<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1999
REGISTRATION NO. 333-86583
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
(Exact name of Registrant Issuer as specified in its charter--See Inside Facing
Page for Table of Additional Registrant Guarantors)
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DELAWARE 2253 52-2061057
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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17422 DERIAN AVENUE
IRVINE, CALIFORNIA 92614
(949) 863-1171
(Address and telephone number of Registrant's
principal executive offices)
------------------------
ROGER G. RUPPERT
SENIOR VICE PRESIDENT--FINANCE AND
CHIEF FINANCIAL OFFICER
ST. JOHN KNITS INTERNATIONAL,
INCORPORATED
17422 DERIAN AVENUE
IRVINE, CALIFORNIA 92614
(949) 863-1171
(Name, address, including zip code, and telephone
number of agent for service)
------------------------
WITH A COPY TO:
GARY I. HOROWITZ
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 455-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration number of the earlier effective
Registration Statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities
Registration Statement number of the earlier effective Registration Statement
for the same offering. / /
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SHALL SPECIFICALLY STATE THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT, AS AMENDED OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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TABLE OF ADDITIONAL REGISTRANT GUARANTORS
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ADDRESS, INCLUDING ZIP CODE,
STATE OR OTHER AND TELEPHONE NUMBER,
EXACT NAME OF JURISDICTION OF INCLUDING AREA CODE, OF
REGISTRANT GUARANTOR AS INCORPORATION OR I.R.S. EMPLOYER REGISTRANT GUARANTOR'S
SPECIFIED IN ITS CHARTER ORGANIZATION IDENTIFICATION NUMBER PRINCIPAL EXECUTIVE OFFICES
- ----------------------------- ---------------- --------------------- -----------------------------
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St. John Knits, Inc. California 95-2245070 17422 Derian Avenue
Irvine, California 92614
(949) 863-1171
St. John Italy, Inc. California 33-0690789 17422 Derian Avenue
Irvine, California 92614
(949) 863-1171
St. John Trademarks, Inc. California 33-0760317 17422 Derian Avenue
Irvine, California 92614
(949) 863-1171
St. John Home, LLC Delaware 33-0567039 17422 Derian Avenue
Irvine, California 92614
(949) 863-1171
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PROSPECTUS
$100,000,000
[LOGO]
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
OFFER TO EXCHANGE ALL OUTSTANDING 12 1/2% SENIOR SUBORDINATED NOTES DUE 2009 FOR
12 1/2% SENIOR SUBORDINATED NOTES DUE 2009, WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT
UNCONDITIONALLY GUARANTEED ON A SENIOR SUBORDINATED BASIS BY ST. JOHN
KNITS, INC., ST. JOHN ITALY, INC., ST. JOHN TRADEMARKS, INC. AND ST. JOHN HOME,
LLC
THE EXCHANGE OFFER
- - St. John Knits International, Incorporated will exchange all outstanding notes
that are validly tendered and not validly withdrawn for an equal principal
amount of exchange notes that are freely tradeable.
- - You may withdraw tenders of outstanding notes at any time prior to the
expiration of the exchange offer.
- - The exchange offer expires at 5:00 p.m., New York City time, on December 27,
1999, unless extended. We do not currently intend to extend the expiration
date.
- - We will not receive any proceeds from the exchange offer.
THE EXCHANGE NOTES
- - The terms of the exchange notes to be issued in the exchange offer are
substantially identical to the outstanding notes, except that the exchange
notes will be freely tradeable.
- - The exchange notes will be issued under and entitled to the benefits of the
same indenture that authorized the issuance of the outstanding notes.
- - The guarantees of the outstanding notes are, and the guarantees of the
exchange notes will be, full, unconditional, joint and several.
- - The outstanding notes and the guarantees of the outstanding notes are, and the
exchange notes and the guarantees of the exchange notes will be, senior
subordinated indebtedness. As of August 1, 1999, we had approximately
$190.0 million of senior indebtedness outstanding.
--------------------------
If you are a broker-dealer and you receive exchange notes for your own account
pursuant to the exchange offer, you must acknowledge that you will deliver a
prospectus in connection with any resale of such exchange notes. The letter of
transmittal states that by so acknowledging and by delivering a prospectus, you
will not be deemed to admit that you are an "underwriter" within the meaning of
the Securities Act. Broker-dealers may use this prospectus in connection with
resales of exchange notes received in exchange for outstanding notes where such
outstanding notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. We have agreed that, for a
period of 180 days after the date on which the exchange offer is consummated, we
will make this prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution."
--------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 18 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
--------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------
The date of this prospectus is November 22, 1999.
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TABLE OF CONTENTS
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PAGE
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Forward-Looking Statements............ 3
Prospectus Summary.................... 4
Risk Factors.......................... 18
The Transactions...................... 28
Use of Proceeds....................... 28
Capitalization........................ 29
Unaudited Pro Forma Condensed
Consolidated Financial
Information......................... 30
Selected Historical Condensed
Consolidated Financial
Information......................... 35
Management's Discussion and Analysis
of
Financial Condition and Results of
Operations.......................... 37
Business.............................. 44
Management............................ 54
Securities Ownership of Certain
Beneficial Owners and Management.... 59
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Certain Relationships and Related
Transactions........................ 60
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Description of Senior Credit
Facilities.......................... 62
The Exchange Offer.................... 65
Description of the Notes.............. 76
Description of Preferred Stock........ 117
Certain United States Federal Income
Tax Considerations of the Exchange
Offer............................... 120
Book-Entry; Delivery and Form......... 121
Exchange and Registration Rights...... 125
Plan of Distribution.................. 128
Legal Matters......................... 128
Experts............................... 128
Where You Can Find More Information... 129
Index to Consolidated Financial
Statements.......................... F-1
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. All statements other
than statements of historical facts included in this prospectus, including
statements we make under "Prospectus Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," may
constitute forward-looking statements. We have based these forward-looking
statements on our current expectations and projections about future events.
Although we believe that our assumptions made in connection with the
forward-looking statements are reasonable, we cannot assure you that our
assumptions and expectations will prove to have been correct. Important factors
that could cause our actual results to differ from our expectations are
disclosed below under "Risk Factors."
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT ST. JOHN KNITS
INTERNATIONAL, INCORPORATED AND ITS SUBSIDIARIES AND THIS EXCHANGE OFFER.
BECAUSE IT IS JUST A SUMMARY, IT MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. YOU SHOULD READ THIS PROSPECTUS, INCLUDING THE FINANCIAL DATA
AND RELATED NOTES, IN ITS ENTIRETY. IN THIS PROSPECTUS, REFERENCES TO "SJKI,"
"WE," "OUR" AND "US" REFER TO ST. JOHN KNITS INTERNATIONAL, INCORPORATED AND ITS
SUBSIDIARIES, REFERENCES TO "ST. JOHN KNITS INTERNATIONAL" REFER ONLY TO ST.
JOHN KNITS INTERNATIONAL, INCORPORATED, AND REFERENCES TO "ST. JOHN" REFER ONLY
TO ST. JOHN KNITS, INC., ONE OF OUR SUBSIDIARIES. IN THIS PROSPECTUS, REFERENCES
TO "FISCAL 1998" REFER TO THE YEAR ENDED NOVEMBER 1, 1998 AND PRIOR FISCAL YEARS
ARE REFERRED TO IN A SIMILAR MANNER UNLESS OTHERWISE INDICATED. UNLESS OTHERWISE
SPECIFICALLY INDICATED, ALL REFERENCES TO OUR PERFORMANCE ARE FOR FISCAL 1998.
THE COMPANY
OVERVIEW
We are a leading designer, manufacturer and marketer of fine women's
clothing and accessories. The St. John name has been associated with high
quality women's knitwear for over 35 years. Our core knitwear product line,
which represents approximately 81% of our sales, consists of a collection of
lifestyle clothing for women's business, evening and casual needs. We
manufacture our products primarily to order and distribute them on a highly
selective basis through a group of upscale retailers with whom we have long-term
relationships, as well as through our company-owned stores.
Our core knitwear products are considered unique and highly desirable by
customers due to their classic styling, durability, comfort, fit and quality.
These attributes, combined with selective distribution and targeted advertising,
have created a loyal base of customers consisting of professional and higher-
income women.
The strength of our brand name and customer loyalty has also enabled us to
expand our business into product lines that complement our core offerings. These
products account for approximately 19% of our sales and include:
- women's wovens;
- activewear;
- shoes;
- coats;
- accessories;
- fragrances; and
- home furnishings.
The success of our knitwear business, together with growth from our other
product lines, have allowed us to increase net sales from approximately
$128.0 million in fiscal 1994 to approximately $282.0 million in fiscal 1998,
representing a compound annual growth rate of approximately 21.8%. For the
twelve months ended August 1, 1999, our net sales and Adjusted EBITDA (as
defined) were approximately $297.6 million and $61.7 million, respectively.
We have developed a vertically integrated manufacturing process which allows
us to produce approximately 93% of our own products. We believe that this
vertical integration differentiates us from other apparel manufacturers and has
been critical to our success because it enables us to manufacture products to
order, maximize manufacturing flexibility and maintain superior quality control.
We operate seven production facilities in California and one in Mexico. During
the past five years we have invested
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approximately $53.0 million in production facilities and state-of-the-art
equipment, which we believe has further enhanced our position as the leading
manufacturer of high-end women's knitwear.
We have had relationships with our top three retail customers, Saks Fifth
Avenue, Neiman Marcus and Nordstrom, for approximately 25, 20 and 15 years,
respectively. We also distribute our products through 18 company-owned boutiques
and nine outlet stores. The boutiques showcase our entire line of products and
have expanded the distribution and enhanced the brand awareness of our products.
COMPETITIVE STRENGTHS
Our competitive strengths, summarized below, include our:
- stable core product offering;
- premier brand name;
- manufacturing expertise;
- long-standing customer relationships; and
- proven management team with substantial equity ownership.
STABLE CORE PRODUCT OFFERING. We believe our knitwear is one of the most
successful product lines in women's apparel. For over 35 years, our classic,
timeless styling and consistency in designs, fabrics and colors across seasons
have made our products a core part of our customers' wardrobes and have created
a high degree of customer loyalty. We believe that consistent styling encourages
our customers to augment wardrobes and match garments purchased during prior
seasons with our current products. In addition, we believe our position as the
leading supplier of high-end women's knitwear enhances our stability. Over the
past 10 years, the success of our core knitwear products has driven an increase
in net sales, from approximately $41.5 million in fiscal 1988 to approximately
$282.0 million in fiscal 1998.
PREMIER BRAND NAME. We believe the St. John name is synonymous with high
quality women's apparel. We believe we have developed an exclusive image by
selectively distributing our products through upscale retailers and through a
long-term investment in a targeted advertising campaign. Our knitwear has
developed a distinct reputation for its exceptional fit and low maintenance,
qualities attributable to our proprietary high-twist yarn and knit fabric. Our
target customers, professional and higher-income women, have proven willing to
pay a premium price for our garments and many have become repeat purchasers of
our products. We have been able to capitalize on this brand loyalty by
developing products, such as accessories, shoes and coats, that complement our
core knitwear garments.
MANUFACTURING EXPERTISE. We believe that our vertical integration
differentiates us from other apparel manufacturers and has been critical to our
success because it enables us to manufacture products to order, maximize
manufacturing flexibility and maintain superior quality control. We believe the
ability to produce to order limits our exposure to both the inventory and market
risks associated with many apparel companies that source products
internationally. Our in-house manufacturing capabilities also enable us to
quickly increase production of popular styles. Our ability to control every
aspect of the manufacturing process allows us to consistently produce garments
to our high quality standards. Finally, we believe that our vertical integration
has enabled us to consistently achieve margins that are among the highest in the
apparel industry.
LONG-STANDING CUSTOMER RELATIONSHIPS. We have had relationships with our
top three retail customers, Saks Fifth Avenue, Neiman Marcus and Nordstrom, for
approximately 25, 20 and 15 years, respectively. We believe that St. John is
among the highest selling and most profitable product lines for each of these
accounts. As a result, our products receive substantial senior management
attention, high quality selling space and prominent positioning in store
advertising. In addition, these key retail
5
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customers have demonstrated a commitment to us by providing additional square
footage in their stores for our new products.
PROVEN MANAGEMENT TEAM WITH SUBSTANTIAL EQUITY OWNERSHIP. We operate under
a strong management team with significant experience in the apparel industry.
Bob Gray and his wife, Marie Gray, co-founded the company in 1962. Bob Gray has
been chief executive officer and Marie Gray has been chief designer since our
inception. In addition, Kelly Gray has served in various executive positions
since 1988 and has been our president since 1996. Mr. Gray leads a management
team with significant experience in the design, marketing and sale of women's
apparel. Our senior management team has a large stake in our performance. The
Gray family beneficially owns approximately 15% of St. John Knits
International's stock, and has the opportunity, based upon performance, to
acquire up to an additional 5% of stock. Other members of the senior management
team also will be given the chance to own up to approximately 5% of St. John
Knits International through the sale of stock and the grant of incentive-based
options.
BUSINESS STRATEGY
We believe our knitwear is one of the most successful product lines in
women's apparel in terms of both growth and profitability. In addition, we
believe the line has significant remaining growth potential within its existing
distribution base. Accordingly, we intend to pursue a strategy of controlled
growth by focusing on the continued development of our core knitwear product
line. We will also continue to selectively pursue expanded distribution, both
domestically and internationally. Finally, we will augment our core product
sales growth by continuing to extend the St. John brand into complementary
apparel and non-apparel product lines and markets.
EXPAND DISTRIBUTION. While we intend to remain selective in the
distribution of our products, we believe that there are opportunities to
increase sales through expanded distribution. Based on our historical
performance and profitability as well as our strong relationships with our key
accounts, we believe our sales will grow as these retail customers offer our
products in newly-opened stores. In addition, we intend to selectively expand
our company-owned boutiques by opening at least one to two stores per year in
markets which we believe are either complementary or underserved.
CAPITALIZE ON INTERNATIONAL OPPORTUNITIES. We believe that international
sales, which currently account for approximately 7.5% of our annual sales, offer
an opportunity to grow our business. We have established relationships with a
number of high quality retail customers in Asia and Europe and we are seeking to
increase our penetration in these accounts. We are also planning to selectively
expand our successful in-hotel boutiques business in Japan and have recently
opened a boutique in Hong Kong.
BROADEN COMPLEMENTARY PRODUCT LINES. We believe we can continue to extend
the powerful St. John brand beyond our core knitwear product lines to
complementary segments of the women's apparel market, including sportswear and
wovens. We believe that St. John Sport and Griffith & Gray, our current entries
in these important categories, represent substantial growth opportunities. Our
non-apparel product lines, including Accessories, Shoes and Fragrance, accounted
for approximately 7% of wholesale sales in fiscal 1998. We believe that these
lines can complement the knitwear business through the introduction of new
products and expanded distribution. We view these select product extensions as
an attractive and efficient means of growth as they generally target our core
knitwear customer. We will continue to add devoted design resources to these
areas and to develop additional sourcing and licensing relationships with
suppliers capable of providing products of appropriate quality.
6
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THE TRANSACTIONS
On February 2, 1999, we entered into a merger agreement to be acquired by a
group consisting of Vestar Capital Partners III, L.P. and Bob Gray, Marie Gray
and Kelly Gray for approximately $536.9 million, which represents an offering
price of $30.00 per share. Pursuant to the agreement, in July 1999 we entered
into two mergers. As a result of the mergers, St. John became a wholly owned
subsidiary of St. John Knits International. After the closing of the mergers,
former public shareholders of St. John (other than the Grays) owned
approximately 7%, the Grays beneficially owned approximately 15%, and Vestar
beneficially owned approximately 78% of St. John Knits International's common
stock.
The total financing used to consummate the mergers was approximately
$536.9 million, funded by:
- approximately $26.9 million in excess cash of St. John;
- a $75.0 million term loan and a $115.0 million term loan provided by a
group of banks led by The Chase Manhattan Bank;
- approximately $98.6 million from the offering of the outstanding notes,
net of discount;
- approximately $153.6 million of cash equity contributed by Vestar;
- $25.0 million of preferred stock of St. John Knits International, acquired
by an affiliate of Vestar;
- approximately $29.1 million from the rollover of a portion of the Grays'
investment in St. John; and
- approximately $13.7 million from the rollover of a portion of St. John's
then-outstanding public shares.
In this prospectus, we refer to the mergers, the elements of the financing
discussed above, and a $25.0 million revolving credit facility to be used for
working capital as the transactions. We refer to the two term loans and the
revolving credit facility as the senior credit facilities.
VESTAR CAPITAL PARTNERS
Vestar Capital Partners, headquartered in New York with an office in Denver,
Colorado, is a leading private equity firm which manages over $3.5 billion in
private equity capital. Founded in 1988, Vestar Capital focuses on management
buyouts, recapitalizations and growth equity investments and to date has
completed 29 investments with an aggregate value of approximately $5.5 billion.
Previous Vestar Capital investments have included Aearo Corporation, Celestial
Seasonings, Inc., Clark-Schwebel, Inc., Consolidated Cigar Holdings, Inc.,
Insight Communications Company, L.P., La Petite Holdings, Inc., Prestone
Products Corporation, Pyramid Communications, Inc., Siegel & Gale
Holdings, Inc. and Westinghouse Air Brake Company. In addition, Vestar Capital
has considerable experience in the apparel sector. Prior equity investments in
the apparel sector include Sun Apparel, Inc., a leading manufacturer and
distributor of jeanswear under the "Polo Jeans Company" name (sold to Jones
Apparel, Inc. in 1998) and Cluett American Corp., a leading designer,
manufacturer and marketer of men's socks and dress shirts under the "Gold Toe"
and "Arrow" brand names.
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SUMMARY OF TERMS OF THE EXCHANGE OFFER
On July 7, 1999, we completed the private offering of the outstanding notes.
References to "notes" in this prospectus are references to both the outstanding
notes and the exchange notes.
St. John Knits International and its subsidiaries which guarantee the
outstanding notes entered into an exchange and registration rights agreement
with the initial purchasers in the private offering in which St. John Knits
International and those subsidiaries agreed to deliver to you this prospectus
and to complete the exchange offer within 180 days after the date of original
issuance of the outstanding notes.
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The Exchange Offer........................... We are offering to exchange up to $100.0
million aggregate principal amount of
exchange notes for up to $100.0 million
aggregate principal amount of outstanding
notes. Outstanding notes may be exchanged
only in integral multiples of $1,000. The
exchange notes will be substantially
identical to the outstanding notes, except
that because we have registered the exchange
notes they:
- will be freely tradeable;
- will not bear legends restricting their
transfer;
- will not be subject to any additional
obligations regarding registration under
the Securities Act; and
- will not be subject to the special
interest payments described in "Exchange and
Registration Rights."
The exchange notes will be issued under and
entitled to the benefits of the same
indenture that authorized the issuance of the
outstanding notes. Consequently, both series
will be treated as a single class of debt
securities under the indenture.
Resales...................................... Based on interpretations of the staff of the
Securities and Exchange Commission set forth
in no-action letters issued to unrelated
third parties, we believe that the exchange
notes may be offered for resale, resold and
otherwise transferred by you without
compliance with the registration and
prospectus delivery provisions of the
Securities Act, if:
- you are acquiring the exchange notes in
the ordinary course of your business;
- you have not engaged in, do not intend to
engage in, and have no arrangement or
understanding with any person to
participate in, a distribution of the
exchange notes; and
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- you are not an affiliate of St. John Knits
International within the meaning of Rule
405 under the Securities Act.
If you do not meet these requirements, you
will need to comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with the resale
of exchange notes, unless an exemption to
these requirements is applicable. Each
participating broker-dealer that receives
exchange notes for its own account in
exchange for outstanding notes acquired as a
result of market-making or trading activity
must acknowledge that it will deliver a
prospectus in connection with any resale of
the exchange notes. See "Plan of
Distribution."
Expiration Date; Withdrawal of Tender........ The exchange offer expires at 5:00 p.m., New
York City time, on December 27, 1999 unless
we extend the expiration date. We do not
currently intend to extend the expiration
date. You may withdraw tenders of outstanding
notes at any time prior to the expiration of
the exchange offer.
Conditions to the Exchange Offer............. The exchange offer is subject to conditions,
which we may waive if, in our reasonable
determination, one or more conditions have
not been satisfied. We currently expect that
each of the conditions will be satisfied and
that no waivers will be necessary. Please
read the section captioned "The Exchange
Offer--Conditions to the Exchange Offer" of
this prospectus for more information
regarding the conditions to the exchange
offer.
Procedures for Tendering Outstanding Notes... If you wish to accept the exchange offer, you
must complete, sign and date the accompanying
letter of transmittal, or a facsimile of the
letter of transmittal, according to the
instructions contained in this prospectus and
the letter of transmittal. You must also mail
or otherwise deliver the letter of
transmittal, or a facsimile of the letter of
transmittal, together with the outstanding
notes and any other required documents to the
exchange agent at the address set forth on
the cover page of the letter of transmittal.
If you hold outstanding notes through The
Depository Trust Company and wish to
participate in the exchange offer, you must
comply with the Automated Tender Offer
Program procedures of The Depository Trust
Company, by which you will agree to be bound
by the letter of transmittal.
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Terms and Conditions of the
Letter of Transmittal...................... By signing, or agreeing to be bound by, the
letter of transmittal, you will represent to
us that:
- any exchange notes that you receive will
be acquired in the ordinary course of your
business;
- you have no arrangement or understanding
with any person or entity to participate
in, and do not intend to engage in, a
distribution of the exchange notes;
- if you are a broker-dealer that will
receive exchange notes for your own account
in exchange for outstanding notes that you
have acquired as a result of market-making
or trading activities, that you will
deliver a prospectus, as required by law,
in connection with any resale of those
exchange notes;
- you are not an affiliate, as defined in
Rule 405 of the Securities Act, of St. John
Knits International or, if you are an
affiliate, that you will comply with
applicable registration and prospectus
delivery requirements of the Securities
Act; and
- if you are a person in the United Kingdom,
that your ordinary activities involve you
in acquiring, holding, managing or
disposing of investments, as principal or
agent, for the purposes of your business.
Special Procedures for Beneficial Owners..... If you are a beneficial owner of outstanding
notes which are registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee, and you wish to
tender those outstanding notes in the
exchange offer, you should promptly contact
the person in whose name your outstanding
notes are registered and instruct them to
tender on your behalf. If you wish to tender
on your own behalf, you must, prior to
completing and executing the letter of
transmittal and delivering your outstanding
notes, either make appropriate arrangements
to register ownership of the outstanding
notes in your name or obtain a properly
completed bond power from the person in whose
name your outstanding notes are registered.
The transfer of registered ownership may take
considerable time and may not be able to be
completed prior to the expiration date.
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Guaranteed Delivery Procedures............... If you wish to tender your outstanding notes
and, prior to the expiration date, you
cannot:
- deliver your outstanding notes, the letter
of transmittal or any other documents
required by the letter of transmittal; or
- comply with the applicable procedures
under the Depository Trust Company's
Automated Tender Offer Program,
then you must tender your outstanding notes
according to the guaranteed delivery
procedures which we explain in this
prospectus under the caption "The Exchange
Offer--Guaranteed Delivery Procedures."
Effect on Holders of Outstanding Notes....... As a result of this exchange offer, we will
have fulfilled a covenant contained in the
exchange and registration rights agreement
among St. John Knits International and its
subsidiaries which guarantee the outstanding
notes and the initial purchasers in the
private offering through which we issued the
outstanding notes. Accordingly, there will be
no increase in the interest rate on the
outstanding notes. If you do not tender your
outstanding notes in the exchange offer, you
will continue to be entitled to all the
rights and limitations that apply to the
outstanding notes under the indenture, except
as noted in the preceding sentence.
Consequence of Failure to Exchange........... If you do not exchange your outstanding notes
for exchange notes in the exchange offer,
your outstanding notes will continue to be
subject to restrictions on transfer. In
general, outstanding notes may not be offered
or sold unless registered under the
Securities Act, except pursuant to an
exemption from, or in a transaction not
subject to, the Securities Act and applicable
state securities laws. We do not currently
anticipate that we will register the
outstanding notes under the Securities Act.
In addition, the tender of outstanding notes
in the exchange offer will reduce the
principal amount of the outstanding notes
outstanding, which may have an adverse effect
upon, and increase the volatility of, the
market price of the outstanding notes due to
a reduction in liquidity. See "Risk
Factors--Failure to Exchange Outstanding
Notes."
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<TABLE>
<S> <C>
U.S. Federal Income Tax Considerations....... The exchange of outstanding notes for
exchange notes in the exchange offer will not
be a taxable event for U.S. federal income
tax purposes. See "Certain United States
Federal Income Tax Considerations of the
Exchange Offer."
Use of Proceeds.............................. We will not receive any cash proceeds from
the issuance of exchange notes.
Exchange Agent............................... The Bank of New York is the exchange agent
for the exchange offer. The address and
telephone number of the exchange agent are
set forth in the section captioned "The
Exchange Offer--Exchange Agent" of this
prospectus.
</TABLE>
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<PAGE>
SUMMARY OF TERMS OF THE EXCHANGE NOTES
<TABLE>
<S> <C>
Issuer.................................... St. John Knits International, Incorporated.
Notes Offered............................. $100,000,000 aggregate principal amount of 12 1/2%
Senior Subordinated Notes due 2009.
Maturity.................................. July 1, 2009.
Interest.................................. Annual Rate: 12.5%.
Payment Frequency: Every six months on January 1 and
July 1, commencing January 1, 2000.
Interest on the exchange notes will accrue from the last
interest payment date on which interest was paid on the
outstanding notes or, if no interest was paid on the
outstanding notes, from the date the outstanding notes
were originally issued.
Optional Redemption....................... Except as described below, we may not redeem the
exchange notes prior to July 1, 2004. At any time on or
after July 1, 2004, we may redeem the exchange notes at
the redemption prices, plus accrued and unpaid interest,
listed in "Description of the Notes--Optional
Redemption."
In addition, on or before July 1, 2002 we may redeem up
to 35% of the outstanding exchange notes with the net
cash proceeds of certain equity offerings. See
"Description of the Notes--Optional Redemption."
Change of Control......................... Upon the occurrence of a "change of control," we will be
required to make an offer to repurchase each holder's
exchange notes at a price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if
any, to the date of repurchase. See "Description of the
Notes--Offer to Purchase Upon Change of Control."
Guarantees................................ Our existing and future domestic subsidiaries will
guarantee the exchange notes with guarantees of payment
that will effectively rank below their senior debt.
Ranking................................... The exchange notes will not be secured by any collateral
and:
- will rank below all of our senior debt; and
- will rank equal to any other senior subordinated debt
we may incur.
Therefore, if we default, your right to payment under
the exchange notes will be junior to the rights of
holders of our senior debt to collect money we owe them
at the time. The exchange notes will effectively rank
below all liabilities (including trade payables) of our
subsidiaries which are not guarantors.
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
As of August 1, 1999, we owed approximately $190.0
million in senior debt, all of which was secured. See
"Description of the Notes--Subordination of the Notes,"
"Description of Senior Credit Facilities" and
"Capitalization."
Basic Covenants of Indenture.............. We issued the outstanding notes and will issue the
exchange notes under an indenture with The Bank of New
York. The indenture will limit our ability and the
ability of our restricted subsidiaries to:
- incur more debt;
- pay dividends, redeem stock or make other
distributions;
- issue capital stock;
- make restricted investments;
- sell assets;
- use assets as security in other transactions;
- enter into transactions with affiliates; and
- merge or consolidate.
These covenants are subject to a number of important
qualifications and limitations. See "Description of the
Notes--Certain Covenants."
Absence of a Public Market for the
Notes................................... The exchange notes will generally be freely transferable
but will be new securities for which there will not
initially be a market. Accordingly, there can be no
assurance as to the development or liquidity of any
market for the exchange notes. The initial purchasers in
the private placement of the outstanding notes have
advised us that they currently intend to make a market
in the exchange notes. However, they are not obligated
to do so, and any market making with respect to the
exchange notes may be discontinued at any time without
notice.
</TABLE>
RISK FACTORS
Prospective participants in the exchange offer should carefully consider the
risk factors set forth under the caption "Risk Factors" and the other
information included in this prospectus prior to tendering their outstanding
Notes. See "Risk Factors."
------------------------
Our principal executive offices are located at 17422 Derian Avenue, Irvine,
California 92614. Our telephone number is (949) 863-1171.
------------------------
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<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL AND OTHER INFORMATION
The following table sets forth summary historical condensed consolidated
financial and other information for the three fiscal years ended November 3,
1996, November 2, 1997 and November 1, 1998 and as of and for the 39 weeks ended
August 2, 1998, August 1, 1999 and the twelve months ended August 1, 1999. The
summary historical condensed consolidated financial and other information for
the three fiscal years ended November 3, 1996, November 2, 1997 and November 1,
1998 is derived from, and should be read in conjunction with, the audited
historical consolidated financial statements of St. John and the notes thereto
included elsewhere in this prospectus. The summary historical condensed
consolidated financial and other information as of and for the 39 weeks ended
August 2, 1998, August 1, 1999 and the twelve months ended August 1, 1999 have
been derived from St. John's unaudited consolidated financial statements and, in
the opinion of our management, have been prepared on a basis consistent with the
audited historical condensed consolidated financial statements and include all
adjustments (which consist of normal recurring accruals) that are considered by
management to be necessary for a fair presentation of such financial
information.
Also set forth below is summary unaudited pro forma condensed consolidated
financial information as of and for the twelve months ended August 1, 1999 which
was derived from, and should be read in conjunction with, the unaudited pro
forma condensed consolidated financial information included in this prospectus.
The unaudited pro forma condensed consolidated statement of income for the
twelve months ended August 1, 1999 gives effect to the transactions as if they
had been consummated on November 3, 1997. The pro forma adjustments are
described in the notes which accompany the information under the heading
"Unaudited Pro Forma Condensed Consolidated Financial Information" in this
prospectus. The unaudited pro forma financial statements should not be
considered indicative of actual results that would have been achieved had the
transactions been consummated on the date or for the periods indicated and do
not purport to indicate results of operations as of any future date or any
future period.
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<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
AND OTHER INFORMATION
<TABLE>
<CAPTION>
TWELVE
FISCAL YEAR ENDED 39 WEEKS ENDED MONTHS
---------------------------------------- --------------------- ENDED
NOVEMBER 3, NOVEMBER 2, NOVEMBER 1, AUGUST 2, AUGUST 1, AUGUST 1,
1996 1997 1998 1998 1999 1999
------------ ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Net sales........................... $202,951 $242,101 $281,961 $206,293 $221,935 $297,602
Cost of sales....................... 88,871 99,545 120,883 86,210 97,382 132,053
-------- -------- -------- -------- -------- --------
Gross profit........................ 114,080 142,556 161,078 120,083 124,553 165,549
Selling, general and administrative
expenses.......................... 68,385 84,545 107,026 76,858 91,175 121,343
Transaction fees and expenses....... -- 15,212 15,212
-------- -------- -------- -------- -------- --------
Operating income.................... 45,695 58,011 54,052 43,225 18,166 28,994
Interest expense.................... -- 2,045 2,045
Other income(1)..................... 1,355 713 1,369 1,100 1,220 1,489
-------- -------- -------- -------- -------- --------
Income before taxes................. 47,050 58,724 55,421 44,325 17,341 28,438
Income taxes........................ 19,929 24,300 22,001 18,033 7,117 11,085
-------- -------- -------- -------- -------- --------
Net income.......................... $ 27,121 $ 34,424 $ 33,420 $ 26,292 $ 10,224 $ 17,353
======== ======== ======== ======== ======== ========
OTHER DATA (UNAUDITED):
EBITDA(2)........................... $ 52,999 $ 67,126 $ 66,294 $ 51,998 $ 47,309 $ 60,853
Depreciation and Amortization....... 7,042 8,859 11,371 8,276 10,931 14,025
Capital expenditures................ 21,400 22,751 23,648 16,800 10,758 17,606
PRO FORMA DATA:
EBITDA(2)........................... $ 60,353
Adjusted EBITDA(3).................. 61,725
Cash interest expense............... 27,142
Ratio of total debt to Adjusted
EBITDA............................ 4.71x
Ratio of Adjusted EBITDA to cash
interest expense.................. 2.27x
Pro forma ratio of earnings to fixed
charges(4)........................ 0.94x
</TABLE>
<TABLE>
<CAPTION>
AUGUST 1,
1999
---------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA (AT PERIOD END):
Cash, cash equivalents and short-term investments............................................ $ 18,057
Working capital.............................................................................. 85,132
Total assets................................................................................. 195,748
Total debt................................................................................... 290,520
Mandatorily Redeemable Preferred Stock....................................................... 25,000
Stockholders' equity (deficit)............................................................... (140,392)
</TABLE>
- ------------------------
(1) "Other income" primarily includes interest income and royalty income.
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<PAGE>
(2) "EBITDA" represents earnings before interest expense, other income (except
royalty income), income taxes, depreciation and amortization expense,
non-cash write-off of assets and non-recurring expenses associated with the
transactions. It is not intended to represent cash flow from operations as
defined by generally accepted accounting principles and should not be used
as an alternative to net income as an indicator of SJKI's operating
performance or to cash flow as a measure of liquidity. EBITDA is included in
this prospectus as it is a basis upon which SJKI assesses its financial
performance. SJKI believes that EBITDA, as presented, presents a useful
measure of assessing SJKI's ongoing operating activities without the impact
of financing activity and non-recurring charges. While EBITDA is frequently
used as a measure of operations and the ability to meet debt service
requirements, it is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the method
of calculation. For purposes of the EBITDA calculation, non-cash write-off
of assets was $16,000, $200,000 and $611,000 for fiscal years 1996, 1997 and
1998, respectively, $431,000 and $1,720,000 for the 39 weeks ended
August 2, 1998 and August 1, 1999, respectively, and $1,873,000 for the
twelve months ended August 1, 1999. For the fiscal year ended November 1,
1998 and the twelve months ended August 1, 1999, non-cash write-off of
assets was primarily related to the closure of three home furnishings stores
and the write-off of a trademark. Pro forma EBITDA reflects inclusion of an
annual advisory fee payable to Vestar under a management agreement.
(3) "Adjusted EBITDA" represents pro forma EBITDA plus (i) expenses associated
with the termination of SJKI's home furnishings joint venture and settlement
of associated litigation, which were $886,000 for the twelve months ended
August 1, 1999, and (ii) operating results relating to the four home
furnishings retail stores which SJKI no longer operates (three of which were
closed and one of which was transferred to the former joint venture
partner), which represented a net loss of $486,000 for the twelve months
ended August 1, 1999. SJKI's home furnishings joint venture was terminated
in May 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(4) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes and extraordinary items, plus
fixed charges. Fixed charges consist of interest expense, including
amortization of debt issuance costs and a portion of operating lease rental
expense deemed to be representative of the interest factor. The pro forma
ratio of earnings to fixed charges was 1.60x for the fiscal year ended
November 1, 1998 and 1.70x and .80x for the 39 weeks ended August 2, 1998
and August 1, 1999, respectively.
17
<PAGE>
RISK FACTORS
Before you participate in the exchange offer, you should be aware that there
are various risks, including those described below. You should carefully
consider these risk factors, together with the other information in this
prospectus, before deciding to participate in the exchange offer.
FAILURE TO EXCHANGE OUTSTANDING NOTES--IF YOU DO NOT EXCHANGE YOUR OUTSTANDING
NOTES, THEY MAY BE MORE DIFFICULT TO SELL BECAUSE THEY WILL CONTINUE TO BE
SUBJECT TO RESTRICTIONS ON TRANSFER AND MAY SUFFER FROM REDUCED LIQUIDITY.
If you do not exchange your outstanding notes for exchange notes, your
outstanding notes will continue to be subject to restrictions on transfer. In
general, outstanding notes may not be offered or sold unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. We do
not currently anticipate that we will register the outstanding notes under the
Securities Act. In addition, the tender of outstanding notes in the exchange
offer will reduce the principal amount of the outstanding notes outstanding,
which may have an adverse effect upon, and increase the volatility of, the
market price of the outstanding notes due to a reduction in liquidity.
ABSENCE OF AN ACTIVE TRADING MARKET--IF AN ACTIVE TRADING MARKET DOES NOT
DEVELOP FOR THE NOTES, IT WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE MARKET
PRICE AND LIQUIDITY OF THE NOTES.
A liquid market for the exchange notes or outstanding notes may not develop.
The outstanding notes and exchange notes constitute a new class of securities
for which there is no established trading market. We do not intend to list the
outstanding notes or exchange notes on any national securities exchange or to
seek their quotation on any automated dealer quotation system. Although the
initial purchasers of the outstanding notes have informed us that they intend to
make a market in the outstanding notes and exchange notes, they are not
obligated to do so, and they may cease market-making activities at any time
without notice. The liquidity of a market for the outstanding notes and exchange
notes will depend upon a number of factors, including the number of those
holding the outstanding notes and exchange notes and the interest of securities
dealers in making a market in the outstanding notes and exchange notes.
If the outstanding notes and exchange notes are traded, they may trade at a
discount from the initial offering price of the outstanding notes, depending
upon prevailing interest rates, the market for similar securities, our
performance and other factors. However, declines in the liquidity and market
price of the outstanding notes or exchange notes may also occur independent of
our financial performance or prospects.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE--OUR SUBSTANTIAL LEVEL OF DEBT COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL HEALTH AND PREVENT US FROM FULFILLING
OUR OBLIGATIONS UNDER THE NOTES.
As a result of the transactions, we have a substantial amount of debt. As of
August 1, 1999, we had total debt of approximately $290.5 million, of which
approximately $190.0 million was senior debt, and a stockholders' deficit of
approximately $140.4 million, which resulted from the recapitalization of SJKI
in connection with the transactions. In addition, we may borrow money under the
revolving credit facility which is intended to be used primarily for working
capital, and subject to restrictions in the senior credit facilities and in the
indenture governing the notes, we may borrow more money for working capital,
capital expenditures, acquisitions or other purposes.
Our high level of debt could have important consequences for you, including
the following:
- our debt level makes us more vulnerable to economic downturns and adverse
developments in our business, may cause us to have difficulty borrowing
money in the future for working capital,
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<PAGE>
capital expenditures, acquisitions or other purposes and limits our
ability to pursue other business opportunities and implement our business
strategies;
- we will need to use a large portion of the money we earn to pay principal
and interest on the senior credit facilities, the notes and on other debt,
which will reduce the amount of money available to us to finance our
operations and other business activities;
- some of our debt has a variable rate of interest, which exposes us to the
risk of increased interest rates;
- debt under the senior credit facilities will be secured and will mature
prior to the notes; and
- we may have a much higher level of debt than our competitors, which may
put us at a competitive disadvantage and may reduce our flexibility in
responding to changing business and economic conditions, including
increased competition.
After giving pro forma effect to the transactions, our cash interest expense
for the 12 months ended August 1, 1999 would have been approximately
$27.1 million. As of August 1, 1999, after giving pro forma effect to the
transactions, our ratio of earnings to fixed charges would have been 0.94 to 1.
We expect to obtain the money to pay our expenses and to pay the principal
and interest on the notes, the senior credit facilities and other debt from our
operations and from additional loans under the revolving credit facility. Our
ability to meet our expenses thus depends on our future performance, which will
be affected by financial, business, economic and other factors. We will not be
able to control many of these factors, such as economic conditions in the
markets where we operate and pressure from competitors. We cannot be certain
that the money we earn will be sufficient to allow us to pay principal and
interest on our debt (including the notes) and meet our other obligations. If we
do not have enough money, we may be required to refinance all or part of our
existing debt, including the notes, sell assets or borrow more money. We cannot
guarantee that we will be able to refinance our debt, sell assets or borrow more
money on terms acceptable to us. In addition, the terms of existing or future
debt agreements, including the senior credit facilities and the indenture, may
restrict us from adopting any of these alternatives.
RESTRICTIONS IMPOSED BY OUR DEBT AGREEMENTS--COVENANT RESTRICTIONS MAY LIMIT OUR
ABILITY TO MAKE PAYMENTS ON THE NOTES OR OPERATE OUR BUSINESS.
The indenture contains covenants that, among other things:
- limit our ability to incur indebtedness and pay dividends on and redeem
capital stock; and
- create restrictions on:
-- investments in unrestricted subsidiaries,
-- limiting distributions from some of St. John Knits International's
subsidiaries,
-- the use of proceeds from the sale of assets and subsidiary stock,
-- entering into transactions with affiliates and
-- creating liens.
The indenture also restricts, subject to certain exceptions, our ability to
consolidate and merge with, or to transfer all or substantially all our assets
to, another person.
Under the senior credit facilities, we must also comply with certain
specified financial ratios and tests that may restrict our ability to make
distributions or other payments to our investors and creditors. If we do not
comply with these or other covenants and restrictions contained in the senior
credit facilities, we could default under the senior credit facilities. Such
debt, together with accrued
19
<PAGE>
interest, could then be declared immediately due and payable. Our ability to
comply with such provisions may be affected by events beyond our control.
Although we believe that we will be able to maintain compliance with our
current financial tests there can be no assurance that we will be able to do so.
The restrictions imposed by such covenants may adversely affect our ability to
take advantage of favorable business opportunities. Failure to comply with the
terms of such covenants could result in acceleration of the indebtedness
represented by the notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Description of Senior Credit Facilities" and "Description of the Notes."
SUBORDINATION--YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES IS JUNIOR TO OUR BANK
AND OTHER UNSUBORDINATED INDEBTEDNESS AND POSSIBLY TO ALL OF OUR FUTURE
BORROWINGS. THE GUARANTEES ARE JUNIOR TO ALL THE GUARANTORS' EXISTING
INDEBTEDNESS AND POSSIBLY TO ALL OF THEIR FUTURE BORROWINGS. IN ADDITION, THE
TERMS OF THE SENIOR CREDIT FACILITIES MAY PREVENT US FROM REPURCHASING THE NOTES
WHEN THE INDENTURE REQUIRES US TO DO SO.
The notes will be contractually subordinated in right of payment to all
senior indebtedness of St. John Knits International and the guarantees will be
contractually subordinated in right of payment to all senior indebtedness of the
guarantors. At August 1, 1999, St. John Knits International had approximately
$190.0 million of senior indebtedness, all of which was secured. The indenture
will permit St. John Knits International and the guarantors to borrow certain
additional debt, which may be senior indebtedness.
If St. John Knits International or the guarantors are declared bankrupt or
insolvent, or if there is a default under and acceleration of any senior
indebtedness, we are required to pay the lenders under the senior credit
facilities and any other creditors who are holders of senior indebtedness in
full before we pay you. Accordingly, we may not have enough assets remaining
after payments to holders of such senior indebtedness to pay you. In addition,
the indenture will provide that payments with respect to the notes will be
blocked in the event of a payment default on certain senior indebtedness
(including debt under the senior credit facilities) and may be blocked for up to
179 days each year in the event of certain non-payment defaults on such senior
indebtedness. See "Description of the Notes--Subordination of the Notes."
Further, in certain cases the senior credit facilities prohibit us from
repurchasing any notes prior to maturity, even though the indenture requires us
to offer to repurchase notes in certain circumstances. If we or some of our
subsidiaries make certain asset sales or if a change of control occurs when we
are prohibited from repurchasing notes, we could ask our lenders under the
senior credit facilities if we may repurchase the notes or we could attempt to
refinance the borrowings that contain such prohibitions. If we do not obtain
such a consent or repay such borrowings, we would be unable to repurchase the
notes. Our failure to repurchase tendered notes at a time when such repurchase
is required by the indenture would constitute an event of default under the
indenture which, in turn, would constitute a default under the senior credit
facilities. In such circumstances, the subordination provisions in the indenture
would restrict payments to you. See "Description of Senior Credit Facilities"
and "Description of the Notes--Subordination of the Notes."
ASSET ENCUMBRANCES TO SECURE SENIOR CREDIT FACILITIES--OUR ASSETS WILL BE
PLEDGED AS SECURITY UNDER THE SENIOR CREDIT FACILITIES BUT OUR OBLIGATIONS UNDER
THE NOTES WILL BE UNSECURED.
In addition to being contractually subordinated to all existing and future
senior indebtedness, our obligations under the notes will be unsecured while our
obligations under the senior credit facilities will
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<PAGE>
be secured by the pledge of all the equity securities of St. John and
substantially all of the assets of St. John Knits International and each of its
subsidiaries, except that:
- the pledge of the capital stock of St. John Knits International's foreign
subsidiaries will be limited to 65% of such subsidiary's capital stock if
the pledge of any greater percentage could result in adverse tax
consequences to St. John Knits International or such subsidiary; and
- no security interests in the assets of any of St. John Knits
International's foreign subsidiaries will be granted if such security
interests could result in adverse tax consequences to St. John Knits
International or such subsidiary.
If we default under the senior credit facilities, the lenders could declare
all of the funds borrowed thereunder, together with accrued interest,
immediately due and payable. If we were unable to repay such indebtedness, the
lenders could foreclose on the pledged assets to your exclusion, even if an
event of default exists under the indenture at such time. If the lenders did
foreclose on the pledged assets, they could end up controlling St. John. See
"Description of Senior Credit Facilities."
HOLDING COMPANY STRUCTURE AND STRUCTURAL SUBORDINATION--OUR ABILITY TO MAKE
PAYMENTS ON THE NOTES DEPENDS ON OUR ABILITY TO RECEIVE DIVIDENDS FROM OUR
SUBSIDIARIES. IN ADDITION, BECAUSE NOT ALL OF OUR SUBSIDIARIES WILL GUARANTEE
PAYMENT ON THE NOTES, THE ASSETS OF NON-GUARANTOR SUBSIDIARIES MAY NOT BE
AVAILABLE TO MAKE PAYMENTS ON THE NOTES.
St. John Knits International is a holding company which held no significant
assets as of August 1, 1999, other than the stock of its subsidiaries. As a
holding company, St. John Knits International is dependent upon dividends or
other intercompany transfers of funds from its subsidiaries to meet its debt
service and other obligations. Generally, creditors of a subsidiary will have a
superior claim to the assets and earnings of such subsidiary than the claims of
creditors of its parent company, except to the extent the claims of the parent's
creditors are guaranteed by the subsidiary. St. John Knits International's
existing and future domestic subsidiaries will guarantee payments on the notes
on a senior subordinated basis. The notes therefore will be effectively
subordinated to creditors of St. John Knits International's non-guarantor
subsidiaries and the guarantees will be contractually subordinated to senior
creditors of St. John Knits International's guarantor subsidiaries. As of
August 1, 1999, St. John Knits International's non-guarantor subsidiaries had
total liabilities of approximately $2.5 million, and St. John Knits
International's guarantor subsidiaries had total liabilities of approximately
$209.4 million (excluding liabilities under the notes and the guarantees),
approximately $190.0 million of which was senior indebtedness.
Although the indenture will limit the ability of some of St. John Knits
International's subsidiaries to incur indebtedness and issue preferred stock,
there are certain significant qualifications and exceptions. The indenture will
not limit such subsidiaries from incurring liabilities that are excluded from
the definitions of indebtedness or preferred stock under the indenture. See
"Description of the Notes--Certain Covenants--Limitation on Indebtedness."
In addition, the ability of St. John Knits International's subsidiaries to
pay dividends and make other payments to St. John Knits International may be
restricted by, among other things, applicable corporate and other laws and
regulations and agreements of the subsidiaries. Although the indenture will
limit the ability of such subsidiaries to enter into consensual restrictions on
their ability to pay dividends and make other payments, such limitations are
subject to a number of significant qualifications and exceptions. See
"Description of the Notes--Certain Covenants--Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries."
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<PAGE>
APPAREL INDUSTRY RISKS--COMPETITION AND/OR AN ECONOMIC DOWNTURN COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
The apparel industry is highly competitive. We compete primarily on the
basis of price and quality. We believe that our success depends in large part on
our ability to anticipate, gauge and respond to changing consumer demands in a
timely manner. We cannot assure that we will always be successful in this
regard. If we misjudge these demands, our sales may suffer, which could
adversely affect our business, financial condition and results of operations.
For example, in fiscal 1997 we introduced a lower-priced line of apparel under
the SJK label and attempted to broaden the appeal of our core knitwear line by
including a number of more "fashion forward" styles. The SJK line did not
perform as well as we anticipated and has been discontinued. The Fall 1998 core
knitwear line did not include sufficient product options for the traditional St.
John customer and experienced below-average retail performance.
We compete with numerous domestic and foreign designers, brands and
manufacturers of apparel and accessories, some of which may be significantly
larger and more diversified and have greater financial and other resources than
we do. Increased competition from these and future competitors could reduce our
sales and prices, adversely affecting our results. Because of our debt level, we
may be less able to respond effectively to such competition than others.
The industry in which we operate is cyclical. Purchases of apparel generally
tend to decline during recessions and also may decline at other times. A
recession in the general economy or uncertainties regarding future economic
prospects could affect consumer spending habits and have a material adverse
effect on our business, financial condition and results of operations.
OWNERSHIP CHANGES IN THE RETAIL INDUSTRY AND RELIANCE ON KEY CUSTOMERS--THE LOSS
OF ONE OR MORE OF OUR PRIMARY CUSTOMERS COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS.
We, like many of our competitors, sell to retailers. In recent years, the
retail industry has experienced consolidation and other ownership changes. In
the future, retailers in the United States and in foreign markets may have
financial problems or consolidate, undergo restructurings or reorganizations, or
realign their affiliations, any of which could decrease the number of stores
that carry our products or increase the ownership concentration within the
retail industry. We cannot assure you as to the future effect of any such
changes.
During fiscal 1998 and 1997, net sales to our three largest retail
customers, Saks Fifth Avenue, Neiman Marcus and Nordstrom, totaled approximately
45% and 47% of net sales, respectively, and net sales to Saks Fifth Avenue, our
largest retail customer, accounted for approximately 17% and 17% of net sales,
respectively. Although we have long-established relationships with many of our
customers, we do not have any long-term sales agreements. The loss of or
significant decrease in business from any of our major customers could have a
material adverse effect on our business, financial condition and results of
operations. See "Business--Distribution."
