are in full force and effect, (ii) except filings
necessary to perfect Liens created under the Loan Documents and
the Receivables Transaction Documents and (iii) except where the
failure to obtain such consent or approval or make such
registration or filing, individually or in the aggregate, could
not reasonably be expected to result in a Material Adverse
Effect, (b) will not violate any applicable law or regulation or
the charter, by-laws or other organizational documents of
Holdings, the Borrower or any of its Subsidiaries or any order of
any Governmental Authority, (c) will not violate or result in a
default under any indenture, agreement or other instrument
binding upon Holdings, the Borrower or any of its Subsidiaries or
its assets, or give rise to a right thereunder to require any
payment to be made by Holdings, the Borrower or any of its
Subsidiaries, except for violations under retail store leases
that in the aggregate could not reasonably be expected to result
in a Material Adverse Effect, and (d) will not result in the
creation or imposition of any Lien on any asset of Holdings, the
Borrower or any of its Subsidiaries, except Liens created under
the Loan Documents and the Receivables Transaction Documents.
SECTION 3.04. Financial Condition; No Material Adverse
Change. (a) Holdings has heretofore furnished to the Lenders its
consolidated balance sheet and
51
statements of income, stockholders equity and cash flows (i) as
of and for the fiscal year ended February 2, 1997, reported on by
Deloitte & Touche LLP, independent public accountants, and (ii)
as of and for the fiscal quarter and the portion of the fiscal
year ended July 18, 1997, certified by its chief financial
officer. Such financial statements present fairly, in all
material respects, the financial position and results of
operations and cash flows of Holdings and its consolidated
Subsidiaries as of such dates and for such periods in accordance
with GAAP, subject to year-end audit adjustments and the absence
of footnotes in the case of the statements referred to in clause
(ii) above.
(b) Holdings has heretofore furnished to the Lenders
its pro forma consolidated balance sheet as of July 18, 1997,
prepared giving effect to the Transactions as if the Transactions
had occurred on such date. Such pro forma consolidated balance
sheet (i) has been prepared in good faith based on the same
assumptions used to prepare the pro forma financial statements
included in the Information Memorandum (which assumptions are
believed by Holdings and the Borrower to be reasonable), (ii) is
based on the best information available to Holdings and the
Borrower after due inquiry, (iii) accurately reflects in all
material respects all adjustments necessary to give effect to the
Transactions and (iv) presents fairly, in all material respects,
the pro forma financial position of Holdings and its consolidated
Subsidiaries as of July 18, 1997 as if the Transactions had
occurred on such date.
(c) Except as disclosed in the financial statements
referred to in paragraphs (a) and (b) above or the notes thereto
or in the Information Memorandum and except for the Disclosed
Matters, after giving effect to the Transactions, none of
Holdings, the Borrower or its Subsidiaries has, as of the
Effective Date, any material contingent liabilities, unusual
long-term commitments or unrealized losses.
(d) Since February 2, 1997, there has been no material
adverse change in the business, assets, operations, prospects or
condition, financial or otherwise, of Holdings, the Borrower and
its Subsidiaries, taken as a whole.
SECTION 3.05. Properties. (a) Each of Holdings, the
Borrower and its Subsidiaries has good title to, or valid
leasehold interests in, all its real and personal property
material to its business (including its Mortgaged Properties),
except for minor defects in title that do not interfere
materially with its ability to conduct its business as currently
conducted or to utilize such properties for their intended
purposes.
(b) Each of Holdings, the Borrower and its
Subsidiaries owns, or is licensed to use, all trademarks,
tradenames, copyrights, patents and other intellectual property
material to its business, and the use thereof by Holdings, the
Borrower and its Subsidiaries does not infringe upon the rights
of any other Person, except for any such infringements that,
individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect.
(c) Schedule 3.05 sets forth the address of each real
property that is owned or leased by the Borrower or any of its
Subsidiaries as of the Effective Date after giving effect to the
Transactions.
52
(d) As of the Effective Date, neither Holdings, the
Borrower nor any of its Subsidiaries has received notice of, or
has knowledge of, any pending or contemplated condemnation
proceeding affecting any Mortgaged Property or any sale or
disposition thereof in lieu of condemnation. Neither any
Mortgaged Property nor any interest therein is subject to any
right of first refusal, option or other contractual right to
purchase such Mortgaged Property or interest therein.
SECTION 3.06. Litigation and Environmental Matters.
(a) There are no actions, suits or proceedings by or before any
arbitrator or Governmental Authority pending against or, to the
knowledge of Holdings or the Borrower, threatened against or
affecting Holdings, the Borrower or any of its Subsidiaries (i)
as to which there is a reasonable possibility of an adverse
determination and that, if adversely determined, could reasonably
be expected, individually or in the aggregate, to result in a
Material Adverse Effect (other than the Disclosed Matters) or
(ii) that involve any of the Loan Documents or the Transactions.
(b) Except for the Disclosed Matters and except with
respect to any other matters that, individually or in the
aggregate, could not reasonably be expected to result in a
Material Adverse Effect, neither Holdings, the Borrower nor any
of its Subsidiaries (i) has failed to comply with any
Environmental Law or to obtain, maintain or comply with any
permit, license or other approval required under any
Environmental Law, (ii) has become subject to any Environmental
Liability, (iii) has received notice of any claim with respect to
any Environmental Liability or has reason to believe that any
such notice will be received or is being threatened, (iv)
currently owns or operates property which contains Hazardous
Materials, property from which Hazardous Materials were
transported, or property at, on or under which Hazardous
Materials were Released, generated treated, stored or disposed
of, or (v) otherwise knows of, or has reason to believe that
there is, any basis for any Environmental Liability.
(c) Since the date of this Agreement, there has been
no change in the status of the Disclosed Matters that,
individually or in the aggregate, has resulted in, or materially
increased the likelihood of, a Material Adverse Effect.
SECTION 3.07. Compliance with Laws and Agreements.
Each of Holdings, the Borrower and its Subsidiaries is in
compliance with all laws, regulations and orders of any
Governmental Authority applicable to it or its property and all
indentures, agreements and other instruments binding upon it or
its property, except where the failure to do so, individually or
in the aggregate, could not reasonably be expected to result in a
Material Adverse Effect. No Default has occurred and is
continuing.
SECTION 3.08. Investment and Holding Company Status.
Neither Holdings, the Borrower nor any of its Subsidiaries is (a)
an "investment company" as defined in, or subject to regulation
under, the Investment Company Act of 1940 or (b) a "holding
company" as defined in, or subject to regulation under, the
Public Utility Holding Company Act of 1935.
SECTION 3.09. Taxes. Each of Holdings, the Borrower
and its Subsidiaries has timely filed or caused to be filed all
Tax returns and reports required to have been filed and has paid
or caused to be paid all Taxes required to have been paid by it,
except (a) Taxes that are being contested in good faith by
appropriate proceedings and for which Holdings, the Borrower
53
or such Subsidiary, as applicable, has set aside on its books
adequate reserves or (b) to the extent that the failure to do so
could not reasonably be expected to result in a Material Adverse
Effect.
SECTION 3.10. ERISA. No ERISA Event has occurred or is
reasonably expected to occur that, when taken together with all
other such ERISA Events for which liability is reasonably
expected to occur, could reasonably be expected to result in a
Material Adverse Effect. The present value of all accumulated
benefit obligations of all underfunded Plans (based on the
assumptions used for purposes of Statement of Financial
Accounting Standards No. 87) did not, as of the date of the most
recent financial statements reflecting such amounts, exceed the
fair market value of the assets of all such underfunded Plans by
an amount which, if it were required to be fully paid, would
reasonably be expected to result in a Material Adverse Effect.
SECTION 3.11. Disclosure. Holdings and the Borrower
have disclosed to the Lenders all agreements, instruments and
corporate or other restrictions to which Holdings, the Borrower
or any of its Subsidiaries is subject, and all other matters
known to any of them, that, individually or in the aggregate,
could reasonably be expected to result in a Material Adverse
Effect. Neither the Information Memorandum nor any of the other
reports, financial statements, certificates or other information
furnished by or on behalf of any Loan Party to the Administrative
Agent or any Lender in connection with the negotiation of this
Agreement or any other Loan Document or delivered hereunder or
thereunder (as modified or supplemented by other information so
furnished), when made or delivered, contained any material
misstatement of fact or omitted to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
provided that, with respect to projected financial information,
Holdings and the Borrower represent only that such information
was prepared in good faith based upon assumptions believed to be
reasonable at the time.
SECTION 3.12. Subsidiaries. After giving effect to the
consummation of the Recapitalization on the Effective Date,
Holdings does not have any Subsidiaries other than the Borrower
and the Borrower's Subsidiaries. Schedule 3.12 sets forth the
name of, and the ownership interest of the Borrower in, each
Subsidiary of the Borrower and identifies each Subsidiary that is
a Subsidiary Loan Party, in each case as of the Effective Date.
SECTION 3.13. Insurance. Schedule 3.13 sets forth a
description of all insurance maintained by or on behalf of the
Borrower and its Subsidiaries as of the Effective Date. As of the
Effective Date, all premiums in respect of such insurance have
been paid.
SECTION 3.14. Labor Matters. As of the Effective Date,
there are no strikes, lockouts or slowdowns against Holdings, the
Borrower or any Subsidiary pending or, to the knowledge of
Holdings or the Borrower, threatened. The hours worked by and
payments made to employees of Holdings, the Borrower and the
Subsidiaries have not been in material violation of the Fair
Labor Standards Act or any other applicable Federal, state, local
or foreign law dealing with such matters. The consummation of the
Transactions will not give rise to any right of termination or
right of renegotiation on the part of any union under any
collective bargaining agreement to which Holdings, the Borrower
or any Subsidiary is bound.
SECTION 3.15. Solvency. Immediately after the
consummation of the Transactions to occur on the Effective Date
and immediately following the making of each Loan
54
made on the Effective Date and after giving effect to the
application of the proceeds of such Loans, (a) the fair value of
the assets of each Loan Party, at a fair valuation, will exceed
its debts and liabilities, subordinated, contingent or otherwise;
(b) the present fair saleable value of the property of each Loan
Party will be greater than the amount that will be required to
pay the probable liability of its debts and other liabilities,
subordinated, contingent or otherwise, as such debts and other
liabilities become absolute and matured; (c) each Loan Party will
be able to pay its debts and liabilities, subordinated,
contingent or otherwise, as such debts and liabilities become
absolute and matured; and (d) each Loan Party will not have
unreasonably small capital with which to conduct the business in
which it is engaged as such business is now conducted and is
proposed to be conducted following the Effective Date.
SECTION 3.16. Senior Indebtedness. The Obligations
constitute "Senior Debt" under and as defined in the Subordinated
Debt Documents.
SECTION 3.17. Security Documents. (a) The Pledge
Agreement is effective to create in favor of the Collateral
Agent, for the ratable benefit of the Secured Parties, a legal,
valid and enforceable security interest in the Collateral (as
defined in the Pledge Agreement) and, when such Collateral is
delivered to the Collateral Agent, the Pledge Agreement shall
constitute a fully perfected first priority Lien on, and security
interest in, all right, title and interest of each pledgor
thereunder in such Collateral, in each case prior and superior in
right to any other Person.
(b) The Security Agreement is effective to create in
favor of the Collateral Agent, for the ratable benefit of the
Secured Parties, a legal, valid and enforceable security interest
in the Collateral (as defined in the Security Agreement) and,
when financing statements in appropriate form are filed in the
offices specified on Schedule 5 to the Perfection Certificate,
the Security Agreement shall constitute a fully perfected Lien
on, and security interest in, all right, title and interest of
the grantors thereunder in such Collateral (other than the
Intellectual Property (as defined in the Security Agreement)), in
each case prior and superior in right to any other Person, other
than with respect to Liens expressly permitted by Section 6.02.
(c) When the Security Agreement is filed in the United
States Patent and Trademark Office and the United States
Copyright Office, the Security Agreement shall constitute a fully
perfected Lien on, and security interest in, all right, title and
interest of the Loan Parties in the Intellectual Property (as
defined in the Security Agreement) in which a security interest
may be perfected by filing, recording or registering a security
agreement, financing statement or analogous document in the
United States Patent and Trademark Office or the United States
Copyright Office, as applicable, in each case prior and superior
in right to any other Person other than Liens expressly permitted
by Section 6.02 (it being understood that subsequent recordings
in the United States Patent and Trademark Office and the United
States Copyright Office may be necessary to perfect a Lien on
registered trademarks, trademark applications and copyrights
acquired by the Loan Parties after the date hereof).
(d) The Mortgages are effective to create, subject to
the exceptions listed in each title insurance policy covering
such Mortgage, in favor of the Collateral Agent, for the ratable
benefit of the Secured Parties, a legal, valid and enforceable
Lien on all of the Loan Parties' right, title and interest in and
to the Mortgaged Properties thereunder and the proceeds thereof,
55
and when the Mortgages are filed in the offices specified on
Schedule 3.17(d), the Mortgages shall constitute a Lien on, and
security interest in, all right, title and interest of the Loan
Parties in such Mortgaged Properties and the proceeds thereof, in
each case prior and superior in right to any other Person, other
than with respect to the rights of Persons pursuant to Liens
expressly permitted by Section 6.02.
SECTION 3.18. Federal Reserve Regulations. (a) Neither
Holdings, the Borrower nor any of its Subsidiaries is engaged
principally, or as one of its important activities, in the
business of extending credit for the purpose of buying or
carrying Margin Stock.
(b) No part of the proceeds of any Loan or any Letter
of Credit or any Acceptance will be used, whether directly or
indirectly, and whether immediately, incidentally or ultimately,
for any purpose that entails a violation of, or that is
inconsistent with, the provisions of the Regulations of the
Board, including Regulation G, U or X.
ARTICLE IV
Conditions
SECTION 4.01. Effective Date. The obligations of the
Lenders to make Loans and of the Issuing Bank to issue Letters of
Credit and Acceptances hereunder shall not become effective until
the date on which each of the following conditions is satisfied
(or waived in accordance with Section 9.02):
(a) The Administrative Agent (or its counsel) shall have
received from each party hereto either (i) a counterpart of
this Agreement signed on behalf of such party or (ii)
written evidence satisfactory to the Administrative Agent
(which may include telecopy transmission of a signed
signature page of this Agreement) that such party has
signed a counterpart of this Agreement.
(b) The Administrative Agent shall have received a
favorable written opinion (addressed to the Administrative
Agent and the Lenders and dated the Effective Date) of each
of (i) Cleary, Gottlieb, Steen & Hamilton, counsel for the
Borrower, substantially in the form of Exhibit B-1 and (ii)
Herzfeld & Rubin, counsel for the Borrower, substantially
in the form of Exhibit B-2, and, in the case of each such
opinion required by this paragraph, covering such other
matters relating to the Loan Parties, the Loan Documents or
the Transactions as the Required Lenders shall reasonably
request. The Borrower hereby requests such counsel to
deliver such opinions.
(c) The Administrative Agent shall have received such
documents and certificates as the Administrative Agent or
its counsel may reasonably request relating to the
organization, existence and good standing of each Loan
Party, the authorization of the Transactions and any other
legal matters relating to the Loan Parties, the Loan
Documents or the Transactions, all in form and substance
satisfactory to the Administrative Agent and its counsel.
