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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].
For the fiscal year ended January 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 333-42423
-------------
J. CREW OPERATING CORP.
(Exact name of registrant as specified in its charter)
Delaware 22-3540930
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
770 BROADWAY, NEW YORK, NEW YORK 10003
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (212) 209-2500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
NONE None
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether 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 ______ No X
-----
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 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. [ ]
The common stock of the registrant is not publicly traded. Therefore, the
aggregate market value is not readily determinable.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes _____ No _____
As of April 15, 1998, 100 shares of Common Stock, par value $.01 per share, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
The Registrant meets the conditions set forth in General Instruction I (1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
In connection with the recapitalization (the "Recapitalization") of J. Crew
Group, Inc., a New York corporation ("Holdings"), Holdings organized J. Crew
Operating Corp., a Delaware corporation ("Operating Corp"), and immediately
prior to the consummation of the Recapitalization, Holdings transferred
substantially all of its assets and liabilities to Operating Corp. Holdings and
its subsidiaries are collectively referred to herein as the "Company."
References herein to fiscal years are to the fiscal years of Holdings, which end
on the Saturday closest to January 31 in the following calendar year. Effective
January 31, 1998, the Company changed its fiscal year end from the Friday
closet to January 31 to the Saturday closest January 31. Accordingly, fiscal
years 1993, 1994, 1995, 1996 and 1997 ended on January 28, 1994, February 3,
1995, February 2, 1996, January 31, 1997 and January 31, 1998. All fiscal years
for which financial information is included had 52 weeks, except fiscal 1994
which had 53 weeks.
Certain statements in this Annual Report 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. 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 any future results,
performances or achievements expressed or implied by such forward-looking
statements. The Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.
PART I
ITEM 1. BUSINESS
The Company is a leading mail order and store retailer of women's and men's
apparel, shoes and accessories operating primarily under the J. Crew(R) brand
name. The J. Crew merchandising strategy emphasizes timeless styles and a broad
assortment of high-quality products designed to provide customers with one-stop
shopping opportunities at attractive prices. J. Crew catalogs and retail stores
offer a full line of men's and women's basic durables (casual weekend wear),
sport, swimwear, accessories and shoes, as well as the more tailored men's
sportswear and women's "Classics" lines. Approximately 60% of the Company's J.
Crew brand sales are derived from its core offerings of durables and sport
clothing, the demand for which the Company believes is stable and resistant to
changing fashion trends. The Company believes that the J. Crew image and
merchandising strategy appeal to college-educated, professional and affluent
customers who, in the Company's experience, have demonstrated strong brand
loyalty and a tendency to make repeat purchases.
J. Crew products are distributed exclusively through the Company's catalog
and store distribution channels. The Company currently circulates over 76
million J. Crew catalogs per annum and owns and operates 51 J. Crew retail
stores and 42 J. Crew factory outlets. In addition, J. Crew products are
distributed through 67 free-standing and shop-in-shop stores in Japan under a
licensing agreement with Itochu.
In addition to the Company's J. Crew operations, the Company operates
Clifford & Wills ("C&W"), a mail order and factory store women's apparel
business that targets older, more conservative customers, and Popular Club Plan
("PCP"), a direct selling catalog merchandiser of consumer branded goods through
a "club" concept that provides credit sales to lower-income customers.
The Company has five major operating divisions: J. Crew Mail Order, J. Crew
Retail, J. Crew Factory Outlets, PCP and C&W. J. Crew Mail Order, J. Crew
Retail and J. Crew Factory Outlets each operate under the J. Crew brand name. In
1997, products sold under the J. Crew brand contributed $577.6 million in
revenues (including licensing revenues) or 69.3% of the Company's total
revenues. J. Crew brand revenues in 1997 were comprised primarily of $264.8
million (45.8%) from J. Crew Mail Order, $209.6 million (36.3%) from J. Crew
Retail and $100.3 million (17.4%) from J. Crew Factory Outlets. In fiscal 1997,
PCP and C&W contributed revenues of $184.4 million and
1
$72.0 million, respectively, representing approximately 22.1% and 8.6%,
respectively, of the Company's total revenues.
ITEM 2. PROPERTIES
The Company is headquartered in New York City, although PCP maintains a
separate main office in Garfield, New Jersey. Both the New York City
headquarters offices and PCP's Garfield office are leased from third parties.
The Company owns two telemarketing and distribution facilities: a 406,500-
square-foot telemarketing and distribution center for J. Crew and C&W mail order
operations in Lynchburg, Virginia and a 192,500-square-foot distribution center
in Asheville, North Carolina servicing the J. Crew Retail and J. Crew and C&W
outlet store operations. The Company also leases from a third party a 369,000-
square-foot distribution facility located in Edison, New Jersey dedicated to
PCP's fulfillment operations.
As of January 31, 1998, the Company operated 102 retail and factory outlet
stores. All of the retail and factory outlet stores are leased from third
parties, and the leases in most cases have terms of 10 to 12 years, not
including renewal options. As a general matter, the leases contain standard
provisions concerning the payment of rent, events of default and the rights and
obligations of each party. Rent due under the leases is comprised of annual base
rent plus a contingent rent payment based on the store's sales in excess of a
specified threshold. Substantially all the leases are guaranteed by Holdings.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in several lawsuits arising in the ordinary
course of business. Although the amount of any liability that could arise with
respect to any such lawsuit cannot be accurately predicted, in the opinion of
management, the resolution of these matters is not expected to have a material
adverse effect on the financial position or results of operations of the
Company.
A 1992 Supreme Court decision confirmed that the Commerce Clause of the
United States Constitution prevents a state from requiring the collection of its
use tax by a mail order company unless the company has a physical presence in
the state. However, there continues to be some uncertainty in this area due to
inconsistent application of the Supreme Court decision by state and federal
courts. The Company attempts to conduct its operations in compliance with its
interpretation of the applicable legal standard, but there can be no assurance
that this compliance will not be challenged. From time to time, various states
have sought to require companies to begin collection of use taxes and/or pay
taxes from previous sales. The Company has not received assessments from any
state in which it is not currently collecting sales taxes since the 1992 Supreme
Court decision.
The Supreme Court decision also established that Congress has the power to
enact legislation that would permit states to require collection of use taxes by
mail order companies. Congress has from time to time considered proposals for
such legislation. The Company anticipates that any legislative change, if
adopted, would be applied only on a prospective basis.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
2
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY SECURITIES AND RELATED
STOCKHOLDER MATTERS
There is no established public market for any class of Operating Corp
capital stock. Holdings owns 100% of the common stock of Operating Corp
("Common Stock").
On October 17, 1997, Operating Corp made a cash distribution of
approximately $69.3 million to permit Holdings to make certain payments in
connection with the Recapitalization. Operating Corp may from time to time pay
cash dividends on the Common Stock to permit Holdings to make required payments
relating to its senior discount debentures.