DEPENDENCE ON KEY PERSONNEL--THE LOSS OF ONE OR MORE MEMBERS OF OUR SENIOR
MANAGEMENT TEAM COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our success has been largely dependent on the personal efforts and abilities
of Bob Gray, Chairman and Chief Executive Officer, Marie Gray, Chief Designer,
and Kelly Gray, President, each of whom has an employment agreement with SJKI.
The loss of the services of any of these executives could have a material
adverse effect on our business, financial condition and results of operations.
See "Management."
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CONTROL BY CERTAIN STOCKHOLDERS--WE ARE CONTROLLED BY VESTAR.
Vestar and the Grays, through Vestar/Gray Investors LLC, beneficially own
approximately 78% and 15%, respectively, of the outstanding common stock of St.
John Knits International. As a result, Vestar will be able to effectively
control the outcome of certain matters requiring a stockholder vote, including
the election of three of the five directors of St. John Knits International (the
Grays will be contractually entitled to appoint the remaining two directors).
Such ownership of common stock may have the effect of delaying, deferring or
preventing a change of control.
LITIGATION--WE MAY INCUR COSTS IN CONNECTION WITH CERTAIN LEGAL PROCEEDINGS.
On October 13, 1998, Binary Traders, Inc. filed a complaint on behalf of
purchasers of publicly traded securities of St. John during the period of
February 25, 1998 to August 20, 1998 against SJKI, Bob Gray and Kelly Gray in
the United States District Court, Central District of California, Southern
Division (Binary Traders, Inc. v. St. John Knits, Inc., et al.). In this action,
Binary Traders claims that the defendants violated federal securities laws by
allegedly making fraudulent statements to cover up management's mistakes and
certain material adverse conditions affecting our business. In addition, the
complaint alleges that Mr. Gray traded shares of St. John's common stock while
in possession of allegedly material non-public information. Binary Traders seeks
class action certification and an unspecified amount of compensatory damages. On
August 6, 1999, defendants filed a motion to dismiss the action. On
September 8, 1999, at the request of the plaintiff, the court stayed all
proceedings in this action pending the outcome of the petition for rehearing EN
BANC in front of the Ninth Circuit Court of Appeals in IN RE SILICON GRAPHICS,
INC. SECURITIES LITIGATION.
We are also a party to six lawsuits that allege claims against some of St.
John's current and former directors for breach of fiduciary duty alleged to have
arisen in connection with the mergers. All of these lawsuits were filed in the
Superior Court of the State of California for the County of Orange. The
principal relief sought in the six actions is certification of the putative
class and a rescission of the mergers and damages and attorneys' fees in an
unspecified amount. These six lawsuits were consolidated into one action on
February 24, 1999.
On April 15, 1999, the plaintiffs in this lawsuit filed a motion for a
preliminary injunction seeking to prevent the mergers from proceeding. The
preliminary injunction motion was heard by the California state court on
April 28, 1999. On April 30, 1999, the court denied the plaintiffs' motion. In
denying the plaintiffs' request, the court ruled that the plaintiffs had not
shown a "reasonable probability" that they could succeed in proving at trial
that the $30.00 per share offer in the mergers is unfair. Similarly, the court
ruled that the plaintiffs were unlikely to show that the special committee of
St. John's board of directors that evaluated and approved the terms of the
mergers on behalf of St. John lacked independence or failed to "shop" St. John
adequately to other buyers. Discovery in this case is now complete and the court
has set a January 31, 2000 trial date.
On September 9, 1999, three of the plaintiffs filed another lawsuit in the
Superior Court of the State of California, County of Orange, naming SJKI, Pearl
Acquisition Corp., Vestar/Gray Investors LLC, SJK Acquisition, Inc., Vestar
Capital Partners III, L.P., Vestar Capital Partners and Merrill Lynch, Pierce,
Fenner & Smith, Inc. The plaintiffs claim that each of the defendants aided and
abetted the breach of fiduciary duties alleged in their earlier actions against
St. John Knits, Inc., Bob Gray and Kelly Gray. Since the claims in this
litigation are based exclusively on secondary liability and are completely
contingent upon the success of the claims in the earlier action, on
November 16, 1999, at the request of several defendants, the court stayed all
proceedings in this litigation pending the outcome of the earlier action.
We intend to contest these lawsuits vigorously if the plaintiffs elect to
proceed with their actions. We expect to incur legal and other defense costs as
a result of such proceedings. These proceedings
23
<PAGE>
could involve a substantial diversion of the time of some of the members of
management, and an adverse determination in, or settlement of, such litigation
could involve payment of significant amounts.
PRICE AND AVAILABILITY OF RAW MATERIALS--AN INCREASE IN THE PRICE OR A DECREASE
IN THE AVAILABILITY OF WOOL OR RAYON, OUR PRIMARY RAW MATERIALS, COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our principal raw materials are wool and rayon. In fiscal 1998, we purchased
approximately $10.8 million of wool and approximately $3.7 million of rayon. The
price of wool and rayon may fluctuate significantly depending on world demand.
We cannot assure that such fluctuation in the price of wool or rayon will not
affect our business, financial condition and results of operations.
We purchase wool imported primarily from Australia. We also import other raw
materials, including rayon, from Europe and Japan. In addition, our shoes, small
leather goods and certain woven products are manufactured in Europe. Our
imported materials and products are subject to United States customs duties
which comprise a material portion of the cost of the merchandise. A substantial
increase in customs duties could have a material adverse effect on our business,
financial condition and results of operations. The United States and the
countries in which materials and products are produced or sold may, from time to
time, impose new quotas, duties, tariffs or other restrictions, or adversely
adjust prevailing quota, duty or tariff levels, any of which could have a
material adverse effect on SJKI.
INTERNATIONAL OPERATIONS--OUR INTERNATIONAL OPERATIONS EXPOSE US TO ADDITIONAL
POLITICAL, ECONOMIC AND REGULATORY RISKS NOT FACED BY BUSINESSES THAT OPERATE
ONLY IN THE UNITED STATES.
We conduct international operations in Mexico, Europe and Asia. In fiscal
1998, approximately 7.5% of our sales occurred outside the United States, and
approximately 5.7% of our products were manufactured abroad by third-party
contractors. Any international operations will be subject to risks similar to
those affecting our U.S. operations in addition to a number of other risks,
including:
- lack of complete operating control;
- currency fluctuations;
- trade barriers;
- exchange controls;
- governmental expropriation;
- foreign taxation;
- difficulty in enforcing intellectual property rights;
- language and other cultural barriers; and
- political and economic instability.
In addition, various jurisdictions outside the United States have laws
limiting the right and ability of non-United States subsidiaries and affiliates
to pay dividends and remit earnings to affiliated companies unless specified
conditions exist. Our ability to expand the manufacture and sale of our products
internationally is also limited by the necessity of obtaining regulatory
approval in new countries.
Our financial performance on a U.S. dollar denominated basis can be
significantly affected by fluctuations in currency exchange rates. From time to
time we enter into agreements to seek to reduce our foreign currency exposure,
but we cannot assure that we will be successful in so doing.
24
<PAGE>
GOVERNMENTAL REGULATION--CHANGES IN, OR THE COSTS OF COMPLYING WITH, VARIOUS
GOVERNMENTAL REGULATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We are subject to a variety of federal, state and local laws and regulations
including those relating to zoning, land use, environmental protection and
workplace safety. We are also subject to laws governing our relationship with
our employees, including minimum wage requirements, overtime, working conditions
and work permit requirements. Although we believe that we are and have been in
material compliance with all of the various regulations applicable to our
business, we cannot assure that requirements will not change in the future or
that we will not incur significant costs to comply with such requirements.
TRADEMARKS--THE LOSS OR INFRINGEMENT OF OUR TRADEMARKS AND OTHER PROPRIETARY
RIGHTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We believe that our trademarks and other proprietary rights are important to
our success and competitive position. Accordingly, we devote substantial
resources to the establishment and protection of our trademarks on a worldwide
basis. We cannot assure that our actions taken to establish and protect our
trademarks and other proprietary rights will be adequate to prevent imitation of
our products by others or to prevent others from seeking to block sales of our
products as violative of their trademarks and proprietary rights. Moreover, we
cannot assure that others will not assert rights in, or ownership of, trademarks
and other proprietary rights of ours or that we will be able to successfully
resolve such conflicts. In addition, the laws of certain foreign countries may
not protect proprietary rights to the same extent as do the laws of the United
States. The loss of such trademarks and other proprietary rights, or the loss of
the exclusive use of our trademarks and other proprietary rights, could have a
material adverse effect on our business, financial condition and results of
operations. See "Business--Trademarks."
YEAR 2000--TECHNOLOGY ISSUES RELATED TO THE YEAR 2000 COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
We use various types of technology in the operation of our business. Some of
this technology incorporates date identification functions; however, many of
these date identification functions were developed to use only two digits to
identify a year. These date identification functions, if not corrected, could
cause their relating technology to fail or create erroneous results by or at the
year 2000.
We are continuing to monitor the impact of Year 2000 issues on our
information and non-information technology systems. As part of this process, we
retained the services of an independent contractor with experience in analyzing
and addressing Year 2000 issues. In addition, we developed a five-phased plan
with respect to the Year 2000 readiness of our internal technology systems. This
plan involved:
- creating internal awareness of Year 2000 issues;
- analyzing our Year 2000 state of readiness;
- correcting systems or acquiring new ones as needed;
- testing the corrected or new systems; and
- incorporating the corrected or new systems into our business.
We have substantially completed all five phases of the plan. As of
August 1, 1999, we had incurred approximately $619,000 in costs related to the
Year 2000 issue.
We have also developed a plan to address the impact that Year 2000 issues
may have on our vendors and customers. We are currently finalizing our
evaluation of the materiality of our vendor and
25
<PAGE>
customer relationships and have initiated communications with certain
significant vendors and customers to identify and minimize disruptions to our
operations and to assist in resolving Year 2000 issues. We have substantially
completed this evaluation; however, there can be no assurance that our Year 2000
compliance efforts will be successful or that the systems and products of other
companies on which we rely will not have an adverse effect on our business,
financial condition and results of operations. In the event that our Year 2000
compliance efforts are not successful or if we are not satisfied with our
vendors' or customers' Year 2000 compliance, we will take appropriate measures.
We believe that additional costs related to the Year 2000 issue will not be
material to our business, financial condition and results of operations.
However, estimates of Year 2000 related costs are based on numerous assumptions
and there is no certainty that estimates will be achieved and actual costs could
be materially greater than anticipated. We anticipate that we will fund our
additional Year 2000 costs with cash from operations.
FRAUDULENT TRANSFER CONSIDERATIONS--BANKRUPTCY AND RELATED LAWS COULD PREVENT OR
HINDER US FROM MAKING PAYMENTS ON THE NOTES.
The incurrence of indebtedness by us or any of the guarantors, respectively,
such as the notes and the guarantees, may be subject to review under U.S.
federal bankruptcy law or relevant state fraudulent conveyance laws if a
bankruptcy case or lawsuit is commenced by or on behalf of unpaid creditors of
such entity. Under these laws, if in such a case or lawsuit a court were to find
that, at the time such entity incurred indebtedness (including indebtedness
under the notes or the guarantees),
(1) it incurred such indebtedness with the intent of hindering, delaying or
defrauding current or future creditors; or
<TABLE>
<S> <C> <C>
(2) (a) it received less than reasonably equivalent value or fair
consideration for incurring such indebtedness; and
</TABLE>
(b) such entity
(i) was insolvent or was rendered insolvent by reason of any of the
transactions;
(ii) was engaged, or about to engage, in a business or transaction
for which the assets remaining with such entity constituted
unreasonably small capital to carry on its business; or
(iii) intended to incur, or believed that it would incur, debts
beyond its ability to pay as such debts matured (as all of the
foregoing terms are defined in or interpreted under the relevant
fraudulent transfer or conveyance statutes),
then such court could avoid or subordinate the amounts owing under the notes or
the guarantees to presently existing and future indebtedness of such entity and
take other actions detrimental to you.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied in any
such proceeding. Generally, however, an entity would be considered insolvent if,
at the time it incurred the indebtedness, either
- the sum of its debts (including contingent liabilities) is greater than
its assets, at fair valuation, or
- the present fair saleable value of its assets is less than the amount
required to pay the probable liability on its total existing debts and
liabilities (including contingent liabilities) as they become absolute and
matured.
There can be no assurance as to what standards a court would use to determine
whether an entity was solvent at the relevant time, or whether, whatever
standard was used, the notes or the guarantees
26
<PAGE>
would not be avoided or further subordinated on another of the grounds set forth
above. In rendering its opinion in connection with the offering of exchange
notes, our counsel will not express any opinion as to the applicability of
federal or state fraudulent transfer and conveyance laws.
We believe that at the time we and the guarantors initially incurred
indebtedness represented by the notes and the guarantees, each was:
(1) neither insolvent nor rendered insolvent thereby,
(2) in possession of sufficient capital to run its businesses effectively
and
(3) incurring debts within its ability to pay as the same mature or
become due.
In reaching the foregoing conclusions, we have relied upon our analyses of
our internal cash flow projections and estimated values of our assets and
liabilities. There can be no assurance, however, that a court passing on such
questions would reach the same conclusions.
LIMITATION ON CHANGE OF CONTROL--WE MAY NOT BE ABLE TO AFFORD, OR BE PERMITTED,
TO PURCHASE THE NOTES UPON A CHANGE OF CONTROL AS REQUIRED BY THE INDENTURE.
Upon a change of control under the indenture, we will be required to offer
to purchase all of the notes then outstanding at 101% of their principal amount,
plus accrued interest to the date of repurchase. If a change of control were to
occur, we can provide no assurance that we would have sufficient funds to pay
the purchase price (as defined in the indenture) for the notes, and we expect
that we would require third party financing; however, we can provide no
assurance that we would be able to obtain such financing on favorable terms, if
at all. In addition, the senior credit facilities restrict our ability to
repurchase the notes, including pursuant to an offer in connection with a change
of control. A change of control under the indenture will result in an event of
default under the senior credit facilities and may cause the acceleration of
other senior indebtedness, if any, in which case the subordination provisions of
the notes would require payment in full of the senior credit facilities and any
other senior indebtedness before repurchase of the notes. See "Description of
the Notes--Offer to Purchase upon Change of Control" and "Description of Senior
Credit Facilities." The inability to repay senior indebtedness, if accelerated,
and to purchase all of the tendered notes, would constitute an event of default
under the indenture.
27
<PAGE>
THE TRANSACTIONS
THE MERGERS
On February 2, 1999, St. John Knits International, St. John,
SJKAcquisition, Inc. and Pearl Acquisition Corp. entered into a merger
agreement. Under the merger agreement, St. John agreed to enter into two
mergers, which were completed in July 1999. In the first merger--the
reorganization merger--St. John merged with SJKAcquisition and became a wholly
owned subsidiary of St. John Knits International. As a result of the
reorganization merger, shareholders of St. John became stockholders of St. John
Knits International. The reorganization merger did not result in any change in
the business, management, fiscal year, location of the principal facilities,
assets or liabilities of St. John.
In the second merger--the acquisition merger--St. John Knits International
merged with Pearl, a Delaware corporation which is wholly owned by Vestar/Gray
Investors LLC, with St. John Knits International surviving the merger. Upon the
completion of the acquisition merger, Vestar/Gray Investors was approximately
84% owned by Vestar and approximately 16% beneficially owned by Bob Gray, Marie
Gray and Kelly Gray. As a result of the acquisition merger, former public
shareholders of St. John (other than the Grays) owned approximately 7% of St.
John Knits International's common stock and Vestar and the Grays beneficially
owned (through Vestar/Gray Investors) approximately 78% and 15% of St. John
Knits International's common stock, respectively. Our corporate structure is now
as follows:
[LOGO]
In connection with the mergers, former St. John shareholders (other than the
Grays) were entitled to receive either $30.00 in cash or one share of St. John
Knits International common stock for each share of St. John common stock owned
before the mergers. The amount of St. John Knits International stock to be
received by each former St. John shareholder was subject to proration so that as
a result of the mergers, St. John shareholders, other than the Grays, received a
total of 456,047 shares, or approximately 7%, of the common stock of St. John
Knits International. The acquisition merger was accounted for as a
recapitalization under generally accepted accounting principles. Accordingly,
the historical basis of St. John's assets and liabilities was not impacted by
the acquisition merger.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes. The net proceeds from the issuance and sale of the outstanding notes,
which were approximately $98.6 million after deduction of underwriting
discounts, were used to consummate the transactions.
28
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of SJKI as of
August 1, 1999 after giving effect to the transactions. The information below
should be read in conjunction with "Unaudited Pro Forma Condensed Consolidated
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of St. John and the notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF
AUGUST 1, 1999
---------------
<S> <C>
(DOLLARS IN
MILLIONS)
Cash, cash equivalents and short-term investments.......... $ 18.1
======
Debt:
Senior Credit Facilities(1)
Term Loan A............................................ $ 75.0
Term Loan B............................................ 115.0
Outstanding notes........................................ 98.6
Other.................................................... 1.9
------
Total debt............................................. 290.5
Mandatorily Redeemable Preferred Stock..................... 25.0
Total stockholders' equity (deficit)(2).................... (140.4)
------
Total capitalization................................... $175.1
======
</TABLE>
- ------------------------
(1) The senior credit facilities also include a new $25.0 million revolving
credit facility which was undrawn and fully available as of August 1, 1999.
(2) The stockholders' deficit gives effect to the transactions in accordance
with recapitalization accounting treatment.
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
information of St. John Knits International (the "Unaudited Pro Forma Financial
Statements") has been derived by the application of pro forma adjustments to St.
John's historical consolidated financial statements included elsewhere in this
prospectus. The unaudited pro forma condensed consolidated statements of income
for the periods presented give effect to the transactions as if they had been
consummated on November 3, 1997 for the fiscal year ended November 1, 1998, the
39 weeks ended August 2, 1998 and the 39 weeks ended August 1, 1999. The
adjustments are described in the accompanying notes. The Unaudited Pro Forma
Financial Statements should not be considered indicative of actual results that
would have been achieved had the transactions been consummated on the date or
for the periods indicated and do not purport to indicate results of operations
as of any future date or any future period. The Unaudited Pro Forma Financial
Statements should be read in conjunction with St. John's historical consolidated
financial statements and the notes thereto included elsewhere in this
prospectus.
The pro forma adjustments were applied to the respective historical
consolidated financial statements to reflect the transactions. The
reorganization merger is reflected as a recapitalization. Accordingly, the
historical accounting basis of St. John's assets and liabilities has not been
impacted by the transactions.
30
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED NOVEMBER 1, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- --------
<S> <C> <C> <C>
Net sales............................................... $281,961 -- $281,961
Cost of sales........................................... 120,883 -- 120,883
-------- -------- --------
Gross profit.......................................... 161,078 $ -- 161,078
Selling, general and administrative expenses............ 107,026 500 (a) 107,526
-------- -------- --------
Operating income...................................... 54,052 (500) 53,552
Interest expense........................................ -- 32,193 (b) 32,193
Other income............................................ 1,369 (1,117)(c) 252
-------- -------- --------
Income before income taxes............................ 55,421 (33,810) 21,611
Income taxes............................................ 22,001 (13,423)(d) 8,578
-------- -------- --------
Net income............................................ 33,420 (20,387) 13,033
Preferred dividends..................................... -- 3,813 (e) 3,813
-------- -------- --------
Earnings available to common shareholders............. $ 33,420 $(24,200) $ 9,220
======== ======== ========
EBITDA.................................................. $ 66,294 $ 65,794
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income
31
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE 39 WEEKS ENDED AUGUST 2, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- --------
<S> <C> <C> <C>
Net sales................................................. $206,293 -- $206,293
Cost of sales............................................. 86,211 -- 86,211
-------- -------- --------
Gross profit............................................ 120,082 $ -- 120,082
Selling, general and administrative expenses.............. 76,858 375(a) 77,233
-------- -------- --------
Operating income........................................ 43,224 (375) 42,849
Interest expense.......................................... -- 24,292(b) 24,292
Other income.............................................. 1,100 (917)(c) 183
-------- -------- --------
Income before income taxes................................ 44,324 (25,584) 18,740
Income taxes.............................................. 18,033 (10,157)(d) 7,876
-------- -------- --------
Net income.............................................. 26,291 (15,427) 10,864
Preferred dividends....................................... -- 1,906(e) 1,906
-------- -------- --------
Earnings available to common shareholders............... $ 26,291 $(17,333) $ 8,958
======== ======== ========
EBITDA.................................................... $ 51,998 $ 51,623
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income
32
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE 39 WEEKS ENDED AUGUST 1, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- --------
<S> <C> <C> <C>
Net sales................................................... $221,935 $ -- $221,935
Cost of sales............................................... 97,382 -- 97,382
-------- -------- --------
Gross profit.............................................. 124,553 -- 124,553
Selling, general and administrative expenses................ 91,175 341 (a) 91,516
Transaction fees and expenses............................... 15,212 -- 15,212
-------- -------- --------
Operating income.......................................... 18,166 (341) 17,825
Interest expense............................................ 2,045 21,157 (b) 23,202
Other income................................................ 1,220 (962)(c) 258
-------- -------- --------
Income loss before income taxes........................... 17,341 (22,460) (5,119)
Income taxes.............................................. 7,117 (8,917)(d) (1,800)
-------- -------- --------
Net income (loss)......................................... 10,224 (13,543) (3,319)
Preferred dividends......................................... 265 1,641 (e) 1,906
-------- -------- --------
Earnings available to common shareholders................. $ 9,959 $(15,184) $ (5,225)
======== ======== ========
EBITDA...................................................... $ 47,309 $ 46,968
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income
33
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME
The unaudited pro forma financial information has been derived by the
application of pro forma adjustments to St. John's historical financial
statements of income for the periods noted. The mergers have been accounted for
as a recapitalization, which will have no impact on the historical basis of St.
John's assets and liabilities.
(a) Represents an annual advisory fee under the management agreement paid to
Vestar Capital.
(b) The pro forma adjustment to interest expense for the periods presented
reflects the following items (dollars in thousands):
<TABLE>
<CAPTION>
39 WEEKS 39 WEEKS
YEAR ENDED ENDED ENDED
NOVEMBER 1, AUGUST 2, AUGUST 1,
1998 1998 1999(1)
----------- --------- ---------
<S> <C> <C> <C>
Interest expense on the notes.............................. $12,500 $ 9,375 $ 8,485
Interest expense on term loans............................. 16,785 12,838 10,811
Interest expense on the revolving credit facility.......... 777 473 397
Amortization of discount................................... 138 104 94
Amortization of deferred debt issuance
costs.................................................... 1,913 1,435 1,310
Commitment fee of the unused portion of revolving credit
facility................................................. 80 67 60
------- ------- -------
Total................................................ $32,193 $24,292 $21,157
======= ======= =======
</TABLE>
- ------------------------
(1) Represents pro forma interest expense through July 7, 1999, the date the
transactions closed.
The cash interest expense above results in a weighted average interest rate
of 10.09%, 10.18%, and 9.76% for the year ended November 1, 1998, the 39
weeks ended August 2, 1998 and the 39 weeks ended August 1, 1999,
respectively.
The deferred debt issuance costs reflect direct estimated costs associated
with obtaining the debt financing. These amounts are being amortized
straight line over the estimated weighted average life of eight years.
An increase or decrease in the interest rate of 0.125% would change the
annual pro forma interest expense by $360,000 and the pro forma net income
by $216,000.
(c) Eliminates interest income on cash and short-term investments which is not
expected to be received after the mergers have been completed.
(d) Represents the tax effect of the pro forma adjustments using an effective
tax rate of 39.7%.
(e) Represents dividends on the Mandatorily Redeemable Preferred Stock. The
dividend rate is 15.25%. Dividends on the Mandatorily Redeemable Preferred
Stock may only be paid in cash to the extent permitted by the senior credit
facilities, the indenture and other contractual arrangements of SJKI.
(f) Upon completion of the transactions, all stock options outstanding were
canceled and converted to the right to receive a cash payment equal to the
excess of $30.00 over the exercise price per share. This one-time payment of
approximately $13.9 million will be reflected as a non-recurring expense to
St. John in the period the mergers were effected and has not been included
in the pro forma adjustment.
34
<PAGE>
SELECTED HISTORICAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth our selected historical condensed
consolidated financial information. The selected historical condensed
consolidated financial information for the three fiscal years ended November 3,
1996, November 2, 1997 and November 1, 1998 are derived from the historical
consolidated financial statements of St. John and related notes thereto (the
"Financial Statements"), which have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report included elsewhere
in this prospectus. The selected historical condensed consolidated financial
information for the two fiscal years ended October 30, 1994 and October 29, 1995
are derived from the audited historical consolidated financial statements of St.
John, which are not included in this prospectus. The selected historical
condensed consolidated financial and other data as of and for the 39 weeks ended
August 2, 1998, August 1, 1999 and the twelve months ended August 1, 1999 have
been derived from St. John's unaudited consolidated financial statements and, in
the opinion of our management, have been prepared on a basis consistent with the
Financial Statements and include all adjustments (which consist of normal
recurring accruals) that are considered by management to be necessary for a fair
presentation of such financial information.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 39 WEEKS ENDED
------------------------------------------------------------------- ---------------------
OCTOBER 30, OCTOBER 29, NOVEMBER 3, NOVEMBER 2, NOVEMBER 1, AUGUST 2, AUGUST 1,
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
STATEMENTS OF INCOME:
Net sales.................. $127,953 $161,795 $202,951 $242,101 $281,961 $206,293 $221,935
Cost of sales............ 59,179 74,252 88,871 99,545 120,883 86,210 97,382
-------- -------- -------- -------- -------- -------- --------
Gross profit............... 68,774 87,543 114,080 142,556 161,078 120,083 124,553
Selling, general and
administrative
expenses............... 43,288 54,550 68,385 84,545 107,026 76,858 91,175
-------- -------- -------- -------- -------- -------- --------
Transaction fees and
expenses................. -- -- -- -- -- -- 15,212
-------- -------- -------- -------- -------- -------- --------
Operating income........... 25,486 32,993 45,695 58,011 54,052 43,225 18,166
Interest expense........... -- -- -- -- -- -- 2,045
Other income(1).......... 340 803 1,355 713 1,369 1,100 1,220
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................... 25,826 33,796 47,050 58,724 55,421 44,325 17,341
Income taxes............. 10,880 14,243 19,929 24,300 22,001 18,033 7,117
-------- -------- -------- -------- -------- -------- --------
Net income................. $ 14,946 $ 19,553 $ 27,121 $ 34,424 $ 33,420 $ 26,292 $ 10,224
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
EBITDA(2).................. $ 29,251 $ 38,539 $ 52,999 $ 67,126 $ 66,294 $ 51,998 $ 47,309
Depreciation and
amortization............. 3,673 5,313 7,042 8,859 11,371 8,276 10,931
Capital expenditures....... 7,796 17,571 21,400 22,751 23,648 16,800 10,758
Net cash provided by
operating activities..... 12,637 18,014 16,841 30,459 24,982 15,656 25,304
Net cash used in investing
activities............... 14,292 17,714 20,114 21,542 22,377 16,881 9,324
Net cash provided by (used
in) financing
activities............... (998) (444) 748 (817) (2,724) 164 (12,252)
Ratio of earnings to fixed
charges(3)................. 17.5x 18.7x 21.8x 22.6x 16.6x 18.6x 4.5x
BALANCE SHEET DATA (AT PERIOD
END):
Working capital............ $ 31,442 $ 38,130 $ 49,628 $ 69,693 $ 89,190 $ 88,592 $ 85,132
Total assets............... 62,634 85,973 116,494 153,904 182,390 174,265 195,748
Total debt................. -- -- -- -- 408 -- 290,520
Stockholders' equity....... 50,530 69,227 97,093 130,680 161,574 157,303 (140,392)
<CAPTION>
TWELVE
MONTHS
ENDED
AUGUST 1,
1999
---------
<S> <C>
(DOLLARS
IN
THOUSANDS,
EXCEPT
RATIOS)
STATEMENTS OF INCOME:
Net sales.................. $297,602
Cost of sales............ 132,053
--------
Gross profit............... 165,549
Selling, general and
administrative
expenses............... 121,343
--------
Transaction fees and
expenses................. 15,212
--------
Operating income........... 28,994
Interest expense........... 2,045
Other income(1).......... 1,489
--------
Income before income
taxes.................... 28,438
Income taxes............. 11,085
--------
Net income................. $ 17,353
========
OTHER DATA:
EBITDA(2).................. $ 60,853
Depreciation and
amortization............. 14,025
Capital expenditures....... 17,606
Net cash provided by
operating activities..... 34,630
Net cash used in investing
activities............... 14,820
Net cash provided by (used
in) financing
activities............... (15,140)
Ratio of earnings to fixed
charges(3)................. 5.7x
BALANCE SHEET DATA (AT PERIOD
END):
Working capital............ $ 85,132
Total assets............... 195,748
Total debt................. 290,520
Stockholders' equity....... (140,392)
</TABLE>
- ------------------------------
(1) "Other income" primarily includes interest income and royalty income.
35
<PAGE>
(2) "EBITDA" represents earnings before interest expense, other income (except
royalty income), income taxes, depreciation and amortization expense,
non-cash write-off of assets and non-recurring expenses associated with the
transactions. It is not intended to represent cash flow from operations as
defined by generally accepted accounting principles and should not be used
as an alternative to net income as an indicator of SJKI's operating
performance or to cash flow as a measure of liquidity. EBITDA is included in
this prospectus as it is a basis upon which SJKI assesses its financial
performance. SJKI believes that EBITDA, as presented, presents a useful
measure of assessing SJKI's ongoing operating activities without the impact
of financing activity and non-recurring charges. While EBITDA is frequently
used as a measure of operations and the ability to meet debt service
requirements, it is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the method
of calculation. For purposes of the EBITDA calculation, non-cash write-off
of assets was $77,000, $85,000, $16,000, $200,000 and $611,000 for fiscal
years 1994, 1995, 1996, 1997 and 1998, respectively, $431,000 and $1,720,000
for the 39 weeks ended August 2, 1998 and August 1, 1999, respectively, and
$1,873,000 for the twelve months ended August 1, 1999. For the fiscal year
ended November 1, 1998 and the twelve months ended August 1, 1999, non-cash
write-off of assets was primarily related to the closure of three home
furnishings stores and the write-off of a trademark.
(3) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes and extraordinary items, plus
fixed charges. Fixed charges consist of interest expense, including
amortization of debt issuance costs and a portion of operating lease rental
expense deemed to be representative of the interest factor.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis should be read in conjunction with
"Selected Historical Condensed Consolidated Financial Information" and the notes
thereto and St. John's consolidated financial statements and the notes thereto
and the other more detailed financial information appearing elsewhere in this
prospectus.
OVERVIEW
SJKI is a leading designer, manufacturer and marketer of high quality
women's clothing and accessories, principally under the St. John brand name.
SJKI's core knitwear line is sold as a collection of lifestyle clothing for
business, evening and casual needs, and represented approximately 81% of fiscal
1998 net sales. This core knitwear line is complemented by SJKI's other product
categories, including women's wovens, activewear, shoes, coats, accessories,
fragrances and home furnishings.
SJKI operates seven production facilities in California and one
recently-built facility in Mexico, manufacturing approximately 93% of its
products in-house during fiscal 1998. SJKI believes that its vertical
integration differentiates it from other apparel manufacturers and has been
critical to its success because it enables SJKI to manufacture products to
order, maximize manufacturing flexibility and maintain superior quality control.
SJKI distributes its products on a highly selective basis through a group of
upscale retail customers with whom it has long-standing relationships, as well
as through company-owned boutiques and outlet stores.
SJKI's revenues increased from approximately $128.0 million in fiscal 1994
to approximately $282.0 million in fiscal 1998, representing a compound annual
growth rate of 21.8%. This growth was primarily attributable to (i) increased
penetration within SJKI's long-standing retail accounts; (ii) increased
same-store sales at both retail accounts and company-owned stores; (iii) the
expansion of four existing company-owned boutiques as well as the opening of
five new company-owned boutiques and five new outlet stores; and (iv) the
introduction of several additional product lines. In addition to SJKI's strong
growth in sales, EBITDA increased from approximately $29.3 million in fiscal
1994 to approximately $66.3 million in fiscal 1998, representing a compound
annual growth rate of 22.7%. EBITDA margins improved over the same period from
22.9% in fiscal 1994 to 23.5% in fiscal 1998.
Despite this strong growth in sales and cash flow, SJKI's financial
performance in fiscal 1998 and during the first quarter of fiscal 1999 was
impacted by a number of issues which led to unfavorable comparisons with prior
periods. These issues relate primarily to SJKI's efforts to maintain its high
historical growth rates. Recognizing that the core knitwear line could no longer
support rates of growth in excess of 20%, SJKI undertook a number of growth
initiatives which have not been successful. These initiatives included the
introduction of a lower-priced line under the SJK label and the creation of a
home furnishings joint venture under the Amen Wardy Home Stores name. In
addition, SJKI attempted to broaden the appeal of its core knitwear line by
including a number of more "fashion forward" styles in its Fall 1998 collection.
As a result, the core knitwear line did not include sufficient product options
for the traditional St. John customer and experienced below-average retail
performance.
SJKI's continued sales growth also led to capacity constraints and related
production difficulties, despite its significant historical and on-going capital
investments. These issues were exacerbated in fiscal 1998 by the increased
complexity of garments in the Fall 1998 line, which required more time to
produce. As a result, SJKI incurred substantial costs related to overtime and
rework and experienced certain delays in shipping. This increase in costs was
due in part to the reevaluation of SJKI's quality control program and the
related procedures which were implemented during the second half of fiscal 1998.
37
<PAGE>
Importantly, SJKI's results in fiscal 1998 and during the first quarter of
fiscal 1999 also reflect significant on-going investments which depressed
immediate financial results, but which SJKI believes will improve future
performance. For example, SJKI commenced operations in a new jewelry and garment
hardware manufacturing facility in Mexico and experienced inefficiencies
commonly associated with start-up operations of this nature. In addition, SJKI
opened one and expanded two boutiques, incurring increased fixed overhead
without an immediate commensurate increase in revenue. SJKI also invested
heavily in its workforce throughout the year, with the majority of this increase
relating to the hiring of additional production personnel. The immediate impact
of this initiative was to lower gross margins, as these new employees required
additional training and were initially less efficient than longer-term
personnel.
SJKI believes it has taken actions to respond to all of the issues which
impacted performance described above and has made a significant investment in
its production capabilities. The SJK line has been discontinued. The Amen Wardy
Home Stores joint venture was terminated in May 1999; three of the original six
Amen Wardy stores were closed, one was transferred to the former joint venture
partner, and two continue to be operated as a wholly owned subsidiary of SJKI
under the St. John Home name. In addition, the knitwear line for the current
Cruise/Spring season included a more traditional mix of styles and, as a result,
experienced performance more in line with SJKI's historical results. SJKI's
investments during fiscal 1998 in its production capabilities included the
addition of personnel and approximately $5.7 million invested in 56 new
state-of-the-art electronic knitting machines. As a result of these investments,
SJKI believes it is well-positioned to meet anticipated manufacturing
requirements.
While SJKI believes it has taken actions to respond to all of the issues
which impacted fiscal 1998 and the first quarter of fiscal 1999, profit margins
were affected during these periods. Specifically, gross margins declined
primarily due to (i) capacity constraints which led to production
inefficiencies; (ii) production difficulties and overtime associated with the
manufacture of certain highly ornate styles in the knitwear line;
(iii) training of new employees; and (iv) lower gross margins at company-owned
stores. In addition, selling, general and administrative expense as a percentage
of net sales increased as a result of (i) increases in sales, marketing, design
and administrative personnel expenses; (ii) expenses associated with the
start-up of SJKI's home furnishings retail stores; (iii) higher markdowns on the
Fall 1998 line than on prior lines due to merchandising and design issues
associated with targeting a more "fashion forward" customer base; (iv) expenses
associated with the discontinuation of the SJK line; and (v) an immediate
increase in fixed overhead at several upgraded boutiques without a corresponding
increase in revenues.
As a result of SJKI's efforts to address the issues which affected its
results of operations in fiscal 1998 and the first quarter of fiscal 1999,
SJKI's financial results improved during the second and third quarters of fiscal
1999 as compared to the first quarter. Specifically, SJKI's gross profit margin
increased from 53.9% in the first quarter to 57.9% in the second quarter, even
though second quarter gross profit margins were negatively impacted by one-time
markdowns reported at three Amen Wardy Home stores which were closed during the
period, and to 56.5% in the third quarter. In addition, after excluding the
effect of certain non-recurring charges including (i) charges incurred in the
second quarter related to the termination of the Amen Wardy Home Store joint
venture, (ii) fees and expenses incurred in the third quarter in connection with
the transactions and (iii) the write-off during the third quarter of the costs
associated with the acquisition of a trademark which was no longer being used,
operating profit margin increased from 12.8% in the first quarter to 19.6% and
15.3% in the second and third quarters, respectively.
SJKI intends to pursue a strategy of controlled growth driven primarily by
the significant remaining growth potential of its core knitwear line, while
selectively pursuing other growth opportunities. Management believes this will
lessen the risk associated with undertaking new initiatives, relieve the
38
<PAGE>
pressure on SJKI's production capacity, enable it to continue its highly
selective distribution strategy and enhance margins. See "Prospectus
Summary--The Company--Business Strategy."
RESULTS OF OPERATIONS
The following table is derived from St. John's Consolidated Statements of
Income and sets forth, for the periods indicated, the results of operations as a
percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 39 WEEKS ENDED
--------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
NOVEMBER NOVEMBER NOVEMBER AUGUST AUGUST
3, 2, 1, 2, 1,
1996 1997 1998 1998 1999
------ ----- ------ ----- -----
Net sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................... 43.8 41.1 42.9 41.8 43.9
------ ----- ------ ----- -----
Gross Profit................................ 56.2 58.9 57.1 58.2 56.1
Selling, general and administrative
expenses.................................. 33.7 34.9 38.0 37.3 41.1
Transaction fees and expenses............... -- -- -- -- 6.9
------ ----- ------ ----- -----
Operating income............................ 22.5% 24.0% 19.1% 20.9% 8.1%
====== ===== ====== ===== =====
</TABLE>
FIRST 39 WEEKS FISCAL 1999 COMPARED TO FIRST 39 WEEKS FISCAL 1998
Net sales for the first 39 weeks of fiscal 1999 increased by $15,642,000, or
7.6% over the first 39 weeks of fiscal 1998. This increase was principally
attributable to (i) an increase in sales by company-owned retail stores of
approximately $10,693,000, due in part to the expansion of the Las Vegas and
South Coast Plaza boutiques which were completed in May 1998 and December 1998,
respectively, and the addition of one retail boutique in Scottsdale, Arizona and
one outlet store since the beginning of fiscal 1998, (ii) an increase in sales
of approximately $3,082,000 recorded by St. John Home Stores, LLC, which
commenced operations during the fourth quarter of fiscal 1997 and (iii) an
increase in international sales of $3,788,000, which includes the sales of St.
John Company, Ltd., which commenced operations in Japan during the fourth
quarter of fiscal 1997. These increases were offset by a net decrease of
$1,921,000 in sales to existing domestic retail customers, primarily due to the
discontinuance of the SJK line. Net sales increased primarily as a result of
increased unit sales of various product lines.
Gross profit for the first 39 weeks of fiscal 1999 increased by $4,471,000,
or 3.7% as compared with the first 39 weeks of fiscal 1998, and decreased as a
percentage of net sales to 56.1% from 58.2%. This decrease in the gross profit
margin was primarily due to a decrease in the gross margin for the knitwear
line, due to increased production costs which were not offset by a corresponding
increase in the selling price. This increase in the production costs was due in
part to the reevaluation of SJKI's quality control program and the related
procedures which were implemented during the second half of fiscal 1998.
Selling, general and administrative expenses for the first 39 weeks of
fiscal 1999 increased by $14,317,000, or 18.6% over the first 39 weeks of fiscal
1998, and increased as a percentage of net sales to 41.1% from 37.3%. This
increase was primarily due to (i) an increase in selling expenses due to
increased costs of promoting and marketing its products to its major customers,
(ii) non-recurring expenses incurred in connection with resolving the litigation
involving Amen Wardy Home stores and the closure of three such stores and
(iii) the write-off of the costs associated with the acquisition of a trademark
which is no longer being used.
Transaction fees and expenses represent costs directly associated with the
completion of the transactions, including $13,792,000 of costs related to
payments made to settle St. John's outstanding stock options.
39
<PAGE>
Operating income for the first 39 weeks of fiscal 1999 decreased by
$25,059,000, or 58.0% over the first 39 weeks of fiscal 1998. Operating income
as percentage of net sales decreased to 8.1% from 20.9% during the same period.
This decrease in the operating income as a percentage of net sales was due to
transaction fees and expenses recorded during the third quarter of fiscal 1999,
a decrease in the gross profit margin and an increase in selling, general and
administrative expenses as a percentage of net sales.
Interest expense for the first 39 weeks of fiscal 1999 increased to
$2,045,000. Interest expense recorded during the period was a result of the debt
acquired to finance a portion of the cash consideration paid pursuant to the
mergers, which were completed on July 7, 1999.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales for fiscal 1998 increased by approximately $39.9 million, or 16.5%
over fiscal 1997. This increase was principally attributable to (i) an increase
in sales to existing domestic retail customers of approximately $20.9 million;
(ii) an increase in sales by company-owned stores of approximately
$10.2 million, due in part to the increased sales of the New York boutique, the
expansion of the Las Vegas boutique and the addition of three outlet stores
since the beginning of fiscal 1997; (iii) an increase in sales of approximately
$6.0 million recorded by Amen; and (iv) an increase in international sales of
approximately $2.8 million, which includes the sales of St. John Japan. Net
sales increased primarily as a result of increased unit sales of various product
lines.
Gross profit for fiscal 1998 increased by approximately $18.5 million, or
13.0% as compared with fiscal 1997, and decreased as a percentage of net sales
to 57.1% from 58.9%. This decrease in the gross profit margin was primarily due
to (i) capacity constraints which led to production inefficiencies; (ii) cost
increases related to production difficulties and overtime associated with the
manufacture of certain highly ornate styles in the knitwear line;
(iii) expenses relating to training of new employees; and (iv) lower gross
margins at company-owned outlet stores. All of such additional costs were
partially offset by an increase in the number of garments being produced and
sold without a corresponding increase in certain production costs, due in part
to the fixed nature of these costs.
Selling, general and administrative expenses for fiscal 1998 increased by
approximately $22.5 million, or 26.6% over fiscal 1997, and increased as a
percentage of net sales to 38.0% from 34.9%. This increase was primarily due to
(i) an increase of approximately $5.2 million in sales, marketing, design and
administrative personnel expenses; (ii) expenses of approximately $4.9 million
associated with the start-up of SJKI's home furnishings retail stores;
(iii) increased costs of approximately $2.1 million in connection with higher
markdowns on the Fall 1998 line and with the discontinuation of the SJK line;
(iv) an immediate increase in fixed overhead at one upgraded boutique without a
corresponding increase in revenues; and (v) costs related to the start-up of a
new jewelry and garment hardware manufacturing facility in Mexico.
Operating income for fiscal 1998 decreased by approximately $4.0 million, or
6.8% over fiscal 1997. Operating income as a percentage of net sales decreased
to 19.1% from 24.0% during the same period as a result of the reasons mentioned
above.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 increased by approximately $39.2 million, or 19.3%
over fiscal 1996. This increase was principally attributable to (i) an increase
in sales to existing domestic retail customers of approximately $23.0 million;
(ii) an increase in sales by company-owned stores of approximately
$12.8 million, due in part to the expansion of the New York boutique, which was
completed in October 1996, and the addition of one retail boutique and two
outlet stores since the beginning of fiscal 1996; and (iii) an increase in sales
to international retail customers of approximately $3.3 million. Net sales
increased primarily as a result of increased unit sales of various product
lines.
40
<PAGE>
Gross profit for fiscal 1997 increased by approximately $28.5 million, or
25.0% as compared with fiscal 1996, and increased as a percentage of net sales
to 58.9% from 56.2%. This increase in the gross profit margin was primarily due
to an increase in the number of garments being produced and sold without a
corresponding increase in the production costs, due in part to the fixed nature
of certain costs.
Selling, general and administrative expenses for fiscal 1997 increased by
approximately $16.2 million, or 23.6% over fiscal 1996, and increased as a
percentage of net sales to 34.9% from 33.7%. This increase was primarily due to
(i) an increase of approximately $3.0 million in promotion and advertising
expenses related to an expansion of SJKI's advertising program; (ii) an increase
of approximately $2.0 million in salaries due to SJKI's continued effort to
build its sales and marketing team; and (iii) an increase in expenses related to
an expansion of SJKI's sales to foreign customers which include, among other
things, import duties, sales commissions and additional freight charges.
Operating income for fiscal 1997 increased by approximately $12.3 million,
or 27.0% over fiscal 1996. Operating income as a percentage of net sales
increased to 24.0% from 22.5% during the same period as a result of the reasons
mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
St. John Knits International is effectively a holding company and
accordingly, must rely on distributions, loans and other intercompany cash flows
from its affiliates and subsidiaries to generate the funds necessary to satisfy
the repayment of its outstanding loans.
SJKI's primary cash requirements are to fund payments required to service
its debt, to fund its working capital needs, primarily inventory and accounts
receivable, and for the purchase of property and equipment. During the first 39
weeks of fiscal 1999, cash provided by operating activities was $25,304,000.
Cash provided by operating activities was primarily generated by net income and
a decrease in accounts receivable. Cash used in investing activities was
$9,324,000 during the first 39 weeks of fiscal 1999. The principal use of cash
in investing activities was for the purchase of electronic knitting machines,
the construction of leasehold improvements for a new boutique location in South
Coast Plaza in Costa Mesa, California and the completion of leasehold
improvements for a new St. John Home store at South Coast Plaza. Cash used in
financing activities was $12,252,000 during the first 39 weeks of fiscal 1999.
Cash provided by financing activities included $190,000,000 provided by senior
secured credit facilities, $98,616,000 provided by the sale of senior
subordinated notes, and $25,000,000 provided by the issuance of preferred stock.
Cash used in financing activities related to the mergers was $311,447,000 and
$15,231,000 was paid as fees and expenses related to the acquisition of the
financing.
SJKI anticipates purchasing property and equipment of approximately
$5,500,000 during the remainder of fiscal 1999. The estimated $5,500,000 will be
used principally for the purchase of computerized knitting machines, upgrades to
SJKI's computer systems, expansion of the company-owned boutique in Boston and
the construction of leasehold improvements for a new boutique location in Hawaii
and a new boutique in Portland, Oregon.
As of August 1, 1999, SJKI had approximately $85,132,000 in working capital
and $18,057,000 in cash and marketable securities. SJKI's principal source of
liquidity is internally generated funds. As part of the senior credit
facilities, SJKI has a $25,000,000 revolving credit facility which expires on
July 31, 2005. The revolving credit facility is secured and borrowings
thereunder bear interest at SJKI's choice of the bank's borrowing rate plus 2.0%
(8.0% at August 1, 1999) or a Eurodollar rate plus 3.0%. The availability of
funds under the revolving credit facility is subject to SJKI's continued
compliance with certain covenants, including a covenant that sets the maximum
amount SJKI can spend annually on the acquisition of fixed or capital assets,
and certain financial covenants, including a maximum leverage ratio, a minimum
fixed charge coverage ratio and a minimum interest expense coverage ratio. See
41
<PAGE>
"Description of Senior Credit Facilities." As of August 1, 1999, no amounts were
outstanding under the revolving credit facility. SJKI invests its excess cash
primarily in a money market fund and investment grade commercial paper.
Total debt outstanding increased $289.9 million to $290.5 million at August
1, 1999, as compared to the amount outstanding at November 1, 1998. This
increase is due to the effect of the transactions. SJKI's outstanding debt is
comprised of bank borrowings of $191.9 million and $98.6 million of the
outstanding notes. Note 9 to the Consolidated Financial Statements outlines
certain terms and conditions of SJKI's senior credit facilities and the notes.
In addition, Note 10 outlines certain terms and conditions of SJKI's 15 1/4%
Preferred Stock issued in connection with the transactions.
SJKI's primary ongoing cash requirements will be for debt service and
capital expenditures. SJKI's debt service requirements consist primarily of
principal and interest payments on bank borrowings and interest on the notes.
SJKI believes it will be able to finance its debt service and capital
expenditure requirements for the foreseeable future with internally generated
funds and availability under the revolving credit facility. However, SJKI's
ability to fund its capital investment requirements, interest and principal
payment obligations and working capital requirements and to comply with all of
the financial covenants under its debt agreements depends on its future
operating performance and cash flow, which in turn are subject to prevailing
economic conditions and to financial, business and other factors, some of which
are beyond SJKI's control. See "Risk Factors--Substantial Leverage and Debt
Service."
The indenture governing the notes, among other things, (i) restricts St.
John Knits International's and certain of its subsidiaries' (including the
guarantors') ability to incur additional indebtedness, issue shares of preferred
stock, incur liens, pay dividends or make certain other restricted payments and
enter into certain transactions with affiliates, (ii) prohibits certain
restrictions on the ability of certain subsidiaries of St. John Knits
International (including the guarantors) to pay dividends or make certain
payments to St. John Knits International and (iii) places restrictions on the
ability of St. John Knits International and certain of its subsidiaries
(including the guarantors) to merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of SJKI. The senior credit facilities also
contain other and more restrictive covenants, prohibit St. John Knits
International from prepaying other indebtedness (including the notes) and
require St. John Knits International to maintain specified financial ratios,
such as a minimum ratio of EBITDA to interest expense, a minimum fixed charge
coverage ratio and a maximum ratio of total debt to EBITDA, and satisfy
financial condition tests. The senior credit facilities and the indenture
contain customary events of default. The senior credit facilities prohibit St.
John Knits International from declaring or paying any dividends or making any
payments with respect to the notes if it fails to perform its obligations under,
or fails to meet the conditions of, the senior credit facilities or if payment
creates a default under the senior credit facilities.
St. John declared a quarterly cash dividend of $0.025 per share on June 8,
1999 which was paid on July 22, 1999 to shareholders of record on June 24, 1999.