56
(d) The Administrative Agent shall have received a
certificate, dated the Effective Date and signed by the
President, a Vice President or a Financial Officer of each
of Holdings and the Borrower, confirming compliance with
the conditions set forth in paragraphs (a) and (b) of
Section 4.02.
(e) The Administrative Agent shall have received all
fees and other amounts due and payable on or prior to the
Effective Date, including, to the extent invoiced,
reimbursement or payment of all out-of-pocket expenses
required to be reimbursed or paid by any Loan Party
hereunder or under any other Loan Document.
(f) The Administrative Agent shall have received
counterparts of the Pledge Agreement signed on behalf of
Holdings, the Borrower and each Subsidiary Loan Party,
together with stock certificates representing all the
outstanding shares of capital stock of the Borrower and
each Subsidiary owned by or on behalf of any Loan Party as
of the Effective Date after giving effect to the
Transactions (except that stock certificates representing
shares of common stock of a Foreign Subsidiary that is not
a Subsidiary Loan Party may be limited to 65% of the
outstanding shares of common stock of such Foreign
Subsidiary), promissory notes evidencing all intercompany
Indebtedness (other than the Purchase Money Note) owed to
any Loan Party by Holdings, the Borrower or any Subsidiary
as of the Effective Date after giving effect to the
Transactions and stock powers and instruments of transfer,
endorsed in blank, with respect to such stock certificates
and promissory notes.
(g) The Administrative Agent shall have received
counterparts of the Security Agreement signed on behalf of
Holdings, the Borrower and each Subsidiary Loan Party,
together with the following:
(i) all documents and instruments, including
Uniform Commercial Code financing statements, required
by law or reasonably requested by the Administrative
Agent to be filed, registered or recorded to create or
perfect the Liens intended to be created under the
Security Agreement; and
(ii) a completed Perfection Certificate dated the
Effective Date and signed by an executive officer or
Financial Officer of the Borrower, together with all
attachments contemplated thereby, including the
results of a search of the Uniform Commercial Code (or
equivalent) filings made with respect to the Loan
Parties in the jurisdictions contemplated by the
Perfection Certificate and copies of the financing
statements (or similar documents) disclosed by such
search and evidence reasonably satisfactory to the
Administrative Agent that the Liens indicated by such
financing statements (or similar documents) are
permitted by Section 6.02 or have been released.
(h) The Administrative Agent shall have received (i)
counterparts of the Guarantee Agreement signed on behalf of
Holdings and each Subsidiary Loan Party, and (ii)
counterparts of the Indemnity, Subrogation and Contribution
Agreement signed on behalf of each Loan Party.
57
(i) The Administrative Agent shall have received (i)
counterparts of a Mortgage with respect to each Mortgaged
Property signed on behalf of the record owner of such
Mortgaged Property, (ii) a policy or policies of title
insurance issued by a nationally recognized title insurance
company, insuring the Lien of each such Mortgage as a valid
first Lien on the Mortgaged Property described therein,
free of any other Liens except as permitted by Section
6.02, in form and substance reasonably acceptable to the
Collateral Agent, together with such endorsements,
coinsurance and reinsurance as the Collateral Agent or the
Required Lenders may reasonably request and (iii) such
surveys, abstracts and appraisals as may be required
pursuant to such Mortgages or as the Administrative Agent
or the Required Lenders may reasonably request.
(j) The Administrative Agent shall have received
evidence satisfactory to it that the insurance required by
Section 5.07 is in effect.
(k) The Lenders shall be reasonably satisfied as to
the amount and nature of any environmental and employee
health and safety exposures to which Holdings and its
subsidiaries may be subject after giving effect to the
Transactions, and with the plans of Holdings and the
Borrower with respect thereto, and the Lenders shall have
received environmental assessments satisfactory to the
Administrative Agent from an environmental consulting firm
satisfactory to the Administrative Agent.
(l) Holdings shall have received gross cash proceeds of
not less than $66,000,000 from the Equity Financing and the
Initial Investors shall have received not less than 75% of
the outstanding common stock of Holdings.
(m) The Borrower shall have received gross cash
proceeds of not less than $150,000,000 from the issuance of
the Subordinated Debt. The terms and conditions of the
Subordinated Debt (including but not limited to terms and
conditions relating to the interest rate, fees,
amortization, maturity, subordination, covenants, events of
defaults and remedies) and the provisions of the
Subordinated Debt Documents shall be satisfactory to the
Lenders. The Administrative Agent shall have received
copies of the Subordinated Debt Documents, certified by a
Financial Officer as complete and correct.
(n) All material consents and approvals required to be
obtained from any Governmental Authority or other Person in
connection with the Recapitalization shall have been
obtained, and all applicable waiting periods and appeal
periods shall have expired, in each case without the
imposition of any burdensome conditions. The
Recapitalization shall have been, or substantially
simultaneously with the initial funding of Loans on the
Effective Date shall be, consummated in accordance with the
Recapitalization Documents and applicable law, without any
amendment to or waiver of any material terms or conditions
of the Recapitalization Documents not approved by the
Required Lenders. The Administrative Agent shall have
received copies of the Recapitalization Documents and all
certificates, opinions and other documents delivered
thereunder, certified by a Financial Officer as complete
and correct. The Lenders shall (i) be satisfied with the
Recapitalization Agreement and such related documentation
and
58
(ii) be satisfied with the capitalization, structure
and equity ownership of Holdings after giving effect to the
Transactions.
(o) The Lenders shall have received (i) audited
consolidated balance sheets and related statements of
income, stockholders' equity and cash flows of Holdings for
the five fiscal years ended prior to the Effective Date and
(ii) unaudited consolidated balance sheets and related
statements of income, stockholders' equity and cash flows
of Holdings for the 1997 fiscal quarters preceding the
Effective Date (and, to the extent available, for each
month preceding the Effective Date since the last such
quarter), which audited and unaudited financial statements
shall not be materially inconsistent with the financial
statements or forecasts previously provided to the Lenders.
(p) The Lenders shall have received a pro forma
consolidated balance sheet of Holdings as of July 18, 1997,
reflecting all pro forma adjustments as if the Transactions
had been consummated on such date, and such pro forma
consolidated balance sheet shall be consistent in all
material respects with the forecasts and other information
previously provided to the Lenders. After giving effect to
the Transactions, neither Holdings, the Borrower nor any of
its Subsidiaries shall have outstanding any shares of
preferred stock or any Indebtedness, other than (i)
Indebtedness incurred under the Loan Documents, (ii) the
Subordinated Debt, (iii) Holdings Senior Discount
Debentures, (iv) Holdings Preferred Stock, (v) Indebtedness
and Obligations incurred in connection with the Qualified
Receivables Transaction and (vi) other Indebtedness
permitted under Section 6.01. The aggregate amount of fees
and expenses (including underwriting discounts and
commissions) payable or otherwise borne by Holdings, the
Borrower and its Subsidiaries in connection with the
Transactions shall not exceed $48,590,957.
(q) The Administrative Agent shall have received a
solvency letter, in form and substance reasonably
satisfactory to the Lenders, from Valuation Research
Corporation, with respect to the solvency of the Loan
Parties after giving effect to the Transactions.
(r) The initial closing under the Receivables Sale
Agreement and the Receivables Pooling Agreement shall have
been consummated and Popular Club Plan shall have received
not less than $39,000,000 as consideration for the initial
sale of receivables thereunder.
(s) Holdings shall have received not less than
$75,257,000 in gross cash proceeds from the issuance of the
Holdings Senior Discount Debentures in a public offering or
in a Rule 144A or other private placement to one or more
holders satisfactory to the Administrative Agent. The terms
and conditions of the Holdings Senior Discount Debentures
(including but not limited to terms and conditions relating
to the warrants, interest rate, fees, amortization,
maturity, subordination, covenants, collateral, events of
defaults and remedies) and the provisions of the Holdings
Senior Discount Debt Documents shall be satisfactory in all
respects to the Lenders.
(t) Holdings shall have received not less than
$125,000,000 in gross cash proceeds from the issuance of
the Holdings Preferred Stock in a public offering or in a
59
Rule 144A or other private placement to one or more holders
satisfactory to the Administrative Agents. The terms and
conditions of the Holdings Preferred Stock (including but
not limited to terms and conditions relating to the
dividend rate and redemption), shall be satisfactory in all
respects to the Lenders.
(u) The Administrative Agent shall be reasonably
satisfied with the results of an examination of the
receivables and inventory of Holdings and its Subsidiaries
after giving effect to the Transactions and the
consummation of the other transactions contemplated hereby.
(v) The Lenders shall be reasonably satisfied in all
respects with the tax position and the contingent tax and
other liabilities of, and with any tax sharing agreements
(including the Tax Sharing Agreement) among, Holdings and
its subsidiaries after giving effect to the Transactions
and the other transactions contemplated hereby, and with
the plans of Holdings with respect thereto.
(w) The Administrative Agent shall be reasonably
satisfied with the sufficiency of amounts available under
the Revolving Commitments to meet the ongoing working
capital requirements of the Borrower and its Subsidiaries
following the consummation of the Transactions and the
other transactions contemplated hereby.
(x) The Administrative Agent shall have received
counterparts of the Intercreditor Agreement signed by the
Receivables Trustee.
The Administrative Agent shall notify the Borrower and the
Lenders of the Effective Date, and such notice shall be
conclusive and binding. Notwithstanding the foregoing, the
obligations of the Lenders to make Loans and of the Issuing Bank
to issue Letters of Credit and Acceptances hereunder shall not
become effective unless each of the foregoing conditions is
satisfied (or waived pursuant to Section 9.02) at or prior to
3:00 p.m., New York City time, on October 31, 1997 (and, in the
event such conditions are not so satisfied or waived, the
Commitments shall terminate at such time).
SECTION 4.02. Each Credit Event. The obligation of
each Lender to make a Loan on the occasion of any Borrowing, and
of the Issuing Bank to issue, amend, renew or extend any Letter
of Credit or any Acceptance, is subject to the satisfaction of
the following conditions:
(a) The representations and warranties of each Loan
Party set forth in the Loan Documents shall be true and
correct in all material respects on and as of the date of
such Borrowing or the date of issuance, amendment, renewal
or extension of such Letter of Credit or such Acceptance,
as applicable, except to the extent such representations
and warranties expressly relate to an earlier date (in
which case such representations and warranties shall be
true and correct in all material respects as to such
earlier date).
(b) At the time of and immediately after giving effect
to such Borrowing or the issuance, amendment, renewal or
extension of such Letter of Credit or such Acceptance, as
applicable, no Default shall have occurred and be
continuing.
60
Each Borrowing and each issuance, amendment, renewal or extension
of a Letter of Credit or Acceptance shall be deemed to constitute
a representation and warranty by Holdings and the Borrower on the
date thereof as to the matters specified in paragraphs (a) and
(b) of this Section.
ARTICLE V
Affirmative Covenants
---------------------
Until the Commitments have expired or been terminated
and the principal of and interest on each Loan and all fees
payable hereunder shall have been paid in full and all Letters of
Credit and Acceptances shall have expired or terminated and all
LC Disbursements and Acceptance Disbursements shall have been
reimbursed, each of Holdings and the Borrower covenants and
agrees with the Lenders that:
SECTION 5.01. Financial Statements and Other
Information. Holdings and the Borrower will furnish to the
Administrative Agent and each Lender:
(a) within 90 days after the end of each fiscal year of
Holdings, (i) Holdings' audited consolidated balance sheet
and related statements of operations, stockholders' equity
and cash flows as of the end of and for such year, setting
forth in each case in comparative form the figures for the
previous fiscal year, all reported on by KPMG Peat Marwick
or other independent public accountants of recognized
national standing (without a "going concern" or like
qualification or exception and without any qualification or
exception as to the scope of such audit) to the effect that
such consolidated financial statements present fairly in
all material respects the financial condition and results
of operations of Holdings and its consolidated Subsidiaries
on a consolidated basis in accordance with GAAP
consistently applied and (ii) Holdings' unaudited
consolidated and consolidating balance sheet and related
statements of operations, stockholders' equity and cash
flows as of the end of and for such fiscal year, setting
forth in each case in comparative form the figures for the
previous fiscal year, all certified by one of its Financial
Officers as presenting fairly in all material respects the
financial condition and results of operations of Holdings
and its consolidated Subsidiaries on a consolidated and
consolidating basis in accordance with GAAP consistently
applied;
(b) within 45 days after the end of each of the first
three fiscal quarters of each fiscal year of Holdings,
Holdings' unaudited consolidated and consolidating balance
sheet and related statements of operations, stockholders'
equity and cash flows as of the end of and for such fiscal
quarter and the then elapsed portion of the fiscal year,
setting forth in each case in comparative form the figures
for the corresponding period or periods of (or, in the case
of the balance sheet, as of the end of) the previous fiscal
year, all certified by one of its Financial Officers as
presenting fairly in all material respects the financial
condition and results of operations of Holdings and its
consolidated Subsidiaries on a consolidated and
consolidating basis in accordance with GAAP consistently
applied, subject to normal year-end audit adjustments and
the absence of footnotes;
61
(c) within 30 days after the end of each of the first
two fiscal months of each fiscal quarter of Holdings, (i)
Holdings' unaudited consolidated balance sheet and related
statements of operations, stockholders' equity and cash
flows as of the end of and for such fiscal month and the
then elapsed portion of the fiscal year, all certified by
one of its Financial Officers as presenting in all material
respects the financial condition and results of operations
of Holdings and its consolidated Subsidiaries on a
consolidated basis in accordance with GAAP consistently
applied, subject to normal year-end audit adjustments and
the absence of footnotes, (ii) unaudited financial
information with respect to sales, margin and EBITDA
information for each of the Borrower's divisions, (iii)
unaudited financial information with respect to same store
retail sales information and (iv) monthly adjusted seasonal
mail order sales/inventory coverage reports; provided that
(A) with respect clause (ii), the Borrower will also
provide a monthly comparison of such information to
budgeted levels prepared on a quarterly basis for each of
the Borrower's divisions and (B) with respect to clause
(iii), the Borrower will also provide a monthly comparison
of such information to budgeted levels prepared on a
quarterly basis;
(d) concurrently with any delivery of financial
statements under clause (a) or (b) above, a certificate of
a Financial Officer of Holdings (i) certifying as to
whether a Default has occurred and, if a Default has occurred,
specifying the details thereof and any action taken or
proposed to be taken with respect thereto, (ii) setting
forth reasonably detailed calculations demonstrating
compliance with Sections 6.12, 6.13, 6.14, 6.15 and 6.16
and (iii) stating whether any change in GAAP or in the
application thereof has occurred since the date of
Holdings' audited financial statements referred to in
Section 3.04 and, if any such change has occurred,
specifying the effect of such change on the financial
statements accompanying such certificate;
(e) concurrently with any delivery of financial
statements under clause (a) above, a certificate of the
accounting firm that reported on such financial statements
stating whether they obtained knowledge during the course
of their examination of such financial statements of any
Default (which certificate may be limited to the extent
required by accounting rules or guidelines);
(f) at least 30 days prior to the commencement of each
fiscal year of Holdings, a detailed consolidated budget for
such fiscal year (including a projected consolidated
balance sheet and related statements of projected
operations and cash flow as of the end of and for such
fiscal year) and, promptly when available, any significant
revisions of such budget;
(g) promptly after the same become publicly available,
copies of all periodic and other reports, proxy statements
and other materials filed by Holdings, the Borrower or any
Subsidiary with the Securities and Exchange Commission, or
any Governmental Authority succeeding to any or all of the
functions of said Commission, or with any national
securities exchange, or, in the event Holdings becomes a
publicly registered company, distributed by Holdings to its
shareholders generally, as the case may be; and
62
(h) promptly following any request therefor, such
other information regarding the operations, business
affairs and financial condition of Holdings, the Borrower
or any Subsidiary, or compliance with the terms of any Loan
Document, as the Administrative Agent or any Lender may
reasonably request.
