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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 2002
Commission Registrant, State of Incorporation I.R.S. Employer
File Number Address and Telephone Number Identification No.
333-42427 J. CREW GROUP, INC. 22-2894486
- --------- ----------
(Incorporated in New York)
770 Broadway
New York, New York 10003
Telephone: (212) 209-2500
333-42423 J. CREW OPERATING CORP. 22-3540930
- --------- ----------
(Incorporated in Delaware)
770 Broadway
New York, New York
Telephone: (212) 209-2500
Securities Registered Pursuant to section 12(b) of the Act:
J. Crew Group, Inc. None
J. Crew Operating Corp. None
Securities Registered Pursuant to section 12(g) of the Act:
J. Crew Group, Inc. None
J. Crew Operating Corp. None
Indicate by check mark whether each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of each registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The common stock of each registrant is not publicly traded. Therefore, the
aggregate market value is not readily determinable.
As of March 15, 2002, there were 11,748,789 shares of Common Stock, par value
$.01 per share, of J. Crew Group, Inc. outstanding and 100 shares of Common
Stock, par value $.01 per share, of J. Crew Operating Corp. outstanding (all of
which are owned beneficially and of record by J. Crew Group, Inc.).
Documents incorporated by reference: None
J. Crew Operating Corp. meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of the Form 10-K and is therefore filing this Form 10-K with
the reduced disclosure format.
FILING FORMAT
This Annual Report on Form 10-K is a combined report being filed by two
different registrants: J. Crew Group, Inc. ("Holdings") and J. Crew Operating
Corp., a wholly-owned subsidiary of Holdings ("Operating Corp."). Except where
the content clearly indicates otherwise, any references in this report to the
"Company", "J. Crew" or "Holdings" include all subsidiaries of Holdings,
including Operating Corp. Operating Corp. makes no representation as to the
information contained in this report in relation to Holdings and its
subsidiaries other than Operating Corp.
FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K under the captions
"Business", "Selected Financial Data", "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Financial Statements and
Supplementary Data" and elsewhere constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. We may also
make written or oral forward looking statements in our periodic reports to the
Securities and Exchange Commission on Forms 10-Q, 8-K, etc., in press releases
and other written materials and in oral statements made by our officers,
directors or employees to third parties. Statements that are not historical
facts, including statements about our beliefs and expectations, are
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company, or industry results,
to differ materially from historical results, any future results, performance or
achievements expressed or implied by such forward-looking statements. Such risks
and uncertainties include, but are not limited to, competitive pressures in the
apparel industry, changes in levels of consumer spending or preferences in
apparel and acceptance by customers of the Company's products, overall economic
conditions, governmental regulations and trade restrictions, acts of war or
terrorism in the United States or worldwide, political or financial instability
in the countries where the Company's goods are manufactured, postal rate
increases, paper and printing costs, availability of suitable store locations at
appropriate terms, the level of the Company's indebtedness and exposure to
interest rate fluctuations, and other risks and uncertainties described in this
report and the Company's other reports and documents filed or which may be
filed, from time to time, with the Securities and Exchange Commission. These
statements are based on current plans, estimates and projections, and therefore
you should not place undue reliance on them. Forward looking statements speak
only as of the date they are made and we undertake no obligation to update
publicly any of them in light of new information or future events.
References herein to fiscal years are to the fiscal years of J. Crew Group, Inc.
and J. Crew Operating Corp., which end on the Saturday closest to January 31 in
the following calendar year for fiscal years 1997, 1998, 1999, 2000 and 2001.
Accordingly, fiscal years 1997, 1998, 1999, 2000 and 2001 ended on January 31,
1998, January 30, 1999, January 29, 2000, February 3, 2001 and February 2, 2002.
All fiscal years for which financial information is included had 52 weeks,
except fiscal year 2000 which had 53 weeks.
Part I
ITEM 1. BUSINESS
General
The Company is a leading retailer of women's and men's apparel, shoes and
accessories operating under the J. Crew (R) brand name. 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 19-year history through the
circulation of approximately 900 million 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.
1
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 retail stores, catalogs and
its Internet site offer a full line of men's and women's basic durables (casual
weekend wear), workwear (casual weekday wear) sport, swimwear, accessories and
shoes, as well as the more tailored men's and women's "Classics" lines.
Approximately 70% of the Company's J.Crew brand sales are derived from its core
offerings of classics, 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 retail and
factory outlet stores, catalogs and the Company's Internet site, jcrew.com. The
Company currently circulates over 70 million J. Crew catalogs per annum and
operates 136 J. Crew retail stores and 41 J. Crew factory outlet stores. In
addition, J. Crew products are distributed through 61 free-standing and
shop-in-shop stores in Japan under a licensing agreement with Itochu
Corporation.
The Company has three major operating divisions: J. Crew Retail, J. Crew Direct,
and J. Crew Factory, each of which operate under the J. Crew brand name. In
2001, products sold under the J. Crew brand contributed $741.3 million in net
sales. J. Crew brand net sales in 2001 were comprised of $398.0 million from J.
Crew Retail, $258.2 million from J. Crew Direct and $85.1 million from J. Crew
Factory. The Company also markets to its customers through its Internet site
(jcrew.com). Net sales derived from the Internet, which were $122.9 million for
2001, are included in J. Crew Direct net sales. The Company also generated
licensing revenues of $2.6 million and shipping and handling fees of $34.1
million.
J. Crew Brand
Merchandising and Design Strategy
Over time, the J. Crew merchandising strategy has evolved from providing unisex
products to creating full lines of men's and women's clothing, shoes and
accessories. This strategy had the effect of increasing overall J. Crew brand
sales volume, and significantly increasing revenues from sales of women's
apparel to 75% of J.Crew brand sales in 2001.
Every J. Crew product is designed by an in-house design staff, 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 product development, merchandising and production staffs 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 finished 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.
Sourcing, Production and Quality
The Company maintains separate merchandising, design, manufacturing and quality
assurance teams for the production of J. Crew brand 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 J. Crew brand image.
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 in over 22 countries for the production of its products. In 2001,
approximately 80% of the Company's J. Crew brand products were sourced in the
Far East, 5% were sourced domestically and 15% were sourced in Europe and other
regions. One vendor supplies approximately 16% of the Company's merchandise.
2
The Company retains independent buying agents to conduct in-line and final
quality inspections at each manufacturing site. Random inspections of all
incoming merchandise at the Lynchburg and Asheville distribution facilities
further assure that the Company's products are of a consistently high quality.
Due to the high concentration of foreign suppliers of J. Crew brand merchandise,
the Company estimates seven month lead times for its products. The Company has
established through the use of domestic vendors and strategic partnerships, a
core group of long-term suppliers to provide quick response programs at
significantly shorter lead times for certain product categories.
Distribution
The Company operates two major telemarketing and distribution facilities for its
operations. Order fulfillment for J. Crew Direct takes place at the 406,500
square foot telemarketing and distribution center located in Lynchburg,
Virginia. The Lynchburg facility processes approximately 3.6 million orders per
year and employs approximately 900 full and part-time employees during its
non-peak season and an additional 400 employees during its peak season.
A 192,500 square foot telemarketing and distribution facility in Asheville,
North Carolina serves as the main distribution center for the retail and outlet
store operations and also houses a J. Crew Direct telemarketing center. This
facility employs approximately 300 full- and part-time employees during its
non-peak season and an additional 200 employees during the peak holiday season.
The Company ships merchandise via UPS, the United States Postal Service,
Airborne and FedEx. To enhance efficiency, each facility is fully equipped with
a highly advanced telephone system, an automated warehouse locator system and an
inventory bar coding system and the Lynchburg facility has an automated packing
and shipping sorter.
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 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 systems, coupled with its
point-of-sale registers and software programs, allow for rapid stock
replenishment, concise merchandise planning and real-time inventory accounting
practices. The Company's telephone and telemarketing systems, warehouse package
sorting systems, automated warehouse locator 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. In
addition, the Company's real-time inventory systems provide inventory management
on a SKU basis and allow for an efficient fulfillment process.
The Company has installed a SAP enterprise resource planning system for its
information technology requirements. This system was implemented in 2000 and
2001. In fiscal 2000, the Company's accounting systems were implemented. A
corporate wide purchasing system, a retail sales and inventory system (including
new point of sale registers) and a human resource / payroll system were
completed in fiscal 2001. In November 2000, the Company outsourced its data
center, desktop, network and telecommunication services management and
operations support. In February 2001, the Company outsourced the hosting and
support of its Internet website to a third party vendor.
3
J. Crew Retail
During fiscal 2001, J. Crew Retail generated net sales of $398.0 million,
representing 53.7% of the Company's total net sales.
The principal aspect of the Company's business strategy is an expansion 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.
The Company believes that J. Crew Retail derives significant benefits from the
concurrent operation of J. Crew Direct. The broad circulation of J. Crew
catalogs and distribution of e-mails 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 stores that were open during all of fiscal 2001 averaged $3.5
million per store in sales, produced sales per gross square foot of $439 and
generated store contribution margins of approximately 18.0%. The Company
believes that these results are in line with the average among retailers that
the Company believes to be its primary competitors. J. Crew Retail stores have
an average size of 7,752 total square feet.
As of February 2, 2002, J. Crew Retail operated 136 retail stores nationwide,
having expanded from 39 stores in 1997. The Company opened 34 stores in fiscal
2001 and intends to open approximately 15 stores in fiscal 2002. 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 2001.
Stores Stores Average
------ ------ -------
Opened Closed Stores Total Store Total
------ ------ ------ ----- -----------
Stores Open During During Open at Square Square
----------- ------ ------ ------- ------ ------
At Beginning Fiscal Fiscal End of Footage Footage at
------------ ------ ------ ------ ------- ----------
Of Fiscal Year Year Year Fiscal Year (000's) End of Year
-------------- ---- ---- ----------- ------- -----------
1997 39 12 -- 51 428 8,392
1998 51 14 -- 65 530 8,150
1999 65 16 -- 81 668 8,243
2000 81 24 -- 105 833 7,933
2001 105 34 3 136 1,054 7,752
J. Crew Direct
Since its inception in 1983, J. Crew Direct 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
2001, J. Crew Direct distributed 36 catalog editions with a total circulation of
approximately 71 million. J. Crew Direct generated $258.2 million in net sales
(including $122.9 million from its Internet site) representing 34.8% of the
Company's total J. Crew brand net sales in fiscal 2001.
Circulation Strategy
J. Crew Direct's circulation strategy focuses on continually improving the
segmentation of customer files and the acquisition of additional customer names.
In 2001, approximately 65% of J. Crew Direct revenues were from customers in the
12-month buyer file (buyers who have made a purchase from any J. Crew catalog or
on the Internet in the prior 12 months).
4
The Company segments its customer file and tailors 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 appropriate catalog editions. The
Company currently circulates Base, Women's, Version, Prospect and Sale catalogs
to targeted customer segments.
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. 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.
Version Books. These editions are abridged versions (in page count) 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.
Prospect Books. These editions are abridged versions (in size and page count) of
the Version Books and are sent to prospective customers to cost effectively
acquire new customers.
Sale Books. These catalogs contain overstock merchandise to be sold at reduced
prices without adversely affecting the J. Crew brand image.
In 2001, total circulation decreased to approximately 71 million from 73 million
in 2000, and pages circulated were approximately 8.2 billion in 2001 compared to
8.7 billion in 2000.
J. Crew Direct name acquisition programs are designed to attract new customers
in a cost-effective manner. The Company acquires new names from various sources,
including its Internet site, list rentals, exchanges with other catalog and
credit card companies, "friends' name" card inserts, and through J. Crew Retail
stores which represent an increasingly significant resource in prospecting for
new names. The Company is also in the process of placing telephones in its J.
Crew Retail stores with direct access to the J. Crew Direct telemarketing center
to allow customers in the stores to order catalog-specific or out-of-stock
items.
Catalog Creation and Production
The Company is distinguished from other catalog retailers by its award-winning
catalog, which utilizes magazine-quality "real moment" pictures to depict an
aspirational lifestyle image. All creative work on the catalogs is coordinated
by J. Crew personnel to maintain and reinforce the J. Crew brand image.
Photography is executed both on location and in studios, and creative design and
copy writing are executed on a desk-top publishing system. Digital images are
transmitted directly to outside printers, thereby reducing lead times and
improving reproduction quality. The Company believes that appropriate page
presentation of its merchandise stimulates demand and therefore places great
emphasis on page layout.
J. Crew Direct does not have long-term contracts with paper mills. Projected
paper requirements are communicated on an annual basis to paper mills to ensure
the availability of an adequate supply. Management believes that 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.
Telemarketing and Customer Service
J. Crew Direct's primary telemarketing and fulfillment facilities are located in
Lynchburg, Virginia. An additional telemarketing facility is located in
Asheville, North Carolina. Telemarketing operations are open 24 hours a day,
seven days a week and handled over 4.0 million calls in fiscal 2001. Orders for
merchandise may be received by telephone, facsimile, mail and on the Company's
Internet site. The telemarketing centers are staffed by a total of 550 full-time
and part-time telemarketing associates, and up to 300 additional associates
during peak periods, who are trained to assist
5
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.
J. Crew Factory
The Company extends its reach to additional consumers through its 41 J. Crew
Factory outlet stores. Offering J. Crew products at an average of 30% below full
retail prices, J. Crew Factory targets 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 three primary distribution channels. During
fiscal 2001, J. Crew Factory generated net sales of $85.1 million, representing
11.5% of the Company's total J. Crew brand net sales.
J. Crew Factory offers selections of J. Crew menswear and womenswear. Ranging in
size from 3,500 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.
Trademarks and International Licensing
J. Crew International, Inc., an indirect subsidiary of J. Crew Group, Inc.,
currently owns all of the trademarks and domain names for the J. Crew name that
the Company holds throughout the world, as well as its international licensing
contracts with third parties.
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 a
licensing agreement with Itochu Corporation 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. 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. This
agreement expires in January 2003. In 2001, licensing revenues totaled $2.6
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 February 2, 2002, the Company had approximately 5,800 associates, of whom
approximately 2,700 were full-time associates and 3,100 were part-time
associates. In addition, approximately 2,000 associates are hired on a seasonal
basis to meet demand during the peak holiday buying season. None of the
associates employed by J. Crew are represented by a union. The Company believes
that its relationship with its associates is good.
Competition
All aspects of the Company's businesses are highly competitive. The Company
competes primarily with specialty brand retailers, other catalog operations,
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.
6
ITEM 2. PROPERTIES
The Company is headquartered in New York City. The New York City headquarters'
offices are leased under a lease agreement expiring in 2012 (not including
renewal options). The Company owns two telemarketing and distribution
facilities: a 406,500-square-foot telemarketing and distribution center for J.
Crew Direct operations in Lynchburg, Virginia and a 192,500-square-foot
telemarketing and distribution center in Asheville, North Carolina servicing the
J. Crew Retail operations.
As of February 2, 2002, the Company operated 136 J. Crew retail stores and 41
factory outlet stores in 38 states and the District of Columbia. 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 generally comprised of annual base rent plus a contingent
rent payment based on the store's sales in excess of a specified threshold.
Substantially all the leases are guaranteed by Holdings.
The table below sets forth the number of stores by state operated by the Company
in the United States as of February 2, 2002.
Total
-----
Retail Outlet Number
------ ------ ------
Stores Stores Of Stores
------ ------ ---------
Alabama 1 1 2
Arizona 4 -- 4
California 18 3 21
Colorado 4 2 6
Connecticut 5 1 6
Delaware 1 1 2
Florida 4 3 7
Georgia 3 2 5
Illinois 7 -- 7
Indiana 2 2 4
Kansas 1 -- 1
Kentucky 1 -- 1
Louisiana 1 -- 1
Maine -- 2 2
Maryland 3 1 4
Massachusetts 6 1 7
Michigan 4 1 5
Minnesota 3 -- 3
Missouri 2 1 3
Nevada 1 1 2
New Hampshire 1 2 3
New Jersey 7 1 8
New Mexico 1 -- 1
New York 14 4 18
North Carolina 3 -- 3
Ohio 7 -- 7
Oklahoma 1 -- 1
Oregon 2 -- 2
Pennsylvania 6 3 9
Rhode Island 1 - 1
South Carolina 2 2 4
Tennessee 3 1 4
Texas 6 2 8
Utah 2 -- 2
Vermont -- 1 1
Virginia 5 1 6
Washington 2 1 3
Wisconsin 1 1 2
District of Columbia 1 -- 1
- -- -
Total. 136 41 177
=== == ===
7
ITEM 3. LEGAL PROCEEDINGS
Routine litigation is pending against Holdings and Operating Corp. with respect
to matters incidental to their business. Although the outcome of litigation
cannot be predicted with certainty, in the opinion of Holdings and Operating
Corp. none of those actions should have a material adverse effect on the
consolidated financial position or results of operations of Holdings and
Operating Corp.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
February 2, 2002.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for Holdings or Operating Corp.
Common Stock. As of March 15, 2002, there were 39 shareholders of record of the
Holdings Common Stock. See "Item 12. Security Ownership of Certain Beneficial
Owners and Management" for a discussion of the ownership of Holdings. Holdings
owns 100% of the Common Stock of Operating Corp.
Holdings has not paid cash dividends on its Common Stock and does not anticipate
paying any such dividends in the foreseeable future. Operating Corp. may from
time to time pay cash dividends on its Common Stock to permit Holdings to make
required payments relating to its Senior Discount Debentures.
The credit agreement (the "Credit Agreement") and the Indenture relating to the
Senior Discount Debentures (the "Holdings Indenture") prohibit the payment of
dividends by Holdings on shares of its Common Stock (other than dividends
payable solely in shares of capital stock of Holdings). Additionally, because
Holdings is a holding company, its ability to pay dividends is dependent upon
the receipt of dividends from its direct and indirect subsidiaries. Each of the
Credit Agreement, the Holdings Indenture and the Indenture relating to the
Senior Subordinated Notes of Operating Corp., contains covenants which impose
substantial restrictions on Operating Corp.'s ability to pay dividends or make
distributions to Holdings.