St. John Knits International does not anticipate the payment of any cash
dividends on its common stock in the future. See "Description of Senior Credit
Facilities," "Description of the Notes" and "Risk Factors--Restrictions Imposed
by Our Debt Agreements."
SJKI's EBITDA as defined in its credit agreement for its senior secured
credit facilities was $47,309,000 and $51,998,000 for the first 39 weeks of
fiscal 1999 and 1998, respectively. The credit agreement is filed as
Exhibit (a)(1) to St. John Knits International's Amendment no. 4 to the
Rule 13e-3 Transaction Statement on Schedule 13E-3 dated July 12, 1999. EBITDA
is not a defined term under GAAP and is not an alternative to operating income
or cash flow from operations as determined under GAAP. SJKI believes that EBITDA
provides additional information for determining its ability to meet future debt
service requirements; however, EBITDA does not reflect cash available to fund
cash requirements and should not be construed as an indication of SJKI's
operating performance or as a measure of liquidity.
42
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SJKI will be required to adopt this
standard for fiscal 1999. The adoption of this standard will only affect
disclosure and will not impact SJKI's financial position or results of
operations.
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" and Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities." SJKI will be required to adopt
these standards in fiscal 2000. The adoption of these standards will not have a
material impact on SJKI's financial position or results of operations.
YEAR 2000
SJKI uses various types of technology in the operation of its business. Some
of this technology incorporates date identification functions; however, many of
these date identification functions were developed to use only two digits to
identify a year. These date identification functions, if not corrected, could
cause their relating technology to fail or create erroneous results by or at the
year 2000.
SJKI is continuing to monitor the impact of Year 2000 issues on its
information and non-information technology systems. As part of this process,
SJKI retained the services of an independent contractor with experience in
analyzing and addressing Year 2000 issues. In addition, SJKI developed a
five-phased plan with respect to the Year 2000 readiness of its internal
technology systems. This plan involved (i) creating internal awareness of Year
2000 issues, (ii) analyzing SJKI's Year 2000 state of readiness,
(iii) correcting systems or acquiring new ones as needed, (iv) testing the
corrected or new systems and (v) incorporating the corrected or new systems into
SJKI's business. SJKI has substantially completed all five phases of the plan.
As of August 1, 1999, SJKI had incurred approximately $619,000 in costs related
to the Year 2000 issue.
SJKI has also developed a plan to address the impact that Year 2000 issues
may have on its vendors and customers. SJKI is currently finalizing its
evaluation of the materiality of its vendor and customer relationships and has
initiated communications with certain significant vendors and customers to
identify and minimize disruptions to its operations and to assist in resolving
Year 2000 issues. SJKI has substantially completed this evaluation; however,
there can be no assurance that its Year 2000 compliance efforts will be
successful or that the systems and products of other companies on which it
relies will not have an adverse effect on its business, financial condition and
results of operations. In the event that SJKI's Year 2000 compliance efforts are
not successful or if it is not satisfied with its vendors' or customers' Year
2000 compliance, SJKI will take appropriate measures.
SJKI believes that additional costs related to the Year 2000 issue will not
be material to its business, financial condition and results of operations.
However, estimates of Year 2000 related costs are based on numerous assumptions
and there is no certainty that estimates will be achieved and actual costs could
be materially greater than anticipated. SJKI anticipates that it will fund its
additional Year 2000 costs with cash from operations.
43
<PAGE>
BUSINESS
OVERVIEW
SJKI is a leading designer, manufacturer and marketer of fine women's
clothing and accessories. The St. John name has been associated with high
quality women's knitwear for over 35 years. SJKI's core knitwear product line,
which represents approximately 81% of its sales, consists of a collection of
lifestyle clothing for women's business, evening and casual needs. SJKI
manufactures its products primarily to order and distributes them on a highly
selective basis through a group of upscale retailers with whom it has long-term
relationships, as well as through company-owned stores.
SJKI's core knitwear products are considered unique and highly desirable by
customers due to their classic styling, durability, comfort, fit and quality.
These attributes, combined with selective distribution and targeted advertising,
have created a loyal base of customers consisting of professional and
higher-income women.
The strength of SJKI's brand name and customer loyalty has also enabled it
to expand its business into product lines that complement its core offerings.
These products account for approximately 19% of its sales and include women's
wovens, activewear, shoes, coats, accessories, fragrances and home furnishings.
The success of SJKI's knitwear business, together with growth from its other
product lines, have allowed it to increase net sales from approximately
$128.0 million in fiscal 1994 to approximately $282.0 million in fiscal 1998,
representing a compound annual growth rate of approximately 21.8%. For the
twelve months ended August 1, 1999, SJKI's net sales and Adjusted EBITDA (as
defined) were approximately $297.6 million and $61.7 million, respectively.
SJKI has developed a vertically integrated manufacturing process which
allows it to produce approximately 93% of its own products. SJKI believes that
this vertical integration differentiates it from other apparel manufacturers and
has been critical to its success because it enables it to manufacture products
to order, maximize manufacturing flexibility and maintain superior quality
control. SJKI operates seven production facilities in California and one in
Mexico. During the past five years SJKI has invested approximately
$53.0 million in production facilities and state-of-the-art equipment, which it
believes has further enhanced its position as the leading manufacturer of
high-end women's knitwear.
SJKI has had relationships with its top three retail customers, Saks Fifth
Avenue, Neiman Marcus and Nordstrom, for approximately 25, 20 and 15 years,
respectively. SJKI also distributes its products through 18 Company-owned
boutiques and nine outlet stores. The boutiques showcase SJKI's entire line of
products and have expanded the distribution and enhanced the brand awareness of
its products.
PRODUCTS
ST. JOHN
SJKI's products are organized primarily into six separate product lines:
Knitwear, Sport, Griffith & Gray, Shoes, Accessories and Fragrance. In fiscal
1998, sales to SJKI's retail customers accounted for approximately
$197.0 million, and sales through company-owned stores accounted for
approximately
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<PAGE>
$74.3 million. The following table details the approximate range of suggested
retail prices by product line. The suggested retail prices are indicative of
individual item prices.
<TABLE>
<CAPTION>
RANGE OF SUGGESTED
PRODUCT LINE SELECTED PRODUCTS RETAIL PRICES
- ------------ ---------------------------------------------- -------------------
<S> <C> <C>
Knitwear
COLLECTION.................................. Dresses, Two-Piece Suits, Three-Piece Suits, $350-$1,400
Jackets, Pants, Skirts, Coats, Sweaters,
Separates
DRESSY...................................... Dresses, Theater Suits, Dressy Separates $650-$2,000
BASICS...................................... Skirts, Jackets, Pants $160-$690
COUTURE..................................... Dresses, Gowns, Two-Piece Suits $900-$3,800
Sport......................................... Jackets, Skirts, Pants, Tops, Jeans $ 95-$1,100
Griffith & Gray............................... Suits, Coats, Dresses, Separates, Eveningwear $200-$1,800
Shoes......................................... Pumps, Sling Backs, Loafers, Boots $210-$375
Accessories................................... Jewelry, Scarves, Belts, Handbags $ 60-$525
Fragrance..................................... Perfume, Bath Products $ 25-$250
</TABLE>
KNITWEAR. SJKI organizes its St. John Knitwear into four groups:
Collection, Dressy, Basics and Couture. Due to the breadth of each product
group, SJKI competes in most segments of women's designer clothing. SJKI's
knitwear products are sold as a collection of lifestyle clothing for women's
business, evening and casual needs. Due to its all-purpose weight, St. John
Knitwear is a year-round product, not confined to a single season or climate.
SJKI manufactures all of its knitwear products and designs knitwear collections
to encourage consumers to coordinate outfits, resulting in multiple product
purchases within a collection. In fiscal 1998, knitwear sales were approximately
$228.6 million, or 81.1% of total sales.
COLLECTION. SJKI is best known for its Collection line consisting of elegant
ready-to-wear styles. This line of daytime knit fashions includes
sophisticated dresses and suits that focus on a tailored look. The
Collection line also includes jackets, pants, skirts, coats and sweaters.
All items in the line are sold as separates, including two-piece suit
styles.
DRESSY. The Dressy line consists of dresses, theater suits and dressy
separates. The look of the Dressy line is one of understated elegance
enhanced by innovative touches, such as layers of transparent paillettes and
sequins, embroidered sleeves or glittery collars and cuffs.
BASICS. The Basics line is comprised of products which are sold throughout
the year and which generally do not vary by season. These products consist
of classic jackets, skirts and pants that are an integral part of women's
wardrobes, all in solid black, white or navy. Simplicity of design and color
allows these products to be combined with any number of styles from any of
SJKI's product lines and worn for daytime or dressed up for evening.
Retailers' inventories of Basics products tend to be maintained throughout
the year and reordered as necessary.
COUTURE. The Couture line is SJKI's most exclusive group of day and evening
apparel and is produced in limited quantities. The day group includes
dresses and two-piece suits which are designed with elegant embroidery. The
evening group consists of two-piece suits and long gowns. Both groups are
designed using colored paillettes and sequins.
SPORT. St. John Sport is a line of activewear which includes jackets,
skirts, pants, tops and jeans and is targeted to our core knitwear customers.
The line is primarily manufactured in SJKI's production facilities using woven
fabrics purchased in Italy. In fiscal 1998, Sport sales were approximately
$10.3 million, or 3.7% of total sales.
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<PAGE>
GRIFFITH & GRAY. Griffith & Gray includes suits, coats, dresses, separates
and eveningwear. The line targets a slightly younger customer than the core
Knitwear line. Approximately half of the line is manufactured in SJKI's
facilities, including various knit styles. The balance of the line is
manufactured by outside contractors located in Italy using high quality European
woven fabrics. Commencing with the Fall 1999 line, Griffith & Gray will be
carried exclusively in our company-owned stores. In fiscal 1998, Griffith & Gray
sales were approximately $6.3 million, or 2.2% of total sales.
SHOES. The St. John Shoe line consists of pumps, sling backs, loafers and
boots, manufactured in Italy using high quality Italian leather. Shoes are
designed to match the styles and colors of the Knitwear line. During fiscal
1997, SJKI began distribution of the Shoe line to most of its major customers in
the United States. In fiscal 1998, Shoe sales were approximately $9.2 million,
or 3.3% of total sales.
ACCESSORIES. The Accessories line is comprised of fine jewelry, scarves,
belts and handbags. All Accessories are color coordinated with the various
fashion collections. Four collections of upscale jewelry are produced each year.
In fiscal 1998, Accessories sales were approximately $8.3 million, or 2.9% of
total sales.
FRAGRANCE. The Fragrance line includes perfume, eau de parfum, perfumed
body mist, body cream, lotion, body powder and bath products. The signature
fragrance, St. John, is marketed as an accessory to the St. John apparel line
through most of SJKI's major customers and SJKI's own retail stores. During
fiscal 1997, SJKI signed a distribution agreement to allow another company the
right to distribute fragrance in the United States. During fiscal 1998, SJKI
launched a second scent, White Camellia, which is currently marketed along with
SJKI's signature scent. In fiscal 1998, Fragrance sales were approximately
$2.6 million, or 0.9% of total sales.
LICENSED
SJKI has license agreements to manufacture and sell eyewear, watches and
coats under the St. John name. The eyewear line was launched during fiscal 1998
and the watch line was launched during the first quarter of fiscal 1999.
In February 1999, SJKI also signed a licensing agreement to create a new
line of women's coats. The new St. John Coat Collection will offer the usual
classic styles, elegance and superior quality which St. John customers have come
to expect. The new line was launched in August 1999. Prior to the license
agreement, SJKI's Coat Collection, consisting primarily of faux fur coats in
various styles and colors, was manufactured in SJKI's factories using fabric
imported from Europe and sold for between $750 and $1,100 per item. In fiscal
1998, Coat Collection sales were approximately $1.4 million, or 0.5% of total
sales.
ST. JOHN HOME
SJKI operates two home furnishings stores, located in Scottsdale, Arizona
and Costa Mesa, California, under the name St. John Home. In addition, SJKI
operates one St. John Home outlet store in Nevada that opened in June 1999. St.
John Home stores sell upscale home furnishings and gift items. SJKI previously
operated six home furnishings stores through a joint venture which was
terminated in May 1999. Three of those stores were closed, and one was
transferred to the joint venture partner. For the 39 weeks ended August 1, 1999,
the Scottsdale and Costa Mesa stores, together with the Nevada outlet, generated
net sales of approximately $3.3 million.
MANUFACTURING
SJKI has developed a vertically integrated manufacturing process which it
believes is unique and critical to its success. During fiscal 1998,
approximately 93% of SJKI's products were manufactured at
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<PAGE>
SJKI's own facilities, while the remaining 7% was manufactured by outside
contractors, primarily in Europe. SJKI twists, dyes and knits its yarn, as well
as constructs, presses and finishes its knitwear products, in its seven
facilities located in Southern California and one in Mexico. SJKI manufactures
its knitwear using its highly automated electronic knitting machines coupled
with a skilled labor force. SJKI also manufactures its own jewelry and hardware
for its products. Products not manufactured by SJKI principally consist of the
Griffith & Gray and Shoe product lines as well as home furnishings, handbags,
scarves, belts and fragrances.
SJKI believes that its vertical integration differentiates it from other
apparel manufacturers and has been critical to its success because it enables
SJKI to manufacture products to order, maximize manufacturing flexibility and
maintain superior quality control. SJKI believes that the ability to produce to
order limits its exposure to both the inventory and market risks associated with
many apparel companies that source products internationally. SJKI's in-house
manufacturing capabilities also enable it to quickly increase production of
popular styles. SJKI's ability to control every aspect of the manufacturing
process allows it to consistently produce garments to its high quality
standards. Finally, SJKI believes that its vertical integration has enabled it
to consistently achieve margins that are among the highest in the apparel
industry.
The manufacturing process begins with the twisting together of wool and
rayon on SJKI's precision twisting machines in a proprietary process that
produces SJKI's "Santana" yarn. The twisted yarn is transferred to SJKI's dye
house for dyeing based on garment orders received. The dyed yarn is knit on
SJKI's computerized electronic knitting machines and then cut, assembled and
finished in SJKI's linking, seaming and hand finishing facilities. SJKI's
jewelry and hardware manufacturing plants produce the buttons and buckles for
garments, as well as bracelets, earrings, necklaces, chokers, pins and other
accessories. SJKI also manufactures many of its woven products, as well as
blouses, jeans and certain scarves.
SJKI has made recent investments in its production capabilities, including
the addition of personnel hired during fiscal 1998 and approximately
$5.7 million invested in 56 new state-of-the-art electronic knitting machines.
Also, during fiscal 1998, SJKI completed a new jewelry and garment hardware
manufacturing facility in Mexico. The new facility gives SJKI additional
manufacturing capacity as well as the ability to lower the cost of certain
labor-intensive jewelry and hardware components through reduced labor costs. In
addition, workers at the Mexico facility apply paillettes and sequins to some of
SJKI's apparel products.
DESIGN
St. John designs its garments to be consistent with SJKI's classic, timeless
style. To accomplish this goal, design teams reference the prior season's
designs and patterns to establish a basis for the current season's lines. The
design teams also work closely with the sales force to incorporate current
consumer preferences into the season's line. Dye lots are kept consistent with
prior years to enable consumers to augment their wardrobes over several seasons.
Once design parameters for a particular item are established, the design teams
work with the manufacturing group to plan construction details and hardware
attachments, such as buttons, to ensure efficient manufacturing. The design
staff has an average of nine years of experience with SJKI. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DISTRIBUTION
SJKI's products are distributed primarily through a select group of retail
customers and SJKI's 18 boutiques, nine outlet stores, two home furnishing
stores and one home furnishing outlet.
RETAIL CUSTOMERS. SJKI selectively distributes its products through some of
the nation's leading upscale retailers, including Saks Fifth Avenue, Neiman
Marcus and Nordstrom, each of which
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<PAGE>
accounted for more than 10.0% of SJKI's net sales in fiscal 1998 (approximately
45% collectively) and have been customers of SJKI for approximately 25, 20 and
15 years, respectively. Since the mid-1980s, SJKI has worked with these and
certain other retail customers to create in-store boutiques, which are
designated areas devoted exclusively to SJKI's products. Other significant
customers of SJKI include Jacobson's, Macy's West, Lord & Taylor and select
Marshall Field's and Dayton Hudson stores.
COMPANY-OWNED STORES. In order to diversify its product distribution and
enhance name recognition, SJKI began opening its own retail boutiques in 1989
and currently operates 18 such boutiques. The boutiques showcase SJKI's entire
line of products and have expanded the distribution and enhanced the brand
awareness of its products. SJKI also operates nine outlet stores. Unlike many of
its competitors, SJKI does not expressly manufacture product for its outlets,
instead utilizing the outlets to sell seconds, design samples and slow-moving
inventory from SJKI's full-price boutiques. In addition, SJKI operates two home
furnishing stores and one home furnishing outlet.
INTERNATIONAL. SJKI sells its products to retail customers in Asia, Europe,
Canada and Mexico. In Asia, SJKI has established relationships with a number of
highly qualified retailers, including Lane Crawford in Hong Kong and China and
ShinSegae in South Korea, and is now seeking to increase its penetration in
these accounts. In addition, SJKI is planning to expand its successful in-hotel
boutiques business in Japan and opened a boutique in Hong Kong in May 1999.
SJKI's European efforts involve expanding and upgrading its relationships with
high quality independent retail customers, principally in the United Kingdom,
Germany, Belgium, Switzerland and the Netherlands. During fiscal 1998,
international sales to retail customers and through St. John Japan accounted for
approximately 7.5% of SJKI's net sales.
MARKETING
SJKI markets its Collection, Dressy and Couture lines along with its Sport
and Griffith & Gray lines twice a year, during the Fall and Cruise/Spring
seasons. These lines are shown in January for delivery between May and October
and in August for delivery between November and April. The majority of orders
for each of these six-month delivery periods normally are received within five
weeks of showings, and the goods are then made to order. The Shoe line is
marketed four times per year. SJKI markets its Basics, Accessories and Fragrance
lines throughout the year.
SJKI shows its product lines to retail customer buyers in its New York,
Irvine and Dallas showrooms. Members of SJKI's senior management team work
closely with major retail customers to develop sales plans and to determine the
appropriate mix of merchandise. These detailed sales plans are based on past
purchases, expected sales growth and profitability. SJKI also shows its products
in its Dusseldorf and Japan showrooms as well as in other foreign countries at
various times during the year using its outside sales representatives.
SJKI's strategy is to sell its products to its retail accounts and to
facilitate the sale of its products through to the ultimate consumer. SJKI
employs a sales team, showroom personnel and customer service representatives.
The sales team is currently comprised of 24 U.S. and seven international field
representatives. The sales team establishes and maintains in-store boutique
presentations, develops close working relationships with store management and
trains key sales people to be St. John specialists. The St. John specialists at
certain key retail accounts are eligible for SJKI's incentive rewards. In
addition, SJKI's customer service representatives monitor computerized
information on each store's sales and styles sold in an effort to track and
increase sales.
In order to promote its exclusive upscale image, SJKI consistently
advertises in both national and international fashion magazines, including
Vanity Fair, Vogue, Elle and Harper's. In fiscal 1998, SJKI spent approximately
$11.0 million on advertising. Management believes that this advertising approach
enhances SJKI's image. SJKI's advertising features Kelly Gray as its Signature
Model. SJKI also designs and produces seasonal exclusive St. John catalogs,
which are distributed at the discretion of individual
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<PAGE>
retailers. Distribution is usually limited to target repeat purchasers or those
who meet SJKI's consumer profile.
RAW MATERIALS AND SUPPLIERS
SJKI's primary raw materials in the production of its knitwear are wool and
rayon. In fiscal 1998, SJKI purchased approximately $10.8 million of wool and
approximately $3.7 million of rayon. SJKI uses the highest quality wool,
primarily from Australia. Generally, a wool commitment is taken with SJKI's
primary U.S. spinner for a set quantity of wool based on SJKI's forecasted wool
requirements for approximately one year. Multiple spinners are available, both
domestically and internationally, with comparable pricing for spun Australian
wool yarn. SJKI also maintains yarn suppliers in Europe and Asia. SJKI generally
holds an inventory of twisted yarn sufficient for approximately six weeks of
production to protect it from potential supply interruptions. Rayon is available
in raw or dyed form from various European and Japanese suppliers.
In addition to wool and rayon, SJKI purchases fabric from various suppliers
and has little difficulty in satisfying its fabric requirements from Europe and
Asia. Crystals, glass beadings, pearls and raw materials used in the manufacture
of paillettes are purchased from certain suppliers in Europe. SJKI believes that
there are alternative sources for certain of these specialized items.
COMPETITION
Due to its long history of strong sales and market leadership in designer
knitwear, SJKI believes that it faces limited direct competition for its core
product offerings. In addition, SJKI believes that the risk of strong new
competitors is further limited given its substantial investment in knitwear
production technology and its strong relationships with its retail accounts. In
a broader context, SJKI does compete with such successful designers as Armani,
Calvin Klein, Chanel, Donna Karan and Escada for higher-income female customers.
EMPLOYEES
At August 1, 1999, SJKI had approximately 4,360 full-time employees,
including seven in executive positions, approximately 275 in design and sample
production, 2,895 in production, 180 in quality control, 275 in retail, 110 in
sales and advertising and the balance in clerical and office positions. In
addition, SJKI had approximately 260 full-time employees working at SJKI's
facility in Mexico, 40 working at St. John Home and 40 at St. John Japan. SJKI
is not party to any labor agreements, and none of its employees is represented
by a union. SJKI believes a significant number of its employees are highly
skilled and that turnover among these employees has been minimal. SJKI considers
its relationship with its employees to be good and has not experienced any
interruption of its operations due to labor disputes.
BACKLOG
Net sales for the first 39 weeks of fiscal 1999 increased by approximately
$15.6 million, or 7.6% over the first 39 weeks of fiscal 1998. As of August 1,
1999, SJKI had unfilled customer orders of approximately $56.4 million for the
1999 Fall season compared with approximately $63.5 million as of August 2, 1998.
Backlog decreased primarily as a result of timing issues, with earlier shipments
of fall products in 1999 compared with the corresponding 1998 period, as well as
the discontinuation of the SJK and Coat product lines.
49
<PAGE>
PROPERTIES
HEADQUARTERS, ADMINISTRATIVE AND MANUFACTURING FACILITIES. The general
location, use and approximate size of SJKI's headquarters, administrative and
manufacturing facilities, as well as whether they are leased or owned, are set
forth below:
<TABLE>
<CAPTION>
APPROXIMATE AREA IN LEASED OR
LOCATION USE SQUARE FEET OWNED
- -------- -------------------------------- ------------------- ---------
<S> <C> <C> <C>
Irvine, California.............. Design Facility, Showroom, 110,500 Owned
Sewing, Warehousing, Shipping
Tijuana, Mexico................. Jewelry and Hardware 63,100 Owned
Manufacturing
Van Nuys, California............ Assembling, Sewing 27,900 Owned
San Ysidro, California.......... Assembling 27,300 Owned
Irvine, California.............. Warehousing, Administrative 24,300 Owned
Offices
Irvine, California.............. Knitting 20,500 Owned
Irvine, California(1)........... Knitting, Sewing, Finishing, 175,000 Leased
Shipping, Administrative
Offices
Irvine, California.............. Warehousing 120,300 Leased
Irvine, California(2)........... Corporate Headquarters, 85,000 Leased
Showroom, Twisting, Dyeing
Alhambra, California(3)......... Assembling, Sewing 41,000 Leased
Santa Ana, California........... Jewelry and Hardware 23,000 Leased
Manufacturing
Irvine, California.............. Administrative Offices 20,200 Leased
</TABLE>
- ------------------------------
(1) SJKI leases this property from a general partnership in which SJKI holds a
50% interest.
(2) SJKI leases this property from a partnership in which the Gray Family Trust,
a revocable living trust of which Bob and Marie Gray serve as co-trustees
and are the sole beneficiaries, has a 50% general partnership interest.
(3) SJKI leases this property from a limited partnership in which the Gray
Family Trust has a 65% general partnership interest.
SJKI believes that there are facilities available for lease in the event
that either the productive capacities of SJKI's manufacturing facilities need to
be expanded or a current lease of a manufacturing facility expires.
SJKI leases certain of its facilities from affiliates of SJKI. See "Certain
Relationships and Related Transactions." SJKI believes that its existing
facilities are well maintained and in good operating condition.
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<PAGE>
RETAIL PROPERTIES. The general location, use and approximate size of SJKI's
retail properties, all of which are leased, are set forth below:
<TABLE>
<CAPTION>
APPROXIMATE AREA IN
LOCATION USE SQUARE FEET
- -------- ------------------------------------ -------------------
<S> <C> <C>
Costa Mesa, California(1)........... Boutique, Home Furnishings 15,400
New York, New York(2)............... Boutique 13,700
Beverly Hills, California........... Boutique 7,000
Chicago, Illinois................... Boutique 6,000
Las Vegas, Nevada................... Boutique 5,600
Palm Beach, Florida................. Boutique 5,200
Munich, Germany..................... Boutique 4,400
Dallas, Texas....................... Boutique 4,300
Atlanta, Georgia.................... Boutique 3,500
Scottsdale, Arizona................. Boutique 3,200
Honolulu, Hawaii.................... Boutique 2,900
Charlotte, North Carolina........... Boutique 2,800
Boston, Massachusetts............... Boutique 3,900
Palm Desert, California............. Boutique 2,400
Manhasset, New York................. Boutique 2,400
Denver, Colorado.................... Boutique 2,300
Bal Harbour, Florida................ Boutique 2,200
Hong Kong........................... Boutique 600
Primm, Nevada....................... Outlet 3,200
Queenstown, Maryland................ Outlet 2,700
Central Valley, New York............ Outlet 2,600
Milpitas, California................ Outlet 2,200
Sunrise, Florida.................... Outlet 2,200
San Antonio, Texas.................. Outlet 2,100
Camarillo, California............... Outlet 2,000
Cabazon, California................. Outlet 2,000
Philadelphia, Pennsylvania.......... Outlet 1,400
Scottsdale, Arizona................. Home Furnishings 5,400
Primm, Nevada....................... Home Furnishings Outlet 4,000
New York, New York.................. Showroom 12,300
Dusseldorf, Germany................. Showroom 2,900
Dallas, Texas....................... Showroom 2,600
</TABLE>
- ------------------------------
(1) The lease includes both the St. John boutique and St. John Home store which
were opened subsequent to the end of fiscal 1998.
(2) The boutique located on 5(th) Avenue in New York City is covered by two
leases.
As of November 1, 1998, annual base rents for SJKI's leased properties
listed in the table above ranged from approximately $102,000 to $1.2 million. In
general, the terms of these leases provide for rent escalations dependent upon
either increases in the lessor's operating expenses or fluctuations in the
consumer price index in the relevant geographical area.
TRADEMARKS
SJKI owns and utilizes several trademarks, principal among which are St.
John-Registered Trademark-, St. John by Marie Gray-Registered Trademark-, St.
John Boutiques-Registered Trademark- and Griffith & Gray-Registered Trademark-.
The St. John-Registered Trademark- trademark is registered with the United
States Patent and Trademark Office and in several other major jurisdictions in
the world.
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SJKI regards its trademarks and other proprietary rights as valuable assets and
believes that they have significant value in the marketing of its products. SJKI
vigorously protects its trademarks against infringement.
REGULATION
SJKI is subject to a variety of federal, state and local laws and
regulations including those relating to zoning, land use, environmental
protection and workplace safety. SJKI is also subject to laws governing its
relationship with its employees, including minimum wage requirements, overtime,
working conditions and work permit requirements. Although SJKI believes that it
is and has been in material compliance with all of the various regulations
applicable to its business, SJKI cannot assure that requirements will not change
in the future or that it will not incur significant costs to comply with such
requirements.
LEGAL PROCEEDINGS
Securities Fraud Class Action
On October 13, 1998, Binary Traders, Inc. filed a complaint on behalf of
purchasers of publicly traded securities of St. John during the period of
February 25, 1998 to August 20, 1998 against SJKI, Bob Gray and Kelly Gray in
the United States District Court, Central District of California, Southern
Division (Binary Traders, Inc. v. St. John Knits, Inc., et al.). In this action,
Binary Traders claims that the defendants violated federal securities laws by
allegedly making fraudulent statements to cover up management's mistakes and
certain material adverse conditions affecting SJKI's business. In addition, the
complaint alleges that Mr. Gray traded shares of St. John's common stock while
in possession of allegedly material non-public information. Binary Traders seeks
class action certification and an unspecified amount of compensatory damages. On
August 6, 1999, defendants filed a motion to dismiss the action. On
September 8, 1999, at the request of the plaintiff, the court stayed all
proceedings in this action pending the outcome of the petition for rehearing EN
BANC in front of the Ninth Circuit Court of Appeals in IN RE SILICON GRAPHICS,
INC. SECURITIES LITIGATION.
Litigation Regarding the Transactions
SJKI is also a party to six lawsuits that allege claims against some of St.
John's current and former directors for breach of fiduciary duty alleged to have
arisen in connection with the mergers that were part of the transactions. All of
these lawsuits were filed in the Superior Court of the State of California for
the County of Orange. The principal relief sought in the six actions is
certification of the putative class and a rescission of the mergers and damages
and attorneys' fees in an unspecified amount. These six lawsuits were
consolidated into one action on February 24, 1999.
On April 15, 1999, the plaintiffs in this lawsuit filed a motion for a
preliminary injunction seeking to prevent the mergers from proceeding. The
preliminary injunction motion was heard by the California state court on
April 28, 1999. On April 30, 1999, the court denied the plaintiffs' motion. In
denying the plaintiffs' request, the court ruled that the plaintiffs had not
shown a "reasonable probability" that they could succeed in proving at trial
that the $30.00 per share offer in the mergers is unfair. Similarly, the court
ruled that the plaintiffs were unlikely to show that the special committee of
St. John's board of directors that evaluated and approved the terms of the
mergers on behalf of St. John lacked independence or failed to "shop" St. John
adequately to other buyers.
While declining to grant the preliminary injunction, the court imposed a
constructive trust which prevents the Grays from receiving in the mergers any
amount for their St. John shares in excess of $30.00 per share until a full
trial on the merits is held. Prior to the determination of the final terms of
the stock options to be granted to the Grays after the mergers, the plaintiffs
had argued that these options represent additional consideration for the Grays'
St. John shares. It is SJKI's belief that these
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<PAGE>
employee stock options represent incentive compensation for the Grays' services
as officers of St. John Knits International after the mergers and are not
additional consideration for their St. John shares.
The court also imposed a constructive trust preventing two of St. John's
former directors from exercising options that were repriced by the board of
directors in September 1998 until a full trial on the merits is held. It is
SJKI's belief that the September 1998 option repricing was not improper. The
repricing was consistent with the repricing of options held by key employees of
St. John, excluding the Grays.
In imposing the constructive trusts, the court indicated that the plaintiffs
had shown "reasonable probability" that they could succeed at trial in proving
that the former St. John directors breached their fiduciary duties with respect
to the repricing of the director options and the alleged preferential treatment
of the Grays to the extent that the Grays receive a higher price for their
shares than the public shareholders in the mergers. Discovery in this case is
now complete and the court has set a January 31, 2000 trial date.
On September 9, 1999, three of the plaintiffs filed another lawsuit in the
Superior Court of the State of California, County of Orange, naming SJKI, Pearl
Acquisition Corp., Vestar/Gray Investors LLC, SJK Acquisition, Inc., Vestar
Capital Partners III, L.P., Vestar Capital Partners and Merrill Lynch, Pierce,
Fenner & Smith, Inc. The plaintiffs claim that each of the defendants aided and
abetted the breach of fiduciary duties alleged in their earlier actions against
St. John Knits, Inc., Bob Gray and Kelly Gray. Since the claims in this
litigation are based exclusively on secondary liability and are completely
contingent upon the success of the claims in the earlier action, on
November 16, 1999, at the request of several defendents, the court stayed all
proceedings in this litigation pending the outcome of the earlier action.
SJKI intends to contest these lawsuits vigorously if the plaintiffs elect to
proceed with their actions. SJKI expects to incur legal and other defense costs
as a result of such proceedings. These proceedings could involve a substantial
diversion of the time of some of the members of management, and an adverse
determination in, or settlement of, such litigation could involve payment of
significant amounts. SJKI believes it has sufficient insurance to cover any
amounts for which it may be held liable pursuant to either the litigation
regarding the transactions or the securities fraud class action. Therefore, SJKI
believes that these proceedings will not have a material adverse effect on
SJKI's business, financial condition and results of operations.
Amen Wardy Home Stores Litigation
In May 1999, SJKI settled litigation relating to the Amen Wardy Home Stores
joint venture. In connection with this settlement, SJKI transferred ownership of
the Las Vegas home furnishings store and the Amen Wardy name to its former
partner in the joint venture. SJKI also transferred certain property and agreed
to pay certain expenses in connection with the settlement.
SJKI is not a party to any other litigation which is individually or in the
aggregate material to its business.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF ST. JOHN KNITS INTERNATIONAL
The following sets forth certain information concerning the directors and
executive officers of St. John Knits International:
<TABLE>
<CAPTION>
NAME POSITION WITH ST. JOHN KNITS INTERNATIONAL AGE
---- ------------------------------------------ --------
<S> <C> <C>
Bob Gray................ Chairman of the Board and Chief Executive Officer 73
Kelly Gray.............. Director and President 33
Marie Gray.............. Chief Designer and Secretary 62
Bruce Fetter............ Executive Vice President and Chief Operating Officer 44
Roger Ruppert........... Senior Vice President--Finance and Chief Financial Officer 56
Karla Guyer............. Senior Vice President--Marketing 47
Linda Koontz............ Vice President--Sales 42
Daniel O'Connell........ Director 45
James Kelley............ Director 44
Sander Levy............. Director 37
</TABLE>
BIOGRAPHICAL INFORMATION
Bob Gray, a co-founder of St. John, has served as Chairman of the Board and
Chief Executive Officer of the company since its inception in 1962. Prior to
forming St. John, Mr. Gray held various sales and production positions with
Cannady Creations, a small sportswear company, from 1952 to 1962, his last
position being General Manager. He graduated from the University of Southern
California with a B.A. degree in political science and psychology. Mr. Gray is
the husband of Marie Gray and the father of Kelly Gray.
Kelly Gray became President of the company in April 1996. She served as
Creative Director of the company from June 1991 and Executive Vice
President--Creative Director from December 1995 until April 1996. Ms. Gray also
heads the company's retail boutique division and has design responsibilities for
the St. John product line and the Griffith & Gray line. In addition, she has
been the company's Signature Model since 1982. Prior to becoming Creative
Director, Ms. Gray headed the company's advertising department from 1988 to
June 1991. Prior to heading the advertising department of the company, Ms. Gray
held various other administrative positions with the company, Ms. Gray is the
daughter of Bob Gray and Marie Gray.
Marie Gray, a co-founder of the company, has served as Chief Designer of the
company since its inception in 1962 and as Secretary of the company since
March 1993. Prior to forming the company, Ms. Gray was a fashion model, served
as hostess of the Queen For a Day television show and was a fit model for some
of the leading designers in the Los Angeles area. Ms. Gray is the wife of Bob
Gray and the mother of Kelly Gray.
Bruce Fetter was appointed Executive Vice President and Chief Operating
Officer in June 1999. He served as Senior Vice President and Chief Operating
Officer of the company since November 1997. He joined the company in
January 1997 as Vice President--Distribution and in April was appointed Senior
Vice President--Operations. From August 1994 to December 1996 he held the
position of Vice President--Logistics for Bob's Stores, a division of the
Melville Corporation. Mr. Fetter graduated with a B.S. degree from the
University of Southern California in 1976, majoring in business.
Roger Ruppert has served as Senior Vice President--Finance and Chief
Financial Officer of the company since October 1986. Prior to joining the
company, Mr. Ruppert was Vice President--Finance and Chief Financial Officer of
Cardis Corporation, a publicly traded auto parts distributor, from October 1985
to October 1986. He graduated with a B.S. degree in engineering from the U.S.
Naval
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Academy and also received an M.B.A. from the University of California, Los
Angeles. Mr. Ruppert is a certified public accountant.
Karla Guyer has been Senior Vice President--Marketing of the company since
1993. Between August 1990 and 1993, she was Vice President/National Sales
Manager. Ms. Guyer attended Fullerton College in California.
Linda Koontz was appointed Vice President--Sales of the company in
January 1996. Previously, she served as National Sales Manager for ready-to-wear
from 1993 to 1996 and National Sales Manager for the accessory division from
1991 to 1993. Ms. Koontz graduated with a B.A. degree in political science from
California State University--San Bernardino and also received a J.D. from
Western State University.
Daniel O'Connell is the Chief Executive Officer and founder of Vestar
Capital. Mr. O'Connell is a director of Advanced Organics, Inc., Aearo
Corporation, Cluett American Corp., Insight Communications Company, L.P.,
Remington Products Company L.L.C., Russell-Stanley Holdings, Inc., Siegel & Gale
Holdings, Inc. and Sheridan Healthcare, Inc. Mr. O'Connell received an A.B.
degree from Brown University and an M.B.A. degree from Yale University.
James Kelley is a Managing Director of Vestar Capital and was a founding
partner of Vestar Capital at its inception in 1988. Mr. Kelley is a director of
Consolidated Container Holdings, LLC, Celestial Seasonings, Inc. and
Westinghouse Air Brake Company. Mr. Kelley received a B.S. degree from the
University of Northern Colorado, a J.D. degree from the University of Notre Dame
and an M.B.A. degree from Yale University.
Sander Levy is a Managing Director of Vestar Capital and was a founding
partner of Vestar Capital at its inception in 1988. Mr. Levy is a director of
Cluett American Corp. Mr. Levy received a B.S. degree from The Wharton School of
the University of Pennsylvania and an M.B.A. degree from Columbia University.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Directors of St. John Knits International do not receive compensation,
except as officers or employees of the company.
Summary Compensation Table
The following table sets forth the compensation in fiscal 1998 for services
in all capacities to St. John Knits International and its subsidiaries of the
following persons: (i) the chief executive officer of St. John during fiscal
year 1998 and (ii) the other four most highly compensated executive officers of
St. John:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(5)
----------------------------------------
<S> <C> <C> <C>
ALL OTHER
SALARY(1) BONUS(1) COMPENSATION
---------- ---------- ------
Bob Gray......................................... $1,617,132(2) $ -- $1,383
Chairman and Chief Executive Officer
Marie Gray....................................... 525,985 -- 1,383
Chief Designer
Kelly Gray....................................... 663,432(3) -- 1,383
President
David Frankel(4)................................. 258,912 -- 1,383
Executive Vice President
Bruce Fetter..................................... 258,130 -- 1,383
Chief Operating Officer
</TABLE>
- ------------------------------
(1) The amounts shown in this column include amounts and awards accrued during
fiscal 1998 that were earned but not paid in such fiscal year.
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<PAGE>
(2) This amount includes $500,000 of annual salary that was earned but deferred
in fiscal 1998 pursuant to the Employment Agreement, as amended, dated
June 1, 1995 by and between St. John and Mr. Gray.
(3) This amount includes modeling fees of $250,000 which were paid to Ms. Gray
during fiscal 1998.
(4) David Frankel resigned from his employment by SJKI on February 10, 1999.
(5) SJKI has concluded that the aggregate amount of perquisites and other
personal benefits, securities or property paid to each of the listed
officers for fiscal 1998 did not exceed the lesser of 10% of such officer's
total annual salary and bonus for such year or $50,000. Therefore, any such
amounts are not included in the table.
EMPLOYMENT AGREEMENTS
During fiscal 1995, SJKI entered into an Employment Agreement with Bob Gray
commencing, June 1, 1995 for three years. During fiscal 1998, this agreement was
amended to extend the term to May 31, 2000. SJKI also entered into new
Employment Agreements with Marie Gray, Kelly Gray and Bruce Fetter, effective
July 14, 1998. The new employment agreements extended through December 31, 1998
and renew automatically at the end of each year unless terminated on thirty days
notice by either party. The agreements require each employee to devote
substantially his or her full business time and attention and best efforts to
the affairs of SJKI during the term of the agreements. The agreements currently
provide for the payment of a base salary at the rate of $1,475,000 for Bob Gray,
$500,000 for Marie Gray, $420,000 for Kelly Gray and $350,000 for Bruce Fetter.
Under Kelly Gray's employment agreement, SJKI also compensates Ms. Gray $250,000
each year for her position as the Signature Model of SJKI.
Prior to being amended in October 1999, Bob Gray's employment agreement
provided for additional annual compensation of $500,000 to be deferred each year
into a grantor trust. However, in connection with the closing of the
transactions, Bob Gray received a lump sum payment of approximately
$2.1 million, which represented all deferred compensation owed to him under his
employment agreement (the "Deferred Payment"). Under the terms of his employment
agreement, the deferred compensation would not otherwise be distributed to
Mr. Gray until the earlier of (i) the termination of his employment with SJKI
and (ii) June 1, 2000, on an installment basis, subject to the $1.0 million
compensation limit under Section 162(m) of the Internal Revenue Code of 1986, as
amended. In connection with the payment of the Deferred Payment, Mr. Gray's
employment agreement was amended to provide that as of August 6, 1999, no
portion of his annual compensation from SJKI will be deferred and all provisions
of his employment agreement regarding compensation deferrals were terminated.
Under the amended employment agreement, Mr. Gray's base compensation under his
employment agreement was increased by $500,000 per year to approximately
$1,475,000.
The employment agreements for each of Bob, Marie and Kelly Gray and Bruce
Fetter also provide for the payment of severance benefits upon the termination
of the employee's employment. Each employment agreement provides that SJKI pay
severance benefits in the form of compensation continuation for a period equal
to 18 months if the employee's employment is terminated by reason of a
disability. In cases where the employee's employment is terminated by reason of
the employee's death, SJKI generally will provide certain health insurance
benefits to the employee's immediate family for a period of six months.
Under the agreements, in cases where the employee's employment is terminated
by SJKI without cause or by the employee with good reason, such severance
benefits would include payment to the employee (excluding Mr. Gray) of the
employee's base salary for the longer of the remaining term of the agreement or
six months. Under Mr. Gray's employment agreement, such severance benefits would
include payment to him of all base salary through May 31, 2000. For purposes of
the employment agreements, (i) termination by SJKI "with cause" includes
termination for dishonesty, willful misconduct, a breach of a fiduciary duty
which involves personal profit or benefit to the employee, a willful violation
of any law and conviction thereunder and a material breach of the employment
agreement and (ii) termination by the employee "for good reason" includes
termination as a result of the assignment to the employee of duties inconsistent
with the employee's position and status, a
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<PAGE>
substantial alteration in the nature, status or prestige of the employee's
responsibilities, the relocation of SJKI's executive offices to a point more
than 50 miles from the location of such offices as of the date of the applicable
employment agreement and a reduction in the employee's base salary.
Under the employment agreements, termination of employment for good reason
also means voluntary termination by the employee as a result of (i) the failure
by SJKI to obtain from any successor, before the succession takes place, an
agreement to assume and perform the employment agreements or (ii) an occurrence
of a "change of control event." A "change of control event" takes place when a
person or group of persons acquire ownership of 25% or more of the outstanding
common stock of St. John without first obtaining the approval of St. John's then
outstanding directors. These employment agreements provide for additional
severance benefits to the employees upon these events of voluntary termination,
including a lump sum payment equal to two times the employee's then base salary.
Kelly Gray has been SJKI's Signature Model since 1982. Ms. Gray's
responsibilities as Signature Model include still photography modeling for
SJKI's Cruise/Spring and Fall clothing lines, fragrance and accessories. SJKI
uses photographs of Ms. Gray in SJKI's print advertising for these products.
SJKI believes the modeling arrangement with Ms. Gray contains terms no less
favorable to SJKI than those obtainable from unaffiliated third parties.
RETIREMENT PLAN
SJKI maintains the Employees' Profit Sharing Plan, as amended (the
"Retirement Plan"), a qualified profit-sharing plan for the benefit of all
eligible employees. The Retirement Plan contemplates the sharing of profits and
is funded annually by cash contributions at the discretion of the board of
directors. The Retirement Plan was funded in each of fiscal years 1998, 1997 and
1996 with contributions of $500,000.
STOCK OPTION PLAN
In connection with the transactions, in order to provide financial
incentives for certain of its employees, St. John Knits International adopted a
stock option plan which provides for the grant of options to purchase shares of
St. John Knits International common stock.
St. John Knits International granted Bob Gray, Marie Gray and Kelly Gray, as
incentive compensation, employee stock options to acquire St. John Knits
International common stock representing 5% of the total shares of St. John Knits
International common stock outstanding on a fully diluted basis. The exercise
price of the options will be $30.00 per share. The options will vest and become
exercisable in specified circumstances, including upon the continued employment
of the Grays for a specified period of time and the achievement of specified
performance criteria, and will have up to a 10-year term. Any unvested options
will expire following specified terminations of the applicable individual's
employment with SJKI. In addition, if the applicable performance criteria are
not met, the options will not become exercisable and will terminate without
payment therefor.
In addition, some members of senior management other than the Grays have
been and will be offered the opportunity to purchase shares of St. John Knits
International. These members of senior management will also receive, as
incentive compensation, employee stock options to acquire shares of St. John
Knits International common stock. The exercise price of any options granted on
the date of the closing of the transactions will be $30.00 per share. The
exercise price of any options granted subsequent to the date of the closing of
the transactions will reflect the fair market value of the underlying shares, as
determined by the board of directors of St. John Knits International in its best
judgment. The options will vest and become exercisable upon the continued
employment of the applicable individual with SJKI for a specified period of time
and will have up to a 10-year term. Any unvested options will expire following
specified terminations of the applicable individual's employment with SJKI. In
addition, upon the occurrence of a change in control transaction, these options
may
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<PAGE>
become fully exercisable. The board of directors of St. John Knits International
determines which members of senior management are offered the opportunity to
purchase these shares and receive these options.
The shares of St. John Knits International common stock that these members
of senior management have been and will be offered the opportunity to purchase
and the shares of St. John Knits International common stock underlying the
options that these members of senior management will receive as incentive
compensation will, in the aggregate, represent approximately 5% of the
outstanding common stock of St. John Knits International on a fully diluted
basis.
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<PAGE>
SECURITIES OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of November 16, 1999 regarding
the beneficial ownership of St. John Knits International's common stock by:
(i) each person who is known by SJKI to be the beneficial owner of more than 5%
of the common stock; (ii) each of the directors of St. John Knits International;
(iii) each executive officer listed in the Summary Compensation Table above; and
(iv) all current directors and executive officers of St. John Knits
International as a group.
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF SHARES
BENEFICIALLY
NAME OWNED PERCENTAGE OWNED
- ---- ---------------- ----------------
<S> <C> <C>
Vestar/Gray Investors LLC(1)................................ 6,090,205 93.03%
1225 17th Street, Suite 1660
Denver, Colorado 80202
Bob Gray(2)................................................. 611,412 9.34%
Marie Gray(2)............................................... 611,412 9.34%
Kelly Gray.................................................. 357,571 5.46%
Bruce Fetter................................................ 1,750 0.03%
Daniel O'Connell(3)......................................... 5,121,222 78.23%
James Kelley(3)............................................. 5,121,222 78.23%
Sander Levy(3).............................................. 5,121,222 78.23%
All current directors and executive officers as a group
(seven persons)........................................... 6,091,955 93.08%
</TABLE>
- ------------------------------
(1) Vestar Capital Partners III, L.P., 245 Park Avenue, New York, New York
10167, beneficially owns 5,121,222 shares, or approximately 78.23%, of St.
John Knits International's common stock through its controlling interest in
Vestar/SJK Investors LLC, which owns approximately 84% of Vestar/Gray
Investors.
(2) Includes 556,772 shares which are beneficially owned (through Vestar/Gray
Investors) by the Gray Family Trust, of which Robert and Marie Gray serve as
co-trustees and are the sole beneficiaries. In addition, includes 54,640
shares which are beneficially owned (through Vestar/Gray Investors) by the
Kelly Ann Gray Trust, of which Robert and Marie Gray serve as co-trustees
and of which Kelly Gray is the sole beneficiary.
(3) Includes shares beneficially owned by Vestar. Each of Mr. O'Connell,
Mr. Kelley and Mr. Levy disclaims the existence of a group and disclaims
beneficial ownership of the common stock not held by him.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SJKI leases its corporate office and manufacturing facility in Irvine,
California from GM Properties, a partnership in which the Gray Family Trust, of
which Bob and Marie Gray serve as co-trustees and are the sole beneficiaries,
has a 50% general partnership interest. The lease is for a five-year term
expiring on May 30, 2001, with SJKI having the option to extend the lease for
another five-year term at a lease amount to be agreed upon. The current base
monthly lease payment under this lease is approximately $60,000, with annual
increases of 4%. During fiscal years 1998, 1997 and 1996, SJKI paid GM
Properties approximately $701,000, $621,000 and $645,000, respectively, under
this lease.
SJKI leases its Alhambra, California manufacturing facility from Alhambra
Partners, a limited partnership in which the Gray Family Trust has a 65% general
partnership interest. The lease is for a five-year term expiring on August 31,
2001, with SJKI having the option to extend the lease for a five-year term at a
lease amount to be agreed upon. The current base monthly lease payment under
this lease is approximately $24,000, with annual increases of 4%. During fiscal
years 1998, 1997 and 1996, SJKI paid Alhambra Partners approximately $274,000,
$263,000 and $321,000, respectively, under this lease.
SJKI periodically rents certain personal property from Ocean Air
Charters, Inc. ("Ocean"), in which Bob Gray and Marie Gray are the sole
shareholders. During fiscal years 1998, 1997 and 1996, SJKI paid approximately
$21,000, $30,000 and $37,000, respectively, with respect to such property. In
addition, St. John and Ocean each hold a 50% ownership interest in a partnership
("Partnership") which owns an airplane. As of November 1, 1998, each partner had
a net capital investment in the Partnership of approximately $854,000. During
fiscal years 1998, 1997 and 1996, the Partnership leased the airplane to SJKI
and received lease payments totaling approximately $868,000, $840,000 and
$572,000, respectively. As of April 1, 1999, St. John and the Partnership
entered into a lease agreement for the airplane expiring March 31, 2001, at a
lease rate of $93,000 per month.