SECTION 5.02. Notices of Material Events. Holdings and
the Borrower will furnish to the Administrative Agent and each
Lender, promptly upon Holdings or the Borrower's knowledge
thereof, written notice of the following:
(a) the occurrence of any Default;
(b) the filing or commencement of any action, suit or
proceeding by or before any arbitrator or Governmental
Authority against or affecting Holdings, the Borrower or
any Affiliate thereof that, if adversely determined, could
reasonably be expected to result in a Material Adverse
Effect;
(c) the occurrence of any ERISA Event that, alone or
together with any other ERISA Events that have occurred,
could reasonably be expected to result in liability of
Holdings, the Borrower and its Subsidiaries in an aggregate
amount exceeding $10,000,000; and
(d) any other development that results in, or could
reasonably be expected to result in, a Material Adverse
Effect.
Each notice delivered under this Section shall be accompanied by
a statement of a Financial Officer or other executive officer of
the Borrower setting forth the details of the event or
development requiring such notice and any action taken or
proposed to be taken with respect thereto.
SECTION 5.03. Information Regarding Collateral. (a)
The Borrower will furnish to the Administrative Agent prompt
written notice of any change (i) in any Loan Party's corporate
name or in any trade name used to identify it (x) in the conduct
of its business or (y) in the ownership of its properties, (ii)
in the location of any Loan Party's chief executive office, its
principal place of business, any office in which it maintains
books or records relating to Collateral owned by it or any office
or facility at which Collateral owned by it is located (including
the establishment of any such new office or facility), (iii) in
any Loan Party's identity or corporate structure or (iv) in any
Loan Party's Federal Taxpayer Identification Number. The Borrower
agrees not to effect or permit any change referred to in the
preceding sentence unless all filings have been made, or will
have been made within any applicable statutory period, under the
Uniform Commercial Code or otherwise that are required in order
for the Administrative Agent to continue at all times following
such change to have a valid, legal and perfected security
interest in all the Collateral. The Borrower also agrees promptly
to notify the Administrative Agent if any material portion of the
Collateral is damaged or destroyed.
(b) Each year, at the time of delivery of annual
financial statements with respect to the preceding fiscal year
pursuant to clause (a) of Section 5.01, the Borrower shall
deliver to the Administrative Agent a certificate of a Financial
Officer of the Borrower (i) setting forth the
63
information required pursuant to Section 2 of the Perfection
Certificate or confirming that there has been no change in such
information since the date of the Perfection Certificate
delivered on the Effective Date or the date of the most recent
certificate delivered pursuant to this Section and (ii)
certifying that all Uniform Commercial Code financing statements
(including fixture filings, as applicable) or other appropriate
filings, recordings or registrations, including all refilings,
rerecordings and reregistrations, containing a description of the
Collateral have been filed of record in each governmental,
municipal or other appropriate office in each jurisdiction
identified pursuant to clause (i) above to the extent necessary
to protect and perfect the security interests under the Security
Agreement for a period of not less than 18 months after the date
of such certificate (except as noted therein with respect to any
continuation statements to be filed within such period).
SECTION 5.04. Existence; Conduct of Business. Each of
Holdings and the Borrower will, and will cause each of its
Subsidiaries to, do or cause to be done all things necessary to
preserve, renew and keep in full force and effect its legal
existence and the rights, licenses, permits, privileges,
franchises, patents, copyrights, trademarks and trade names
material to the conduct of the business of the Borrower and its
Subsidiaries, taken as a whole; provided that the foregoing shall
not prohibit any merger, consolidation, liquidation or
dissolution permitted under Section 6.03.
SECTION 5.05. Payment of Obligations. Each of Holdings
and the Borrower will, and will cause each of its Subsidiaries
to, pay its Indebtedness and other obligations, including Tax
liabilities, before the same shall become delinquent or in
default, except where (a) the validity or amount thereof is being
contested in good faith by appropriate proceedings, (b) Holdings,
the Borrower or such Subsidiary has set aside on its books
adequate reserves with respect thereto in accordance with GAAP,
(c) such contest effectively suspends collection of the contested
obligation and the enforcement of any Lien securing such
obligation and (d) the failure to make payment pending such
contest could not reasonably be expected to result in a Material
Adverse Effect.
SECTION 5.06. Maintenance of Properties. Each of
Holdings and the Borrower will, and will cause each of its
Subsidiaries to, keep and maintain all property material to the
conduct of its business in good working order and condition,
ordinary wear and tear excepted.
SECTION 5.07. Insurance. (a) Each of Holdings and the
Borrower will, and will cause each of its Subsidiaries to,
maintain, with financially sound and reputable insurance
companies:
(i) fire and extended coverage insurance, on a
replacement cost basis, with respect to all personal
property and improvements to real property, in such amounts
as are customarily maintained by companies in the same or
similar business operating in the same or similar
locations;
(ii) commercial general liability insurance against
claims for bodily injury, death or property damage
occurring upon, about or in connection with the use of any
properties owned, occupied or controlled by it, providing
coverage on an occurrence basis
64
with a combined single limit of not less than $1,000,000
and including the broad form CGL endorsement;
(iii) business interruption insurance, insuring
against loss of gross earnings for a period of not less
than 12 months arising from any risks or occurrences
required to be covered by insurance pursuant to clause (i)
above; and
(iv) such other insurance of the type and in the
amount described in Schedule 3.13 or as may be required by
law.
Deductibles or self-insured retention shall not exceed $25,000
for fire and extended coverage policies, $25,000 for commercial
general liability policies or 24 hours for business interruption
policies.
(b) Fire and extended coverage policies (and any
policies required to be maintained pursuant to paragraph (c)
below) maintained with respect to any Collateral shall be
endorsed or otherwise amended to include (i) a non-contributing
mortgage clause (regarding improvements to real property) and
lenders' loss payable clause (regarding personal property), in
each case in favor of the Administrative Agent and providing for
losses thereunder to be payable to the Administrative Agent or
its designee, (ii) a provision to the effect that neither the
Borrower, the Administrative Agent nor any other party shall be a
coinsurer and (iii) such other provisions as the Administrative
Agent may reasonably require from time to time to protect the
interests of the Lenders. Commercial general liability policies
shall be endorsed to name the Administrative Agent as an
additional insured. Business interruption policies shall name the
Administrative Agent as loss payee. Each such policy referred to
in this paragraph also shall provide that it shall not be
canceled, modified or not renewed (i) by reason of nonpayment of
premium except upon not less than 10 days' prior written notice
thereof by the insurer to the Administrative Agent (giving the
Administrative Agent the right to cure defaults in the payment of
premiums) or (ii) for any other reason except upon not less than
30 days' prior written notice thereof by the insurer to the
Administrative Agent. The Borrower shall deliver to the
Administrative Agent, prior to the cancellation, modification or
nonrenewal of any such policy of insurance, a copy of a renewal
or replacement policy (or other evidence of renewal of a policy
previously delivered to the Administrative Agent) together with
evidence satisfactory to the Administrative Agent of payment of
the premium therefor.
(c) If at any time the area in which any Mortgaged
Property is located is designated (i) a "flood hazard area" in
any Flood Insurance Rate Map published by the Federal Emergency
Management Agency (or any successor agency), the Borrower shall
obtain flood insurance in such total amount as the Administrative
Agent or the Required Lenders may from time to time require, and
otherwise comply with the National Flood Insurance Program as set
forth in the Flood Disaster Protection Act of 1973, as amended
from time to time, or (ii) a "Zone 1" area, the Borrower shall
obtain earthquake insurance in such total amount as the
Administrative Agent or the Required Lenders may from time to
time require.
SECTION 5.08. Casualty and Condemnation. (a) The
Borrower will furnish to the Administrative Agent and the Lenders
prompt written notice of any casualty or other insured damage to
any portion of any Collateral or the commencement of any action
or proceeding for
65
the taking of any Collateral or any part thereof or interest
therein under power of eminent domain or by condemnation or
similar proceeding.
(b) If any event described in paragraph (a) of this
Section results in Net Proceeds (whether in the form of insurance
proceeds, condemnation award or otherwise), the Administrative
Agent is authorized to collect such Net Proceeds and, if received
by Holdings, the Borrower or any Subsidiary, such Net Proceeds
shall be paid over to the Administrative Agent; provided that (i)
if the aggregate Net Proceeds in respect of such event (other
than proceeds of business interruption insurance) are less than
$100,000, such Net Proceeds shall be paid over to the Borrower
unless a Default has occurred and is continuing, and (ii) all
proceeds of business income insurance shall be paid over to the
Borrower unless a Default has occurred and is continuing. All
such Net Proceeds retained by or paid over to the Administrative
Agent shall be held by the Administrative Agent and released from
time to time to pay the costs of repairing, restoring or
replacing the affected property in accordance with the terms of
the applicable Security Document, subject to the provisions of
the applicable Security Document regarding application of such
Net Proceeds during a Default. If requested by the Borrower, the
Administrative Agent shall apply any such Net Proceeds being held
by the Administrative Agent to prepay Term Borrowings.
(c) If any Net Proceeds retained by or paid over to
the Administrative Agent as provided above continue to be held by
the Administrative Agent on the date that is 180 days after the
occurrence of the event resulting in such Net Proceeds, then such
Net Proceeds shall be applied to prepay Term Borrowings as
provided in Section 2.11(b).
SECTION 5.09. Books and Records; Inspection and Audit
Rights. Each of Holdings and the Borrower will, and will cause
each of its Subsidiaries to, keep proper books of record and
account in which full, true and correct entries are made of all
dealings and transactions in relation to its business and
activities. Each of Holdings and the Borrower will, and will
cause each of its Subsidiaries to, permit any representatives
designated by the Administrative Agent or any Lender, upon
reasonable prior notice and at its own expense, to visit and
inspect its properties, to examine and make extracts from its
books and records, and to discuss its affairs, finances and
condition with its officers and independent accountants, all at
such reasonable times and as often as reasonably requested.
SECTION 5.10. Compliance with Laws. Each of Holdings
and the Borrower will, and will cause each of its Subsidiaries
to, comply with all laws, rules, regulations and orders of any
Governmental Authority applicable to it or its property, except
where the failure to do so, individually or in the aggregate,
could not reasonably be expected to result in a Material Adverse
Effect.
SECTION 5.11. Use of Proceeds and Letters of Credit
and Acceptances. The proceeds of the Term Loans, together with
the proceeds of Revolving Loans not exceeding $37,000,000 to be
drawn on the Effective Date, the net proceeds of the Subordinated
Debt and the proceeds from the initial sale of receivables under
the Qualified Receivables Transaction, will be used (a) for the
payment of the Effective Date Dividend, (b) to pay the fees and
expenses in connection with the Transactions and (c) to refinance
existing Indebtedness of Holdings
66
(including the redemption of the Outstanding Senior Notes) and
its Subsidiaries in an amount not to exceed $195,074,875. The
proceeds of the Effective Date Dividend will be used by Holdings,
together with the net proceeds of the Holdings Senior Discount
Debentures, the net proceeds of the Holdings Preferred Stock and
the Equity Financing, for the payment of the cash consideration
to be paid in connection with the Recapitalization. The proceeds
of the Revolving Loans (other than the Loans used for the
purposes specified in the immediately preceding sentence) and
Acceptances will be used for general corporate purposes. No part
of the proceeds of any Loan will be used, whether directly or
indirectly, for any purpose that entails a violation of any
applicable Regulation of the Board, including Regulations G, U
and X. Letters of Credit will be issued to support obligations of
the Borrower and its Subsidiaries incurred in connection with
general corporate purposes.
SECTION 5.12. Additional Subsidiaries. If any
additional Subsidiary is formed or acquired after the Effective
Date or if any subsidiary ceases to be an Inactive Subsidiary,
Holdings and the Borrower will notify the Administrative Agent
and the Lenders thereof and (a) if such Subsidiary is a
Subsidiary Loan Party, Holdings and the Borrower will cause such
Subsidiary to become a party to the Guarantee Agreement, the
Indemnity, Subrogation and Contribution Agreement and each
applicable Security Document in the manner provided therein
within three Business Days after such Subsidiary is formed or
acquired and promptly take such actions to create and perfect
Liens on such Subsidiary's assets to secure the Obligations as
the Administrative Agent or the Required Lenders shall reasonably
request and (b) if any shares of capital stock or Indebtedness of
such Subsidiary are owned by or on behalf of any Loan Party,
Holdings and the Borrower will cause such shares and promissory
notes evidencing such Indebtedness (other than the Purchase Money
Note) to be pledged pursuant to the Pledge Agreement within three
Business Days after such Subsidiary is formed or acquired (except
that, if such Subsidiary is a Foreign Subsidiary and is not a
Subsidiary Loan Party, shares of common stock of such Subsidiary
to be pledged pursuant to the Pledge Agreement may be limited to
65% of the outstanding shares of common stock of such
Subsidiary).
SECTION 5.13. Further Assurances. (a) Each of Holdings
and the Borrower will, and will cause each Subsidiary Loan Party
to, execute any and all further documents, financing statements,
agreements and instruments, and take all such further actions
(including the filing and recording of financing statements,
fixture filings, mortgages, deeds of trust and other documents),
which may be required under any applicable law, or that the
Administrative Agent or the Required Lenders may reasonably
request, to effectuate the transactions contemplated by the Loan
Documents or to grant, preserve, protect or perfect the Liens
created or intended to be created by the Security Documents or
the validity or priority of any such Lien, all at the expense of
the Loan Parties. Holdings and the Borrower also agree to provide
to the Administrative Agent, from time to time upon request,
evidence reasonably satisfactory to the Administrative Agent as
to the perfection and priority of the Liens created or intended
to be created by the Security Documents.
(b) If any material assets (including any real
property or improvements thereto or any interest therein) are
acquired by the Borrower or any Subsidiary Loan Party after the
Effective Date (other than assets constituting Collateral under
the Security Agreement that become subject to the Lien of the
Security Agreement upon acquisition thereof), the Borrower
67
will notify the Administrative Agent and the Lenders thereof, and,
if requested by the Administrative Agent or the Required Lenders,
the Borrower will cause such assets to be subjected to a Lien
securing the Obligations and will take, and cause the Subsidiary
Loan Parties to take, such actions as shall be necessary or
reasonably requested by the Administrative Agent to grant and
perfect such Liens, including actions described in paragraph (a)
of this Section, all at the expense of the Loan Parties.
SECTION 5.14. Interest Rate Protection. As promptly as
practicable, and in any event within 90 days after the Effective
Date, the Borrower will enter into, and thereafter for a period
of not less than three years will maintain in effect, one or more
interest rate protection agreements on such terms and with such
parties as shall be reasonably satisfactory to the Administrative
Agent, the effect of which shall be to fix or limit the interest
cost to the Borrower with respect to at least 50% of the
outstanding Term Loans.