The Directors of Holdings have the right to receive all or a portion of the fees
for their services as a Director in Holdings Common Stock. In fiscal year 2001,
certain Directors elected to receive a total of 5,524 shares of Holdings Common
Stock in payment of their fees, at purchase price per share equal to the fair
market value thereof. Holdings issued the Common Stock to the Directors in
transactions which did not involve any public offering in reliance upon Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act").
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated historical financial,
operating, balance sheet and other data of the Company. The selected income
statement and balance sheet data for each of the five fiscal years ended
February 2, 2002 are derived from the Consolidated Financial Statements of the
Company, which have been audited by KPMG LLP, independent auditors. The data
presented below should be read in conjunction with the Consolidated Financial
Statements, including the related Notes thereto, included herein, the other
financial information included herein, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Fiscal Year Ended
January 31, January 30, January 29, February 3, February 2,
----------- ----------- ----------- ----------- -----------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(dollars in thousands, except per square foot data)
Income Statement Data:
Revenues $ 881,044 $ 870,842 $ 750,696 $ 825,975 $ 777,940
Cost of goods sold(a) 517,378 511,716 431,193 463,909 462,371
Selling, general and administrative 354,614 332,050 279,302 301,865 295,568
expenses
Other charges -- 7,995 7,018 -- --
Charges incurred in connection with
discontinuance of Clifford & Wills -- 13,300 4,000 4,130 --
Income from operations 9,052 5,781 29,183 56,071 20,001
Interest expense-net 20,494 39,323 38,861 36,642 36,512
Gain on sale of Popular Club Plan ---- (10,000) (1,000) --- --
Expenses incurred-Recapitalization 20,707 -- -- ---- --
Provision (benefit) for income taxes (5,262) (8,162) (2,050) 7,500 (5,500)
Extraordinary items and cumulative effect
of accounting changes, net of taxes (4,500) -- -- -- --
---------- ---------- --------- ---------- ----------
Net income (loss) $ (31,387) $ (15,380) $ (6,628) $ 11,929 $ (11,011)
========== ========== ========= ========== ==========
9
Fiscal Year Ended
January 31, January 30, January 29, February 3, February 2,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Balance Sheet Data (at period end):
Cash and cash equivalents $ 12,166 $ 9,643 $ 38,693 $ 32,930 $ 16,201
Working capital 142,677 95,710 75,929 49,482 39,164
Total assets 421,878 376,330 373,604 389,861 401,320
Total long term debt and redeemable
preferred stock 428,457 433,243 458,218 464,310 510,147
Stockholders' deficit (201,642) (235,773) (264,593) (278,347) (319,043)
Operating Data:
Revenues:
J. Crew retail $ 209,559 $273,972 $ 333,575 $ 406,784 $ 397,998
J. Crew direct
Catalog 260,853 230,752 213,308 177,535 135,353
Internet 4,000 22,000 65,249 107,225 122,844
--------- -------- ---------- --------- ----------
264,853 252,752 278,557 284,760 258,197
--------- -------- ---------- --------- ----------
J. Crew factory 100,285 96,461 101,987 96,114 85,085
J. Crew licensing 2,897 2,712 2,505 3,020 2,560
J. Crew shipping & handling fees 28,936 30,575 34,072 35,297 34,100
--------- -------- ---------- --------- ----------
Total J. Crew brand 606,530 656,472 750,696 825,975 777,940
Other divisions(b) 274,514 214,370 -- --- ---
------- ------- ---------- --------- ----------
Total $ 881,044 $870,842 $ 750,696 $ 825,975 $ 777,940
========= ======== ========== ========= ==========
J. Crew Direct:
Number of catalogs circulated (in 76,994 73,440 75,479 72,522 70,762
thousands)
Number of pages circulated (in millions) 9,830 8,819 9,319 8,677 8,242
J. Crew Retail:
Sales per gross square foot(c) $ 542 $ 558 $ 571 $ 567 $ 439
Store contribution margin(c) 23.4% 25.0% 26.0% 23.9% 18.0%
Number of stores open at end of period 51 65 81 105 136
Comparable store sales change(c) (6.6)% 9.0% 1.8% 1.7% (15.5)%
Depreciation and amortization $ 15,255 $ 15,972 $ 19,241 $ 22,600 $ 31,718
Net capital expenditures(d)
New store openings $ 19,802 $ 14,749 $ 13,300 $ 16,700 $ 17,572
Other 11,565 21,605 27,953 25,475 25,003
--------- -------- ---------- --------- ----------
Total net capital expenditures $ 31,367 $ 36,354 $ 41,253 $ 42,175 $ 42,575
========= ======== ========== ========= ==========
(a) Includes buying and occupancy costs.
(b) Includes revenues from the Company's Popular Club Plan, Inc. ("PCP") and
Clifford & Wills, Inc. ("C&W") divisions and finance charge income from PCP
installment sales. PCP was sold effective October 30, 1998 and the Company
made a decision in 1998 to exit the catalog and outlet store operations of
C&W.
(c) Includes stores that have been opened for a full twelve month period.
(d) Capital expenditures are net of proceeds from construction allowances.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - J.CREW GROUP, INC.
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity of J. Crew Group, Inc. and
subsidiaries during the three-year period ended February 2, 2002. This
discussion should be read in conjunction with the audited consolidated financial
statements of J. Crew Group, Inc. and subsidiaries for the three-year period
ended February 2, 2002 and notes thereto included elsewhere in this Annual
Report on Form 10-K.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations is based upon the consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires estimates
and judgements that effect the reported amounts of assets, liabilities, revenues
and expenses. The Company bases its estimates on historical experience and other
assumptions that are believed to be reasonable under the circumstances and
evaluates these estimates on an on-going basis. Actual results may differ from
these estimates under different assumptions or conditions.
The following critical accounting policies reflect the more significant
estimates and judgements used in the preparation of the consolidated financial
statements.
(a) Inventory Valuation
Merchandise inventories are carried at the lower of cost or
market. Cost is determined on a first-in first-out basis. We
evaluate all of our inventories to determine excess inventories
based on estimated future sales. Excess inventories may be
disposed of through outlet stores, clearance catalogs, Internet
clearance sales and other liquidations. Based on the historical
results experienced by the Company through the various methods of
disposition the Company writes down the carrying value of
inventories which are not expected to be sold at or above costs.
(b) Deferred catalog costs
The costs associated with direct response advertising, which
consist primarily of catalog production and mailing costs, are
capitalized and amortized over the expected future revenue stream
of the catalog mailings, which approximates four months. The
expected future revenue stream is determined based on historical
revenue trends developed over an extended period of time. If the
current revenue streams were to diverge from the expected trend,
the future revenue streams would be adjusted accordingly.
(c) Asset impairment
The Company is exposed to potential impairment if the book value
of its assets exceeds their future cash flows. The major component
of our long lived assets represents store fixtures, equipment and
leasehold improvements. The impairment of unamortized costs is
measured at the store level and the unamortized cost is reduced to
fair value if it is determined that the sum of expected future net
cash flows is less than net book value.
(d) Sales Returns
The Company must make estimates of future sales returns related to
current period sales. Management analyzes historical returns,
current economic trends and changes in customer acceptance of its
products when evaluating the adequacy of the reserve for sales
returns.
11
(e) Income taxes
Deferred tax assets are carried at the amount that the Company
believes is more likely than not to be realized. The Company has
considered future taxable income and prudent and feasible tax
strategies in assessing the need for a valuation allowance. If the
Company were to determine that it would not be able to realize all
or part of its net deferred tax assets in the future an adjustment
to the deferred tax assets would be charged to income in the
period such determination was made.
Results of Operations
Consolidated statements of operations presented as a percentage of revenues are
as follows:
Fiscal year ended
February 2, February 3, January 29,
2002 2001 2000
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of goods sold, including buying and occupancy costs 59.4 56.2 57.4
Selling, general and administrative expenses 38.0 36.5 37.2
Other charges -- -- .9
Charges incurred in connection with discontinuance of C&W -- .5 .5
Income from operations 2.6 6.8 3.9
Interest expense, net (4.7) (4.4) (5.2)
Gain on the sale of Popular Club Plan -- .1 .1
Income/(loss) before income taxes (2.1) 2.4 (2.2)
Income taxes .7 (.9) .3
-------- -------- ---------
Net income/(loss) (1.4)% 1.5% (.9)%
======== ======== =========
Fiscal 2001 Compared to Fiscal 2000
Revenues
- --------
Revenues in the fiscal year ended February 2, 2002 decreased 5.8% to $778.0
million from $826.0 million in the fiscal year ended February 3, 2001. The
fiscal year ended February 2, 2002 consisted of 52 weeks compared to 53 weeks in
fiscal year 2000. Net sales for the fifty-third week were $10.8 million.
J. Crew Retail net sales decreased by 2.2% from $406.8 million in fiscal 2000 to
$398.0 million in fiscal 2001. The percentage of the Company's total net sales
derived from J. Crew Retail increased to 53.7% in fiscal year 2001 compared to
51.6% in fiscal 2000. The decrease in net sales was due to a decrease of 15.5%
in comparable store sales. This decrease offset a 30% increase in the number of
stores from 105 at February 3, 2001 to 136 at February 2, 2002.
J. Crew Direct net sales (which includes net sales from catalog and internet
operations) decreased by 9.3% from $284.8 million in fiscal 2000 to $258.2
million in fiscal 2001. The percentage of the Company's total net sales derived
from J. Crew Direct decreased to 34.8% in fiscal 2001 from 36.2% in fiscal 2000.
Catalog net sales decreased to $135.3 million in fiscal 2001 from $177.5 million
in fiscal 2000. Pages circulated decreased from 8.7 million in fiscal 2000 to
8.2 billion in fiscal 2001. Internet net sales increased to $122.9 million in
fiscal 2001 from $107.3 million in fiscal 2000 as the Company continued to
migrate catalog customers to the Internet.
J. Crew Factory net sales decreased from $96.1 million in fiscal 2000 to $85.1
million in fiscal 2001. The percentage of the Company's total net sales derived
from J. Crew Factory decreased to 11.5% in fiscal 2001 from 12.2% in fiscal
2000. Comparable store sales for J. Crew Factory decreased by 10.5% in fiscal
2001. There were 41 J. Crew Factory outlet stores at February 2, 2002 and
February 3, 2001.
12
Other revenues which consist of shipping and handling fees and royalties
decreased to $36.7 million in fiscal 2001 from $38.3 million in fiscal 2000,
primarily as a result of a decrease in shipping and handling fees which is
attributable to the decrease in net sales of J.Crew Direct.
Cost of sales, including buying and occupancy costs
- ---------------------------------------------------
Cost of sales (including buying and occupancy costs) as a percentage of revenues
increased to 59.4% in fiscal 2001 from 56.2% in fiscal 2000. This increase was
caused by a significant increase in markdowns as a result of the highly
promotional retail environment and an increase in buying and occupancy costs
caused by a decrease in leverage related to the decline in comp store sales.
Selling, general and administrative expenses
- --------------------------------------------
Selling, general and administrative expenses decreased to $295.6 million in
fiscal 2001 (38.0% of revenues) from $301.9 million in fiscal 2000 (36.6% of
revenues).
General and administrative expenses of the J.Crew brand decreased to $234.8
million in fiscal 2001 (30.2% of revenues) from $239.2 million in fiscal 2000
(29.0% of revenues). This decrease resulted from a decrease in bonus provision
in fiscal 2001 and the cost cutting initiatives instituted in the first quarter
of 2001 which were offset by the additional retail stores in operation during
fiscal 2001 and a $10.1 million increase in depreciation and amortization.
Selling expenses were $60.8 million in fiscal 2001 (7.8% of revenues) compared
to $62.7 million in fiscal 2000 (7.6% of revenues). This decrease was due
primarily to a decrease in pages circulated from 8.7 billion pages in fiscal
year 2000 to 8.2 billion pages in fiscal 2001.
Interest expense
- ----------------
Interest expense, net was $36.5 million in fiscal year 2001 compared to $36.6
million in fiscal 2000. The increase resulting from higher average borrowings in
fiscal 2001 under the Revolving Credit Facility and higher non-cash interest was
offset by the pay off of the term loan in January 2001 and a decrease in
interest rates. Average borrowings under the Revolving Credit Facility required
to fund inventories and capital expenditures were $43.1 million in fiscal 2001
compared to $9.8 million in fiscal 2000.
Interest expense included non-cash interest and amortization of deferred
financing costs of $17.4 million in fiscal 2001 compared to $16.4 million in
fiscal 2000.
Income Taxes
- ------------
The effective tax rate was a benefit of 33.3% in fiscal 2001 compared to a
provision of 38.6% in fiscal 2000. The effective rate in 2001 was less than the
normal rate due primarily to the inability of subsidiaries to carry back net
operating losses for state tax purposes, resulting in a lower tax benefit.
Fiscal 2000 Compared to Fiscal 1999
Revenues
- --------
Revenues increased 10.0% to $826.0 million in the fiscal year ended February 3,
2001 from $750.7 million in the fiscal year ended January 29, 2000. The fiscal
year ended February 3, 2001 consisted of 53 weeks compared to 52 weeks in the
prior year. Net sales for the fifty-third week were $10.8 million. The increase
in revenues was due primarily to the increase of $73.2 million in the net sales
for J.Crew Retail.
J. Crew Retail net sales increased by 21.9% from $333.6 million in fiscal 1999
to $406.8 million in fiscal 2000. The percentage of the Company's total net
sales derived from J. Crew Retail increased to 51.6% in fiscal year 2000
compared to 46.7% in fiscal 1999. This increase was attributed primarily to net
sales from stores not opened for a full fiscal year.
13
Comparable store sales increased by 1.7% in fiscal 2000. The number of stores
opened at February 3, 2001 increased to 105 from 81 at January 29, 2000.
J. Crew Direct net sales (which includes net sales from catalog and Internet
operations) increased by 2.2% from $278.6 million in fiscal 1999 to $284.8
million in fiscal 2000. The percentage of the Company's total net sales derived
from J. Crew Direct decreased to 36.2% in fiscal 2000 from 39.0% in fiscal 1999.
Catalog net sales decreased to $177.5 million in fiscal 2000 from $213.3 million
in fiscal 1999. Internet net sales increased to $107.3 million in fiscal 2000
from $65.2 million in fiscal 1999 as the Company continued to migrate catalog
customers to the Internet.
J.Crew Factory net sales decreased by 5.8% from $102.0 million in fiscal 1999 to
$96.1 million in fiscal 2000. The percentage of the Company's total net sales
derived from J. Crew Factory decreased to 12.2% in fiscal 2000 from 14.3% in
fiscal 1999. Comparable store sales for J. Crew Factory decreased by 2.9% in
fiscal 2000. J. Crew Factory closed one store in fiscal 2000 and 41 stores were
open at February 3, 2001.
Other revenues which consist of shipping and handling fees and royalties
increased from $36.6 million to $38.3 million, primarily as a result of an
increase in shipping and handling fees.
Cost of sales, including buying and occupancy costs
- ---------------------------------------------------
Cost of sales, including buying and occupancy costs as a percentage of revenues
decreased to 56.2% in fiscal 2000 from 57.4% in fiscal 1999. This decrease was
caused primarily by an increase in initial mark up due to a decrease in the cost
of merchandise and an improvement in inventory mix in our factory division.
Selling, general and administrative expenses
- --------------------------------------------
Selling, general and administrative expenses increased to $301.9 million in
fiscal 2000 (36.6% of revenues) from $279.3 million in fiscal 1999 (37.2% of
revenues).
General and administrative expenses of the J.Crew brand increased to $239.2
million in fiscal 2000 (29.0% of revenues) from $203.6 million in fiscal 1999
(27.1% of revenues). This increase resulted primarily from (a) an increase in
the expenses attributable to the increased number of retail stores in operation
during fiscal 2000 compared to fiscal 1999 and (b) an increase in bonus
provision in fiscal 2000 as a result of the increase in operating income.
Selling expenses were $62.7 million in fiscal 2000 (7.6% of revenues) compared
to $75.7 million in fiscal 1999 (10.1% of revenues). This decrease was due
primarily to $6.0 million of direct advertising related to the Internet that was
incurred in fiscal 1999, a decrease in pages circulated from 9.3 billion pages
in fiscal 1999 to 8.7 billion pages in fiscal year 2000 and catalog production
efficiencies.
Write-down of assets and other charges in connection with the discontinuance of
- -------------------------------------------------------------------------------
Clifford & Wills
- ----------------
An additional charge of $4.1 million was incurred in fiscal 2000 to write off
the remaining balance of the net assets of the Company's Clifford & Wills
catalog and factory outlet subsidiaries, primarily inventories.
Interest expense
- ----------------
Interest expense, net decreased to $ 36.6 million in fiscal 2000 from $38.9
million in fiscal 1999. This decrease resulted from lower average borrowings
during fiscal 2000 under the Revolving Credit Facility and the reduced term loan
balance offset by higher non-cash interest. Average borrowings under the
Revolving Credit Facility required to fund inventories and capital expenditures
were $9.8 million in fiscal 2000 compared to $30.8 million in fiscal 1999.
Interest expense included non-cash interest and amortization of deferred
financing costs of $16.4 million in fiscal 2000 compared to $14.2 million in
fiscal 1999.
14
Income Taxes
- ------------
The effective tax rate was a provision of 38.6% in fiscal 2000 compared to a
benefit of (23.6%) in fiscal 1999. The effective tax rate in 1999 was less than
the normal rate due primarily to the inability of certain subsidiaries to deduct
net operating losses for state tax purposes.
