**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q/A**

**(Amendment No. 1)**

 

| **(Mark One)**                                 |
|------------------------------------------------|
| **ý**                                     | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                           | ** ** | ** ** |
| **For the quarterly period ended May 1, 2004** |
| ** **                                     | ** ** | ** ** |
| **Or**                                         |
| ** **                                     | ** ** | ** ** |
| **o**                                          | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

| **Commission  File Number** | ** ** | **Registrant, State of Incorporation  Address and Telephone Number**                                                                 | ** ** | **I.R.S. Employer  Identification No.** |
|-----------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|
|                        |       |                                                                                                                                 |       |                                    |
| **333-42427**               | ** ** | **J. CREW GROUP, INC.****(Incorporated in New York)****770 Broadway****New York, New York  10003****Telephone: (212)  209-2500**     | ** ** | **22-2894486**                          |
|                        |       |                                                                                                                                 |       |                                    |
| **333-107211**              | ** ** | **J. CREW INTERMEDIATE LLC****(Formed in Delaware)****770 Broadway****New York, New York  10003****Telephone: (212)  209-2500**      | ** ** | **N/A**                                 |
|                        |       |                                                                                                                                 |       |                                    |
| **333-42423**               | ** ** | **J. CREW OPERATING CORP.****(Incorporated in Delaware)****770 Broadway****New York, New York  10003****Telephone: (212)  209-2500** | ** ** | **22-3540930**                          |

 

Indicateby check mark whether each registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý    No o

 

Indicateby a check mark whether any of the registrants is an accelerated filer (asdefined in Rule 12b-2 of the Exchange Act). Yes o    No ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Outstandingat June 1, 2004

 

----

 
| J. Crew Group, Inc.      |   | 12,197,978 shares of  common stock, par value $.01 per share                                                |
|--------------------------|--------|-------------------------------------------------------------------------------------------------------------|
| J. Crew Intermediate LLC |   | 100% of its membership  interests are owned by J. Crew Group, Inc.                                          |
| J. Crew Operating Corp.  |   | 100 shares of common  stock, par value $.01 per share (all of which are owned by J. Crew  Intermediate LLC) |

 

ThisQuarterly Report on Form 10-Q/Ais a combined report being filed by three different registrants: J. Crew Group,Inc., J. Crew Intermediate LLC (a wholly-owned subsidiary of J. Crew Group,Inc.) and J. Crew Operating Corp. (a wholly-owned subsidiary of J. CrewIntermediate LLC).  The informationcontained herein relating to each individual registrant is filed by suchregistrant on its own behalf. No registrant makes any representation as toinformation relating to any other registrant.

 

J.Crew Intermediate LLC and J. Crew Operating Corp. meet the conditions set forthin General Instruction (I)(1)(a) and (b) of the Form 10-Q and aretherefore filing this Form 10-Q/Awith the reduced disclosure format.

 

EXPLANATORYNOTE

 

J. CrewGroup, Inc., J. Crew Intermediate LLC, and J. Crew Operating Corp. (the"Registrants") are filing this Amendment No. 1 to their Quarterly Report on Form 10-Q for the quarter endedMay 1, 2004 (this "Form 10-Q/A") to reflect the write-off of certainprepaid sample costs that should have been expensed as incurred. As a result ofthis revision, the Registrants are restating their financial statements for thefiscal quarter ended May 1, 2004. For a detailed description of the effect ofthe restatement, see Note 4 to our unaudited condensed consolidated financial statements accompanying this Amendment.

 

Inaccordance with the rules of the Commission, the affected items of the Form10-Q as originally filed, Items 1, 2, 4 and 6 ofPart I, are being amended and restated in their entirety. This Form 10-Q/A doesnot reflect events occurring after May 1, 2004 or substantively modify orupdate the disclosure contained in the Form 10-Q as originally filed in any wayother than as required to reflect the amendments discussed above and reflectedherein.

 

----

 

**PART I –FINANCIAL INFORMATION**

 

**ITEM I. FINANCIAL STATEMENTS**

 

**J. CREWGROUP, INC. AND**

**SUBSIDIARIES**

 

**CondensedConsolidated Balance Sheets**

 
| ** **                                            | ** ** | **May 1,  2004**                | ** ** | **January 31,  2004** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **(as restated)**               | ** ** | **(as restated)**          | ** ** |
| ** **                                            | ** ** | **(unaudited)  (in thousands)** | ** ** |
| Assets                                                |       |                            |       |                       |       |
| Current assets:                                       |       |                            |       |                       |       |
| Cash and cash equivalents                             |       | $                               | 31,635     |                       | $          | 49,650 |   |
| Merchandise inventories                               |       | 84,721                          |       | 66,028                     |       |
| Prepaid expenses and other current assets             |       | 19,472                          |       | 20,733                     |       |
| Refundable income taxes                               |       | 9,320                           |       | 9,320                      |       |
| Total current assets                                  |       | 145,148                         |       | 145,731                    |       |
|                                                  |       |                            |       |                       |       |
| Property and equipment - at cost                      |       | 284,374                         |       | 284,945                    |       |
| Less accumulated depreciation and  amortization       |       | (153,271                        | )          | (146,565                   | )          |
| Property and equipment, net                           |       | 131,103                         |       | 138,380                    |       |
|                                                  |       |                            |       |                       |       |
| Other assets                                          |       | 12,705                          |       | 13,500                     |       |
| Total assets                                          |       | $                               | 288,956    |                       | $          | 297,611 |   |
|                                                  |       |                            |       |                       |       |
| Liabilities and Stockholders’ Deficit            |       |                            |       |                       |       |
|                                                  |       |                            |       |                       |       |
| Current liabilities:                                  |       |                            |       |                       |       |
| Current portion of long-term debt                     |       | $                               | 1,164      |                       | $          | 1,164 |   |
| Accounts payable and other current  liabilities       |       | 98,854                          |       | 97,175                     |       |
| Federal and state income taxes                        |       | 830                             |       | 1,175                      |       |
| Total current liabilities                             |       | 100,848                         |       | 99,514                     |       |
|                                                  |       |                            |       |                       |       |
| Deferred credits                                      |       | 55,352                          |       | 56,723                     |       |
|                                                  |       |                            |       |                       |       |
| Long-term debt (includes redeemable  preferred stock) |       | 535,163                         |       | 516,640                    |       |
|                                                  |       |                            |       |                       |       |
| Preferred stock                                       |       | 92,800                          |       | 92,800                     |       |
|                                                  |       |                            |       |                       |       |
| Stockholders’ deficit                            |       | (495,207                        | )          | (468,066                   | )          |
|                                                  |       |                            |       |                       |       |
| Total liabilities and stockholders’ deficit      |       | $                               | 288,956    |                       | $          | 297,611 |   |

 

See notes to unauditedcondensed consolidated financial statements.