Each of the arrangements between SJKI and entities controlled by the Gray
family is, in the opinion of management, on terms no less favorable to SJKI than
those that were available from persons not affiliated with SJKI.
CERTAIN AGREEMENTS RELATING TO THE TRANSACTIONS
Vestar Capital, St. John Knits International and St. John have entered into
a management agreement. Pursuant to the management agreement, St. John Knits
International and St. John paid to Vestar Capital a transaction fee of
$4.0 million at closing and reimbursed Vestar Capital for all out-of-pocket
expenses incurred in connection with the mergers. In addition, under the
agreement Vestar Capital will provide management services, including advisory
and consulting services, in relation to the selection, supervision and retention
of independent auditors, outside legal counsel, investment bankers or other
financial advisors or consultants. For these services, the management agreement
provides that St. John Knits International and St. John will pay Vestar Capital
an annual fee of $500,000 and will reimburse Vestar Capital for all
out-of-pocket expenses. The management agreement will terminate if Vestar
Capital and its partners and their respective affiliates, through Vestar/Gray
Investors or otherwise, hold, in the aggregate, less than 50% of the St. John
Knits International stock beneficially owned by Vestar immediately following the
closing of the transactions and cease to control a majority of St. John Knits
International's board of directors.
St. John Knits International is approximately 93% owned by Vestar/Gray
Investors. Vestar beneficially owns approximately 84%, and the Grays
beneficially own approximately 16%, of Vestar/ Gray Investors. The Vestar/Gray
Investors limited liability company agreement provides, among other things, that
Vestar may appoint three of St. John Knits International's five directors and
the Grays may appoint the remaining two directors. The right of Vestar and the
Grays to appoint directors will be
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subject to reduction to the extent the amount of St. John Knits International
stock allocated to either is reduced.
St. John Knits International has entered into a stockholders' agreement with
stockholders of St. John Knits International, including Vestar/Gray Investors,
Vestar and the Grays, which states, among other things, that (i) prior to a
public offering of St. John Knits International common stock, if Bob Gray ceases
to serve as Chairman or Chief Executive Officer of St. John or St. John Knits
International or if the employment with SJKI of Marie Gray or Kelly Gray ceases
for any reason, then he or she will have the right to require St. John Knits
International, or, under some circumstances, St. John, to purchase the shares of
St. John Knits International common stock beneficially owned by such employee,
up to a maximum of $5.0 million worth of such common stock for all Gray
employees during any 12-month period; and (ii) prior to a public offering of St.
John Knits International common stock, if any of the Grays is terminated without
"cause" or resigns for "good reason," as these terms are defined in their
current respective employment agreements with St. John, then he or she will have
the right to require St. John Knits International, or, under some circumstances,
St. John, to purchase shares of St. John Knits International common stock
beneficially owned by such employee, up to a maximum of 25% of the common stock
beneficially owned by all such terminated or resigning Gray employees during any
12-month period.
The stockholders' agreement also provides that each of the Grays, so long as
he or she is employed by SJKI and for a period of five years after he or she
ceases to be so employed, will not, directly or indirectly, engage in the
design, manufacturing, production, marketing, sale or distribution of women's
clothing or accessories anywhere in the world in which SJKI is doing business,
other than through his or her employment with SJKI. The agreement also provides
that if Kelly Gray is terminated without "cause" or resigns for "good reason,"
as defined under her current employment agreement, the term of the non-compete
period will be reduced to three years, and, subject to restrictions, she will be
permitted to engage in certain otherwise competitive activities.
The Preferred Stock is currently held by Vestar/SJK Investors LLC, Kelly A.
Gray and The Gray Family Trust. The holders of the Preferred Stock will be
entitled to up to five demand registration rights at the expense of SJKI.
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DESCRIPTION OF SENIOR CREDIT FACILITIES
In connection with the transactions, St. John Knits International entered
into a credit agreement (the "Credit Agreement") with The Chase Manhattan Bank,
as administrative agent (the "Agent"), and the Lenders named therein (the
"Lenders") that provided term loans of $190.0 million and a revolving credit
facility of up to $25.0 million. Chase Securities Inc. acted as advisor and
arranger (the "Arranger") in connection with the senior credit facilities. The
following is a summary description of the principal terms of the senior credit
facilities and is subject to and qualified in its entirety by reference to the
Credit Agreement.
STRUCTURE
Loans under the Credit Agreement consist of (i) the $75.0 million Term Loan
A; (ii) the $115.0 million Term Loan B; and (iii) the $25.0 million revolving
credit facility (a portion of which will be available for letters of credit and
in the form of swingline loans). St. John Knits International used the proceeds
from the Term Loans to provide a portion of the funding necessary to consummate
the acquisition merger. St. John Knits International will use the revolving
credit facility for working capital requirements.
SECURITY; GUARANTY
The obligations of St. John Knits International under the senior credit
facilities are unconditionally and irrevocably guaranteed, jointly and
severally, by each existing and subsequently acquired or organized domestic, and
to the extent no adverse tax consequences to St. John Knits International or
such subsidiary would result from such guarantees, each foreign subsidiary of
St. John Knits International. In addition, the senior credit facilities and the
guarantees thereunder are secured by substantially all of the assets of St. John
Knits International and its subsidiaries (collectively, the "Collateral"),
including but not limited to (i) a first priority pledge of all the capital
stock of each existing and subsequently acquired or organized subsidiary of St.
John Knits International (which pledge, in the case of any foreign subsidiary,
will be limited to 65% of the capital stock of such foreign subsidiary to the
extent the pledge of any greater percentage could result in adverse tax
consequences to St. John Knits International or such subsidiary); and (ii) a
perfected first priority security interest in, and mortgage on, substantially
all tangible and intangible assets of St. John Knits International and each
existing and subsequently acquired domestic, and to the extent no adverse tax
consequence to St. John Knits International or such subsidiary could result
therefrom, each foreign, subsidiary of St. John Knits International (including
but not limited to accounts receivable, documents, inventory, equipment,
intellectual property, investment property, general intangibles, real property,
cash and cash accounts and proceeds of the foregoing), in each case subject to
certain limited exceptions. The Credit Agreement provides for the release of
guarantees under certain limited circumstances.
AVAILABILITY
Amounts repaid or prepaid under the Term Loans may not be reborrowed.
Amounts under the revolving credit facility will be available on a revolving
basis.
AMORTIZATION; INTEREST
Term Loan A will be repayable in quarterly principal payments over six
years. The scheduled annual payments, in equal quarterly installments, are
$3.0 million during the first year, $5.0 million during the second year,
$7.0 million during the third year, $11.0 million during the fourth year,
$22.0 million during the fifth year and $27.0 million during the sixth year.
Term Loan A will bear interest at a rate per annum equal (at St. John Knits
International's option) to: (i) an adjusted London interbank offered rate
("Adjusted LIBOR") plus 3.00% or (ii) a rate equal to the highest of the Agent's
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prime rate, a certificate of deposit rate plus 1% and the Federal Funds
effective rate plus 1/2 of 1% (the "Alternate Base Rate") plus 2.00%, in each
case subject to certain reductions based on SJKI's financial performance. Term
Loan B will be repayable in quarterly principal payments over eight years, with
no payment scheduled during the first year, payments totaling $1.0 million per
year for the second through fifth years and payments totaling $11.0 million
during the sixth year, $40.0 million during the seventh year and $60.0 million
during the eighth year, and will bear interest at a rate per annum equal (at
St. John Knits International's option) to: (i) Adjusted LIBOR plus 3.50% or
(ii) the Alternate Base Rate plus 2.50%, in each case subject to certain
reductions based on SJKI's financial performance. The revolving credit facility
will be a six year facility and outstanding balances thereunder will bear
interest at a rate per annum equal (at St. John Knits International's option)
to: (i) Adjusted LIBOR plus 3.00% or (ii) the Alternate Base Rate plus 2.00%, in
each case subject to certain reductions based on SJKI's financial performance.
Amounts under the senior credit facilities not paid when due bear interest at a
default rate equal to 2.00% above the otherwise applicable rate.
PREPAYMENTS
The senior credit facilities permit St. John Knits International to prepay
loans and to permanently reduce revolving credit commitments, in whole or in
part, at any time. In addition, St. John Knits International is required to make
mandatory prepayments of Term Loans, subject to certain exceptions, in amounts
equal to (i) 75% of Excess Cash Flow (as defined in the Credit Agreement); and
(ii) 100% of the net cash proceeds of certain dispositions of assets or
issuances of debt or equity of St. John Knits International or any of its
subsidiaries (in each case, subject to certain exceptions and subject to a
reduction to zero based upon SJKI's financial performance). Mandatory and
optional prepayments of the Term Loans will be allocated pro rata between Term
Loan A and Term Loan B and applied ratably based on the number of remaining
installments under each, except that, so long as Term Loan A is outstanding, the
Lenders participating in Term Loan B will have the right to refuse mandatory
prepayments, in which case such prepayments will be applied to Term Loan A. Any
prepayment of Adjusted LIBOR loans other than at the end of an interest period
will be subject to reimbursement of breakage costs.
FEES
St. John Knits International is required to pay the Lenders, on a quarterly
basis, a commitment fee equal to 1/2 of 1% per annum on the undrawn portion of
the unused commitments, subject to reductions based upon SJKI's financial
performance. St. John Knits International is also required to pay (i) a
commission on the face amount of all outstanding letters of credit equal to
(A) with respect to trade letters of credit, 1.25% per annum and (B) with
respect to all other letters of credit, the applicable margin then in effect for
Adjusted LIBOR loans under the revolving credit facility, less amounts paid
under clause (ii) below, (ii) a fronting fee in the amount of 0.25% per annum on
each letter of credit, to the issuing bank on a quarterly basis, (iii) annual
administration fees and (iv) agent, arrangement and other similar fees.
COVENANTS
The senior credit facilities contain covenants that, among other things,
restrict the ability of St. John Knits International and its subsidiaries to
dispose of assets, incur additional indebtedness, incur guarantee obligations,
prepay other indebtedness or amend other debt instruments, pay dividends, create
liens on assets, enter into sale and leaseback transactions, make investments,
loans or advances, make acquisitions, engage in mergers or consolidations,
change the business conducted by SJKI, make capital expenditures, or engage in
certain transactions with affiliates and otherwise restrict certain corporate
activities. In addition, under the senior credit facilities, St. John Knits
International is
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required to comply with specified financial ratios, including minimum interest
coverage ratios, maximum leverage ratios and minimum fixed charge coverage
ratios.
The senior credit facilities also contain provisions that prohibit any
modification of the indenture in any manner adverse to the Lenders and that
limit St. John Knits International's ability to refinance or otherwise prepay
the notes without the consent of such Lenders.
EVENTS OF DEFAULT
The senior credit facilities contain customary events of default, including
payment defaults, breach of representations and warranties, covenant defaults,
cross-defaults to certain other indebtedness, certain events of bankruptcy and
insolvency, ERISA events, judgment defaults, actual or asserted invalidity of
any security interest and change of control.
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THE EXCHANGE OFFER
GENERAL
We are offering, upon the terms and subject to the conditions set forth in
this prospectus and in the accompanying letter of transmittal, which together
constitute the exchange offer, to exchange up to $100.0 million aggregate
principal amount of exchange notes for a like aggregate principal amount of
outstanding notes properly tendered on or prior to the expiration date and not
withdrawn as permitted by the procedures described below. We are making the
exchange offer with respect to all of the outstanding notes.
The exchange notes will be substantially identical to the outstanding notes,
except that because we have registered the exchange notes they:
- will be freely tradeable;
- will not bear legends restricting their transfer;
- will not be subject to any additional obligations regarding registration
under the Securities Act; and
- will not be subject to the special interest payments described in
"Exchange and Registration Rights."
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The outstanding notes were issued on July 7, 1999 in a transaction exempt
from the registration requirements of the Securities Act. Accordingly, the
outstanding notes may not be reoffered, resold, or otherwise transferred unless
registered under the Securities Act or an applicable exemption from the
registration and prospectus delivery requirements of the Securities Act is
available.
In connection with the issuance and sale of the outstanding notes, we
entered into an exchange and registration rights agreement with the initial
purchasers of the outstanding notes, in which we and our subsidiaries
guaranteeing the outstanding notes agreed:
- to use our reasonable best efforts to file with the Securities and
Exchange Commission, within 90 days of July 7, 1999, a registration
statement under the Securities Act relating to this exchange offer;
- to use our reasonable best efforts to cause the registration statement to
become effective as soon as practicable, but no later than 150 days after
July 7, 1999; and
- to commence the exchange offer promptly after the exchange offer
registration statement has become effective, hold the offer open for at
least 30 days and exchange the exchange notes for all outstanding notes
validly tendered and not withdrawn before the expiration of the offer.
We are making this exchange offer in order to satisfy our obligations with
respect to the exchange and registration rights agreement. A copy of the
exchange and registration rights agreement has been filed as an exhibit to the
registration statement of which this prospectus is a part.
Other than pursuant to the exchange and registration rights agreement, we
are not required to file any registration statement to register any outstanding
notes which remain outstanding. If you hold outstanding notes and do not tender
your outstanding notes or your outstanding notes are tendered but not accepted,
you will have to rely on exemptions to registration requirements under the
securities laws, including the Securities Act, if you wish to sell your
outstanding notes.
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If we fail to comply with the obligations described above under the exchange
and registration rights agreement, we will be required to pay you additional
interest. Please read the section captioned "Exchange and Registration Rights"
for more details regarding the exchange and registration rights agreement.
If you wish to exchange your outstanding notes for transferable exchange
notes in the exchange offer, you will be required to represent to us that, among
other things:
- any exchange notes that you receive will be acquired in the ordinary
course of your business;
- you have no arrangement or understanding with any person or entity to
participate in, and do not intend to engage in, a distribution of the
exchange notes;
- if you are a broker-dealer that will receive exchange notes for your own
account in exchange for outstanding notes that you have acquired as a
result of market-making or trading activities, that you will deliver a
prospectus, as required by law, in connection with any resale of those
exchange notes;
- you are not an affiliate, as defined in Rule 405 of the Securities Act, of
St. John Knits International or, if you are an affiliate, that you will
comply with applicable registration and prospectus delivery requirements
of the Securities Act; and
- if you are a person in the United Kingdom, that your ordinary activities
involve you in acquiring, holding, managing or disposing of investments,
as principal or agent, for the purposes of your business.
RESALE OF EXCHANGE NOTES
Based on interpretations of the staff of the Securities and Exchange
Commission set forth in no-action letters issued to unrelated third parties, we
believe that the exchange notes may be offered for resale, resold and otherwise
transferred by you without compliance with the registration and prospectus
delivery provisions of the Securities Act, if:
- you are acquiring the exchange notes in the ordinary course of your
business;
- you have not engaged in, do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a
distribution of the exchange notes; and
- you are not an affiliate of St. John Knits International within the
meaning of Rule 405 under the Securities Act.
See "K-III Communications Corporation," SEC No-Action Letter, available
May 14, 1993; "Mary Kay Cosmetics, Inc.," SEC No-Action Letter, available
June 5, 1991; "Morgan Stanley & Co., Incorporated," SEC No-Action Letter,
available June 5, 1991; and "Exxon Capital Holdings Corporation," SEC No-Action
Letter, available May 13, 1988.
If you do not meet these requirements:
- you cannot rely on the position of the staff of the Securities and
Exchange Commission enunciated in "Exxon Capital Holdings Corporation" or
similar interpretive letters; and
- you must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction,
unless an exemption to these requirements is applicable.
This prospectus may be used for an offer to resell, resale or other
retransfer of exchange notes only as specifically set forth in this prospectus.
With regard to broker-dealers, only broker-dealers that acquired outstanding
notes as a result of market-making or trading activity may participate in the
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exchange offer. Each broker-dealer that receives exchange notes for its own
account in exchange for outstanding notes acquired as a result of market-making
or trading activity must acknowledge that it will deliver a prospectus in
connection with any resale of the exchange notes. Please read the section
captioned "Plan of Distribution" for more details regarding the transfer of
exchange notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any outstanding
notes properly tendered and not withdrawn prior to the expiration date. We will
issue $1,000 principal amount of exchange notes in exchange for each $1,000
principal amount of outstanding notes surrendered under the exchange offer.
Outstanding notes may be tendered only in integral multiples of $1,000.
The exchange notes will be issued under and entitled to the benefits of the
same indenture that authorized the issuance of the outstanding notes.
Consequently, both series will be treated as a single class of debt securities
under the indenture.
The exchange offer is not conditioned upon any minimum aggregate principal
amount of outstanding notes being tendered for exchange.
As of the date of this prospectus, $100.0 million aggregate principal amount
of the outstanding notes is outstanding. This prospectus and the letter of
transmittal are being sent to all registered holders of outstanding notes. There
will be no fixed record date for determining those who are registered holders of
outstanding notes entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the provisions of
the exchange and registration rights agreement, the applicable requirements of
the Securities Act and the Exchange Act and the rules and regulations of the
Securities and Exchange Commission. Outstanding notes that are not tendered for
exchange will remain outstanding and continue to accrue interest and will be
entitled to the rights and benefits relating to the outstanding notes under the
indenture and the exchange and registration rights agreement.
We will be deemed to have accepted for exchange properly tendered
outstanding notes when we have given oral or written notice of the acceptance to
the exchange agent. The exchange agent will act as your agent for the purposes
of receiving the exchange notes from us and delivering exchange notes to you.
Subject to the terms of the exchange and registration rights agreement, we
expressly reserve the right to amend or terminate the exchange offer, and not to
accept for exchange any outstanding notes not previously accepted for exchange,
upon the occurrence of any of the conditions specified below under the caption
"--Conditions to the Exchange Offer."
If you tender outstanding notes in the exchange offer, you will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
outstanding notes. We will pay all charges and expenses, other than specific
applicable taxes described below, in connection with the exchange offer. It is
important that you read the section labeled "--Fees and Expenses" below for more
details regarding fees and expenses incurred in the exchange offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time on
December 27, 1999, unless in our sole discretion, we extend it.
In order to extend the exchange offer, we will notify the exchange agent
orally or in writing of any extension. We will notify registered holders of
outstanding notes of the extension no later than 9:00 a.m., New York City time,
on the business day after the previously scheduled expiration date.
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We reserve the right, in our sole discretion:
- to delay accepting for exchange any outstanding notes;
- to extend the exchange offer or to terminate the exchange offer and to
refuse to accept outstanding notes not previously accepted if any of the
conditions set forth below under "--Conditions to the Exchange Offer" have
not been satisfied, by giving oral or written notice of the delay,
extension or termination to the exchange agent; or
- subject to the terms of the exchange and registration rights agreement, to
amend the terms of the exchange offer in any manner.
Any delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice of the delay to
registered holders of the outstanding notes. If we amend the exchange offer in a
manner that we determine to constitute a material change, we will promptly
disclose the amendment in a manner reasonably calculated to inform you of the
amendment.
Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the exchange offer, we have no obligation to publish, advertise, or otherwise
communicate those public announcements, other than by making a timely release to
a financial news service.
CONDITIONS TO THE EXCHANGE OFFER
Despite any other term of the exchange offer, we will not be required to
accept for exchange, or exchange any exchange notes for, any outstanding notes,
and we may terminate the exchange offer as provided in this prospectus before
accepting any outstanding notes for exchange if in our reasonable judgment:
- any action or proceeding is instituted or threatened in any court or by or
before any governmental agency or regulatory authority, or any injunction,
order or decree is issued with respect to the exchange offer which, in our
sole judgment, might materially impair our ability to proceed with the
exchange offer or have a material adverse effect on the contemplated
benefits of the exchange offer to us; or
- any change or any development involving a prospective change shall have
occurred or been threatened in our business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects that is or may be adverse to us, or we shall have become aware
of facts that have or may have adverse significance with respect to the
value of the outstanding notes or the exchange notes or that may
materially impair the contemplated benefits of the exchange offer to us;
or
- any law, rule or regulation or applicable interpretations of the staff of
the Securities and Exchange Commission is issued or promulgated which, in
our good faith determination, do not permit us to effect the exchange
offer; or
- any governmental approval has not been obtained, which approval we, in our
sole discretion, deem necessary for the consummation of the exchange
offer; or
- there shall have been proposed, adopted or enacted any law, statute, rule
or regulation or an amendment to any existing law, statute, rule or
regulation which, in our sole judgment, might materially impair our
ability to proceed with the exchange offer or have a material adverse
effect on the contemplated benefits of the exchange offer to us; or
- there shall occur a change in the current interpretation by the staff of
the Securities and Exchange Commission which permits the outstanding notes
to be offered for resale, resold and otherwise transferred by holders who
are not affiliates of ours within the meaning of Rule 405
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under the Securities Act without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that the
notes are acquired in the ordinary course of the holders' business and the
holder have no arrangement with any person to participate in the
distribution of the outstanding notes.
In addition, we will not be obligated to accept for exchange your
outstanding notes if you have not made to us:
- the representations described under "--Purpose and Effect of the Exchange
Offer," "--Procedures for Tendering" and "Plan of Distribution;" and
- those other representations as may be reasonably necessary under
applicable Securities and Exchange Commission rules, regulations or
interpretations to make available to us an appropriate form for
registration of the exchange notes under the Securities Act.
We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. Consequently, we may
delay acceptance of any outstanding notes by giving oral or written notice of an
extension. During an extension, all outstanding notes previously tendered will
remain subject to the exchange offer, and we may accept them for exchange. We
will return any outstanding notes that we do not accept for exchange for any
reason without expense as promptly as practicable after the expiration or
termination of the exchange offer.
We expressly reserve the right to amend or terminate the exchange offer, and
to reject for exchange any outstanding notes not previously accepted for
exchange, upon the occurrence of any of the conditions of the exchange offer
specified above. We will give oral or written notice of any amendment or
termination as promptly as practicable.
These conditions are for our sole benefit, and we may assert them regardless
of the circumstances that may give rise to them or waive them in whole or in
part at any or at various times in our sole discretion if we reasonably
determine that one or more conditions have not been satisfied. If we fail at any
time to exercise any of the rights above, this failure will not constitute a
waiver of those rights. Each of those rights will be deemed an ongoing right
that we may assert at any time or at various times.
In addition, we will not accept for exchange any outstanding notes tendered,
and will not issue exchange notes in exchange for any outstanding notes, if any
stop order is threatened or in effect with respect to the registration statement
of which this prospectus constitutes a part or the qualification of the
indenture under the Trust Indenture Act of 1939.
PROCEDURES FOR TENDERING
Only a registered holder of outstanding notes may tender outstanding notes
in the exchange offer. If you are a registered holder of outstanding notes, to
tender in the exchange offer, you must:
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal; have the signature on the letter of transmittal
guaranteed if the letter of transmittal so requires; and mail or deliver
the letter of transmittal or facsimile to the exchange agent prior to the
expiration date; or
- comply with The Depository Trust Company's Automated Tender Offer Program
procedures described below.
In addition, with respect to delivery of the outstanding notes, either:
- the exchange agent must receive the outstanding notes along with the
letter of transmittal; or
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- the exchange agent must receive confirmation of book-entry transfer of the
outstanding notes into the exchange agent's account at The Depository
Trust Company according to the procedure for book-entry transfer described
below or a properly transmitted agent's message; or
- you must comply with the guaranteed delivery procedures described below.
If you physically deliver the letter of transmittal and other required
documents, the exchange agent must receive them at the address set forth below
under "--Exchange Agent" prior to the expiration date.
If you tender your outstanding notes and do not withdraw your tender prior
to the expiration date, your tender will constitute an agreement between you and
us in accordance with the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal.
The method of delivery of outstanding notes, the letter of transmittal and
all other required documents to the exchange agent is at your election and risk.
Rather than mail these items, we recommend that you use an overnight or hand
delivery service. In all cases, you should allow sufficient time to assure
delivery to the exchange agent before the expiration date. You should not send
the letter of transmittal or outstanding notes to us. You may request your
broker, dealer, commercial bank, trust company or other nominee to effect the
above transactions for you.
If your outstanding notes are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and you wish to tender, you
should contact that party promptly and instruct it to tender on your behalf. If
your outstanding notes are registered in the name of a nominee and you wish to
tender on your own behalf, you must, prior to completing and executing the
letter of transmittal and delivering outstanding notes, either:
- make appropriate arrangements to register ownership of the outstanding
notes in your name; or
- obtain a properly completed bond power from the nominee. The bond power
must be signed by the nominee as its name appears on the outstanding
notes, and an eligible institution must guarantee the signature on the
bond power.
The transfer of registered ownership may take considerable time and may not
be completed prior to the expiration date.
Your signature on a letter of transmittal or a notice of withdrawal
described below must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or another eligible institution within the meaning of
Rule 17Ad-15 under the Exchange Act, unless you:
- are the registered owner of the outstanding notes, and you have not
completed the sections entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the letter of transmittal; or
- are an eligible institution.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, those persons should so indicate when signing. They must also submit
evidence satisfactory to us of their authority to deliver the letter of
transmittal.
The exchange agent and The Depository Trust Company have confirmed that any
financial institution that is a participant in The Depository Trust Company's
system may use The Depository Trust Company's Automated Tender Offer Program to
tender. If you are a participant in the program, you may, instead of physically
completing and signing the letter of transmittal and delivering it to the
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exchange agent, transmit your acceptance of the exchange offer electronically.
You may do so by causing The Depository Trust Company to transfer the
outstanding notes to the exchange agent in accordance with its procedures for
transfer. The Depository Trust Company will then send an agent's message to the
exchange agent. An agent's message is a message transmitted by The Depository
Trust Company, received by the exchange agent and forming part of the book-entry
confirmation, to the effect that:
- The Depository Trust Company has received an express acknowledgment from a
participant in its Automated Tender Offer Program that is tendering
outstanding notes that are the subject of the book-entry confirmation;
- the participant has received and agrees to be bound by the terms of the
letter of transmittal; alternatively, in the case of an agent's message
relating to guaranteed delivery, that the participant has received and
agrees to be bound by the applicable notice of guaranteed delivery; and
- the agreement may be enforced against the participant.
We will determine in our sole discretion all questions as to the validity,
form, eligibility, time of receipt, acceptance of tendered outstanding notes and
withdrawal of tendered outstanding notes. Our determination will be final and
binding. We reserve the absolute right to reject any outstanding notes not
properly tendered or any outstanding notes our acceptance of which would, in the
opinion of our counsel, be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular outstanding
notes. Our interpretation of the terms and conditions of the exchange offer,
including the instructions in the letter of transmittal, will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of outstanding notes must be cured within the time that
we shall determine. Although we intend to notify you of defects or
irregularities with respect to tenders of outstanding notes, neither we, the
exchange agent nor any other person will incur any liability for failure to give
that notification. Tenders of outstanding notes will not be deemed made until
the defects or irregularities have been cured or waived. Any outstanding notes
received by the exchange agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned by
the exchange agent without cost to the person that tendered, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date.
In all cases, we will issue exchange notes for outstanding notes that we
have accepted for exchange under the exchange offer only after the exchange
agent timely receives:
- outstanding notes or a timely book-entry confirmation of the outstanding
notes into the exchange agent's account at The Depository Trust Company;
and
- a properly completed and duly executed letter of transmittal and all other
required documents or a properly transmitted agent's message.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The letter of transmittal contains, among other things, the following terms
and conditions, which are part of the exchange offer.
The party tendering outstanding notes for exchange exchanges, assigns and
transfers the outstanding notes to us and irrevocably constitutes and appoints
the exchange agent as the transferor's agent and attorney-in-fact to cause the
outstanding notes to be assigned, transferred and exchanged. The transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the outstanding notes and to acquire exchange
notes issuable upon the exchange of the tendered outstanding notes, and that,
when the outstanding notes are accepted for exchange, we will
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acquire good and unencumbered title to the tendered outstanding notes, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim. The transferor also warrants that it will, upon request,
execute and deliver any additional documents deemed by the exchange agent or us
to be necessary or desirable to complete the exchange, assignment and transfer
of tendered outstanding notes or transfer ownership of the outstanding notes on
the account books maintained by a book-entry transfer facility. The transferor
further agrees that acceptance of any tendered outstanding notes by us and the
issuance of exchange notes in exchange for outstanding notes will constitute
performance in full by us and our subsidiaries guaranteeing the outstanding
notes of our obligations under the exchange and registration rights agreement
described above under "--Purpose and Effect of the Exchange Offer." All
authority conferred by the transferor will survive the death or incapacity of
the transferor and every obligation of the transferor shall be binding upon the
heirs, legal representatives, successors, assigns, executors and administrators
of the transferor.
By agreeing to be bound by the letter of transmittal, you will represent to
us that:
- any exchange notes that you receive will be acquired in the ordinary
course of your business;
- you have no arrangement or understanding with any person or entity to
participate in, and do not intend to engage in, a distribution of the
exchange notes;
- if you are a broker-dealer that will receive exchange notes for your own
account in exchange for outstanding notes that you have acquired as a
result of market-making or trading activities, that you will deliver a
prospectus, as required by law, in connection with any resale of those
exchange notes;
- you are not an affiliate, as defined in Rule 405 of the Securities Act, of
St. John Knits International or, if you are an affiliate, that you will
comply with applicable registration and prospectus delivery requirements
of the Securities Act; and
- if you are a person in the United Kingdom, that your ordinary activities
involve you in acquiring, holding, managing or disposing of investments,
as principal or agent, for the purposes of your business.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the outstanding notes at The Depository Trust Company for purposes of the
exchange offer promptly after the date of this prospectus. If you are a
financial institution participating in The Depository Trust Company's system,
you may make book-entry delivery of outstanding notes by causing The Depository
Trust Company to transfer the outstanding notes into the exchange agent's
account at The Depository Trust Company in accordance with The Depository Trust
Company's procedures for transfer. If you are unable to deliver confirmation of
the book-entry tender of your outstanding notes into the exchange agent's
account at The Depository Trust Company or other documents required by the
letter of transmittal to the exchange agent on or prior to the expiration date,
you must tender your outstanding notes according to the guaranteed delivery
procedures described below.
GUARANTEED DELIVERY PROCEDURES
If you wish to tender outstanding notes but your outstanding notes are not
immediately available or you cannot deliver your outstanding notes, the letter
of transmittal or any other required documents to the exchange agent or comply
with the applicable procedures under The Depository Trust Company's Automated
Tender Offer Program prior to the expiration date you may still tender your
outstanding notes in the exchange offer if:
- you make the tender through an eligible institution;
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- prior to the expiration date, the exchange agent receives from the
eligible institution either a properly completed and duly executed notice
of guaranteed delivery by facsimile transmission, mail or hand delivery or
a properly transmitted agent's message and notice of guaranteed delivery
setting forth your name and address, the registered number(s) of the
outstanding notes, if applicable, and the principal amount of outstanding
notes tendered, stating that the tender of the outstanding notes is being
made and guaranteeing that, within three New York Stock Exchange trading
days after the expiration date, the letter of transmittal or facsimile of
the letter of transmittal together with the outstanding notes or a
book-entry confirmation, and any other documents required by the letter of
transmittal, will be deposited by the eligible institution with the
exchange agent; and
- the exchange agent receives a properly completed and executed letter of
transmittal or facsimile of the letter of transmittal, as well as all
tendered outstanding notes in proper form for transfer or a book-entry
confirmation, and all other documents required by the letter of
transmittal, within three New York Stock Exchange trading days after the
expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to you.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw your
tender at any time prior to the expiration date.
For a withdrawal to be effective:
- the exchange agent must receive a written notice, including telegram,
telex, facsimile transmission or letter of withdrawal at one of the
addresses set forth below under "--Exchange Agent", or
- you must comply with the appropriate procedures of The Depository Trust
Company's Automated Tender Offer Program system.
A notice of withdrawal must:
- specify the name of the person who tendered the outstanding notes to be
withdrawn;
- identify the outstanding notes to be withdrawn, including the principal
amount of the outstanding notes; and
- where certificates for outstanding notes have been transmitted, specify
the name in which the outstanding notes were registered.
If certificates for outstanding notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of those
certificates, you must also submit:
- the serial numbers of the particular certificates to be withdrawn; and
- a signed notice of withdrawal with signatures guaranteed by an eligible
institution unless you are an eligible institution.
If you have tendered outstanding notes pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at The Depository Trust Company to be credited
with the withdrawn outstanding notes and otherwise comply with the procedures of
the facility. We will determine all questions as to the validity, form and
eligibility, including time of receipt of the notices of withdrawal, and our
determination shall be final and binding on all parties. We will deem any
outstanding notes properly withdrawn not to have been validity tendered for
exchange for purposes of the exchange offer. We will return any outstanding
notes that you have tendered for exchange but that are not exchanged for any
reason to you without cost as
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soon as practicable after withdrawal, rejection of tender or termination of the
exchange offer. In the case of outstanding notes being tendered by book-entry
transfer into the exchange agent's account at The Depository Trust Company
according to the procedures described above, these outstanding notes will be
credited to an account maintained with The Depository Trust Company for
outstanding notes as soon as practicable after withdrawal, rejection of tender
or termination of the exchange offer. Properly withdrawn outstanding notes may
be re-tendered at any time on or prior to the expiration date.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. You should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for the notice of guaranteed delivery to the exchange agent addressed
as follows:
<TABLE>
<S> <C>
FOR DELIVERY BY REGISTERED OR CERTIFIED MAIL: FOR OVERNIGHT DELIVERY ONLY OR BY HAND:
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street
New York, New York 10286 New York, New York 10286
Attn: Reorganization Unit Attn: Reorganization Unit
</TABLE>
BY FACSIMILE TRANSMISSION (FOR ELIGIBLE INSTITUTIONS ONLY):
The Bank of New York
(212) 815-6339
Attn: Reorganization Unit
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitation by
telegraph, telephone or in person by our officers and regular employees and
those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the exchange
offer. The expenses are estimated in the aggregate to be approximately $330,000.
They include:
- registration fees of the Securities and Exchange Commission;
- fees and expenses of the exchange agent and trustee;
- accounting and legal fees and printing costs; and
- related fees and expenses.
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes under the exchange offer. If you tender outstanding notes,
however, you will be required to pay any transfer taxes whether imposed on the
registered holder of the outstanding notes, or any other person if:
- certificates representing outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding notes tendered;
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- tendered outstanding notes are registered in the name of any person other
than the person signing the letter of transmittal; or
- a transfer tax is imposed for any reason other than the exchange of
outstanding notes under the exchange offer. If satisfactory evidence of
payment of the taxes is not submitted with the letter of transmittal, the
amount of the transfer taxes will be billed to the person tendering.
CONSEQUENCES OF FAILURE TO EXCHANGE
If you do not exchange outstanding notes, they may be more difficult to sell
because they will continue to be subject to transfer restrictions and may suffer
from reduced liquidity.
If you do not exchange your outstanding notes for exchange notes, your
outstanding notes will continue to be subject to restrictions on transfer. In
general, outstanding notes may not be offered or sold unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. We do
not currently anticipate that we will register the outstanding notes under the
Securities Act. In addition, the tender of outstanding notes in the exchange
offer will reduce the principal amount of the outstanding notes outstanding,
which may have an adverse effect upon, and increase the volatility of, the
market price of the outstanding notes due to a reduction in liquidity.
ACCOUNTING TREATMENT
We will record the exchange notes in our accounting records at the same
carrying value as the outstanding notes as reflected in our accounting records
on the date of exchange. Accordingly, we will not recognize any gain or loss for
accounting purposes in connection with the exchange offer. We will capitalize
the expenses of the exchange offer and amortize them over the life of the
related debt.
OTHER
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.
We may in the future seek to acquire untendered outstanding notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. We have no present plans to acquire any outstanding notes that are
not tendered in the exchange offer or to file a registration statement to permit
resales of any untendered outstanding notes.
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DESCRIPTION OF THE NOTES
The outstanding notes were issued and the exchange notes will be issued
under an indenture dated as of July 7, 1999 among St. John Knits International,
the guarantors and The Bank of New York, as trustee (the "Trustee"), a copy of
which has been filed as an exhibit to the registration statement of which this
prospectus is a part. Upon the issuance of the exchange notes, the indenture
will be subject to and governed by the Trust Indenture Act of 1939. The
following summary of certain provisions of the indenture and the notes does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Trust Indenture Act, and to all of the provisions of the
indenture, including the definitions of certain terms therein and those terms
made a part of the indenture by reference to the Trust Indenture Act, as in
effect on the date of the indenture. The definitions of certain capitalized
terms used in the following summary are set forth below under "--Certain
Definitions." References in this "Description of the Notes" section to "St. John
Knits International" mean only St. John Knits International and not any of its
Subsidiaries, and references to the notes refer to both the exchange notes and
the outstanding notes.
GENERAL
The outstanding notes were and the exchange notes will be issued only in
registered form, without coupons, in denominations of $1,000 and integral
multiples of $1,000. St. John Knits International will appoint the Trustee to
serve as registrar and paying agent under the indenture. No service charge will
be made for any registration of transfer or exchange of the notes, except for
any tax or other governmental charge that may be imposed in connection
therewith.
RANKING
The outstanding notes are and the exchange notes will be unsecured and will
rank junior to, and be subordinated in right of payment to, all existing and
future Senior Indebtedness of St. John Knits International, PARI PASSU in right
of payment with all Senior Subordinated Indebtedness of St. John Knits
International and senior in right of payment to all Subordinated Indebtedness of
St. John Knits International. At August 1, 1999, St. John Knits International
had approximately $190.0 million of Senior Indebtedness outstanding (exclusive
of undrawn commitments of $25.0 million). All debt incurred under the Credit
Facility will be Senior Indebtedness of St. John Knits International, is
guaranteed by each of the Guarantors on a senior basis and will be secured by
substantially all of the assets of St. John Knits International and such
Guarantors.
MATURITY, INTEREST AND PRINCIPAL OF THE NOTES
The notes will be limited to $100.0 million aggregate principal amount and
will mature on July 1, 2009. Cash interest on the notes will accrue at a rate of
12 1/2% per annum and will be payable semi-annually in arrears on each
January 1 and July 1 commencing January 1, 2000, to the holders of record of
notes at the close of business on December 15 and June 15, respectively,
immediately preceding such interest payment date. Cash interest will accrue from
the most recent interest payment date to which interest has been paid or, if no
interest has been paid, from July 7, 1999. Interest will be computed on the
basis of a 360-day year of twelve 30-day months.
OPTIONAL REDEMPTION
The notes will be redeemable at the option of St. John Knits International,
in whole or in part, at any time on or after July 1, 2004, at the redemption
prices (expressed as a percentage of principal amount) set forth below, plus
accrued and unpaid interest thereon, if any, to the redemption date (subject to
the right of Holders of record on the relevant record date to receive interest
due on the
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relevant interest payment date), if redeemed during the 12-month period
beginning on July 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2004........................................................ 106.250%
2005........................................................ 104.688%
2006........................................................ 103.125%
2007........................................................ 101.563%
2008 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time on or prior to July 1, 2002,
St. John Knits International may redeem in the aggregate up to 35% of the
originally issued aggregate principal amount of the notes with the net cash
proceeds of one or more Public Equity Offerings by St. John Knits International
at a redemption price in cash equal to 112.5% of the principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the date of redemption
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); PROVIDED, HOWEVER,
that at least 65% of the originally issued aggregate principal amount of the
notes must remain outstanding immediately after giving effect to each such
redemption (excluding any notes held by St. John Knits International or any of
its Affiliates). Notice of any such redemption must be given within 60 days
after the date of the closing of the relevant Public Equity Offering of St. John
Knits International.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the notes are to be redeemed at any time
pursuant to an optional redemption, selection of such notes for redemption will
be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the notes are listed or, if the
notes are not then listed on a national securities exchange, on a PRO RATA
basis, by lot or by such method as the Trustee shall deem fair and appropriate
(and in such manner as complies with applicable legal requirements); PROVIDED,
HOWEVER, that no notes of a principal amount of $1,000 or less shall be redeemed
in part; PROVIDED, FURTHER, HOWEVER, that if a partial redemption is made with
the net cash proceeds of a Public Equity Offering by St. John Knits
International, selection of the notes or portions thereof for redemption shall
be made by the Trustee only on a PRO RATA basis or on as nearly a PRO RATA basis
as is practicable (subject to the procedures of The Depository Trust Company),
unless such method is otherwise prohibited. Notice of redemption shall be mailed
by first-class mail at least 30 but not more than 60 days before the redemption
date to each Holder of notes to be redeemed at its registered address. If any
note is to be redeemed in part only, the notice of redemption that relates to
such note shall state the portion of the principal amount thereof to be
redeemed. A new note in a principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original note. On and after the redemption date, interest will cease to
accrue on notes or portions thereof called for redemption as long as St. John
Knits International has deposited with the paying agent for the notes funds in
satisfaction of the applicable redemption price pursuant to the indenture.
SUBORDINATION OF THE NOTES
The payment of the principal of, premium, if any, and interest on the notes
is subordinated in right of payment, to the extent and in the manner provided in
the indenture, to the prior payment in full in cash of all Senior Indebtedness.
Upon any payment or distribution of assets or securities of St. John Knits
International of any kind or character, whether in cash, property or securities
(excluding any payment or distribution of
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Permitted Junior Securities and excluding any payment from the trust described
under "--Satisfaction and Discharge of Indenture; Defeasance" (a "Defeasance
Trust Payment")), upon any dissolution or winding-up or liquidation or
reorganization of St. John Knits International or assignment for the benefit of
creditors of St. John Knits International or similar proceeding, whether
voluntary or involuntary or in bankruptcy, insolvency, receivership or other
proceedings, all Senior Indebtedness shall first be paid in full in cash before
the Holders of the notes or the Trustee on behalf of such Holders shall be
entitled to receive any payment by or on behalf of St. John Knits International
of the principal of, premium, if any, or interest on the notes, or any payment
by or on behalf of St. John Knits International to acquire any of the notes for
cash, property or securities, or any distribution by St. John Knits
International with respect to the notes of any cash, property or securities
(excluding any payment or distribution of Permitted Junior Securities and
excluding any Defeasance Trust Payment). Before any such payment or distribution
may be made by, or on behalf of, St. John Knits International in respect of the
principal of, premium, if any, or interest on the notes upon any such
dissolution or winding-up or liquidation or reorganization of St. John Knits
International or assignment for the benefit of creditors of St. John Knits
International or similar proceeding, whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings, any payment or
distribution of assets or securities of St. John Knits International of any kind
or character, whether in cash, property or securities (excluding any payment or
distribution of Permitted Junior Securities and excluding any Defeasance Trust
Payment), to which the Holders of the notes or the Trustee on their behalf would
be entitled, but for the subordination provisions of the indenture, shall be
made by St. John Knits International or by any receiver, trustee in bankruptcy,
liquidation trustee, agent or other Person making such payment or distribution,
directly to the holders of the Senior Indebtedness (PRO RATA to such holders on
the basis of the respective amounts of Senior Indebtedness held by such holders)
or their representatives or to the trustee or trustees or agent or agents under
any agreement or indenture pursuant to which any of such Senior Indebtedness may
have been issued, as their respective interests may appear, to the extent
necessary to pay all such Senior Indebtedness in full in cash after giving
effect to any prior or concurrent payment, distribution or provision therefor to
or for the holders of such Senior Indebtedness.
No direct or indirect payment of any kind or character (excluding any
payment or distribution of Permitted Junior Securities and excluding any
Defeasance Trust Payment) by or on behalf of St. John Knits International in
respect of principal of, premium, if any, or interest on the notes or to acquire
any of the notes, whether pursuant to the terms of the notes, upon acceleration,
pursuant to an Offer to Purchase or otherwise, will be made if, at the time of
such payment, there exists a default in the payment of all or any portion of the
obligations in respect of any Designated Senior Indebtedness, whether at
maturity, on account of mandatory redemption or prepayment, acceleration or
otherwise, and such default shall not have been cured or waived or the benefits
of this sentence waived by or on behalf of the requisite number of holders of
such Designated Senior Indebtedness. In addition, if any non-payment event of
default occurs with respect to any Designated Senior Indebtedness pursuant to
which the maturity thereof may be immediately accelerated, then upon and after
receipt by the Trustee of written notice (a "Payment Blockage Notice") from the
holder or holders of such Designated Senior Indebtedness or the trustee or agent
acting on behalf of the holders of such Designated Senior Indebtedness, unless
and until all such events of default have been cured or waived or have ceased to
exist or such Designated Senior Indebtedness has been discharged or repaid in
full in cash or the benefits of these provisions have been waived by the
requisite number of holders of such Designated Senior Indebtedness, no direct or
indirect payment of any kind or character (excluding any payment or distribution
of Permitted Junior Securities and excluding any Defeasance Trust Payment) will
be made by or on behalf of St. John Knits International in respect of principal
of, premium, if any, or interest on the notes or to acquire any of the notes,
upon acceleration, pursuant to an Offer to Purchase or otherwise to such
Holders, during a period (a "Payment Blockage Period") commencing on the date of
receipt of such Payment Blockage Notice by the Trustee and ending 179 days
thereafter.
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Notwithstanding anything in the subordination provisions of the indenture or the
notes to the contrary, (x) in no event will a Payment Blockage Period extend
beyond 179 days from the date the Payment Blockage Notice in respect thereof was
given, (y) there shall be a period of at least 181 consecutive days in each
360-day period when no Payment Blockage Period is in effect and (z) not more
than one Payment Blockage Period may be commenced with respect to the notes
during any period of 360 consecutive days. No event of default that existed or
was continuing on the date of commencement of any Payment Blockage Period with
respect to the Designated Senior Indebtedness initiating such Payment Blockage
Period (to the extent the holder of Designated Senior Indebtedness, or trustee
or agent, giving notice commencing such Payment Blockage Period had knowledge of
such existing or continuing event of default) may be, or be made, the basis for
the commencement of any other Payment Blockage Period by the holder or holders
of such Designated Senior Indebtedness or the trustee or agent acting on behalf
of such Designated Senior Indebtedness, whether or not within a period of 360
consecutive days, unless such event of default has been cured or waived for a
period of not less than 90 consecutive days (it being understood that a
subsequent act or event that constitutes a breach of a covenant or other
provision, including breach of a financial covenant with respect to a subsequent
period, shall be considered a separate event of default from a previous act or
event that constitutes a breach of the same covenant or other provision for this
purpose).
If any payment or distribution is made to the Trustee or any of the Holders
that should not have been made in accordance with the foregoing subordination
provisions, such payment or distribution shall be held in trust for, and paid or
delivered to, the holders of Senior Indebtedness or their representatives or to
the trustee or trustees or agent or agents therefor, as their respective
interests may appear.
The failure to make any payment or distribution for or on account of the
notes by reason of the provisions of the indenture described under this
"--Subordination of the Notes" heading will not be construed as preventing the
occurrence of any Event of Default in respect of the notes. See "--Events of
Default" below.
By reason of the subordination provisions described above, in the event of
insolvency of St. John Knits International, funds which would otherwise be
payable to Holders of the notes will be paid to the holders of Senior
Indebtedness to the extent necessary to pay the Senior Indebtedness in full in
cash, and St. John Knits International may be unable to meet fully its
obligations with respect to the notes.
At the time of the issuance of the exchange notes, the Credit Facility is
expected to be the only outstanding Senior Indebtedness. Subject to the
restrictions set forth in the indenture, in the future St. John Knits
International may issue additional Senior Indebtedness.
GUARANTEES OF THE NOTES
The indenture provides that each of the Guarantors will unconditionally
guarantee on a joint and several basis (the "Guarantees") all of St. John Knits
International's obligations under the notes, including its obligations to pay
principal, premium, if any, and interest with respect to the notes. The
Guarantees will be general unsecured obligations of the Guarantors. The
obligations of each Guarantor under its Guarantee will be subordinated and
junior in right of payment to the prior payment in full of all existing and
future Guarantor Senior Indebtedness of such Guarantor to substantially the same
extent as the notes are subordinated to all existing and future Senior
Indebtedness of St. John Knits International. Payments and distributions under
or in respect of the Guarantees will not be permitted when payment and
distributions by St. John Knits International under the notes are not permitted
by reason of the subordination provisions described above. The Guarantors will
also be guaranteeing all obligations of St. John Knits International under the
Credit Facility, and each Guarantor will be granting a security interest in all
or substantially all of its assets to secure the obligations under the Credit
Facility. The obligations of each Guarantor are limited to the maximum amount
which, after
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giving effect to all other contingent and fixed liabilities of such Guarantor
(including any Guarantor Senior Indebtedness Incurred after the Issue Date) and
after giving effect to any collections from or payments made by or on behalf of
any other Guarantor in respect of the obligations of such other Guarantor under
its Guarantee or pursuant to its contribution obligations under the indenture,
will result in the obligations of such Guarantor under its Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under Federal or
state law. Each Guarantor that makes a payment or distribution under a Guarantee
shall be entitled to a contribution from each other Guarantor in a PRO RATA
amount, based on the net assets of each Guarantor determined in accordance with
GAAP.
At August 1, 1999, outstanding Guarantor Senior Indebtedness was
approximately $190.0 million, all of which was outstanding under the Credit
Facility; and the Guarantors had no Guarantor Senior Subordinated Indebtedness
other than the Guarantees.
St. John Knits International shall cause each Domestic Restricted Subsidiary
issuing a Guarantee after the Issue Date to execute and deliver to the Trustee a
supplemental indenture in form reasonably satisfactory to the Trustee pursuant
to which such Domestic Restricted Subsidiary shall become a party to the
indenture and thereby unconditionally guarantee all of St. John Knits
International's Obligations under the notes and the indenture on the terms set
forth therein. Thereafter, such Domestic Restricted Subsidiary shall (unless
released in accordance with the terms of this indenture) be a Guarantor for all
purposes of the indenture.