Liquidity and Capital Resources
The Company's sources of liquidity have been primarily cash flows from
operations and borrowings under the Revolving Credit Facility. The Company's
primary cash needs have been for capital expenditures incurred primarily for
opening new stores and system enhancements, debt service requirements and
working capital.
Cash provided by operating activities was $25.6 million in fiscal 2001 compared
to $70.3 million in fiscal 2000. The decrease in cash provided by operations
resulted from a decrease in earnings before interest, taxes and depreciation and
amortization of $30.1 million and a change in working capital items of $14.6
million.
Capital expenditures, net of construction allowances, were approximately $42.6
million in fiscal 2001. These expenditures consisted primarily of the opening of
34 new J. Crew retail stores and for systems enhancements, primarily the SAP
enterprise resource planning system.
Capital expenditures are expected to be approximately $25.0 million in fiscal
2002, primarily for the opening of at least 15 J. Crew retail stores. The
expected capital expenditures will be funded from internally generated cash
flows and by borrowings from available financing sources.
There were no borrowings under the Revolving Credit Facility at February 2, 2002
and February 3, 2001. Average borrowings under the Revolving Credit Facility
were $43.1 for fiscal 2001 and $9.8 million for fiscal 2000. There are no
scheduled principal payments of the Company's long term debt during the next
five years.
Effective October 15, 2002, the interest payments accruing on the 13 1/8% Senior
Discount Debentures will become payable in cash on April 15 and October 15 of
each year subsequent thereto. The annual cash payments will be approximately
$18.6 million.
Management believes that cash flow from operations and availability under the
Revolving Credit Facility will provide adequate funds for the Company's
foreseeable working capital needs, planned capital expenditures and debt service
obligations. The Company's ability to fund its operations and make planned
capital expenditures, to make scheduled debt payments, to refinance indebtedness
and to remain in compliance with all of the financial covenants under its debt
agreements depends on its future operating performance and cash flow, which in
turn, are subject to prevailing economic conditions and to financial, business
and other factors, some of which are beyond its control.
The following summarizes the Company's contractual and other commercial
obligations as of February 2, 2002 and the effect such obligations are expected
to have on its liquidity and cash flows in future periods.
Contractual Obligations Within 1 year 2 - 3 years 4 - 5 years after 5 years Total
- ----------------------- ------------- ----------- ----------- ------------- -----
($ in millions)
Long term debt $ -- $ -- $ -- $279.7 $279.7
Operating lease obligations 46.4 88.6 76.8 139.3 351.1
----- ----- ----- ------ ------
46.4 88.6 76.8 419.0 630.8
===== ===== ===== ====== ======
15
Other Commerical commitments Within 1 year 2 - 3 years 4 - 5 years after 5 years Total
- ---------------------------- ------------- ----------- ----------- ------------- -----
Letters of Credit ($ in millions)
Standby $ -- $ -- $ -- $ 1.8 $ 1.8
Import 44.5 -- -- -- 44.5
----- ----- ------ ------ ------
44.5 -- -- 1.8 46.3
===== ===== ====== ====== ======
Impact of Inflation
The Company's results of operations and financial condition are presented based
upon historical cost. While it is difficult to accurately measure the impact of
inflation due to the imprecise nature of the estimates required, the Company
believes that the effects of inflation, if any, on its results of operations and
financial condition have been minor. However, there can be no assurance that
during a period of significant inflation, the Company's results of operations
would not be adversely affected.
Seasonality
The Company's retail and direct businesses experience two distinct selling
seasons, spring and fall. The spring season is comprised of the first and second
quarters and the fall season is comprised of the third and fourth quarters. Net
sales are usually substantially higher in the fall season and selling, general
and administrative expenses as a percentage of net sales are usually higher in
the spring season. Approximately 35% of annual net sales in fiscal 2001 occurred
in the fourth quarter. The Company's working capital requirements also fluctuate
throughout the year, increasing substantially in September and October in
anticipation of the holiday season inventory requirements.
Recent Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Standards No. 141,
"Business Combinations" and Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets". SFAS 141 eliminates the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001 and modifies the application of the purchase accounting
method effective for transactions that are completed after June 30, 2001. SFAS
142 eliminates the requirement to amortize goodwill and intangible assets having
indefinite useful lives but requires testing at least annually for impairment.
Intangible assets that have finite lives will continue to be amortized over
their useful lives. SFAS 142 will apply to goodwill and intangible assets
arising from transactions completed before and after the Statement's effective
date of January 1, 2002. These statements had no effect on the Company's
financial statements in fiscal 2001 and are not anticipated to have any effect
in fiscal 2002.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets.
The Company also records a corresponding asset which is depreciated over the
life of the asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period to
reflect the passage of time and changes in the estimated future cash flows
underlying the obligation. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. Management does not believe that the adoption of SFAS No.
143 will have a significant impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and requires
companies to separately report discontinued operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. This Statement requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The adoption of
SFAS No. 144 will not have any impact on the Company's financial statements.
16
EITF Issue No. 00-14 "Accounting for Certain Sales Incentives" will be effective
in the first quarter of fiscal 2002. This EITF addresses the accounting for and
classification of various sales incentives. The adoption of the provisions of
this EITF will not have a material effect on the Company's financial statements
in fiscal 2002.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - J. CREW OPERATING CORP.
This discussion should be read in conjunction with the audited consolidated
financial statements of J. Crew Operating Corp. and subsidiaries for the
two-year period ended February 2, 2002 and notes thereto included elsewhere in
this Annual Report on Form 10-K.
Results of Operations
- ---------------------
Fiscal 2001 Compared to Fiscal 2000
Revenues
- --------
Revenues in the fiscal year ended February 2, 2002 decreased 5.8% to $778.0
million from $826.0 million in the fiscal year ended February 3, 2001. The
fiscal year ended February 2, 2002 consisted of 52 weeks compared to 53 weeks in
fiscal year 2000. Net sales for the fifty-third week were $10.8 million.
J. Crew Retail net sales decreased by 2.2% from $406.8 million in fiscal 2000 to
$398.0 million in fiscal 2001. The percentage of the Company's total net sales
derived from J. Crew Retail increased to 53.7% in fiscal year 2001 compared to
51.6% in fiscal 2000. The decrease in net sales was due to a decrease of 15.5%
in comparable store sales. This decrease offset a 30% increase in the number of
stores from 105 at February 3, 2001 to 136 at February 2, 2002.
J. Crew Direct net sales (which includes net sales from catalog and Internet
operations) decreased by 9.3% from $284.8 million in fiscal 2000 to $258.2
million in fiscal 2001. The percentage of the Company's total net sales derived
from J. Crew Direct decreased to 34.8% in fiscal 2001 from 36.2% in fiscal 2000.
Catalog net sales decreased to $135.3 million in fiscal 2001 from $177.5 million
in fiscal 2000 pages circulated decreased from 8.7 million in fiscal 2000 to 8.2
billion in fiscal 2001. Internet net sales increased to $122.9 million in fiscal
2001 from $107.3 million in fiscal 2000 as the Company continued to migrate
catalog customers to the Internet.
J.Crew Factory net sales decreased from $96.1 million in fiscal 2000 to $85.1
million in fiscal 2001. The percentage of the Company's total net sales derived
from J. Crew Factory decreased to 11.5% in fiscal 2001 from 12.2% in fiscal
2000. Comparable store sales for J. Crew Factory decreased by 10.5% in fiscal
2001. There were 41 J. Crew Factory stores at February 2, 2002 and February 3,
2001.
Other revenues which consist of shipping and handling fees and royalties
decreased to $36.7 million in fiscal 2001 from $38.3 million in fiscal 2000,
primarily as a result of a decrease in shipping and handling fees which is
attributable to the decrease in net sales of J.Crew Direct.
Cost of sales, including buying and occupancy costs
- ----------------------------------------------------
Cost of sales (including buying and occupancy costs) as a percentage of revenues
increased to 59.4% in fiscal 2001 from 56.2% in fiscal 2000. This increase was
caused by a significant increase in markdowns as a result of the highly
promotional retail environment and an increase in buying and occupancy costs
caused by a decrease in leverage related to the decline in comp store sales.
Selling, general and administrative expenses
- --------------------------------------------
Selling, general and administrative expenses decreased to $294.9 million in
fiscal 2001 (37.9% of revenues) from $301.2 million in fiscal 2000 (36.5% of
revenues).
17
General and administrative expenses of the J.Crew brand decreased to $234.1
million in fiscal 2001 (30.1% of revenues) from $238.5 million in fiscal 2000
(28.9% of revenues). This decrease resulted from a decrease in bonus provision
in fiscal 2001 and the cost cutting initiatives instituted in the first quarter
of 2001 which were offset by the additional retail stores in operation and a
$10.1 million increase in depreciation and amortization during fiscal 2001.
Selling expenses were $60.8 million in fiscal 2001 (7.8% of revenues) compared
to $62.7 million in fiscal 2000 (7.6% of revenues). This decrease was due
primarily to a decrease in pages circulated from 8.7 billion pages in fiscal
year 2000 to 8.2 billions pages in fiscal 2001.
Interest expense
- ----------------
Interest expense, net was $20.9 million in fiscal 2001 compared to $22.8 million
in fiscal 2000. The decrease resulted from the pay off of the term loan in
January 2001 and a decrease in interest rates offset by higher average
borrowings in fiscal 2001. Average borrowings under the Revolving Credit
Facility required to fund inventories and capital expenditures were $43.1
million in fiscal 2001 compared $9.8 million in fiscal 2000.
Income Taxes
- ------------
The effective tax rate was a benefit of 46.7% in fiscal 2001 compared to a
provision of 35.9% in fiscal 2000. The state tax provision in 2000 was reduced
by the utilization of net operating loss carryovers.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal market risk relates to interest rate sensitivity, which
is the risk that future changes in interest rates will reduce net income or the
net assets of the Company. The Company's variable rate debt consists of
borrowings under the Revolving Credit Facility. The interest rates are a
function of the bank prime rate or LIBOR. A one percentage point change in the
base interest rate would result in approximately $500,000 change in income
before income taxes.
The Company enters into letters of credit to facilitate the international
purchase of merchandise. The letters of credit are primarily denominated in U.S.
dollars. Outstanding letters of credit at February 2, 2002 were approximately
$46.3 million.
The Company has a licensing agreement in Japan which provides for royalty
payments based on sales of J. Crew merchandise as denominated in yen. The
Company has from time to time entered into forward foreign exchange contracts to
minimize this risk. There were no forward foreign exchange contracts outstanding
during fiscal year 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are set forth herein commencing on page F-1 of this
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
18
PART III
Information required by Items 10-14 with respect to Operating Corp. has been
omitted pursuant to General Instruction I of Form 10-K. Information required by
Items 10-14 with respect to Holdings is described below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of individuals who are
serving as directors of Holdings and executive officers of Holdings and
Operating Corp. Each Director of Holdings will hold office until the next annual
meeting of shareholders or until his or her successor has been elected and
qualified. Officers are elected by the respective Boards of Directors and serve
at the discretion of such Board.
Name Age Position
- ---- --- --------
Emily Woods............................ 40 Director, Chairman of the Board
Mark A. Sarvary........................ 42 Director, Chief Executive Officer
David Bonderman........................ 59 Director
Richard W. Boyce....................... 47 Director
Gregory D. Brenneman................... 40 Director
John W. Burden, III.................... 65 Director
Basha Cohen............................ 41 Senior Vice President, Womens Product Development
James G. Coulter....................... 42 Director
Donald Fleming......................... 54 Executive Vice President, Stores
Scott Formby........................... 40 Executive Vice President, Design
Blair Gordon........................... 39 Executive Vice President, Creative Director
Arlene S. Hong......................... 33 Senior Vice President, General Counsel and
Corporate Secretary
Scott D. Hyatt......................... 44 Senior Vice President, Manufacturing
Walter Killough........................ 47 Chief Operating Officer
David F. Kozel......................... 46 Executive Vice President, Human Resources
Nicholas Lamberti...................... 59 Vice President, Corporate Controller
Scott M. Rosen......................... 43 Executive Vice President, Chief Financial Officer
Michael J. Scandiffio.................. 53 Executive Vice President, Mens
David M. Schwarz....................... 51 Director
Thomas W. Scott........................ 36 Director
Carol Sharpe........................... 47 Executive Vice President, Womens
Brian T. Swette........................ 48 Director
Josh S. Weston......................... 73 Director
19
Emily Woods
Ms. Woods became Chairman of the Board of Directors of Holdings in
1997. Ms. Woods is also a director and Chairman of the Board of Operating Corp.
Ms. Woods co-founded the J. Crew brand in 1983. Ms. Woods has also served as
Chief Executive Officer and Vice-Chairman of Holdings and as Chief Executive
Officer of Operating Corp. She is also a director of Yankee Candle Company, Inc.
Mark A. Sarvary
Mr. Sarvary has been Chief Executive Officer of the Company and a
director of Holdings since May 1999. He was President/General Manager of the
Nestle Frozen Food Division of Nestle USA from 1996 to 1999.
David Bonderman
Mr. Bonderman became a director of Holdings in 1997. Mr. Bonderman is a
founding partner of Texas Pacific Group and has been Managing General Partner of
TPG since 1992. Mr. Bonderman serves on the Boards of Directors of Proquest
Company, Continental Airlines, Inc., Co-Star Group, Inc., Denbury Resources
Inc., Ducati Motor Holdings S.p.A., Magellan Health Services, Inc., Oxford
Health Plans, Inc., Paradyne Networks, Inc., RyanAir Holdings PLC., ON
Semiconductor Corporation, Washington Mutual, Inc., Agenesys, Inc. and Seagate
Technology, Inc.
Richard W. Boyce
Mr. Boyce became a director of Holdings in 1997 and served as Chief
Executive Officer of the Company during portions of 1997 and 1999 while also
providing operating oversight to the remainder of the TPG portfolio. Mr. Boyce
is the senior operating partner of Texas Pacific Group. Prior to joining Texas
Pacific Group in 1997, Mr. Boyce was employed by PepsiCo from 1992 to 1997, most
recently as Senior Vice President of Operations for Pepsi-Cola, North America.
He was Chairman of Favorite Brands International Holding Corp., which filed for
protection under Chapter 11 of the Bankruptcy Code in 1999. He also serves on
the Boards of Directors of Del Monte Foods Corp., MEMC Electronic Materials,
Inc., Punch Group Ltd., and ON Semiconductor Corporation.
Gregory D. Brenneman
Mr. Brenneman became a director of Holdings in 1998. Mr. Brenneman has
been Chairman and Chief Executive Officer of Turnworks, Inc. (private equity
firm) since 1994. He was President and Chief Operating Officer of Continental
Airlines, Inc. from 1995 to 2001. He also serves as director of Automatic Data
Processing and Home Depot, Inc.
John W. Burden, III
Mr. Burden became a director of Holdings in 1998. Mr. Burden has been
a retail consultant for more than five years. He also serves as a director of
Saks Incorporated and Chicos Fas Inc.
Basha Cohen
Ms. Cohen has been Senior Vice President, Womens Product Development of
the Company since 2000. Prior thereto, she was Senior Vice President, General
Merchandising Manager, Womens Mail Order and Retail since 1999 and Senior Vice
President, General Merchandising Manager, Womens Mail Order from 1998 to 1999.
Prior to joining the Company, Ms. Cohen was Senior Vice President, Design and
Buying of Laura Ashley PLC (retail apparel company) for three years.
James G. Coulter
Mr. Coulter became a director of Holdings in 1997. Mr. Coulter is a
founding partner of Texas Pacific Group and has been Managing General Partner of
TPG for more than eight years. Mr. Coulter serves on the Boards of Directors of
Genesis Health Ventures, Inc., Globespan, Inc., Seagate Technology, Inc., MEMC
Electronic Materials, Inc., Evolution Global Partners and Zhone Technologies.
Donald Fleming
Mr. Fleming has been Executive Vice President, Stores of the Company
since May 2001 and prior thereto he was Senior Vice President, Factory since
1999. Before joining the Company, he was Northeast Regional Director of
Victoria's Secret (retail apparel company) since 1996.
20
Scott Formby
Mr. Formby has been Executive Vice President, Design of the Company
since 1999. His employment with the Company terminated on April 18, 2002.
Prior thereto, he was Vice President, Design for more than five years.
Blair Gordon
Mr. Gordon has been Executive Vice President, Creative Director of the
Company since January 2002. Prior thereto, he was Executive Vice President,
Specialty Retail of Nautica Enterprises, Inc. (retail apparel company) since
2000 and Vice President, Creative Services of Polo Ralph Lauren Corporation
(retail apparel company) from 1997 to 2000.
Arlene S. Hong
Ms. Hong has been Senior Vice President, General Counsel and Corporate
Secretary of the Company since February 2002 and Vice President and Associate
General Counsel since 2000. Prior to joining the Company, she practiced law at
the New York offices of the international law firm of Proskauer Rose LLP for
more than three years.
Scott D. Hyatt
Mr. Hyatt has been Senior Vice President, Manufacturing of the Company
since 1998. Prior thereto, he was with Express, a division of the Limited, Inc.
(retail apparel company), as Vice President, Production and Sourcing from 1996
to 1998
Walter Killough
Mr. Killough has been Chief Operating Officer of the Company since
1999. He was Senior Vice President, General Manager, Mail Order from 1997 to
1999 and prior thereto, he was Senior Vice President of Clifford & Wills, a
subsidiary of the Company, for more than five years.
David F. Kozel
Mr. Kozel has been Executive Vice-President, Human Resources of the
Company since February 2002 and Senior Vice President, Human Resources since
1999. Prior thereto, he was with Grey Advertising Inc. (advertising services
company) as Vice President, Human Resources since 1998, and Vice President,
Human Resources of Deluxe Corporation (check printing and electronic payment
processing services company) from 1997 to 1998.
Nicholas Lamberti
Mr. Lamberti has been Vice President - Corporate Controller of the
Company for more than five years.