 

2

----

 

**J. CREWGROUP, INC. AND**

**SUBSIDIARIES**

 

**CondensedConsolidated Statements of Operations**

 
|                                                      |   | **Thirteen weeks  ended**       |       |
|-----------------------------------------------------------|--------|---------------------------------|------------|
|                                                      |   | **May 1,  2004**                | ** ** | **May 3,  2003** |   |
|                                                      |   | **(as restated)**               | ** ** | **(as restated)** |   |
|                                                      |   | **(unaudited)  (in thousands)** |       |
| Revenues:                                                 |   |                            |       |   |   |
| Net sales                                                 |   | $                               | 140,575    |   | $ | 152,592 |   |
| Other                                                     |   | 4,837                           |       | 8,903 |   |
|                                                      |   | 145,412                         |       | 161,495 |   |
|                                                      |   |                            |       |   |   |
| Cost of goods sold, including buying and  occupancy costs |   | 84,680                          |       | 103,660 |   |
|                                                      |   |                            |       |   |   |
| Gross profit                                              |   | 60,732                          |       | 57,835 |   |
|                                                      |   |                            |       |   |   |
| Selling, general and administrative  expenses             |   | 63,557                          |       | 68,330 |   |
|                                                      |   |                            |       |   |   |
| Loss from operations                                      |   | (2,825                          | )          | (10,495 | ) |
|                                                      |   |                            |       |   |   |
| Interest expense – net                               |   | (20,962                         | )          | (9,762 | ) |
|                                                      |   |                            |       |   |   |
| Loss before income taxes                                  |   | (23,787                         | )          | (20,257 | ) |
|                                                      |   |                            |       |   |   |
| Income taxes                                              |   | —                          |       | — |   |
|                                                      |   |                            |       |   |   |
| Net loss                                                  |   | $                               | (23,787    | ) | $ | (20,257 | ) |

 

See notes to unauditedcondensed consolidated financial statements.

 

3

----

 

**J. CREWGROUP, INC. AND**

**SUBSIDIARIES**

 

**CondensedConsolidated Statements of Cash Flows**

 
| ** **                                                                                                                       | ** ** | **Thirteen weeks ended**        | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                       | ** ** | **May 1,  2004**                | ** ** | **May 3,  2003** | ** ** |
| ** **                                                                                                                       | ** ** | **(as restated)**               | ** ** | **(as restated)** | ** ** |
| ** **                                                                                                                       | ** ** | **(unaudited)  (in thousands)** | ** ** |
| Cash flow from operating activities:                                                                                             |       |                            |       |   |   |
| Net loss                                                                                                                         |       | $                               | (23,787    | ) | $ | (20,257 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:                                                     |       |                            |       |   |   |
| Depreciation and amortization                                                                                                    |       | 9,163                           |       | 10,369 |   |
| Amortization of deferred financing costs                                                                                         |       | 570                             |       | 467 |   |
| Amortization of deferred compensation                                                                                            |       | 10                              |       | 10 |   |
| Non-cash interest expense (including  non-cash preferred stock dividends of $7,675 and $—) in 2004 and 2003,  respectively  |       | 15,450                          |       | 4,184 |   |
|                                                                                                                             |       |                            |       |   |   |
| Changes in operating assets and  liabilities:                                                                                    |       |                            |       |   |   |
| Merchandise inventories                                                                                                          |       | (18,693                         | )          | 7,064 |   |
| Prepaid expenses and other current assets                                                                                        |       | 1,261                           |       | 5,320 |   |
| Other assets                                                                                                                     |       | 225                             |       | (113 | ) |
| Accounts payable and other liabilities                                                                                           |       | (157                            | )          | (29,806 | ) |
| Federal and state income taxes                                                                                                   |       | (345                            | )          | (201 | ) |
|                                                                                                                             |       |                            |       |   |   |
| Net cash used in operating activities                                                                                            |       | (16,303                         | )          | (22,963 | ) |
|                                                                                                                             |       |                            |       |   |   |
| Cash flow from investing activities:                                                                                             |       |                            |       |   |   |
| Capital expenditures                                                                                                             |       | (1,886                          | )          | (2,476 | ) |
| Proceeds from construction allowances                                                                                            |       | 465                             |       | 1,000 |   |
|                                                                                                                             |       |                            |       |   |   |
| Net cash used in investing activities                                                                                            |       | (1,421                          | )          | (1,476 | ) |
|                                                                                                                             |       |                            |       |   |   |
| Cash flow from financing activities:                                                                                             |       |                            |       |   |   |
| Additional long-term debt                                                                                                        |       | —                          |       | 25,820 |   |
| Costs incurred in connection with debt  financing                                                                                |       | —                          |       | (400 | ) |
| Repayment of long-term debt                                                                                                      |       | (291                            | )          | — |   |
| Net cash provided by/(used in) financing  activities                                                                             |       | (291                            | )          | 25,420 |   |
|                                                                                                                             |       |                            |       |   |   |
| Increase/(decrease) in cash and cash  equivalents                                                                                |       | (18,015                         | )          | 981 |   |
|                                                                                                                             |       |                            |       |   |   |
| Cash and cash equivalents - beginning of  period                                                                                 |       | 49,650                          |       | 18,895 |   |
|                                                                                                                             |       |                            |       |   |   |
| Cash and cash equivalents - end of period                                                                                        |       | $                               | 31,635     |   | $ | 19,876 |   |
|                                                                                                                             |       |                            |       |   |   |
| Non-cash financing activities:                                                                                                   |       |                            |       |   |   |
| Dividends on preferred stock (reflected  directly in stockholders’ deficit)                                                 |       | $                               | 3,364      |   | $ | 9,607 |   |
|                                                                                                                             |       |                            |       |   |   |
| Interest payable on 13 1/8% Senior Discount  Debentures at February 1, 2003 that was added to the principal amount of  debt |       | $                               | —     |   | $ | 4,416 |   |

 

See notes to unauditedcondensed consolidated financial statements. 

 

4

----

 

**J. CREWINTERMEDIATE LLC**

 

**CondensedConsolidated Balance Sheets**

 
| ** **                                       | ** ** | **May 1,  2004**                | ** ** | **January 31,  2004** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **(as restated)**               | ** ** | **(as restated)**          | ** ** |
| ** **                                       | ** ** | **(unaudited)  (in thousands)** | ** ** |
| Assets                                           |       |                            |       |                       |       |
| Current assets:                                  |       |                            |       |                       |       |
| Cash and cash equivalents                        |       | $                               | 31,635     |                       | $          | 49,650 |   |
| Merchandise inventories                          |       | 84,721                          |       | 66,028                     |       |
| Prepaid expenses and other current assets        |       | 19,472                          |       | 20,733                     |       |
| Refundable income taxes                          |       | 9,320                           |       | 9,320                      |       |
| Total current assets                             |       | 145,148                         |       | 145,731                    |       |
|                                             |       |                            |       |                       |       |
| Property and equipment - at cost                 |       | 284,374                         |       | 284,945                    |       |
| Less accumulated depreciation and  amortization  |       | (153,271                        | )          | (146,565                   | )          |
| Property and equipment, net                      |       | 131,103                         |       | 138,380                    |       |
|                                             |       |                            |       |                       |       |
| Investment in debentures of J. Crew Group,  Inc. |       | 131,083                         |       | 131,083                    |       |
|                                             |       |                            |       |                       |       |
| Intercompany interest receivable                 |       | 16,965                          |       | 12,665                     |       |
| Other assets                                     |       | 12,547                          |       | 13,333                     |       |
| Total assets                                     |       | $                               | 436,846    |                       | $          | 441,192 |   |
|                                             |       |                            |       |                       |       |
| Liabilities and Membership Interests             |       |                            |       |                       |       |
| Current liabilities:                             |       |                            |       |                       |       |
| Current portion of long-term debt                |       | $                               | 1,164      |                       | $          | 1,164 |   |
| Accounts payable and other current  liabilities  |       | 98,738                          |       | 96,335                     |       |
| Federal and state income taxes                   |       | 830                             |       | 1,175                      |       |
| Total current liabilities                        |       | 100,732                         |       | 98,674                     |       |
|                                             |       |                            |       |                       |       |
| Long-term debt                                   |       | 290,754                         |       | 283,269                    |       |
|                                             |       |                            |       |                       |       |
| Deferred credits                                 |       | 55,352                          |       | 56,723                     |       |
|                                             |       |                            |       |                       |       |
| Due to J. Crew Group, Inc.                       |       | 7,071                           |       | 8,506                      |       |
|                                             |       |                            |       |                       |       |
| Membership interests                             |       | (17,063                         | )          | (5,980                     | )          |
|                                             |       |                            |       |                       |       |
| Total liabilities and membership interests       |       | $                               | 436,846    |                       | $          | 441,192 |   |