The indenture provides that if the notes thereunder are defeased in
accordance with the terms of the indenture, or if all or substantially all of
the assets of any Guarantor or all of the Equity Interests of any Guarantor are
sold (including by consolidation, merger, issuance or otherwise) by St. John
Knits International (or pursuant to an exercise of remedies, or transfer in lieu
thereof, on behalf of any holder or holders of a Lien securing Senior
Indebtedness), and if (x) the Net Cash Proceeds from such Asset Sale are used in
accordance with the covenant described under "--Certain Covenants--Disposition
of Proceeds of Asset Sales" or (y) St. John Knits International delivers to the
Trustee an officers' certificate to the effect that the Net Cash Proceeds from
such Asset Sale shall be used in accordance with the covenant described under
"--Certain Covenants--Disposition of Proceeds of Asset Sales" and within the
time limits specified by such covenant, then such Guarantor (in the event of a
sale or other disposition of all of the Equity Interests of such Guarantor) or
the corporation acquiring such assets (in the event of a sale or other
disposition of all or substantially all of the assets of such Guarantor) shall
be released and discharged of its Guarantee obligations in respect of the
indenture and the notes PROVIDED, HOWEVER, that a sale of a Guarantor (other
than by way of a sale or disposition pursuant to an exercise of remedies, or
transfer in lieu thereof, on behalf of any holder or holders of a Lien securing
Senior Indebtedness) will still be subject to St. John Knits International's
obligations under the first paragraph under "--Certain Covenants--Merger, Sale
of Assets, etc.".
Any Guarantor that is designated an Unrestricted Subsidiary pursuant to and
in accordance with "--Certain Covenants--Designation of Unrestricted
Subsidiaries" below shall upon such Designation be released and discharged of
its Guarantee obligations in respect of the indenture and the notes and any
Unrestricted Subsidiary whose Designation is revoked pursuant to "--Certain
Covenants--Designation of Unrestricted Subsidiaries" below will be required to
become a Guarantor in accordance with the procedure described in the third
preceding paragraph.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Following the occurrence of a Change of Control (the date of such occurrence
being the "Change of Control Date"), St. John Knits International shall notify
the Holders of the notes of such occurrence in the manner prescribed by the
indenture and shall, within 45 days after the Change of Control Date, make an
Offer to Purchase all notes then outstanding at a purchase price in cash equal
to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the Purchase
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Date (subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date).
St. John Knits International will not be required to make an Offer to
Purchase upon a Change of Control if a third party makes the Offer to Purchase
in the manner, at the times and otherwise in compliance with the requirements
set forth in the indenture applicable to an Offer to Purchase made by St. John
Knits International and purchases all notes validly tendered and not withdrawn
under such Offer to Purchase.
St. John Knits International's ability to repurchase notes pursuant to an
Offer to Purchase may be limited by a number of factors. The occurrence of
certain of the events that constitute a Change of Control could constitute a
default under the Credit Facility. In addition, certain events that may
constitute a change of control under the Credit Facility and cause a default may
not constitute a Change of Control under the indenture. Future Indebtedness of
St. John Knits International and its Subsidiaries may also contain prohibitions
of certain events that would constitute a Change of Control or require such
Indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the Holders of their right to require St. John Knits International to
repurchase the notes could cause a default under such Indebtedness, even if the
Change of Control itself does not, due to the financial effect of such
repurchase on St. John Knits International. Finally, St. John Knits
International's ability to pay cash to the Holders upon a repurchase may be
limited by St. John Knits International's then existing financial resources.
There can be no assurance that sufficient funds will be available when necessary
to make any required repurchases.
Even if sufficient funds were otherwise available, the terms of the Credit
Facility will (and other Indebtedness may) prohibit St. John Knits
International's repurchase of notes. Consequently, if St. John Knits
International is not able to prepay the Credit Facility and any such other
Indebtedness containing similar restrictions or obtain requisite consents, St.
John Knits International will be unable to fulfill its repurchase obligations if
Holders of notes exercise their repurchase rights following a Change of Control,
thereby resulting in a default under the indenture. A default under the
indenture may result in a cross-default under the Credit Facility. In the event
of a default under the Credit Facility, the subordination provisions of the
indenture would likely restrict payments to the Holders of the notes.
If a Change of Control occurs which also constitutes an event of default
under the Credit Facility, the lenders under the Credit Facility would be
entitled to exercise the remedies available to a secured lender under applicable
law and pursuant to the terms of the Credit Facility. Accordingly, any claims of
such lenders with respect to the assets of St. John Knits International will be
prior to any claim of the Holders of the notes to the extent of the value of
such assets.
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving St. John Knits International
by increasing the capital required to effectuate such transactions. The
definition of "Change of Control" includes a disposition of all or substantially
all of the property and assets of St. John Knits International and its
Subsidiaries taken as a whole to any Person other than St. John Knits
International or any Wholly Owned Restricted Subsidiary. Although there is a
limited body of case law interpreting the phrase "substantially all," there is
no precise established definition of the phrase under applicable law.
Accordingly, in certain circumstances there may be a degree of uncertainty as to
whether a particular transaction would involve a disposition of "all or
substantially all" of the property or assets of a Person. As a result, it may be
unclear as to whether a Change of Control has occurred and whether a Holder of
notes may require St. John Knits International to make an offer to repurchase
the notes as described above.
If St. John Knits International makes an Offer to Purchase, St. John Knits
International shall comply with all applicable securities laws and regulations,
and any violation of the provisions of the indenture relating to such Offer to
Purchase occurring as a result of such compliance shall not be
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deemed an Event of Default or an event that, with the passing of time or giving
of notice, or both, would constitute an Event of Default.
Except as described above with respect to a Change of Control, the indenture
does not contain provisions that permit the Holders of the notes to require that
St. John Knits International repurchase or redeem the notes in the event of a
takeover, recapitalization or similar transaction.
CERTAIN COVENANTS
LIMITATION ON INDEBTEDNESS. St. John Knits International shall not, and
shall not cause or permit any Restricted Subsidiary to, directly or indirectly,
Incur any Indebtedness (including Acquired Indebtedness), except for Permitted
Indebtedness; PROVIDED, HOWEVER, that St. John Knits International and any
Restricted Subsidiary may Incur Indebtedness if, at the time of and immediately
after giving pro forma effect to such Incurrence of Indebtedness and the
application of the proceeds therefrom, the Consolidated Coverage Ratio would be
at least 2.0 to 1.0 prior to the second anniversary of the Issue Date; 2.25 to
1.0 on or after the second anniversary of the Issue Date but prior to the fourth
anniversary of the Issue Date; and 2.5 to 1.0 on or after the fourth anniversary
of the Issue Date.
The foregoing limitations will not apply to the Incurrence by St. John Knits
International or any Restricted Subsidiary of any of the following
(collectively, "Permitted Indebtedness"), each of which shall be given
independent effect:
(a) Indebtedness under the notes and other Indebtedness outstanding on
the Issue Date;
(b) Indebtedness of St. John Knits International and any Guarantor
Incurred pursuant to the Credit Facility if at the time of and immediately
after giving effect thereto, the aggregate consolidated Indebtedness
Incurred under the Credit Facility would not exceed $215.0 million at any
one time outstanding; PROVIDED, HOWEVER, that such $215.0 million shall be
reduced by the sum of (i) the amount of any repayments or prepayments of
Indebtedness (that are accompanied by a corresponding permanent commitment
reduction) under the Credit Facility and (ii) the outstanding principal
amount of Indebtedness and preferred stock of a Receivables Entity
(excluding the net proceeds of such Indebtedness and preferred stock that
are applied to the repayment or prepayment of Indebtedness described in
clause (i));
(c) Indebtedness of any Guarantor owed to and held by St. John Knits
International or any Guarantor and other Indebtedness of St. John Knits
International owed to and held by any Guarantor which is unsecured and
subordinated in right of payment to the payment and performance of St. John
Knits International's obligations under any Senior Indebtedness, the
indenture and the notes and Indebtedness of a Foreign Restricted Subsidiary
that is not a Guarantor owed to and held by any other Foreign Restricted
Subsidiary that is not a Guarantor; PROVIDED, HOWEVER, that an Incurrence of
Indebtedness that is not permitted by this clause (c) shall be deemed to
have occurred upon (i) any sale or other disposition of any Indebtedness of
St. John Knits International or any Restricted Subsidiary referred to in
this clause (c) to a Person (other than St. John Knits International or a
Guarantor), (ii) any sale or other disposition of Equity Interests of any
Guarantor which holds Indebtedness of St. John Knits International or
another Restricted Subsidiary such that such Guarantor ceases to be a
Guarantor and (iii) the designation of a Restricted Subsidiary that is a
Guarantor and which holds Indebtedness of St. John Knits International or
any other Restricted Subsidiary as an Unrestricted Subsidiary;
(d) the Guarantees and guarantees by any Guarantor of Indebtedness of
St. John Knits International; PROVIDED, HOWEVER, that if such guarantee is
of Subordinated Indebtedness, then the Guarantee of such Guarantor shall be
senior to such Guarantor's guarantee of Subordinated Indebtedness;
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(e) Hedging Obligations of St. John Knits International or any
Restricted Subsidiary entered into in the ordinary course of business and
not for speculative purposes;
(f) Purchase Money Indebtedness (and refinancings thereof) and
Capitalized Lease Obligations (and refinancings thereof) which do not exceed
$7.0 million in the aggregate at any one time outstanding;
(g) Indebtedness to the extent representing a replacement, renewal,
refinancing or extension (collectively, a "refinancing") of outstanding
Indebtedness Incurred in compliance with the Consolidated Coverage Ratio of
the first paragraph of this covenant or clause (a) of this paragraph of this
covenant; PROVIDED, HOWEVER, that (i) any such refinancing shall not exceed
the sum of the principal amount (or accreted amount (determined in
accordance with GAAP), if less) of the Indebtedness being refinanced, plus
the amount of accrued interest thereon, plus the amount of any reasonably
determined prepayment premium necessary to accomplish such refinancing and
such reasonable fees and expenses incurred in connection therewith,
(ii) Indebtedness representing a refinancing of Indebtedness other than
Senior Indebtedness shall have a Weighted Average Life to Maturity equal to
or greater than the Weighted Average Life to Maturity of the Indebtedness
being refinanced, (iii) Indebtedness that is PARI PASSU with the notes may
only be refinanced with Indebtedness that is made PARI PASSU with or
subordinate in right of payment to the notes and Subordinated Indebtedness
may only be refinanced with Subordinated Indebtedness, (iv) no Restricted
Subsidiary that is not a Guarantor may Incur Indebtedness to refinance
Indebtedness of St. John Knits International or any Guarantor and
(v) Indebtedness of St. John Knits International may only be refinanced by
Indebtedness of St. John Knits International and Indebtedness of a
Restricted Subsidiary may only be refinanced by Indebtedness of such
Restricted Subsidiary or by St. John Knits International;
(h) Indebtedness incurred in respect of workers' compensation claims,
self-insurance obligations, performance, surety and similar bonds and
completion guarantees provided by St. John Knits International or a
Restricted Subsidiary in the ordinary course of business;
(i) Indebtedness arising from agreements of St. John Knits International
or a Restricted Subsidiary providing for indemnification, adjustment of
purchase price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or Equity Interests
of a Restricted Subsidiary, PROVIDED that the maximum aggregate liability in
respect of all such Indebtedness shall at no time exceed the gross proceeds
actually received by St. John Knits International and its Restricted
Subsidiaries in connection with such disposition;
(j) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument (except in the case of
daylight overdrafts) drawn against insufficient funds in the ordinary course
of business, PROVIDED, HOWEVER, that such Indebtedness is extinguished
within five business days of Incurrence;
(k) Indebtedness representing deferred compensation to employees of St.
John Knits International and its Subsidiaries in an aggregate amount not to
exceed $1.0 million at any one time outstanding;
(l) Indebtedness of Foreign Restricted Subsidiaries which are not
Guarantors in an aggregate amount not to exceed $7.5 million at any one time
outstanding;
(m) Indebtedness of Foreign Restricted Subsidiaries which are not
Guarantors owed to and held by St. John Knits International or any Guarantor
in an aggregate amount not to exceed $12.5 million at any one time
outstanding;
(n) Indebtedness of a Receivables Entity that is non-recourse to St.
John Knits International or any other Restricted Subsidiary of St. John
Knits International Incurred in connection with a
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Qualified Receivables Transaction, PROVIDED that the proceeds of such
Indebtedness are used to reduce Indebtedness under the Credit Facility; and
(o) in addition to the items referred to in clauses (a) through
(n) above, Indebtedness of St. John Knits International (including any
Indebtedness under the Credit Facility that utilizes this subparagraph (o))
having an aggregate principal amount not to exceed $10.0 million at any one
time outstanding.
For purposes of determining compliance with, and the outstanding principal
amount of any particular Indebtedness incurred pursuant to and in compliance
with, this covenant:
(1) in the event that Indebtedness meets the criteria of more than one
of the types of Indebtedness described in the first and second paragraphs of
this covenant, St. John Knits International, in its sole discretion, will
classify such item of Indebtedness on the date of Incurrence and only be
required to include the amount and type of such Indebtedness in one of such
clauses; and
(2) the amount of Indebtedness issued at a price that is less than the
principal amount thereof will be equal to the amount of the liability in
respect thereof determined in accordance with GAAP.
Accrual of interest, accrual of dividends, the accretion of accreted value,
the payment of interest in the form of additional Indebtedness and the payment
of dividends in the form of additional shares of preferred stock will not be
deemed to be an Incurrence of Indebtedness for purposes of this covenant
PROVIDED, in each such case, that the amount thereof is included in the
Consolidated Fixed Charges of such Person.
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS. St. John Knits
International shall not, directly or indirectly, Incur any Indebtedness that by
its terms would expressly rank senior in right of payment to the notes and
subordinate in right of payment to any other Indebtedness of St. John Knits
International.
St. John Knits International shall not permit any Guarantor to, and no
Guarantor shall, directly or indirectly, Incur any Indebtedness that by its
terms would expressly rank senior in right of payment to the Guarantee of such
Guarantor and subordinate in right of payment to any other Indebtedness of such
Guarantor.
LIMITATION ON RESTRICTED PAYMENTS. St. John Knits International shall not,
and shall not cause or permit any Restricted Subsidiary to, directly or
indirectly,
(i) declare or pay any dividend or any other distribution on any Equity
Interests of St. John Knits International or any Restricted Subsidiary or
make any payment or distribution to the direct or indirect holders (in their
capacities as such) of Equity Interests of St. John Knits International or
any Restricted Subsidiary (other than any dividends, distributions and
payments made to St. John Knits International or any Restricted Subsidiary
and dividends or distributions payable to any Person solely in Qualified
Equity Interests of St. John Knits International or any Restricted
Subsidiary or in options, warrants or other rights to purchase Qualified
Equity Interests of St. John Knits International or any Restricted
Subsidiary);
(ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of St. John Knits International or any Restricted
Subsidiary (other than any such Equity Interests owned by St. John Knits
International or any Restricted Subsidiary);
(iii) purchase, redeem, defease or retire for value, or make any
principal payment on, prior to any scheduled maturity, scheduled repayment
or scheduled sinking fund payment, any
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Subordinated Indebtedness (other than any Subordinated Indebtedness held by
St. John Knits International); or
(iv) make any Investment in any Person (other than Permitted
Investments)
(any such payment or any other action (other than any exception thereto)
described in (i), (ii), (iii) or (iv) each, a "Restricted Payment"), unless
(a) no Default or Event of Default shall have occurred and be continuing
at the time or immediately after giving effect to such Restricted Payment;
(b) immediately after giving effect to such Restricted Payment, St. John
Knits International would be able to Incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) under the Consolidated Coverage Ratio of
the first paragraph of "--Limitation on Indebtedness" above; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after the
Issue Date does not exceed an amount equal to the sum of (1) 50% of
cumulative Consolidated Net Income determined for the period (taken as one
period) from the Issue Date and ending on the last day of the most recent
fiscal quarter immediately preceding the date of such Restricted Payment for
which consolidated financial information of St. John Knits International is
available (or if such cumulative Consolidated Net Income shall be a loss,
minus 100% of such loss), PLUS (2) the aggregate net cash proceeds received
by St. John Knits International either (x) as capital contributions to St.
John Knits International after the Issue Date or (y) from the issue and sale
(other than to a Restricted Subsidiary) of its Qualified Equity Interests
after the Issue Date (excluding the net proceeds from any issuance and sale
of Qualified Equity Interests financed, directly or indirectly, using funds
borrowed from St. John Knits International or any Restricted Subsidiary
until and to the extent such borrowing is repaid), PLUS (3) the principal
amount (or accreted amount (determined in accordance with GAAP), if less) of
any Indebtedness of St. John Knits International or any Restricted
Subsidiary Incurred after the Issue Date which has been converted into or
exchanged for Qualified Equity Interests of St. John Knits International,
PLUS(4) without duplication of any amounts included in clause (1) above, in
the case of the disposition or repayment of, or the receipt by St. John
Knits International or any Restricted Subsidiary of any dividends or
distributions from, any Investment constituting a Restricted Payment made
after the Issue Date (including by way of a Revocation), an amount equal, in
the aggregate, to the lesser of the amount of such Investment, other than
pursuant to a Revocation, in which case such amount will be the lesser of
the Fair Market Value of such Investment at the date of Revocation, and the
amount received by St. John Knits International or any Restricted Subsidiary
upon such disposition, repayment, dividend or distribution or Revocation.
The foregoing provisions will not prevent:
(i) the payment of any dividend or distribution on, or redemption of,
Equity Interests within 60 days after the date of declaration of such
dividend or distribution or the giving of formal notice of such redemption,
if at the date of such declaration or giving of such formal notice such
payment or redemption would comply with the provisions of the indenture
PROVIDED, HOWEVER, that the payment of the $0.025 per share dividend on St.
John common stock declared on June 8, 1999 and payable on July 22, 1999
shall not constitute a Restricted Payment;
(ii) the purchase, redemption, retirement or other acquisition of any
Equity Interests of St. John Knits International in exchange for, or out of
the net cash proceeds of the substantially concurrent issue and sale (other
than to a Restricted Subsidiary) of, Qualified Equity Interests of St. John
Knits International; PROVIDED, HOWEVER, that any such net cash proceeds and
the value of any Qualified Equity Interests issued in exchange for such
retired Equity Interests are excluded
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from clause (c)(2) of the preceding paragraph (and were not included therein
at any time) and are not used to redeem the notes pursuant to "--Optional
Redemption" above;
(iii) the purchase, redemption, retirement, defeasance or other
acquisition of Subordinated Indebtedness, or any other payment thereon, made
in exchange for, or out of the net cash proceeds of a substantially
concurrent issue and sale (other than to a Restricted Subsidiary) of,
(x) Qualified Equity Interests of St. John Knits International; PROVIDED,
HOWEVER, that any such net cash proceeds and the value of any Qualified
Equity Interests issued in exchange for Subordinated Indebtedness are
excluded from clauses (c)(2) and (c)(3) of the preceding paragraph (and were
not included therein at any time) and are not used to redeem the notes
pursuant to "--Optional Redemption" above or (y) Subordinated Indebtedness
permitted to be Incurred pursuant to clause (g) of the second paragraph
under "--Limitation on Indebtedness";
(iv) the making of loans or advances to officers, employees and
directors of St. John Knits International or any Restricted Subsidiary
entered into in the ordinary course of business or to fund purchases by such
employees from St. John Knits International of Equity Interests of St. John
Knits International, in an amount not to exceed $5.0 million at any one time
outstanding;
(v) the repurchase, redemption, defeasance, retirement, refinancing or
acquisition for value or payment of principal of Subordinated Indebtedness
at a purchase price not greater than 101% of the principal amount of such
Subordinated Indebtedness in the event of a Change of Control pursuant to a
provision similar to the "--Offer to Purchase upon Change of Control"
provisions above; PROVIDED, HOWEVER, that prior to any such repurchase, St.
John Knits International has made an Offer to Purchase as provided in
"--Offer to Purchase upon Change of Control" above with respect to the notes
and has repurchased all notes validly tendered for payment in connection
with such Offer to Purchase;
(vi) the purchase, redemption or other acquisition, cancellation or
retirement for value of Equity Interests of St. John Knits International or
any Restricted Subsidiary of St. John Knits International or any parent of
St. John Knits International held by any existing or former employees or
management of St. John Knits International or any Restricted Subsidiary of
St. John Knits International (other than Robert Gray, Marie Gray and Kelly
Gray) or their assigns, estates or heirs, in each case in connection with
the repurchase provisions under employee stock option or stock purchase
agreements or other agreements to compensate management employees; PROVIDED
that such redemptions or repurchases pursuant to this clause will not exceed
$500,000 in the aggregate during any calendar year; provided, further, that
any amounts not used for redemptions or repurchases pursuant to this
clause (vi) may be used in any subsequent calendar year;
(vii) repurchases of Equity Interests deemed to occur upon the exercise
of stock options if such Equity Interests represent a portion of the
exercise price thereof;
(viii) the defeasance, redemption or repurchase of any Disqualified
Equity Interest of St. John Knits International or any Restricted Subsidiary
in exchange for, or out of the net cash proceeds of, a substantially
concurrent issue and sale (other than to St. John Knits International or a
Subsidiary of St. John Knits International) of Disqualified Equity Interests
of St. John Knits International or such Restricted Subsidiary, respectively;
PROVIDED that: (A) the aggregate liquidation preference of such Disqualified
Equity Interest does not exceed the aggregate liquidation preference of the
Disqualified Equity Interest so extended, refinanced, renewed, replaced,
defeased or refunded (plus the amount of reasonable expenses incurred in
connection therewith); (B) such Disqualified Equity Interest has a final
maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life
to Maturity of the notes; and (C) such Disqualified Equity Interest is
incurred either by St. John Knits International or by the Restricted
Subsidiary who is the obligor
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on the Disqualified Equity Interest being extended, refinanced, renewed,
replaced, defeased or refunded;
(ix) the defeasance, redemption or repurchase of any Preferred Equity
Interest or Disqualified Equity Interest issued in connection with the
acquisition of assets or a Permitted Business, PROVIDED, that the aggregate
amount of such defeasance, redemption or repurchase payments shall not
exceed at any time $5.0 million;
(x) the payment of any dividend by a Restricted Subsidiary to the
holders of its common Equity Interests on a pro rata basis;
(xi) the purchase by St. John Knits International of Gray Common Stock
pursuant to the terms of the Stockholders' Agreement in an amount not to
exceed $5.0 million, PROVIDED HOWEVER, that such amounts do not exceed
$2.5 million for the first twelve month period following the Issue Date;
(xii) cash payments to Robert Gray, Marie Gray or Kelly A. Gray on
Preferred Equity Interests of St. John Knits International that are
Qualified Equity Interests in an amount not to exceed $250,000 for each
fiscal year;
(xiii) Restricted Payments in an amount not to exceed $10.0 million;
(xiv) Restricted Payments made on the Issue Date in connection with the
transactions; and
(xv) the redemption of up to $5.0 million of Preferred Stock (which
$5.0 million amount may include the amount of any accrued but unpaid
dividends) after the first anniversary of the Issue Date;
PROVIDED the Consolidated Coverage Ratio, pro forma for such transaction, for
the two most recently completed fiscal quarters of St. John Knits International,
is at least 2.25 to 1.0; and PROVIDED, FURTHER, that St. John Knits
International and its Restricted Subsidiaries may only redeem Preferred Stock
pursuant to this clause (xv) once; PROVIDED, HOWEVER, that in the case of each
of clauses (v), (vi), (ix), (x) and (xv) no Default or Event of Default shall
have occurred and be continuing or would arise therefrom.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (iv), (vi), (ix), (xi), (xii),
(xiii) and (xv) of the immediately preceding paragraph shall be included as
Restricted Payments. Amounts paid pursuant to clause (i) of the immediately
preceeding paragraph shall be included, when paid, as Restricted Payments only
to the extent not already included as Restricted Payments upon declaration.
Amounts expended pursuant to all other clauses of the immediately preceding
paragraph shall not be included as Restricted Payments. The amount of any
non-cash Restricted Payment shall be deemed to be equal to the Fair Market Value
thereof at the date of the making of such Restricted Payment.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. St. John Knits International shall not, and shall not cause or
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions to St. John Knits International or any other Restricted Subsidiary
on its Equity Interests or with respect to any other interest or participation
in, or measured by, its profits, or pay any Indebtedness owed to St. John Knits
International or any other Restricted Subsidiary, (b) make loans or advances to,
or guarantee any Indebtedness or other obligations of, or make any Investment
in, St. John Knits International or any other Restricted Subsidiary or
(c) transfer any of its properties or
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assets to St. John Knits International or any other Restricted Subsidiary,
except for such encumbrances or restrictions existing under or by reason of:
(i) the Credit Facility, or any other agreement of St. John Knits
International or the Restricted Subsidiaries outstanding on the Issue Date,
in each case as in effect on the Issue Date, and any amendments,
restatements, renewals, replacements or refinancings thereof; PROVIDED,
HOWEVER, that any such amendment, restatement, renewal, replacement or
refinancing is no more restrictive in the aggregate with respect to such
encumbrances or restrictions than those contained in the agreement being
amended, restated, reviewed, replaced or refinanced;
(ii) applicable law;
(iii) any instrument governing Indebtedness or Equity Interests of an
Acquired Person acquired by St. John Knits International or any Restricted
Subsidiary as in effect at the time of such acquisition (except to the
extent such Indebtedness was Incurred by such Acquired Person in connection
with, as a result of or in contemplation of such acquisition); PROVIDED,
HOWEVER, that such encumbrances and restrictions are not applicable to St.
John Knits International or any Restricted Subsidiary, or the properties or
assets of St. John Knits International or any Restricted Subsidiary, other
than the Acquired Person;
(iv) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(v) Purchase Money Indebtedness for property acquired in the ordinary
course of business that only imposes encumbrances and restrictions on the
property so acquired;
(vi) any agreement for the sale or disposition of the Equity Interests
or assets of any Restricted Subsidiary; PROVIDED, HOWEVER, that such
encumbrances and restrictions described in this clause (vi) are only
applicable to such Restricted Subsidiary or assets, as applicable, and any
such sale or disposition is made in compliance with "--Disposition of
Proceeds of Asset Sales" below to the extent applicable thereto;
(vii) refinancing Indebtedness permitted under clause (g) of the second
paragraph of "--Limitation on Indebtedness" above; PROVIDED, HOWEVER, that
such encumbrances and restrictions contained in the agreements governing
such Indebtedness are no more restrictive in the aggregate than those
contained in the agreements governing the Indebtedness being refinanced
immediately prior to such refinancing;
(viii) the indenture;
(ix) mortgages, pledges or other security agreements permitted under the
indenture securing Indebtedness of St. John Knits International or a
Restricted Subsidiary to the extent such encumbrances or restrictions
restrict the transfer of the property subject to such mortgages, pledges or
other security agreements;
(x) Liens securing Indebtedness otherwise permitted to be Incurred
pursuant to the provisions of the covenant described below under the caption
"--Limitation on Liens" that limit the right of St. John Knits International
or any Restricted Subsidiary to dispose of the assets subject to such Liens;
(xi) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business;
(xii) any other security agreement, instrument or document relating to
Senior Indebtedness hereafter in effect, PROVIDED that such encumbrances or
restrictions are customary in connection with such documents and that the
terms and conditions of such encumbrances or restrictions are
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no more restrictive than those encumbrances or restrictions imposed in
connection with the Credit Facility as in effect on the Issue Date;
(xiii) any agreement relating to a sale and leaseback transaction or
capital lease, but only on the property subject to such transaction or lease
and only to the extent that such restrictions or encumbrances are customary
with respect to a sale and leaseback transaction or capital lease;
(xiv) Indebtedness Incurred by Foreign Restricted Subsidiaries; or
(xv) customary restrictions imposed on the payment of dividends by a
Receivables Entity in connection with a Qualified Receivables Transaction.
DESIGNATION OF UNRESTRICTED SUBSIDIARIES. St. John Knits International may
designate after the Issue Date any Subsidiary of St. John Knits International as
an "Unrestricted Subsidiary" under the indenture (a "Designation") only if:
(i) no Default or Event of Default shall have occurred and be continuing
at the time of or after giving effect to such Designation;
(ii) at the time of and after giving effect to such Designation, St.
John Knits International could Incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the Consolidated Coverage Ratio of the
first paragraph of "--Limitation on Indebtedness" above; and
(iii) St. John Knits International would be permitted to make an
Investment (other than a Permitted Investment) at the time of Designation
(assuming the effectiveness of such Designation) pursuant to the first
paragraph of "--Limitation on Restricted Payments" above in an amount (the
"Designation Amount") equal to the Fair Market Value of the net assets of
such Subsidiary on such date.
In the event of any such Designation, St. John Knits International shall be
deemed to have made an Investment constituting a Restricted Payment pursuant to
"--Limitation on Restricted Payments" for all purposes of the indenture in the
Designation Amount.
Neither St. John Knits International nor any Restricted Subsidiary shall at
any time (x) provide credit support for, subject any of its property or assets
(other than the Equity Interests of any Unrestricted Subsidiary) to the
satisfaction of, or guarantee, any Indebtedness of any Unrestricted Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness), (y) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary or (z) be directly or indirectly liable for any
Indebtedness which provides that the holder thereof may (upon notice, lapse of
time or both) declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the occurrence
of a default with respect to any Indebtedness of any Unrestricted Subsidiary,
except for any non-recourse guarantee given solely to support the pledge by St.
John Knits International or any Restricted Subsidiary of the capital stock of
any Unrestricted Subsidiary. For purposes of the foregoing, the Designation of a
Subsidiary of St. John Knits International as an Unrestricted Subsidiary shall
be deemed to include the Designation of all of the Subsidiaries of such
Subsidiary.
St. John Knits International may revoke any Designation of a Subsidiary as
an Unrestricted Subsidiary (a "Revocation") only if:
(i) no Default or Event of Default shall have occurred and be continuing
at the time of and after giving effect to such Revocation; and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if Incurred at such
time, have been permitted to be Incurred for all purposes of the indenture.
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All Designations and Revocations must be evidenced by resolutions of the
board of directors of St. John Knits International, delivered to the Trustee
certifying compliance with the foregoing provisions.
LIMITATION ON LIENS. St. John Knits International shall not, and shall not
cause or permit any Restricted Subsidiary to, directly or indirectly, Incur any
Liens of any kind against or upon any of their respective properties or assets
now owned or hereafter acquired, or any proceeds therefrom or any income or
profits therefrom, to secure any Indebtedness unless contemporaneously therewith
effective provision is made, (x) in the case of St. John Knits International, to
secure the notes and all other amounts due under the indenture and any other
class of Senior Subordinated Indebtedness, and (y) in the case of a Restricted
Subsidiary which is a Guarantor, to secure such Restricted Subsidiary's
Guarantee of the notes and all other amounts due under the indenture, in each
case, equally and ratably with such Indebtedness (or, in the event that such
Indebtedness is subordinated in right of payment to the notes or such Restricted
Subsidiary's Guarantee, prior to such Indebtedness) with a Lien on the same
properties and assets securing such Indebtedness for so long as such
Indebtedness is secured by such Lien, except for (i) Liens securing Senior
Indebtedness (including, without limitation, Indebtedness incurred under the
Credit Facility) and (ii) Permitted Liens.
DISPOSITION OF PROCEEDS OF ASSET SALES. St. John Knits International shall
not, and shall not cause or permit any Restricted Subsidiary to, directly or
indirectly, make any Asset Sale, unless (i) St. John Knits International or such
Restricted Subsidiary, as the case may be, receives consideration at the time of
such Asset Sale at least equal to the Fair Market Value of the assets sold or
otherwise disposed of and (ii) at least 75% of such consideration consists of
(A) cash or Cash Equivalents, or (B) properties and capital assets that will be
used in the business of St. John Knits International and its Restricted
Subsidiaries as existing at such time or in businesses reasonably related
thereto (as determined in good faith by St. John Knits International's board of
directors) ("Replacement Assets") or the Equity Interests of any Person engaged
in a Permitted Business if, in connection with the receipt by St. John Knits
International or any Restricted Subsidiary of such Equity Interests, (1) such
Person becomes a Restricted Subsidiary and a Guarantor or (2) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, St. John Knits
International or any Restricted Subsidiary that is a Guarantor. The amount of
any Indebtedness (other than any Subordinated Indebtedness) of St. John Knits
International or any Restricted Subsidiary that is actually assumed by the
transferee in such Asset Sale and from which St. John Knits International and
the Restricted Subsidiaries are fully and unconditionally released shall be
deemed to be cash for purposes of determining the percentage of cash
consideration received by St. John Knits International or the Restricted
Subsidiaries within such period.
St. John Knits International or such Restricted Subsidiary, as the case may
be, may (i) apply the Net Cash Proceeds of any Asset Sale within 360 days of
receipt thereof to repay Senior Indebtedness and permanently reduce any related
commitment, or (ii) make an Investment in Replacement Assets within such period.
To the extent all or part of the Net Cash Proceeds of any Asset Sale are not
applied within 360 days of such Asset Sale as described in clause (i) or
(ii) of the immediately preceding paragraph (such Net Cash Proceeds, the
"Unutilized Net Cash Proceeds"), St. John Knits International shall, within
45 days after such 360th day, make an Offer to Purchase all outstanding notes
and other Senior Subordinated Indebtedness, PRO RATA, up to a maximum principal
amount (expressed as a multiple of $1,000) of notes and other Senior
Subordinated Indebtedness equal to such Unutilized Net Cash Proceeds, at a
purchase price in cash equal to 100% of the principal amount thereof (or the
accreted value of such other Senior Subordinated Indebtedness, if such other
Senior Subordinated Indebtedness is issued at a discount), plus accrued and
unpaid interest thereon, if any, to the Purchase Date; PROVIDED, HOWEVER, that
the Offer to Purchase may be deferred until there are aggregate Unutilized Net
Cash Proceeds equal to or in excess of $10.0 million, at which time the entire
amount of such
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Unutilized Net Cash Proceeds, and not just the amount in excess of
$10.0 million, shall be applied as required pursuant to this paragraph.
With respect to any Offer to Purchase effected pursuant to this covenant,
among the notes, to the extent the aggregate principal amount of notes and other
Senior Subordinated Indebtedness tendered pursuant to such Offer to Purchase
exceeds the Unutilized Net Cash Proceeds to be applied to the repurchase
thereof, such notes and other Senior Subordinated Indebtedness shall be
purchased PRO RATA based on the aggregate principal amount of such notes and
other Senior Subordinated Indebtedness tendered (or the accreted value of such
other Senior Subordinated Indebtedness, if such other Senior Subordinated
Indebtedness is issued at a discount) by each holder of notes and such other
Senior Subordinated Indebtedness. To the extent the Unutilized Net Cash Proceeds
exceed the aggregate amount of notes and other Senior Subordinated Indebtedness
tendered pursuant to such Offer to Purchase, St. John Knits International may
retain and utilize any portion of the Unutilized Net Cash Proceeds not applied
to repurchase the notes and other Senior Subordinated Indebtedness for any
purpose consistent with the other terms of the indenture. Upon completion of the
Offer to Purchase, Unutilized Net Cash Proceeds will be reset at zero.
In the event that St. John Knits International makes an Offer to Purchase
the notes and other Senior Subordinated Indebtedness, St. John Knits
International shall comply with any applicable securities laws and regulations,
and any violation of the provisions of the indenture relating to such Offer to
Purchase occurring as a result of such compliance shall not be deemed an Event
of Default or an event that, with the passing of time or giving of notice, or
both, would constitute an Event of Default.
Each Holder shall be entitled to tender all or any portion of the notes
owned by such Holder pursuant to the Offer to Purchase, subject to the
requirement that any portion of a note tendered must be tendered in an integral
multiple of $1,000 principal amount and subject to any proration among tendering
Holders and holders of other Senior Subordinated Indebtedness as described
above.
MERGER, SALE OF ASSETS, ETC. St. John Knits International shall not
consolidate with or merge with or into (whether or not St. John Knits
International is the Surviving Person) any other entity and St. John Knits
International shall not, and shall not cause or permit any Restricted Subsidiary
to, sell, convey, assign, transfer, lease or otherwise dispose of all or
substantially all of St. John Knits International's and the Restricted
Subsidiaries' properties and assets (determined on a consolidated basis for St.
John Knits International and the Restricted Subsidiaries) to any entity in a
single transaction or series of related transactions (including by way of
consolidation or merger), unless: (i) either (x) St. John Knits International
shall be the Surviving Person or (y) the Surviving Person (if other than St.
John Knits International) shall be a corporation organized and validly existing
under the laws of the United States of America or any State thereof or the
District of Columbia or, if any such transaction involves a Disposition by a
Foreign Restricted Subsidiary, under the laws of the United States of America or
any state thereof or the District of Columbia or the jurisdiction under which
such Foreign Restricted Subsidiary was organized, and shall, in any such case,
expressly assume by a supplemental indenture, the due and punctual payment of
the principal of, premium, if any, and interest on all the notes and the
performance and observance of every covenant of the indenture and the
Registration Rights Agreement to be performed or observed on the part of St.
John Knits International; (ii) immediately thereafter, no Default or Event of
Default shall have occurred and be continuing; and (iii) immediately after
giving effect to any such transaction involving the Incurrence by St. John Knits
International or any Restricted Subsidiary, directly or indirectly, of
additional Indebtedness (and treating any Indebtedness not previously an
obligation of St. John Knits International or any Restricted Subsidiary in
connection with or as a result of such transaction as having been Incurred at
the time of such transaction), the Surviving Person could Incur, on a pro forma
basis after giving effect to such transaction as if it had occurred at the
beginning of the four quarter period immediately preceding such transaction for
which consolidated financial statements of St. John Knits International are
available, at
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least $1.00 of additional Indebtedness (other than Permitted Indebtedness) under
the Consolidated Coverage Ratio of the first paragraph of "--Limitation on
Indebtedness" above.
Notwithstanding the foregoing clause (iii) of the immediately preceding
paragraph, (x) any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to St. John Knits
International or any Restricted Subsidiary that is a Guarantor and (y) St. John
Knits International may merge with an Affiliate incorporated solely for the
purpose of reincorporating St. John Knits International in another domestic
United States jurisdiction to realize tax or other benefits.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all the properties and assets of one or more Restricted
Subsidiaries the Equity Interest of which constitutes all or substantially all
the properties and assets of St. John Knits International shall be deemed to be
the transfer of all or substantially all the properties and assets of St. John
Knits International.
No Guarantor (other than a Guarantor whose Guarantee is to be released in
accordance with the terms of its Guarantee and the indenture as provided in the
fourth paragraph under "Guarantees of the Notes" above) shall consolidate with
or merge with or into another Person, whether or not such Person is affiliated
with such Guarantor and whether or not such Guarantor is the Surviving Person,
unless (i) the Surviving Person (if other than such Guarantor) is a corporation
organized and validly existing under the laws of the United States, any State
thereof or the District of Columbia; (ii) the Surviving Person (if other than
such Guarantor) expressly assumes by a supplemental indenture all the
obligations of such Guarantor under its Guarantee of the notes and the
performance and observance of every covenant of the indenture and the
Registration Rights Agreement to be performed or observed by such Guarantor,
(iii) at the time of and immediately after such Disposition, no Default or Event
of Default shall have occurred and be continuing; and (iv) immediately after
giving effect to any such transaction involving the Incurrence by such
Guarantor, directly or indirectly, of additional Indebtedness (and treating any
Indebtedness not previously an obligation of such Guarantor in connection with
or as a result of such transaction as having been Incurred at the time of such
transaction), St. John Knits International could Incur, on a pro forma basis
after giving effect to such transaction as if it had occurred at the beginning
of the latest fiscal quarter for which consolidated financial statements of St.
John Knits International are available, at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the Consolidated Coverage
Ratio of the first paragraph of "Limitation on Indebtedness" above; PROVIDED,
HOWEVER, that this paragraph shall not be a condition to a merger or
consolidation of a Guarantor if such merger or consolidation only involves St.
John Knits International and/or one or more other Guarantors. Notwithstanding
the foregoing, nothing in this covenant shall prohibit the consolidation or
merger with or into or the sale of all or substantially all of the assets or
properties of a Guarantor to any other Restricted Subsidiary that is a
Guarantor.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraphs in
which St. John Knits International or a Guarantor, as the case may be, is not
the Surviving Person and the Surviving Person is to assume all the Obligations
of St. John Knits International under the notes, the indenture and the
Registration Rights Agreement or of such Guarantor under its Guarantee, the
indenture and the Registration Rights Agreement, as the case may be, pursuant to
a supplemental indenture, such Surviving Person shall succeed to, and be
substituted for, and may exercise every right and power of, St. John Knits
International or such Guarantor, as the case may be, and St. John Knits
International, as the case may be, shall be discharged from its Obligations
under the indenture and the notes or such Guarantor shall be discharged from its
Obligations under the indenture and its Guarantee.
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TRANSACTIONS WITH AFFILIATES. St. John Knits International shall not, and
shall not cause or permit any Restricted Subsidiary to, directly or indirectly,
conduct any business or enter into any transaction (or series of related
transactions) with or for the benefit of any of their respective Affiliates or
any officer, director or employee of St. John Knits International or any
Restricted Subsidiary (each an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms which are no less favorable to St. John Knits
International or such Restricted Subsidiary, as the case may be, than would be
available in a comparable transaction with an unaffiliated third party and
(ii) (A) if such Affiliate Transaction (or series of related Affiliate
Transactions) involves aggregate payments or the transfer of other consideration
between St. John Knits International and an Affiliate of St. John Knits
International having a Fair Market Value in excess of $5.0 million, such
Affiliate Transaction is in writing and St. John Knits International delivers an
officer's certificate to the Trustee certifying that such Affiliate Transaction
(or series of Affiliate Transactions) complies with the foregoing provisions or
(B) if such Affiliate Transaction (or series of related Affiliate Transactions)
involves aggregate payments or the transfer of other consideration between St.
John Knits International and an Affiliate of St. John Knits International having
a Fair Market Value in excess of $10.0 million, such Affiliate Transaction is in
writing and St. John Knits International delivers a written opinion from an
Independent Financial Advisor (filed with the Trustee) stating that the terms of
such Affiliate Transaction are fair, from a financial point of view, to St. John
Knits International or the Restricted Subsidiary involved in such Affiliate
Transaction, as the case may be.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to:
(i) transactions with or among St. John Knits International and any
Restricted Subsidiary or between or among Restricted Subsidiaries;
(ii) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans and other reasonable
fees and compensation paid to and indemnity provided on behalf of, officers,
directors, employees, consultants or agents of St. John Knits International
or any Restricted Subsidiary of St. John Knits International as determined
in good faith by St. John Knits International's Board of Directors;
(iii) the payment of fees and expenses to Vestar or any of its
Affiliates (A) pursuant to the Management Agreement, as in effect on the
Issue Date, or (B) pursuant to any amended, supplemented or replacement
management agreement in an aggregate amount not to exceed 1.25% of
Consolidated EBITDA for the last four full fiscal quarters completed prior
to the date of such payment;
(iv) any Restricted Payments made in compliance with "--Limitation on
Restricted Payments" above;
(v) loans and advances to officers, directors and employees of St. John
Knits International or any Restricted Subsidiary made in the ordinary course
of business;
(vi) the entering into by St. John Knits International and any of its
Restricted Subsidiaries of a tax sharing or similar arrangement;
(vii) any employment agreement entered into by St. John Knits
International or any Restricted Subsidiary in the ordinary course of
business;
(viii) payment of reasonable Directors' fees to Persons who are not
otherwise Affiliates of St. John Knits International;
(ix) any sale or other issuance of Equity Interests (other than
Disqualified Equity Interests) of
St. John Knits International;
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(x) payments by St. John Knits International or any Restricted
Subsidiary to Vestar and its Affiliates made for any financial advisory,
financing, underwriting or placement services in connection with
acquisitions or other corporate transactions, in amounts which are
(a) usual and customary for transactions of such type, in an amount not to
exceed 1% of the value of any such transaction or (b) approved by a majority
of the disinterested members of the board of directors of St. John Knits
International as comparable to that which would be charged by an
unaffiliated third party for such services;
(xi) transactions permitted by the Vestar/Gray LLC Agreement;
(xii) sales or other transfers or dispositions of accounts receivable
and other related assets customarily transferred in an asset securitization
transaction involving accounts receivable to a Receivables Entity in a
Qualified Receivables Transaction, and acquisitions of Permitted Investments
in connection with a Qualified Receivables Transaction;
(xiii) leases in effect on the Issue Date and any renewals thereof which
include substantially similar terms;
(xiv) the transactions and the payment of all fees and expenses related
thereto;
(xv) any agreement as in effect on the Issue Date (including, without
limitation, each of the agreements entered into in connection with the
transactions) or any transaction contemplated thereby; and
(xvi) the sale of Preferred Stock to Vestar or any of its affiliates and
any transaction contemplated by the terms of the Preferred Stock.
LIMITATION ON THE SALE OR ISSUANCE OF EQUITY INTERESTS OF RESTRICTED
SUBSIDIARIES. St. John Knits International shall not sell any Equity Interest
of a Restricted Subsidiary, and shall not cause or permit any Restricted
Subsidiary, directly or indirectly, to issue or sell any Equity Interests,
except: (i) to
St. John Knits International or a Wholly Owned Restricted Subsidiary; or
(ii) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary.
Notwithstanding the foregoing, St. John Knits International is permitted to sell
all the Equity Interest of a Restricted Subsidiary as long as St. John Knits
International is in compliance with the terms of the covenant described under
"--Disposition of Proceeds of Asset Sales" and, if applicable, "--Merger, Sale
of Assets, etc." above.
LIMITATION ON GUARANTEES BY RESTRICTED SUBSIDIARIES. The indenture will
provide that in the event St. John Knits International (i) organizes or acquires
any Domestic Restricted Subsidiary (other than a Receivables Entity) after the
Issue Date that is not a Guarantor or (ii) causes or permits any Foreign
Restricted Subsidiary that is not a Guarantor to, directly or indirectly,
guarantee the payment of any Indebtedness of St. John Knits International or any
Domestic Restricted Subsidiary ("Other Indebtedness"), then in each case St.
John Knits International shall cause such Restricted Subsidiary to
simultaneously execute and deliver a supplemental indenture to the indenture
pursuant to which it will become a Guarantor under the indenture; PROVIDED,
HOWEVER, that in the event a Domestic Restricted Subsidiary is acquired in a
transaction in which a merger agreement is entered into, such Domestic
Restricted Subsidiary shall not be required to execute and deliver such
supplemental indenture until the consummation of the merger contemplated by any
such merger agreement; PROVIDED, FURTHER, that if such Other Indebtedness is
(i) Indebtedness that is ranked PARI PASSU in right of payment with the notes or
the Guarantee of such Domestic Restricted Subsidiary, as the case may be, the
Guarantee of such Foreign Restricted Subsidiary shall be PARI PASSU in right of
payment with the guarantee of the Other Indebtedness; or (ii) Subordinated
Indebtedness, the Guarantee of such Foreign Restricted Subsidiary shall be
senior in right of payment to the guarantee of the Other Indebtedness (which
guarantee of such Subordinated Indebtedness shall provide that such guarantee is
subordinated to the Guarantees of such Subsidiary to the same extent and in
substantially the same manner as the Other Indebtedness is
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subordinated to the notes or the Guarantee of such Domestic Restricted
Subsidiary, as the case may be).
BUSINESS ACTIVITIES. St. John Knits International will not, and will not
permit any Restricted Subsidiary to, engage in any business other than the
Permitted Business.
PROVISION OF FINANCIAL INFORMATION. Whether or not St. John Knits
International is subject to Section 13(a) or 15(d) of the Exchange Act, or any
successor provision thereto, St. John Knits International shall file with the
SEC (if permitted by SEC practice and applicable law and regulations) the annual
reports, quarterly reports and other documents which St. John Knits
International would have been required to file with the SEC pursuant to such
Section 13(a) or 15(d) or any successor provision thereto if St. John Knits
International were so subject, such documents to be filed with the SEC on or
prior to the respective dates (the "Required Filing Dates") by which St. John
Knits International would have been required so to file such documents if St.
John Knits International were so subject. St. John Knits International shall
also in any event (a) within 15 days of each Required Filing Date (whether or
not permitted or required to be filed with the SEC) (i) transmit (or cause to be
transmitted) by mail to all Holders, as their names and addresses appear in the
note register, without cost to such Holders upon their request, and (ii) file
with the Trustee, copies of the annual reports, quarterly reports and proxy
statements which St. John Knits International is required to file with the SEC
pursuant to the preceding sentence, or, if such filing is not so permitted,
information and data of a similar nature, and (b) if, notwithstanding the
preceding sentence, filing such documents by St. John Knits International with
the SEC is not permitted by SEC practice or applicable law or regulations,
promptly upon written request supply copies of such documents to any Holder. In
addition, for so long as any notes remain outstanding and prior to the later of
the consummation of the Exchange Offer and the filing of the Initial Shelf
Registration Statement, if required, St. John Knits International will furnish
to the Holders upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT
The occurrence of any of the following will be defined as an "Event of
Default" under the indenture:
(a) failure to pay principal of (or premium, if any, on) any note when
due (whether or not prohibited by the provisions of the indenture described
under "--Subordination of the Notes" above);
(b) failure to pay any interest on any note when due, continued for
30 days or more (whether or not prohibited by the provisions of the
indenture described under "--Subordination of the Notes" above);
(c) default in the payment of principal of or interest on any note
required to be purchased pursuant to any Offer to Purchase required by the
indenture when due and payable or failure to pay on the Purchase Date the
Purchase Price for any note validly tendered pursuant to any Offer to
Purchase required by the indenture (whether or not prohibited by the
provisions of the indenture described under "--Subordination of the Notes"
above);
(d) failure to perform or comply with any of the provisions described
under "--Certain Covenants--Merger, Sale of Assets, etc." above;
(e) failure to perform any other covenant, warranty or agreement of St.