SECTION 5.15. Change of Fiscal Year. Before January
31, 1998, each of Holdings, the Borrower and its Subsidiaries
will change the ends of its fiscal periods so that its fiscal
quarters and fiscal years will end on the dates contemplated by
Sections 6.12, 6.13, 6.14, 6.15 and 6.16; provided that if any of
Holdings, the Borrower or any Subsidiary shall fail to make such
change, the Borrower and the Administrative Agent shall negotiate
in good faith in order to adjust the timing of such entities'
financial reporting for purposes of determining compliance with
Sections 6.12, 6.13, 6.14, 6.15 and 6.16 and any other applicable
provisions of this Agreement and, pending such adjustment, such
compliance shall be determined as though the changes in such
entity's fiscal periods had been made in accordance with this
Section 5.15.
ARTICLE VI
Negative Covenants
Until the Commitments have expired or terminated and
the principal of and interest on each Loan and all fees payable
hereunder have been paid in full and all Letters of Credit and
Acceptances have expired or terminated and all LC Disbursements
and Acceptance Disbursements shall have been reimbursed, each of
Holdings and the Borrower covenants and agrees with the Lenders
that:
SECTION 6.01. Indebtedness; Certain Equity Securities.
(a) The Borrower will not, and will not permit any Subsidiary to,
create, incur, assume or permit to exist any Indebtedness,
except:
(i) Indebtedness created under the Loan Documents;
(ii) the Subordinated Debt;
(iii) Indebtedness that will be fully repaid on the
Effective Date;
(iv) Indebtedness of the Borrower to any Subsidiary
and of any Subsidiary to the Borrower or any other
Subsidiary; provided that Indebtedness of any Subsidiary
that
68
is not a Loan Party to the Borrower or any Subsidiary
Loan Party shall be subject to Section 6.04;
(v) Guarantees by the Borrower of Indebtedness of any
Subsidiary and by any Subsidiary of Indebtedness of the
Borrower or any other Subsidiary; provided that Guarantees
by the Borrower or any Subsidiary Loan Party of
Indebtedness of any Subsidiary that is not a Loan Party
shall be subject to Section 6.04;
(vi) Indebtedness of the Borrower or any Subsidiary
incurred to finance the acquisition, construction or
improvement of any fixed or capital assets, including
Capital Lease Obligations and any Indebtedness assumed in
connection with the acquisition of any such assets or
secured by a Lien on any such assets prior to the
acquisition thereof, and extensions, renewals and
replacements of any such Indebtedness that do not increase
the outstanding principal amount thereof; provided that (A)
such Indebtedness is incurred prior to or within 90 days
after such acquisition or the completion of such
construction or improvement and (B) the aggregate principal
amount of Indebtedness permitted by this clause (vi) shall
not exceed $15,000,000 at any time outstanding;
(vii) Indebtedness of any Person that becomes a
Subsidiary after the date hereof; provided that (A) such
Indebtedness exists at the time such Person becomes a
Subsidiary and is not created in contemplation of or in
connection with such Person becoming a Subsidiary and (B)
the aggregate principal amount of Indebtedness permitted by
this clause (vii) shall not exceed $5,000,000 at any time
outstanding;
(viii) other unsecured Indebtedness in an aggregate
principal amount not exceeding $5,000,000 at any time
outstanding; and
(ix) Indebtedness incurred pursuant to any Qualified
Receivables Transaction.
(b) Holdings will not create, incur, assume or permit
to exist any Indebtedness except (i) Indebtedness created or
permitted under the Loan Documents and (ii) the Holdings Senior
Discount Debentures; provided that Holdings may issue additional
debt securities having terms and provisions which are, in the
reasonable determination of the Required Lenders (which shall be
obtained in the manner set forth in Section 9.02(b) and not
unreasonably withheld), no less favorable to the Lenders than the
terms and provisions of the Holdings Senior Discount Debentures.
(c) Neither Holdings nor the Borrower will, nor will
they permit any Subsidiary to, issue any preferred stock or be or
become liable in respect of any obligation (contingent or
otherwise) to purchase, redeem, retire, acquire or make any other
payment in respect of any shares of capital stock of Holdings,
the Borrower or any Subsidiary or any option, warrant or other
right to acquire any such shares of capital stock, except
Holdings (i) may issue the Holdings Preferred Stock and (ii) may
issue additional preferred stock that does not require mandatory
cash dividends or redemptions and does not provide for any right
on the part of the holder to require redemption or repayment
thereof (other than such dividends, redemptions or rights which
are expressly subject to compliance with this Agreement), in each
case prior to one year after the Maturity Date and (iii) may
repurchase stock issued to employee benefit plans to
69
the extent required by law in order to maintain statutory
qualifications and as permitted under Section 6.07(a).
(d) The Borrower will not, and will not permit any of
its Subsidiaries to, incur any Indebtedness (other than
Indebtedness created under the Loan Documents), whether or not
such Indebtedness is permitted under this Section 6.01, in
reliance upon such Indebtedness constituting "Credit Facilities"
(as defined in the Subordinated Debt Documents). In addition, the
Borrower will not, and will not permit any of its Subsidiaries
to, designate any Indebtedness (other than Indebtedness created
under the Loan Documents) as "Designated Senior Debt" (as defined
in the Subordinated Debt Documents).
SECTION 6.02. Liens. (a) The Borrower will not, and
will not permit any Subsidiary to, create, incur, assume or
permit to exist any Lien on any property or asset now owned or
hereafter acquired by it, or assign or sell any income or
revenues (including accounts receivable) or rights in respect of
any thereof, except:
(i) Liens created under the Loan Documents;
(ii) Permitted Encumbrances;
(iii) any Lien on any property or asset of the
Borrower or any Subsidiary existing on the date hereof and
set forth in Schedule 6.02; provided that (i) such Lien
shall not apply to any other property or asset of the
Borrower or any Subsidiary and (ii) such Lien shall secure
only those obligations which it secures on the date hereof
and extensions, renewals and replacements thereof that do
not increase the outstanding principal amount thereof;
(iv) any Lien existing on any property or asset prior
to the acquisition thereof by the Borrower or any
Subsidiary or existing on any property or asset of any
Person that becomes a Subsidiary after the date hereof
prior to the time such Person becomes a Subsidiary;
provided that (A) such Lien is not created in contemplation
of or in connection with such acquisition or such Person
becoming a Subsidiary, as the case may be, (B) such Lien
shall not apply to any other property or assets of the
Borrower or any Subsidiary and (C) such Lien shall secure
only those obligations which it secures on the date of such
acquisition or the date such Person becomes a Subsidiary,
as the case may be and extensions, renewals and
replacements thereof that do not increase the outstanding
principal amount thereof;
(v) Liens on fixed or capital assets acquired,
constructed or improved by the Borrower or any Subsidiary;
provided that (A) such Liens secure Indebtedness permitted
by clause (vi) of Section 6.01(a), (B) such Liens and the
Indebtedness secured thereby are incurred prior to or
within 90 days after such acquisition or the completion of
such construction or improvement, (C) the Indebtedness
secured thereby does not exceed 90% of the cost of
acquiring, constructing or improving such fixed or capital
assets and (D) such security interests shall not apply to
any other property or assets of the Borrower or any
Subsidiary;
70
(vi) Liens on accounts receivables and related assets
of Popular Club or the Receivables Subsidiary in connection
with any Qualified Receivables Transaction;
(vii) Liens on goods the purchase price of which is
financed by a letter of credit issued for the account of
the Borrower or any of its Subsidiaries, provided that any
such Lien secures only the obligations of the Borrower or
such Subsidiaries in respect of such letter of credit to
the extent permitted under Section 6.01;
(viii) Liens, defects and other matters specifically
disclosed on title insurance policies delivered to and
accepted by the Administrative Agent on the Effective Date;
(ix) Liens arising solely by virtue of any statutory
or common law provision relating to banker's liens, rights
of setoff or similar rights; and
(x) Liens in favor of a landlord on leasehold
improvements in leased premises.
(b) Holdings will not create, incur, assume or permit
to exist any Lien on any property or asset now owned or hereafter
acquired by it, or assign or sell any income or revenues
(including accounts receivable) or rights in respect thereof,
except Liens created under the Pledge Agreement and Permitted
Encumbrances.
SECTION 6.03. Fundamental Changes. (a) Neither
Holdings nor the Borrower will, nor will they permit any
Subsidiary to, merge into or consolidate with any other Person,
or permit any other Person to merge into or consolidate with it,
or liquidate or dissolve, except that, if at the time thereof and
immediately after giving effect thereto no Default shall have
occurred and be continuing (i) any Subsidiary may merge into the
Borrower in a transaction in which the Borrower is the surviving
corporation, (ii) any Subsidiary may merge into any Subsidiary
Loan Party in a transaction in which the surviving entity is a
Subsidiary Loan Party and (iii) any Subsidiary may liquidate or
dissolve if the Borrower determines in good faith that such
liquidation or dissolution is in the best interests of the
Borrower and is not materially disadvantageous to the Lenders;
provided that any such merger involving a Person that is not a
wholly owned Subsidiary immediately prior to such merger shall
not be permitted unless also permitted by Section 6.04.
(b) The Borrower will not, and will not permit any of
its Subsidiaries (other than the Receivables Subsidiary) to,
engage to any material extent in any business other than the
design, manufacture, importing, exporting, distribution,
marketing, licensing and wholesale and retail sale of apparel,
housewares, home furnishings and related items, and businesses
reasonably related thereto.
(c) Holdings will not engage in any business or
activity other than the ownership of all the outstanding shares
of capital stock of the Borrower and activities incidental
thereto. Holdings will not own or acquire any assets (other than
shares of capital stock of the Borrower, cash and Permitted
Investments) or incur any liabilities (other than liabilities
under the Loan Documents, the Holdings Senior Discount
Debentures, any additional debt securities permitted under the
proviso in Section 6.01(b), Guarantees by Holdings of obligations
of the Borrower and its Subsidiaries under leases of real
property, obligations under any stock option plans or other
71
benefit plans for management or employees of Holdings and its
Subsidiaries, liabilities imposed by law, including tax
liabilities, and other liabilities incidental to its existence
and permitted business and activities).
(d) The Receivables Subsidiary will not engage in any
business or activity other than the purchase and sale and
servicing of receivables (or interests therein) in connection
with any Qualified Receivables Transaction, together with
activities related thereto.
SECTION 6.04. Investments, Loans, Advances, Guarantees
and Acquisitions. The Borrower will not, and will not permit any
of the Subsidiaries to, purchase, hold or acquire (including
pursuant to any merger with any Person that was not a wholly
owned Subsidiary prior to such merger) any capital stock,
evidences of indebtedness or other securities (including any
option, warrant or other right to acquire any of the foregoing)
of, make or permit to exist any loans or advances to, Guarantee
any obligations of, or make or permit to exist any investment or
any other interest in, any other Person, or purchase or otherwise
acquire (in one transaction or a series of transactions) any
assets of any other Person constituting a business unit, except:
(a) Permitted Investments;
(b) investments existing on the date hereof and set
forth on Schedule 6.04, to the extent such investments
would not be permitted under any other clause of this
Section;
(c) investments by the Borrower and its Subsidiaries
in the capital stock of their Subsidiaries (other than the
Receivables Subsidiary); provided that (i) any such shares
of capital stock held by a Loan Party shall be pledged
pursuant to the Collateral Agreement (subject to the
limitations applicable to common stock of a Foreign
Subsidiary referred to in Section 5.12) and (ii) the
aggregate amount of investments by Loan Parties in, and
loans and advances by Loan Parties to, and Guarantees by
Loan Parties of Indebtedness of, Subsidiaries that are not
Loan Parties and all investments in joint ventures
permitted by clause (k) below, shall not exceed $10,000,000
in the aggregate at any time outstanding; provided further
that the Borrower will be permitted to invest, loan or
advance to Subsidiaries that are not Loan Parties up to
$20,000,000 in excess of the limitation imposed by the
foregoing clause (ii) to the extent such investments, loans
and advances are funded with proceeds from issuance by
Holdings of equity to a member of the Control Group;
(d) loans or advances made by the Borrower to any
Subsidiary (other than the Receivables Subsidiary) and made
by any Subsidiary to the Borrower or any other Subsidiary
(other than the Receivables Subsidiary); provided that (i)
any such loans and advances made by a Loan Party shall be
evidenced by a promissory note pledged pursuant to the
Pledge Agreement and (ii) the amount of all such loans and
advances by Loan Parties to Subsidiaries that are not Loan
Parties shall be subject to the limitation set forth in
clause (c)(ii) above;
(e) Guarantees constituting Indebtedness permitted by
Section 6.01; provided that (i) neither the Borrower nor
any Subsidiary shall Guarantee any Indebtedness of
72
Holdings, other than the Obligations, (ii) the aggregate
principal amount of Indebtedness of Subsidiaries that are
not Loan Parties Guaranteed by any Loan Party shall be
subject to the limitation set forth in clause (c)(ii) above
and (iii) the Subordinated Debt shall not be Guaranteed by
any Subsidiary that is not a party to the Guarantee
Agreement;
(f) investments received in connection with the
bankruptcy or reorganization of, or settlement of
delinquent accounts and disputes with, customers and
suppliers, in each case in the ordinary course of business;
(g) (i) investments by the Borrower or any Subsidiary
in (A) the capital stock of the Receivables Subsidiary and
(B) other interests in the Receivables Subsidiary, in each
case to the extent necessary in connection with or required
by the terms of the Qualified Receivables Transaction and
(ii) loans or advances made by the Borrower or any
Subsidiary to the Receivables Subsidiary; provided that (i)
any such loans and advances made by a Loan Party shall be
evidenced by the Purchase Money Note and (ii) the amount of
all such loans and advances by Loan Parties to the
Receivables Subsidiary shall not exceed $70,000,000 in the
aggregate at any time outstanding;
(h) Guarantees by the Borrower and its Subsidiaries of
leases entered into by any Subsidiary as lessee;
(i) extensions of credit in the nature of accounts
receivable or notes receivable in the ordinary course of
business;
(j) loans and advances to employees in the ordinary
course of business; provided that the aggregate amount of
all loans and advances permitted by this clause (j) shall
not exceed $1,000,000 at any time outstanding;
(k) investments in joint ventures; provided that the
amount of all such investments shall be subject to the
limitation set forth in clause (c)(ii) above;
(l) investments constituting obligations under Hedging
Agreements;
(m) other investments in an aggregate amount not
exceeding $1,000,000 at any time outstanding; and
(n) intercompany loans made by the Receivables
Subsidiary to the Borrower or any other Subsidiary as
permitted by the Receivables Transaction Documents.
SECTION 6.05. Asset Sales. The Borrower will not, and
will not permit any of its Subsidiaries to, sell, transfer, lease
or otherwise dispose of any asset, including any capital stock,
nor will the Borrower permit any of its Subsidiaries to issue any
additional shares of its capital stock or other ownership
interest in such Subsidiary, except:
(a) sales of inventory, vehicles, used or surplus
equipment and Permitted Investments in the ordinary course
of business;
(b) sales, transfers and dispositions to the Borrower
or a Subsidiary; provided
73
that any such sales, transfers or dispositions
involving a Subsidiary that is not a Loan Party shall be
made in compliance with Section 6.08;
(c) sales, transfers or dispositions of all or
substantially all of the assets or capital stock of Popular
Club or C&W.