 

See notes to unauditedcondensed consolidated financial statements.

 

5

----

 

**J. CREWINTERMEDIATE LLC**

 

**CondensedConsolidated Statements of Operations**

 
| ** **                                                | ** ** | **Thirteen weeks ended**        | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **May 1,  2004**                | ** ** | **May 3,  2003** | ** ** |
| ** **                                                | ** ** | **(as restated)**               | ** ** | **(as restated)** | ** ** |
| ** **                                                | ** ** | **(unaudited)  (in thousands)** | ** ** |
| Revenues:                                                 |       |                            |       |   |   |
| Net sales                                                 |       | $                               | 140,575    |   | $ | 152,592 |   |
| Other                                                     |       | 4,837                           |       | 8,903 |   |
|                                                      |       | 145,412                         |       | 161,495 |   |
|                                                      |       |                            |       |   |   |
| Cost of goods sold, including buying and  occupancy costs |       | 84,680                          |       | 103,660 |   |
|                                                      |       |                            |       |   |   |
| Gross profit                                              |       | 60,732                          |       | 57,835 |   |
|                                                      |       |                            |       |   |   |
| Selling, general and administrative  expenses             |       | 63,547                          |       | 68,320 |   |
|                                                      |       |                            |       |   |   |
| Loss from operations                                      |       | (2,815                          | )          | (10,485 | ) |
|                                                      |       |                            |       |   |   |
| Interest expense – net                               |       | (12,568                         | )          | (5,060 | ) |
|                                                      |       |                            |       |   |   |
| Intercompany interest income                              |       | 4,300                           |       | — |   |
|                                                      |       |                            |       |   |   |
| Loss before income taxes                                  |       | (11,083                         | )          | (15,545 | ) |
|                                                      |       |                            |       |   |   |
| Income taxes                                              |       | —                          |       | — |   |
|                                                      |       |                            |       |   |   |
| Net loss                                                  |       | $                               | (11,083    | ) | $ | (15,545 | ) |

 

See notes to unauditedcondensed consolidated financial statements.

 

6

----

 

**J. CREWINTERMEDIATE LLC**

 

**CondensedConsolidated Statements of Cash Flows**

 
| ** **                                                                     | ** ** | **Thirteen weeks ended**        | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                     | ** ** | **May 1,  2004**                | ** ** | **May 3,  2003** | ** ** |
| ** **                                                                     | ** ** | **(as restated)**               | ** ** | **(as restated)** | ** ** |
| ** **                                                                     | ** ** | **(unaudited)  (in thousands)** | ** ** |
| Cash flow from operating activities:                                           |       |                            |       |   |   |
| Net loss                                                                       |       | $                               | (11,083    | ) | $ | (15,545 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:   |       |                            |       |   |   |
| Depreciation and amortization                                                  |       | 9,163                           |       | 10,369 |   |
| Amortization of deferred financing costs                                       |       | 560                             |       | 410 |   |
| Non-cash interest expense                                                      |       | 7,775                           |       | 250 |   |
|                                                                           |       |                            |       |   |   |
| Changes in operating assets and  liabilities:                                  |       |                            |       |   |   |
| Merchandise inventories                                                        |       | (18,693                         | )          | 7,064 |   |
| Prepaid expenses and other current assets                                      |       | 1,261                           |       | 5,320 |   |
| Other assets                                                                   |       | 225                             |       | (113 | ) |
| Accounts payable and other liabilities                                         |       | 569                             |       | (30,517 | ) |
| Federal and state income taxes                                                 |       | (345                            | )          | (201 | ) |
|                                                                           |       |                            |       |   |   |
| Net cash used in operating activities                                          |       | (10,568                         | )          | (22,963 | ) |
|                                                                           |       |                            |       |   |   |
| Cash flow from investing activities:                                           |       |                            |       |   |   |
| Capital expenditures                                                           |       | (1,886                          | )          | (2,476 | ) |
| Proceeds from construction allowances                                          |       | 465                             |       | l,000 |   |
|                                                                           |       |                            |       |   |   |
| Net cash used in investing activities                                          |       | (1,421                          | )          | (l,476 | ) |
|                                                                           |       |                            |       |   |   |
| Cash flow from financing activities:                                           |       |                            |       |   |   |
| Additional long-term debt                                                      |       | —                          |       | 25,820 |   |
| Costs incurred in connection with debt  financing                              |       | —                          |       | (400 | ) |
| Transfers to affiliates                                                        |       | (5,735                          | )          | — |   |
| Repayment of long-term debt                                                    |       | (291                            | )          | — |   |
|                                                                           |       |                            |       |   |   |
| Net cash provided by/(used in) financing  activities                           |       | (6,026                          | )          | 25,420 |   |
|                                                                           |       |                            |       |   |   |
| Increase/(decrease) in cash and cash  equivalents                              |       | (18,015                         | )          | 981 |   |
|                                                                           |       |                            |       |   |   |
| Cash and cash equivalents - beginning of  period                               |       | 49,650                          |       | 18,895 |   |
| Cash and cash equivalents - end of period                                      |       | $                               | 31,635     |   | $ | 19,876 |   |
|                                                                           |       |                            |       |   |   |
| Non-cash financing activities:                                                 |       |                            |       |   |   |
| Dividends to J. Crew Group, Inc. (reflected  directly in membership interests) |       | $                               | —     |   | $ | 9,320 |   |

 

See notes to unauditedcondensed consolidated financial statements.