The indenture relating to the Senior Subordinated Notes and the credit
agreement to which Operating Corp is a party contain covenants which impose
substantial restrictions on Operating Corp's ability to make dividends or
distributions to Holdings.
3
ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the audited consolidated
financial statements of the Company for the three-year period ended January 31,
1998 and notes thereto included elsewhere in this Annual Report on Form 10-K.
Revenues
Revenues increased 3.1% to $834.0 million in the fiscal year ended January
31, 1998 from $808.8 million in the fiscal year ended January 31, 1997, as a
result of increased revenues of J. Crew Retail stores. The increased revenues of
J. Crew Retail stores were offset by a decrease in J. Crew Mail Order revenues.
J. Crew Retail revenues increased by 24.8% to $209.6 million in the fiscal year
ended January 31, 1998 from $168.0 million in the fiscal year ended January 31,
1997. The increase in J. Crew Retail store revenues was the result of the
opening of 12 new stores in fiscal 1997 , which offset a decline of 6.6% in
comparable store sales.
J. Crew Mail Order revenues decreased by 8.6% to $264.8 million in the
fiscal year ended January 31, 1998 from $289.8 million in the fiscal year ended
January 31, 1997. The percentage of the Company's total revenues derived from
J. Crew Mail Order decreased to 31.8% in the fiscal year ended January 31, 1998
from 35.8% in the fiscal year ended January 31, 1997. The decrease in J. Crew
Mail Order revenues was primarily due to weak performance in menswear sales and
unseasonably warm weather on the east coast during the fall season. The UPS
strike also contributed to the decrease in J. Crew Mail Order revenues. Gross
sales were down 19% from July 18, 1997 to the end of the UPS strike on August
23, 1997 compared to the same period in the prior period. The number of catalogs
mailed was approximately 77 million in fiscal 1997 compared to 76 million in
fiscal 1996.
J. Crew Retail revenues increased by 24.8% to $209.6 million in the fiscal
year ended January 31, 1998 from $168.0 million in the fiscal year ended January
31, 1997. The percentage of the Company's total revenue derived from its J.
Crew Retail stores increased to 25.1% in the fiscal year ended January 31, 1998
from 20.8% in the fiscal year ended January 31, 1997. The increase in J. Crew
Retail revenues is the result of opening 12 new stores in the fiscal year ended
January 31, 1998. Comparable stores sales decreased 6.6% as the result of the
opening of new stores in proximity to existing store locations, weak performance
in menswear sales and unseasonably warm weather in the second half of the year
which contributed to a decrease in the sales of fall and winter clothing.
J. Crew Factory Outlet revenues increased by 6.1% to $100.3 million in the
fiscal year ended January 31, 1998 from $94.5 million in the fiscal year ended
January 31, 1997. The percentage of the Company's total revenue derived from J.
Crew Factory Outlet remained at approximately 12%. J. Crew Factory stores
comparable store sales increased by 2.0% in the fiscal year ended January 31,
1998. The comparable store sales increase was principally due to the overall
improvement in store merchandising under the direction of a new factory outlet
merchandising vice president. J. Crew Factory Outlet opened three new stores
and closed one store in fiscal 1997.
PCP revenues increased by 3.8% to $184.4 million in the fiscal year ended
January 31, 1998 compared to $177.7 million in the fiscal year ended January 31,
1997. The percentage of the Company's total revenues derived from PCP remained
at approximately 22.0%. The number of catalogs mailed remained at the same
approximate level of 7 million and the number of selling agents remained
unchanged at approximately 106,000 during fiscal 1997 and 1996. The increase in
sales in fiscal 1997 over fiscal 1996 was attributable to better performance in
ready-to-wear apparel and specifically in new branded merchandise.
C&W revenues decreased 4.0% to $72.0 million in the fiscal year ended
January 31, 1998 from $75.0 million in the fiscal year ended January 31, 1997.
The percentage of the Company's revenue derived from C&W
4
decreased to 8.6% in the fiscal year ended January 31, 1998 from 9.3% in the
fiscal year ended January 31, 1997. The number of catalogs mailed increased to
approximately 40 million in the fiscal year ended January 31, 1998 from
approximately 38 million in the fiscal year ended January 31, 1997. The decrease
in sales was the result of the effect of the UPS strike, the unseasonably warm
weather in the second half of the fiscal year effecting the sales of fall and
winter clothing and a lower response from the Company's sale catalogs compared
to the prior year.
Gross Profit
Gross profit as a percentage of revenues was 44.2% for the fiscal year
ended January 31, 1998 compared to 47.0% in the fiscal year ended January 31,
1997. Half of the decrease in gross profit was primarily the result of
significant promotional discounting in the November and December Holiday
catalogs in J. Crew Mail Order and the other half of the decrease was the result
of an increase in J. Crew Retail buying and occupancy costs, reflecting the
higher costs associated with opening new stores in urban areas such as New York
City.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of revenues
was 43.1% in the fiscal year ended January 31, 1998 and the fiscal year ended
January 31, 1997. As a percentage of revenues general and administrative
expenses increased by 1.2%, primarily as a result of a higher expense ratio due
to the decrease in J. Crew Mail Order revenues and the decline in comparable
store sales in J. Crew Retail. Catalog circulation costs (consisting primarily
of paper, postage and printing) expenses decreased by 1.2% primarily as a result
of decreased paper costs. Absolute dollar amounts of selling, general and
administrative expenses increased to $359.8 million in fiscal 1997 from $348.3
million in fiscal 1996, primarily reflecting volume related costs.
Interest Expense
Interest expense increased to $17.5 million or 2.1% of revenues in the
fiscal year ended January 31, 1998 from $10.5 million or 1.3% of revenues in the
fiscal year ended January 31, 1997. This increase in interest expense was due
to the issuance by Operating Corp of the Senior Subordinated Notes of $150
million which contributed approximately $4.6 million in increased interest and
the borrowings by Operating Corp under its term loan facility of $70 million
which contributed approximately $1.8 million in increased interest. These
borrowings were required to fund the Recapitalization. This increase was
partially offset by a decrease in the interest expense related to the $85.0
million of senior indebtedness which was retired in October 1997. Borrowings by
Operating Corp under its revolving credit facility required to fund inventories
and capital expenditures contributed $1.9 million in increased interest.
Recapitalization Expenses
The recapitalization expenses of $20.7 million consisted of management
bonuses of $12.2 million, a financial advisory fee paid to TPG Partners II,
L.P. of $5.6 million, legal and accounting fees of $1.4 million, a consulting
fee of $1.0 million and other expenses of $0.5 million. The Company's results
of operations were negatively impacted by these recapitalization expenses. The
loss before income taxes and extraordinary item of $29.2 million for the fiscal
year ended January 31, 1998 includes the $20.7 million of non-recurring
recapitalization expenses, the majority of which were paid before January 31,
1998.