Scott M. Rosen
Mr. Rosen has been Executive Vice President and Chief Financial Officer
of the Company since 1999, Senior Vice President and Chief Financial Officer
from 1998 until then and Chief Financial Officer of the Mail Order division of
the Company for four years prior thereto.
Michael J. Scandiffio
Mr. Scandiffio has been Executive Vice President, Mens since June 2001.
Prior thereto, he was Executive Vice President, Merchandising and Design of
Pacific Sunwear of California, Inc. (retail apparel company) since 1999 and
President of the retail division of Brooks Brothers (retail apparel company)
from 1997 to 1999.
David M. Schwarz
Mr. Schwarz became a director of Holdings in October 2001. Mr. Schwarz
has been President and Chief Executive Officer of David M. Schwarz /
Architectural Services, Inc. (architectural services firm) for more than five
years.
Thomas W. Scott
Mr. Scott became a director of Holdings in January 2002. Mr. Scott is
a founding partner of Nantucket Allserve Inc. (beverage supplier) and has been
Co-Chairman since 1989 and Co-Chairman and Co-Chief Executive Officer from 1989
to 2000. Mr. Scott has also been Co-Chairman of Shelflink (supply chain software
company) since 2000.
21
Ms. Sharpe has been Executive Vice President, Womens of the Company since
June 2001 and prior thereto was in the positions of Executive Vice President -
Merchandising - Brand, Senior Vice President, General Merchandising Manager,
Retail and Senior Vice President and General Merchandising Manager-Women's since
1998. She was Vice President, Women's for more than 5 years prior to 1998.
Brian T. Swette
Mr. Swette became a director of Holdings in 1998. He has been
Vice-President of Corporate Development of eBay Inc. (person-to-person trading
community on the Internet), since 2001 and prior thereto he was Chief Operating
Officer since 1999 and Senior Vice President of Marketing and International from
1998 to 1999. Prior to joining eBay, he was Executive Vice President and Chief
Marketing Officer-Global Beverages of Pepsi-Cola Beverages from 1996 and
Executive Vice President Marketing-North America of Pepsi-Cola Beverages from
1994 to 1996. He is also a director of eBay.
Josh S. Weston
Mr. Weston became a director of Holdings in 1998. He has been Honorary
Chairman of the Board of Directors of Automatic Data Processing (computing
services business) since 1998. He was Chairman of the Board of Automatic Data
Processing from 1996 until 1998 and Chairman and Chief Executive Officer for
more than five years prior thereto. Mr. Weston is also a director of Gentiva
Health Services, Inc., Aegis Communications Group, Inc., and Russ Berrie &
Company, Inc.
22
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid by the Company for fiscal years
2001, 2000, and 1999 to each individual serving as its chief executive officer
during fiscal 2001 and to each of the four other most highly compensated
executive officers of the Company as of the end of fiscal 2001.
Long-Term Compensation
Annual Compensation Awards Payouts
------------------------------------------------------------------------
Securities
Name Other Annual Restricted Underlying LTIP All Other
And Fiscal Salary Bonus Compensation Stock Options/ Payouts Compensation
Principal Position Year ($) ($) ($) Award(s)($)(1) SARS (#)(1) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
Emily Woods 2001 $1,000,000 -- $ -- -- -- -- $ 5,250(4)
Chairman (2) 2000 1,000,000 1,000,000 -- -- -- -- 5,250(4)
1999 1,000,000 1,000,000 -- -- -- -- 5,000(4)
Mark Sarvary 2001 675,000 -- -- -- -- -- 5,250(4)
Chief Executive Officer 5,250(4)
2000 675,000 502,500 -- -- -- -- 60,000(5)
1999 425,000 335,000 1,000,000(3) -- 272,000 -- 135,000(5)
Basha Cohen 2001 400,000 -- -- -- -- -- 5,250(4)
Senior Vice President,
Womens Product Development 2000 400,000 210,000 -- -- -- -- 5,250(4)
1999 400,000 100,000 -- -- -- -- --
Scott Formby
Executive Vice President, 2001 450,000 -- -- -- -- -- 4,558(4)
Design (6)
2000 450,000 337,500 -- -- 10,000 -- 4,558(4)
1999 422,000 106,800 -- -- 8,800 -- 5,000(4)
Carol Sharpe
Executive Vice President, 2001 400,000 -- -- -- -- -- 5,250(4)
Women's 2000 400,000 360,000 -- -- -- -- 5,250(4)
1999 362,500 240,000 360,000(3) -- 12,000 -- 5,000(4)
____________
(1) There is no established public market for shares of Holdings Common Stock.
Holders of restricted stock have the same right to receive dividends as
other holders of Holdings Common Stock. Holdings has not paid any cash
dividends on its Common Stock.
(2) Ms. Woods was granted 661,600 shares of Holdings Common Stock ("Woods
Restricted Shares"), on October 17, 1997 of which 78,600 shares vested
immediately upon grant, 194,400 shares vested on each of October 17, 2000
and 2001 and 194,200 shares will vest on October 17, 2002.
(3) This amount is a signing bonus.
(4) Represents Company matching contributions to 401(k) plan.
(5) Relocation.
(6) Mr. Formby's employment with the Company terminated on April 18, 2002.
23
The following Table shows information concerning stock options to purchase
shares of Holdings Common Stock granted to any of the named executive officers
during fiscal year 2001.
Option Grants In Fiscal Year 2001
Assumed Annual Rates Of
Stock Price Appreciation For
Individual Grants Option Term
- -------------------------------------------------------------------------------------------------------------------------
Number of Percent Of
Securities Total Options
Underlying Granted To
Options Employees In Exercise Expiration
Name Granted(#) (1) Fiscal Year Price($/Sh) Date 5%($) 10% ($)
- -------------------------------------------------------------------------------------------------------------------------
None
___________
(1) The Company has not granted any SARs.
The following Table shows the number of stock options held to purchase
shares of Holdings Common Stock by the named executive officers at the end of
fiscal year 2001. The named executive officers did not exercise any stock
options in fiscal year 2001.
Aggregated Option Exercises in Fiscal Year 2001 and Fiscal Year-End Option Values
Number Of Securities
Underlying Unexercised
Options At Fiscal Year End (1)
(#)
Name Exercisable/Unexercisable
- ---- -------------------------
Basha Cohen................................................................. 20,000/ 5,000
Scott Formby (2)............................................................ 34,240/ 15,760
Mark Sarvary ............................................................... 108,800/163,200
Carol Sharpe ............................................................... 24,800/ 12,200
Emily Woods ................................................................ 131,200/361,000
__________
(1) There is no established public market for shares of Holdings Common Stock.
(2) Mr. Formby's employment with the Company terminated on April 18, 2002.
24
Employment Agreements and Other Compensation Arrangements
Ms. Woods has an employment agreement with Holdings and Operating Corp. (the
"Employers") which provides that, for a period of five years beginning on
October 17, 1997, she will serve as Chairman of the Board of Directors of
Holdings. The employment agreement provides for a minimum annual base salary of
$1.0 million, and an annual target bonus of up to $1.0 million based on
achievement of earnings objectives to be determined each year. The employment
agreement also provided for the grant of 661,600 shares of Holdings Common Stock
(the "Woods Restricted Shares") and the reimbursement of income taxes incurred
by Ms. Woods in connection with such grant. (See footnote 2 to the Executive
Compensation Table for information on the vesting of the Woods Restricted
Shares). Ms. Woods is also entitled to various executive benefits and
perquisites under the employment agreement.
Under the terms of stock options awarded to Ms. Woods under the Company's Stock
Option Plan, 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, or (ii) in the event of a change in control
of Holdings. Because of a change in Ms. Woods' duties and responsibilities, upon
the termination of Ms. Woods' employment, she will be entitled to severance
benefits and other benefits as described in the February 4, 2000 amendment to
her employment agreement.
Mr. Sarvary has an employment agreement with Operating Corp., which provides
that, for a period of five years commencing on May 10, 1999, he will serve as
Chief Executive Officer of Operating Corp. The Employers also agreed to cause
Mr. Sarvary to be elected to the Board of Directors of Holdings. The employment
agreement provides for a minimum annual base salary of $670,000 and an annual
target bonus of 50% of his annual base salary based on achievement of earnings
objectives to be determined each year. The employment agreement also provides
for the payment of a signing bonus of $1,000,000 and the grant of options to
purchase 272,000 shares of Holdings Common Stock as well as the grant of
additional stock options to purchase 68,000 shares on the earlier of the date of
an initial public offering of Holdings Common Stock or May 10, 2004. Mr. Sarvary
is also entitled to various executive benefits and perquisites under the
employment agreement.
In the event of a change in Mr. Sarvary's duties and responsibilities, upon the
termination of Mr. Sarvary's employment, he will be entitled to receive
severance and other benefits described in the January 15, 2002 amendment to his
employment agreement. These include the payment of an amount equal to two times
his base salary and the continuation of medical and life insurance benefits for
a period of time after the termination date. In addition, the portion of his
stock options that are vested as of the termination of his employment will
remain exercisable for three years.
Ms. Cohen has a letter agreement with Operating Corp. which provides that, in
the event of her termination by Operating Corp. without Cause (as that term is
defined in the letter agreement), she will receive a continuation of her base
salary and medical benefits for a period of one year after the termination date
and the payment of any bonus that she would otherwise have received for the
fiscal year ending before the termination date.
Mr. Formby has a letter agreement with Operating Corp. which provides that, in
the event of the termination of his employment with Operating Corp. without
Cause (as that term is defined in the letter agreement), he will receive a
continuation of his base salary and medical benefits for a period of one year
after the termination date. Mr. Formby's employment with the Company terminated
on April 18, 2002 as a result of which he is entitled to receive the
aforementioned benefits.
25
Ms. Sharpe has an employment agreement with Operating Corp. which provides that,
for a period of five years commencing on April 30, 1999, she will serve as
Executive Vice President-Merchandising of Operating Corp. The employment
agreement provides for a minimum annual base salary of $400,000 and an annual
target bonus of 60% of her annual base salary based on achievement of earnings
objectives to be determined for each year. The employment agreement also
provides for a signing bonus of $360,000 and the grant of options to purchase
12,000 shares of Holdings Common Stock. The employment agreement provides for
continuation of salary for a period of one year if Ms. Sharpe's employment is
terminated without Cause (as defined in the Agreement). Ms. Sharpe's employment
agreement also provides that if, on April 30, 2003, the aggregate spread between
the fair market value per share and the exercise price per share of her options
to purchase 34,600 shares of Holdings Common Stock does not equal or exceed
$1,124,500, then Operating Corp. will pay her a cash payment equal to any such
shortfall, subject to adjustment in the event she has disposed of any of the
shares underlying such options.
The Woods Restricted Shares and any shares of Holdings Common Stock acquired by
Ms. Woods, Mr. Sarvary, Mr. Formby, Ms. Sharpe and Ms. Cohen pursuant to the
exercise of options are subject to a shareholders' agreement providing for
certain transfer restrictions, registration rights and customary tag-along and
drag-along rights.
Compensation Committee Interlocks and Insider Participation
Ms. Woods, Chairman, and Mr. Boyce, a director and former Chief Executive
Officer of the Company, are members of the Compensation Committee of Holdings.
Compensation of Directors
An attendance fee of $10,000 for each Board of Directors meeting (up to a
maximum of $40,000 per year) is paid to each Director who is neither an employee
of the Company nor a representative of TPG. Directors have the option to receive
all or a portion of that fee paid in cash or in shares of Holdings Common Stock
at a per share purchase price equal to the fair market value thereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of
the Common Stock of Holdings as of March 15, 2002 for each person who is known
to Holdings to be the beneficial owner of 5% or more of Holdings Common Stock.
The holders listed have sole voting power and investment power over the shares
held by them, except as indicated by the notes following the table.
Name and Address Amount and Nature of Percent of
Title of Class of Beneficial Owner Beneficial Ownership Class
- ----------------------------------------------------------------------------------------------------------------------
Common Stock TPG Partners II, L.P. 7,313,797.6 shares (1) 59%
301 Commerce Street, Suite 3300
Fort Worth, TX 76102
Common Stock Emily Woods 2,396,376.6 shares (2) 19%
J. Crew Group, Inc.
770 Broadway
New York, NY 10003
___________
(1) These shares of Common Stock are held by TPG and the following affiliates
of TPG (collectively, "TPG Affiliates"): TPG Parallel II L.P., TPG
Partners II L.P. and TPG Investors II, L.P.
(2) Includes (a) 131,200 shares not currently owned but which are issuable
upon the exercise of stock options awarded under the Company's Stock
Option Plan that are currently exercisable, and (b) 194,200 shares of
Common Stock that have not vested and are held in custody by the Company
until vesting thereof.
26
The following table sets forth information regarding the beneficial
ownership of each class of equity securities of Holdings as of March 15, 2002
for (i) each director, (ii) each of the executive officers identified in the
table set forth under Item 11. "Executive Compensation", and (iii) all directors
and executive officers as a group. The holders listed have sole voting power and
investment power over the shares held by them, except as indicated by the notes
following the table.
Number of Shares
and Nature of Percent of
Title of Class Name of Beneficial Owner Beneficial Ownership Class
- ----------------------------------------------------------------------------------------------------------------------
Common Stock David Bonderman 7,313,797.6(1) 59%
Common Stock Richard W. Boyce 55,200(2) *
Common Stock Gregory D. Brenneman 13,000 *
Common Stock John W. Burden, III 4,466.276 *
Common Stock Basha Cohen 20,000(2)
Common Stock James G. Coulter 7,313,797.6(1) 59%
Common Stock Scott Formby 34,240(2)(4) *
Common Stock Mark A. Sarvary 163,200(2) *
Common Stock David M. Schwarz 1,232 *
Common Stock Thomas W. Scott 0 *
Common Stock Carol Sharpe 27,200(2) *
Common Stock Brian T. Swette 20,012.276 *
Common Stock Josh S. Weston 19,612.276 *
Common Stock Emily Woods 2,396,376.6(3) 19%
Common Stock All Directors and executive 10,156,617(1)(2)(3) 81%
officers as a group
Series A Preferred Stock David Bonderman 73,474.58(1) 79%
Series A Preferred Stock Gregory D. Brenneman 60 *
Series A Preferred Stock James G. Coulter 73,474.58(1) 79%
Series A Preferred Stock Brian T. Swette 60 *
Series A Preferred Stock Josh S. Weston 60 *
Series A Preferred Stock Emily Woods 2,978.505 3%
Series A Preferred Stock All Directors and executive 76,633.085 83%
officers as a group
__________
*Represents less than 1% of the class.
(1) Attributes ownership of the shares owned by TPG Affiliates to Messrs.
Bonderman and Coulter, who are partners of TPG. Each of Messrs. Bonderman
and Coulter disclaim beneficial ownership of the shares owned by TPG
Affiliates.
(2) These are shares not currently owned but which are issuable upon the
exercise of stock options awarded under the Company's Stock Option Plan
that are currently exercisable or become exercisable within 60 days.
(3) Includes (a) 131,200 shares not currently owned but which are issuable upon
the exercise of stock options awarded under the Company's Stock Option Plan
that are currently exercisable, and (b) 194,200 shares of Common Stock that
have not vested and are held in custody by the Company until vesting
thereof.
(4) Mr. Formby's employment with the Company terminated on April 18, 2002.
27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with Mr. Sarvary's relocation to the Company's headquarters,
the Company loaned Mr. Sarvary $1.0 million on an interest-free basis to
purchase a residence. The largest amount outstanding in fiscal year 2001 was
$950,000. The loan is secured by a mortgage on that residence and $850,000 is
still outstanding.
Holdings and its subsidiaries entered into a tax sharing agreement
providing (among other things) that each of the subsidiaries will reimburse
Holdings for its share of income taxes determined as if such subsidiary had
filed its tax returns separately from Holdings.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
J. Crew Group, Inc.
- -------------------
(a) 1. Financial Statements
The following financial statements of J. Crew Group, Inc. and
subsidiaries are included in Item 8:
(i) Report of KPMG LLP, Independent Auditors
(ii) Consolidated Balance Sheets as of February 2, 2002 and
February 3, 2001
(iii) Consolidated Statements of Operations - Years ended
February 2, 2002, February 3, 2001 and January 29, 2000
(iv) Consolidated Statements of changes in Stockholders'
Deficit -Years ended February 2, 2002, February 3, 2001
and January 29, 2000
(v) Consolidated Statements of Cash Flows - Years ended
February 2, 2002, February 3, 2001 and January 29, 2000
(vi) Notes to consolidated financial statements
2. Financial Statements Schedules
Schedule II Valuation and Qualifying Accounts
3. Exhibits
The exhibits listed on the accompanying Exhibit Index are
incorporated by reference herein and filed as part of this
report.
(b) Reports on Form 8-K
J. Crew Group, Inc., has not filed any reports on Form 8-K during the
fiscal quarter ended February 2, 2002.
(c) Exhibits
See Item 14(a)3 above
(d) Financial Statement Schedules
See Item 14(a)1 and 14(a)2 above
29
J. Crew Operating Corp.
- ----------------------
(a) 1. Financial Statements
The following financial statements of J. Crew Operating Corp. and
subsidiaries are included in Item 8:
(i) Report of KPMG LLP, Independent Auditors
(ii) Consolidated Balance Sheets - as of February 2, 2002 and
February 3, 2001
(iii) Consolidated Statements of Operations - Years ended
February 2, 2002, February 3, 2001and January 31, 2000
(iv) Consolidated Statements of Cash Flows - Years ended
February 2, 2002, February 3, 2001 and January 29, 2000
(v) Notes to consolidated financial statements
2. Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts
3. Exhibits
The exhibits listed in the accompanying Exhibit Index are
incorporated by reference herein and filed as part of this
report.
(b) Reports on Form 8-K
J. Crew Operating Corp., has not filed any reports on Form 8-K during
the fiscal quarter ended February 2, 2002.