 

7

----

 

**J. CREWOPERATING CORP. AND**

**SUBSIDIARIES**

 

**CondensedConsolidated Balance Sheets**

 
| ** **                                       | ** ** | **May 1,  2004**                | ** ** | **January 31,  2004** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **(as restated)**               | ** ** | **(as restated)**          | ** ** |
| ** **                                       | ** ** | **(unaudited)  (in thousands)** | ** ** |
| Assets                                           |       |                            |       |                       |       |
| Current assets:                                  |       |                            |       |                       |       |
| Cash and cash equivalents                        |       | $                               | 31,635     |                       | $          | 49,650 |   |
| Merchandise inventories                          |       | 84,721                          |       | 66,028                     |       |
| Prepaid expenses and other current assets        |       | 19,472                          |       | 20,733                     |       |
| Refundable income taxes                          |       | 9,320                           |       | 9,320                      |       |
|                                             |       |                            |       |                       |       |
| Total current assets                             |       | 145,148                         |       | 145,731                    |       |
|                                             |       |                            |       |                       |       |
| Property and equipment - at cost                 |       | 284,374                         |       | 284,945                    |       |
| Less accumulated depreciation and  amortization  |       | (153,271                        | )          | (146,565                   | )          |
| Property and equipment, net                      |       | 131,103                         |       | 138,380                    |       |
|                                             |       |                            |       |                       |       |
| Other assets                                     |       | 10,434                          |       | 11,091                     |       |
| Total assets                                     |       | $                               | 286,685    |                       | $          | 295,202 |   |
|                                             |       |                            |       |                       |       |
| Liabilities and Stockholder’s Deficit       |       |                            |       |                       |       |
|                                             |       |                            |       |                       |       |
| Current liabilities:                             |       |                            |       |                       |       |
| Current portion of long-term debt                |       | $                               | 1,164      |                       | $          | 1,164 |   |
| Accounts payable and other current  liabilities  |       | 98,731                          |       | 96,328                     |       |
| Federal and state income taxes                   |       | 830                             |       | 1,175                      |       |
|                                             |       |                            |       |                       |       |
| Total current liabilities                        |       | 100,725                         |       | 98,667                     |       |
|                                             |       |                            |       |                       |       |
| Deferred credits                                 |       | 55,352                          |       | 56,723                     |       |
|                                             |       |                            |       |                       |       |
| Long-term debt                                   |       | 174,839                         |       | 174,880                    |       |
|                                             |       |                            |       |                       |       |
| Due to J. Crew Group, Inc.                       |       | 4,462                           |       | 5,897                      |       |
|                                             |       |                            |       |                       |       |
| Stockholder’s deficit                       |       | (48,693                         | )          | (40,965                    | )          |
|                                             |       |                            |       |                       |       |
| Total liabilities and stockholder’s deficit |       | $                               | 286,685    |                       | $          | 295,202 |   |

 

See notes tounaudited condensed consolidated financial statements.

 

8

----

 

**J. CREWOPERATING CORP. AND**

**SUBSIDIARIES**

 

**CondensedConsolidated Statements of Operations**

 
| ** **                                                | ** ** | **Thirteen weeks ended**        | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **May 1,  2004**                | ** ** | **May 3,  2003** | ** ** |
| ** **                                                | ** ** | **(as restated)**               | ** ** | **(as restated)** | ** ** |
| ** **                                                | ** ** | **(unaudited)  (in thousands)** | ** ** |
| Revenues                                                  |       |                            |       |   |   |
| Net sales                                                 |       | $                               | 140,575    |   | $ | 152,592 |   |
| Other                                                     |       | 4,837                           |       | 8,903 |   |
|                                                      |       | 145,412                         |       | 161,495 |   |
|                                                      |       |                            |       |   |   |
| Cost of goods sold, including buying and  occupancy costs |       | 84,680                          |       | 103,660 |   |
|                                                      |       |                            |       |   |   |
| Gross profit                                              |       | 60,732                          |       | 57,835 |   |
|                                                      |       |                            |       |   |   |
| Selling, general and administrative  expenses             |       | 63,547                          |       | 68,320 |   |
|                                                      |       |                            |       |   |   |
| Loss from operations                                      |       | (2,815                          | )          | (10,485 | ) |
|                                                      |       |                            |       |   |   |
| Interest expense – net                               |       | (4,913                          | )          | (5,060 | ) |
|                                                      |       |                            |       |   |   |
| Loss before income taxes                                  |       | (7,728                          | )          | (15,545 | ) |
|                                                      |       |                            |       |   |   |
| Income taxes                                              |       | —                          |       | — |   |
|                                                      |       |                            |       |   |   |
| Net loss                                                  |       | $                               | (7,728     | ) | $ | (15,545 | ) |

 

See notes to unauditedcondensed consolidated financial statements.

 

9

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**J. CREWOPERATING CORP. AND**

**SUBSIDIARIES**

 

**CondensedConsolidated Statements of Cash Flows**

 
| ** **                                                                           | ** ** | **Thirteen weeks ended**        | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                           | ** ** | **May 1,  2004**                | ** ** | **May 3,  2003** | ** ** |
| ** **                                                                           | ** ** | **(as restated)**               | ** ** | **(as restated)** | ** ** |
| ** **                                                                           | ** ** | **(unaudited)  (in thousands)** | ** ** |
| Cash flow from operating activities:                                                 |       |                            |       |   |   |
| Net loss                                                                             |       | $                               | (7,728     | ) | $ | (15,545 | ) |
|                                                                                 |       |                            |       |   |   |
| Adjustments to reconcile net loss to net  cash used in operating activities:         |       |                            |       |   |   |
| Depreciation and amortization                                                        |       | 9,163                           |       | 10,369 |   |
| Amortization of deferred financing costs                                             |       | 432                             |       | 410 |   |
| Non-cash interest expense                                                            |       | 250                             |       | 250 |   |
|                                                                                 |       |                            |       |   |   |
| Changes in operating assets and  liabilities:                                        |       |                            |       |   |   |
| Merchandise inventories                                                              |       | (18,693                         | )          | 7,064 |   |
| Prepaid expenses and other current assets                                            |       | 1,261                           |       | 5,320 |   |
| Other assets                                                                         |       | 225                             |       | (113 | ) |
| Accounts payable and other liabilities                                               |       | 567                             |       | (30,517 | ) |
| Federal and state income taxes                                                       |       | (345                            | )          | (201 | ) |
| Net cash used in operating activities                                                |       | (14,868                         | )          | (22,963 | ) |
|                                                                                 |       |                            |       |   |   |
| Cash flow from investing activities:                                                 |       |                            |       |   |   |
| Capital expenditures                                                                 |       | (1,886                          | )          | (2,476 | ) |
| Proceeds from construction allowances                                                |       | 465                             |       | 1,000 |   |
| Net cash used in investing activities                                                |       | (1,421                          | )          | (1,476 | ) |
|                                                                                 |       |                            |       |   |   |
| Cash flow from financing activities:                                                 |       |                            |       |   |   |
| Additional long-term debt                                                            |       | —                          |       | 25,820 |   |
| Costs incurred in connection with debt  financing                                    |       | —                          |       | (400 | ) |
| Repayment of long-term debt                                                          |       | (291                            | )          | — |   |
| Transfers to affiliates                                                              |       | (1,435                          | )          | — |   |
| Net cash provided by/(used in) financing  activities                                 |       | (1,726                          | )          | 25,420 |   |
|                                                                                 |       |                            |       |   |   |
| Increase/(decrease) in cash and cash  equivalents                                    |       | (18,015                         | )          | 981 |   |
| Cash and cash equivalents - beginning of  period                                     |       | 49,650                          |       | 18,895 |   |
| Cash and cash equivalents - end of period                                            |       | $                               | 31,635     |   | $ | 19,876 |   |
|                                                                                 |       |                            |       |   |   |
| Non-cash financing activities:                                                       |       |                            |       |   |   |
| Dividends to J. Crew Group, Inc. (reflected  directly in stockholders’ deficit) |       | $                               | —     |   | $ | 9,320 |   |

 

See notes to unauditedcondensed consolidated financial statements.