(d) sales, transfers and dispositions of assets (other
than capital stock of a Subsidiary) that are not permitted
by any other clause of this Section; provided that the
aggregate fair market value of all assets sold, transferred
or otherwise disposed of in reliance upon this clause (d)
shall not exceed $1,000,000 during any fiscal year of the
Borrower; and
(e) Popular Club may sell or otherwise convey accounts
receivable and related assets to the Receivables Subsidiary
pursuant to any Qualified Receivables Transaction; provided
that the aggregate principal amount of Indebtedness
incurred in connection with such sale or conveyance does
not to exceed $70,000,000 at any time outstanding;
provided that all sales, transfers, leases and other dispositions
permitted hereby (other than those permitted by clause (b) above)
shall be made for fair value and solely for cash consideration.
SECTION 6.06. Hedging Agreements. The Borrower will
not, and will not permit any of its Subsidiaries to, enter into
any Hedging Agreement, other than (a) Hedging Agreements required
by Section 5.14 and (b) Hedging Agreements entered into in the
ordinary course of business to hedge or mitigate risks to which
the Borrower or any Subsidiary is exposed in the conduct of its
business or the management of its liabilities.
SECTION 6.07. Restricted Payments; Certain Payments of
Indebtedness. (a) Neither Holdings nor the Borrower will, nor
will they permit any Subsidiary to, declare or make, or agree to
pay or make, directly or indirectly, any Restricted Payment,
except:
(i) Holdings may make Restricted Payments with respect
to its capital stock payable solely in additional shares of
its common stock;
(ii) Holdings may make Restricted Payments with
respect to the Holdings Preferred Stock payable solely in
additional shares of the Holdings Preferred Stock;
(iii) Subsidiaries of the Borrower may make Restricted
Payments to the Borrower and to wholly owned Subsidiaries
and may declare and pay dividends ratably with respect to
their common stock;
(iv) Holdings may make Restricted Payments, not
exceeding $2,000,000 during any fiscal year, pursuant to
and in accordance with stock option plans or other benefit
plans for management or employees of Holdings and its
Subsidiaries, including the redemption or purchase of
shares of common stock of Holdings held by former employees
of Holdings or any Subsidiary following the termination of
their employment; provided, however, that the amount of
Restricted Payments permitted under this clause (iv) in any
fiscal year shall be increased (but not by more than
$10,000,000) on a
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cumulative basis by an amount equal to the total unused
amount of permitted Restricted Payments under this clause
(iv) for the preceding year;
(v) following the fifth anniversary of the Effective
Date, if at the time thereof and after giving effect
thereto no Default has occurred and is continuing, the
Borrower may pay interest to Holdings at such times and in
such amounts, not exceeding $18,637,500 during any fiscal
year, as shall be necessary to permit Holdings to pay, as
and when due, interest on the Holdings Senior Discount
Debentures accrued subsequent to the fifth anniversary of
the Effective Date;
(vi) if at the time thereof and after giving effect
thereto no Default has occurred and is continuing, Holdings
may redeem, purchase, retire or otherwise acquire
outstanding shares of Holdings Preferred Stock with the Net
Proceeds from the issuance after the Effective Date of new
preferred stock of Holdings or the issuance after the
Effective Date of common stock of Holdings issued in a Rule
144A or other private placement;
(vii) if at the time thereof and after giving effect
thereto no Default has occurred and is continuing, the
Borrower may pay cash dividends to Holdings, in an
aggregate amount not exceeding $1,500,000 during any fiscal
year, at such times and in such amounts as shall be
necessary to permit Holdings to (A) pay taxes imposed upon
it and liabilities incidental to its existence when due and
(B) pay directors' fees and management compensation to its
directors when due; provided that any dividends permitted
to be paid to Holdings shall not be paid prior to the date
that Holdings will apply the proceeds of such dividends to
the purposes for which such dividends are permitted;
(viii) the Borrower may pay a one time management fee
to TPG Partners in amount not exceeding $5,500,000;
(ix) the Borrower may make payments to Holdings
pursuant to and in accordance with the Tax Sharing
Agreement;
(x) the Borrower may pay cash dividends to Holdings in
such amounts and at such times as Holdings makes Restricted
Payments permitted by clause (iv) above and clause (xi)
below; and
(xi) at any time after May 1, 1999 if at the time
thereof no Default has occurred and is continuing and if
the Leverage Ratio of the Borrower is less than 4.00 to
1.00 for the two immediately preceding consecutive fiscal
quarters, Holdings may redeem, purchase, retire or
otherwise acquire outstanding shares of Holdings Preferred
Stock in an aggregate amount not exceeding 50% of the Net
Proceeds from the issuance of equity securities of
Holdings.
(b) Neither Holdings nor the Borrower will, nor will
they permit any Subsidiary to, make or agree to pay or make,
directly or indirectly, any payment or other distribution
(whether in cash securities or other property) of or in respect
of principal of or interest on any
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Indebtedness, or any payment or other distribution (whether in
cash, securities or other property), including any sinking fund
or similar deposit, on account of the purchase, redemption,
retirement, acquisition, cancellation or termination of any
Indebtedness, except:
(i) payment of Indebtedness created under the Loan
Documents;
(ii) payment of regularly scheduled interest and
principal payments as and when due in respect of any
Indebtedness, other than payments in respect of the
Subordinated Debt prohibited by the subordination
provisions thereof;
(iii) refinancing of Indebtedness to the extent
permitted by Section 6.01;
(iv) payment of secured Indebtedness that becomes due
as a result of the voluntary sale or transfer of the
property or assets securing such Indebtedness;
(v) payment of interest on the Holdings Senior
Discount Debentures payable solely by the issuance of
additional Holdings Senior Discount Debentures, provided
that after the fifth anniversary of the Effective Date,
Holdings will be permitted to pay interest in cash on (A)
the Holdings Senior Discount Debentures as and when due and
(B) any additional debt securities permitted under the
proviso in Section 6.01(b);
(vi) repayment of the Indebtedness under Existing
Credit Agreement on the Effective Date;
(vii) payment of unsecured Indebtedness permitted
under clause (viii) of Section 6.01(a);
(viii) if at the time thereof and after giving effect
thereto no Default has occurred and is continuing and if
Popular Club or C & W shall have been sold, Holdings may
redeem, purchase, retire or otherwise acquire outstanding
Holdings Senior Discount Debentures in an aggregate amount
not exceeding the lesser of 20% of the Net Proceeds from
such sales or $25,000,000; and
(ix) payment of Obligations required under the
Qualified Transaction Documents.
SECTION 6.08. Transactions with Affiliates. Neither
Holdings nor the Borrower will, nor will they permit any
Subsidiary to, sell, lease or otherwise transfer any property or
assets to, or purchase, lease or otherwise acquire any property
or assets from, or otherwise engage in any other transactions
with, any of its Affiliates, except (a) transactions in the
ordinary course of business that do not involve Holdings and are
at prices and on terms and conditions not less favorable to the
Borrower or such Subsidiary than could be obtained on an
arm's-length basis from unrelated third parties, (b) transactions
between or among the Borrower and the Subsidiary Loan Parties not
involving any other Affiliate, (c) any Restricted Payment
permitted by Section 6.07 and (d) any Qualified Receivables
Transactions of Popular Club or the Receivables Subsidiary.
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SECTION 6.09. Restrictive Agreements. Neither Holdings
nor the Borrower will, nor will they permit any Subsidiary to,
directly or indirectly, enter into, incur or permit to exist any
agreement or other arrangement that prohibits, restricts or
imposes any condition upon (a) the ability of Holdings, the
Borrower or any Subsidiary to create, incur or permit to exist
any Lien upon any of its property or assets, or (b) the ability
of any Subsidiary to pay dividends or other distributions with
respect to any shares of its capital stock or to make or repay
loans or advances to the Borrower or any other Subsidiary or to
Guarantee Indebtedness of the Borrower or any other Subsidiary;
provided that (i) the foregoing shall not apply to restrictions
and conditions imposed by law or by any Loan Document or
Subordinated Debt Document or Holdings Senior Discount Debt
Document, (ii) the foregoing shall not apply to restrictions and
conditions existing on the date hereof identified on Schedule
6.09 (but shall apply to any extension or renewal of, or any
amendment or modification expanding the scope of, any such
restriction or condition), (iii) the foregoing shall not apply to
customary restrictions and conditions contained in agreements
relating to the sale of a Subsidiary pending such sale, provided
such restrictions and conditions apply only to the Subsidiary
that is to be sold and such sale is permitted hereunder, (iv)
clause (a) of the foregoing shall not apply to restrictions or
conditions imposed by any agreement relating to secured
Indebtedness permitted by this Agreement if such restrictions or
conditions apply only to the property or assets securing such
Indebtedness, (v) clause (a) of the foregoing shall not apply to
customary provisions in leases restricting the assignment thereof
and (vi) the foregoing shall not apply to restrictions and
conditions imposed by any Qualified Receivables Transaction.
SECTION 6.10. Amendment of Material Documents. Neither
Holdings nor the Borrower will, nor will they permit any
Subsidiary to, amend or modify, or waive any of its material
rights under, (a) any Subordinated Debt Document, (b) any
Holdings Senior Discount Debt Document, (c) its certificate of
incorporation, by-laws or other organizational documents or (d)
the Tax Sharing Agreement.
SECTION 6.11. Sale and Lease-Back Transactions. The
Borrower will not, and will not permit any of its Subsidiaries
to, enter into any arrangement, directly or indirectly, with any
Person whereby it shall sell or transfer any property, real or
personal, used or useful in its business, whether now owned or
hereafter acquired, and thereafter rent or lease such property or
other property which it intends to use for substantially the same
purpose or purposes as the property being sold or transferred.
SECTION 6.12. Capital Expenditures. The Borrower will
not permit the aggregate amount of Capital Expenditures made by
the Borrower and the Subsidiaries in any fiscal year (commencing
with the fiscal year beginning February 1, 1998) to exceed the
amount set forth below opposite such year; provided, however,
that the amount of permitted Capital Expenditures in any fiscal
year may be increased by an amount equal to (a) the lesser of (i)
50% of the total amount of Capital Expenditures permitted
hereunder for the immediately preceding year (disregarding
amounts permitted by reason of this proviso) and (ii) the excess,
if any, of the total amount of Capital Expenditures permitted
hereunder for the immediately preceding fiscal year (disregarding
amounts permitted by reason of this proviso) over the amount of
Capital Expenditures made during such preceding year, and (b) the
total amount of Capital Expenditures permitted hereunder for the
year immediately subsequent to such fiscal year; provided further
77
that any Capital Expenditures made in reliance upon clause (b) of
the foregoing proviso will be deducted from the amount of Capital
Expenditures permitted hereunder for such subsequent year:
Fiscal Year
Ending Amounts
---------- -------
January 30, 1999 $43,000,000
January 29, 2000 35,000,000
February 3, 2001 31,000,000
February 2, 2002 31,000,000
February 1, 2003 31,000,000
SECTION 6.13. Leverage Ratio. Subject to Section 1.05,
the Borrower will not permit the Leverage Ratio as of the last
day of any fiscal quarter during any period set forth below to be
in excess of the ratio set forth opposite such period:
Quarter Ending
During the Period Ratio
----------------- -----
January 30, 1998 through
October 31, 1998 6.00 to 1.00
January 30, 1999 5.50 to 1.00
May 1, 1999 through
October 30, 1999 5.75 to 1.00
January 29, 2000 through
October 28, 2000 4.75 to 1.00
February 3, 2001 through
November 3, 2001 4.25 to 1.00
February 2, 2002 and
thereafter 3.50 to 1.00
SECTION 6.14. Interest Coverage Ratio. Subject to
Section 1.05, the Borrower will not permit the ratio of (a)
Consolidated EBITDAR of the Borrower to (b) the sum of (i) Cash
Interest Expense plus (ii) rental expense deducted in determining
Consolidated Net Income plus (iii) cash interest expense on the
Holdings Senior Discount Debentures, in each case for any period
of four consecutive fiscal quarters of the Borrower ending during
any period set forth below, to be less than the ratio set forth
below opposite such period:
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Four-Quarter
Period Ending Ratio
------------- -----
January 30, 1998 through
October 31, 1998 1.20 to 1.00
January 30, 1999 through
October 30, 1999 1.35 to 1.00
January 29, 2000 through
October 28, 2000 1.40 to 1.00
February 3, 2001 and
thereafter 1.50 to 1.00
SECTION 6.15. Net Worth. The Borrower will not permit
Consolidated Net Worth at any date to be less than the sum of (a)
($17,000,000), plus (b) 50% of the cumulative amount of positive
Consolidated Net Income for each fiscal year ending on or after
January 30, 1999 and on or prior to the date of determination
that has positive Consolidated Net Income, plus (c) 100% of all
increases in Consolidated Net Worth attributable to the issuance
of equity by or capital contributions to the Borrower after the
Effective Date.
SECTION 6.16. Inventory Coverage Ratio. The Borrower
will not permit the ratio of (a) the sum of (i) Inventory plus
(ii) Letters of Credit to (b) the sum of Revolving Exposure, in
each case as of the end of any fiscal month, to be less than 1.75
to 1.00.