(c) Exhibits
See Item 14(a)3 above
(d) Financial Statement Schedules
See Item 14(a) 1 and 14(a) 2 above
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
J. CREW GROUP, INC.
Date: April 17, 2002 J. CREW OPERATING CORP.
By: /s/ Mark A. Sarvary
-------------------
Mark A. Sarvary
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of each
registrant and in the capacities indicated, on April 17, 2002.
Signature Title
--------- ------
/s/ Emily Woods Director; Chairman of the Board
---------------------------
Emily Woods
/s/ Mark A. Sarvary Director; Chief Executive Officer
--------------------------- (Principal Executive Officer)
Mark A. Sarvary
/s/ Scott M. Rosen Executive Vice President, Chief Financial
--------------------------- Officer (Principal Financial Officer)
Scott M. Rosen
/s/ Nicholas Lamberti Vice President, Corporate Controller
--------------------------- (Principal Accounting Officer)
Nicholas Lamberti
/s/ David Bonderman Director
---------------------------
David Bonderman
/s/ Richard W. Boyce Director
---------------------------
Richard W. Boyce
/s/ Gregory D. Brenneman Director
---------------------------
Gregory D. Brenneman
/s/ John W. Burden, III Director
---------------------------
John W. Burden, III
/s/ James G. Coulter Director
---------------------------
James G. Coulter
/s/ David M. Schwarz Director
---------------------------
David M. Schwarz
/s/ Thomas W. Scott Director
---------------------------
Thomas W. Scott
/s/ Brian T. Swette Director
---------------------------
Brian T. Swette
/s/ Josh S. Weston Director
---------------------------
Josh S. Weston
S-1
Independent Auditors' Report
The Board of Directors and Stockholders
J. Crew Group, Inc. and Subsidiaries:
We have audited the consolidated financial statements of J. Crew Group, Inc. and
subsidiaries (the "Company") as listed in the accompanying Index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of J. Crew Group, Inc.
and subsidiaries as of February 2, 2002 and February 3, 2001 and the results of
their operations and their cash flows for each of the years in the three-year
period ended February 2, 2002, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects the information set forth therein.
KPMG LLP
March 25, 2002, except as to note 6,
which is as of April 17, 2002
New York, NY
F-1
J. CREW GROUP, INC. AND
SUBSIDIARIES
Consolidated Balance Sheets
February 2, February 3,
Assets 2002 2001
------ ---- ----
(in thousands)
Current assets:
Cash and cash equivalents $ 16,201 $ 32,930
Merchandise inventories 138,918 140,667
Prepaid expenses and other current assets 27,026 23,740
--------- ---------
Total current assets $ 182,145 $ 197,337
--------- ---------
Property and equipment - at cost:
Land 1,610 1,460
Buildings and improvements 11,700 11,432
Furniture, fixtures and equipment 105,292 70,541
Leasehold improvements 170,195 144,906
Construction in progress 4,903 22,983
--------- ---------
293,700 251,322
Less accumulated depreciation and amortization 106,427 85,746
--------- ---------
187,273 165,576
--------- ---------
Deferred income tax assets 18,071 14,362
Other assets 13,831 12,586
--------- ---------
Total assets $ 401,320 $ 389,861
========= =========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 66,703 $ 49,705
Other current liabilities 61,788 75,168
Income taxes payable 8,840 17,581
Deferred income tax liabilities 5,650 5,401
--------- ---------
Total current liabilities 142,981 147,855
--------- ---------
Deferred credits and other long-term liabilities 67,235 56,043
--------- ---------
Long-term debt 279,687 264,292
--------- ---------
Redeemable preferred stock 230,460 200,018
--------- ---------
Stockholders' deficit (319,043) (278,347)
--------- ---------
Total liabilities and stockholders' deficit $ 401,320 $ 389,861
========= =========
See accompanying notes to consolidated financial statements.
F-2
J. CREW GROUP, INC. AND
SUBSIDIARIES
Consolidated Statements of Operations
Years ended
-----------
February 2, February 3, January 29,
----------- ---------- -----------
2002 2001 2000
---- ---- ----
(in thousands)
Revenues:
Net sales $ 741,280 $ 787,658 $ 714,119
Other 36,660 38,317 36,577
--------- --------- ---------
777,940 825,975 750,696
Operating costs and expenses:
Cost of goods sold, including buying and occupancy costs 462,371 463,909 431,193
Selling, general and administrative expenses 295,568 301,865 279,302
Write off of software development costs -- -- 7,018
Write down of assets and other charges in connection with
discontinuance of Clifford & Wills -- 4,130 4,000
--------- --------- ---------
757,939 769,904 721,513
--------- --------- ---------
Income from operations 20,001 56,071 29,183
Interest expense - net (36,512) (36,642) (38,861)
Gain on sale of Popular Club Plan -- -- 1,000
--------- --------- ---------
Income/(loss) before income taxes (16,511) 19,429 (8,678)
(Provision) benefit for income taxes 5,500 (7,500) 2,050
--------- --------- ---------
Net income/(loss) $ (11,011) $ 11,929 $ (6,628)
========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
J. CREW GROUP, INC. AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended
-----------
February 2, February 3, January 29,
----------- ----------- -----------
2002 2001 2000
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income/(loss) $(11,011) $ 11,929 $ (6,628)
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization 31,718 22,600 19,241
Write off of software development costs -- -- 7,018
Amortization of deferred financing costs 1,997 2,793 2,196
Non-cash interest expense 15,395 13,608 11,989
Deferred income taxes (3,460) 27 (6,840)
Non-cash compensation expense 1,574 649 636
Gain on sale of subsidiary -- -- (1,000)
Write down of assets and other charges in connection
with discontinued catalog -- 4,130 4,000
Changes in operating assets and liabilities:
Merchandise inventories 1,749 (10,739) 26,094
Net assets held for disposal -- 4,797 4,450
Prepaid expenses and other current assets (3,286) 6,343 16,646
Other assets (3,416) (2,788) (777)
Accounts payable 16,998 8,754 821
Other liabilities (13,767) 5,263 12,892
Income taxes payable (8,741) 2,894 3,407
-------- -------- --------
Net cash provided by operating activities 25,750 70,260 94,145
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (61,862) (55,694) (48,684)
Proceeds from construction allowances 19,287 13,519 7,431
-------- -------- --------
Net cash used in investing activities (42,575) (42,175) (41,253)
-------- -------- --------
Cash flows from financing activities:
Decrease in notes payable, bank -- -- (14,000)
Repayment of long-term debt -- (34,000) (10,000)
Proceeds from the issuance of common stock 96 178 158
Repurchase of common stock -- (26) --
-------- -------- --------
Net cash provided by/(used in) financing activities 96 (33,848) (23,842)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (16,729) (5,763) 29,050
Cash and cash equivalents at beginning of year 32,930 38,693 9,643
-------- -------- --------
Cash and cash equivalents at end of year $ 16,201 $ 32,930 $ 38,693
======== ======== ========
Supplementary cash flow information:
Income taxes paid (refunded) $ 6,442 $ 4,279 $ (7,570)
======== ======== ========
Interest paid $ 19,389 $ 20,513 $ 24,792
======== ======== ========
Noncash financing activities:
Dividends on redeemable preferred stock $ 30,442 $ 26,484 $ 22,986
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
J. CREW GROUP, INC. AND
SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Deficit
(in thousands, except shares)
Common stock Additional Retained Deferred Stock-
------------ paid-in earnings Treasury compen- holders'
Shares Amount capital (Deficit) stock sation deficit
------ ------ ------- --------- ----- ------ -------
Balance at January 30, 1999 12,196,600 $ 1 $ 70,379 $ (301,564) $ (2,325) $ (2,264) $ (235,773)
Net loss -- -- -- (6,628) -- -- (6,628)
Preferred stock dividends -- -- -- (22,986) -- -- (22,986)
Issuance of common stock 17,665 -- 158 -- -- -- 158
Amortization of restricted stock -- -- -- -- -- 636 636
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at January 29, 2000 12,214,265 $ 1 $ 70,537 $ (331,178) $ (2,325) $ (1,628) $ (264,593)
========== ========== ========== ========== ========== ========== ==========
Net loss -- -- -- 11,929 -- -- 11,929
Preferred stock dividends -- -- -- (26,484) -- -- (26,484)
Issuance of common stock 18,400 -- 178 -- -- -- 178
Amortization of restricted stock -- -- -- -- -- 649 649
Repurchase of common stock -- -- -- -- (26) -- (26)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at February 3, 2001 12,232,665 $ 1 $ 70,715 $ (345,733) $ (2,351) $ (979) $ (278,347)
========== ========== ========== ========== ========== ========== ==========
Net loss -- -- -- (11,011) -- -- (11,011)
Preferred stock dividends -- -- -- (30,442) -- -- (30,442)
Issuance of common stock 5,524 -- 96 -- -- -- 96
Amortization of restricted stock -- -- -- -- -- 661 661
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at February 2, 2002 12,238,189 $ 1 $ 70,811 $ (387,186) $ (2,351) $ (318) $ (319,043)
========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(1) Nature Of Business And Summary Of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of J. Crew Group, Inc. ("Holdings") and its wholly-owned subsidiaries
(collectively, the "Company"). All significant intercompany balances
and transactions have been eliminated in consolidation.
(b) Business
The Company designs, contracts for the manufacture of, markets and
distributes men's and women's apparel and accessories. The Company's
products are marketed, primarily in the United States, through retail
stores, catalogs, and the Internet. The Company is also party to a
licensing agreement which grants the licensee exclusive rights to use
the Company's trademarks in connection with the manufacture and sale of
products in Japan. The license agreement provides for payments based on
a specified percentage of net sales.
The Company is subject to seasonal fluctuations in its merchandise
sales and results of operations. The Company expects its sales and
operating results generally to be lower in the first and second
quarters than in the third and fourth quarters (which include the
back-to-school and holiday seasons) of each fiscal year.
A significant amount of the Company's products are produced in the Far
East through arrangements with independent contractors. As a result,
the Company's operations could be adversely affected by political
instability resulting in the disruption of trade from the countries in
which these contractors are located or by the imposition of additional
duties or regulations relating to imports or by the contractor's
inability to meet the Company's production requirements.
(c) Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31.
The fiscal years 2001, 2000, and 1999 ended on February 2, 2002 (52
weeks), February 3, 2001 (53 weeks) and January 29, 2000 (52 weeks).
(d) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments, with maturities of 90
days or less when purchased, to be cash equivalents. Cash equivalents,
which were $7,895,000 and $18,331,000 at February 2, 2002 and February
3, 2001, are stated at cost, which approximates market value.
F-6
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(e) Merchandise Inventories
Merchandise inventories are stated at the lower of cost (determined on
a first-in, first-out basis) or market. The Company capitalizes certain
design, purchasing and warehousing costs in inventory.
(f) Advertising and Catalog Costs
Direct response advertising which consists primarily of catalog
production and mailing costs, are capitalized and amortized over the
expected future revenue stream. The Company accounts for catalog costs
in accordance with the AICPA Statement of Position ("SOP") 93-7,
"Reporting on Advertising Costs." SOP 93-7 requires that the
amortization of capitalized advertising costs be the amount computed
using the ratio that current period revenues for the catalog cost pool
bear to the total of current and estimated future period revenues for
that catalog cost pool. Deferred catalog costs, included in prepaid
expenses and other current assets, as of February 2, 2002 and February
3, 2001 were $7,959,000 and $10,600,000. Catalog costs, which are
reflected in selling and administrative expenses, for the fiscal years
2001, 2000, and 1999 were $65,477,000, $69,000,000, and $84,077,000.
All other advertising costs are expensed as incurred. Advertising
expenses were $6,671,000 for fiscal year 1999. Advertising costs were
not significant in all other years.
(g) Property and Equipment
Property and equipment are stated at cost. Buildings and improvements
are depreciated by the straight-line method over the estimated useful
lives of twenty years. Furniture, fixtures and equipment are
depreciated by the straight-line method over the estimated useful
lives, ranging from three to ten years. Leasehold improvements are
amortized over the shorter of their useful lives or related lease
terms.
Significant systems development costs are capitalized and amortized on
a straight-line basis over periods ranging from three to five years.
Approximately $8.5 million and $15.0 million of system development
costs were capitalized in fiscal years 2001 and 2000.
The Company receives construction allowances upon entering into certain
store leases. These construction allowances are recorded as deferred
credits and are amortized over the term of the related lease.
(h) Debt Issuance Costs
Debt issuance costs (included in other assets) of $6,906,000 and
$8,703,000 at February 2, 2002 and February 3, 2001 are amortized over
the term of the related debt agreements.
(i) Income Taxes
The provision for income taxes includes taxes currently payable and
deferred taxes resulting from the tax effects of temporary differences
between the financial statement and tax bases of assets and
liabilities, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes."
F-7
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(j) Revenue Recognition
Revenue is recognized for catalog and internet sales when merchandise
is shipped to customers and at the time of sale for retail sales. The
Company accrues a sales return allowance for estimated returns of
merchandise subsequent to the balance sheet date that relate to sales
prior to the balance sheet date. Amounts billed to customers for
shipping and handling fees related to catalog and internet sales are
included in other revenues at the time of shipment. Expenses associated
with shipping and handling functions are included in cost of goods
sold.
(k) Store Preopening Costs
Costs associated with the opening of new retail and outlet stores are
expensed as incurred.
(l) Derivative Financial Instruments
Derivative financial instruments are used by the Company from time to
time to manage its interest rate and foreign currency exposures. The
Company may enter into (a) interest rate swaps to convert fixed rate
debt to variable rates or (b) forward foreign exchange contracts as
hedges relating to identifiable currency positions to reduce the risk
from exchange rate fluctuations. Effective in the first quarter of 2001
the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Certain Hedging Activities," as amended by SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." SFAS No. 133 and SFAS No. 138 require that all derivative
instruments be recorded either as assets or liabilities on the balance
sheet at their respective fair values. SFAS No. 133 also establishes
criteria for a derivative to qualify as a hedge for accounting
purposes. Changes in the fair value of derivative financial instruments
are either recognized periodically in income or stockholders' equity,
depending on whether the derivative is being used to hedge changes in
fair value or cash flows. The adoption of SFAS 133 did not have a
material effect on the Company's financial statements; therefore a
transition adjustment was not necessary. There were no derivative
financial instruments outstanding at February 2, 2002.
(m) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(n) Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
The Company assesses the recoverability of such assets based upon
estimated undiscounted cash flow forecasts.
During fiscal 1999 the Company wrote off $7,018,000 of capitalized
computer software costs which were impaired by the Company's decision
to adopt an enterprise resource planning system for its future
information technology requirements.
F-8
(o) Stock Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method of accounting for employee stock options as permitted by
SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly,
compensation expense is not recorded for options granted if the option
price is equal to or in excess of the fair market price at the date of
grant, as determined by management.
(p) Reclassifications
Certain amounts in the prior year have been reclassified to conform
with the current year presentation.
(q) Recent Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Standards No. 141,
"Business Combinations" and Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets". SFAS 141 eliminates
the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001 and modifies the application of the
purchase accounting method effective for transactions that are
completed after June 30, 2001. SFAS 142 eliminates the requirement to
amortize goodwill and intangible assets having indefinite useful lives
but requires testing at least annually for impairment. Intangible
assets that have finite lives will continue to be amortized over their
useful lives. SFAS 142 will apply to goodwill and intangible assets
arising from transactions completed before and after the Statement's
effective date of January 1, 2002. These statements had no effect on
the Company's financial statements in fiscal 2001 and are not
anticipated to have any effect in fiscal 2002.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires the Company to record the
fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the
retirement of tangible long-lived assets. The Company also records a
corresponding asset which is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period
to reflect the passage of time and changes in the estimated future cash
flows underlying the obligation. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. Management does not believe that
the adoption of SFAS No. 143 will have a significant impact on the
Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and requires companies to separately report
discontinued operations and extends that reporting to a component of an
entity that either has been disposed of or is classified as held for
sale. This Statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS No. 144 will not have any impact on the Company's
financial statements.
EITF Issue No. 00-14 "Accounting for Certain Sales Incentives" will be
effective in the first quarter of fiscal 2002. This EITF addresses the
accounting for and classification of various sales incentives. The
adoption of the provisions of this EITF will not have a material effect
on the Company's financial Statements in fiscal 2002.
F-9
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(2) Events of September 11, 2001
The terrorist events of September 11, 2001 resulted in the destruction
of the Company's retail store located at the World Trade Center in New
York City, resulting in the loss of inventories and store fixtures,
equipment and leasehold improvements. These losses and the resulting
business interruption are covered by insurance policies maintained by
the Company.
The statement of operations for the year ended February 2, 2002
includes losses of $1.9 million relating to inventories and stores
fixtures, equipment and leasehold improvements. Insurance recoveries
have been recorded to the extent of the losses recognized. Additional
insurance recoveries will be recorded at the time of settlement
including recoveries for business interruption which were not
determinable as of February 2, 2002.
(3) Disposal of Businesses
(a) Popular Club Plan
In accordance with a sale agreement dated November 24, 1998 the Company
sold all of the capital stock of Popular Club Plan, Inc. and
subsidiaries ("PCP") to The Fingerhut Companies, Inc. effective as of
October 30, 1998 for gross proceeds of $42.0 million in cash. A gain on
the sale of PCP of $10.0 million was included in the statement of
operations for fiscal 1998. An additional gain of $1.0 million was
recognized in fiscal 1999 from the reversal of certain estimated
liabilities recorded at the date of sale.
(b) Clifford & Wills
In 1998, management of the Company made a decision to exit the catalog
and outlet store operations of Clifford & Wills ("C&W"). Revenues and
expenses of C&W for fiscal 1999 and 2000 were not material and as a
result have been netted in the accompanying consolidated statements of
operations.