 

10

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**J. CREW GROUP, INC. AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**Thirteen weeks ended May 1, 2004 and May 3,2003**

 

**1.****                 Basis ofPresentation**

 

The consolidated financial statements presented herein are as follows:

 

a.                    J. Crew Operating Corp. and itswholly-owned subsidiaries (collectively, “Operating Corp.”), which consist ofthe accounts of J. Crew Operating Corp. and its wholly-owned subsidiaries.

 

b.                   J. Crew Intermediate LLC and itswholly-owned subsidiaries (collectively, “Intermediate”), which consist of theaccounts of J. Crew Intermediate LLC and Operating Corp.

 

c.                    J. Crew Group, Inc. and itswholly-owned subsidiaries (collectively, “Group” or the “Company”), which consist of theaccounts of J. Crew Group, Inc. and Intermediate.

 

All significant intercompany balances andtransactions are eliminated in consolidation.

 

Intermediate was formed in Delaware as a limited liability company onMarch 27, 2003.  100% of the membershipinterests of Intermediate are owned by Group.  Effective May 2003, Group transferred its investmentin J. Crew Operating Corp. and subsidiaries to Intermediate.  This combination of entities under commoncontrol was accounted for in a manner similar to a pooling of interests.  On May 6, 2003, Intermediate issued193,346,138 aggregate principal amount at maturity of 16% senior discountcontingent principal notes due 2008 in exchange for $131,083,000 in aggregateprincipal amount (including accrued interest of $10,750,000) of outstanding 131/8% senior discount debentures of Group.  The 13 1/8% senior discount debentures of Group that were exchanged arebeing held as an intercompany asset by Intermediate, and interest incomereceived by Intermediate from Group during the thirteen weeksended May 1, 2004 was $4.3 million.

 

The accompanyingfinancial statements of Intermediate include the balance sheet of Intermediateand its subsidiaries at May 1, 2004 and the statements of operations and cashflows for the thirteen week period then ended. The statements of operations and cash flows of Intermediate for thethree months ended May 3, 2003 consist of the operations of Operating Corp.(the predecessor business).

 

The condensedconsolidated balance sheet as of May 1, 2004 and the condensed consolidatedstatements of operations and cash flows for the thirteen week periods ended May1, 2004 and May 3, 2003 have been prepared by the Company and have not beenaudited.  In the opinion of management,all adjustments, consisting of only normal recurring adjustments necessary forthe fair presentation of the financial position, results of operations and cashflows have been made.

 

Certain information andfootnote disclosure normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted. These financial statements should be read in conjunction with thefinancial statements and notes thereto included in the consolidated financialstatements for the fiscal year ended January 31, 2004.

 

The results of operationsfor the thirteen-week period ended May 1, 2004 are not necessarily indicativeof the operating results for the full fiscal year.

 

**2**.**                 Recent AccountingPronouncements**

 

In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity”.  This statement establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances).  Many of those instruments were previouslyclassified as equity.  The provisions ofthis statement were effective at the beginning of the first interim periodbeginning after June 15, 2003.  Theadoption of SFAS No. 150 resulted in a reclassification of the liquidation valueand accumulated and unpaid dividends of the Series B preferred stock and theaccumulated and unpaid dividends related to the Series A preferred stock toliabilities, which total $222.7 million as of May 1, 2004.  In connection with this reclassification, thedividends related to the Series B preferred stock and the accreted dividends ofthe Series A preferred stock are included in interest expense.

 

 

11

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In December 2003,the FASB revised and reissued FASB Interpretation No. 46, “Consolidation ofVariable Interest Entities”.  FIN No. 46requires unconsolidated variable interest entities to be consolidated by theirprimary beneficiaries if the entities do not effectively dispense the risks andrewards of ownership among their owners and other parties involved.  The provisions of FIN No. 46 must be appliedno later than as of the end of the first reporting period ending afterMarch 5, 2004.  The adoption of FASBInterpretation No. 46 did not have any effect on our financial statements.

 

**3.****                 Long-term debt**

 

Long-term debt consistsof the following:

 
| ** **                                                                                            | ** ** | **May 1,  2004**   | ** ** | **January 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------------|------------|
| ** **                                                                                            | ** ** | **(in thousands)** | ** ** |
| Operating Corp.:                                                                                      |       |               |       |                       |       |
| Congress Credit Facility                                                                              |       | $                  | 4,753      |                       | $          | 5,044 |   |
| 5% notes payable                                                                                      |       | 21,250             |       | 21,000                     |       |
| 10 3/8% senior subordinated notes                                                                     |       | 150,000            |       | 150,000                    |       |
|                                                                                                  |       | 176,003            |       | 176,044                    |       |
| Less amount due within one year                                                                       |       | (1,164             | )          | (1,164                     | )          |
| Total Operating Corp.                                                                                 |       | $                  | 174,839    |                       | $          | 174,880 |   |
|                                                                                                  |       |               |       |                       |       |
| Intermediate:                                                                                         |       |               |       |                       |       |
| 16% senior discount contingent principal  notes, net of debt issuance discount of $36,793 and $38,677 |       | 115,915            |       | 108,389                    |       |
| Total Intermediate                                                                                    |       | $                  | 290,754    |                       | $          | 283,269 |   |
|                                                                                                  |       |               |       |                       |       |
| Group:                                                                                                |       |               |       |                       |       |
| 13 1/8% senior discount debentures                                                                    |       | 21,667             |       | 21,667                     |       |
| Mandatorily redeemable preferred stock                                                                |       | 222,742            |       | 211,704                    |       |
| Total Group                                                                                           |       | $                  | 535,163    |                       | $          | 516,640 |   |

 

**4. Restatement**

 

In September 2004, Group concluded that itspreviously reported financial statements for the thirteen weeks ended May 3,2003 and May 1, 2004 shouldbe restated to reflect the write-off of certain prepaid sample costs,which had been capitalized as a prepaid asset on the balance sheet and chargedto expense in the period that the inventories associated with the sampleswere sold.  Such costs should have beenexpensed as incurred.  There has been no changes to the totals ofoperating, investing and financing activities within the statement of cashflows.  The corrections which are reflected in theaccompanying unauditedcondensed financial statements as areduction of prepaid expenses and other current assets and an increase in costof goods sold, are as follows:

 
| ** **                                 | ** ** | **Group**       | ** ** | **Intermediate** | ** ** | **Operating  Corp** | ** ** |
|--------------------------------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                                 | ** ** | **as reported** | ** ** | **as  restated** | ** ** | **as reported**     | ** ** | **as  restated** | ** ** | **as reported** | ** ** | **as  restated** | ** ** |
| Cost of  goods sold                        |       |            |       |             |       |                |       |   |   |   |   |   |   |
| 13  weeks ended May 3, 2003                |       | $               | 103,030    |             | $          | 103,660             |       | $ | 103,030 |   | $ | 103,660 |   | $ | 103,030 |   | $ | 103,660 |   |
| 13  weeks ended May 1, 2004                |       | 84,200          |       | 84,680           |       | 84,200              |       | 84,680 |   | 84,200 |   | 84,680 |   |
|                                       |       |            |       |             |       |                |       |   |   |   |   |   |   |
| Net  loss                                  |       |            |       |             |       |                |       |   |   |   |   |   |   |
| 13  weeks ended May 3, 2003                |       | (19,627         | )          | (20,257          | )          | (14,915             | )          | (15,545 | ) | (14,915 | ) | (15,545 | ) |
| 13  weeks ended May 1, 2004                |       | (23,307         | )          | (23,787          | )          | (10,603             | )          | (11,083 | ) | (7,248 | ) | (7,728 | ) |
|                                       |       |            |       |             |       |                |       |   |   |   |   |   |   |
| Prepaid  expenses and other current assets |       |            |       |             |       |                |       |   |   |   |   |   |   |
| January  31, 2004                          |       | 23,633          |       | 20,733           |       | 23,633              |       | 20,733 |   | 23,633 |   | 20,733 |   |
| May 1,  2004                               |       | 22,852          |       | 19,472           |       | 22,852              |       | 19,472 |   | 22,852 |   | 19,472 |   |
|                                       |       |            |       |             |       |                |       |   |   |   |   |   |   |
| Stockholders’  deficit                |       |            |       |             |       |                |       |   |   |   |   |   |   |
| January  31, 2004                          |       | (465,166        | )          | (468,066         | )          | (3,080              | )          | (5,980 | ) | (38,065 | ) | (40,965 | ) |
| May 1,  2004                               |       | (491,827        | )          | (495,207         | )          | (13,683             | )          | (17,063 | ) | (45,313 | ) | (48,693 | ) |
|                                            |            |                 |            |                  |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**5.****          Reclassifications**

 

Certainprior year amounts have been reclassified to conform to current year’spresentation.

 

12

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**Forward-LookingStatements**

 

Certain statements in this Report on Form 10-Q/A constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. We may also make written or oral forward-looking statements in ourperiodic reports to the Securities and Exchange Commission on Forms 10-K, 10-Q,8-K, etc., in press releases and other written materials and in oral statementsmade by our officers, directors or employees to third parties. Statements thatare not historical facts, including statements about our beliefs andexpectations, are forward-looking statements. Such forward-looking statementsinvolve known and unknown risks, uncertainties and other important factors thatcould cause the actual results, performance or achievements of the Company, orindustry results, to differ materially from historical results, any futureresults, performance or achievements expressed or implied by suchforward-looking statements. Such risks and uncertainties include, but are notlimited to, competitive pressures in the apparel industry, changes in levels ofconsumer spending or preferences in apparel and acceptance by customers of theCompany’s products, overall economic conditions, governmental regulations andtrade restrictions, acts of war or terrorism in the United States or worldwide,political or financial instability in the countries where the Company’s goodsare manufactured, postal rate increases, paper and printing costs, availabilityof suitable store locations at appropriate terms, the level of the Company’sindebtedness and exposure to interest rate fluctuations, and other risks anduncertainties described in this report and the Company’s other reports anddocuments filed or which may be filed, from time to time, with the Securitiesand Exchange Commission. These statements are based on current plans, estimatesand projections, and therefore, you should not place undue reliance on them.Forward-looking statements speak only as of the date they are made and weundertake no obligation to update publicly any of them in light of newinformation or future events.

 
| **ITEM  2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|--------------|-------------------------------------------------------------------------------------------------|

 

Management’sdiscussion and analysis of the results of operations are provided solely withrespect to J. Crew Operating Corp. and its subsidiaries since substantially allof our operations are conducted by J. Crew Operating Corp.  However, J. Crew Intermediate LLC and J. CrewGroup, Inc. have outstanding additional debt securities and preferred stock anddebt securities of J. Crew Group, Inc. are being held as an intercompany assetby Intermediate.  Accordingly,information with respect to interest income and expense of each of thoseentities is also provided herein.  Thediscussion of liquidity and capital resources pertains to J. Crew Group, Inc.and its consolidated subsidiaries, including J. Crew Intermediate LLC and J.Crew Operating Corp.

 

Thisdocument should be read in conjunction with the Management’s Discussionand Analysis section of our Annual Report on Form 10-K/A for the year endedJanuary 31, 2004 filed with the Securities and Exchange Commission.

 

**Restatement**

 

We have restated our unaudited condensedconsolidated financial statements for the fiscal year ended January 31, 2004 and the13 week periods ended May 3, 2003 and May 1, 2004 to reflect the write-off of certainprepaid sample costs that should have been expensed as incurred.  (See Note 4 to the unaudited condensed consolidated financial statements).

 

**Resultsof Operations – Thirteen Weeks Ended May 1, 2004 Compared to Thirteen WeeksEnded May 3, 2003**

 

Revenues for the thirteenweeks ended May 1, 2004 decreased to $145.4 million from $161.5 million in thethirteen weeks ended May 3, 2003, a decrease of 10.0%.

 

Revenues of the retaildivision (including J. Crew Retail stores and J. Crew Factory stores) increasedto $104.0 million in the first quarter of 2004 from $97.6 million in the firstquarter of 2003.  This increase was dueto an increase of 3.9% in comparable store sales in the first quarter of 2004and sales from stores not open in the first quarter of 2003.  There were 154  J. Crew Retail stores and 42 J. Crew Factorystores open at May 1, 2004 and May 3, 2003.

 

Revenues of the Directdivision (which consists of the Internet and catalog operations) decreased to$36.6 million in the first quarter of 2004 from $55.0 million in the firstquarter of 2003.  Revenues from the Internetoperation decreased to $21.2 million in the first quarter of 2004 from $36.6million in the first quarter of 2003. Catalog revenues in the first quarter of 2004 decreased to $15.4 millionfrom $18.4 million in the first quarter of 2003.  The decrease in Direct revenues was due to(a) a 28% reduction in pages circulated to 964 million in 2004 from 1.33billion in 2003 primarily from the elimination of two “women’s only” editions,(b) the reduction in clearance activities which particularly impacted therevenues of the Internet operation and (c) reduced inventory levels.

 

Other revenues, whichconsist of shipping and handling fees and royalties, decreased to $4.8 millionin the first quarter of 2004 from $8.9 million in the first quarter of 2003 dueto a reduction in shipping and handling fees as a result of the decline in therevenues of the Direct division.

 

13

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Grossmargin increased as a percentage of revenues to 41.8%in the first quarter of 2004 from 35.8% in the first quarter of2003.  This increase was attributable toan increase in merchandise margins of 880 basis points from decreased markdownsacross all channels and a significant reduction in clearance activities.  The merchandise margin in the first quarterof 2004 was reduced by 280 basis points from the effectthat the decrease in net sales had on buying and occupancy costs as apercentage of revenues as these expenses were relatively fixed during bothperiods.  The first quarter of 2003 wasnegatively impacted by clearance activities as we adopted a new inventorystrategy of liquidating current season inventories in season and commenced thedisposition of prior season inventories. This change continued to impact 2003 gross margin through the end of thesecond quarter.

 

Selling,general and administrative expenses decreased to $63.5 million (43.7% ofrevenues) in the first quarter of 2004 from $68.3 million (42.3% of revenues)in the 2003 first quarter.  This decreasecan be attributed primarily to a reduction of $2.3 million in selling expensein the Direct division due to the decrease in pages circulated and a $1.2million decrease in depreciation and amortization.  The 2003 first quarter was negativelyimpacted by $900,000 of severance expense.