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 and the $70 million Term Loan
Facility. In order to manage this interest rate risk, the Company entered into
an interest rate swap agreement in October 1997 for $70 million notional
principal amount. This agreement which has a term of three years, converts the
interest rate on $70 million of debt to a fixed rate of 6.23%. If this interest
rate swap agreement was settled on January 31, 1998, the Company would be
required to pay an additional $935,000.
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 January 31, 1998
were approximately $20.1 million.
Furthermore, the Company has a licensing agreement in Japan which
provides for a royalty payment 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. At January 31, 1998, there
were no forward foreign exchange contracts outstanding. A 10% change in the
dollar-yen exchange rate would have an effect on net income of approximately
$200,000, which amount is not material.
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 DISCLOSURES
Not applicable.
5
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I 1(a) and (b) of Form 10-K.
6
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of J. Crew Operating Corp. and
subsidiaries are included in Item 8:
(i) Report of KPMG Peat Marwick LLP, Independent Auditors
(ii) Report of Deloitte & Touche LLP, Independent Auditors
(iii) Consolidated Balance Sheets - January 31, 1998 and 1997
(iv) Consolidated Statements of Operations - Years ended January 31,
1998 and 1997 and February 2, 1996
(v) Consolidated Statements of Cash Flows - Years ended January 31,
1998 and 1997 and February 2, 1996
(vi) Notes to consolidated financial statements
2. Financial Statements Schedules
Schedule II Valuation and Qualifying Accounts is set forth herein
commencing on page F-23 of this Report.
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
No reports on Form 8-K have been filed by registrant during the last
quarter of the period covered by this report.
(c) Exhibits
See Item 14(a)3 above.
(d) Financial Statement Schedules
See Item 14(a)1 and 14(a)2 above.
7
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Financial Statements
January 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
J. Crew Operating Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of J. Crew Operating
Corp. and subsidiaries (the "Company") as of January 31, 1998 and the related
consolidated statements of operations and cash flows for the fiscal year then
ended. In connection with our audit of the consolidated financial statements, we
also have audited the financial statement schedule for the fiscal year ended
January 31, 1998 as 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
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 31, 1998
and the results of its operations and cash flows for the fiscal year then ended
in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule for the fiscal year ended
January 31, 1998, 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 Peat Marwick LLP
April 13, 1998
New York, New York
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
J. Crew Group, Inc.
We have audited the accompanying consolidated balance sheet of J. Crew
Group, Inc. and subsidiaries as of January 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two fiscal years in the period ended January 31, 1997. Our audits
also included the financial statement schedule listed in the Index at Item
14(a)2. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of J. Crew Group, Inc. and
subsidiaries as of January 31, 1997, and the results of their operations and
their cash flows for each of the two fiscal years in the period ended January
31, 1997 in conformity with generally accepted accounting principles. Also, in
our opinion, such 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.
As discussed in Note 14 to the consolidated financial statements, in
1995, the Company changed its method of accounting for catalog costs to conform
with the provisions of Statement of Position 93-7, "Reporting on Advertising
Costs," and changed its method of accounting for merchandise inventories.
Deloitte & Touche LLP
New York, New York
March 31, 1997
F-3
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Balance Sheets
January 31
-------------------
ASSETS 1998 1997
--------- --------
(in thousands)
Current assets:
Cash and cash equivalents $ 12,166 7,132
Accounts receivable (net of allowance for doubtful
accounts of $5,438 and $4,357) 16,834 58,079
Merchandise inventories 202,763 197,657
Prepaid expenses and other current assets 62,399 58,318
--------- -------
Total current assets 294,162 321,186
--------- -------
Property and equipment - at cost:
Land 1,460 1,405
Buildings and improvements 11,167 11,167
Furniture, fixtures and equipment 47,673 43,537
Leasehold improvements 101,407 75,378
Construction in progress 4,569 4,063
--------- -------
166,276 135,550
Less accumulated depreciation and amortization 55,613 49,121
--------- -------
110,663 86,429
--------- -------
Other assets 14,619 3,206
--------- -------
Total assets $ 419,444 410,821
========= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable 65,553 103,279
Other current liabilities 77,850 62,938
Deferred income taxes 8,986 12,555
Federal and state income taxes payable 251 9,955
Current portion of long-term debt -- 237
--------- -------
Total current liabilities 152,640 188,964
--------- -------
Long-term debt 220,000 86,855
--------- -------
Deferred credits and other long-term liabilities 43,578 32,996
--------- -------
Stockholder's equity 3,226 102,006
--------- -------
Total liabilities and stockholder's equity $ 419,444 410,821
========= =======
See accompanying notes to consolidated financial statements.
F-4
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Statements of Operations
Years ended
-------------------------------
January 31 February 2
------------------ -----------
1998 1997 1996
-------- -------- -----------
(in thousands)
Net sales $ 822,840 795,931 732,580
Other revenues 11,191 12,912 13,329
------- ------- -------
Revenues 834,031 808,843 745,909
Cost of goods sold, including buying and occupancy
costs 465,168 428,719 399,668
------- ------- -------
Gross profit 368,863 380,124 346,241
Selling, general and administrative expenses 359,811 348,305 327,672
------- ------- -------
Income from operations 9,052 31,819 18,569
Interest expense - net 17,524 10,470 9,350
Expenses incurred in connection with the recapitalization 20,707 -- --
------- ------- -------
(Loss) income before income taxes,
extraordinary item and cumulative effect
of accounting changes (29,179) 21,349 9,219
(Benefit) provision for income taxes (4,257) 8,800 3,700
------- ------- ----------
(Loss) income before extraordinary
item and cumulative effect
of accounting changes (24,922) 12,549 5,519
Extraordinary item - loss on early retirement of debt
(net of income tax benefit of $3,127 and $1,200) (4,500) -- (1,679)
Cumulative effect of accounting changes (net of
income taxes of $1,800) -- -- 2,610
------- ------- -------
Net (loss) income $ (29,422) 12,549 6,450
======= ======= =======
See accompanying notes to consolidated financial statements.