John Knits International under the indenture or in the notes or of the
Guarantors under the indenture or in the Guarantees continued for 30 days or
more after written notice to St. John Knits International by the Trustee or
Holders of at least 25% in aggregate principal amount of the outstanding
notes;
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(f) default or defaults under the terms of one or more instruments
evidencing or securing Indebtedness of St. John Knits International or any
of its Restricted Subsidiaries having an outstanding principal amount of
$10.0 million or more individually or in the aggregate that has resulted in
the acceleration of the payment of such Indebtedness or failure by St. John
Knits International or any of its Restricted Subsidiaries to pay principal
of at least $10.0 million when due at the stated maturity of any such
Indebtedness and such default or defaults shall have continued after any
applicable grace period and shall not have been cured or waived within
10 days after the occurrence thereof;
(g) the rendering of a final judgment or judgments (not subject to
appeal) against St. John Knits International or any of its Restricted
Subsidiaries in an amount of $10.0 million or more (net of any amounts
covered by reputable and creditworthy insurance companies) which remains
undischarged or unstayed for a period of 60 days after the date on which the
right to appeal has expired;
(h) certain events of bankruptcy, insolvency or reorganization affecting
St. John Knits International or any of its Significant Restricted
Subsidiaries; or
(i) other than as provided in or pursuant to any Guarantee or the
indenture, the Guarantee of any Guarantor ceases to be in full force and
effect or is declared null and void and unenforceable or found to be invalid
or any Guarantor denies its liability under its Guarantee (other than by
reason of a release of such Guarantor from its Guarantee in accordance with
the terms of the indenture and such Guarantee).
Subject to the provisions of the indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
indenture at the request or direction of any of the Holders of notes, unless
such Holders shall have offered to the Trustee reasonable indemnity. Subject to
such provisions for the indemnification of the Trustee, the Holders of a
majority in aggregate principal amount of the outstanding notes will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred on
such Trustee subject to applicable law.
If an Event of Default with respect to the notes (other than an Event of
Default with respect to St. John Knits International described in clause (h) of
the second preceding paragraph) occurs and is continuing, the Trustee or the
Holders of at least 25% in aggregate principal amount of the outstanding notes,
by notice in writing to St. John Knits International, may declare the unpaid
principal of (and premium, if any) and accrued interest to the date of
acceleration on all the outstanding notes to be due and payable immediately and,
upon any such declaration, such principal amount (and premium, if any) and
accrued interest, notwithstanding anything contained in the indenture or the
notes to the contrary, will become immediately due and payable; PROVIDED,
HOWEVER, that so long as the Credit Facility shall be in full force and effect,
if an Event of Default shall have occurred and be continuing (other than an
Event of Default with respect to St. John Knits International described in
clause (h) of the second preceding paragraph), the notes shall not become due
and payable until the earlier to occur of (x) five business days following
delivery of written notice of such acceleration of the notes to the agent under
the Credit Facility and (y) the acceleration (ipso facto or otherwise) of any
Indebtedness under the Credit Facility. If an Event of Default specified in
clause (h) of the preceding paragraph with respect to St. John Knits
International occurs under the indenture, the notes will ipso facto become
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder of the notes.
Any such declaration with respect to the notes may be annulled by the
Holders of a majority in aggregate principal amount of the outstanding notes
upon the conditions provided in the indenture. For information as to waiver of
defaults, see "--Modification and Waiver" below.
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The indenture provides that the Trustee shall, within 90 days after the
occurrence of any Default or Event of Default with respect to the notes
outstanding, give the Holders of the notes thereof notice of all uncured
Defaults or Events of Default thereunder known to it; PROVIDED, HOWEVER, that,
except in the case of a Default or an Event of Default in payment with respect
to the notes or a Default or Event of Default in complying with "--Certain
Covenants--Merger, Sale of Assets, etc." above, the Trustee shall be protected
in withholding such notice if and so long as a committee of its trust officers
in good faith determines that the withholding of such notice is in the interest
of the Holders of the notes.
No Holder of any note will have any right to institute any proceeding with
respect to the indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default thereunder and unless the Holders of at least 25% of the aggregate
principal amount of the outstanding notes shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as the
Trustee, and the Trustee shall have not have received from the Holders of a
majority in aggregate principal amount of such outstanding notes a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days. However, such limitations do not apply to a suit
instituted by a Holder of such a note for enforcement of payment of the
principal of and premium, if any, or interest on such note on or after the
respective due dates expressed in such note.
St. John Knits International will be required to furnish to the Trustee
annually a statement as to the performance by it of certain of its obligations
under the indenture and as to any default in such performance.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATOR,
STOCKHOLDERS, PARTNERS AND MEMBERS
No director, officer, employee, incorporator, stockholder, partner (general
or limited) or member of St. John Knits International or any of its Affiliates,
as such, shall have any liability for any obligations of St. John Knits
International or any of its Affiliates under the notes, the indenture or the
Guarantees or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of notes by accepting a note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes.
SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE
St. John Knits International may terminate its and the Guarantors'
substantive obligations in respect of the notes by delivering all outstanding
notes to the Trustee for cancellation and paying all sums payable by it on
account of principal of, premium, if any, and interest on all notes or
otherwise. In addition to the foregoing, St. John Knits International may,
provided that no Default or Event of Default has occurred and is continuing or
would arise therefrom (or, with respect to a Default or Event of Default
specified in clause (h) of "--Events of Default" above, occurs at any time on or
prior to the 91st calendar day after the date of such deposit (it being
understood that this condition shall not be deemed satisfied until after such
91st day)) under the indenture and provided that no default under any Senior
Indebtedness would result therefrom, terminate its and the Guarantors'
substantive obligations in respect of the notes (except for its obligations to
pay the principal of (and premium, if any, on) and the interest on the notes and
the Guarantors' Guarantee thereof) by (i) depositing with the Trustee, under the
terms of an irrevocable trust agreement, money or United States Government
Obligations sufficient (without reinvestment) to pay all remaining Indebtedness
on such notes; (ii) delivering to the Trustee either an Opinion of Counsel or a
ruling directed to the Trustee from the Internal Revenue Service to the effect
that the Holders of the notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and termination of
obligations; (iii) delivering to the Trustee an Opinion of Counsel to the effect
that St. John Knits International's exercise of its option
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under this paragraph will not result in any of St. John Knits International, the
Trustee or the trust created by St. John Knits International's deposit of funds
pursuant to this provision becoming or being deemed to be an "investment
company" subject to regulation under the Investment Company Act of 1940, as
amended (the "Investment Act"); and (iv) complying with certain other
requirements set forth in the indenture. In addition, St. John Knits
International may, provided that no Default or Event of Default has occurred and
is continuing or would arise therefrom (or, with respect to a Default or Event
of Default specified in clause (h) of "--Events of Default" above, occurs at any
time on or prior to the 91st calendar day after the date of such deposit (it
being understood that this condition shall not be deemed satisfied until after
such 91st day)) under the indenture and provided that no default under any
Senior Indebtedness would result therefrom, terminate all of its and the
Guarantors' substantive obligations in respect of the notes (including its
obligations to pay the principal of (and premium, if any, on) and interest on
the notes and the Guarantors' Guarantee thereof) by (i) depositing with the
Trustee, under the terms of an irrevocable trust agreement, money or United
States Government Obligations sufficient (without reinvestment) to pay all
remaining Indebtedness on the notes; (ii) delivering to the Trustee either a
ruling directed to the Trustee from the Internal Revenue Service to the effect
that the Holders of the notes will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit and termination of
obligations or an Opinion of Counsel addressed to the Trustee based upon such a
ruling or based on a change in the applicable federal tax law since the date of
the indenture, to such effect; (iii) delivering to the Trustee an Opinion of
Counsel to the effect that St. John Knits International's exercise of its option
under this paragraph will not result in any of St. John Knits International, the
Trustee or the trust created by St. John Knits International's deposit of funds
pursuant to this provision becoming or being deemed to be an "investment
company" subject to regulation under the Investment Act; and (iv) complying with
certain other requirements set forth in the indenture.
St. John Knits International may make an irrevocable deposit pursuant to
this provision only if at such time it is not prohibited from doing so under the
subordination provisions of the indenture or certain covenants in the Senior
Indebtedness and St. John Knits International has delivered to the Trustee and
any Paying Agent an officers' certificate and Opinion of Counsel to that effect.
GOVERNING LAW
The indenture, the notes and the Guarantees will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
MODIFICATION AND WAIVER
Modifications and amendments of the indenture may be made by St. John Knits
International, the Guarantors, and the Trustee with the consent of the Holders
of a majority in aggregate principal amount of the outstanding notes (including
consents obtained in connection with a tender offer or exchange offer for the
notes); PROVIDED, HOWEVER, that no such modification or amendment to the
indenture may, without the consent of the Holder of each note affected thereby,
(a) change the maturity of the principal of or any installment of
interest on any such note or alter the optional redemption provisions of any
such note or the indenture in a manner adverse to the Holders of the notes;
(b) reduce the principal amount of (or the premium) of any such note;
(c) reduce the rate of or extend the time for payment of interest on any
such note;
(d) change the place or currency of payment of principal of (or premium)
or interest on any such note;
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(e) modify any provisions of the indenture relating to the waiver of
past defaults (other than to add sections of the indenture or the notes
subject thereto) or the right of the Holders of notes to institute suit for
the enforcement of any payment on or with respect to any such note or any
Guarantee in respect thereof or the modification and amendment provisions of
the indenture and the notes (other than to add sections of the indenture or
the notes which may not be amended, supplemented or waived without the
consent of each Holder therein affected);
(f) reduce the percentage of the principal amount of outstanding notes
necessary for amendment to or waiver of compliance with any provision of the
indenture or the notes or for waiver of any Default in respect thereof;
(g) waive a default in the payment of principal of, interest on, or
redemption payment with respect to, the notes (except a rescission of
acceleration of the notes by the Holders thereof as provided in the
indenture and a waiver of the payment default that resulted from such
acceleration);
(h) modify the ranking or priority of any note or the Guarantee in
respect thereof of any Guarantor or modify the definition of Senior
Indebtedness or Guarantor Senior Indebtedness or amend or modify the
subordination provisions of the indenture in any manner adverse to the
Holders of the notes;
(i) amend, change or modify in any material respect the obligation of
St. John Knits International to make and consummate an Offer to Purchase in
the event of a Change of Control or make and consummate an Offer to Purchase
with respect to any Asset Sale that has been consummated or modify in any
material respect any of the provisions or definitions with respect thereto;
or
(j) release any Significant Restricted Subsidiary that is a Guarantor
from any of its obligations under its Guarantee or the indenture otherwise
than in accordance with the indenture.
The Holders of a majority in aggregate principal amount of the outstanding
notes, on behalf of all Holders of notes, may waive compliance by St. John Knits
International and the Guarantors with certain restrictive provisions of the
indenture. Subject to certain rights of the Trustee, as provided in the
indenture, the Holders of a majority in aggregate principal amount of the notes,
on behalf of all Holders, may waive any past default under the indenture
(including any such waiver obtained in connection with a tender offer or
exchange offer for the notes), except a default in the payment of principal,
premium or interest or a default arising from failure to purchase any notes
tendered pursuant to an Offer to Purchase, or a default in respect of a
provision that under the indenture cannot be modified or amended without the
consent of the Holder of each note that is affected.
Without the consent of any Holder, St. John Knits International and the
Trustee may amend the indenture to:
(i) cure any ambiguity, omission, defect or inconsistency;
(ii) provide for the assumption by a successor corporation, partnership,
trust or limited liability company of the obligations of St. John Knits
International under the indenture;
(iii) provide for uncertificated notes in addition to or in place of
certificated notes (PROVIDED that the uncertificated notes are issued in
registered form for purposes of Section 163(f) of the Internal Revenue Code,
or in a manner such that the uncertificated notes are described in
Section 163(f)(2)(B) of the Internal Revenue Code);
(iv) add Guarantees with respect to the notes;
(v) secure the notes;
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(vi) add to the covenants of St. John Knits International for the
benefit of the Holders or surrender any right or power conferred upon St.
John Knits International;
(vii) make any change that does not adversely affect the rights of any
Holder; or
(viii) comply with any requirement of the SEC in connection with the
qualification of the indenture under the Trust Indenture Act.
However, no amendment may be made to the subordination provisions of the
indenture that adversely affects the rights of any holder of Senior Indebtedness
or Guarantor Senior Indebtedness, as the case may be, then outstanding unless
the holders of such Senior Indebtedness or Guarantor Senior Indebtedness, as the
case may be (or any group or representative thereof authorized to give a
consent), consent to such change.
THE TRUSTEE
Except during the continuance of a Default, the Trustee will perform only
such duties as are specifically set forth in the indenture. During the existence
of a Default, the Trustee will exercise such rights and powers vested in it
under the indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of St. John Knits International, any Guarantor or any other
obligor upon the notes, to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of any such claim as
security or otherwise. The Trustee is permitted to engage in other transactions
with St. John Knits International or an Affiliate of St. John Knits
International; PROVIDED, HOWEVER, that if it acquires any conflicting interest
(as defined in the indenture or in the Trust Indenture Act), it must eliminate
such conflict or resign.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full definition of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person (a) assumed in
connection with an Acquisition from such Person or (b) existing at the time such
Person becomes a Restricted Subsidiary or is merged or consolidated with or into
St. John Knits International or any Restricted Subsidiary.
"ACQUIRED PERSON" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Subsidiary of such specified
Person.
"ACQUISITION" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by St. John Knits International or any
Restricted Subsidiary to any other Person, or any acquisition or purchase of
Equity Interests of any other Person by St. John Knits International or any
Restricted Subsidiary, in either case pursuant to which such Person shall become
a Restricted Subsidiary or shall be consolidated with or merged into St. John
Knits International or any Restricted Subsidiary or (ii) any acquisition by St.
John Knits International or any Restricted Subsidiary of the assets of any
Person which constitute substantially all of an operating unit or line of
business of such Person or which is otherwise outside of the ordinary course of
business.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person and shall also mean any beneficial owner of
shares representing 5% or more of the total voting power of the Voting
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Equity Interests (on a fully diluted basis) of St. John Knits International or
of rights or warrants to purchase such Voting Equity Interests (whether or not
currently exercisable) and any Person who would be an Affiliate of any such
beneficial owner pursuant to this definition; PROVIDED, HOWEVER, that for
purposes of the "--Transactions with Affiliates" covenant, the term "Affiliate"
shall not include the Initial Purchasers or their affiliates. For purposes of
this definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise.
"ASSET SALE" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition) or other disposition (including, without
limitation, any merger, consolidation or sale-leaseback transaction) to any
Person other than St. John Knits International or a Restricted Subsidiary, in
one transaction or a series of related transactions, of (i) any Equity Interest
of any Restricted Subsidiary (other than directors' qualifying shares, to the
extent mandated by applicable law); (ii) any assets of St. John Knits
International or any Restricted Subsidiary which constitute substantially all of
an operating unit or line of business of St. John Knits International or any
Restricted Subsidiary; or (iii) any other property or asset of St. John Knits
International or any Restricted Subsidiary outside of the ordinary course of
business (including the receipt of proceeds paid on account of the loss of or
damage to any property or asset and awards of compensation for any asset taken
by condemnation, eminent domain or similar proceedings). For the purposes of
this definition, the term "Asset Sale" shall not include (a) the creation of any
Lien not prohibited by "--Certain Covenants--Limitation on Liens" above;
(b) sales of property or equipment that has become worn out, obsolete or damaged
or otherwise unsuitable for use in connection with the business of St. John
Knits International or any Restricted Subsidiary, as the case may be; (c) any
transaction consummated in compliance with "--Certain Covenants--Limitation on
Restricted Payments" above; (d) any transfers of properties and assets between
Restricted Subsidiaries or St. John Knits International and a Restricted
Subsidiary; (e) the sale of Cash Equivalents in the ordinary course of business;
(f) a disposition of inventory in the ordinary course of business;
(g) transactions permitted under "--Certain Covenants--Merger, Sale of Assets,
etc."; (h) the sale or other disposition of assets owned by Amen Wardy Home
Stores, LLC; and (i) the sale of accounts receivable, or participation therein,
in connection with any Qualified Receivables Transactions. In addition, solely
for purposes of "--Certain Covenants--Disposition of Proceeds of Asset Sales"
above, any sale, conveyance, transfer, lease or other disposition of any
property or asset, whether in one transaction or a series of related
transactions, involving assets with a Fair Market Value not in excess of
$2.5 million in any fiscal year shall be deemed not to be an Asset Sale.
"ATTRIBUTABLE INDEBTEDNESS" in respect of a sale/leaseback transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the notes, compounded semi-annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such sale/leaseback transaction (including any period for
which such lease has been extended).
"BOARD RESOLUTION" means, with respect to any Person, a duly adopted
resolution of the Board of Directors of such Person.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be properly capitalized on the balance sheet in accordance with
GAAP.
"CASH EQUIVALENTS" means: (a) U.S. dollars; (b) securities issued or
directly and fully guaranteed or insured by the U.S. government or any agency or
instrumentality thereof having maturities of not more than one year from the
date of acquisition; (c) certificates of deposit and eurodollar time deposits
with
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maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500 million; (d) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in clauses
(b) and (c) above entered into with any financial institution meeting the
qualifications specified in clause (c) above; (e) commercial paper rated P-1,
A-1 or the equivalent thereof by Moody's Investors Service, Inc. or Standard &
Poor's Corporation, respectively, and in each case maturing within six months
after the date of acquisition; and (f) money market funds at least 95% of the
assets of which constitute Cash Equivalents of the kinds described in clauses
(a) through (e) of this definition.
"CHANGE OF CONTROL" means the occurrence of any of the following events
(whether or not approved by the Board of Directors of St. John Knits
International): (i) any Person (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act, including any group acting for the purpose of acquiring,
holding or disposing of securities within the meaning of Rule 13d-5(b)(1) under
the Exchange Act), other than one or more Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have "beneficial ownership" of all
shares that any such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time, upon the happening of
an event or otherwise), directly or indirectly, of greater than 35% of the total
voting power of the then outstanding Voting Equity Interests of St. John Knits
International and such Person beneficially owns a greater percentage of the
total voting power of the then outstanding Voting Equity Interests of St. John
Knits International than the Permitted Holders; (ii) St. John Knits
International or any of its Subsidiaries sells, assigns, conveys, transfers,
leases or otherwise disposes (other than by way of merger or consolidation) of
all or substantially all of the assets of St. John Knits International and its
Subsidiaries (determined on a consolidated basis) to any Person (other than St.
John Knits International or any Wholly Owned Restricted Subsidiary);
(iii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of St. John Knits
International (together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of St. John Knits
International was approved by a vote of a majority of the directors of St. John
Knits International then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of St. John Knits International then in office; or (iv) St.
John Knits International is liquidated or dissolved or adopts a plan of
liquidation or dissolution.
"CHANGE OF CONTROL DATE" has the meaning set forth under "--Offer to
Purchase upon Change of Control" above.
"CONSOLIDATED COVERAGE RATIO" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated EBITDA for the four quarter
period of the most recent four consecutive fiscal quarters for which financial
statements are available ending prior to the date of such determination (the
"Four Quarter Period") to (ii) Consolidated Fixed Charges for such Four Quarter
Period; PROVIDED, HOWEVER, that (1) if St. John Knits International or any
Restricted Subsidiary has incurred any Indebtedness since the beginning of such
Four Quarter Period that remains outstanding on such date of determination or if
the transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Incurrence of Indebtedness, Consolidated EBITDA and Consolidated
Fixed Charges for such Four Quarter Period shall be calculated after giving
effect on a pro forma basis to such Indebtedness as if such Indebtedness had
been Incurred on the first day of such Four Quarter Period and the discharge of
any other Indebtedness repaid, repurchased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the first
day of such Four Quarter Period, (2) if since the beginning of such Four Quarter
Period St. John Knits International or any Restricted Subsidiary shall have made
any Asset Sale, the Consolidated EBITDA for such Four Quarter Period
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shall be reduced by an amount equal to the Consolidated EBITDA (if positive)
directly attributable to the assets that are the subject of such Asset Sale for
such Four Quarter Period or increased by an amount equal to the Consolidated
EBITDA (if negative) directly attributable thereto for such Four Quarter Period
and Consolidated Fixed Charges for such Four Quarter Period shall be reduced by
an amount equal to the Consolidated Fixed Charges directly attributable to any
Indebtedness of St. John Knits International or any Restricted Subsidiary
repaid, repurchased or otherwise discharged with respect to St. John Knits
International and its continuing Restricted Subsidiaries in connection with such
Asset Sale for such Four Quarter Period (or, if the Equity Interests of any
Restricted Subsidiary are sold, the Consolidated Fixed Charges for such Four
Quarter Period directly attributable to the Indebtedness of such Restricted
Subsidiary to the extent St. John Knits International and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness after such
sale), (3) if since the beginning of such Four Quarter Period St. John Knits
International or any Restricted Subsidiary (by merger or otherwise) shall have
made an Investment in any Restricted Subsidiary (or any Person that becomes a
Restricted Subsidiary) or an acquisition of assets, including any acquisition of
assets occurring in connection with a transaction causing a calculation to be
made hereunder, which constitutes all or substantially all of an operating unit
or a line of a business or which constitutes Replacement Assets, Consolidated
EBITDA and Consolidated Fixed Charges for such Four Quarter Period shall be
calculated after giving pro forma effect to (x) such Investment or acquisition
of assets (including the Incurrence of any Indebtedness) as if such Investment
or acquisition occurred on the first day of such Four Quarter Period and
(y) net expense and cost reductions attributable to the assets acquired
calculated on a basis consistent with the standards set forth in Regulation S-X
under the Securities Act as in effect on the Issue Date and (4) if since the
beginning of such Four Quarter Period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into St. John Knits International or
any Restricted Subsidiary since the beginning of such Four Quarter Period) shall
have made any Asset Sale or any Investment or acquisition of assets that would
have required an adjustment pursuant to clause (2) or (3) above if made by St.
John Knits International or a Restricted Subsidiary during such Four Quarter
Period, Consolidated EBITDA and Consolidated Fixed Charges for such Four Quarter
Period shall be calculated after giving pro forma effect thereto as if such
Asset Sale, Investment or acquisition of assets occurred on, with respect to any
Investment or acquisition, the first day of such Four Quarter Period and, with
respect to any Asset Sale, the day prior to the first day of such Four Quarter
Period. For purposes of this definition, whenever pro forma effect is to be
given to an acquisition of assets, the amount of income or earnings relating
thereto and the amount of Consolidated Fixed Charges associated with any
Indebtedness Incurred in connection therewith, the pro forma calculations shall
be determined in accordance with GAAP. If any Indebtedness bears a floating rate
of interest and is being given pro forma effect, the interest expense on such
Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any agreement under which Hedging Obligations are outstanding applicable
to such Indebtedness if such agreement under which such Hedging Obligations are
outstanding has a remaining term as at the date of determination in excess of
12 months); PROVIDED, HOWEVER, that the Consolidated Fixed Charges of St. John
Knits International attributable to interest on any Indebtedness Incurred under
a revolving credit facility computed on a pro forma basis shall be computed
based upon the average daily balance of such Indebtedness during the Four
Quarter Period.
"CONSOLIDATED EBITDA" means, for any period, the Consolidated Net Income for
such period, plus, without duplication, the following to the extent deducted in
calculating such Consolidated Net Income: (i) Consolidated Income Tax Expense
for such period; (ii) Consolidated Interest Expense for such period;
(iii) Consolidated Non-cash Charges for such period; (iv) step-ups in inventory
valuation as a result of purchase accounting in connection with the acquisition
of assets or Equity Interests; (v) costs not reimbursable by St. John Knits
International's or any Subsidiary's insurance incurred in connection with any
litigation and other legal proceedings to which St. John Knits International or
such Subsidiary is currently a party (other than in connection with the
settlement of the litigation concerning Amen
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Wardy Home Stores, LLC), PROVIDED that such costs included in this clause (v)
shall not exceed $1.0 million for all periods; (vi) cash charges not to exceed
$1.0 million in connection with the settlement of the litigation concerning Amen
Wardy Home Stores, LLC, the acquisition of the remaining 49% interest in Amen
Wardy Home Stores, LLC and the closure of certain Amen Wardy stores and related
costs; and (vii) expenses related to the transactions; LESS (A) all non-cash
items increasing Consolidated Net Income for such period and (B) all cash
payments during such period relating to non-cash charges that were added back in
determining Consolidated EBITDA in any prior period.
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense and
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Equity Interest of St. John Knits International and its Restricted
Subsidiaries (other than dividends paid solely in Qualified Equity Interests and
other than unpaid dividends on the Preferred Stock) paid, accrued or scheduled
to be paid or accrued during such period times (y) a fraction, the numerator of
which is one and the denominator of which is one minus the then current
effective consolidated federal, state and local tax rate of such Person,
expressed as a decimal.
"CONSOLIDATED INCOME TAX EXPENSE" means, with respect to St. John Knits
International for any period, the provision for Federal, state, local and
foreign income taxes payable by St. John Knits International and the Restricted
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to St. John Knits
International for any period, without duplication, the sum of (i) the interest
expense of St. John Knits International and the Restricted Subsidiaries for such
period as determined on a consolidated basis in accordance with GAAP, including,
without limitation, (a) any amortization of debt discount, (b) the net cost
under Hedging Obligations, (c) the interest portion of any deferred payment
obligation, (d) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing, (e) all
capitalized interest and all accrued interest and (f) the cash contributions to
any employee stock ownership plan or similar trust to the extent such
contributions are used by such plan or trust to pay interest or fees to any
Person (other than St. John Knits International) in connection with Indebtedness
Incurred by such plan or trust; PROVIDED, HOWEVER, that there will be excluded
therefrom any such interest expense of any Unrestricted Subsidiary to the extent
the related Indebtedness is not guaranteed or paid by St. John Knits
International or any Restricted Subsidiary and (ii) interest expense
attributable to Capitalized Lease Obligations and the interest portion of rent
expense associated with Attributable Indebtedness in respect of the relevant
lease giving rise thereto, determined as if such lease were a capitalized lease
in accordance with GAAP, as determined for St. John Knits International and the
Restricted Subsidiaries on a consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, for any period, the consolidated net income
(loss) of St. John Knits International and the Restricted Subsidiaries
determined in accordance with GAAP and before any reduction in respect of
dividends paid solely in Qualified Equity Interests and before any reduction in
respect of unpaid dividends on the Preferred Stock; PROVIDED, HOWEVER, that
there shall not be included in such Consolidated Net Income: (i) any net income
(loss) of any Person if such Person is not a Restricted Subsidiary, except
(A) to the extent of cash actually distributed by such Person during such period
to St. John Knits International or a Restricted Subsidiary as a dividend or
other distribution, (B) with respect to foreign joint ventures, to the extent
that cash is available for distribution (without restriction and not committed
for other purposes) during such period to St. John Knits International or a
Restricted Subsidiary as a dividend or other distribution, but is not
distributed due to adverse tax or other business reasons, such cash shall be
included and (C) St. John Knits International's equity in a net loss of any such
Person (other than an Unrestricted Subsidiary) for such
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period shall be included in determining such Consolidated Net Income; (ii) any
net income (loss) of any person acquired by St. John Knits International or a
Restricted Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition; (iii) any net income (but not loss) of any
Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions,
directly or indirectly, on the payment of dividends or the making of
distributions by such Restricted Subsidiary, directly or indirectly, to St. John
Knits International to the extent of such restrictions; (iv) any gain or loss,
together with any related provision for taxes on such gain or loss, realized
upon the sale or other disposition of any asset of St. John Knits International
or the Restricted Subsidiaries (including pursuant to any sale/leaseback
transaction) outside of the ordinary course of business; (v) any extraordinary
gain or loss, together with any related provision for taxes on such
extraordinary gain or loss; (vi) the cumulative effect of a change in accounting
principles; (vii) any restoration to income of any contingency reserve of an
extraordinary, non-recurring or unusual nature, except to the extent that
provision for such reserve was made out of Consolidated Net Income accrued at
any time following the Issue Date; (viii) gains and losses resulting from
foreign currency transaction adjustments; (ix) gains and losses on assets that
are marked to market; (x) any costs and expenses related to the transactions
incurred on or immediately after the Issue Date, including the settlement of all
outstanding options; and (xi) non-cash expenses resulting from the grant of
Equity Interests and other compensation to management personnel of St. John
Knits International and its Subsidiaries pursuant to a written plan or agreement
or the treatment of options under variable plan accounting.
"CONSOLIDATED NET WORTH" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Equity
Interests of such Person.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for any
period the sum of (i) depreciation, (ii) amortization and (iii) all non-cash
extraordinary charges and other non-cash expenses of such Person and its
Restricted Subsidiaries reducing Consolidated Net Income of such Person and its
Restricted Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP (excluding, for purposes of clause (iii) only, such charges
which require an accrual of or a reserve for cash charges for any future period)
including, without limitation, non-cash charges in connection with the
settlement of the litigation concerning Amen Wardy Home Stores, LLC, the
acquisition of the remaining 49% interest in Amen Wardy Home Stores, LLC and the
closure of certain Amen Wardy stores and related costs.
"CREDIT FACILITY" means the Credit Agreement, dated as of the Issue Date,
among St. John Knits International, the lenders named therein, and The Chase
Manhattan Bank, as Administrative Agent, and any and all guarantee agreements,
security agreements and other agreements and instruments relating thereto, in
each case as the same may be amended, modified, supplemented or replaced from
time to time, and including any deferrals, renewals, extensions, replacements,
refinancings or refundings thereof, or amendments, modifications or supplements
thereto and any agreement providing therefor (including any restatements thereof
and any increases in the amount of the commitments or Indebtedness thereunder),
whether by or with the same or any other lender, creditor, group of lenders or
group of creditors, and including related notes, guarantee and note agreements
and other instruments and agreements executed in connection therewith.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DESIGNATED SENIOR INDEBTEDNESS" means (a) any Indebtedness outstanding
under the Credit Facility and (b) after the Credit Facility has been terminated
and all Indebtedness thereunder has been repaid in full, any other Senior
Indebtedness which, at the time of determination, has an aggregate principal
amount outstanding, together with any commitments to lend additional amounts, of
at least $10.0 million, if the instrument governing such Senior Indebtedness
expressly states that such
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Indebtedness is "Designated Senior Indebtedness" for purposes of the indenture
and a Board Resolution setting forth such designation by St. John Knits
International has been filed with the Trustee.
"DESIGNATION" has the meaning set forth under "--Certain
Covenants--Designation of Unrestricted Subsidiaries" above.
"DESIGNATION AMOUNT" has the meaning set forth under "--Certain
Covenants--Designation of Unrestricted Subsidiaries" above.
"DISPOSITION" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
"DISQUALIFIED EQUITY INTEREST" means any Equity Interest which, by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable, at the option of the holder thereof
(except, in each case, upon the occurrence of a Change of Control or Asset
Sale), in whole or in part, or exchangeable into Indebtedness on or prior to the
earlier of the maturity date of the notes or the date on which no notes remain
outstanding.
"DOMESTIC RESTRICTED SUBSIDIARY" means a Restricted Subsidiary of St. John
Knits International organized under the laws of the United States or any
political subdivision thereof or the operations of which are located
substantially inside the United States.
"EQUITY INTEREST" in any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited, in
such Person, including any Preferred Equity Interests.
"EXCHANGE ACT" means the Exchange Act, as amended, and the rules and
regulations promulgated by the SEC thereunder.
"EXPIRATION DATE" has the meaning set forth in the definition of "Offer to
Purchase" below.
"FAIR MARKET VALUE" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) which could be
negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing and able buyer, neither of which is under any
compulsion to complete the transaction; PROVIDED, HOWEVER, that the Fair Market
Value of any such asset or assets shall be determined conclusively by the Board
of Directors of St. John Knits International acting in good faith, and shall be
evidenced by resolutions of the Board of Directors of St. John Knits
International delivered to the Trustee.
"FOREIGN RESTRICTED SUBSIDIARY" means a Restricted Subsidiary of St. John
Knits International not organized under the laws of the United States or any
political subdivision thereof and the operations of which are located and
conducted substantially outside of the United States.
"FOUR QUARTER PERIOD" has the meaning set forth in the definition of
"Consolidated Coverage Ratio" above.
"GAAP" means generally accepted accounting principles in effect in the
United States on the date hereof and which are consistently applied for all
applicable periods.
"GRAY COMMON STOCK" means common stock of St. John Knits International owned
by Robert E. Gray, Marie Gray or Kelly A. Gray.
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"GUARANTEE" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit.
"GUARANTEE" means the guarantee of the notes by each Guarantor under the
indenture.
"GUARANTOR" means (i) each Domestic Restricted Subsidiary (other than a
Receivables Entity) in existence on the Issue Date and (ii) each other
Restricted Subsidiary formed, created or acquired before or after the Issue Date
required to become a Guarantor after the Issue Date pursuant to "--Limitation on
Guarantees by Restricted Subsidiaries" above.
"GUARANTOR SENIOR INDEBTEDNESS" means, with respect to any Guarantor, at any
date, (a) all Obligations of such Guarantor under or in respect of the Credit
Facility; (b) all Hedging Obligations of such Guarantor; (c) all Obligations of
such Guarantor under stand-by letters of credit; and (d) all other Indebtedness
of such Guarantor for borrowed money, including principal, premium, if any, and
interest (including Post-Petition Interest) on such Indebtedness unless the
instrument under which such Indebtedness of such Guarantor for money borrowed is
Incurred expressly provides that such Indebtedness for money borrowed is not
senior or superior in right of payment to such Guarantor's Guarantee of the
notes, and all renewals, extensions, modifications, amendments or refinancings
thereof. Notwithstanding the foregoing, Guarantor Senior Indebtedness shall not
include (a) to the extent that it may constitute Indebtedness, any Obligation
for federal, state, local or other taxes; (b) any Indebtedness among or between
such Guarantor and any Subsidiary of such Guarantor or any Affiliate of such
Guarantor or any of such Affiliate's Subsidiaries; unless, and for so long as
such Indebtedness has been pledged to secure obligations under or in respect of
Guarantor Senior Indebtedness; (c) to the extent that it may constitute
Indebtedness, any Obligation in respect of any trade payable Incurred for the
purchase of goods or materials, or for services obtained, in the ordinary course
of business; (d) that portion of any Indebtedness that is Incurred in violation
of the indenture; (e) Indebtedness evidenced by such Guarantor's Guarantee of
the notes; (f) Indebtedness of such Guarantor that is expressly subordinate or
junior in right of payment to any other Indebtedness of such Guarantor; (g) to
the extent that it may constitute Indebtedness, any obligation owing under
leases (other than Capitalized Lease Obligations) or management agreements;
(h) any obligation that by operation of law is subordinate to any general
unsecured obligations of such Guarantor; and (i) Indebtedness of a Guarantor to
the extent such Indebtedness is owed to and held by any Federal, state, local or
other governmental authority.
"GUARANTOR SENIOR SUBORDINATED INDEBTEDNESS" means the Guarantees and any
other Indebtedness of a Guarantor that specifically provides that such
Indebtedness is to rank PARI PASSU in right of payment with the Guarantees and
is not subordinated by its terms in right of payment to any Indebtedness or
other obligation of the Guarantor other than Guarantor Senior Indebtedness.
"HEDGING AGREEMENT" means, with respect to any Person, all interest rate
swap or similar agreements or foreign currency or commodity hedge, exchange or
similar agreements of such Person.
"HEDGING OBLIGATIONS" means, with respect to any Person, the Obligations of
such Person under Hedging Agreements.
"HOLDERS" means the registered holders of the notes.
"INCUR" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and
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"Incurrence," "Incurred" and "Incurring" shall have meanings correlative to the
foregoing). Indebtedness of any Acquired Person or any of its Subsidiaries
existing at the time such Acquired Person becomes a Restricted Subsidiary (or is
merged into or consolidated with St. John Knits International or any Restricted
Subsidiary), whether or not such Indebtedness was Incurred in connection with,
as a result of, or in contemplation of, such Acquired Person becoming a
Restricted Subsidiary (or being merged into or consolidated with St. John Knits
International or any Restricted Subsidiary), shall be deemed Incurred at the
time any such Acquired Person becomes a Restricted Subsidiary or merges into or
consolidates with St. John Knits International or any Restricted Subsidiary.
"INDEBTEDNESS" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (a) every obligation of such Person for money borrowed;
(b) every obligation of such Person evidenced by bonds, debentures, notes or
other similar instruments, including obligations incurred in connection with the
acquisition of property, assets or businesses; (c) every reimbursement
obligation of such Person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person;
(d) every obligation of such Person issued or assumed as the deferred purchase
price of property or services (but excluding trade accounts payable incurred in
the ordinary course of business and payable in accordance with industry
practices, or other accrued liabilities arising in the ordinary course of
business which are not overdue or which are being contested in good faith);
(e) every Capital Lease Obligation of such Person; (f) every net obligation
under Hedging Agreements of such Person; (g) every obligation of the type
referred to in clauses (a) through (f) of another Person and all dividends of
another Person the payment of which, in either case, such Person has guaranteed
or is responsible or liable for, directly or indirectly, as obligor, guarantor
or otherwise; and (h) any and all deferrals, renewals, extensions and refundings
of, or amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clauses (a) through (g) above. Indebtedness
(a) shall never be calculated taking into account any cash and cash equivalents
held by such Person; (b) shall not include obligations of any Person
(x) arising from the honoring by a bank or other financial institution of a
check, draft or similar instrument inadvertently drawn against insufficient
funds in the ordinary course of business, provided that such obligations are
extinguished within two business days of their incurrence, (y) resulting from
the endorsement of negotiable instruments for collection in the ordinary course
of business and consistent with past business practices and (z) under stand-by
letters of credit to the extent collateralized by cash or Cash Equivalents;
(c) which provides that an amount less than the principal amount thereof shall
be due upon any declaration of acceleration thereof shall be deemed to be
incurred or outstanding in an amount equal to the accreted value thereof at the
date of determination; and (d) shall include the liquidation preference and any
mandatory redemption payment obligations in respect of any Disqualified Equity
Interests of St. John Knits International or any Restricted Subsidiary.
"INDEPENDENT FINANCIAL ADVISOR" means a nationally recognized, accounting,
appraisal, investment banking firm or consultant which, in the judgment of the
Board of Directors of St. John Knits International, is independent and qualified
to perform the task for which it is to be engaged.
"INSOLVENCY OR LIQUIDATION PROCEEDING" means, with respect to any Person,
any liquidation, dissolution or winding up of such Person, or any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
such Person, whether voluntary or involuntary.
"INTEREST" means, with respect to the notes, the sum of any cash interest
and any Liquidated Damages (as defined under "Exchange and Registration Rights"
below) on the notes.
"INVESTMENT" means, with respect to any Person, any direct or indirect loan,
advance, guarantee or other extension of credit or capital contribution to (by
means of transfers of cash or other property or assets to others or payments for
property or services for the account or use of others, or otherwise), or
purchase or acquisition of capital stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued by, any other Person; PROVIDED
that (i) endorsements of negotiable instruments and
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documents in the ordinary course of business and (ii) an acquisition of assets,
Equity Interests or other securities by St. John Knits International for
consideration consisting exclusively of Equity Interests (other than
Disqualified Equity Interests) of St. John Knits International shall in each
case not be deemed to be an Investment. For purposes of the "Limitation on
Restricted Payments" covenant above, (i) "Investment" shall include the
applicable Designation Amount at the time of the Designation of any Restricted
Subsidiary as an Unrestricted Subsidiary and (ii) the amount of any Investment
shall be the original cost of such Investment, plus the cost of all additions
thereto, but without any other adjustments for increases or decreases in value,
or write-ups, write-downs or write-offs with respect to such Investment; reduced
by the payment of dividends or distributions in connection with such Investment
or any other amounts received in respect of such Investment; PROVIDED, HOWEVER,
that no such payment of dividends or distributions or receipt of any such other
amounts shall reduce the amount of any Investment if such payment of dividends
or distributions or receipt of any such amounts would be included in
Consolidated Net Income. If St. John Knits International or any Restricted
Subsidiary sells or otherwise disposes of any Voting Equity Interests of any
direct or indirect Restricted Subsidiary such that, after giving effect to any
such sale or disposition, St. John Knits International no longer owns, directly
or indirectly, greater than 50% of the outstanding Voting Equity Interests of
such Restricted Subsidiary, St. John Knits International shall be deemed to have
made an Investment on the date of any such sale or disposition.
"ISSUE DATE" means July 7, 1999, the original issue date of the outstanding
notes.
"LIEN" means any lien, mortgage, charge, security interest, hypothecation,
assignment for security or encumbrance of any kind (including any conditional
sale or capital lease or other title retention agreement, any lease in the
nature thereof, and any agreement to give any security interest).
"MANAGEMENT AGREEMENT" means the management agreement dated as of the Issue
Date between St. John Knits International and Vestar.
"MATURITY DATE" means the date, which is set forth on the face of the notes,
on which the notes will mature.
"NET CASH PROCEEDS" means the aggregate proceeds in the form of cash or Cash
Equivalents received by St. John Knits International or any Restricted
Subsidiary in respect of any Asset Sale, including all cash or Cash Equivalents
received upon any sale, liquidation or other exchange of proceeds of Asset Sales
received in a form other than cash or Cash Equivalents, net of (a) the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof; (b) taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements); (c) amounts required to be applied
to the repayment of Indebtedness secured by a Lien on the asset or assets that
were the subject of such Asset Sale; (d) amounts deemed, in good faith,
appropriate by the Board of Directors of St. John Knits International to be
provided as a reserve, in accordance with GAAP, against any liabilities
associated with such assets which are the subject of such Asset Sale; including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as reflected in
an officers' certificate delivered to the Trustee (provided that the amount of
any such reserves shall be deemed to constitute Net Cash Proceeds at the time
such reserves shall have been reversed or are not otherwise required to be
retained as a reserve); and (e) with respect to Asset Sales by Restricted
Subsidiaries, the portion of such cash payments attributable to Persons holding
a minority interest in such Restricted Subsidiary.
"OBLIGATIONS" means any principal, interest (including, without limitation,
Post-Petition Interest), penalties, fees, indemnification obligations,
reimbursement obligations, obligations to provide cash collateral, damages and
other liabilities payable under the documentation governing any Indebtedness.
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"OFFER" has the meaning set forth in the definition of "Offer to Purchase"
below.
"OFFER TO PURCHASE" means a written offer (the "Offer") sent by or on behalf
of St. John Knits International by first-class mail, postage prepaid, to each
Holder at his address appearing in the register for the notes on the date of the
Offer offering to purchase up to the principal amount of notes specified in such
Offer at the purchase price specified in such Offer (as determined pursuant to
the indenture if so required). Unless otherwise required by applicable law, the
Offer shall specify an expiration date (the "Expiration Date") of the Offer to
Purchase, which shall be not less than 20 business days nor more than 60 days
after the date of such Offer, and a settlement date (the "Purchase Date") for
purchase of notes to occur no later than five business days after the Expiration
Date. St. John Knits International shall notify the Trustee at least 15 business
days (or such shorter period as is acceptable to the Trustee) prior to the
mailing of the Offer of St. John Knits International's obligation to make an
Offer to Purchase, and the Offer shall be mailed by St. John Knits International
or, at St. John Knits International's request, by the Trustee in the name and at
the expense of St. John Knits International. The Offer shall contain all the
information required by applicable law to be included therein. The Offer shall
contain all instructions and materials necessary to enable such Holders to
tender notes pursuant to the Offer to Purchase. The Offer shall also state:
(1) the section of the indenture pursuant to which the Offer to Purchase is
being made; (2) the Expiration Date and the Purchase Date; (3) the aggregate
principal amount of the outstanding notes offered to be purchased by St. John
Knits International pursuant to the Offer to Purchase (including, if less than
100%, the manner by which such amount has been determined pursuant to the
section of the indenture requiring the Offer to Purchase) (the "Purchase
Amount"); (4) the purchase price to be paid by St. John Knits International for
each $1,000 aggregate principal amount of notes accepted for payment (as
specified pursuant to the indenture) (the "Purchase Price"); (5) that the Holder
may tender all or any portion of the notes registered in the name of such Holder
and that any portion of a note tendered must be tendered in an integral multiple
of $1,000 principal amount; (6) the place or places where notes are to be
surrendered for tender pursuant to the Offer to Purchase; (7) that interest on
any note not tendered or tendered but not purchased by St. John Knits
International pursuant to the Offer to Purchase will continue to accrue;
(8) that on the Purchase Date the Purchase Price will become due and payable
upon each note being accepted for payment pursuant to the Offer to Purchase and
that interest thereon shall cease to accrue on and after the Purchase Date;
(9) that each Holder electing to tender all or any portion of a note pursuant to
the Offer to Purchase will be required to surrender such note at the place or
places specified in the Offer prior to the close of business on the Expiration
Date (such note being, if St. John Knits International or the Trustee so
requires, duly endorsed by, or accompanied by a written instrument of transfer
in form satisfactory to St. John Knits International and the Trustee duly
executed by, the Holder thereof or his attorney duly authorized in writing);
(10) that (a) if notes in an aggregate principal amount less than or equal to
the Purchase Amount are duly tendered and not withdrawn pursuant to the Offer to
Purchase, St. John Knits International shall purchase all such notes and (b) if
notes in an aggregate principal amount in excess of the Purchase Amount are
tendered and not withdrawn pursuant to the Offer to Purchase, St. John Knits
International shall purchase notes having an aggregate principal amount equal to
the Purchase Amount on a PRO RATA basis (with such adjustments as may be deemed
appropriate so that only notes in denominations of $1,000 principal amount or
integral multiples thereof shall be purchased); and (11) that in the case of any
Holder whose note is purchased only in part, St. John Knits International shall
execute and the Trustee shall authenticate and deliver to the Holder of such
note without service charge, a new note or notes, of any authorized denomination
as requested by such Holder, in an aggregate principal amount equal to and in
exchange for the unpurchased portion of the note so tendered.
An Offer to Purchase shall be governed by and effected in accordance with
the provisions above pertaining to any Offer.
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"OPINION OF COUNSEL" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to St. John Knits International, Vestar or the Trustee.
"PERMITTED BUSINESS" means the business of St. John Knits International and
its Restricted Subsidiaries conducted on the Issue Date and businesses ancillary
or reasonably related thereto, including businesses whose principal strategy is
to capitalize on the image of St. John Knits International and its products.
"PERMITTED HOLDER" means Vestar and its Affiliates.
"PERMITTED INDEBTEDNESS" has the meaning set forth in the second paragraph
of "--Certain Covenants--Limitation on Indebtedness" above.
"PERMITTED INVESTMENTS" means (a) Cash and Cash Equivalents;
(b) Investments in prepaid expenses, negotiable instruments held for collection
and lease, utility and workers' compensation, performance and other similar
deposits; (c) Hedging Obligations; (d) bonds, notes, debentures, stock or other
securities received as a result of Asset Sales permitted under "--Certain
Covenants--Disposition of Proceeds of Asset Sales" above; (e) Investments in St.
John Knits International and Investments in a Guarantor or a Person that, as a
result of or in connection with such Investment, becomes a Guarantor or is
merged with or into or consolidated with St. John Knits International or another
Guarantor or that transfers or conveys all or substantially all its assets to
St. John Knits International or a Guarantor; (f) Investments existing as of the
Issue Date; (g) any Investment consisting of a guarantee by a Restricted
Subsidiary of Senior Indebtedness or any guarantee of Indebtedness otherwise
permitted by the indenture; (h) receivables owing to St. John Knits
International or any Restricted Subsidiary created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; PROVIDED, HOWEVER, that such trade terms may include such
concessionary trade terms as St. John Knits International or any such Restricted
Subsidiary deems reasonable under the circumstances; (i) payroll, travel and
similar advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and that are made
in the ordinary course of business; (j) Investments in joint ventures in an
aggregate amount not to exceed $5.0 million; (k) stock, obligations or
securities received in settlement of debts created in the ordinary course of
business and owing to St. John Knits International or any Restricted Subsidiary
or in satisfaction of judgments or pursuant to any plan of reorganization or
similar arrangement upon the bankruptcy or insolvency of a debtor;
(l) Investments by St. John Knits International or a Restricted Subsidiary in a
Receivables Entity or any Investment by a Receivables Entity in any other
Person, in each case, in connection with a Qualified Receivables Transaction;
(m) Indebtedness permitted pursuant to clause (m) of "--Certain
Covenants--Limitation on Indebtedness"; (n) Investments by St. John Knits
International or a Restricted Subsidiary in St. John Japan for the purpose of
purchasing minority interests therein in an aggregate amount not to exceed
$1.5 million and (o) Investments in Foreign Restricted Subsidiaries which are
not Guarantors in an aggregate amount not to exceed $10.0 million.
"PERMITTED JUNIOR SECURITIES" means any securities of St. John Knits
International or any other Person that are (i) equity securities without special
covenants or (ii) debt securities expressly subordinated in right of payment to
all Senior Indebtedness that may at the time be outstanding, to substantially
the same extent as, or to a greater extent than, the notes are subordinated as
provided in the indenture, in any event pursuant to a court order so providing
and as to which (a) the rate of interest on such securities shall not exceed the
effective rate of interest on the notes on the date of the indenture, (b) such
securities shall not be entitled to the benefits of covenants or defaults
materially more beneficial to the holders of such securities than those in
effect with respect to the notes on the date of the indenture and (c) such
securities shall not provide for amortization (including sinking fund and
mandatory prepayment provisions) commencing prior to the date six months
following the final
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scheduled maturity date of the Senior Indebtedness (as modified by the plan of
reorganization pursuant to which such securities are issued).