In February 2000, the Company sold certain intellectual property assets
to Spiegel Catalog Inc. for $3.9 million. In connection with this sale
the Company agreed to cease the fulfillment of catalog orders but
retained the right to operate C&W outlet stores and conduct other
liquidation sales of inventories through December 31, 2000. After
consideration of the proceeds from the sale and other terms of the
agreement the Company provided an additional $4,000,000 to write down
inventories to net realizable value as of January 29, 2000. At February
3, 2001, the Company determined that the realizable value of the
remaining net assets of C&W, primarily inventories, was less than their
carrying amounts and an additional charge of $4,130,000 was taken.
F-10
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(4) Other Current Liabilities
Other current liabilities consist of:
February 2, February 3,
2002 2001
---- ----
Customer liabilities $ 11,381,000 $ 12,251,000
Accrued catalog and marketing costs 3,655,000 4,515,000
Taxes, other than income taxes 2,930,000 3,686,000
Accrued interest 4,690,000 4,746,000
Accrued occupancy 1,036,000 2,339,000
Reserve for sales returns 6,475,000 6,530,000
Accrued compensation 1,697,000 11,051,000
Other 29,924,000 30,050,000
------------ ------------
$ 61,788,000 $ 75,168,000
------------ ------------
(5) Long-Term Debt
Long term debt consists of:
February 2, February 3,
2002 2001
---- ----
10-3/8% senior subordinated notes (a) 150,000,000 150,000,000
13-1/8% senior discount debentures (b) 129,687,000 114,292,000
------------ ------------
Total $279,687,000 $264,292,000
============ ============
(a) The senior subordinated notes are unsecured general obligations of
J. Crew Operating Corp., a subsidiary of Holdings, and are subordinated
in right of payment to all senior debt. Interest on the notes accrues
at the rate of 10-3/8% per annum and is payable semi-annually in
arrears on April 15 and October 15. The notes mature on October 15,
2007 and may be redeemed at the option of the issuer subsequent to
October 15, 2002 at prices ranging from 105.188% of principal in 2002
to 100% in 2005 and thereafter.
(b) The senior discount debentures were issued in aggregate principal
amount of $142.0 million at maturity and mature on October 15, 2008.
These debentures are senior unsecured obligations of Holdings. Cash
interest will not accrue prior to October 15, 2002. However, the
Company records non-cash interest expense as an accretion of the
principal amount of the debentures at a rate of 13-1/8% per annum.
Interest will be payable in arrears on April 15 and October 15 of each
year subsequent to October 15, 2002. The senior discount debentures may
be redeemed at the option of Holdings on or after October 15, 2002 at
prices ranging from 106.563% of principal to 100% in 2005 and
thereafter.
There are no maturities of long-term debt required during the next five
years.
F-11
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(6) Lines of Credit
On October 17, 1997, the Company entered into a syndicated revolving
credit agreement (the "Revolving Credit Agreement") with a group of
banks. This agreement was amended on March 18, 1998, November 23, 1998,
April 20, 1999 and April 17, 2002. Borrowings may be utilized to fund
the working capital requirements of the Company including issuance of
stand-by and trade letters of credit and bankers' acceptances. The
maximum amount available under this agreement is $175.0 million.
Borrowings are secured by a perfected first priority security interest
in all assets of the Company's subsidiaries and bear interest, at the
Company's option, at a base rate equal to the Administrative Agent's
Eurodollar rate plus an applicable margin or an alternate base rate
equal to the highest of the Administrative Agent's prime rate, a
certificate of deposit rate plus 1% or the Federal Funds effective rate
plus one-half of 1% plus, in each case, an applicable margin. The
Revolving Credit Agreement matures on October 17, 2003.
Maximum borrowings under revolving credit agreements were $95,000,000,
$34,000,000, and $58,000,000 during fiscal years 2001, 2000 and 1999
and average borrowings were $ 43,100,000, $9,800,000, and $30,800,000.
There were no borrowings outstanding at February 2, 2002 and February
3, 2001.
Outstanding letters of credit established to facilitate international
merchandise purchases at February 2, 2002 and February 3, 2001 amounted
to $46,300,000 and $50,948,000.
The provisions of the Revolving Credit Agreement, as amended, require
that the Company maintain certain levels of (i) leverage ratio, (ii)
interest coverage ratio and (iii) inventory coverage ratio; provide for
limitations on capital expenditures, sale and leaseback transactions,
liens, investments, sales of assets and indebtedness; and prohibit the
payment of cash dividends on shares of common stock.
(7) Common Stock
The restated certificate of incorporation authorizes Holdings to issue
up to 100,000,000 shares of common stock; par value $.01 per share. At
February 2, 2002, shares issued were 12,238,189 and shares outstanding
were 11,748,789. In April 1999 the Board of Directors approved a 200
for 1 stock split of Holdings common stock in the form of a stock
dividend. During 1999, 2000 and 2001 directors converted fees into
17,665, 18,400 and 5,524 shares of Holdings common stock.
(8) Redeemable Preferred Stock
The restated certificate of incorporation authorizes Holdings to issue
up to:
(a) 1,000,000 shares of Series A cumulative preferred stock; par value
$.01 per share; and
(b) 1,000,000 shares of Series B cumulative preferred stock; par value
$.01 per share.
At February 2, 2002, 92,800 shares of Series A Preferred Stock and
32,500 shares of Series B Preferred Stock were outstanding.
F-12
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
The Preferred Stock accumulates dividends at the rate of 14.5% per
annum (payable quarterly) for periods ending on or prior to October 17,
2009. Dividends compound to the extent not paid in cash. On October 17,
2009, Holdings is required to redeem the Series B Preferred Stock and
to pay all accumulated but unpaid dividends on the Series A Preferred
Stock. Thereafter, the Series A Preferred Stock will accumulate
dividends at the rate of 16.5% per annum. Subject to restrictions
imposed by certain indebtedness of the Company, Holdings may redeem
shares of the Preferred Stock at any time at redemption prices ranging
from 103% of liquidation value plus accumulated and unpaid dividends at
October 17, 1998 to 100% of liquidation value plus accumulated and
unpaid dividends at October 17, 2000 and thereafter. In certain
circumstances (including a change of control of Holdings), subject to
restrictions imposed by certain indebtedness of the Company, Holdings
may be required to repurchase shares of the Preferred Stock at
liquidation value plus accumulated and unpaid dividends.
Accumulated but unpaid dividends amounted to $105,460,000 at February
2, 2002. Dividends are recorded as an increase to redeemable preferred
stock and a reduction of retained earnings.
(9) Commitments and Contingencies
(a) Operating Leases
As of February 2, 2002, the Company was obligated under various
long-term operating leases for retail and outlet stores,
warehouses, office space and equipment requiring minimum annual
rentals. These operating leases expire on varying dates through
2014. At February 2, 2002 aggregate minimum rentals in future
periods are, as follows:
Fiscal year Amount
----------- ------
2002 $ 46,354,000
2003 45,979,000
2004 42,585,000
2005 40,051,000
2006 36,785,000
Thereafter 139,305,000
Certain of these leases include renewal options and escalation
clauses and provide for contingent rentals based upon sales and
require the lessee to pay taxes, insurance and other occupancy
costs.
Rent expense for fiscal 2001, 2000, and 1999 was $46,573,000,
$45,138,000, and $39,474,000, including contingent rent based on
store sales of $1,023,000, $1,974,000, and $2,600,000.
(b) Employment Agreements
The Company is party to employment agreements with certain
executives which provide for compensation and certain other
benefits. The agreements also provide for severance payments under
certain circumstances.
(c) Litigation
The Company is subject to various legal proceedings and claims
that arise in the ordinary conduct of its business. Although the
outcome of these claims cannot be predicted with certainty,
management does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's
financial condition or results of operations.
F-13
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(10) Employee Benefit Plan
The Company has a thrift/savings plan pursuant to Section 401 of the
Internal Revenue Code whereby all eligible employees may contribute up
to 15% of their annual base salaries subject to certain limitations.
The Company's contribution is based on a percentage formula set forth
in the plan agreement. Company contributions to the thrift/savings plan
were $1,334,000, $1,241,000, and $1,320,000 for fiscal 2001, 2000 and
1999.
(11) License Agreement
The Company has a licensing agreement through January 2003 with Itochu
Corporation, a Japanese trading company. The agreement permits Itochu
to distribute J. Crew merchandise in Japan. The Company earns royalty
payments under the agreement based on the sales of its merchandise.
Royalty income, which is included in other revenues, for fiscal 2001,
2000, and 1999 was $2,560,000, $3,020,000, and $2,505,000
(12) Interest Expense - Net
Interest expense, net consists of the following:
2001 2000 1999
---- ---- ----
Interest expense $34,810,000 $34,390,000 $36,903,000
Amortization of
deferred financing costs 1,997,000 2,793,000 2,196,000
Interest income (295,000) (541,000) (238,000)
----------- ----------- -----------
Interest expense, net $36,512,000 $36,642,000 $38,861,000
----------- ----------- -----------
Interest expense in fiscal 1999 includes $1,029,000 incurred in
connection with the settlement of a sales and use tax assessment.
(13) Other Revenues
Other revenue consists of the following:
2001 2000 1999
---- ---- ----
Shipping and handling fees $34,100,000 $35,297,000 $34,072,000
Royalties 2,560,000 3,020,000 2,505,000
----------- ----------- -----------
$36,660,000 $38,317,000 $36,577,000
=========== =========== ===========
(14) Financial Instruments
The following disclosure about the fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The fair value
of the Company's long-term debt is estimated to be approximately
$187,191,000 and $202,793,000 at February 2, 2002 and February 3, 2001,
and is based on dealer quotes or quoted market prices of the same or
similar instruments The carrying amounts of long-term debt were
$279,687,000 and $264,292,000 at February 2, 2002 and February 3, 2001.
The carrying amounts reported in the consolidated balance sheets for
cash and cash equivalents, notes payable-bank, accounts payable and
other current liabilities approximate fair value because of the
short-term maturity of those financial instruments. The estimates
presented herein are not necessarily indicative of amounts the Company
could realize in a current market exchange.
F-14
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(15) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This statement requires the use of the
asset and liability method of accounting for income taxes. Under the
asset and liability method, deferred taxes are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
The income tax provision/(benefit) consists of:
2001 2000 1999
---- ---- ----
Current:
Foreign $ 260,000 $ 300,000 $ 250,000
Federal (2,400,000) 6,253,000 3,100,000
State and local 100,000 920,000 1,440,000
------------- ----------- ------------
(2,040,000) 7,473,000 4,790,000
------------- ----------- ------------
Deferred - Federal, state and local (3,460,000) 27,000 (6,840,000)
------------- ----------- ------------
Total $ (5,500,000) $ 7,500,000 $ (2,050,000)
============= =========== ============
A reconciliation between the provision/(benefit) for income taxes based on the
U.S. Federal statutory rate and the Company's effective rate is as follows.
2001 2000 1999
---- ---- ----
Federal income tax rate (35.0)% 35.0 % (35.0)%
State and local income taxes, net
of federal benefit (2.3) 7.6 7.0
Nondeductible expenses and other 4.0 (4.0) 4.4
------- ------ ------
Effective tax rate (33.3)% 38.6 % (23.6)%
======= ====== ======
F-15
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
The tax effect of temporary differences which give rise to deferred tax assets
and liabilities are:
February 2, February 3,
2002 2001
---- ----
Deferred tax assets:
Original issue discount $ 20,836,000 $ 15,007,000
State and local NOL carryforwards 1,900,000 1,900,000
Reserve for sales returns 2,603,000 2,625,000
Other 3,766,000 3,412,000
------------- ------------
29,105,000 22,944,000
------------- ------------
Deferred tax liabilities:
Prepaid catalog and other prepaid expenses (8,841,000) (8,026,000)
Difference in book and tax basis
for property and equipment (7,903,000) (5,957,000)
------------- ------------
(16,744,000) (13,983,000)
------------- -------------
Net deferred income tax asset $ 12,421,000 $ 8,961,000
============== ============
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize
the deferred tax assets. The Company has state and local income tax net
operating loss carryforwards of varying amounts.
F-16
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(16) Stock Options
The J. Crew Group, Inc. Stock Option Plan (the "Option Plan") was
adopted by the Company in 1997. Under the terms of the Option Plan, an
aggregate of 1,910,000 shares are available for grant to certain key
employees or consultants. The options have terms of seven to ten years
and become exercisable over a period of five years. Options granted
under the Option Plan are subject to various conditions, including
under some circumstances, the achievement of certain performance
objectives.
A summary of stock option activity for the Plan was, as follows:
2001 2000 1999
---- ---- ----
Weighted Weighted Weighted
-------- -------- --------
average average average
------- ------- -------
Shares exercise price Shares exercise price Shares exercise price
------- -------------- ------ -------------- ------ --------------
Outstanding, beginning of year 1,788,750 $ 9.15 1,532,800 $ 8.87 997,200 $ 8.00
Granted 283,000 14.53 374,700 10.17 772,800 9.47
Exercised -- -- (2,000) 6.82 - -
Cancelled (262,960) 9.31 (116,750) 8.72 (237,200) 7.14
---------- ------ --------- ------ --------- ------
Outstanding, end of year 1,808,790 $ 9.97 1,788,750 $ 9.15 1,532,800 $ 8.87
---------- ------ ========= ====== ========= ======
Options exercisable at end of year 728,950 $ 9.21 583,000 $ 9.24 318,040 $ 7.97
========== ====== ========= ====== ========= ======
(17) Employee Restricted Stock
Under the terms of an employment agreement with a key executive 661,600
shares of restricted stock were awarded in fiscal 1997. These shares
vest through October 2002. Deferred compensation is charged to expense
over the vesting period.
(18) Segment Information
The Company operates in one business segment. The Company designs,
contracts to manufacture and markets men's, women's, and children's
apparel, shoes and accessories under the J. Crew brand name. The brand
is marketed through various channels of distribution including retail
and factory outlet stores, catalogs, the Internet and licensing
arrangements with third parties. During 1998, the Company decided to
discontinue the operations of its C&W brand. Fiscal 1999 and 2000
include charges of $4,000,000 and $4,130,000 primarily to write down
inventories to net realizable value. (See note 3 to the consolidated
financial statements).
All of the Company's identifiable assets are located in the United
States. Export sales are not significant.
F-17
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
Corporate and other expenses include expenses incurred by the corporate office
and certain non-recurring expenses that are not allocated to specific business
units. Corporate and other expenses in fiscal 1999 include the write off of
impaired software development costs.
Segment assets represent the assets used directly in the operations of each
business unit such as inventories and property and equipment. Corporate assets
consist principally of investments, deferred financing costs deferred income tax
assets and certain capitalized software.
The accounting policies used for segment reporting are consistent with those
described in the summary of significant accounting policies.
[$ in thousands]
Revenues 2001 2000 1999
---- ---- ----
J. Crew $ 777,940 $ 825,975 $ 750,696
--------- --------- ---------
Income from operations
J. Crew 21,575 61,094 41,052
Clifford & Wills -- (4,130) (4,000)
Corporate and other expenses (1,574) (893) (7,869)
--------- --------- ---------
Income from operations 20,001 56,071 29,183
--------- --------- ---------
Interest expense, net 36,512 (36,642) (38,861)
Gain on sale of PCP -- -- 1,000
--------- --------- ---------
Income/(loss) before income taxes $ (16,511) $ 19,429 $ (8,678)
========= ========= =========
Depreciation and amortization
J. Crew $ 31,568 $ 22,448 $ 19,051
Corporate 150 152 190
--------- --------- ---------
$ 31,718 $ 22,600 $ 19,241
========= ========= =========
Identifiable assets
J. Crew $ 360,882 $ 342,541 $ 305,552
Clifford & Wills -- -- 8,927
Corporate 40,438 47,320 59,125
--------- --------- ---------
$ 401,320 $ 389,861 $ 373,604
========= ========= =========
Capital expenditures
J. Crew $ 59,846 $ 55,394 $ 39,435
Corporate 2,016 300 9,249
--------- --------- ---------
$ 61,862 $ 55,694 $ 48,684
========= ========= =========
F-18
J. CREW GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(19) Quarterly Financial Information (Unaudited)
-------------------------------
($ in millions)
13 weeks 13 weeks 13 weeks 13 weeks 52 weeks
ended ended ended ended ended
5/5/01 8/4/01 11/3/01 2/2/02 2/2/02
------ ------ ------- ------ ------
Net sales $158.9 $160.5 $187.1 $234.8 $741.3
Gross profit 68.2 60.5 82.8 104.1 315.6
Net income (loss) $ (9.3) $ (8.6) $ .3 $ 6.6 $(11.0)
13 weeks 13 weeks 13 weeks 14 weeks 53 weeks
ended ended ended ended ended
4/29/00 7/29/00 10/28/00 2/3/01(a) 2/03/01
------- ------- -------- --------- -------
Net sales $158.0 $162.2 $194.0 $273.5 $787.7
Gross profit 72.8 71.0 90.2 128.1 362.1
Net income (loss) $ (5.2) $ (5.1) $ 4.5 $ 17.7 $ 11.9
(a) includes $4.1 million writedown of net assets of C&W.
F-19
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
beginning charged to cost charged to other ending
balance and expenses accounts deductions balance
($ in thousands)
Inventory reserve
- -----------------
(deducted from inventories)
fiscal year ended:
February 2, 2002 $ 7,360 $ 1,007(a) $ -- $ -- $ 8,367
February 3, 2001 4,447 2,913(a) -- -- 7,360
January 29, 2000 6,122 (1,675)(a) -- -- 4,447
Allowance for sales returns
- ---------------------------
(included in other current liabilities)
fiscal year ended:
February 2, 2002 $ 6,530 $ (55)(a) $ -- $ -- $ 6,475
February 3, 2001 5,011 1,519(a) -- 6,530
January 29, 2000 3,473 1,538(a) -- -- 5,011
(a) The inventory reserve and allowance for sales returns are evaluated at the
end of each fiscal quarter and adjusted (plus or minus) based on the
quarterly evaluation. During each period inventory write-downs and sales
returns are charged to the statement of operations as incurred.