F-5
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended
---------------------------------
January 31 February 2
-------------------- -----------
1998 1997 1996
----- ----- -----
(in thousands)
Cash flows from operating activities:
Net (loss)/income $ (29,422) 12,549 6,450
Adjustments to reconcile net (loss) income to net cash
provided by (used in)operating activities:
Loss on early retirement of debt 7,627 -- --
Depreciation and amortization 15,255 10,541 10,272
Amortization of deferred financing costs 892 401 1,186
Deferred income taxes (4,005) (1,184) 10,131
Provision for losses on accounts receivable 7,343 6,945 7,277
Noncash compensation expense -- -- 1,142
Changes in operating assets and liabilities:
Accounts receivable (12,098) (6,744) (7,708)
Sale of accounts receivable 46,000 -- --
Merchandise inventories (5,106) (49,602) (10,417)
Prepaid expenses and other current assets (4,081) (4,007) (12,444)
Other assets (587) (375) (2,031)
Accounts payable (37,726) 31,864 6,318
Other liabilities 17,727 3,439 (5,351)
Federal and state income taxes payable (9,268) 12,670 (12,674)
--------- ------- -------
Net cash (used in) provided by operating activities (7,449) 16,497 (7,849)
--------- ------- -------
Cash flows from investing activities:
Capital expenditures (43,134) (27,462) (18,466)
Proceeds from construction allowances 11,767 4,981 3,826
--------- ------- -------
Net cash used in investing activities (31,367) (22,481) (14,640)
--------- ------- -------
Cash flows from financing activities:
Issuance of long-term debt 220,000 -- 85,000
Repayment of long-term debt (92,863) (237) (67,237)
Costs incurred in connection with the issuance of debt (13,929) -- --
Dividends paid (69,358) (176) --
--------- ------- -------
Net cash provided by (used in) financing activities 43,850 (413) 17,763
--------- ------- -------
Increase (decrease) in cash and cash equivalents 5,034 (6,397) (4,726)
Cash and cash equivalents at beginning of year 7,132 13,529 18,255
--------- ------- -------
Cash and cash equivalents at end of year $ 12,166 7,132 13,529
======= ======= ======
Supplementary cash flow information:
Income taxes paid (refunded) $ 5,180 (3,600) 7,000
======= ======= ======
Interest paid $ 12,655 9,880 9,601
======= ======= ======
See accompanying notes to consolidated financial statements.
F-6
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 31, 1998 and 1997 and
February 2, 1996
(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"). The consolidated
balance sheet as of January 31, 1997 and the consolidated statements of
operations and cash flows for the period February 1, 1997 through October
17, 1997 and for the years ended January 31, 1997 and February 2, 1996
are those of Holdings, as predecessor to Operating Corp. All
significant intercompany balances and transactions have been eliminated
in consolidation.
Prior to the Recapitalization (see Note 2), Holdings owned all of the
stock, directly or indirectly, of its various operating subisidiaries. In
connection with the Recapitalization, Holdings formed Operating Corp. and
immediately prior to the consummation of the Recapitalization, Holdings
transferred substantially all of its assets and liabilities to Operating
Corp. On October 17, 1997, Operating Corp. made a cash distribution of
$69,358,000 to permit Holdings to make certain payments in connection
with the Recapitalization.
(B) BUSINESS
The Company, which operates in one business segment, designs, contracts
for the manufacture of, markets and distributes men's, women's and
children's apparel, accessories and home furnishings. The Company's
products are marketed through catalogs and retail stores primarily in the
United States. The Company is also party to a licensing agreement which
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 1997, 1996 and 1995 ended on January 31, 1998 (52
weeks), January 31, 1997 (52 weeks) and February 2, 1996 (52 weeks).
Effective January 31, 1998 the Company changed its fiscal year-end from
the Friday closest to January 31, to the Saturday closest to January 31.
The effect of this change on the results of operations was not material.
(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 $1,902,000 and $1,968,000 at January 31, 1998 and 1997, are stated
at cost, which approximates market value.
F-7
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(E) ACCOUNTS RECEIVABLE
Accounts receivable consists of installment receivables resulting from
the sale of merchandise of Popular Club Plan, Inc., a subsidiary of the
Company. Concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of customers comprising
the accounts receivable base. Finance charge income (including the gain
on sale of receivables (see Note 4)), which is included in other
revenues, for the fiscal years 1997, 1996 and 1995 was $8,294,000,
$9,095,000 and $9,354,000.
(F) MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost (determined on a
first-in, first-out basis) or market. The Company capitalizes certain
design, purchasing and warehousing costs into inventory. (See Note 14).
(G) CATALOG COSTS
Catalog costs, which primarily consist of catalog production and mailing
costs, are capitalized and amortized over the expected future revenue
stream, which extends up to five months from the date catalogs are
mailed. The Company accounts for catalog costs in accordance with the
AICPA Statement of Position ("SOP") 93-7, "Reporting on Advertising
Costs." SOP 93-7 requires that the amortization of capitalized
advertising costs 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 January 31, 1998 and 1997 were $39,227,000 and
$41,191,000. Catalog costs, which are reflected in selling and
administrative expenses, for the fiscal years 1997, 1996 and 1995 were
$131,103,000, $135,633,000 and $132,566,000 (See Note 14).
(H) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Buildings and improvements
are depreciated by the straight-line method over the estimated useful
lives of the respective assets of twenty years. Furniture, fixtures and
equipment are depreciated by the straight-line method over the estimated
useful lives of the respective assets, ranging from three to ten years.
Leasehold improvements are amortized over the shorter of their useful
lives or related lease terms.
The Company receives construction allowances upon entering into certain
store leases. These construction allowances are recorded as deferred
credits and are amortized over the term of the related lease.
F-8
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(I) OTHER ASSETS
Other assets consist primarily of debt issuance costs of $12,431,000 and
$1,250,000 at January 31, 1998 and 1997, which are amortized over the
term of the related debt agreements.
(J) INCOME TAXES
The provision for income taxes includes taxes currently payable and
deferred taxes resulting from the tax effects of temporary differences
between the financial statement and tax bases of assets and liabilities,
in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes."
(K) REVENUE RECOGNITION
Revenue is recognized when merchandise is shipped to customers. The
Company accrues a sales return allowance in accordance with its return
policy for estimated returns of merchandise subsequent to the balance
sheet date that relate to sales prior to the balance sheet date.
(L) STORE PREOPENING COST
Costs associated with the opening of new retail and outlet stores are
expensed as incurred.
(M) DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company to manage its
interest rate and foreign currency exposures. The Company does not hold
derivative financial instruments for trading or speculative purposes. For
interest rate swap agreements, the net interest paid is recorded as
interest expense on a current basis. Gains or losses resulting from
market fluctuations are not recognized. The Company from time to time
enters into forward foreign exchange contracts as hedges relating to
indentifiable currency positions to reduce the risk from exchange rate
fluctuations. Gains and losses on these contracts are deferred and
recognized as adjustments to the bases of those assets. Such gains and
losses were not material for the fiscal years ended January 31, 1998 and
1997.
F-9
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(N) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(O) IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF
In March 1995, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable, and is effective for fiscal years beginning after December
15, 1995. The adoption of SFAS No. 121 did not have an effect on the
Company's financial position or results of operations.
F-10
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) RECAPITALIZATION TRANSACTION
During 1997 Holdings entered into a recapitalization transaction (the
"Recapitalization"). In October 1997, Holdings purchased from the existing
shareholders for an aggregate purchase price of approximately $316,688,000
all of the outstanding shares of Holdings' capital stock, other than a
certain number of shares of Holdings' common stock held by existing
shareholders which represented 14.8% of the outstanding shares of Holdings'
common stock immediately following consummation of the Recapitalization. The
purchase of such outstanding shares of capital stock was financed in part
by (a) issuing to TPG Partners II, L.P. ("TPG"), its affiliates and other
investors shares of common stock of Holdings for approximately $63,891,000
and shares of preferred stock of Holdings for $125,000,000 and (b)
consummating the debt and securitization transactions described in Notes 4, 5
and 6. In connection with the Recapitalization, the Company repaid
substantially all of its preexisting debt obligations immediately before the
consummation of the Recapitalization.