 

Interestexpense, net, consists of:

 
| ** **                                           | ** ** | **Operating Corp.** | ** ** | **Intermediate** | ** ** | **Group** | ** ** |
|------------------------------------------------------|------------|---------------------|------------|------------------|------------|-----------|------------|
|                                                 |       |                |       |             |       |      |       |
| Thirteen weeks ended May 1, 2004:                    |       |                |       |             |       |      |       |
| Interest - cash                                      |       | $                   | 4,231      |             | $          | 4,231     |       | $ | 4,940 |   |
| Non-cash interest:                                   |       |                |       |             |       |      |       |
| Interest on notes                                    |       | 250                 |       | 5,891            |       | 5,891     |       |
| Amortization of deferred financing costs             |       | 432                 |       | 560              |       | 570       |       |
| Amortization of debt issuance costs                  |       | —              |       | 1,886            |       | 1,886     |       |
| Dividends on mandatorily redeemable  preferred stock |       | —              |       | —           |       | 7,675     |       |
| Total interest expense                               |       | $                   | 4,913      |             | $          | 12,568    |       | $ | 20,962 |   |
|                                                 |       |                |       |             |       |      |       |
| Thirteen weeks ended May 3, 2003:                    |       |                |       |             |       |      |       |
| Interest - cash                                      |       | $                   | 4,400      |             | $          | 4,400     |       | $ | 5,097 |   |
| Non-cash interest:                                   |       |                |       |             |       |      |       |
| Interest on notes                                    |       | 250                 |       | 250              |       | 4,198     |       |
| Amortization of deferred financing costs             |       | 410                 |       | 410              |       | 467       |       |
| Total interest expense                               |       | $                   | 5,060      |             | $          | 5,060     |       | $ | 9,762 |   |
|                                                 |       |                |       |             |       |      |       |
| Increase (decrease) in interest expense              |       | $                   | (147       | )                | $          | 7,508     |       | $ | 11,200 |   |

 

Theincrease in interest expense at Intermediate of $7.5 million results from theissuance of $193,346,138 aggregate principal amount at maturity of the 16%senior discount contingent principal notes due 2008 of Intermediate inconnection with the exchange offer completed on May 6, 2003 and consists ofinterest expense of $5.6 million and amortization of debt issuance discount anddeferred financing costs of $1.9 million.

 

Group’s  interestexpense increased by $11.2 million due to the classification of $7.7 million ofdividends on mandatorily redeemable preferred stock as interest expensecommencing in the third quarter of 2003, which was recorded as a direct chargeto stockholders deficit in the first quarter, and additional interest expenseand amortization of debt issuance costs resulting from the exchange of Group’s 13 1/8% senior discountdebentures for the 16% senior discount contingent principal notes ofIntermediate.

 

No tax benefit was attributed to the pre-tax loss in the first quarterof 2004 and 2003.  We fully reserved ournet deferred tax assets at January 31, 2004.  We do not expect to recognize any taxbenefits in future results of operations until an appropriate level ofprofitability is sustained.

 

14

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**Liquidityand Capital Resources**

 

Oursources of liquidity are primarily cash flows from operations and borrowingsunder our working capital credit facility. Our primary cash needs are forcapital expenditures incurred primarily for opening new stores and systemenhancements, debt service requirements and working capital.

 

OnDecember 23, 2002, Operating Corp. entered into a Loan and SecurityAgreement with Wachovia Bank, N.A., as arranger, Congress FinancialCorporation, as administrative and collateral agent, and a syndicate of lenderswhich provides for maximum credit availability of up to $180.0 million (the“Congress Credit Facility”).  TheCongress Credit Facility expires in December 2005 and provides forrevolving loans of up to $160.0 million; supplemental loans of up to $20.0million each year during the period from April 15 to September 15;and letter of credit accommodations.  Thetotal amount of availability is limited to the sum of 85% of eligiblereceivables, 90% of the net recovery percentage of inventories (as determinedby inventory appraisal) for the period of August 1 throughNovember 30, 85% of the net recovery percentage of inventories for theperiod December 1 through July 31 and the remaining outstandingbalance of the real estate availability loan.

 

The Congress Credit Facility includes restrictions, including theincurrence of additional indebtedness, the payment of dividends and otherdistributions, the making of investments, the granting of loans and the makingof capital expenditures.  We are requiredto maintain minimum levels of earnings before interest, taxes, depreciation,amortization and certain non-cash items (“EBITDA”) if excess availability isless than $15.0 million for any 30 consecutive day period.  We have at all times been in compliance withall financial covenants under the Congress Credit Facility.

 

At May 1, 2004, there was $32.0 million in availability under theCongress Credit Facility.  There were noshort-term borrowings under the Congress Credit Facility at May 1, 2004 or May3, 2003.

 

Cash used in operations decreased to $16.3 million in the first quarterof 2004 from $23.0 million in the first quarter of 2003, primarily as a resultof the decrease in loss from operations of $7.5 million.

 

Capital expenditures, net of construction allowances, were $1.4 millionfor the first quarter of 2004 compared to $1.5 million in the first quarter of2003.  Capital expenditures for fiscalyear 2004 are expected to be approximately $10.0 million.  Two new stores have opened to date in fiscal2004 and an additional three new stores are planned to open in fiscal 2004.

 

Long-term indebtedness increased by $25.8 million in the first quarterof 2003 consisting of $20.0 million of notes payable due in 2008 and $5.8million under the Congress Credit Facility repayable over a period of 60 monthscommencing June 1, 2003.

 

Management believes that invested cash, cash flow from operations, andavailability under the Congress Credit Facility will provide adequate funds forour foreseeable working capital needs, planned capital expenditures and debtservice obligations.  Our ability to fundour operations and make planned capital expenditures, to make scheduled debtpayments, to refinance indebtedness and to remain in compliance with thefinancial covenants under our debt agreements depends on our future operatingperformance and cash flow, which in turn, are subject to prevailing economicconditions and to financial, business and other factors, some of which arebeyond our control.

 

15

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**OffBalance Sheet Arrangements**

 

We enter into letters of credit to facilitate the internationalpurchase of merchandise.  Standby lettersof credit are required to secure certain obligations.

 
| ** **        | ** ** | **Within 1  Year**        | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5  Years** | ** ** | **Total** | ** ** |
|-------------------|------------|---------------------------|------------|---------------|------------|---------------|------------|--------------------|------------|-----------|------------|
| ** **        | ** ** | **(dollars in millions)** | ** ** |
| Letters of Credit |       |                      |       |          |       |          |       |               |       |      |       |
| Standby           |       | $—                   |       | $—       |       | $—       |       | $2.7               |       | $2.7      |       |
| Import            |       | 46.4                      |       | —        |       | —        |       | —             |       | 46.4      |       |
|              |       | $46.4                     |       | $—       |       | $—       |       | $2.7               |       | $49.1     |       |

 

**ContractualObligations**

 

The following summarizes our contractual obligations as of May 1, 2004and the effect such obligations are expected to have on our liquidity and cashflows in future periods.