ARTICLE VII
Events of Default
SECTION 7.01. Events of Default. If any of the
following events ("Events of Default") shall occur:
(a) the Borrower shall fail to pay any principal of
any Loan when and as the same shall become due and payable,
whether at the due date thereof or at a date fixed for
prepayment thereof or otherwise;
(b) the Borrower shall fail to pay any interest on any
Loan, any reimbursement obligation in respect of any LC
Disbursement and Acceptance Disbursement or any fee or any
other amount (other than an amount referred to in clause
(a) of this Article) payable under this Agreement or any
other Loan Document, when and as the same shall become due
and payable, and such failure shall continue unremedied for
a period of five days;
(c) any representation or warranty made or deemed made
by or on behalf of Holdings, the Borrower or any Subsidiary
in or in connection with any Loan Document or any amendment
or modification thereof or waiver thereunder, or any
certificate, or other document furnished pursuant to or in
connection with any Loan Document or any
79
amendment or modification thereof or waiver thereunder,
shall prove to have been incorrect in any material respect
when made or deemed made;
(d) Holdings or the Borrower shall fail to observe or
perform any covenant, condition or agreement contained in
Section 5.02, 5.04 (with respect to the existence of
Holdings or the Borrower) or 5.11 or in Article VI;
(e) any Loan Party shall fail to observe or perform
any covenant, condition or agreement contained in any Loan
Document (other than those specified in clause (a), (b)
or (d) of this Article), and such failure shall continue
unremedied for a period of 30 days after written notice
thereof from the Administrative Agent to the Borrower
(which notice will be given at the request of any Lender);
(f) Holdings, the Borrower or any Subsidiary shall
fail to make any payment (whether of principal or interest
and regardless of amount) in respect of any Material
Indebtedness, when and as the same shall become due and
payable after giving effect to any applicable grace period
with respect thereto (without giving effect to any waiver,
consent or amendment for which Holdings, the Borrower or
any Subsidiary gave any consideration or benefit of any
kind (including any increased compensation, prepayment,
shortening of maturities, security or other credit support)
during the continuation of such failure to make payment);
(g) any event or condition occurs that results in any
Material Indebtedness becoming due prior to its scheduled
maturity or that enables or permits (or would permit, but
for a waiver to or consent or amendment of such event or
condition for which Holdings, the Borrower or any
Subsidiary gave any consideration or benefit of any kind
(including any increased compensation, prepayment,
shortening of maturities, security or other credit support)
during the continuation of such failure) the holder or
holders of any Material Indebtedness or any trustee or
agent on its or their behalf to cause any Material
Indebtedness to become due, or to require the prepayment,
repurchase, redemption or defeasance thereof, prior to its
scheduled maturity; provided that this clause (g) shall not
apply to Indebtedness that becomes due as a result of the
voluntary sale or transfer of the property or assets;
(h) an involuntary proceeding shall be commenced or an
involuntary petition shall be filed seeking (i)
liquidation, reorganization or other relief in respect of
Holdings, the Borrower or, subject to Section 7.02, any
Subsidiary or its debts, or of a substantial part of its
assets, under any Federal, state or foreign bankruptcy,
insolvency, receivership or similar law now or hereafter in
effect or (ii) the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official
for Holdings, the Borrower or, subject to Section 7.02, any
Subsidiary or for a substantial part of its assets, and, in
any such case, such proceeding or petition shall continue
undismissed for 60 days or an order or decree approving or
ordering any of the foregoing shall be entered;
(i) Holdings, the Borrower or, subject to Section
7.02, any Subsidiary shall (i) voluntarily commence any
proceeding or file any petition seeking liquidation,
reorganization or other relief under any Federal, state or
foreign bankruptcy, insolvency,
80
receivership or similar law now or hereafter in effect,
(ii) consent to the institution of, or fail to contest in a
timely and appropriate manner, any proceeding or petition
described in clause (h) of this Article, (iii) apply for or
consent to the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official
for Holdings, the Borrower or, subject to Section 7.02, any
Subsidiary or for a substantial part of its assets, (iv)
file an answer admitting the material allegations of a
petition filed against it in any such proceeding, (v) make
a general assignment for the benefit of creditors or (vi)
take any action for the purpose of effecting any of the
foregoing;
(j) Holdings, the Borrower or, subject to Section
7.02, any Subsidiary shall become unable, admit in writing
its inability or fail generally to pay its debts as they
become due;
(k) one or more judgments for the payment of money in
an aggregate amount in excess of $10,000,000 (net of
amounts covered by insurance as to which the insurer has
not denied liability) shall be rendered against Holdings,
the Borrower, any Subsidiary or any combination thereof and
the same shall remain undischarged for a period of 30
consecutive days during which execution shall not be
effectively stayed, or any action shall be legally taken by
a judgment creditor to attach or levy upon any assets of
Holdings, the Borrower or any Subsidiary to enforce any
such judgment;
(l) an ERISA Event shall have occurred that, in the
opinion of the Required Lenders, when taken together with
all other ERISA Events that have occurred, could reasonably
be expected to result in a Material Adverse Effect;
(m) any Lien purported to be created under any
Security Document shall cease to be, or shall be asserted
by any Loan Party not to be, a valid and perfected Lien on
any material portion of the Collateral, with the priority
required by the applicable Security Document, except (i) as
a result of the sale or other disposition of the applicable
Collateral in a transaction permitted under the Loan
Documents, (ii) any action taken by the Collateral Agent to
release any such Lien or (iii) as a result of the
Collateral Agent's failure to maintain possession of any
stock certificates, promissory notes or other instruments
delivered to it under the Pledge Agreement; or
(n) a Change in Control shall occur; or
(o) any event or condition occurs that results in any
"Early Amortization Event" (as defined in the Receivables
Pooling Agreement) with respect to the securities or other
instruments issued in connection with a Qualified
Receivables Transaction and such securities or other
instruments becoming due prior to their scheduled maturity
or that enables or permits (or would permit, but for a
waiver to or consent or amendment of such event or
condition for which Holdings, the Borrower or any
Subsidiary gave any consideration or benefit of any kind
(including any increased compensation, prepayment,
shortening of maturities, security or other credit support)
during the continuation of such failure) the holder or
holders of such securities or other instruments or any
trustee or agent on its or their behalf to cause any such
securities or other instruments to become
81
due, or to require the prepayment, repurchase, redemption
or defeasance thereof, prior to their scheduled maturity;
then, and in every such event (other than an event with respect
to the Borrower described in clause (h) or (i) of this Article),
and at any time thereafter during the continuance of such event,
the Administrative Agent may, and at the request of the Required
Lenders shall, by notice to the Borrower, take either or both of
the following actions, at the same or different times: (i)
terminate the Commitments, and thereupon the Commitments shall
terminate immediately, and (ii) declare the Loans then
outstanding to be due and payable in whole (or in part, in which
case any principal not so declared to be due and payable may
thereafter be declared to be due and payable), and thereupon the
principal of the Loans so declared to be due and payable,
together with accrued interest thereon and all fees and other
obligations of the Borrower accrued hereunder, shall become due
and payable immediately, without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the
Borrower; and in case of any event with respect to the Borrower
described in clause (h) or (i) of this Article, the Commitments
shall automatically terminate and the principal of the Loans then
outstanding, together with accrued interest thereon and all fees
and other obligations of the Borrower accrued hereunder, shall
automatically become due and payable, without presentment,
demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower.
SECTION 7.02. Exclusion of Immaterial Subsidiaries.
Solely for purposes of determining whether a Default has occurred
under clause (h), (i) or (j) of Section 7.01, any reference in
any such clause to any "Subsidiary" shall be deemed not to
include any Subsidiary affected by any event or circumstance
referred to in any such clause that did not, as of the last day
of the fiscal quarter of the Borrower most recently ended have
assets with a value in excess of 2.5% of the total consolidated
assets of the Borrower and its Subsidiaries as of such date;
provided that if it is necessary to exclude more than one
Subsidiary from clause (h), (i) or (j) of Section 7.01 pursuant
to this Section in order to avoid a Default thereunder, all
excluded Subsidiaries shall be considered to be a single
consolidated Subsidiary for purposes of determining whether the
condition specified above is satisfied.
ARTICLE VIII
The Administrative Agent
Each of the Lenders and the Issuing Bank hereby
irrevocably appoints the Administrative Agent (which term for
purposes of this Article shall be deemed to refer to the
Administrative Agent and the Collateral Agent) as its agent and
authorizes the Administrative Agent to take such actions on its
behalf and to exercise such powers as are delegated to the
Administrative Agent by the terms of the Loan Documents, together
with such actions and powers as are reasonably incidental
thereto. The Administrative Agent is hereby expressly authorized
by the Lenders, without hereby limiting any implied authority, to
enter into the Intercreditor Agreement in substantially the form
as set forth in Exhibit G and each Lender agrees to be bound by
the terms thereof.
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The bank serving as the Administrative Agent hereunder
shall have the same rights and powers in its capacity as a Lender
as any other Lender and may exercise the same as though it were
not the Administrative Agent, and such bank and its Affiliates
may accept deposits from, lend money to and generally engage in
any kind of business with Holdings, the Borrower or any
Subsidiary or other Affiliate thereof as if it were not the
Administrative Agent hereunder.
The Administrative Agent shall not have any duties or
obligations except those expressly set forth in the Loan
Documents. Without limiting the generality of the foregoing, (a)
the Administrative Agent shall not be subject to any fiduciary or
other implied duties, regardless of whether a Default has
occurred and is continuing, (b) the Administrative Agent shall
not have any duty to take any discretionary action or exercise
any discretionary powers, except discretionary rights and powers
expressly contemplated by the Loan Documents that the
Administrative Agent is required to exercise in writing by the
Required Lenders (or such other number or percentage of the
Lenders as shall be necessary under the circumstances as provided
in Section 9.02), and (c) except as expressly set forth in the
Loan Documents, the Administrative Agent shall not have any duty
to disclose, and shall not be liable for the failure to disclose,
any information relating to Holdings, the Borrower or any of its
Subsidiaries that is communicated to or obtained by the bank
serving as Administrative Agent or any of its Affiliates in any
capacity. The Administrative Agent shall not be liable for any
action taken or not taken by it with the consent or at the
request of the Required Lenders (or such other number or
percentage of the Lenders as shall be necessary under the
circumstances as provided in Section 9.02) or in the absence of
its own gross negligence or wilful misconduct. The Administrative
Agent shall not be deemed not to have knowledge of any Default
unless and until written notice thereof is given to the
Administrative Agent by Holdings, the Borrower or a Lender, and
the Administrative Agent shall not be responsible for or have any
duty to ascertain or inquire into (i) any statement, warranty or
representation made in or in connection with any Loan Document,
(ii) the contents of any certificate, report or other document
delivered thereunder or in connection therewith, (iii) the
performance or observance of any of the covenants, agreements or
other terms or conditions set forth in any Loan Document, (iv)
the validity, enforceability, effectiveness or genuineness of any
Loan Document or any other agreement, instrument or document, or
(v) the satisfaction of any condition set forth in Article IV or
elsewhere in any Loan Document, other than to confirm receipt of
items expressly required to be delivered to the Administrative
Agent.
The Administrative Agent shall be entitled to rely
upon, and shall not incur any liability for relying upon, any
notice, request, certificate, consent, statement, instrument,
document or other writing reasonably believed by it to be genuine
and to have been signed or sent by the proper Person. The
Administrative Agent also may rely upon any statement made to it
orally or by telephone and reasonably believed by it to be made
by the proper Person, and shall not incur any liability for
relying thereon. The Administrative Agent may consult with legal
counsel (who may be counsel for the Borrower), independent
accountants and other experts selected by it, and shall not be
liable for any action taken or not taken by it in accordance with
the advice of any such counsel, accountants or experts.
The Administrative Agent may perform any and all its
duties and exercise its rights and powers by or through any one
or more sub-agents appointed by the Administrative
83
Agent. The Administrative Agent and any such sub-agent may
perform any and all its duties and exercise its rights and powers
through their respective Related Parties. The exculpatory
provisions of the preceding paragraphs shall apply to any such
sub-agent and to the Related Parties of each Administrative Agent
and any such sub-agent, and shall apply to their respective
activities in connection with the syndication of the credit
facilities provided for herein as well as activities as
Administrative Agent.
Subject to the appointment and acceptance of a
successor the Administrative Agent as provided in this paragraph,
the Administrative Agent may resign at any time by notifying the
Lenders, the Issuing Bank and the Borrower. Upon any such
resignation, the Required Lenders shall have the right, in
consultation with the Borrower, to appoint a successor. If no
successor shall have been so appointed by the Required Lenders
and shall have accepted such appointment within 30 days after the
retiring Administrative Agent gives notice of its resignation,
then the retiring Administrative Agent may, on behalf of the
Lenders and the Issuing Bank, appoint a successor Administrative
Agent which shall be a bank with an office in New York, New York,
or an Affiliate of any such bank. Upon the acceptance of its
appointment as Administrative Agent hereunder by a successor,
such successor shall succeed to and become vested with all the
rights, powers, privileges and duties of the retiring
Administrative Agent, and the retiring Administrative Agent shall
be discharged from its duties and obligations hereunder. The fees
payable by the Borrower to a successor Administrative Agent shall
be the same as those payable to its predecessor unless otherwise
agreed in writing between the Borrower and such successor. After
the Administrative Agent's resignation hereunder, the provisions
of this Article and Section 9.03 shall continue in effect for the
benefit of such retiring Administrative Agent, its sub-agents and
their respective Related Parties in respect of any actions taken
or omitted to be taken by any of them while it was acting as
Administrative Agent.
Each Lender acknowledges that it has, independently
and without reliance upon the Administrative Agent or any other
Lender and based on such documents and information as it has
deemed appropriate, made its own credit analysis and decision to
enter into this Agreement. Each Lender also acknowledges that it
will, independently and without reliance upon the Administrative
Agent or any other Lender and based on such documents and
information as it shall from time to time deem appropriate,
continue to make its own decisions in taking or not taking action
under or based upon this Agreement, any other Loan Document or
related agreement or any document furnished hereunder or
thereunder.
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices. Except in the case of notices
and other communications expressly permitted to be given by
telephone, all notices and other communications provided for
herein shall be in writing and shall be delivered by hand or
overnight courier service, mailed by certified or registered mail
or sent by telecopy, as follows:
84
(a) if to Holdings or the Borrower, to it at J. Crew
Group, Inc., 22 Lincoln Place, Garfield, NJ 07026,
Attention of Michael P. McHugh (Telecopy No. (201)
773-7957);
(b) if to the Administrative Agent or the Collateral
Agent, to The Chase Manhattan Bank, Loan and Agency
Services Group, One Chase Manhattan Plaza, 8th Floor, New
York, New York 10081, Attention of Anne Hickey (Telecopy
No. (212) 552-5658), with a copy to The Chase Manhattan
Bank, 270 Park Avenue, 48th Floor, New York, New York
10017, Attention of Meredith Vanden Handel and Ellen
Gertzog (Telecopy No. (212) 270-1474);
(c) if to the Issuing Bank, to it at One Chase
Manhattan Plaza, 8th Floor, New York, New York 10081,
Attention of Anne Hickey (Telecopy No. (212) 552-5658); and
(d) if to any other Lender, to it at its address (or
telecopy number) set forth in its Administrative
Questionnaire.
Any party hereto may change its address or telecopy number for
notices and other communications hereunder by notice to the other
parties hereto. All notices and other communications given to any
party hereto in accordance with the provisions of this Agreement
shall be deemed to have been given on the date of receipt.
SECTION 9.02. Waivers; Amendments. (a) No failure or
delay by the Administrative Agent, the Collateral Agent, the
Issuing Bank or any Lender in exercising any right or power
hereunder or under any other Loan Document shall operate as a
waiver thereof, nor shall any single or partial exercise of any
such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or
power. The rights and remedies of the Administrative Agent, the
Collateral Agent, the Issuing Bank and the Lenders hereunder and
under the other Loan Documents are cumulative and are not
exclusive of any rights or remedies that they would otherwise
have. No waiver of any provision of any Loan Document or consent
to any departure by any Loan Party therefrom shall in any event
be effective unless the same shall be permitted by paragraph (b)
of this Section, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for
which given. Without limiting the generality of the foregoing,
the making of a Loan or issuance of a Letter of Credit shall not
be construed as a waiver of any Default, regardless of whether
the Administrative Agent, the Collateral Agent, any Lender or the
Issuing Bank may have had notice or knowledge of such Default at
the time.