Expenses incurred in connection with the recapitalization consisted of:
Management bonuses $ 12,163,000
TPG financial advisory fee 5,550,000
Legal and accounting fees 1,454,000
Consulting fee 1,000,000
Other 540,000
----------
Total $ 20,707,000
==========
(3) OTHER CURRENT LIABILITIES
Other current liabilities consist of:
January 31,
-------------------------
1998 1997
---------- ----------
Customer liabilities $ 18,572,000 22,968,000
Accrued catalog and marketing costs 12,504,000 10,734,000
Taxes, other than income taxes 9,067,000 9,093,000
Accrued interest 4,998,000 889,000
Reserve for sales returns 3,529,000 2,406,000
Other 29,180,000 16,848,000
----------- ----------
$ 77,850,000 62,938,000
=========== ==========
F-11
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) SALE OF ACCOUNTS RECEIVABLE
In October 1997, the Company entered into an agreement to securitize certain
customer installment receivables of Popular Club Plan, Inc. on a revolving
basis. This securitization involves the transfer of receivables through a
special purpose, bankruptcy remote subsidiary to a trust in exchange for cash
and subordinated certificates representing undivided interests in the pool of
installment accounts receivable and the subsequent sale by the trust of
certificates of beneficial interest to third party investors. The Company has
no obligation to reimburse the trust or the purchasers of beneficial
interests for credit losses. The transactions have been accounted for as a
sale in accordance with the provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities."
At January 31, 1998, $46,000,000 of accounts receivable had been sold.
The sale of receivables resulted in a gain on sale of $1,472,000
during the year ended January 31, 1998, which is included in other
revenues.
Included in the gain on sale is the discount on sale of accounts
receivable which is comprised of the interest, discount and administrative
and other fees paid or accrued to the purchasers of the accounts receivables
sold. The discount approximates the prevailing short-term London Inter Bank
Offered Rate (LIBOR) plus a credit spread and administrative fees. The
interest rate (including administrative fees) applicable to receivables sold
as of January 31, 1998 was 7.125%.
Under SFAS No. 125, no servicing asset or liability is recorded as fees
charged are expected to cover related expenses.
(5) LONG-TERM DEBT
January 31,
----------------------
1998 1997
----------- ----------
Senior notes due December 15, 2004, (Note 2) $ -- 85,000,000
Industrial Development Revenue Bond,
bearing interest at 73.33% of prime
rate (8.25% at January 31, 1997) (Note 2) -- 2,092,000
Term loan (a) 70,000,000 --
10-3/8% senior subordinated notes (b) 150,000,000
----------- ----------
220,000,000 87,092,000
Less payments due within one year __ (237,000)
----------- ----------
Total $220,000,000 86,855,000
=========== ==========
(a) The $70.0 million term loan is subject to the same interest rates and
security terms as the Revolving Credit Agreement (see Note 6). The term
loan is repayable in quarterly installments of $4.0 million from February
2001 through November 2001 and $6.75 million from February 2002 through
November 2003.
F-12
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5), CONTINUED
(b) The senior subordinated notes are unsecured general obligations of the
Company 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% in
2002 to 100% in 2005 and thereafter.
(c) The maturities of long-term debt required during the next five years are:
Fiscal year Amount
----------- ------
1998 $ --
1999 --
2000 --
2001 16,000,000
2002 27,000,000
(6) LINES OF CREDIT
On October 17, 1997, in connection with the Recapitalization, the Company
entered into a syndicated revolving credit agreement of up to $200.0 million
(the "Revolving Credit Agreement") with a group of banks, with The Chase
Manhattan Bank as administrative and collateral agent (the "Administrative
Agent"), and Donaldson, Lufkin & Jenrette Securities Corporation as
syndication agent. Borrowings may be utilized to fund the working capital
requirements of the Company's subsidiaries, including issuance of stand-by
and trade letters of credit and bankers' acceptances.
F-13
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6), CONTINUED
Borrowings are secured by a perfected first priority security interest in all
assets (except for the accounts receivable of Popular Club Plan, Inc.) of the
Company's direct and indirect, domestic, and to the extent no adverse tax
consequences would result, foreign subsidiaries and bear interest, at the
Company's option, at a base rate equal to the Administrative Agent's
Eurodollar rate plus an applicable margin or an alternate base rate equal to
the highest of the Administrative Agent's prime rate, a certificate of
deposit rate plus 1% or the Federal Funds effective rate plus one-half of 1%
plus, in each case, an applicable margin. The Revolving Credit Agreement
matures on October 17, 2003.
The Revolving Credit Agreement replaced the Company's previous revolving
credit agreement which provided for commitments in an aggregate amount of up
to $200.0 million, of which up to $120.0 million was available for direct
borrowings.
During fiscal 1997, 1996 and 1995, maximum borrowings under revolving credit
agreements were $104,000,000, $55,000,000 and $49,000,000 and average
borrowings were $54,300,000, $31,200,000 and $25,500,000. There were no
borrowings outstanding under the Company's revolving credit agreements at
January 31, 1998 and 1997.
Outstanding letters of credit established to facilitate international
merchandise purchases at January 31, 1998 and 1997 amounted to $20,143,000
and $37,800,000.
The provisions of the Revolving Credit Agreement require that the Company
maintain certain levels of (i) consolidated net worth, (ii), leverage ratio,
(iii) interest coverage ratio and (iv) inventory coverage ratio and provide
for limitations on capital expenditures, sale and leaseback transactions,
liens, investments, sales of assets and indebtedness.
F-14
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES
As of January 31, 1998, 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 to 2012. At January 31, 1998 aggregate minimum
rentals in future periods are as follows:
Fiscal Year Amount
----------- -----------
1998 $ 33,578,000
1999 33,504,000
2000 30,656,000
2001 27,924,000
2002 26,375,000
Thereafter 130,935,000
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 1997, 1996 and 1995 was $35,753,000, $29,852,000
and $27,366,000, including contingent rent based on store sales of
$2,877,000, $2,850,000 and $2,197,000.
(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 involved in various legal proceedings, both as plaintiff
and as defendant, which are routine litigations incidental to the conduct
of its business. The Company believes that the ultimate resolution of
these matters will not have a material effect on its financial position.
(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 for fiscal 1997,
1996 and 1995 were $1,780,000, $1,680,000 and $1,478,000.