 
| ** **                     | ** ** | **Within 1  Year**        | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5  Years** | ** ** | **Total** | ** ** |
|--------------------------------|------------|---------------------------|------------|---------------|------------|---------------|------------|--------------------|------------|-----------|------------|
| ** **                     | ** ** | **(dollars in millions)** | ** ** |
| Long-term debt obligations(1)  |       | $1.2                      |       | $2.4          |       | $346.9        |       | $—            |       | $350.5    |       |
| Redeemable preferred stock(2)  |       | —                    |       | —        |       | —        |       | 222.7              |       | 222.7     |       |
| Operating lease obligations(3) |       | 52.4                      |       | 96.4          |       | 84.3          |       | 116.2              |       | 349.3     |       |
| Purchase obligations           |       |                      |       |          |       |          |       |               |       |      |       |
| Inventory commitments          |       | 211.2                     |       | —        |       | —        |       | —             |       | 211.2     |       |
| Other                          |       | 4.5                       |       | 9.0           |       | 2.4           |       | —             |       | 15.9      |       |
| Employment agreements          |       | 1.8                       |       | 3.6           |       | 3.6           |       | —             |       | 9.0       |       |
|                           |       | $271.1                    |       | $111.4        |       | $437.2        |       | $338.9             |       | $1,158.6  |       |

 

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(1)               Excludes unamortized debt issuancediscount.

(2)               Included in long-term debt in thefinancial statements.

(3)               Operating lease obligations representobligations under various long-tem operating leases entered in the normalcourse of business for retail and factory stores, warehouses, office space andequipment requiring minimum annual rentals. Operating lease expense is a significant component of our operatingexpenses.  The lease terms range forvarious rental markets and are entered into at different times, which mitigatesexposure to market changes which could have a material effect on our results ofoperations within any given year.

 

**Seasonality**

 

We experience two distinct selling seasons, spring and fall.  The spring season is comprised of the firstand second quarters and the fall season is comprised of the third and fourthquarters.  Net sales are usuallysubstantially higher in the fall season and selling, general and administrativeexpenses as a percentage of net sales are usually higher in the springseason.  Approximately 31% of annual netsales in fiscal year 2003 occurred in the fourth quarter.  Our working capital requirements alsofluctuate throughout the year, increasing substantially in September andOctober in anticipation of the holiday season inventory requirements.

 

**CriticalAccounting Policies**

 

A summary of our criticalaccounting policies is included in the Management’s Discussion and Analysissection of our Annual Report on Form 10-K/Afor the year ended January 31, 2004 filed with the Securities and ExchangeCommission.

 

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**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

Our principal market risk relates to interest rate sensitivity, whichis the risk that future changes in interest rates will reduce our net income ornet assets.  Our variable rate debtconsists of borrowings under the Congress Credit Facility.  The interest rates are a function of the bankprime rate or LIBOR.  A one percentagepoint increase in the base interest rate would result in approximately $100,000change in income before taxes for each $10 million of borrowings.

 

We have a licensing agreement in Japan which provides for royaltypayments based on sales of J. Crew merchandise as denominated in yen.  We have entered into forward foreign exchangecontracts from time to time in order to minimize this risk.  At May 1, 2004, there were no forward foreignexchange contracts outstanding.

 

We enter into letters of credit to facilitate the internationalpurchase of merchandise.  The letters ofcredit are primarily denominated in U.S. dollars.  Outstanding letters of credit at May 1, 2004were $49.1 million.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

(a)  *Evaluation of Disclosure Controls and Procedures*.  When the original Form 10-Q was filed, weconcluded that our disclosure controls and procedures as of the end of theperiod covered by the report were effective. Subsequent to the original Form 10-Q filing, in September 2004 our new Chief Financial Officeridentified an error in the company's accounting for samples in the course ofreviewing the company's accounts upon joining the Company.  As a result, we concluded that our previouslyreported financial statements for the fiscal year ended January 31, 2004 and for the first quarter ended May 1,2004 should be restated to reflect the write-off of certain prepaid samplesincurred during those periods which should have been expensed as incurred. SeeNote 4 to our unaudited condensed financial statements for a description of the restatement.  We believe that the deficiencies in ourdisclosure controls and procedures that led to this error related to a lack ofadequate resources to review our accounting policies as appropriate.  We now have such adequate resources and webelieve that the deficiencies have been remediated.  We continue to monitor the effectiveness ofour disclosure controls and procedures on an ongoing basis.

 

(b)  *Changes inInternal Controls*. There were no significant changes in our internal controls overfinancial reporting during the period covered by this report that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

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**PART II – OTHER INFORMATION**

 

###### **ITEM 6.**               EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                      Exhibits.

 

31.1*  Certification of ChiefExecutive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of2002.

 

31.2*  Certification of ChiefFinancial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of2002.

 

32.1*  Certification of ChiefExecutive Officer and Chief Financial Officer pursuant to Section 906 ofthe Sarbanes - Oxley Act of 2002.

 

(b)                     Reports on Form 8-K.

 

Thefollowing reports on Form 8-K were filed during the quarter covered by thisreport:

 

1.                    Form 8-K filed March 26, 2004 relating tothe Company’s financial results for the quarter and fiscal year endedJanuary 31, 2004.

 

2.                    Form 8-K filed April 15, 2004 relating tothe appointment of Amanda Bokman as Executive Vice-President and ChiefFinancial Officer.

 

3.                    Form 8-K filed April 28, 2004 relating tothe appointment of Holly Cohen as Vice President, Real Estate, Planning andConstruction.

 

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*Filed herewith

 

18

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#### **SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, each Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.  The signature for each undersigned companyshall be deemed to relate only to matters having reference to such company.

 
|   | J. CREW GROUP, INC.      |
|--------|--------------------------|
|   | (Registrant)             |
|   |                     |   |
| Date:  | October 22, 2004         | By: |   /s/  Millard S.  Drexler |   |
|   |                     | Millard S. Drexler |
|   |                     | Chairman of the Board and |
|   |                     | Chief Executive Officer |
|   |                     |   |
| Date:  | October 22, 2004         | By: |   /s/  Amanda J.  Bokman |   |
|   |                     | Amanda J. Bokman |
|   |                     | Executive Vice-President and |
|   |                     | Chief Financial Officer |
|   |                     |   |
|   |                     |   |
|   | J. CREW INTERMEDIATE LLC |
|   | (Registrant)             |
|   |                     |   |
| Date:  | October 22, 2004         | By: |   /s/  Millard S.  Drexler |   |
|   |                     | Millard S. Drexler |
|   |                     | Chairman of the Board and |
|   |                     | Chief Executive Officer |
|   |                     |   |
| Date:  | October 22, 2004         | By: |   /s/  Amanda J.  Bokman |   |
|   |                     | Amanda J. Bokman |
|   |                     | Executive Vice-President and |
|   |                     | Chief Financial Officer |
|   |                     |   |
|   |                     |   |
|   | J. CREW OPERATING CORP.  |
|   | (Registrant)             |
|   |                     |   |
| Date:  | October 22, 2004         | By: |   /s/  Millard S.  Drexler |   |
|   |                     | Millard S. Drexler |
|   |                     | Chairman of the Board and |
|   |                     | Chief Executive Officer |
|   |                     |   |
| Date:  | October 22, 2004         | By: |   /s/  Amanda J.  Bokman |   |
|   |                     | Amanda J. Bokman |
|   |                     | Executive Vice-President and |
|   |                     | Chief Financial Officer |
|        |                          |  |  |  |  |  |  |

 

19

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