"PERMITTED LIENS" means (a) Liens on property of a Person existing at the
time such Person is merged into or consolidated with St. John Knits
International or any Restricted Subsidiary; PROVIDED, HOWEVER,that such Liens
were in existence prior to the contemplation of such merger or consolidation and
do not secure any property or assets of St. John Knits International or any
Restricted Subsidiary other than the property or assets subject to the Liens
prior to such merger or consolidation; (b) Liens imposed by law such as
carriers', warehousemen's and mechanics' Liens and other similar Liens arising
in the ordinary course of business which secure payment of obligations not more
than 60 days past due or which are being contested in good faith and by
appropriate proceedings; (c) Liens existing on the Issue Date; (d) Liens
securing only the notes or the Guarantees; (e) Liens in favor of St. John Knits
International or any Restricted Subsidiary (including any such Liens securing
Indebtedness, to the extent and for so long as such Indebtedness is pledged to
secure Senior Indebtedness); (f) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
conducted; PROVIDED, HOWEVER, that any reserve or other appropriate provision as
shall be required in conformity with GAAP shall have been made therefor;
(g) easements, reservation of rights of way, restrictions and other similar
easements, licenses, restrictions on the use of properties, or minor
imperfections of title that in the aggregate do not in any case materially
detract from the properties subject thereto or interfere with the ordinary
conduct of the business of St. John Knits International and the Restricted
Subsidiaries; (h) Liens resulting from the deposit of cash or notes in
connection with contracts, tenders or expropriation proceedings, or to secure
workers' compensation, surety or appeal bonds, costs of litigation when required
by law and public and statutory obligations or obligations under franchise
arrangements entered into in the ordinary course of business; (i) Liens securing
Indebtedness consisting of Capital Lease Obligations, Purchase Money
Indebtedness, mortgage financings, industrial revenue bonds or other monetary
obligations, in each case incurred solely for the purpose of financing all or
any part of the purchase price or cost of construction or installation of assets
used in the business of St. John Knits International or the Restricted
Subsidiaries, or repairs, additions or improvements to such assets, PROVIDED,
HOWEVER, that (I) such Liens secure Indebtedness in an amount not in excess of
the original purchase price or the original cost of any such assets or repair,
addition or improvement thereto (plus an amount equal to the reasonable fees and
expenses in connection with the incurrence of such Indebtedness), (II) such
Liens do not extend to any other assets of St. John Knits International or the
Restricted Subsidiaries (and, in the case of repair, addition or improvements to
any such assets, such Lien extends only to the assets (and improvements thereto
or thereon) repaired, added to or improved), (III) the Incurrence of such
Indebtedness is permitted by "--Certain Covenants--Limitation on Indebtedness"
above and (IV) such Liens attach within 90 days of such purchase, construction,
installation, repair, addition or improvement; (j) Liens in favor of issuers of
surety or performance bonds or letters of credit or bankers' acceptances issued
pursuant to the request of and for the account of such Person in the ordinary
course of its business; PROVIDED, HOWEVER, that such letters of credit do not
constitute Indebtedness; (k) Liens securing Hedging Obligations so long as the
related Indebtedness is, and is permitted to be under the indenture, secured by
a Lien on the same property securing such Hedging Obligation; (l) leases and
subleases of real property which do not materially interfere with the ordinary
conduct of the business of St. John Knits International or any of its Restricted
Subsidiaries; (m) judgment Liens not giving rise to an Event of Default so long
as such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment have not been
finally terminated or the period within which such proceedings may be initiated
has not expired, (n) Liens arising solely by virtue of any statutory or common
law provisions relating to banker's Liens, rights of set-off or similar rights
and remedies as to deposit accounts or other funds maintained with a depositary
institution; PROVIDED that (1) such deposit account is not a dedicated cash
collateral account and is not subject to restrictions against access by St. John
Knits International in excess of those set forth by regulations promulgated by
the Federal Reserve
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Board, and (2) such deposit account is not intended by St. John Knits
International or any Restricted Subsidiary to provide collateral to the
depositary institution; (o) Liens arising from Uniform Commercial Code financing
statement filings regarding operating leases entered into by St. John Knits
International and its Restricted Subsidiaries in the ordinary course of
business; (p) Liens on property at the time St. John Knits International or a
Restricted Subsidiary acquired the property, including any acquisition by means
of a merger or consolidation with or into St. John Knits International or any
Restricted Subsidiary; PROVIDED, HOWEVER, that such Liens are not created,
incurred or assumed in connection with or in contemplation of, such acquisition;
PROVIDED, FURTHER, HOWEVER, that such Liens may not extend to any other property
owned by St. John Knits International or any Restricted Subsidiary; (q) Liens
securing Indebtedness or other obligations of a Restricted Subsidiary owing to
St. John Knits International or a Restricted Subsidiary; (r) Liens on assets
transferred to a Receivables Entity or on assets of a Receivables Entity, in
either case incurred in connection with a Qualified Receivables Transaction;
(s) Liens arising out of consignment or similar arrangements for the sale of
goods entered into by St. John Knits International or any Restricted Subsidiary
in the ordinary course of business; (t) Liens incurred in the ordinary course of
business of St. John Knits International or any Restricted Subsidiary with
respect to obligations that do not exceed $5.0 million at any one time
outstanding and that (1) are not incurred in connection with the borrowing of
money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (2) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by St. John Knits International or such Restricted
Subsidiary; and (u) Liens to secure any refinancings, renewals, extensions,
modifications or replacements (collectively, "refinancing") (or successive
refinancings), in whole or in part, of any Indebtedness secured by Liens
referred to in the clauses above so long as such Lien does not extend to any
other property (other than improvements thereto).
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, limited liability
limited partnership, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"POST-PETITION INTEREST" means, with respect to any Indebtedness of any
Person, all interest accrued or accruing on such Indebtedness after the
commencement of any Insolvency or Liquidation Proceeding with respect to such
Person in accordance with and at the contract rate (including, without
limitation, any rate applicable upon default) specified in the agreement or
instrument creating, evidencing or governing such Indebtedness, whether or not,
pursuant to applicable law or otherwise, the claim for such interest is allowed
or allowable as a claim in such Insolvency or Liquidation Proceeding.
"PREFERRED EQUITY INTEREST", in any Person, means an Equity Interest of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over Equity
Interests of any other class in such Person.
"PREFERRED STOCK" means the 15 1/4% Preferred Stock of St. John Knits
International issued on the Issue Date and any Qualified Equity Interest of St.
John Knits International issued in exchange for or the net proceeds of which are
used to redeem the Preferred Stock.
"PRINCIPAL" of a debt security means the principal of the security plus,
when appropriate, the premium, if any, on the security.
"PUBLIC EQUITY OFFERING" means, with respect to St. John Knits
International, an underwritten public offering of Qualified Equity Interests of
St. John Knits International pursuant to an effective registration statement
filed under the Securities Act (excluding registration statements filed on
Form S-8).
"PURCHASE AMOUNT" has the meaning set forth in the definition of "Offer to
Purchase" above.
"PURCHASE DATE" has the meaning set forth in the definition of "Offer to
Purchase" above.
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"PURCHASE MONEY INDEBTEDNESS" means Indebtedness of St. John Knits
International or any Restricted Subsidiary Incurred for the purpose of financing
all or any part of the purchase price, or the cost of construction or
improvement of any property; PROVIDED, HOWEVER, that the aggregate principal
amount of such Indebtedness does not exceed the lesser of the Fair Market Value
of such property or such purchase price or cost, including any refinancing of
such Indebtedness that does not increase the aggregate principal amount (or
accreted amount, if less) thereof as of the date of refinancing.
"PURCHASE MONEY NOTE" means a promissory note of a Receivables Entity
evidencing a line of credit, which may be irrevocable, from St. John Knits
International or any Restricted Subsidiary of St. John Knits International in
connection with a Qualified Receivables Transaction to a Receivables Entity,
which note is repayable from cash available to the Receivables Entity, other
than amounts required to be established as reserves pursuant to agreements,
amounts paid to investors in respect of interest, principal and other amounts
owing to such investors and amounts owing to such investors and amounts paid in
connection with the purchase of newly generated accounts receivable.
"PURCHASE PRICE" has the meaning set forth in the definition of "Offer to
Purchase" above.
"QUALIFIED EQUITY INTEREST" in any Person means any Equity Interest in such
Person other than any Disqualified Equity Interest.
"QUALIFIED RECEIVABLES TRANSACTION" means any transaction or series of
transactions that may be entered into by St. John Knits International or any of
its Restricted Subsidiaries pursuant to which St. John Knits International or
any of its Restricted Subsidiaries may sell, convey or otherwise transfer to
(1) a Receivables Entity (in the case of a transfer by St. John Knits
International or any of its Restricted Subsidiaries) and (2) any other Person
(in the case of a transfer by a Receivables Entity), or may grant a security
interest in, any accounts receivable (whether now existing or arising in the
future) of St. John Knits International or any of its Restricted Subsidiaries,
and any assets related thereto including, without limitation, all collateral
securing such accounts receivable, all contracts and all guarantees or other
obligations in respect of such accounts receivable, the proceeds of such
receivables and other assets which are customarily transferred, or in respect of
which security interests are customarily granted in connection with asset
securitization involving accounts receivable.
"RECEIVABLES ENTITY" means a Wholly Owned Restricted Subsidiary of St. John
Knits International (other than a Guarantor) which engages in no activities
other than in connection with the financing of accounts receivable and which is
designated by the board of directors of St. John Knits International (as
provided below) as a Receivables Entity:
(1) no portion of the Indebtedness or any other obligations (contingent
or otherwise) of which:
(a) is guaranteed by St. John Knits International or any Restricted
Subsidiary of St. John Knits International (excluding guarantees of
Obligations (other than the principal of, and interest on, Indebtedness)
pursuant to Standard Securitization Undertakings);
(b) is recourse to or obligates St. John Knits International or any
Restricted Subsidiary of St. John Knits International in any way other
than pursuant to Standard Securitization Undertakings; or
(c) subjects any property or asset of St. John Knits International or
any Restricted Subsidiary of St. John Knits International, directly or
indirectly, contingently or otherwise, to the satisfaction thereof, other
than pursuant to Standard Securitization Undertakings;
(2) with which neither St. John Knits International nor any Restricted
Subsidiary of St. John Knits International has any material contract,
agreement, arrangement or understanding (except in connection with a
Purchase Money Note or Qualified Receivables Transaction) other than on
terms no less favorable to St. John Knits International or such Restricted
Subsidiary than those that might be obtained at the time from Persons that
are not Affiliates of St. John Knits
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International, other than fees payable in the ordinary course of business in
connection with servicing accounts receivable; and
(3) to which neither St. John Knits International nor any Restricted
Subsidiary of St. John Knits International has any obligation to maintain or
preserve such entity's financial condition or cause such entity to achieve
certain levels of operating results.
Any such designation by the board of directors of St. John Knits
International shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the resolution of the board of directors of St. John Knits
International giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing conditions.
"REDEMPTION DATE" has the meaning set forth in the third paragraph of
"--Optional Redemption" above.
"REPLACEMENT ASSETS" has the meaning set forth in the first paragraph under
"--Certain Covenants--Disposition of Proceeds of Asset Sales" above.
"RESTRICTED SUBSIDIARY" means any Subsidiary of St. John Knits International
that has not been designated by the Board of Directors of St. John Knits
International, by a resolution of the Board of Directors of St. John Knits
International delivered to the Trustee, as an Unrestricted Subsidiary pursuant
to "--Certain Covenants--Designation of Unrestricted Subsidiaries" above. Any
such designation may be revoked by a resolution of the Board of Directors of St.
John Knits International delivered to the Trustee, subject to the provisions of
such covenant.
"SEC" means the Securities and Exchange Commission.
"SENIOR INDEBTEDNESS" means, at any date, (a) all Obligations of St. John
Knits International under or in respect of the Credit Facility; (b) all Hedging
Obligations of St. John Knits International; (c) all Obligations of St. John
Knits International under stand-by letters of credit; and (d) all other
Indebtedness of St. John Knits International for borrowed money, including
principal, premium, if any, and interest (including Post-Petition Interest) on
such Indebtedness, unless the instrument under which such Indebtedness of St.
John Knits International for money borrowed is Incurred expressly provides that
such Indebtedness for money borrowed is not senior or superior in right of
payment to the notes, and all renewals, extensions, modifications, amendments or
refinancings thereof. Notwithstanding the foregoing, Senior Indebtedness shall
not include (a) to the extent that it may constitute Indebtedness, any
Obligation for Federal, state, local or other taxes; (b) any Indebtedness among
or between St. John Knits International and any Subsidiary of St. John Knits
International or any Affiliate of St. John Knits International or any of such
Affiliate's Subsidiaries, unless and for so long as such Indebtedness has been
pledged to secure obligations under or in respect of Senior Indebtedness;
(c) to the extent that it may constitute Indebtedness, any Obligation in respect
of any trade payable Incurred for the purchase of goods or materials, or for
services obtained, in the ordinary course of business; (d) that portion of any
Indebtedness that is Incurred in violation of the indenture; (e) Indebtedness
evidenced by the notes; (f) Indebtedness of St. John Knits International that is
expressly subordinate or junior in right of payment to any other Indebtedness of
St. John Knits International; (g) to the extent that it may constitute
Indebtedness, any obligation owing under leases (other than Capitalized Lease
Obligations) or management agreements; (h) any obligation that by operation of
law is subordinate to any general unsecured obligations of St. John Knits
International; and (i) Indebtedness of St. John Knits International to the
extent such Indebtedness is owed to and held by any Federal, state, local or
other governmental authority.
"SENIOR SUBORDINATED INDEBTEDNESS" means the notes and any other
Indebtedness of St. John Knits International that specifically provides that
such Indebtedness is to rank PARI PASSU in right of payment with the notes and
is not subordinated by its terms in right of payment to any Indebtedness or
other obligation of St. John Knits International which is not Senior
Indebtedness.
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"SIGNIFICANT RESTRICTED SUBSIDIARY" means any Restricted Subsidiary that
would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X promulgated pursuant to the Securities Act, as such regulation is
in effect on the date hereof.
"STANDARD SECURITIZATION UNDERTAKINGS" means representations, warranties,
covenants and indemnities entered into by St. John Knits International or any
Restricted Subsidiary of St. John Knits International which are reasonably
customary in securitization of accounts receivable transactions.
"STATED MATURITY" means, when used with respect to any note or any
installment of interest thereon, the date specified in such note as the fixed
date on which the principal of such note or such installment of interest is due
and payable.
"STOCKHOLDERS' AGREEMENT" means the Stockholders' Agreement among St. John
Knits, Inc., St. John Knits International, Vestar/Gray Investors LLC, Vestar/SJK
Investors LLC and the members of Vestor/ Gray Investors LLC party thereto dated
as of, and as in effect on, the Issue Date.
"SUBORDINATED INDEBTEDNESS" means, with respect to St. John Knits
International or any Guarantor, any Indebtedness of St. John Knits International
or such Guarantor, as the case may be, which is expressly subordinated in right
of payment to the notes or such Guarantor's Guarantee, as the case may be.
"SUBSIDIARY" means, with respect to any Person, (a) any corporation of which
the outstanding Voting Equity Interests having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, through one or more Persons by such Person, or (b) any
other Person of which at least a majority of Voting Equity Interests are at the
time, directly or indirectly, owned by such first named Person.
"SURVIVING PERSON" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
"UNITED STATES GOVERNMENT OBLIGATIONS" means direct non-callable obligations
of the United States of America for the payment of which the full faith and
credit of the United States is pledged.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of St. John Knits
International designated as such pursuant to "--Certain Covenants--Designation
of Unrestricted Subsidiaries" above. Any such designation may be revoked by a
resolution of the Board of Directors of St. John Knits International delivered
to the Trustee, subject to the provisions of such covenant.
"UNUTILIZED NET CASH PROCEEDS" has the meaning set forth in the third
paragraph under "--Certain Covenants--Disposition of Proceeds of Asset Sales"
above.
"VESTAR" means Vestar Capital Partners III, L.P.
"VESTAR/GRAY LLC AGREEMENT" means the Amended and Restated Limited Liability
Company Agreement of Vestar/Gray Investors LLC, by and among Vestar/SJK
Investors LLC, Robert Gray, Marie Gray, Kelly A. Gray, the Kelly Ann Gray Trust
and the Gray Family Trust dated as of, and as in effect on, the Issue Date.
"VOTING EQUITY INTERESTS" means Equity Interests in a corporation or other
Person with voting power under ordinary circumstances entitling the holders
thereof to elect the Board of Directors or other governing body of such
corporation or Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment of final maturity, in respect thereof, by
(ii) the number of years (calculated to the nearest one-twelfth) that will
elapse between such date and the making of such payment, by (b) the then
outstanding aggregate principal amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary all of
the outstanding Voting Equity Interests (other than directors' qualifying
shares) of which are owned, directly or indirectly, by St. John Knits
International and/or one or more Wholly Owned Restricted Subsidiaries.
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DESCRIPTION OF PREFERRED STOCK
The summary contained herein of certain provisions of the Preferred Stock
issued by St. John Knits International (the "Issuer") in connection with the
transactions does not purport to be complete and is qualified in its entirety by
reference to the provisions of the Certificate of Designations relating thereto,
a copy of which has been filed as an exhibit to the registration statement of
which this prospectus is a part.
GENERAL
Pursuant to the Certificate of Designations, 250,000 shares of Preferred
Stock with a liquidation preference of $100 per share were authorized for
issuance in connection with the transactions. The Preferred Stock will rank
junior in right of payment to all liabilities and obligations (whether or not
for borrowed money) of the Issuer (other than common stock of the Issuer and any
preferred stock of the Issuer which by its terms is on parity with or junior to
the Preferred Stock).
RANK
The Preferred Stock will, with respect to the dividend rights and rights on
liquidation, winding-up and dissolution, rank (i) senior to all classes of
common stock and each other class of capital stock or series of preferred stock
issued by the Issuer established after the Issue Date by the board of directors
of the Issuer which does not expressly provide that it ranks senior to or on a
parity with the Preferred Stock as to dividend rights and rights on liquidation,
winding-up and dissolution (collectively referred to with the common stock of
the Issuer as "Junior Securities"); (ii) on a parity with each other class of
capital stock or series of preferred stock issued by the Issuer established
after the Issue Date by the board of directors of the Issuer, which expressly
provides that such series will rank on a parity with the Preferred Stock as to
dividend rights and rights on liquidation, winding-up and dissolution
(collectively referred to as "Parity Securities"); and (iii) junior to each
other class of capital stock or series of preferred stock issued by the Issuer
established after the Issue Date by the board of directors of the Issuer the
terms of which specifically provide that such series will rank senior to the
Preferred Stock as to dividend rights and rights on liquidation, winding-up and
dissolution (collectively referred to as "Senior Securities"). The Preferred
Stock will be subject to the issuance of series of Junior Securities, Parity
Securities and Senior Securities.
DIVIDENDS
Holders of Preferred Stock will be entitled to receive, when, as and if
declared by the board of directors of the Issuer, out of funds legally available
therefor, dividends on the Preferred Stock, at an annual rate equal to 15 1/4%,
PROVIDED that if dividends are not paid on a dividend payment date, dividends
shall continue to accrue on unpaid dividends. Dividends on the Preferred Stock
may only be paid in cash if permitted under the terms of the senior credit
facilities, the indenture and other contractual arrangements of St. John Knits
International. Dividends will accrue from the date of issuance and will be
payable semi-annually in arrears on January 1 and July 1 of each year,
commencing on January 1, 2000. The indenture would permit the payment of cash
dividends on the Preferred Stock only if the Issuer has availability under
clause (c) of the test set forth under "Description of the Notes-Certain
Covenants-Limitation on Restricted Payments." The senior credit facilities
prohibit the payment of cash dividends on the Preferred Stock for five years
after the Issue Date.
OPTIONAL REDEMPTION
The Preferred Stock may be redeemed at any time on or after July 1, 2004, in
whole or in part, at the option of the Issuer, at the redemption prices
(expressed in percentages of liquidation value) set
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forth below together with all accumulated dividends to the date of redemption,
if redeemed during the 12-month period beginning on July 1 of the years
indicated.
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2004........................................................ 107.625%
2005........................................................ 105.719%
2006........................................................ 103.813%
2007........................................................ 101.906%
2008 and thereafter......................................... 100.000%
</TABLE>
The Preferred Stock will also be redeemable in whole or in part, at the
option of SJKI at any time before July 1, 2004, at a redemption price equal to
the greater of (i) 100% of the liquidation value of the Preferred Stock and
(ii) the present values of the liquidation value at the mandatory redemption
date, discounted on a semi-annual basis at the Treasury Yield plus 15 basis
points. The "Treasury Yield" means, with respect to any redemption date, the
rate per annum equal to the semi-annual equivalent yield to maturity for a
comparable treasury issue.
In addition, at any time and from time to time on or prior to July 1, 2002,
the Issuer may redeem in the aggregate up to 35% of the originally issued
liquidation value of the Preferred Stock with the net cash proceeds of one or
more Public Equity Offerings (as defined in the indenture) by St. John Knits
International at a redemption price in cash equal to 115.25% of the liquidation
value thereof, plus accumulated dividends thereon, if any, to the date of
redemption; PROVIDED, HOWEVER, that at least 65% of the originally issued
aggregate liquidation value of the Preferred Stock must remain outstanding
immediately after giving effect to each such redemption (excluding any Preferred
Stock held by the Issuer or any of its affiliates). Notice of any such
redemption must be given within 60 days after the date of the closing of the
relevant Public Equity Offering of St. John Knits International.
The Preferred Stock may only be redeemed if permitted under the terms of the
senior credit facilities, the indenture and other contractual arrangements of
St. John Knits International.
MANDATORY REDEMPTION
On July 1, 2010, the Issuer will be required to redeem (subject to
contractual and other restrictions with respect thereto and to the legal
availability of funds therefor) all outstanding shares of Preferred Stock at a
price equal to the liquidation value thereof plus all accumulated dividends to
the date of redemption.
RIGHT OF APPOINTMENT
Upon the failure of the Issuer to redeem all outstanding shares of Preferred
Stock as described above under the caption "Mandatory Redemption", or upon the
failure by the Issuer or any of its Restricted Subsidiaries (as defined in the
Certificate of Designations) to comply with any of the covenants or agreements
set forth in the Certificate of Designations, and the continuance of any such
failure for 60 consecutive days or more, the number of members of the board of
directors of the Issuer will be increased by one and the holders of a majority
of the outstanding aggregate liquidation preference of the Preferred Stock,
acting as a separate class, will be entitled to appoint one member to the board
of directors of the Issuer.
EXCHANGE
The Issuer may, at its option, exchange all but not less than all of the
shares of then outstanding Preferred Stock for debentures of the Issuer in a
principal amount equal to the liquidation value of the Preferred Stock plus
accumulated dividends. The exchange debentures will bear interest at 15 1/4% per
annum, have a final stated maturity of July 1, 2010, have optional redemption
provisions comparable to
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the Preferred Stock and will have customary covenants and events of default. The
Issuer may not cause the exchange of Preferred Stock for debentures unless
permitted under the terms of the senior credit facilities, the indenture and
other contractual arrangements of SJKI.
CHANGE OF CONTROL
Upon a change of control of St. John Knits International, the holders of
Preferred Stock will have the right to require St. John Knits International to
repurchase the Preferred Stock at 101% of liquidation value, plus accumulated
dividends to the date of repurchase, to the extent permitted under the terms of
the senior credit facilities, the indenture and other contractual arrangements
of St. John Knits International.
VOTING RIGHTS
Holders of the Preferred Stock will have no voting rights, except as
provided under Delaware law.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
OF THE EXCHANGE OFFER
EXCHANGE OF NOTES
The following summary describes the material United States federal income
tax considerations of the exchange offer. The exchange of outstanding notes for
exchange notes in the exchange offer will not constitute a taxable event to you.
Consequently, no gain or loss will be recognized by you upon receipt of an
exchange note, the holding period of the exchange notes will include the holding
period of the outstanding note and the basis of the exchange notes will be the
same as the basis of the outstanding note immediately before the exchange.
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF OUTSTANDING NOTES FOR
EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS
AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.
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BOOK-ENTRY; DELIVERY AND FORM
The exchange notes will initially be represented by one or more permanent
global notes in definitive, fully registered book-entry form, without interest
coupons, that will be deposited with, or on behalf of, The Depository Trust
Company and registered in the name of The Depository Trust Company or its
nominee, on behalf of the acquirors of exchange notes represented thereby for
credit to the respective accounts of the acquirors, or to such other accounts as
they may direct, at The Depository Trust Company, or Morgan Guaranty Trust
Company of New York, Brussels Office, as operator of the Euroclear System, or
Cedel Bank, societe anonyme. See "The Exchange Offer--Book-entry Transfer."
Except as set forth below, the global notes may be transferred, in whole and
not in part, solely to another nominee of The Depository Trust Company or to a
successor of The Depository Trust Company or its nominee. Beneficial interests
in the global notes may not be exchanged for notes in physical, certificated
form except in the limited circumstances described below.
All interests in the global notes, including those held through Euroclear or
Cedel, may be subject to the procedures and requirements of The Depository Trust
Company. Those interests held through Euroclear or Cedel may also be subject to
the procedures and requirements of such systems.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The descriptions of the operations and procedures of The Depository Trust
Company, Euroclear and Cedel set forth below are provided solely as a matter of
convenience. These operations and procedures are solely within the control of
the respective settlement systems and are subject to change by them from time to
time. We take no responsibility for these operations or procedures, and
investors are urged to contact the relevant system or its participants directly
to discuss these matters.
The Depository Trust Company has advised SJKI that it is:
(i) a limited purpose trust company organized under the laws of the State of
New York,
(ii) a "banking organization" within the meaning of the New York Banking
Law,
(iii) a member of the Federal Reserve System,
(iv) a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended, and
(v) a "clearing agency" registered pursuant to Section 17A of the Exchange
Act, as amended (the "Exchange Act").
The Depository Trust Company was created to hold securities for its
participants (collectively, the "Participants") and facilitates the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes to the accounts of its Participants, thereby
eliminating the need for physical transfer and delivery of certificates. The
Depository Trust Company's Participants include securities brokers and dealers
(including the Initial Purchasers), banks and trust companies, clearing
corporations and certain other organizations. Indirect access to The Depository
Trust Company's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect Participants")
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly. Investors who are not Participants may
beneficially own securities held by or on behalf of The Depository Trust Company
only through Participants or Indirect Participants.
SJKI expects that pursuant to procedures established by The Depository Trust
Company ownership of the notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by The Depository
Trust Company (with respect to the interests of Participants)
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and the records of Participants and the Indirect Participants (with respect to
the interests of persons other than Participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the notes represented by a
global note to such persons may be limited. In addition, because The Depository
Trust Company can act only on behalf of its Participants, who in turn act on
behalf of persons who hold interests through such Participants, the ability of a
person having an interest in notes represented by a global note to pledge or
transfer such interest to persons or entities that do not participate in The
Depository Trust Company's system, or to otherwise take actions in respect of
such interest, may be affected by the lack of a physical definitive security in
respect of such interest.
So long as The Depository Trust Company or its nominee is the registered
owner of a global note, The Depository Trust Company or such nominee, as the
case may be, will be considered the sole owner or holder of the notes
represented by the global note for all purposes under the indenture. Except as
provided below, owners of beneficial interests in a global note will not be
entitled to have notes represented by such global note registered in their
names, will not receive or be entitled to receive physical delivery of
Certificated Notes, and will not be considered the owners or holders thereof
under the indenture for any purpose, including with respect to the giving of any
direction, instruction or approval to the Trustee thereunder. Accordingly, each
holder owning a beneficial interest in a global note must rely on the procedures
of The Depository Trust Company and, if such holder is not a Participant or an
Indirect Participant, on the procedures of the Participant through which such
holder owns its interest, to exercise any rights of a holder of notes under the
indenture or such global note. SJKI understands that under existing industry
practice, in the event that SJKI requests any action of holders of notes, or a
holder that is an owner of a beneficial interest in a global note desires to
take any action that The Depository Trust Company, as the holder of such global
note, is entitled to take, The Depository Trust Company would authorize the
Participants to take such action and the Participants would authorize holders
owning through such Participants to take such action or would otherwise act upon
the instruction of such holders. Neither SJKI nor the Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of notes by The Depository Trust Company, or for
maintaining, supervising or reviewing any records of The Depository Trust
Company relating to such notes.
Payments with respect to the principal of, and premium, if any, liquidated
damages, if any, and interest on, any notes represented by a global note
registered in the name of The Depository Trust Company or its nominee on the
applicable record date will be payable by the Trustee to or at the direction of
The Depository Trust Company or its nominee in its capacity as the registered
holder of the global note representing such notes under the indenture. Under the
terms of the indenture, SJKI and the Trustee may treat the persons in whose
names the notes, including the global notes, are registered as the owners
thereof for the purpose of receiving payment thereon and for any and all other
purposes whatsoever. Accordingly, neither SJKI nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to owners of
beneficial interests in a global note (including principal, premium, if any,
liquidated damages, if any, and interest). Payments by the Participants and the
Indirect Participants to the owners of beneficial interests in a global note
will be governed by standing instructions and customary industry practice and
will be the responsibility of the Participants or the Indirect Participants and
The Depository Trust Company.
Transfers between Participants in The Depository Trust Company will be
effected in accordance with The Depository Trust Company's procedures, and will
be settled in same-day funds. Transfers between participants in Euroclear or
Cedel will be effected in the ordinary way in accordance with their respective
rules and operating procedures.
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Subject to compliance with the transfer restrictions applicable to the
notes, cross-market transfers between the Participants in The Depository Trust
Company, on the one hand, and Euroclear or Cedel participants, on the other
hand, will be effected through The Depository Trust Company in accordance with
The Depository Trust Company's rules on behalf of Euroclear or Cedel, as the
case may be, by its respective depositary; however, such cross-market
transactions will require delivery of instructions to Euroclear or Cedel, as the
case may be, by the counterparty in such system in accordance with the rules and
procedures and within the established deadlines (Brussels time) of such system.
Euroclear or Cedel, as the case may be, will, if the transaction meets its
settlement requirements, deliver instructions to its respective depositary to
take action to effect final settlement on its behalf by delivering or receiving
interests in the relevant global notes in The Depository Trust Company, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to The Depository Trust Company. Euroclear
participants and Cedel participants may not deliver instructions directly to the
depositories for Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a global note from a Participant in
The Depository Trust Company will be credited, and any such crediting will be
reported to the relevant Euroclear or Cedel participant, during the securities
settlement processing day (which must be a business day for Euroclear and Cedel)
immediately following the settlement date of The Depository Trust Company. Cash
received in Euroclear or Cedel as a result of sales of interest in a global note
by or through a Euroclear or Cedel participant to a Participant in The
Depository Trust Company will be received with value on the settlement date of
The Depository Trust Company but will be available in the relevant Euroclear or
Cedel cash account only as of the business day for Euroclear or Cedel following
The Depository Trust Company's settlement date.
Although The Depository Trust Company, Euroclear and Cedel have agreed to
the foregoing procedures to facilitate transfers of interests in the global
notes among participants in The Depository Trust Company, Euroclear and Cedel,
they are under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. Neither SJKI
nor the Trustee will have any responsibility for the performance by The
Depository Trust Company, Euroclear or Cedel or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
CERTIFICATED NOTES
If:
(i) SJKI notifies the Trustee in writing that The Depository Trust Company
is no longer willing or able to act as a depositary or The Depository
Trust Company ceases to be registered as a clearing agency under the
Exchange Act and a successor depositary is not appointed within 90 days
of such notice or cessation,
(ii) SJKI, at its option, notifies the Trustee in writing that it elects to
cause the issuance of notes in definitive form under the indenture or
(iii) upon the occurrence of certain other events as provided in the
indenture,
then, upon surrender by The Depository Trust Company of the global notes,
certificated notes will be issued to each person that The Depository Trust
Company identifies as the beneficial owner of the notes represented by the
global notes. Upon any such issuance, the Trustee is required to register such
certificated notes in the name of such person or persons (or the nominee of any
thereof) and cause the same to be delivered thereto.
Neither SJKI nor the Trustee shall be liable for any delay by The Depository
Trust Company or any Participant or Indirect Participant in identifying the
beneficial owners of the related notes and each
123
<PAGE>
such person may conclusively rely on, and shall be protected in relying on,
instructions from The Depository Trust Company for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the notes to be issued).
YEAR 2000
The Depository Trust Company's management is aware that some computer
applications, systems, and the like for processing data ("Systems") that are
dependent upon calendar dates, including dates before, on, and after January 1,
2000, may encounter "Year 2000 problems." The Depository Trust Company has
informed its Participants and other members of the financial community (the
"Industry") that it has developed and is implementing a program so that its
Systems, as the same relate to the timely payment of distributions (including
principal and income payments) to securityholders, book-entry deliveries and
settlement of trades within The Depository Trust Company ("DTC Services"),
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, The Depository
Trust Company's plan includes a testing phase, which is expected to be completed
within appropriate time frames.
However, The Depository Trust Company's ability to perform properly its
services is also dependent upon other parties, including but not limited to
issuers and their agents, as well as third party vendors from whom The
Depository Trust Company licenses software and hardware, and third party vendors
on whom The Depository Trust Company relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. The Depository Trust Company has informed the Industry that it is
contacting (and will continue to contact) third party vendors from whom The
Depository Trust Company acquires services to: (i) impress upon them the
importance of such services being Year 2000 compliant; and (ii) determine the
extent of their efforts for Year 2000 remediation (and, as appropriate, testing)
of their services. In addition, The Depository Trust Company is in the process
of developing such contingency plans as it deems appropriate.
According to The Depository Trust Company, the foregoing information with
respect to The Depository Trust Company has been provided to the industry for
informational purposes only and is not intended to serve as a representation,
warranty, or contract modification of any kind.
124
<PAGE>
EXCHANGE AND REGISTRATION RIGHTS
St. John Knits International, the guarantors and the initial purchasers of
the outstanding notes entered into the exchange and registration rights
agreement concurrently with the issuance of the outstanding notes. Pursuant to
the exchange and registration rights agreement, St. John Knits International and
the guarantors agreed to:
(i) file with the Commission on or prior to 90 days after the date of
issuance of the outstanding notes a registration statement on Form S-1 or
Form S-4, if the use of such form is then available (the "exchange offer
registration statement") relating to a registered exchange offer for the
outstanding notes and the guarantees under the Securities Act and
(ii) use their reasonable best efforts to cause the exchange offer
registration statement to be declared effective under the Securities Act
within 150 days after the Issue Date. As soon as practicable after the
effectiveness of the exchange offer registration statement, St. John Knits
International and the guarantors will offer to the holders of Transfer
Restricted Securities (as defined below) who are not prohibited by any law
or policy of the Commission from participating in the exchange offer the
opportunity to exchange their Transfer Restricted Securities for an issue of
exchange notes, guaranteed by the guarantors, that are identical in all
material respects to the outstanding notes (except that the exchange notes
will not contain terms with respect to transfer restrictions) and that would
be registered under the Securities Act. St. John Knits International and the
guarantors will keep the exchange offer open for not less than 30 days (or
longer, if required by applicable law) after the date on which notice of the
exchange offer is mailed to the holders of the outstanding notes.
If:
(i) because of any change in law or applicable interpretations thereof
by the staff of the Commission, St. John Knits International and the
guarantors are not permitted to effect the exchange offer as contemplated
hereby,
(ii) any outstanding notes validly tendered pursuant to the exchange
offer are not exchanged for exchange notes within 180 days after the date of
issuance of the outstanding notes,
(iii) the initial purchasers of the outstanding notes so request with
respect to outstanding notes not eligible to be exchanged for exchange notes
in the exchange offer,
(iv) any applicable law or interpretations do not permit any holder of
outstanding notes to participate in the exchange offer,
(v) any holder of outstanding notes that participates in the exchange
offer does not receive freely transferable exchange notes in exchange for
tendered outstanding notes or
(vi) St. John Knits International and the guarantors so elect,
then St. John Knits International and the guarantors will file with the
Commission a shelf registration statement to cover resales of Transfer
Restricted Securities by such holders who satisfy certain conditions relating to
the provision of information in connection with the shelf registration
statement. For purposes of the foregoing, "Transfer Restricted Securities" means
each outstanding note until:
(i) the date on which such outstanding note has been exchanged for a
freely transferable exchange note in the exchange offer;
(ii) the date on which such outstanding note has been effectively
registered under the Securities Act and disposed of in accordance with the
shelf registration statement or
(iii) the date on which such outstanding note is distributed to the
public pursuant to Rule 144 under the Securities Act or is salable pursuant
to Rule 144(k) under the Securities Act.
125
<PAGE>
St. John Knits International and the guarantors will use their reasonable
best efforts to have the exchange offer registration statement or, if
applicable, the shelf registration statement (each, a "Registration Statement")
declared effective by the Commission as promptly as practicable after the filing
thereof. Unless the exchange offer would not be permitted by a policy of the
Commission, St. John Knits International and the guarantors will commence the
exchange offer and will use their reasonable best efforts to consummate the
exchange offer as promptly as practicable, but in any event prior to 180 days
after the date of issuance of the outstanding notes. If applicable, St. John
Knits International and the guarantors will use their reasonable best efforts to
keep the shelf registration statement effective for a period of two years after
the Issue Date or such shorter period when all outstanding notes covered by the
shelf registration statement have been sold in the manner set forth above and as
contemplated in the shelf registration statement or when the outstanding notes
become eligible for resale pursuant to Rule 144 under the Securities Act without
volume restrictions, if any.
If:
(i) the applicable Registration Statement is not filed with the
Commission on or prior to 90 days after the date of issuance of the
outstanding notes (or, in the case of a shelf registration statement
required to be filed in response to a change in law or applicable
interpretations of the Staff of the Commission, if later, within 45 days
after publication of such change in law or interpretation, but in no event
before 90 days after the date of issuance of the outstanding notes);
(ii) the exchange offer registration statement or the shelf registration
statement, as the case may be, is not declared effective within 150 days
after the date of issuance of the outstanding notes (or, in the case of a
shelf registration statement required to be filed in response to a change in
law or applicable interpretations of the Staff of the Commission, if later,
within 60 days after publication of such change in law or interpretation,
but in no event before 150 days after the date of issuance of the
outstanding notes);
(iii) the exchange offer is not consummated on or prior to 180 days
after the date of issuance of the outstanding notes (other than in the event
St. John Knits International files a shelf registration statement); or
(iv) the shelf registration statement is filed and declared effective
within the time periods specified in clause (ii) above but shall thereafter
cease to be effective (at any time that St. John Knits International and the
guarantors are obligated to maintain the effectiveness thereof) without
being succeeded within 45 days by an additional Registration Statement filed
and declared effective (each such event referred to in clauses (i) through
(iv), a "Registration Default"),
St. John Knits International and the guarantors will be obligated to pay
liquidated damages ("Liquidated Damages") to each holder of Transfer Restricted
Securities, during the period of one or more such Registration Defaults, in an
amount equal to $0.192 per week per $1,000 principal amount of the outstanding
notes constituting Transfer Restricted Securities held by such holder until the
applicable Registration Statement is filed, the exchange offer registration
statement is declared effective and the exchange offer is consummated or the
shelf registration statement is declared effective or again becomes effective,
as the case may be. All accrued Liquidated Damages shall be paid to holders in
the same manner as interest payments on the outstanding notes on semi-annual
payment dates which correspond to interest payment dates for the outstanding
notes. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
The exchange and registration rights agreement also provides that St. John
Knits International and the guarantors (i) shall make available for a period of
180 days after the consummation of the exchange offer a prospectus meeting the
requirements of the Securities Act to any broker-dealer for use in connection
with any resale of any such exchange notes and (ii) shall pay all expenses
incident to the exchange offer (including the expense of one counsel to the
holders of the outstanding notes) and
126
<PAGE>
will indemnify certain holders of the outstanding notes (including any broker-
dealer) against certain liabilities, including liabilities under the Securities
Act. A broker-dealer which delivers such a prospectus to purchasers in
connection with such resales will be subject to certain of the civil liability
provisions under the Securities Act and will be bound by the provisions of the
exchange and registration rights agreement (including certain indemnification
rights and obligations).
Each holder of outstanding notes who wishes to exchange such outstanding
notes for exchange notes in the exchange offer will be required to make certain
representations, including representations that:
(i) any exchange notes to be received by it will be acquired in the
ordinary course of its business;
(ii) it has no arrangement or understanding with any person to
participate in the distribution of the exchange notes; and
(iii) it is not an "affiliate" (as defined in Rule 405 under the
Securities Act) of St. John Knits International, or if it is an affiliate,
that it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
exchange notes. If the holder is a broker-dealer that will receive exchange
notes for its own account in exchange for outstanding notes that were acquired
as a result of market-making activities or other trading activities (an
"Exchanging Dealer"), it will be required to acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes.
Holders of the outstanding notes will be required to make certain
representations to St. John Knits International and the guarantors (as described
above) in order to participate in the exchange offer and will be required to
deliver information to be used in connection with the shelf registration
statement in order to have their outstanding notes included in the shelf
registration statement and benefit from the provisions regarding liquidated
damages set forth in the preceding paragraphs. A holder who sells outstanding
notes pursuant to the shelf registration statement generally will be required to
be named as a selling securityholder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the exchange and registration rights agreement which
are applicable to such a holder (including certain indemnification obligations).
For so long as the notes are outstanding, St. John Knits International, upon
request, will continue to provide to holders of the notes and to prospective
purchasers of the notes the information required by Rule 144A(d)(4) under the
Securities Act.
The foregoing description of the exchange and registration rights agreement
is a summary only, does not purport to be complete and is qualified in its
entirety by reference to all provisions of the exchange and registration rights
agreement. A copy of the exchange and registration rights agreement has been
filed as an exhibit to the registration statement of which this prospectus forms
a part.
127
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of the exchange notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of exchange notes received in exchange for outstanding
notes that the broker-dealer had acquired as a result of market-making
activities or other trading activities. We have agreed that for a period of
180 days from the date on which the exchange offer is consummated, we will make
this prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with resale, and will promptly send additional copies of this
prospectus and any amendment or supplement to this prospectus to any
broker-dealer that requests the documents in the letter of transmittal. In
addition, until February 21, 2000, all dealers effecting transactions in the
exchange notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of these methods
of resale, at prevailing market prices at the time of resale, at prices related
to these prevailing market prices or at negotiated prices. Any such resale may
be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any exchange notes. Any broker-dealer that
resells exchange notes that were received by it for its own account pursuant to
the exchange offer and any broker or dealer that participates in a distribution
of exchange notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of exchange notes and any
commissions or concessions received by any these persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days from the date on which the exchange offer is
consummated, we will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
such documents in the letter of transmittal. We have agreed to pay all expenses
incident to the exchange offer (including the expenses of one counsel for the
holders of the outstanding notes) other than commissions or concessions of any
broker-dealers and will indemnify the holders of the outstanding notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the exchange notes will be passed upon for SJKI by Simpson
Thacher & Bartlett, New York, New York.
EXPERTS
The consolidated financial statements of St. John included in this
prospectus for the fiscal years ended November 3, 1996, November 2, 1997 and
November 1, 1998 have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
in reliance upon the authority of said firm as experts in accounting and
auditing in giving said reports.
128
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act with respect to the exchange
notes being offered by this prospectus. This prospectus, which forms a part of
the registration statement, does not contain all of the information set forth
in, or filed as an exhibit to, the registration statement. For further
information with respect to St. John Knits International and the exchange notes,
we refer you to the registration statement. While we believe that we have
provided all material information regarding the contracts and other documents
described in this prospectus, the information we have provided is not
necessarily complete. Where these contracts and other documents are filed as
exhibits to the registration statement, our descriptions are qualified by the
exhibits.
We are not currently subject to the reporting requirements of the Exchange
Act. Upon completion of the exchange offer, we will be subject to the
informational requirements of the Exchange Act and, as a result, will file
periodic reports and other information with the Securities and Exchange
Commission. The registration statement and periodic reports and other
information can be inspected and copied at the Public Reference Section of the
Securities and Exchange Commission located at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington D.C., 20549 and at regional public reference
facilities maintained by the Securities and Exchange Commission located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, Suite 1300, New York, New York 10048. You can
obtain copies of this material, including copies of all or any portion of the
registration statement, from the Public Reference Section of the Securities and
Exchange Commission at prescribed rates. You may also access this material
electronically by means of the Securities and Exchange Commission's home page on
the Internet (http://www.sec.gov).
In addition, whether or not required by the Securities and Exchange
Commission, so long as any outstanding notes are outstanding, beginning with the
quarter ended August 1, 1999 we will furnish to those holding any outstanding
notes, within the time periods specified in the Securities and Exchange
Commission's rules and regulations:
- all quarterly and annual financial information that would be required to
be contained in a filing with the Securities and Exchange Commission on
Forms 10-Q and 10-K if we were required to file these Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and, with respect to the annual information only, a report
on the annual financial statements by our independent auditors; and
- all current reports that we would be required to file with the Securities
and Exchange Commission on Form 8-K if we were required to file these
reports.
In addition, whether or not required by the Securities and Exchange
Commission, we will file a copy of all of the information and reports referred
to above with the Securities and Exchange Commission for public availability
within the time periods specified in the Securities and Exchange Commission's
rules and regulations, unless the Securities and Exchange Commission will not
accept the filing, and we will make the information available to securities
analysts and prospective investors upon request.