F-15
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) LICENSE AGREEMENT
The Company has a licensing agreement through January 2003 with Itochu, a
Japanese trading company. The agreement permits Itochu to distribute J. Crew
merchandise in Japan. The Company earns royalty payments under the agreement
based on the sales of its merchandise. Royalty income, which is included in
other revenues, for fiscal 1997, 1996 and 1995 was $2,897,000, $3,817,000 and
$3,975,000.
(10) INTEREST EXPENSE - NET
Interest expense, net consists of the following:
Fiscal Year
------------------------------------
1997 1996 1995
----------- ----------- ----------
Interest expense $ 17,666,000 10,613,000 9,548,000
Interest income (142,000) (143,000) (198,000)
---------- ---------- ---------
Interest expense, net $ 17,524,000 10,470,000 9,350,000
========== ========== =========
(11) FINANCIAL INSTRUMENTS
The following disclosure about the fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments." The fair value of the Company's long-
term debt, including current portion, is estimated to be approximately
$208,550,000 and $89,100,000 at January 31, 1998 and 1997, respectively, and
is based on dealer quotes or quoted market prices of the same or similar
instruments or management's estimate of the present value of future cash
flows discounted at the current market rate for financial instruments with
similar characteristics and maturity. The carrying amounts of long-term debt
were $220,000,000 and $87,092,000 at January 31, 1998 and 1997. The carrying
amounts reported in the consolidated balance sheets for cash and cash
equivalents, accounts receivable, 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.
In October 1997 the Company entered into an interest rate swap agreement for
$70 million notional amount, which effectively converted the interest rate on
its $70 million term loan from a variable rate to a fixed rate of 6.23%
through October 2000. If this agreement was settled on January 31, 1998, the
Company would be required to pay $935,000.
F-16
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11), CONTINUED
At January 31, 1997, the Company had a forward foreign exchange contract
outstanding with J. P. Morgan to deliver 235 million yen on March 31, 1997.
This contract was a hedge relating to foreign licensing revenues. The fair
value of this contract approximated fair value due to its short-term
maturity. There were no outstanding foreign exchange contracts at January 31,
1998.
The Company is exposed to credit losses in the event of nonperformance by the
counterparties to these contracts, but it does not expect any counterparties
to fail to meet their obligation given their high-credit rating.
(12) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This statement requires the use of the
liability method of accounting for income taxes. Under the liability method,
deferred taxes are determined based on the difference between the financial
reporting and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
The (benefit) provision for income taxes consists of:
1997 1996 1995
----------- --------- -----------
Current:
Foreign $ 309,000 400,000 --
Federal (866,000) 8,984,000 (5,131,000)
State and local 305,000 600,000 500,000
---------- --------- ----------
(252,000) 9,984,000 (4,631,000)
Deferred - Federal and state and local (4,005,000) (1,184,000) 8,331,000
----------- ---------- ---------
Income taxes before tax effect of
extraordinary items and cumulative
effect of accounting changes (4,257,000) 8,800,000 3,700,000
Extraordinary item - current - Federal and
state and local (3,127,000) -- (1,200,000)
Cumulative effect of accounting
changes - deferred -- -- 1,800,000
----------- ---------- ---------
Total (benefit) provision
for income taxes $ (7,384,000) 8,800,000 4,300,000
========== ========= ==========
F-17
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12), CONTINUED
A reconciliation between the provision for income taxes based on the U.S.
Federal statutory rate and the Company's effective rate is as follows:
1997 1996 1995
-------- ----------- ------------
Federal income tax rate (35.0)% 35.0% 35.0%
Foreign 0.8 0.9 --
State and local income taxes, net
of Federal benefit (2.0) 5.3 5.1
Nondeductible expenses 16.1 -- --
-------- ---------- -----------
Effective tax rate (20.1) % 41.2% 40.1%
======== ========== ===========
The tax effect of temporary differences which give rise to deferred tax
assets and liabilities are:
January 31
1998 1997
---------- -----------
Deferred tax assets:
Allowance for doubtful accounts $ 2,118,000 1,769,000
Net operating loss carryforwards 4,074,000 1,300,000
Difference in book and tax basis
for property and equipment 2,277,000 2,212,000
Other 1,596,000 943,000
---------- -----------
10,065,000 6,224,000
Deferred tax liabilities:
Prepaid catalog expenses and other
prepaid expenses (19,051,000) (18,779,000)
---------- -----------
Net deferred income taxes $ (8,986,000) (12,555,000)
========== ===========
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. At January 31, 1998, the Company had Federal income tax
loss carryforwards of approximately $2,860,000 which expire in 2012. The
Company also had state and local income tax loss carryforwards of varying
amounts.
F-18
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) EXTRAORDINARY ITEMS
In June 1995, the Company prepaid $58 million principal amount of senior
notes and recorded an extraordinary loss of $1,679,000 (net of an income tax
benefit of $1,200,000), consisting of the write-off of deferred financing
costs and redemption premiums related to the early retirement of debt.
In October 1997, the Company prepaid $85 million principal amount of senior
notes and recorded an extraordinary loss of $4,500,000 (net of an income tax
benefit of $3,127,000) consisting of the write-off of deferred financing
costs and redemption premiums related to the early retirement of debt.
(14) ACCOUNTING CHANGES
Effective February 4, 1995, the Company changed its method of accounting for
catalog costs to conform with the provisions of the SOP 93-7. SOP 93-7
requires that the amortization of capitalized advertising costs should be the
amount computed using the ratio that current period revenues for the catalog
cost pool bear to the total of current and estimated future period revenues
for that catalog cost pool. Prior to fiscal 1995, such costs were amortized
on a straight-line basis over the estimated productive life of the catalog.
The cumulative effect of applying this change in accounting on prior periods
was a decrease in net income of $1,600,000 (net of an income tax benefit of $
1,000,000).
Effective February 4, 1995, the Company modified its inventory accounting
practices to include the capitalization of certain design, purchasing and
warehousing costs. Prior to this change, these costs were charged to expense
in the period incurred rather than in the period in which the inventories
were sold. The Company believes this change is preferable because it
provides a better matching of revenues and costs and improves the
comparability of operating results and financial position with those of other
companies. The cumulative effect of applying this change in accounting on
prior periods was an increase in net income of $4,210,000 (net of income
taxes of $2,800,000).
(15) STOCKHOLDER'S EQUITY
The Company has authorized 100 shares of common stock, par value $.01 per
share, all of which was issued and outstanding at January 31, 1998.