(b) Neither this Agreement nor any other Loan Document
nor any provision hereof or thereof may be waived, amended or
modified except, in the case of this Agreement, pursuant to an
agreement or agreements in writing entered into by Holdings, the
Borrower and the Required Lenders or, in the case of any other
Loan Document, pursuant to an agreement or agreements in writing
entered into by the Administrative Agent or the Collateral Agent,
as applicable, and the Loan Party or Loan Parties that are
parties thereto, in each case with the consent of the Required
Lenders; provided that no such agreement shall (i) increase the
Commitment of any Lender without the written consent of such
Lender, (ii) reduce the principal
85
amount of any Loan or LC Disbursement or Acceptance Disbursement
or reduce the rate of interest thereon, or reduce any fees
payable hereunder, without the written consent of each Lender
affected thereby, (iii) postpone the scheduled date of payment of
the principal amount of any Loan or LC Disbursement or Acceptance
Disbursement, or any interest thereon, or any fees payable
hereunder, or reduce the amount of, waive or excuse any such
payment, or postpone the scheduled date of expiration of any
Commitment, without the written consent of each Lender affected
thereby, (iv) change Section 2.18(b) or (c) in a manner that
would alter the pro rata sharing of payments required thereby,
without the written consent of each Lender, (v) change any of the
provisions of this Section or the definition of "Required
Lenders" or any other provision of any Loan Document specifying
the number or percentage of Lenders (or Lenders of any Class)
required to waive, amend or modify any rights thereunder or make
any determination or grant any consent thereunder, without the
written consent of each Lender (or each Lender of such Class, as
the case may be), (vi) release Holdings or any Subsidiary Loan
Party from its Guarantee under the Guarantee Agreement (except as
expressly provided in the Guarantee Agreement), or limit its
liability in respect of such Guarantee, without the written
consent of each Lender, (vii) except in strict accordance with
the express provisions of the Security Documents and the
Intercreditor Agreement, release all or any substantial part of
the Collateral from the Liens of the Security Documents, without
the written consent of each Lender or (viii) change any
provisions of any Loan Document in a manner that by its terms
adversely affects the rights in respect of payments due to
Lenders holding Loans of any Class differently than those holding
Loans of any other Class, without the written consent of Lenders
holding a majority in interest of the outstanding Loans and
unused Commitments of each affected Class; provided further that
(A) no such agreement shall amend, modify or otherwise affect the
rights or duties of the Administrative Agent, the Collateral
Agent or the Issuing Bank without the prior written consent of
the Administrative Agent, the Collateral Agent or the Issuing
Bank, as the case may be, and (B) any waiver, amendment or
modification of this Agreement that by its terms affects the
rights or duties under this Agreement of the Revolving Lenders
(but not the Term Lenders), the Term Lenders (but not the
Revolving Lenders) may be effected by an agreement or agreements
in writing entered into by Holdings, the Borrower and requisite
percentage in interest of the affected Class of Lenders that
would be required to consent thereto under this Section if such
Class of Lenders were the only Class of Lenders hereunder at the
time.
SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a)
The Borrower shall pay (i) all reasonable out-of-pocket expenses
incurred by the Administrative Agent, the Collateral Agent and
their Affiliates, including the reasonable fees, charges and
disbursements of counsel for the Administrative Agent and the
Collateral Agent, in connection with the syndication of the
credit facilities provided for herein, the preparation and
administration of the Loan Documents or any amendments,
modifications or waivers of the provisions thereof (whether or
not the transactions contemplated hereby or thereby shall be
consummated), (ii) all reasonable out-of-pocket expenses incurred
by the Issuing Bank in connection with the issuance, amendment,
renewal or extension of any Letter of Credit or Acceptance or any
demand for payment thereunder and (iii) all out-of-pocket
expenses incurred by the Administrative Agent, the Collateral
Agent, the Issuing Bank or any Lender, including the reasonable
fees, charges and disbursements of any counsel for the
Administrative Agent, the Collateral Agent, the Issuing Bank or
any Lender, in connection with the enforcement or protection of
its rights in connection with the Loan Documents, including its
rights under this Section, or in connection with the
86
Loans made or Letters of Credit or Acceptances issued hereunder,
including all such out-of-pocket expenses incurred during any
workout, restructuring or negotiations in respect of such Loans
or Letters of Credit or Acceptances.
(b) The Borrower shall indemnify the Administrative
Agent, the Collateral Agent, the Issuing Bank and each Lender,
and each Related Party of any of the foregoing Persons (each such
Person being called an "Indemnitee") against, and hold each
Indemnitee harmless from, any and all losses, claims, damages,
liabilities and related expenses, including the reasonable fees,
charges and disbursements of any counsel for any Indemnitee,
incurred by or asserted against any Indemnitee arising out of, in
connection with, or as a result of (i) the execution or delivery
of any Loan Document or any other agreement or instrument
contemplated hereby, the performance by the parties to the Loan
Documents of their respective obligations thereunder or the
consummation of the Transactions or any other transactions
contemplated hereby, (ii) any Loan or Letter of Credit or
Acceptance or the use of the proceeds therefrom (including any
refusal by the Issuing Bank to honor a demand for payment under a
Letter of Credit or Acceptance if the documents presented in
connection with such demand do not strictly comply with the terms
of such Letter of Credit or Acceptance), (iii) any actual or
alleged presence or release of Hazardous Materials on or from any
Mortgaged Property or any other property currently or formerly
owned or operated by the Borrower or any of its Subsidiaries, or
any Environmental Liability related in any way to the Borrower or
any of its Subsidiaries, or (iv) any actual or prospective claim,
litigation, investigation or proceeding relating to any of the
foregoing, whether based on contract, tort or any other theory
and regardless of whether any Indemnitee is a party thereto;
provided that such indemnity shall not, as to any Indemnitee, be
available to the extent that such losses, claims, damages,
liabilities or related expenses resulted from the gross
negligence or wilful misconduct of such Indemnitee.
(c) To the extent that the Borrower fails to pay any
amount required to be paid by it to the Administrative Agent, the
Collateral Agent or the Issuing Bank under paragraph (a) or (b)
of this Section, each Lender severally agrees to pay to the
Administrative Agent, the Collateral Agent or the Issuing Bank,
as the case may be, such Lender's pro rata share (determined as
of the time that the applicable unreimbursed expense or indemnity
payment is sought) of such unpaid amount; provided that the
unreimbursed expense or indemnified loss, claim, damage,
liability or related expense, as the case may be, was incurred by
or asserted against the Administrative Agent, the Collateral
Agent or the Issuing Bank in its capacity as such. For purposes
hereof, a Lender's "pro rata share" shall be determined based
upon its share of the sum of the total Revolving Exposures,
outstanding Term Loans and unused Commitments at the time.
(d) To the extent permitted by applicable law, neither
Holdings nor the Borrower shall assert, and each hereby waives,
any claim against any Indemnitee, on any theory of liability, for
special, indirect, consequential or punitive damages (as opposed
to direct or actual damages) arising out of, in connection with,
or as a result of, this Agreement or any agreement or instrument
contemplated hereby, the Transactions, any Loan or Letter of
Credit or Acceptance or the use of the proceeds thereof.
87
(e) All amounts due under this Section shall be
payable promptly after written demand therefor.
SECTION 9.04. Successors and Assigns. (a) The
provisions of this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors
and assigns permitted hereby (including any Affiliate of the
Issuing Bank that issues any Letter of Credit or any Acceptance),
except that the Borrower may not assign or otherwise transfer any
of its rights or obligations hereunder without the prior written
consent of each Lender (and any attempted assignment or transfer
by the Borrower without such consent shall be null and void).
Nothing in this Agreement, expressed or implied, shall be
construed to confer upon any Person (other than the parties
hereto, their respective successors and assigns permitted hereby
(including any Affiliate of the Issuing Bank that issues any
Letter of Credit or any Acceptance) and, to the extent expressly
contemplated hereby, the Related Parties of each of the
Administrative Agent, the Collateral Agent, the Issuing Bank and
the Lenders) any legal or equitable right, remedy or claim under
or by reason of this Agreement.
(b) Any Lender may assign to one or more assignees all
or a portion of its rights and obligations under this Agreement
(including all or a portion of its Commitment and the Loans at
the time owing to it); provided that (i) except in the case of an
assignment to a Lender or an Affiliate of a Lender, each of the
Borrower and the Administrative Agent (and, in the case of an
assignment of all or a portion of a Revolving Commitment or any
Lender's obligations in respect of its LC and Acceptance Exposure
and the Issuing Bank) must give their prior written consent to
such assignment (which consent shall not be unreasonably
withheld), (ii) except in the case of an assignment to a Lender
or an Affiliate of a Lender or an assignment of the entire
remaining amount of the assigning Lender's Commitment or Loans,
the amount of the Commitment or Loans of the assigning Lender
subject to each such assignment (determined as of the date the
Assignment and Acceptance with respect to such assignment is
delivered to the Administrative Agent) shall not be less than
$5,000,000 unless each of the Borrower and the Administrative
Agent otherwise consent, (iii) each partial assignment shall be
made as an assignment of a proportionate part of all the
assigning Lender's rights and obligations under this Agreement,
except that this clause (iii) shall not be construed to prohibit
the assignment of a proportionate part of all the assigning
Lender's rights and obligations in respect of one Class of
Commitments or Loans, (iv) the parties to each assignment shall
execute and deliver to the Administrative Agent an Assignment and
Acceptance, together with a processing and recordation fee of
$3,500, and (v) the assignee, if it shall not be a Lender, shall
deliver to the Administrative Agent an Administrative
Questionnaire; and provided further that any consent of the
Borrower otherwise required under this paragraph shall not be
required if an Event of Default under clause (h) or (i) of
Article VII has occurred and is continuing. Subject to acceptance
and recording thereof pursuant to paragraph (d) of this Section,
from and after the effective date specified in each Assignment
and Acceptance the assignee thereunder shall be a party hereto
and, to the extent of the interest assigned by such Assignment
and Acceptance, have the rights and obligations of a Lender under
this Agreement, and the assigning Lender thereunder shall, to the
extent of the interest assigned by such Assignment and
Acceptance, be released from its obligations under this Agreement
(and, in the case of an Assignment and Acceptance covering all of
the assigning Lender's rights and obligations under this Agreement,
such Lender shall cease to be a party hereto but shall continue to
be entitled to the benefits of Sections 2.15, 2.16, 2.17 and
88
9.03). Any assignment or transfer by a Lender of rights
or obligations under this Agreement that does not comply with
this paragraph shall be treated for purposes of this Agreement as
a sale by such Lender of a participation in such rights and
obligations in accordance with paragraph (e) of this Section.
(c) The Administrative Agent, acting for this purpose
as an agent of the Borrower, shall maintain at one of its offices
in The City of New York a copy of each Assignment and Acceptance
delivered to it and a register for the recordation of the names
and addresses of the Lenders, and the Commitment of, and
principal amount of the Loans and LC Disbursements and Acceptance
Disbursements owing to, each Lender pursuant to the terms hereof
from time to time (the "Register"). The entries in the Register
shall be conclusive, and Holdings, the Borrower, the
Administrative Agent, the Issuing Bank and the Lenders may treat
each Person whose name is recorded in the Register pursuant to
the terms hereof as a Lender hereunder for all purposes of this
Agreement, notwithstanding notice to the contrary. The Register
shall be available for inspection by the Borrower, the Issuing
Bank and any Lender, at any reasonable time and from time to time
upon reasonable prior notice.
(d) Upon its receipt of a duly completed Assignment
and Acceptance executed by an assigning Lender and an assignee,
the assignee's completed Administrative Questionnaire (unless the
assignee shall already be a Lender hereunder), the processing and
recordation fee referred to in paragraph (b) of this Section and
any written consent to such assignment required by paragraph (b)
of this Section, the Administrative Agent shall accept such
Assignment and Acceptance and record the information contained
therein in the Register. No assignment shall be effective for
purposes of this Agreement unless it has been recorded in the
Register as provided in this paragraph.
(e) Any Lender may, without the consent of the
Borrower, the Administrative Agent or the Issuing Bank, sell
participations to one or more banks or other entities (a
"Participant") in all or a portion of such Lender's rights and
obligations under this Agreement (including all or a portion of
its Commitment and the Loans owing to it); provided that (i) such
Lender's obligations under this Agreement shall remain unchanged,
(ii) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations and (iii)
Holdings, the Borrower, the Administrative Agent, the Collateral
Agent, the Issuing Bank and the other Lenders shall continue to
deal solely and directly with such Lender in connection with such
Lender's rights and obligations under this Agreement. Any
agreement or instrument pursuant to which a Lender sells such a
participation shall provide that such Lender shall retain the
sole right to enforce the Loan Documents and to approve any
amendment, modification or waiver of any provision of the Loan
Documents; provided that such agreement or instrument may provide
that such Lender will not, without the consent of the
Participant, agree to any amendment, modification or waiver
described in the first proviso to Section 9.02(b) that affects
such Participant. Subject to paragraph (f) of this Section, the
Borrower agrees that each Participant shall be entitled to the
benefits of Sections 2.15, 2.16 and 2.17 to the same extent as if
it were a Lender and had acquired its interest by assignment
pursuant to paragraph (b) of this Section. To the extent
permitted by law, each Participant also shall be entitled to the
benefits of Section 9.08 as though it were a Lender, provided
such Participant agrees to be subject to Section 2.18(c) as
though it were a Lender.
89
(f) A Participant shall not be entitled to receive any
greater payment under Section 2.15 or 2.17 than the applicable
Lender would have been entitled to receive with respect to the
participation sold to such Participant, unless the sale of the
participation to such Participant is made with the Borrower's
prior written consent. A Participant that would be a Foreign
Lender if it were a Lender shall not be entitled to the benefits
of Section 2.17 unless the Borrower is notified of the
participation sold to such Participant and such Participant
agrees, for the benefit of the Borrower, to comply with Section
2.17(e) as though it were a Lender.
(g) Any Lender may at any time pledge or assign a
security interest in all or any portion of its rights under this
Agreement to secure obligations of such Lender, including any
pledge or assignment to secure obligations to a Federal Reserve
Bank, and this Section shall not apply to any such pledge or
assignment of a security interest; provided that no such pledge
or assignment of a security interest shall release a Lender from
any of its obligations hereunder or substitute any such pledgee
or assignee for such Lender as a party hereto.
SECTION 9.05. Survival. All covenants, agreements,
representations and warranties made by the Loan Parties in the
Loan Documents and in the certificates or other instruments
delivered in connection with or pursuant to this Agreement or any
other Loan Document shall be considered to have been relied upon
by the other parties hereto and shall survive the execution and
delivery of the Loan Documents and the making of any Loans and
issuance of any Letters of Credit and any Acceptances, regardless
of any investigation made by any such other party or on its
behalf and notwithstanding that the Administrative Agent, the
Issuing Bank or any Lender may have had notice or knowledge of
any Default or incorrect representation or warranty at the time
any credit is extended hereunder, and shall continue in full
force and effect as long as the principal of or any accrued
interest on any Loan or any fee or any other amount payable under
this Agreement is outstanding and unpaid or any Letter of Credit
or Acceptance is outstanding and so long as the Commitments have
not expired or terminated. The provisions of Sections 2.15, 2.16,
2.17 and 9.03 and Article VIII shall survive and remain in full
force and effect regardless of the consummation of the
transactions contemplated hereby, the repayment of the Loans, the
expiration or termination of the Letters of Credit or Acceptances
and the Commitments or the termination of this Agreement or any
provision hereof.
SECTION 9.06. Counterparts; Integration;
Effectiveness. This Agreement may be executed in counterparts
(and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when
taken together shall constitute a single contract. This
Agreement, the other Loan Document and any separate letter
agreements with respect to fees payable to the Administrative
Agent constitute the entire contract among the parties relating
to the subject matter hereof and supersede any and all previous
agreements and understandings, oral or written, relating to the
subject matter hereof. Except as provided in Section 4.01, this
Agreement shall become effective when it shall have been executed
by the Administrative Agent and when the Administrative Agent
shall have received counterparts hereof which, when taken
together, bear the signatures of each of the other parties
hereto, and thereafter shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
assigns. Delivery of an executed counterpart of a signature page
of this Agreement by telecopy shall be effective as delivery of a
manually executed counterpart of this Agreement.