F-20
Independent Auditors' Report
The Board of Directors and Stockholders
J. Crew Operating Corp. and Subsidiaries:
We have audited the consolidated financial statements of J. Crew Operating Corp.
and subsidiaries (the "Company") as listed in the accompanying Index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of J. Crew Operating
Corp. and subsidiaries as of February 2, 2002 and February 3, 2001 and the
results of their operations and their cash flows for each of the years in the
three-year period ended February 2, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
March 25, 2002, except as to note 6,
which is as of April 17, 2002
New York, NY
F-21
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Balance Sheets
February 2, February 3,
Assets 2002 2001
------ ---- ----
(in thousands)
Current assets:
Cash and cash equivalents $ 16,201 $ 32,930
Merchandise inventories 138,918 140,667
Prepaid expenses and other current assets 27,026 23,740
-------- --------
Total current assets 182,145 197,337
-------- --------
Property and equipment - at cost:
Land 1,610 1,460
Buildings and improvements 11,700 11,432
Furniture, fixtures and equipment 105,292 70,541
Leasehold improvements 170,195 144,906
Construction in progress 4,903 22,983
-------- --------
293,700 251,322
Less accumulated depreciation and amortization 106,427 85,746
-------- --------
187,273 165,576
-------- --------
Other assets 12,310 10,839
-------- --------
Total assets $381,728 $373,752
======== ========
Liabilities and Stockholder's Equity
------------------------------------
Current liabilities:
Accounts payable $ 66,703 $ 49,705
Other current liabilities 61,788 75,168
Federal and state income taxes payable 10,109 18,850
Deferred income taxes 5,604 3,731
-------- --------
Total current liabilities 144,204 147,454
-------- --------
Long-term debt 150,000 150,000
-------- --------
Deferred credits and other long-term liabilities 67,235 56,043
-------- --------
Due to J.Crew Group, Inc. 1,142 1,047
-------- --------
Stockholder's equity 19,147 19,208
-------- --------
Total liabilities and stockholder's equity $381,728 $373,752
======== ========
See accompanying notes to consolidated financial statements.
F-22
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Statements of Operations
Years ended
-----------
February 2, February 3, January 29,
----------- ---------- -----------
2002 2001 2000
---- ---- ----
(in thousands)
Revenues:
Net sales $ 741,280 $ 787,658 $ 714,119
Other 36,660 38,317 36,577
--------- --------- ---------
777,940 825,975 750,696
Operating costs and expenses:
Cost of goods sold, including buying and occupancy
costs 462,371 463,909 431,193
Selling, general and administrative expenses 294,907 301,216 278,666
Write off of software development costs -- -- 7,018
Write down of assets and other charges in
connection with discontinuance of Clifford & Wills -- 4,130 4,000
--------- --------- ---------
757,278 769,255 720,877
--------- --------- ---------
Income from operations 20,662 56,720 29,819
Interest expense - net (20,890) (22,787) (26,626)
Gain on sale of Popular Club Plan -- -- 1,000
--------- --------- ---------
Income/(loss) before income taxes (228) 33,933 4,193
(Provision) benefit for income taxes 167 (12,180) (2,293)
--------- --------- ---------
Net income/(loss) $ (61) $ 21,753 $ 1,900
========= ========= =========
See accompanying notes to consolidated financial statements.
F-23
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended
------------
February 3, January 29, January 30,
----------- ----------- -----------
2001 2000 1999
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income/(loss) $ (61) $ 21,753 $ 1,900
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization 31,718 22,600 19,241
Write off of software development costs -- -- 7,018
Amortization of deferred financing costs 1,770 2,548 1,950
Non-cash compensation expense 913 -- --
Deferred income taxes 1,873 4,706 (2,497)
Gain on sale of subsidiary -- -- (1,000)
Write down of assets and other charges
in connection with discontinued catalog -- 4,130 4,000
Changes in operating assets and liabilities:
Merchandise inventories 1,749 (10,739) 26,094
Net assets held for disposal -- 4,797 4,450
Prepaid expenses and other current assets (3,286) 6,343 16,646
Other assets (3,416) (2,781) (770)
Accounts payable 16,998 8,754 821
Other liabilities (13,671) 5,407 13,044
Federal and state income taxes payable (8,741) 2,894 3,406
-------- -------- --------
Net cash provided by operating activities 25,846 70,412 94,303
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (61,862) (55,694) (48,684)
Proceeds from construction allowances 19,287 13,519 7,431
-------- -------- --------
Net cash provided by (used in) investing activities (42,575) (42,175) (41,253)
-------- -------- --------
Cash flows from financing activities:
(Decrease)/increase in notes payable, bank -- -- (14,000)
Repayment of long-term debt -- (34,000) (10,000)
-------- -------- --------
Net cash used in financing activities -- (34,000) (24,000)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (16,729) (5,763) 29,050
Cash and cash equivalents at beginning of year 32,930 38,693 9,643
-------- -------- --------
Cash and cash equivalents at end of year $ 16,201 $ 32,930 $ 38,693
======== ======== ========
See accompanying notes to consolidated financial statements.
F-24
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(1) Nature Of Business And Summary Of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of J. Crew Operating Corp ("Operating Corp") and its wholly-owned
subsidiaries (collectively, the "Company"). Operating Corp. is a wholly
owned subsidiary of J.Crew Group, Inc. ("Holdings"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Business
The Company designs, contracts for the manufacture of, markets and
distributes men's and women's apparel and accessories. The Company's
products are marketed, primarily in the United States, through retail
stores, catalogs, and the Internet. The Company is also party to a
licensing agreement which grants the licensee exclusive rights to use
the Company's trademarks in connection with the manufacture and sale of
products in Japan. The license agreement provides for payments based on
a specified percentage of net sales.
The Company is subject to seasonal fluctuations in its merchandise
sales and results of operations. The Company expects its sales and
operating results generally to be lower in the first and second
quarters than in the third and fourth quarters (which include the
back-to-school and holiday seasons) of each fiscal year.
A significant amount of the Company's products are produced in the Far
East through arrangements with independent contractors. As a result,
the Company's operations could be adversely affected by political
instability resulting in the disruption of trade from the countries in
which these contractors are located or by the imposition of additional
duties or regulations relating to imports or by the contractor's
inability to meet the Company's production requirements.
(c) Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31.
The fiscal years 2001, 2000, and 1999 ended on February 2, 2002 (52
weeks), February 3, 2001 (53 weeks) and January 29, 2000 (52 weeks).
(d) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments, with maturities of 90
days or less when purchased, to be cash equivalents. Cash equivalents,
which were $7,895,000 and $18,331,000 at February 2, 2002 and February
3, 2001 are stated at cost, which approximates market value.
(e) Merchandise Inventories
Merchandise inventories are stated at the lower of cost (determined on
a first-in, first-out basis) or market. The Company capitalizes certain
design, purchasing and warehousing costs in inventory.
(f) Advertising and Catalog Costs
Direct response advertising which consists primarily of catalog
production and mailing costs, are capitalized and amortized over the
expected future revenue stream. The Company accounts for catalog costs
in accordance with the AICPA Statement of Position ("SOP") 93-7,
"Reporting on Advertising Costs." SOP 93-7 requires that the
amortization of capitalized advertising costs be the amount computed
using the ratio that current period revenues
F-25
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
for the catalog cost pool bear to the total of current and estimated
future period revenues for that catalog cost pool. Deferred catalog
costs, included in prepaid expenses and other current assets, as of
February 2, 2002 and February 3, 2001 were $7,959,000 and $10,600,000.
Catalog costs, which are reflected in selling and administrative
expenses, for the fiscal years 2001, 2000, and 1999 were $ 65,477,000,
$69,000,000, and $84,077,000.
All other advertising costs are expensed as incurred. Advertising
expenses were $6,671,000 for fiscal year 1999. Advertising costs were
not significant in all other years.
(g) Property and Equipment
Property and equipment are stated at cost. Buildings and improvements
are depreciated by the straight-line method over the estimated useful
lives of twenty years. Furniture, fixtures and equipment are
depreciated by the straight-line method over the estimated useful
lives, ranging from three to ten years. Leasehold improvements are
amortized over the shorter of their useful lives or related lease
terms.
Significant systems development costs are capitalized and amortized on
a straight-line basis over periods ranging from three to five years.
Approximately $8.5 million and $15.0 million of systems development
costs were capitalized in fiscal years 2001 and 2000.
The Company receives construction allowances upon entering into certain
store leases. These construction allowances are recorded as deferred
credits and are amortized over the term of the related lease.
(h) Debt Issuance Costs
Debt issuance costs (included in other assets) of $5,195,000 and
$6,965,000 at February 2, 2002 and February 3, 2001 are amortized over
the term of the related debt agreements.
(i) Income Taxes
The provision for income taxes includes taxes currently payable and
deferred taxes resulting from the tax effects of temporary differences
between the financial statement and tax bases of assets and
liabilities, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes."
(j) Revenue Recognition
Revenue is recognized for catalog and internet sales when merchandise
is shipped to customers, and at the time of sale for retail sales. The
Company accrues a sales return allowance for estimated returns of
merchandise subsequent to the balance sheet date that relate to sales
prior to the balance sheet date. Amounts billed to customers for
shipping and handling fees related to catalog and internet sales are
included in other revenues at the time of shipment. Expenses
associated with shipping and handling functions are included in cost
of goods sold.
(k) Store Preopening Costs
Costs associated with the opening of new retail and outlet stores are
expensed as incurred.
F-26
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(l) Derivative Financial Instruments
Derivative financial instruments are used by the Company from time to
time to manage its interest rate and foreign currency exposures. The
Company may enter into (a) interest rate swaps to convert fixed rate
debt to variable rates or (b) forward foreign exchange contracts as
hedges relating to identifiable currency positions to reduce the risk
from exchange rate fluctuations. Effective in the first quarter of 2001
the Company adopted SFAS No, 133, "Accounting for Derivative
Instruments and Certain Hedging Activities." as amended by SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." SFAS No. 133 and SFAS No. 138 require that all derivative
instruments be recorded either as assets or liabilities on the balance
sheet at their respective fair values. SFAS No. 133 also establishes
criteria for a derivative to qualify as a hedge for accounting
purposes. Changes in the fair value of derivative financial instruments
are either recognized periodically in income or stockholders' equity,
depending on whether the derivative is being used to hedge changes in
fair value or cash flows. The adoption of SFAS 133 did not have a
material effect on the Company's financial statements, therefore a
transition adjustment was not necessary. There were no derivative
financial instruments outstanding at February 2, 2002.
(m) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(n) Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
The Company assesses the recoverability of such assets based upon
estimated undiscounted cash flow forecasts.
During fiscal 1999 the Company wrote off $7,018,000 of capitalized
computer software costs which were impaired by the Company's decision
to adopt an enterprise resource planning system for its future
information technology requirements.
(o) Stock Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method of accounting for employee stock options as permitted by
SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly,
compensation expense is not recorded for options granted if the option
price is equal to or in excess of the fair market price at the date of
grant, as determined by management.
(p) Reclassifications
Certain amounts in the prior year have been reclassified to conform
with the current year presentation.
F-27
(q) Recent Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Standards No. 141,
"Business Combinations" and Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets". SFAS 141 eliminates
the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001 and modifies the application of the
purchase accounting method effective for transactions that are
completed after June 30, 2001. SFAS 142 eliminates the requirement to
amortize goodwill and intangible assets having indefinite useful lives
but requires testing at least annually for impairment. Intangible
assets that have finite lives will continue to be amortized over their
useful lives. SFAS 142 will apply to goodwill and intangible assets
arising from transactions completed before and after the Statement's
effective date of January 1, 2002. These statements had no effect on
the Company's financial statements in fiscal 2001 and are not
anticipated to have any effect in fiscal 2002.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires the Company to record the
fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the
retirement of tangible long-lived assets. The Company also records a
corresponding asset which is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period
to reflect the passage of time and changes in the estimated future cash
flows underlying the obligation. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. Management does not believe that
the adoption of SFAS No. 143 will have a significant impact on the
Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and requires companies to separately report
discontinued operations and extends that reporting to a component of an
entity that either has been disposed of or is classified as held for
sale. This Statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS No. 144 will not have any impact on the Company's
financial statements.
EITF Issue No. 00-14 "Accounting for Certain Sales Incentives" will be
effective in the first quarter of fiscal 2002. This EITF addresses the
accounting for and classification of various sales incentives. The
adoption of the provisions of this EITF will not have a material effect
on the Company's financial Statements in fiscal 2002.
F-28
J. CREW OPERATING CORP AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(2) Events of September 11, 2001
The terrorist actions of September 11, 2001 resulted in the destruction
of our retail store located at the World Trade Center, resulting in the
loss of inventories and store fixtures, equipment and leasehold
improvements. These losses and the resulting business interruption are
covered by insurance policies maintained by the Company.
The statement of operations for the year ended February 2, 2002
includes losses of $1.9 million relating to inventories and stores
fixtures, equipment and leasehold improvements. Insurance recoveries
have been recorded to the extent of the losses recognized. Additional
insurance recoveries will be recorded at the time of settlement
including recoveries for business interruption which were not
determinable as of February 2, 2002.
(3) Disposal of Businesses
(a) Popular Club Plan
In accordance with a sale agreement dated November 24, 1998 the Company
sold all of the capital stock of Popular Club Plan, Inc. and
subsidiaries ("PCP") to The Fingerhut Companies, Inc. effective as of
October 30, 1998 for gross proceeds of $42.0 million in cash. A gain on
the sale of PCP of $10.0 million was included in the statement of
operations for fiscal 1998. An additional gain of $1.0 million was
recognized in fiscal 1999 from the reversal of certain estimated
liabilities recorded at the date of sale.
(b) Clifford & Wills
In 1998, management of the Company made a decision to exit the catalog
and outlet store operations of Clifford & Wills ("C&W"). Revenues and
expenses (C&W) for fiscal 1999 and 2000 were not material and as a
result have been netted in the accompanying consolidated statement of
operations.
In February 2000 the Company sold certain intellectual property assets
to Spiegel Catalog Inc. for $3.9 million. In connection with this sale
the Company agreed to cease the fulfillment of catalog orders but
retained the right to operate C&W outlet stores and conduct other
liquidation sales of inventories through December 31, 2000. After
consideration of the proceeds from the sale and other terms of the
agreement the Company provided an additional $4,000,000 to write down
inventories to net realizable value as of January 29, 2000. At February
3, 2001 the Company determined that the realizable value of the
remaining net assets of C&W, primarily inventories, was less than their
carrying amounts and an additional charge of $4,130,000 was taken.
F-29
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(4) Other Current Liabilities
Other current liabilities consist of:
February 2, February 3,
2002 2001
---- ----
Customer liabilities $11,381,000 $12,251,000
Accrued catalog and marketing costs 3,655,000 4,515,000
Taxes, other than income taxes 2,930,000 3,686,000
Accrued interest 4,690,000 4,746,000
Accrued occupancy 1,036,000 2,339,000
Reserve for sales returns 6,475,000 6,530,000
Accrued compensation 1,697,000 11,051,000
Other 29,924,000 30,050,000
----------- -----------
$61,788,000 $75,168,000
----------- -----------
(5) Long-Term Debt
Long term debt consists of $150,000,000 principal amount of senior
subordinated notes. The senior subordinated notes are unsecured general
obligations of J. Crew Operating Corp., and are subordinated in right of
payment to all senior debt. Interest on the notes accrues at the rate of
10-3/8% per annum and is payable semi-annually in arrears on April 15 and
October 15. The notes mature on October 15, 2007 and may be redeemed at
the option of the issuer, subsequent to October 15, 2002 at prices ranging
from 105.188% of principal in 2002 to 100% in 2005 and thereafter.
There are no maturities of long-term debt required during the next five
years.
(6) Lines of Credit
On October 17, 1997, the Company entered into a syndicated revolving
credit agreement (the "Revolving Credit Agreement") with a group of banks.
This agreement was amended on March 18, 1998, November 23, 1998, April 20,
1999 and April 17, 2002. Borrowings may be utilized to fund the working
capital requirements of the Company including issuance of stand-by and
trade letters of credit and bankers' acceptances. The maximum amount
available under this agreement is $175.0 million.
Borrowings are secured by a perfected first priority security interest in
all assets of the Company's subsidiaries and bear interest, at the
Company's option, at a base rate equal to the Administrative Agent's
Eurodollar rate plus an applicable margin or an alternate base rate equal
to the highest of the Administrative Agent's prime rate, a certificate of
deposit rate plus 1% or the Federal Funds effective rate plus one-half of
1% plus, in each case, an applicable margin. The Revolving Credit
Agreement matures on October 17, 2003.
Maximum borrowings under revolving credit agreements were $95,000,000,
$34,000,000 and $58,000,000 during fiscal years 2001, 2000 and 1999 and
average borrowings were $ 43,100,000, $9,800,000 and $30,800,000. There
were no borrowings outstanding at February 2, 2002 and January 29, 2000.
Outstanding letters of credit established to facilitate international
merchandise purchases at February 2, 2002 and February 3, 2001 amounted to
$46,300,00 and $50,948,000.
F-30
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
The provisions of the Revolving Credit Agreement, as amended, require
that the Company maintain certain levels of (i) leverage ratio, (ii)
interest coverage ratio and (iii) inventory coverage ratio; provide for
limitations on capital expenditures, sale and leaseback transactions,
liens, investments, sales of assets and indebtedness; and prohibit the
payment of cash dividends on shares of common stock.