Stockholder's equity decreased by $98,780,000 from $102,006,000 at January
31, 1997 to $3,226,000 at January 31, 1998. A reconciliation of this decrease
is as follows:
Balance as of January 31, 1997 $ 102,006,000
Net loss (29,422,000)
Dividend to parent company (69,358,000)
--------------
Balance as of January 31, 1998 $ 3,226,000
==============
(16) ISSUER, GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
Operating Corp. has issued the 10 3/8% senior subordinated notes, which are
fully and unconditionally guaranteed on a senior subordinated basis by
Operating Corp. and its guarantor subsidiaries. Separate financial statements
of the guarantor subsidiaries and other disclosures are not presented because
management has determined that they are not material to investors. Condensed,
consolidating financial information is presented in lieu of the separate
guarantor financial statements. The financial information has been segregated
between (a) the issuer, (b) the guarantor subsidiaries and (c) PCP
Receivables Corp., Inc., the only non-guarantor subsidiary. PCP Receivables
Corp., Inc. was formed on October 17, 1997 and accordingly, its results of
operations and cash flows for the period from October 17, 1997 through
January 31, 1998 are included in the accompanying financial information
presented.
F-19
J. CREW OPERATING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 31, 1998
($ IN THOUSANDS)
J. CREW OPERATING GUARANTOR PCP RECEIVABLES CONSOLIDATION
CORP. SUBSIDIARIES CORP. ADJUSTMENTS CONSOLIDATED
----------------- ------------ --------------- ------------- ------------
Assets
Cash and cash equivalents............... $ 4,588 $ 7,578 $ -- $ -- $ 12,166
Accounts receivable..................... -- -- 16,834 -- 16,834
Merchandise inventories................. -- 202,763 -- -- 202,763
Prepaid expenses and other current
assets................................. 1,692 60,707 -- -- 62,399
Intercompany receivables................ 149,649 -- -- (149,649) --
-------- -------- ------- --------- --------
Total current assets............... 155,929 271,048 16,834 (149,649) 294,162
Property and equipment, net............. 334 110,329 -- -- 110,663
Investment in subsidiaries.............. 71,556 14,150 -- (85,706) --
Other assets............................ 11,754 2,865 -- -- 14,619
-------- -------- ------- --------- --------
Total assets....................... $239,573 $398,392 $16,834 $(235,355) $419,444
======== ======== ======= ========= ========
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable....................... $ 2,357 $ 63,196 $ -- $ -- $ 65,553
Other current liabilities.............. 14,706 63,144 -- -- 77,850
Deferred income taxes.................. -- 8,986 -- -- 8,986
Federal and state income taxes payable. (2,051) 1,702 600 -- 251
Intercompany liabilities............... -- 147,565 2,084 (149,649) --
-------- -------- ------- --------- --------
Total current liabilities.......... 15,012 284,593 2,684 (149,649) 152,640
Long term debt.......................... 220,000 -- -- -- 220,000
Deferred credits and other long-term
liabilities............................ 1,335 42,243 -- -- 43,578
Stockholder's equity .................... 3,226 71,556 14,150 (85,706) 3,226
-------- -------- ------- --------- --------
Total liabilities and
stockholder's equity ............. $239,573 $398,392 $16,834 $(235,355) $419,444
======== ======== ======= ========= ========
F-20
J. CREW OPERATING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1998
($ IN THOUSANDS)
J. CREW OPERATING GUARANTOR PCP RECEIVABLES CONSOLIDATION
CORP. SUBSIDIARIES CORP. ADJUSTMENTS CONSOLIDATED
----------------- ------------ --------------- ------------- ------------
Net sales................................ $ -- $822,840 $ -- $ -- $822,840
Other revenues........................... 23,570 9,719 1,472 (23,570) 11,191
------- -------- ------- -------- --------
Revenues........................... 23,570 832,559 1,472 (23,570) 834,031
Cost of goods sold....................... -- 465,168 -- -- 465,168
------- -------- ------- -------- --------
Gross Profit....................... 23,570 367,391 1,472 (23,570) 368,863
Selling, general and administrative
expenses................................ -- 367,438 -- (7,627) 359,811
------- -------- ------- -------- --------
Income (loss) from operations...... 23,570 (47) 1,472 (15,943) 9,052
Interest expense - net................... 15,943 17,524 -- (15,943) 17,524
Expenses incurred in connection with the
recapitalization........................ -- 20,707 -- -- 20,707
------- -------- ------- -------- --------
Income (loss) before income taxes
and extraordinary item............ 7,627 (38,278) 1,472 -- (29,179)
Income tax expense (benefit)............. 3,127 (7,984) 600 -- (4,257)
------- -------- ------- -------- --------
Net income (loss) before
extraordinary item................ 4,500 (30,294) 872 -- (24,922)
Extraordinary item....................... (4,500) -- -- -- (4,500)
------- -------- ------- -------- --------
Net income (loss).................. $ -- $(30,294) $ 872 $ -- $(29,422)
======= ======== ======= ======== ========
F-21
J. CREW OPERATING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED JANUARY 31, 1998
($ IN THOUSANDS)
J. CREW OPERATING GUARANTOR PCP RECEIVABLES
CORP. SUBSIDIARIES CORP. CONSOLIDATED
----------------- ------------ --------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $ -- $(30,294) $ 872 $(29,422)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Loss on early retirement of debt............. 7,627 -- -- 7,627
Depreciation and amortization................ 134 15,121 -- 15,255
Amortization of deferred financing costs..... 819 73 -- 892
Provision for losses on accounts receivable.. -- 7,343 -- 7,343
Deferred income taxes........................ -- (4,005) -- (4,005)
Changes in operating assets and liabilities:
Accounts receivable.......................... -- (12,098) 46,000 33,902
Merchandise inventories...................... -- (5,106) -- (5,106)
Prepaid expenses and other current assets.... 99 (4,180) -- (4,081)
Other assets................................. 122 (709) -- (587)
Increase (decrease) in intercompany, net..... (51,051) 98,523 (47,472) --
Accounts payable............................. (3,657) (34,069) -- (37,726)
Other liabilities............................ 10,976 6,751 -- 17,727
Income taxes payable......................... (10,046) 178 600 (9,268)
-------- -------- -------- --------
Net cash (used in) provided by operating
activities.................................. (44,977) 37,528 -- (7,449)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures......................... (25) (43,109) -- (43,134)
Proceeds from construction allowances........ -- 11,767 -- 11,767
-------- -------- -------- --------
Net cash used in investing activities........ (25) (31,342) -- (31,367)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt................... 220,000 -- -- 220,000
Costs incurred in connection with issuance
of debt..................................... (13,179) (750) -- (13,929)
Repayment of long-term debt.................. (90,892) (1,971) -- (92,863)
Dividend to parent company................... (69,358) -- -- (69,358)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities.................................. 46,571 (2,721) -- 43,850
-------- -------- -------- --------
Increase in cash and cash equivalents......... 1,569 3,465 -- 5,034
-------- -------- -------- --------
Cash and cash equivalents at beginning of year 3,019 4,113 -- 7,132
-------- -------- -------- --------
Cash and cash equivalents at end of year $ 4,588 $ 7,578 $ -- $ 12,166
======== ======== ======== ========
F-22
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
($ IN THOUSANDS)
additions
beginning charged to cost charged to other
balance and expenses accounts
------------- --------------- ----------------
Allowance for doubtful accounts
- -------------------------------
(deducted from accounts receivable)
fiscal year ended:
January 31, 1998 $4,357 $7,343 ___
January 31, 1997 4,824 6,945 ___
February 2, 1996 6,518 7,277 ___
(a) accounts deemed to be uncollectible
Inventory impairment reserve
- ----------------------------
(deducted from inventories)
fiscal year ended:
January 31, 1998 $3,289 $1,111(b) ___
January 31, 1997 5,226 (1,937)(b) ___
February 2, 1996 9,074 (3,848)(b) ___
Allowance for sales returns
- ---------------------------
(included in other current liabilities)
- ---------------------------------------
fiscal year ended:
January 31, 1998 $2,406 $1,123(b) ___
January 31, 1997 2,384 22(b) ___
February 2, 1996 1,935 449(b) ___
deductions ending balance
---------- --------------
Allowance for doubtful accounts
- -------------------------------
(deducted from accounts receivable)
fiscal year ended:
January 31, 1998 $ (6,262)(a) $5,438
January 31, 1997 (7,412)(a) 4,357
February 2, 1996 (8,971)(a) 4,824
(a) accounts deemed to be uncollectible
Inventory impairment reserve
- ----------------------------
(deducted from inventories)
fiscal year ended:
January 31, 1998 ___ $4,400
January 31, 1997 ___ 3,289
February 2, 1996 ___ 5,226
Allowance for sales returns
- ---------------------------
(included in other current liabilities)
- ---------------------------------------
fiscal year ended:
January 31, 1998 ___ $3,529
January 31, 1997 ___ 2,406
February 2, 1996 ___ 2,384
(b) The inventory impairment reserve and allowance for sales returns are
evaluated at the end of each fiscal quarter and adjusted (plus or minus)
based on the quarterly evaluation. During each period inventory write-downs
and sales returns are charged to the statement of operations as incurred.