90
SECTION 9.07. Severability. Any provision of this
Agreement held to be invalid, illegal or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to
the extent of such invalidity, illegality or unenforceability
without affecting the validity, legality and enforceability of
the remaining provisions hereof; and the invalidity of a
particular provision in a particular jurisdiction shall not
invalidate such provision in any other jurisdiction.
SECTION 9.08. Right of Setoff. If an Event of Default
shall have occurred and be continuing, each Lender and each of
its Affiliates is hereby authorized at any time and from time to
time, to the fullest extent permitted by law, to set off and
apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other obligations at
any time owing by such Lender or Affiliate to or for the credit
or the account of the Borrower against any of and all the
obligations of the Borrower now or hereafter existing under this
Agreement held by such Lender, irrespective of whether or not
such Lender shall have made any demand under this Agreement and
although such obligations may be unmatured. The rights of each
Lender under this Section are in addition to other rights and
remedies (including other rights of setoff) which such Lender may
have.
SECTION 9.09. Governing Law; Jurisdiction; Consent to
Service of Process. (a) This Agreement shall be construed in
accordance with and governed by the law of the State of New York.
(b) Each of Holdings and the Borrower hereby
irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of the Supreme Court
of the State of New York sitting in New York County and of the
United States District Court of the Southern District of New
York, and any appellate court from any thereof, in any action or
proceeding arising out of or relating to any Loan Document, or
for recognition or enforcement of any judgment, and each of the
parties hereto hereby irrevocably and unconditionally agrees that
all claims in respect of any such action or proceeding may be
heard and determined in such New York State or, to the extent
permitted by law, in such Federal court. Each of the parties
hereto agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement or any other Loan
Document shall affect any right that the Administrative Agent,
the Issuing Bank or any Lender may otherwise have to bring any
action or proceeding relating to this Agreement or any other Loan
Document against Holdings, the Borrower or its properties in the
courts of any jurisdiction.
(c) Each of Holdings and the Borrower hereby
irrevocably and unconditionally waives, to the fullest extent it
may legally and effectively do so, any objection which it may now
or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or any
other Loan Document in any court referred to in paragraph (b) of
this Section. Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or
proceeding in any such court.
(d) Each party to this Agreement irrevocably consents
to service of process in the manner provided for notices in
Section 9.01. Nothing in this Agreement or any other Loan
91
Document will affect the right of any party to this Agreement to
serve process in any other manner permitted by law.
SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO
HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS
AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER
THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE,
AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B)
ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE
MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
SECTION 9.11. Headings. Article and Section headings
and the Table of Contents used herein are for convenience of
reference only, are not part of this Agreement and shall not
affect the construction of, or be taken into consideration in
interpreting, this Agreement.
SECTION 9.12. Confidentiality. Each of the
Administrative Agent, the Issuing Bank and the Lenders agrees to
maintain the confidentiality of the Information (as defined
below), except that Information may be disclosed (a) to its and
its Affiliates' directors, officers, employees and agents,
including accountants, legal counsel and other advisors (it being
understood that the Persons to whom such disclosure is made will
be informed of the confidential nature of such Information and
instructed to keep such Information confidential), (b) to the
extent requested by any regulatory authority, (c) to the extent
required by applicable laws or regulations or by any subpoena or
similar legal process, (d) to any other party to this Agreement,
(e) in connection with the exercise of any remedies hereunder or
any suit, action or proceeding relating to this Agreement or any
other Loan Document or the enforcement of rights hereunder or
thereunder, (f) subject to an agreement containing provisions
substantially the same as those of this Section, to any assignee
of or Participant in, or any prospective assignee of or
Participant in, any of its rights or obligations under this
Agreement, (g) with the consent of the Borrower or (h) to the
extent such Information (i) becomes publicly available other than
as a result of a breach of this Section or (ii) becomes available
to the Administrative Agent, the Issuing Bank or any Lender on a
nonconfidential basis from a source other than Holdings or the
Borrower. For the purposes of this Section, "Information" means
all information received from Holdings or the Borrower relating
to Holdings or the Borrower or its business, other than any such
information that is available to the Administrative Agent, the
Issuing Bank or any Lender on a nonconfidential basis prior to
disclosure by Holdings or the Borrower; provided that, in the
case of information received from Holdings or the Borrower after
the date hereof, such information is clearly identified at the
time of delivery as confidential. Any Person required to maintain
the confidentiality of Information as provided in this Section
shall be considered to have complied with its obligation to do so
if such Person has exercised the same degree of care to maintain the
92
confidentiality of such Information as such Person would accord
to its own confidential information.
SECTION 9.13. Interest Rate Limitation.
Notwithstanding anything herein to the contrary, if at any time
the interest rate applicable to any Loan, together with all fees,
charges and other amounts which are treated as interest on such
Loan under applicable law (collectively the "Charges"), shall
exceed the maximum lawful rate (the "Maximum Rate") which may be
contracted for, charged, taken, received or reserved by the
Lender holding such Loan in accordance with applicable law, the
rate of interest payable in respect of such Loan hereunder,
together with all Charges payable in respect thereof, shall be
limited to the Maximum Rate and, to the extent lawful, the
interest and Charges that would have been payable in respect of
such Loan but were not payable as a result of the operation of
this Section shall be cumulated and the interest and Charges
payable to such Lender in respect of other Loans or periods shall
be increased (but not above the Maximum Rate therefor) until such
cumulated amount, together with interest thereon at the Federal
Funds Effective Rate to the date of repayment, shall have been
received by such Lender.
93
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be duly executed by their respective authorized
officers as of the day and year first above written.
J. CREW GROUP, INC.,
by
/s/ Michael P. McHugh
--------------------------
Name: Michael P. McHugh
Title: Chief Financial
Officer
J. CREW OPERATING CORP.,
by
/s/ Michael P. McHugh
--------------------------
Name: Michael P. McHugh
Title: Chief Financial
Officer
THE CHASE MANHATTAN BANK,
individually and as
Administrative Agent,
by
/s/ Bruce Borden
--------------------------
Name: Bruce Borden
Title: Vice President
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION,
as Syndication Agent,
by
/s/ Eric Swanson
--------------------------
Name: Eric Swanson
Title: Managing Director
94
BANKBOSTON, N.A.,
by
/s/ Diane J. Exter
--------------------------
Name: Diane J. Exter
Title: Managing Director
BANK LEUMI TRUST COMPANY OF
NEW YORK,
by
/s/ John Koenigsberg
--------------------------
Name: John Koenigsberg
Title: Vice President
by
/s/ Phyllis Rosenfeld
--------------------------
Name: Phyllis Rosenfeld
Title: Vice President
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY,
by
/s/ Paul P. Malecki
--------------------------
Name: Paul P. Malecki
Title: Vice President
DLJ CAPITAL FUNDING, INC.
by
/s/ Eric Swanson
--------------------------
Name: Eric Swanson
Title: Managing Director
FIRST UNION NATIONAL BANK,
by
/s/ Edward H. Ross
--------------------------
Name: Edward H. Ross
Title: Vice President
95
GENERAL ELECTRIC CAPITAL
CORP.,
by
/s/ Eileen T. McColgan
--------------------------
Name: Eileen T. McColgan
Title: Duly Authorized
Signatory
NATIONAL WESTMINSTER BANK PLC,
by
/s/ Andrew S. Weinberg
--------------------------
Name: Andrew S. Weinberg
Title: Vice President
STANDARD CHARTERED BANK,
by
/s/ John Biscette
--------------------------
Name: John Biscette
Title: Assistant Vice
President
by
/s/ Kristina McDavid
--------------------------
Name: Kristina McDavid
Title: Vice President
SUMMIT BANK,
by
/s/ Wayne R. Trotman
--------------------------
Name: Wayne R. Trotman
Title: Vice President &
Regional Manager
96
WELLS FARGO BANK, NATIONAL
ASSOCIATION,
by
/s/ Michael Real
--------------------------
Name: Michael Real
Title: Assistant Vice
President
BANK OF AMERICA NT&SA
by
/s/ Jonathan M. Kitel
--------------------------
Name: Jonathan M. Kitel
Title: Attorney-in-Fact
97
Exhibit 10.12
Conformed Copy
December 16, 1997
Mr. David DeMattei
31 North Moore Street
New York, NY 10003
Dear Dave,
This letter will supersede your current employment
agreement dated December 6, 1996 (countersigned by you on May 27,
1997) and your Stock Option Plan dated February 5, 1997 as
amended on February 10, 1997 ("prior DeMattei Stock Option
Agreement") and all of their provisions, as well as any other
arrangements of any kind pertaining to your employment,
compensation, equity or other incentive programs or transaction
bonuses or other perquisites and whether in writing or orally
understood. Any and all such employment arrangements shall
hereafter be governed solely by this letter agreement and any
amendments to this letter signed by an authorized officer of J.
Crew Group, Inc. and by you. You will continue to be employed as
President, J. Crew Retail (consisting primarily of Grace Holmes,
Inc. and H. F. D. No. 55, Inc.).
You are to continue to devote your full time and best
efforts, attention, and energy to the performance of your duties
as one of the top executives of J. Crew Group and its
subsidiaries and affiliates (the "Company"). You will be paid
bi-weekly for the annualized base salary as set forth below,
commencing:
December 12, 1997 - June 1, 1998 $525,000.
June 1, 1998 - May 31, 1999 $550,000
June 1, 1999 $575,000
In addition, you will continue to be eligible for an
annual bonus in fiscal year 1997 which will be determined in
accord with the provisions of Appendix A hereto. The Company will
present to you in 1998 a bonus schedule for fiscal year 1998. It
is Company policy to make bonus payments in mid-April after the
close of our fiscal year, and only to individuals actively
employed on the date of disbursement. Of course this policy shall
apply to all bonuses payable hereunder.
As consideration for the cancellation of the Prior
DeMattei Stock Option Agreement and in lieu of any common stock
or the proceeds thereof that might otherwise have
been or may hereafter be due thereunder, the Company agrees to
pay you $369,063.73, within five business days of your
countersignature of this letter agreement. In addition, you will
be eligible for a new stock option grant under a new Stock Option
Plan which is in process of being finalized. Your option grant
will be the subject of a separate letter agreement proposal that
will be sent to you as and when the new Stock Option Plan is
finalized.
During your employment hereunder, the Company will
provide you with a car allowance of $600 per period (13
periods/year).
The Company's benefit package currently includes 3
weeks vacation, 3 personal days, holidays, life insurance,
medical insurance, long term disability, 401(k) tax deferred
savings plan, a health flexible spending account, and the
employee discount. The Company reserves the right to change these
benefits at any time at its sole discretion.
If the Company terminates your employment for any
reason whatsoever other than death, disability, or cause (cause
shall include breach of this agreement, dishonesty, theft,
embezzlement, material dereliction in the performance of your
duties, insobriety or drug use while performing duties and
conviction of a crime other than traffic violations or minor
misdemeanors), the Company will continue your base pay and
medical benefits for a period of twelve months; provided that you
execute a general release and waiver, waiving all claims you may
have against the Company. During such period, salary continuation
and medical benefits will be paid provided that you exercise good
faith efforts to promptly obtain comparable employment. The
Company shall have the right to terminate medical continuation
benefits when you obtain new employment and to offset your base
pay continuation by the amount of compensation that you earn
during such twelve-month period from such new employment. If,
however, you resign, become disabled, die, or are terminated for
cause, no salary and benefit continuation will be paid. Your
relationship with the Company is one of employment at will and
the payments described in this paragraph are the only payments to
which you will be entitled as a result of the termination of your
employment.
As additional consideration for the Company entering
into this agreement and agreeing to make the salary continuation
payments described above, you agree that during your employment
by the Company and for a period of twelve (12) months after the
later of the date on which any employment or consulting
relationship is terminated or the date on which the last salary,
salary continuation, bonus, or other payment is made, you shall
not directly or indirectly solicit, hire, or seek to influence on
behalf of any person or entity any employee of the Company.
You agree that, while employed and thereafter, you
will hold in strict confidence any proprietary or confidential
information or material related to the Company and its
affiliates. This includes but is not limited to customer lists,
trade practices, marketing techniques, pricing structures and
practices, research, trade secrets, processes, systems, programs,
methods, software, merchandising, planning, inventory and
financial control, store design, staffing, etc. You also agree
that breach of the confidentiality or non-pirating provisions
previously noted would cause the Company to suffer irreparable
harm for which money damages would not be an adequate remedy and
we would be entitled to temporary and permanent injunctive relief
in any Court of competent jurisdiction (without the need to post
any bond).
This Agreement shall inure to the benefit of and be an
obligation of the Company's assigns and successors; however you
may not assign your duties and obligations hereunder to any other
party.
You agree not to disclose any information regarding
the existence or substance of this agreement, except to an
attorney with whom you choose to consult regarding your
consideration of this agreement or to your spouse or tax advisor;
provided that you notify such
individuals that they are strictly bound by the non-disclosure
restrictions. Further, you agree not to directly or indirectly
disparage or defame J. Crew.
This Agreement and all amendments thereof shall, in
all respects, be governed by and construed and enforced in
accordance with the internal laws (without regard to principles
of conflicts of law) of the State of New York. Each party hereto
hereby agrees to and accepts the exclusive jurisdiction of any
court in New York County or the U.S. District Court for the
Southern District of New York in that County in respect of any
action or proceeding relating to the subject matter hereof,
expressly waiving any defense relating to jurisdiction or forum
non conveniens, and consents to service of process by U.S.
certified or registered mail in any action or proceeding with
respect to this Agreement.
If the terms of this letter agreement meet with your
approval, please sign and return one copy to me.
We are very pleased that you will be continuing as a
key executive of the Company.
Sincerely,
/s/ Emily Woods
-------------------
Emily Woods
Chairman
Agreed to and Accepted:
/s/ David DeMattei 12/22/97
David DeMattei Date
Exhibit 16.1
------------
Conformed Copy
Securities and Exchange Commission
Mail Stop 3-4
450 Fifth Street, NW
Washington, DC 20549
Ladies and Gentlemen:
We have read and agree with the comments pertaining to our firm
contained under the heading "Change in Accountants" in Registration
Statement No. 333-42427 on Form S-4 of J. Crew Group, Inc. filed
with the Securities and Exchange Commission.
Yours Truly,
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 6, 1998
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
J. CREW GROUP, INC.
State of Name Under Which
Name of Subsidiary Incorporation Subsidiary Does Business
- ------------------ ------------- ------------------------
J. Crew Operating Corp. Delaware J. Crew Operating Corp.
J. Crew Inc. New Jersey J. Crew Inc.
Popular Club Plan, Inc. New Jersey Popular Club Plan, Inc.
Clifford & Wills, Inc. New Jersey Clifford & Wills, Inc.
Grace Holmes, Inc. Delaware (J. Crew Retail Stores)
H.F.D. No. 55, Inc. Delaware (J. Crew Factory Outlet
Stores)
C & W Outlet, Inc. New York C & W Outlet, Inc.
J. Crew International, Inc. Delaware J. Crew International, Inc.
J. Crew Services, Inc. Delaware J. Crew Services, Inc.
PCP Receivables Corp. Delaware PCP Receivables Corp.
Exhibit 23.1
------------
Conformed Copy
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration
Statement No. 333-42427 of J. Crew Group, Inc. on Form S-4 of our
report dated March 31, 1997, appearing in the Prospectus, which
is a part of such Registration Statement, and of our report dated
March 31, 1997 relating to the financial statement schedules
appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 6, 1998