(7) Commitments and Contingencies
(a) Operating Leases
As of February 2, 2002, the Company was obligated under various
long-term operating leases for retail and outlet stores,
warehouses, office space and equipment requiring minimum annual
rentals. These operating leases expire on varying dates through
2012. At February 2, 2002 aggregate minimum rentals in future
periods are, as follows:
Fiscal year Amount
----------- ------
2002 46,354,000
2003 45,979,000
2004 42,585,000
2005 40,015,000
2006 36,785,000
Thereafter 139,305,000
Certain of these leases include renewal options and escalation
clauses and provide for contingent rentals based upon sales and
require the lessee to pay taxes, insurance and other occupancy
costs
Rent expense for fiscal 2001, 2000, and 1999 was $46,573,000,
$45,138,000 and $ 39,474,000, including contingent rent based on
store sales of $1,023,000, $1,974,000 and $2,600,000.
(b) Employment Agreements
The Company is party to employment agreements with certain
executives which provide for compensation and certain other
benefits. The agreements also provide for severance payments under
certain circumstances.
(c) Litigation
The Company is subject to various legal proceedings and claims
that arise in the ordinary conduct of its business. Although the
outcome of these claims cannot be predicted with certainty,
management does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's
financial condition or results of operations.
(8) Employee Benefit Plan
The Company has a thrift/savings plan pursuant to Section 401 of the
Internal Revenue Code whereby all eligible employees may contribute up
to 15% of their annual base salaries subject to certain limitations.
The Company's contribution is based on a percentage formula set forth
in the plan agreement. Company contributions to the thrift/savings plan
were $1,334,000, $1,241,000 and $1,320,000 for fiscal 2001, 2000 and
1999.
F-31
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(9) License Agreement
The Company has a licensing agreement through January 2003 with Itochu
Corporation, a Japanese trading company. The agreement permits Itochu
to distribute J. Crew merchandise in Japan. The Company earns royalty
payments under the agreement based on the sales of its merchandise.
Royalty income, which is included in other revenues, for fiscal 2001,
2000, and 1999 was $2,560,000, $3,020,000, and $2,505,000.
(10) Interest Expense - Net
Interest expense, net consists of the following:
2001 2000 1999
---- ---- ----
Interest expense $19,415,000 $20,780,000 $24,914,000
Amortization of deferred 1,770,000 2,548,000 1,950,000
financing costs
Interest income (295,000) (541,000) (238,000)
----------- ----------- -----------
Interest expense, net $20,890,000 $22,787,000 $26,626,000
----------- ----------- -----------
Interest expense in fiscal 1999 includes $1,029,000 incurred in
connection with the settlement of a sales and use tax assessment.
(11) Other Revenues
Other revenue consists of the following:
2001 2000 1999
---- ---- ----
Shipping and handling fees $34,100,000 $35,297,000 $34,072,000
Royalties 2,560,000 3,020,000 2,505,000
----------- ----------- -----------
$36,660,000 $38,317,000 $36,577,000
=========== ============ ============
(12) Financial Instruments
The following disclosure about the fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The fair value
of the Company's long-term debt is estimated to be approximately
$119,754,000 and $132,504,000 at February 2, 2002 and February 3, 2001,
and is based on dealer quotes or quoted market prices of the same or
similar instruments The carrying amounts of long-term debt were
$150,000,000 at February 2, 2002 and February 3, 2001. The carrying
amounts reported in the consolidated balance sheets for cash and cash
equivalents, notes payable-bank, accounts payable and other current
liabilities approximate fair value because of the short-term maturity
of those financial instruments. The estimates presented herein are not
necessarily indicative of amounts the Company could realize in a
current market exchange.
(13) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This statement requires the use of the
asset and liability method of accounting for income taxes. Under the
asset and liability method, deferred taxes are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
F-32
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
The income tax provision/(benefit) consists of:
2001 2000 1999
---- ---- ----
Current:
Foreign $ 260,000 $ 300,000 $ 250,000
Federal (2,400,000) 6,253,000 3,100,000
State and local 100,000 920,000 1,440,000
----------- ------------ -----------
(2,040,000) 7,473,000 4,790,000
----------- ------------ -----------
Deferred - Federal, state and local 1,873,000 4,707,000 (2,497,000)
----------- ------------ -----------
Total $ (167,000) $ 12,180,000 $ 2,293,000
=========== ============ ===========
A reconciliation between the provision/(benefit) for income taxes based on the
U.S. Federal statutory rate and the Company's effective rate is as follows.
2001 2000 1999
---- ---- ----
Federal income tax rate (35.0)% 35.0% 35.0%
State and local income taxes, net
of federal benefit 134.6 3.2 14.4
Nondeductible expenses and other (172.8) (2.3) 5.4
-------- ------ -----
Effective tax rate (73.2)% 35.9% 54.7%
======== ====== =====
The tax effect of temporary differences which give rise to deferred tax assets
and liabilities are:
February 2, February 3,
2002 2001
---- ----
Deferred tax assets:
Reserve for sales returns $ 2,603,000 $ 2,625,000
State and local net operating loss carryforwards 1,900,000 1,900,000
Other 6,637,000 5,727,000
-------------- -------------
11,140,000 10,252,000
-------------- -------------
Prepaid catalog and other prepaid expenses (8,841,000) (8,026,000)
Difference in book and tax basis
for property and equipment (7,903,000) (5,957,000)
-------------- -------------
(16,744,000) (13,983,000)
-------------- -------------
Net deferred income taxes $ (5,604,000) $ (3,731,000)
============== =============
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize
the deferred tax assets. The Company has state and local income tax net
operating loss carryforwards of varying amounts.
F-33
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
(14) Stockholder's Equity
The Company has authorized 100 shares of common stock par value $1 per
share, all of which was issued and outstanding at February 2, 2002 and
February 3, 2001. A reconciliation of stockholder's equity is as
follows:
Year Ended
February 2, 2002 February 3, 2001
---------------- ----------------
Balance, beginning of year $ 19,208,000 $ (2,545,000)
Net income/(loss) for year (61,000) 21,753,000
------------- --------------
Balance, end of year $ 19,147,000 $ 19,208,000
============= ==============
(15) Segment Information
The Company operates in one business segment. The Company designs,
contracts to manufacture and markets men's, women's, and children's
apparel, shoes and accessories primarily under the J.Crew brand name.
The brand is marketed through various channels of distribution
including retail and factory outlet stores, catalogs, the Internet and
licensing arrangements with third parties. During 1998 the Company
decided to discontinue the operations of its C&W brand. Fiscal 1999 and
2000 include charges of $4,000,000 and $4,130,000 primarily to write
down inventories to net realizable value. (See note 3 to the
consolidated financial statements).
All of the Company's identifiable assets are located in the United
States. Export sales are not significant.
Corporate and other expenses include expenses incurred by the corporate
office and certain non-recurring expenses that are not allocated to
specific business units. Corporate and other expenses in fiscal 1999
include the write off of impaired software development costs.
Segment assets represent the assets used directly in the operations of
each business unit such as inventories and property and equipment.
Corporate assets consist principally of investments, deferred financing
costs and certain capitalized software.
F-34
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended February 2, 2002, February 3, 2001 and January 29, 2000
The accounting policies used for segment reporting are consistent with those
described in the summary of significant accounting policies.
[$ in thousands]
Revenues 2001 2000 1999
---- ---- ----
J. Crew $777,940 $825,975 $ 750,696
========= ======== =========
Income from operations
J. Crew 20,650 61094 41,052
Clifford & Wills -- (4,130) (4,000)
Corporate and other expenses -- (244) (7,869)
--------- --------- ----------
Income from operations 20,650 56,720 29,819
Interest expense, net (20,890) (22,787) (26,626)
Gain on sale of PCP --- -- 1,000
--------- --------- ----------
Income/(loss) before income taxes $ (240) $ 33,933 $ 4,193
========= ========= ==========
Depreciation and amortization
J. Crew $ 31,568 $ 22,448 $ 19,051
Corporate 150 152 190
--------- --------- ----------
$ 31,718 $ 22,600 $ 19,241
========= ========= ==========
Identifiable assets
J. Crew $360,882 $342,541 $ 305,552
Clifford & Wills -- -- 8,927
Corporate 20,846 31,211 49,127
--------- --------- -----------
$381,728 $373,752 $ 363,606
========= ========= ==========
Capital expenditures
J. Crew $ 59,846 $ 55,394 $ 39,435
Corporate 2,016 300 9,249
--------- --------- ----------
$ 61,862 $ 55,694 $ 48,684
========= ========= ==========
F-35
(16) Quarterly Financial Information (Unaudited)
-------------------------------
($ in millions)
13 weeks 13 weeks 13 weeks 13 weeks 52 weeks
ended ended ended ended ended
5/5/01 8/4/01 11/3/01 2/2/02 2/2/02
------ ------ ------- ------ ------
Net sales $ 158.9 $160.5 $187.1 $234.8 $741.3
Gross profit 68.2 60.5 82.8 104.1 315.6
Net income (loss) $ (7.1) $ (6.1) $ 2.7 $ 10.4 $ (.1)
13 weeks 13 weeks 13 weeks 14 weeks 53 weeks
ended ended ended ended ended
4/29/00 7/29/00 10/28/00 2/3/01(a) 2/3/01
------- ------- -------- --------- ------
Net sales $ 158.0 $162.2 $194.0 $273.5 $787.7
Gross profit 72.8 71.0 90.2 128.1 362.1
Net income (loss) $ (3.1) $ (2.9) $ 6.7 $ 21.1 $ 21.8
(a) includes $4.1 million writedown of net assets of C&W.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
beginning charged to cost charged to other ending
balance and expenses accounts deductions balance
($ in thousands)
Inventory reserve
- -----------------
(deducted from inventories)
fiscal year ended:
February 2, 2002 $ 7,360 $ 1,007(a) $ -- $ -- $ 8,367
February 3, 2001 4,447 2,913(a) -- -- 7,360
January 29, 2000 6,122 (1,675)(a) --- -- 4,447
Allowance for sales returns
- ---------------------------
(included in other current liabilities)
fiscal year ended:
February 2, 2002 $ 6,530 $ (55)(a) $ -- $ -- $ 6,475
February 3, 2001 5,011 1,519(a) -- -- 6,530
January 29, 2000 3,473 1,538(a) ---- 5,011
(a) The inventory reserve and allowance for sales returns are evaluated at the
end of each fiscal quarter and adjusted (plus or minus) based on the
quarterly evaluation. During each period inventory write-downs and sales
returns are charged to the statement of operations as incurred.
F-36
EXHIBIT INDEX
Exhibit
No. Description
-- -----------
3.1 Restated Certificate of Incorporation of J. Crew Group, Inc.
(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-4, File No. 333-42427, filed
December 16, 1997 (the "Registration Statement")).
3.2 By-laws of J. Crew Group, Inc., as amended (incorporated by
reference to Exhibit 3.2 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended February 3, 2001 (the "2000
Form 10-K")).
4.1 Indenture, dated as of October 17, 1997, between J. Crew Group,
Inc., as issuer, and State Street Bank and Trust Company, as
trustee, relating to the Debentures (incorporated by reference to
Exhibit 4.3 to the Registration Statement).
4.2(a) Credit Agreement, dated as of October 17, 1997 ("Credit
Agreement"), among J. Crew Group, Inc., J. Crew Operating Corp.,
the Lenders Party thereto, the Chase Manhattan Bank, as
Administrative Agent, and Donaldson, Lufkin & Jenrette Securities
Corporation, as Syndication Agent (incorporated by reference to
Exhibit 4.5 to Amendment No. 1 to the Registration Statement,
filed February 6, 1998).
4.2(b) Amendment, dated as of November 23, 1998, to the Credit Agreement
(incorporated by reference to Exhibit 4.2(b) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 30,
1999 (the "1998 Form 10-K")).
4.2(c) Amendment, dated as of March 18, 1998, to the Credit Agreement
(incorporated by reference to Exhibit 4.2(c) of the 1998 Form
10-K).
4.2(d) Amendment and Restatement Agreement, dated as of April 20, 1999,
relating to the Credit Agreement (incorporated by reference to
Exhibit 4.2(d) of the 1998 Form 10-K).
4.2(e)* Amendment, dated as of April 17, 2002, to the Credit Agreement.
4.3 Guarantee Agreement, dated as of October 17, 1997, among J. Crew
Group, Inc., the subsidiary guarantors of J. Crew Operating Corp.
that are signatories thereto and The Chase Manhattan Bank
(incorporated by reference to Exhibit 4.6 to the Registration
Statement).
4.4 Indemnity, Subrogation and Contribution Agreement, dated as of
October 17, 1997, among J. Crew Operating Corp., the subsidiary
guarantors of J. Crew Operating Corp. that are signatories
thereto and The Chase Manhattan Bank (incorporated by reference
to Exhibit 4.7 to the Registration Statement).
4.5 Pledge Agreement, dated as of October 17, 1997, among J. Crew
Operating Corp., J. Crew Group, Inc., the subsidiary guarantors
of J. Crew Operating Corp. that are signatories thereto and The
Chase Manhattan Bank (incorporated by reference to Exhibit 4.8 to
the Registration Statement).
4.6 Security Agreement, dated as of October 17, 1997, among J. Crew
Operating Corp., J. Crew Group, Inc., the subsidiary guarantors
of J. Crew Operating Corp. that are signatories thereto and The
Chase Manhattan Bank (incorporated by reference to Exhibit 4.9 to
the Registration Statement).
1
Exhibit
No. Description
-- -----------
4.7 Registration Rights Agreement, dated as of October 17, 1997, by
and among J. Crew Group, Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Chase Securities Inc. (incorporated by
reference to Exhibit 4.10 to the Registration Statement).
NOTE:Pursuant to the provisions of paragraph (b)(4)(iii) of Item
601 of Regulation S-K, the Registrant hereby undertakes to
furnish to the Commission upon request copies of the instruments
pursuant to which various entities hold long-term debt of the
Company or its parent or subsidiaries, none of which instruments
govern indebtedness exceeding 10 percent of the total assets of
the Company and its subsidiaries on a consolidated basis.
10.1(a)+ Employment Agreement, dated October 17, 1997, among J. Crew
Group, Inc., J. Crew Operating Corp., TPG Partners II, L.P. (only
with respect to Section 2(c) therein) and Emily Woods (the "Woods
Employment Agreement") (incorporated by reference to Exhibit 10.1
to the Registration Statement).
10.1(b)+ Letter Agreement, dated February 4, 2000, between J. Crew Group,
Inc. and Emily Woods (incorporated by reference to Exhibit 10.1
(b) to the Registrant's Annual Report on Form 10-K for the fiscal
year ended January 29, 2000 (the "1999 Form 10-K")).
10.2+ J. Crew Operating Corp. Senior Executive Bonus Plan (included as
Exhibit A to the Woods Employment Agreement filed as Exhibit
10.1(a) above).
10.3+ Stock Option Grant Agreement, made as of October 17, 1997,
between J. Crew Group, Inc. and Emily Woods (time based)
(incorporated by reference to Exhibit 10.3 to the Registration
Statement).
10.4+ Stock Option Grant Agreement, made as of October 17, 1997,
between J. Crew Group, Inc. and Emily Woods (performance based)
(incorporated by reference to Exhibit 10.4 to the Registration
Statement).
10.5(a)+ Employment Agreement, dated May 3, 1999, between J.Crew Group,
Inc. and Mark Sarvary (incorporated by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the period
ended May 1, 1999).
10.5(b)+ Letter Agreement, dated August 9, 1999, between Mark Sarvary and
J. Crew Operating Corp. (incorporated by reference to Exhibit
10.5(b) to the 1999 Form 10-K).
10.5(c)+* Letter Agreement, dated January 15, 2002, between Mark Sarvary
and J. Crew Operating Corp.
10.6+ Agreement, dated September 30, 1999, between J. Crew Operating
Corp. and Carol Sharpe (incorporated by reference to Exhibit 10.6
to the 1999 Form 10-K).
10.7(a)+ Employment Agreement, dated February 18, 2000, between J. Crew
Operating Corp. and Trudy Sullivan (incorporated by reference to
Exhibit 10.7 to the 2000 Form 10-K).
10.7(b)+* Letter Agreement, dated July 12, 2001, between Trudy Sullivan and
J. Crew Operating Corp.
10.8+ Letter Agreement, dated January 29, 2001, between J. Crew Group,
Inc. and Richard Anders (incorporated by reference to Exhibit
10.8(b) of the 2000 Form 10-K).
10.9 Stockholders' Agreement, dated as of October 17, 1997, among J.
Crew Group, Inc. and the Stockholder signatories thereto
(incorporated by reference to Exhibit 4.1 to the Registration
Statement).
2
Exhibit
No. Description
-- ------------
10.10 Stockholders' Agreement, dated as of October 17, 1997, among J.
Crew Group, Inc., TPG Partners II, L.P. and Emily Woods (included
as Exhibit B to the Woods Employment Agreement filed as Exhibit
10.1 to the Registration Statement).
10.11(a)+ J. Crew Group, Inc. 1997 Stock Option Plan (the "1997 Plan")
(incorporated by reference to Exhibit 10.13 to the Registration
Statement).
10.11(b)+ Amendment to the 1997 Plan, dated July 24, 2000 (incorporated by
reference to Exhibit 10.11(b) to the 2000 Form 10-K).
10.11(c)+ Amendment to the 1997 Plan, dated February 2, 2001 (incorporated
by reference to Exhibit 10.11(c) to the 2000 Form 10-K).
10.12+* Employment Agreement, dated May 17, 2001, between J. Crew
Operating Corp. and Michael Scandiffio.
10.13+* Employment Agreement, dated December 12, 2001, between J. Crew
Operating Corp. and Blair Gordon.
10.14+* Form of Executive Severance Agreement between J. Crew Operating
Corp. and certain executives thereof.
10.15+* Letter agreement, dated March 14, 2000, between J. Crew Operating
Corp. and Scott Formby.
21.1* Subsidiaries of J. Crew Group, Inc.
23.1* Consent of KPMG LLP, Independent Auditors.
___________
+ Management contract or compensatory plan or arrangement
* Filed herewith
3