F-23
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
J. CREW OPERATING CORP.
By: /s/ Emily Woods Date: May 1, 1998
-------------------------
Emily Woods
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date
--------- ----- ----
/s/ Emily Woods
- --------------------------------------------------- Chairman of the Board May 1, 1998
Emily Woods
/s/ Nicholas Lamberti
- --------------------------------------------------- Vice President - Corporate May 1, 1998
Nicholas Lamberti Controller
S-1
EXHIBIT INDEX
EXHIBIT
No. Description
--- -----------
3.1 Restated Certificate of Incorporation of J. Crew Operating Corp. (incorporated by
reference to Exhibit 3.1 to Registrant's Form S-4 Registration Statement, File No.
333-42423, filed December 16, 1997 (the "Registration Statement"))
3.2 By-laws of J. Crew Operating Corp. (incorporated by reference to Exhibit 3.14 to the
Registration Statement)
4.1 Indenture, dated as of October 17, 1997, between J. Crew Operating Corp, as issuer, the
subsidiary guarantors of J. Crew Operating Corp. that are signatories thereto and State
Street Bank and Trust Company, as trustee, relating to the Debentures (the "Indenture")
(incorporated by reference to Exhibit 4.1 to the Registration Statement)
4.2 Credit Agreement, dated as of October 17, 1997, among J. Crew Group, Inc., J. Crew
Operating Corp., the Lenders Party thereto, the Chase Manhattan Bank, as Administrative
Agent, and Donaldson, Lufkin & Jenrette Securities Corporation, as Syndication Agent
(incorporated by reference to Exhibit 4.3 to Amendment No. 1 to the Registration
Statement, filed February 6, 1998 (the "Amendment No. 1"))
4.3 Guarantee Agreement dated as of October 17, among J. Crew Group, Inc., the subsidiary
guarantors of J. Crew Operating Corp. that are signatories thereto and The Chase
Manhattan Bank (incorporated by reference to Exhibit 4.4 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
4.5 to the Registration Statement)
4.5 Pledge Agreement, dated as of October 17, among J. Crew Operating Corp., J. Crew Group,
Inc., the subsidiary guarantors of J. Crew Operating Corp. that are signatories thereto
and The Chase Manhattan Bank (incorporated by reference to Exhibit 4.6 to the
Registration Statement)
4.6 Security Agreement, dated as of October 17, among J. Crew Operating Corp., J. Crew
Group, Inc., the subsidiary guarantors of J. Crew Operating Corp. that are signatories
thereto and The Chase Manhattan Bank (incorporated by reference to Exhibit 4.7 to the
Registration Statement)
X-1
EXHIBIT
No. Description
--- -----------
4.7 Registration Rights Agreement, dated as of October 17, 1997 by and among J. Crew
Operating Corp., the subsidiary guarantors of J. Crew Operating Corp. that are
signatories thereto Donaldson, Lufkin & Jenrette Securities Corporation and Chase
Securities Inc. (incorporated by reference to Exhibit 4.8 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 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 Employement Agreement") (incorporated by reference to Exhibit
10.1 to the Registration Statement)
10.2 J. Crew Operating Corp. Senior Executive Bonus Plan (included as Exhibit A to the Woods
Employment Agreement filed as Exhibit 10.1)
10.3 Letter Agreement between Matthew Rubel and J. Crew Group, Inc. (incorporated by
reference to Exhibit 10.11 to Amendment No. 2 to the Registration Statement, filed
February 26, 1998)
10.4 Employment Agreement, dated February 24, 1998, among J. Crew Group, Inc., J. Crew
Operating Corp., TPG Partners II, L.P. (only with respect to Section 7 therein) and
Howard Socol
10.5 Contract Carrier Agreement, between J. Crew Group, Inc. and United Parcel Service, Inc.
(incorporated by reference to Exhibit 10.5 to the Registration Statement)
10.6 Custom Pricing Agreement, made November 15, 1996 between Federal Express Corporation and
J Crew Group, Inc. (incorporated by reference to Exhibit 10.6 to the Registration
Statement)
10.7 Lease dated as of October 21, 1981 between Vornado, Inc. and Popular Services, Inc.
(incorporated by reference to Exhibit 10.7 to the Registration Statement)
10.8 Agreement of Sublease dated November 4, 1993 between Revlon Holdings Inc., as Sublessor,
and Popular Club Plan, Inc., as Sublessee (incorporated by reference to Exhibit 10.8 to
the Registration Statement)
10.9 Letter Agreement dated July 29, 1996 between World Color and Clifford & Wills, Inc.
(incorporated by reference to Exhibit 10.9 to the Registration Statement)
X-2
EXHIBIT
No. Description
--- -----------
10.10 Agreement dated August 14, 1997 between R.R. Donnelley & Sons Company and J. Crew Inc.
(incorporated by reference to Exhibit 10.10 to the Registration Statement)
10.11 Letter Agreement, dated April 17, 1998, between J. Crew Operating Corp. and Barry Erdos
27.1 Financial Data Schedule
X-3