129
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at November 2, 1997, November
1, 1998 and August 1, 1999 (unaudited).................. F-3
Consolidated Statements of Income and Comprehensive Income
for each of the three years in the period ended
November 1, 1998, and the 39 week periods ended
August 2, 1998 and August 1, 1999 (unaudited)........... F-4
Consolidated Statements of Shareholders' Equity for each
of the three years in the period ended November 1,
1998.................................................... F-5
Consolidated Statements of Cash Flows for each of the
three years in the period ended November 1, 1998, and
the 39 week periods ended August 2, 1998 and August 1,
1999 (unaudited)........................................ F-6
Notes to Consolidated Financial Statements................ F-7
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Account............. F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO ST. JOHN KNITS, INC.:
We have audited the accompanying consolidated balance sheets of ST. JOHN
KNITS, INC. (a California corporation) and subsidiaries as of November 2, 1997
and November 1, 1998, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended November 1, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
St. John Knits, Inc. and subsidiaries as of November 2, 1997 and November 1,
1998, and the results of their operations and their cash flows for each of the
three years in the period ended November 1, 1998 in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Orange County, California
December 18, 1998 (except for the matters
discussed in Note 12 and 13 as to which the date is
September 3, 1999)
F-2
<PAGE>
ST. JOHN KNITS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 2, NOVEMBER 1, AUGUST 1,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 14,266,564 $ 14,336,872 $ 18,033,835
Investments............................................... 2,351,765 1,175,427 23,173
Accounts receivable, net.................................. 36,572,423 35,562,189 31,340,472
Inventories............................................... 30,736,980 47,748,286 46,805,050
Prepaid income tax........................................ -- -- 1,858,530
Deferred income tax benefit............................... 5,793,961 7,743,961 7,743,961
Other..................................................... 2,591,742 2,377,352 2,521,905
------------ ------------ ------------
Total current assets.................................... 92,313,435 108,944,087 108,326,926
------------ ------------ ------------
Property and equipment:
Machinery and equipment................................... 35,903,659 47,023,808 50,443,800
Leasehold improvements.................................... 25,351,868 30,691,098 33,316,891
Buildings................................................. 11,572,917 17,883,700 17,880,244
Furniture and fixtures.................................... 5,434,754 6,462,833 6,804,004
Land...................................................... 3,536,606 5,786,857 5,786,857
Construction in progress.................................. 4,225,573 666,481 2,297,034
------------ ------------ ------------
86,025,377 108,514,777 116,528,830
Less--Accumulated depreciation and amortization........... 28,222,633 38,627,543 46,985,297
------------ ------------ ------------
57,802,744 69,887,234 69,543,533
------------ ------------ ------------
Deferred financing costs.................................... -- -- 15,105,916
Other assets................................................ 3,787,396 3,558,347 2,771,448
------------ ------------ ------------
$153,903,575 $182,389,668 $195,747,823
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 10,034,396 $ 8,303,874 $ 6,953,378
Accrued expenses.......................................... 10,504,934 11,329,773 13,012,126
Income taxes payable...................................... 2,081,242 120,657 --
Current portion of long-term debt......................... 227,979 3,229,572
------------ ------------ ------------
Total current liabilities............................... 22,620,572 19,754,304 23,195,076
------------ ------------ ------------
Long-term debt, net of current portion...................... -- 407,599 188,664,889
Subordinated notes, net of discount......................... -- 98,625,611
------------ ------------ ------------
Total liabilities....................................... 310,485,576
------------ ------------ ------------
Minority interest........................................... 602,910 653,435 654,092
------------ ------------ ------------
Mandatorily Redeemable Preferred Stock, $100 stated value:
Authorized--3,000,000 shares, issued and
outstanding--250,000 and none, respectively............... -- -- 25,000,00
Commitments and contingencies (Notes 7, 10, 11 and 12)
Stockholders' equity (deficit):
Common Stock, par value $0.01 per share:
Authorized--30,000,000 shares, Issued and
outstanding--6,546,174 and 16,579,484 shares,
respectively............................................ 502,799 502,799 65,462
Unrealized loss on securities............................... -- (27,504) (30,318)
Cumulative translation adjustment........................... (19,351) 197,249 169,199
Additional paid-in capital.................................. 18,929,541 17,882,672 147,087,032
Retained earnings........................................... 111,267,104 143,019,114 (287,683,220)
------------ ------------ ------------
130,680,093 161,574,330 (140,391,845)
------------ ------------ ------------
$153,903,575 $182,389,668 $195,747,823
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
ST. JOHN KNITS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 39 WEEKS ENDED
---------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
NOVEMBER 3, NOVEMBER 2, NOVEMBER 1, AUGUST 2, AUGUST 1,
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................... $202,951,000 $242,100,843 $281,960,763 $206,293,273 $221,935,006
Cost of sales........................... 88,870,838 99,545,173 120,882,597 86,210,644 97,381,765
------------ ------------ ------------ ------------ ------------
Gross profit............................ 114,080,162 142,555,670 161,078,166 120,082,629 124,553,241
Selling, general and administrative
expenses.............................. 68,385,089 84,544,884 107,025,666 76,857,692 91,175,121
Transaction fees and expenses........... -- 15,211,711
------------ ------------ ------------ ------------ ------------
Operating income........................ 45,695,073 58,010,786 54,052,500 43,224,937 18,166,409
Interest expense........................ -- 2,045,341
Other income............................ 1,355,234 712,694 1,369,022 1,100,080 1,220,441
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes....... 47,050,307 58,723,480 55,421,522 44,325,017 17,341,509
Income taxes............................ 19,928,645 24,299,829 22,000,904 18,033,451 7,117,259
------------ ------------ ------------ ------------ ------------
Net income.............................. 27,121,662 34,423,651 33,420,618 26,291,566 10,224,250
Comprehensive income, net of tax:
Foreign currency translation
adjustment.......................... -- -- -- (147,292) (16,550)
Unrealized loss on securities......... -- -- -- -- (1,660)
------------ ------------ ------------ ------------ ------------
Comprehensive income.................... $ 27,121,662 $ 34,423,651 $ 33,420,618 $ 26,144,274 $ 10,206,040
============ ============ ============ ============ ============
Net income per common share:
Basic................................. $ 1.64 $ 2.07 $ 2.00 $ 1.57 $ 0.64
============ ============ ============ ============ ============
Diluted............................... $ 1.59 $ 2.01 $ 1.94 $ 1.53 $ 0.63
============ ============ ============ ============ ============
Dividends per share..................... $ 0.10 $ 0.10 $ 0.10 $ 0.075 $ 0.075
============ ============ ============ ============ ============
Shares used in the calculation of net
income per share:
Basic................................. 16,518,077 16,614,975 16,693,955 16,707,206 15,670,913
============ ============ ============ ============ ============
Diluted............................... 17,015,991 17,133,631 17,234,630 17,133,421 16,042,501
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
ST. JOHN KNITS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL CUMULATIVE UNREALIZED
NUMBER PAID-IN TRANSLATION LOSS ON RETAINED
OF SHARES AMOUNT CAPITAL ADJUSTMENT SECURITIES EARNINGS TOTAL
---------- -------- ----------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 29,
1995.................... 16,468,734 $502,799 $15,687,393 $ -- $ -- $ 53,037,048 $ 69,227,240
Dividends declared ($.10
per share)............ -- -- -- -- -- (1,653,348) (1,653,348)
Shares issued upon
exercise of options
including tax
benefit............... 130,330 -- 2,397,758 -- -- -- 2,397,758
Net income................ -- -- -- -- -- 27,121,662 27,121,662
---------- -------- ----------- -------- -------- ------------ ------------
Balance, November 3,
1996.................... 16,599,064 502,799 18,085,151 -- -- 78,505,362 97,093,312
Dividends declared ($.10
per share)............ -- -- -- -- -- (1,661,909) (1,661,909)
Shares issued upon
exercise of options
including tax
benefit............... 35,484 -- 844,390 -- -- -- 844,390
Foreign currency
translation
adjustment............ -- -- -- (19,351) -- -- (19,351)
Net income.............. -- -- -- -- -- 34,423,651 34,423,651
---------- -------- ----------- -------- -------- ------------ ------------
Balance November 2, 1997.. 16,634,548 502,799 18,929,541 (19,351) -- 111,267,104 130,680,093
Dividends declared ($.10
per share)............ -- -- -- -- -- (1,668,608) (1,668,608)
Shares issued upon
exercise of options
including tax
benefit............... 109,336 -- 1,832,969 -- -- -- 1,832,969
Shares repurchased...... (164,400) -- (2,879,838) -- -- -- (2,879,838)
Unrealized loss on
securities............ -- -- -- -- (27,504) -- (27,504)
Foreign currency
translation
adjustment............ -- -- -- 216,600 -- -- 216,600
Net income.............. -- -- -- -- -- 33,420,618 33,420,618
---------- -------- ----------- -------- -------- ------------ ------------
Balance November 1, 1998.. 16,579,484 $502,799 $17,882,672 $197,249 $(27,504) $143,019,114 $161,574,330
========== ======== =========== ======== ======== ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
ST. JOHN KNITS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 39 WEEKS ENDED
--------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
NOVEMBER 3, NOVEMBER 2, NOVEMBER 1, AUGUST 2, AUGUST 1,
1996 1997 1998 1998 1999
----------- ----------- ----------- ------------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $27,121,662 $34,423,651 $33,420,618 $ 26,291,566 $10,224,250
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 7,042,376 8,858,703 11,370,680 8,275,770 10,930,588
Net increase in deferred income tax benefit..... (1,925,194) (300,000) (1,950,000) (500,000) --
Loss on disposal of property and equipment...... 42,792 215,810 483,920 478,275 963,949
Partnership losses.............................. 224,368 351,165 331,405 252,113 184,594
Minority interest in income of consolidated
subsidiaries.................................. -- 602,910 50,525 48,190 657
(Increase) decrease in accounts receivable...... (6,969,300) (8,478,817) 1,010,234 4,117,122 4,221,717
(Increase) decrease in inventories.............. (8,710,012) (7,117,926) (17,011,306) (16,509,327) 943,236
Increase in prepaid income taxes................ (1,092,178) (1,858,530)
(Increase) decrease in other current assets..... (1,022,146) (1,322,360) 214,390 236,568 (144,553)
(Increase) decrease in other assets............. (1,501,100) 6,700 (488,410) (48,414) (347,741)
Increase (decrease) in accounts payable......... 923,607 4,629,995 (1,730,522) (2,582,433) (1,350,496)
Increase (decrease) in accrued expenses......... 2,343,116 (1,004,422) 1,240,704 (1,230,303) 1,656,779
Increase (decrease) in income taxes payable..... (729,125) (262,758) (1,960,585) (2,081,242) (120,657)
Decrease in deferred income tax liability....... -- (143,941) -- -- --
----------- ----------- ----------- ------------- -----------
Net cash provided by operating activities..... 16,841,044 30,458,710 24,981,653 15,655,707 25,303,793
----------- ----------- ----------- ------------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment...... 60,294 84,641 10,499 10,499 175,500
Purchase of property and equipment................ (21,400,369) (22,751,076) (23,648,032) (16,799,772) (10,757,801)
Purchase of trademarks............................ -- (747,928) -- -- --
Purchase of short-term investments................ (347,006) (204,959) -- (150,271) --
Sale of short-term investments.................... 2,524,182 2,075,710 1,176,338 -- 1,152,254
Capital contributions to partnership.............. (995,869) (67,108) -- -- --
Capital distributions from partnership............ 44,500 68,500 84,496 58,996 106,500
----------- ----------- ----------- ------------- -----------
Net cash used in investing activities......... (20,114,268) (21,542,220) (22,376,699) (16,880,548) (9,323,547)
----------- ----------- ----------- ------------- -----------
Cash flows from financing activities:
Dividends paid.................................... (1,650,090) (1,661,022) (2,084,472) (1,668,735) (1,244,545)
Issuance of common stock.......................... 2,397,758 844,390 1,832,969 1,832,968 796,510
Addition to long-term debt........................ -- -- 407,599 -- 1,427,000
Payment for the repurchase of common stock........ -- -- (2,879,838) -- --
Principal payments on long-term debt.............. -- -- -- -- (169,710)
Proceeds from credit agreement.................... -- -- -- -- 190,000,000
Proceeds from issuance of subordinated notes...... -- -- -- -- 98,616,000
Recapitalization.................................. -- -- -- -- (311,446,769)
Issuance of preferred stock....................... -- -- -- -- 25,000,000
Financing fees and expenses....................... -- -- -- -- (15,230,905)
----------- ----------- ----------- ------------- -----------
Net cash provided by (used in) financing
activities.................................. 747,668 (816,632) (2,723,742) 164,233 (12,252,419)
----------- ----------- ----------- ------------- -----------
Effect of exchange rate changes..................... -- (19,351) 216,600 (248,384) (28,050)
----------- ----------- ----------- ------------- -----------
Unrealized loss on securities....................... -- -- (27,504) -- (2,814)
----------- ----------- ----------- ------------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... (2,525,556) 8,080,507 70,308 (1,308,992) 3,696,963
Beginning balance, cash and cash equivalents........ 8,711,613 6,186,057 14,266,564 14,266,564 14,336,872
----------- ----------- ----------- ------------- -----------
Ending balance, cash and cash equivalents........... $6,186,057 $14,266,564 $14,336,872 $ 12,957,572 $18,033,835
=========== =========== =========== ============= ===========
Supplemental disclosures of cash flow information:
Cash received during the period for interest
income.......................................... $ 717,099 $ 988,272 $1,154,834 $ 1,115,220 $ 984,558
=========== =========== =========== ============= ===========
Cash paid during the period for:
Interest expense................................ $ -- $ 46,954 $ -- $ 338 $ 7,179
=========== =========== =========== ============= ===========
Income taxes.................................... $20,565,267 $24,526,911 $25,286,040 $ 20,910,962 $10,455,685
=========== =========== =========== ============= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
1. COMPANY BACKGROUND AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of St. John
Knits, Inc. ("St. John"), a California corporation, and its subsidiaries. St.
John and its subsidiaries are collectively referred to herein as "the Company."
All interdivisional and intercompany transactions and accounts have been
eliminated in consolidation. The Company is a leading designer, manufacturer and
marketer of women's clothing and accessories. The Company's products are
distributed primarily through specialty retailers and the Company's own retail
boutiques and outlets.
During fiscal 1997, the Company formed St. John Company, Ltd. in Japan to
operate as a 51 percent owned subsidiary to distribute the Company's products in
Japan. During fiscal 1998 the Company increased its ownership percentage to
68 percent. During fiscal 1997 the Company also formed Amen Wardy Home Stores,
LLC, a 51 percent owned subsidiary which operates five home furnishing boutiques
under the name Amen Wardy Home. The operations of both entities are included in
the accompanying consolidated financial statements.
2. SUMMARY OF ACCOUNTING POLICIES
a. DEFINITION OF FISCAL YEAR. The Company utilizes a 52-53 week fiscal
year whereby the fiscal year ends on the Sunday nearest to October 31.
Accordingly, fiscal years 1996, 1997 and 1998 ended on November 3, November 2
and November 1, respectively. Fiscal year 1996 was comprised of 53 weeks, and
fiscal years 1998 and 1997 were comprised of 52 weeks.
b. USE OF ESTIMATES. The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results may
differ from those estimates.
c. REVENUE RECOGNITION. Revenue on sales to specialty retailers is
recognized when the goods are shipped. The Company establishes liabilities for
estimated returns and allowances at the time of shipment. The Company also
provides for estimated discounts when recording sales. Retail sales are
recognized at the point of sale. The Company establishes liabilities for
estimated returns at the retail stores. Accounts receivable are shown net of
allowances for discounts and uncollectible amounts of $2,543,000 and $905,000 in
fiscal year 1997, and $2,488,000 and $951,000 in fiscal year 1998, respectively.
d. INVENTORIES. Inventories are valued at the lower of cost or market.
During fiscal 1997 the Company elected to change its method of accounting for
its inventory from the last-in, first-out (LIFO) method to the first-in,
first-out (FIFO) method. This change did not have a material effect on the
financial statements for any year presented. Therefore, the cumulative effect
($363,000) was reflected in the fiscal year 1997 financial statements as a
reduction of cost of goods sold.
F-7
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Inventories are comprised of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Raw materials.............................................. $10,362,158 $14,529,822
Work in process............................................ 6,451,053 8,896,248
Finished products.......................................... 13,923,769 24,322,216
----------- -----------
$30,736,980 $47,748,286
=========== ===========
</TABLE>
e. PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. The
Company provides for depreciation using the straight-line method to provide for
the retirement of property and equipment at the end of their estimated useful
lives, which range from three to thirty-nine years.
f. CASH AND CASH EQUIVALENTS. For purposes of the statements of cash
flows, cash and cash equivalents include all liquid debt instruments purchased
with a maturity of three months or less.
g. FOREIGN EXCHANGE TRANSACTIONS AND CONTRACTS. The Company enters into
foreign exchange contracts as a hedge against exchange rate risk on the
collection of certain accounts receivable denominated in a foreign currency.
Market value gains and losses are recognized as the contracts mature, and
exchange adjustments resulting from foreign currency transactions are offset by
exchange gains or losses recognized from such contracts.
h. INCOME TAXES. The Company utilizes the liability method of accounting
for income taxes required by Statement of Financial Accounting Standards
("SFAS") No. 109 "Accounting for Income Taxes."
i. EARNINGS PER SHARE. The Company adopted SFAS No. 128 "Earnings Per
Share" during fiscal 1998. Under the new requirement, primary earnings per share
was replaced with basic earnings per share. Basic earnings per share excludes
the dilutive effect of common stock equivalents, including stock options.
Diluted earnings per share, which replaced fully diluted earnings per share,
includes all dilutive items. Dilution is calculated based upon the treasury
stock method, which assumes that all dilutive securities were exercised and that
the proceeds received were applied to repurchase outstanding shares at the
average market price during the period.
As a result of the adoption of SFAS No. 128, primary earnings per share for
fiscal 1996 and 1997 were restated from $1.59 to $1.64 and from $2.01 to $2.07,
respectively, to reflect the change to basic earnings per share. The difference
between basic and diluted earnings per share, as shown on the Company's
Consolidated Statements of Income, is due to the dilutive effect of stock
options outstanding.
j. TWO-FOR-ONE STOCK SPLIT. On March 12, 1996, the Board of Directors
declared a two-for-one common stock split which was distributed on May 6, 1996
to shareholders of record at the close of business on April 8, 1996. All share
and per share data included in the consolidated financial statements and
accompanying notes have been adjusted to reflect the stock split.
F-8
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
k. FOREIGN CURRENCY TRANSLATION. The Company translates the financial
statements of its foreign subsidiaries from the local (functional) currencies to
U.S. dollars in accordance with SFAS No. 52 "Foreign Currency Translation".
Substantially all assets and liabilities of the Company's foreign subsidiaries
are translated at year-end exchange rates, while revenue and expenses are
translated at average exchange rates prevailing during the year. Adjustments for
foreign currency translation fluctuations are excluded from net income and are
included as a separate component of consolidated shareholders' equity.
l. ADVERTISING AND PROMOTION. All costs associated with advertising and
promotion of the Company's products are expensed as incurred.
m. INVESTMENTS. The Company's investments are categorized as
available-for-sale securities, as defined by SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." Unrealized holding gains and
losses are reflected as a net amount in a separate component of stockholders'
equity until realized. For the purpose of computing realized gains and losses,
cost is identified on a specific identification basis.
n. NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board issued SFAS Nos. 130 and 131 "Reporting Comprehensive Income"
and "Disclosures about Segments of an Enterprise and Related Information." The
Company will be required to adopt these standards in fiscal 1999. The adoption
of these standards is not expected to have a material impact on the Company's
financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities". The
Company will be required to adopt this standard in fiscal 2000. The adoption of
this standard is not expected to have a material impact on the Company's
financial position or results of operations.
o. UNAUDITED INTERIM FINANCIAL INFORMATION. The accompanying consolidated
balance sheet as of August 1, 1999 and the consolidated statements of income and
comprehensive income for the 39 weeks ended August 2, 1998 and August 1, 1999
are unaudited but include all adjustments (consisting of normal recurring
accruals) which, in the opinion of management, are necessary for a fair
statement of the financial position and the operating results and cash flows for
the interim date and periods presented. Results for the interim periods are not
necessarily indicative of results to be achieved for an entire year or future
periods.
p. COMPREHENSIVE INCOME. The Company has adopted SFAS No. 130 "Reporting
Comprehensive Income" during the first quarter of fiscal 1999. This statement
requires that all items that meet the definition of components of comprehensive
income be reported in a financial statement for the period in which they are
recognized. Components of comprehensive income include revenue, expenses, gains
and losses that under generally accepted accounting principles are included in
comprehensive income but excluded from net income.
F-9
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximate fair value.
Investments consist primarily of municipal bonds with maturity dates of less
than six months and common stock, which are classified as available-for-sale.
Investments available-for-sale at November 2, 1997 and November 1, 1998 are
as follows:
NOVEMBER 2, 1997
<TABLE>
<CAPTION>
MARKET UNREALIZED
COST VALUE LOSS
---------- ---------- ----------
<S> <C> <C> <C>
Municipal Securities................................... $1,500,000 $1,500,000 $ --
Money Market Fund...................................... 833,511 833,511 --
Common Stock........................................... 18,254 18,254 --
---------- ---------- -------
$2,351,765 $2,351,765 $ --
========== ========== =======
</TABLE>
- ------------------------
NOVEMBER 1, 1998
<TABLE>
<S> <C> <C> <C>
Municipal Securities.................................... $1,000,000 $1,000,000 $ --
Common Stock............................................ 202,931 175,427 27,504
---------- ---------- -------
$1,202,931 $1,175,427 $27,504
========== ========== =======
</TABLE>
The Company holds various foreign exchange contracts. At November 2, 1997,
the Company had contracts maturing through November 10, 1998 to sell
10.9 million deutsche marks and 670,000 British pounds at rates ranging from
1.55 to 1.71 deutsche marks to the U.S. dollar and 1.62 to 1.66 U.S. dollars to
the British pound. At November 1, 1998, the Company had contracts maturing
through May 28, 1999 to sell 5.4 million deutsche marks and 365,000 British
pounds at rates ranging from 1.71 to 1.77 deutsche marks to the U.S. dollar and
1.63 to 1.64 U.S. dollars to the British pound. At November 2, 1997 and
November 1, 1998 the fair value of these foreign exchange contracts were less
than the face value by $96,000 and $197,000, respectively.
During the fourth quarter of fiscal 1998, the Company adopted SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." The adoption of
SFAS No. 133 did not have a material effect on the Company's financial position
or results of operations. It is the Company's policy to reduce the effects of
fluctuations in foreign currency exchange rates associated with its sale of
goods denominated in foreign currency by entering into forward contracts. The
Company enters into contracts to sell foreign currencies in the future only to
protect the U.S. dollar value of certain investments and future foreign currency
transactions. The Company does not engage in speculation. The gains and losses
on these contracts are included in income upon maturity and offset the foreign
exchange gains and losses reported on the underlying transactions. The total net
gain recorded during fiscal 1998 was
F-10
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
3. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
approximately $321,000 and is included as an offset to selling, general and
administrative expenses on the accompanying Consolidated Statements of Income.
4. ACCRUED EXPENSES
Accrued expenses for fiscal years 1997 and 1998 are comprised of the
following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Wages and benefits.......................................... $ 4,013,350 $ 5,135,454
Workers' compensation....................................... 796,382 646,100
Profit-sharing plan contribution............................ 500,000 500,000
Promotional and advertising allowance....................... 1,741,896 1,896,955
Other....................................................... 3,453,306 3,151,264
----------- -----------
$10,504,934 $11,329,773
=========== ===========
</TABLE>
5. INCOME TAXES
The provision for income taxes for fiscal years 1996, 1997 and 1998,
consists of the following:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal......................................... $16,434,369 $18,878,088 $17,568,636
State........................................... 4,277,275 5,335,096 4,220,969
----------- ----------- -----------
20,711,644 24,213,184 21,789,605
Deferred provision (benefit).......................... (782,999) 86,645 211,299
----------- ----------- -----------
$19,928,645 $24,299,829 $22,000,904
=========== =========== ===========
</TABLE>
The components of the deferred income tax provision (benefit) for fiscal
years 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- --------- --------
<S> <C> <C> <C>
Allowance for uncollectible accounts................... $ -- $ 57,083 $ 16,718
Inventory adjustments to market........................ (1,286,168) 609,067 (431,311)
Accrued expenses....................................... 374,841 (429,750) 663,042
Depreciation........................................... 128,328 (149,755) (37,150)
----------- --------- --------
$ (782,999) $ 86,645 $211,299
=========== ========= ========
</TABLE>
F-11
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
5. INCOME TAXES (CONTINUED)
The components of the Company's deferred income tax benefit as of
November 2, 1997 and November 1, 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Deferred income tax benefit:
Tax basis adjustments to inventory........................ $1,952,210 $2,126,806
Allowance for uncollectible accounts...................... 364,583 879,725
Inventory adjustments to market........................... 2,952,273 2,283,321
Accrued expenses.......................................... 524,895 2,454,109
---------- ----------
$5,793,961 $7,743,961
========== ==========
</TABLE>
The reported provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to the income before provision
for income taxes for fiscal years 1996, 1997 and 1998 as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Income tax provision computed at statutory rate... $16,467,607 $20,553,218 $19,397,537
State taxes, net of federal benefit............... 2,844,192 3,549,834 3,350,232
Tax credits and other............................. 616,846 196,777 (746,865)
----------- ----------- -----------
Tax provision..................................... $19,928,645 $24,299,829 $22,000,904
=========== =========== ===========
</TABLE>
6. BENEFIT AND STOCK OPTION PLANS
The Company is self-insured for a portion of its medical benefits programs.
Amounts charged to expense for health benefits were $3,137,000, $3,110,000 and
$3,594,000 for fiscal years 1996, 1997 and 1998, respectively, and were based on
actual claims and an estimate of claims incurred but not reported. The current
liability for health benefits is included in accrued expenses on the
accompanying consolidated balance sheets. The Company maintains excess insurance
coverage on an individual and an aggregate basis.
The Company maintains a qualified profit-sharing plan for the benefit of all
eligible employees. This plan contemplates the sharing of profits annually at
the discretion of the Board of Directors and is funded by cash contributions.
The contribution to this plan was $500,000, in each of the fiscal years 1996,
1997 and 1998.
The Company has one stock option plan, the 1993 St. John Knits, Inc. Stock
Option Plan (the "Plan"). Options granted under the Plan may be either incentive
or nonstatutory stock options. The Company accounts for the Plan under
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees", under which no compensation cost has been recognized for fiscal
years 1996, 1997 and 1998.
SFAS No. 123 "Accounting for Stock-Based Compensation" was issued in 1995
and, if fully adopted, changes the methods for recognition of cost on plans
similar to that of the Company.
F-12
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
6. BENEFIT AND STOCK OPTION PLANS (CONTINUED)
Adoption of SFAS No. 123 is optional for employee stock option grants, however
pro forma disclosure as if the Company had adopted the cost recognition method
is required. Had compensation cost for stock options awarded under the Plan been
determined consistent with SFAS No. 123, the Company's net income and earnings
per share would have reflected the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C> <C>
Net income: As reported........ $34,423,651 $33,420,618
Pro forma.......... $33,605,519 $31,818,853
Net income per share--diluted: As reported........ $ 2.01 $ 1.94
Pro forma.......... $ 1.96 $ 1.85
</TABLE>
The Company may grant up to 2,350,000 options under the Plan. The Company
has granted 1,625,334 options through November 1, 1998. The options are
primarily issued at fair market value with exercise prices equal to the
Company's stock price at the date of grant. Options generally vest over three
years; are exercisable in whole or in installments; and expire ten years from
date of grant.
The following is a summary of the activity in the Plan for fiscal years
1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year............ 784,470 $ 8.81 681,472 $ 9.45 842,988 $17.16
Granted................................... 28,000 23.04 197,000 42.27 527,334 27.12
Exercised................................. (130,330) 8.50 (35,484) 8.50 (109,336) 9.79
Forfeited................................. (668) 8.50 -- -- (339,334) 39.44
-------- ------ ------- ------ -------- ------
Outstanding, end of year.................. 681,472 $ 9.45 842,988 $17.16 921,652 $15.42
======== ====== ======= ====== ======== ======
Exercisable, end of year.................. 625,458 $ 8.68 668,644 $11.28 677,960 $14.37
Weighted average fair value of options
granted................................. $ 8.80 $17.93 $11.34
</TABLE>
During fiscal 1998, a total of 324,334 options were repriced.
The following is a detail of the stock options outstanding at November 1,
1998, including weighted average contractual life and exercise price
information:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
-----------------------
<S> <C> <C> <C> <C>
REMAINING
RANGE OF OPTIONS OPTIONS CONTRACTUAL EXERCISE
EXERCISE PRICES OUTSTANDING EXERCISABLE LIFE PRICE
---------------- ------- ------- ---- ------
$8.50 492,818 492,818 4.36 $ 8.50
$15.06 to $23.00 328,834 85,142 9.48 18.58
$39.06 to $39.13 100,000 100,000 9.10 39.09
------- ------- ---- ------
$8.50 to $39.13 921,652 677,960 6.70 $15.42
======= ======= ==== ======
</TABLE>
F-13
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
6. BENEFIT AND STOCK OPTION PLANS (CONTINUED)
For purposes of the pro forma presentation above, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes pricing
model with the following assumptions used for the grants in fiscal years 1997
and 1998: weighted average risk-free interest rate of 6.32 and 5.55 percent;
weighted average volatility of 31.0 and 27.5 percent; expected life of 6 years;
and weighted average dividend yield of 0.237 and 0.263 percent.
7. COMMITMENTS
The Company has entered into various leases for manufacturing, showroom,
warehouse, retail and office locations, including leases with related parties
(Note 9). The leases expire at various dates through the year 2014 and certain
leases contain renewal options. Rental expense under these leases was
approximately $8,094,000, $9,474,000 and $12,052,000 in fiscal years 1996, 1997
and 1998, respectively.
The following is a schedule of future minimum rental payments required under
noncancellable operating leases as of November 1, 1998:
<TABLE>
<S> <C>
1999........................................................ $ 12,802,000
2000........................................................ 12,247,000
2001........................................................ 11,305,000
2002........................................................ 10,831,000
2003........................................................ 10,222,000
Thereafter.................................................. 69,584,000
------------
$126,991,000
============
</TABLE>
The Company has various employment contracts with certain key employees,
which expire at various times through June 1, 2000. These agreements provide for
total annual compensation aggregating $3,634,000 and the payment of severance
benefits upon the termination of employment.
As of November 2, 1997 and November 1, 1998, the Company's commitments to
purchase wool yarn were approximately $11,847,000 and $12,779,000 respectively.
The Company's commitment to purchase computerized knitting machines totaled
approximately $2,326,000 and $569,000 at November 2, 1997 and November 1, 1998,
respectively.
On November 4, 1998, the Board of Directors of the Company adopted a
shareholder rights plan whereby shareholders will receive one right for each
share of common stock. The rights were issued as a dividend to shareholders of
record on November 18, 1998. Generally, the plan provides that if a person or
group acquires more than 15 percent of the Company's stock, holders of the
rights will be entitled to purchase the Company's stock at half of market value.
The plan also provides that if the Company is acquired in a merger or other
business combination after a person or group acquires more than 15 percent of
the Company's stock, holders of the rights will be entitled to purchase the
acquiring company's stock at half of market value. Subject to certain
restrictions, the Company will be entitled to redeem the rights for $0.01 per
right at any time until the first date of public announcement that a 15 percent
position in the Company has been acquired.
F-14
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
8. LINE OF CREDIT AND LONG-TERM DEBT
The Company has a line of credit agreement with a bank. The agreement
provides for a $25,000,000 line of credit that matures March 1, 2000. Borrowings
under the line bear interest at the bank's reference rate (8.0 percent at
November 1, 1998) or an offshore rate plus 1.5 percent. The agreement contains
covenants, which, among other matters, restrict capital expenditures, dividends,
investments, loans and advances and require the maintenance of certain financial
ratios. No amounts were due under this line of credit at either November 2, 1997
or November 1, 1998. Letters of credit outstanding under the line of credit
totaled approximately $331,000 and $111,000 at November 2, 1997 and November 1,
1998, respectively.
The long-term debt included on the consolidated balance sheet at
November 1, 1998 represents the long-term portion of a term loan incurred by the
Company's Japanese subsidiary, St. John Company, Ltd. The loan requires 36 equal
monthly installments including principal and interest through August 2001. The
effective interest rate for the loan was 2.1 percent at November 1, 1998. The
current portion of this loan is included in accrued liabilities on the
accompanying consolidated balance sheets.
9. RELATED-PARTY TRANSACTIONS
The Company leases its corporate headquarters/manufacturing facility and one
other manufacturing facility from partnerships in which a shareholder of the
Company is a significant partner. The annual payments on these leases were
approximately $966,000, $884,000 and $975,000 in fiscal years 1996, 1997 and
1998, respectively. The leases expire at various dates during fiscal year 2001
and are included in the future minimum rental payments disclosure (Note 7).
The Company periodically rents personal property provided by a company that
is owned by a shareholder. Rental payments for the use of such equipment were
approximately $37,000, $30,000 and $21,000 in fiscal years 1996, 1997 and 1998,
respectively.
At November 2, 1997 and November 1, 1998, the Company held a 50 percent
ownership interest in a partnership which leases transportation equipment to the
Company. The holder of the other 50 percent ownership interest is a corporation
which is wholly-owned by one of the Company's shareholders. During fiscal 1996,
the Company made net capital contributions to the partnership of approximately
$951,000. At November 2, 1997 and November 1, 1998, the Company's investment in
this partnership, net of partnership losses, was approximately $1,270,000 and
$854,000, respectively, and is included in other assets on the accompanying
consolidated balance sheets. During fiscal years 1996, 1997 and 1998, the
Company made lease payments to the partnership of $572,000, $840,000 and
$868,000, respectively. During the same years, the Company reported net losses
from the activities of the partnership of $224,000, $351,000 and $331,000,
respectively.
10. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
A substantial portion of the Company's sales are made to three major
customers. These three customers accounted for 18, 15 and 15 percent of net
sales during fiscal 1996, 17, 15 and 15 percent of net sales during fiscal 1997
and 17, 14 and 14 percent during fiscal 1998. The loss of any one of these
customers could have a materially adverse affect on the Company's business.
F-15
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
10. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS (CONTINUED)
The Company sells primarily to specialty apparel retailers; thus, the risk
of collection losses is concentrated in this industry. Management believes that
the Company's credit and collection policies are adequate to prevent significant
collection losses and that the allowance for uncollectible accounts is adequate
at November 2, 1997 and November 1, 1998.
11. LITIGATION
AMEN WARDY HOME STORES
On October 5, 1998, Amen Wardy, Jr. ("Wardy Jr.") filed a complaint (the
"Wardy Jr. Complaint") against the Company, Amen Wardy Home Stores, LLC, a
51 percent owned subsidiary of the Company ("Amen"), Robert E. Gray, Marie St.
John Gray, Kelly A. Gray, Black and Co., Inc. and Jennifer Black in the Superior
Court of the State of California, County of Orange (WARDY, JR. V. ST. JOHN
KNITS, INC., ET AL.). The complaint, which was amended on December 4, 1998,
involves claims of wrongful termination, breach of contract, breach of the
implied covenant of good faith and fair dealing, breach of fiduciary duty,
slander, libel, intentional and negligent infliction of emotional distress, an
accounting fraud, negligent misrepresentation, conspiring to commit fraud and
aiding and abetting fraud. The complaint alleges that Amen wrongfully terminated
Wardy Jr. because he refused to participate in improper accounting practices.
The complaint also alleges that the Company used Amen for its benefit and to the
detriment of Amen. Wardy Jr. seeks an unspecified amount of compensatory and
punitive damages as well as costs of suit, including attorneys' fees.
On November 16, 1998, the Company and Amen filed a cross-complaint against
Wardy Jr., and a third party complaint against Amen Wardy, Sr., Bob Hightower
and Amen Wardy Home, Inc. ("AWHI") in the Superior Court of the State of
California, County of Orange. Together, these complaints involve claims of
breach of contract, breach of fiduciary duty and fraud. These complaints allege
that AWHI used Amen for its benefit and to the detriment of Amen and the
Company. The Company and Amen seek an unspecified amount of compensatory and
punitive damages, as well as costs of suit, including attorneys' fees.
On November 17, 1998, AWH Direct, Inc. ("AWH Direct") filed a derivative
complaint against Amen, the Company, Robert E. Gray, Marie St. John Gray, Kelly
A. Gray, David A. Krinsky and David C. Frankel in the Superior Court of the
State of California, County of Orange (AWH DIRECT, LLC V. AMEN WARDY HOME
STORES, LLC, ET AL.). In this action AWH Direct is represented by the same
counsel as Wardy Jr. in WARDY JR. V. ST. JOHN KNITS, INC., ET AL., described
above. AWH Direct claims that the defendants are liable for breach of fiduciary
duty, breach of contract, breach of the implied covenant of good faith and fair
dealing, wrongful refusal to allow inspection of books and records and an
accounting. The complaint makes allegations similar to the ones made in the
Wardy Jr. Complaint. AWH Direct seeks an unspecified amount of compensatory and
punitive damages, a mandatory injunction requiring defendants to allow plaintiff
immediate access to the books and records of Amen and costs of suit, including
attorneys' fees.
SECURITIES FRAUD CLASS ACTION
On October 13, 1998, Binary Traders, Inc. filed a complaint on behalf of
purchasers of publicly traded securities of the Company during the period of
February 25, 1998 to August 25, 1998 against the
F-16
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
11. LITIGATION (CONTINUED)
Company, Robert E. Gray and Kelly A. Gray in the United States District Court,
Central District of California, Southern Division (BINARY TRADERS, INC. V. ST.
JOHN KNITS, INC., ET AL.). In this action, Binary Traders claims that the
defendants violated federal securities laws by allegedly making fraudulent
statements to cover up management's mistakes and certain material adverse
conditions affecting the Company's business. In addition, the complaint alleges
that Mr. Gray traded shares of the Company's common stock while in possession of
allegedly material non-public information. Binary Traders seeks class action
certification and an unspecified amount of compensatory damages.
PROPOSED BUY-OUT LITIGATION
Effective December 8, 1998, the Company received a proposal from Robert E.
Gray, Chairman and Chief Executive Officer, and Vestar Capital Partners III,
L.P. to purchase substantially all of the outstanding common stock of the
Company through a buy-out transaction. The Company has appointed an independent
committee of directors to evaluate the proposed transaction.
The Company is party to lawsuits that allege claims against certain of the
Company's directors for breach of fiduciary duty alleged to have arisen from the
proposed buy-out transaction. The lawsuits were filed in the Superior Court of
the State of California for the County of Orange.
The dates the lawsuits were instituted, as well as the principal parties to
the lawsuits, are as follows: (i) TEHRANI V. ST. JOHN KNITS, INC., ET AL., filed
on December 9, 1998, by Mishel S. Tehrani, as representative for a putative
class of unidentified members, against the Company, Robert E. Gray, Marie St.
John Gray, Kelly A. Gray, Roger G. Ruppert, Richard A. Gadbois III, David A.
Krinsky and Rick Rozar and (ii) HILL V. ST. JOHN KNITS, INC., ET AL., filed on
December 9, 1998, by Kenneth O. Hill, as representative for a putative class of
unidentified members, against the Company, Robert E. Gray, Marie St. John Gray,
Kelly A. Gray, Roger G. Ruppert, Richard A. Gadbois III and David A. Krinsky.
The principal relief sought in the these actions is certification of the
putative class, an injunction of the proposed buy-out transaction from
proceeding or, to the extent the transaction is concluded, a rescission of the
buy-out transaction and damages and attorneys' fees in an unspecified amount.
The Company is unable to estimate the outcome of these matters or any
potential liabilities it may incur. The Company expects to incur legal and other
defense costs as a result of such proceedings in an amount which it can not
currently estimate. These proceedings could involve a substantial diversion of
the time of some of the members of management, and an adverse determination in,
or settlement of, such litigation could involve payment of significant amounts,
which could have an adverse impact on the Company's business, financial
condition, results of operations and cash flows.
12. SUBSEQUENT EVENTS
PROPOSED BUY-OUT LITIGATION
Additional lawsuits were instituted in regards to the proposed buy-out
transaction. The lawsuits were filed in the Superior Court of the State of
California for the County of Orange. The dates the lawsuits were instituted, as
well as the principal parties to the lawsuits, are as follows: (i) SILVERMAN V.
ST. JOHN KNITS, INC., ET AL., filed on December 23, 1998, by Shirley Silverman,
as representative for a putative class of unidentified members, against the
Company, Robert E. Gray, Marie St. John Gray, Kelly A. Gray, Roger G. Ruppert,
Richard A. Gadbois III and David A. Krinsky and (ii) VINIKOW V. ST.
F-17
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
12. SUBSEQUENT EVENTS (CONTINUED)
JOHN KNITS, INC., ET AL., filed on January 8, 1999, by Larry Vinikow as
representative for a putative class of unidentified members, against the
Company, Robert E. Gray, Marie St. John Gray, Kelly A. Gray, Roger G. Ruppert,
Richard A. Gadbois III and David A. Krinsky. All of these lawsuits, including
those described in Note 11, were consolidated into one lawsuit on February 24,
1999.
The principal relief sought in the these actions is certification of the
putative class, an injunction of the proposed buy-out transaction from
proceeding or, to the extent the transaction is concluded, a rescission of the
buy-out transaction, and damages and attorneys' fees in an unspecified amount.
On March 9, 1999, plaintiffs filed a Consolidated Amended Complaint, adding
Robert Davis, Daniel Reiner and Mark Goldston, members of the Company's Board of
Directors, as defendants and also adding an additional cause of action for
unjust enrichment.
On April 15, 1999, the plaintiffs in the lawsuit filed a motion for
preliminary injunction seeking to prevent the mergers from proceeding. The
preliminary injunction motion was heard by the California state court on
April 28, 1999. On April 30, 1999, the court denied the plaintiffs' preliminary
injunction motion. In denying the plaintiffs' request, the court ruled that the
plaintiffs had not shown a "reasonable probability" that they could succeed in
proving at trial that the $30 per share offer in the mergers is unfair.
Similarly, the court ruled that the plaintiffs were unlikely to show that the
special committee of the Company's Board of Directors lacked true independence
or failed to "shop" the Company adequately to other buyers.
While declining to grant the preliminary injunction, the court imposed a
constructive trust which prevents Robert E. Gray, Marie Gray and Kelly A. Gray
from receiving in the mergers any amount for their Company shares in excess of
$30 per share until a full trial on the merits is held. Prior to the
determination of the final, definitive terms of the stock options to be granted
to the Grays after the mergers, the plaintiffs had argued that these options
represent additional consideration for the Grays' Company shares. It is the
Company's belief that these employee stock options represent compensation for
the Grays' services as officers of the reorganized company after the mergers and
are not additional consideration for their Company shares.
The court also imposed a constructive trust preventing Messrs. Gadbois and
Krinsky, directors of the Company, from exercising options that were repriced by
the board in September 1998 until a full trial on the merits is held. It is the
Company's belief that the September 1998 option repricing was not improper. The
repricing was consistent with the repricing of options held by key employees of
the Company, excluding the Grays, and occurred on September 15, 1998, which was
nearly two months in advance of Vestar's first meeting with the Grays.
In imposing the constructive trusts, the court indicated that the plaintiffs
had shown a "reasonable probability" that they could succeed at trial in proving
that the Company directors breached their fiduciary duties with respect to the
repricing of the director options and the alleged preferential treatment of the
Grays to the extent that the Grays receive a higher price for their shares than
the public shareholders in the mergers. The Company intends to continue to
contest vigorously the plaintiffs' allegations in this lawsuit, including any
request by the plaintiffs for the imposition of a constructive trust after a
full trial on the merits is held.
F-18
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
12. SUBSEQUENT EVENTS (CONTINUED)
On June 30, 1999, plaintiffs filed a Second Consolidated Amended Complaint
adding a new cause of action for negligence and new allegations asserting
self-dealing and irremediable conflicts of interest in the Board approval of the
proposed buy-out transaction.
On June 28, 1999, the proposed buy-out transaction was submitted to and
approved by the shareholders of the Company.
The Company is unable to estimate the outcome of these matters or any
potential liabilities it may incur. The Company expects to incur legal and other
defense costs as a result of such proceedings in an amount which it can not
currently estimate. These proceedings could involve a substantial diversion of
the time of some of the members of management, and an adverse determination in,
or settlement of, such litigation could involve payment of significant amounts,
which could have an adverse impact on the Company's business, financial
condition, results of operations and cash flows.
AMEN WARDY HOME STORES LITIGATION
The Wardy Jr. Action and the AWH Direct Action were settled pursuant to a
Memorandum of Understanding between the parties dated April 1, 1999 and a
subsequent Settlement Agreement and Mutual General Release dated April 30, 1999.
As part of the settlement, the Company paid certain legal fees of the plaintiffs
and transferred the AWHS boutique in Las Vegas to an affiliate of Amen Wardy,
Jr. In addition, as part of the settlement, AWHS became a wholly owned
subsidiary of the Company and the name of the entity was changed to "St. John
Home, LLC". Pursuant to the settlement, the Wardy Jr. Action was dismissed with
prejudice on May 11, 1999 and the AWH Direct Action was dismissed with prejudice
on May 5, 1999.
13. SUBSIDIARY GUARANTORS
The payment obligations of St. John Knits International (SJKI) under the
Senior Subordinated Notes are guaranteed by certain of SJKI's wholly owned
subsidiaries (the Guarantor Subsidiaries). Such guarantees are full,
unconditional and joint and several. Separate financial statements of the
Guarantor Subsidiaries are not presented because management has determined that
they would not be material to investors. Supplemental financial information on
the Guarantor Subsidiaries and SJKI's other subsidiaries (the Non-Guarantor
Subsidiaries) has not been presented as the Non-Guarantor Subsidiaries are
inconsequential and, accordingly, the historical consolidated financial
statements represent, in substance, the combined financial information for the
Guarantor Subsidiaries.
14. RECAPITALIZATION TRANSACTION (UNAUDITED)
On February 2, 1999, the Company entered into a merger agreement to be
acquired by a group consisting of Vestar Capital Partners III, L.P. (Vestar) and
Bob Gray, Marie Gray and Kelly Gray for approximately $533.9 million, which
represents an offering price of $30.00 per share. Pursuant to the agreement, on
July 7, 1999 the Company entered into two mergers. As a result of the mergers,
St. John became a wholly owned subsidiary of SJKI. The total financing used to
consummate the mergers was approximately $536.9 million, funded by approximately
$26.9 million in excess cash of St. John; Senior Credit Facilities consisting of
a $75.0 million Term Loan A and a $115.0 million Term Loan B; approximately
$98.6 million from the offering of Senior Subordinated Notes, net of discount;
F-19
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
14. RECAPITALIZATION TRANSACTION (UNAUDITED) (CONTINUED)
approximately $153.6 million of cash equity contributed by Vestar; $25.0 million
of preferred stock of SJKI, acquired by an affiliate of Vestar; approximately
$29.1 million from the rollover of a portion of the Grays' investment in St.
John; and approximately $13.7 million from the rollover of a portion of St.
John's then-outstanding public shares.
SENIOR CREDIT FACILITIES
Under the Senior Credit Facilities, Term Loan A will be repayable in
quarterly principal payments over six years with payments totaling $3.0 million
during the first year, $5.0 million during the second year, $7.0 million during
the third year, $11.0 million during the fourth year, $22.0 million during the
fifth year and $27.0 million during the sixth year. Term Loan A will bear
interest at a rate per annum equal (at SJKI's option) to: (i) an adjusted London
interbank offered rate ("Adjusted LIBOR") plus 3.00% or (ii) a rate equal to the
highest of the Agent's prime rate, a certificate of deposit rate plus 1% and the
Federal Funds effective rate plus 1/2 of 1% (the "Alternate Base Rate") plus
2.00%, in each case subject to certain reductions based on SJKI's financial
performance.
Term Loan B will be repayable in quarterly principal payments over eight
years, with no payment scheduled during the first year, payments totaling $1.0
million per year for the second through fifth years and payments totaling $11.0
million during the sixth year, $40.0 million during the seventh year and $60.0
million during the eighth year, and will bear interest at a rate per annum equal
(at SJKI's option) to: (i) Adjusted LIBOR plus 3.50% or (ii) the Alternate Base
Rate plus 2.50%, in each case subject to certain reductions based on SJKI's
financial performance.
The $25,000,000 revolving credit facility included in the Senior Credit
Facilities will be a six year facility and outstanding balances thereunder will
bear interest at a rate per annum equal (at SJKI's option) to: (i) Adjusted
LIBOR plus 3.00% or (ii) the Alternate Base Rate plus 2.00%, in each case
subject to certain reductions based on SJKI's financial performance. Amounts
under the senior credit facilities not paid when due bear interest at a default
rate equal to 2.00% above the otherwise applicable rate.
SENIOR SUBORDINATED NOTES
The $100,000,000 of Senior Subordinated Notes issued in connection with this
transaction will mature on July 1, 2009. Interest on the Notes will accrue at a
rate of 12.5% per annum and will be payable semi-annually in arrears on each
January 1 and July 1 commencing January 1, 2000.
The notes will be redeemable at the option of SJKI, in whole or in part, at
any time on or after July 1, 2004, at the redemption prices (expressed as a
percentage of principal amount) set forth below, plus accrued and unpaid
interest thereon, if any, to the redemption date (subject to the right of
holders
F-20
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
14. RECAPITALIZATION TRANSACTION (UNAUDITED) (CONTINUED)
of record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period beginning on July
1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR
- ----------
<S> <C>
2004........................................................ 106.250%
2005........................................................ 104.688%
2006........................................................ 103.125%
2007........................................................ 101.563%
2008 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time on or prior to July 1, 2002,
SJKI may redeem in the aggregate up to 35% of the originally issued aggregate
principal amount of the notes with the net cash proceeds of one or more public
equity offerings by SJKI at a redemption price in cash equal to 112.5% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the date of redemption (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date); provided, however, that at least 65% of the originally issued aggregate
principal amount of the notes must remain outstanding immediately after giving
effect to each such redemption (excluding any notes held by SJKI or any of its
affiliates). Notice of any such redemption must be given within 60 days after
the date of the closing of the relevant public equity offering of SJKI.
MANDATORILY REDEEMABLE PREFERRED STOCK
The $25,000,000 Mandatorily Redeemable Preferred Stock consists of 250,000
shares of Preferred Stock with a liquidation preference of $100 per share and
ranks junior in right of payment to all liabilities and obligations (whether or
not for borrowed money) of SJKI (other than common stock of SJKI and any
preferred stock of SJKI which by its terms is on parity with or junior to the
Preferred Stock).
Holders of Preferred Stock will be entitled to receive, when, as and if
declared by the board of directors of SJKI, out of funds legally available
therefor, dividends on the Preferred Stock, at an annual rate equal to 15.25%,
provided that if dividends are not paid on a dividend payment date, dividends
shall continue to accrue on unpaid dividends.
The Preferred Stock may be redeemed at any time on or after July 1, 2004, in
whole or in part, at the option of SJKI, at the redemption prices (expressed in
percentages of liquidation value) set forth
F-21
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
14. RECAPITALIZATION TRANSACTION (UNAUDITED) (CONTINUED)
below together with all accumulated dividends to the date of redemption, if
redeemed during the 12-month period beginning on July 1 of the years indicated.
<TABLE>
<CAPTION>
REDEMPTION
YEAR
- ----------
<S> <C>
2004........................................................ 107.625%
2005........................................................ 105.719%
2006........................................................ 103.813%
2007........................................................ 101.906%
2008 and thereafter......................................... 100.000%
</TABLE>
The Preferred Stock will also be redeemable in whole or in part, at the
option of SJKI at any time before July 1, 2004, at a redemption price equal to
the greater of (i) 100% of the liquidation value of the Preferred Stock and (ii)
the present values of the liquidation value at the mandatory redemption date,
discounted on a semi-annual basis at the Treasury Yield plus 15 basis points.
The "Treasury Yield" means, with respect to any redemption date, the rate per
annum equal to the semi-annual equivalent yield to maturity for a comparable
treasury issue.
In addition, at any time and from time to time on or prior to July 1, 2002,
SJKI may redeem in the aggregate up to 35% of the originally issued liquidation
value of the Preferred Stock with the net cash proceeds of one or more Public
Equity Offerings (as defined in the indenture) by SJKI at a redemption price in
cash equal to 115.25% of the liquidation value thereof, plus accumulated
dividends thereon, if any, to the date of redemption; provided, however, that at
least 65% of the originally issued aggregate liquidation value of the Preferred
Stock must remain outstanding immediately after giving effect to each such
redemption (excluding any Preferred Stock held by SJKI or any of its
affiliates). Notice of any such redemption must be given within 60 days after
the date of the closing of the relevant public equity offering of SJKI. The
Preferred Stock may only be redeemed if permitted under the terms of the senior
credit facilities, the indenture and other contractual arrangements of SJKI.
On July 1, 2010, SJKI will be required to redeem (subject to contractual and
other restrictions with respect thereto and to the legal availability of funds
therefor) all outstanding shares of Preferred Stock at a price equal to the
liquidation value thereof plus all accumulated dividends to the date of
redemption. Accordingly, the carrying value of such stock has been classified
outside of shareholders' equity.
SJKI may, at its option, exchange all but not less than all of the shares of
then outstanding Preferred Stock for debentures of SJKI in a principal amount
equal to the liquidation value of the Preferred Stock plus accumulated
dividends. The exchange debentures will bear interest at 15 1/4% per annum, have
a final stated maturity of July 1, 2010, have optional redemption provisions
comparable to the Preferred Stock and will have customary covenants and events
of default. SJKI may not cause the exchange of Preferred Stock for debentures
unless permitted under the terms of the senior credit facilities, the indenture
and other contractual arrangements of SJKI.
The impact of this recapitalization transaction has been included on the
accompanying unaudited consolidated balance sheet as of August 1, 1999.
F-22
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AUGUST 1, 1999 AND FOR THE 39 WEEK PERIODS ENDED AUGUST 2,
1998
AND AUGUST 1, 1999 IS UNAUDITED)
15. RESULTS BY QUARTER (UNAUDITED)
The unaudited results by quarter for fiscal years 1997 and 1998 are shown
below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
November 2, 1997
Net sales............................................. $56,175 $59,563 $54,811 $71,552
Gross profit.......................................... 31,756 35,871 32,163 42,767
Net income............................................ 7,383 8,874 7,201 10,965
Net income per common share--diluted.................. 0.43 0.52 0.42 0.64
November 1, 1998
Net sales............................................. $68,761 $69,806 $67,727 $75,667
Gross profit.......................................... 39,778 40,876 39,428 40,996
Net income............................................ 9,220 9,746 7,325 7,129
Net income per common share--diluted.................. 0.54 0.57 0.43 0.42
</TABLE>
F-23
<PAGE>
SCHEDULE II
ST. JOHN KNITS, INC.
VALUATION AND QUALIFYING ACCOUNT
FOR THE FISCAL YEARS ENDED NOVEMBER 3, 1996,
NOVEMBER 2, 1997 AND NOVEMBER 1, 1998
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
FISCAL YEAR EXPENSES DEDUCTIONS FISCAL YEAR
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for Uncollectible Accounts:
Fiscal year ended November 3, 1996.............. $750,000 $ 88,547 $ 88,547 $750,000
Fiscal year ended November 2, 1997.............. $750,000 $369,987 $214,987 $905,000
Fiscal year ended November 1, 1998.............. $905,000 $283,826 $238,099 $950,727
</TABLE>
F-24
<PAGE>
<TABLE>
<S> <C>
$100,000,000 [LOGO]
</TABLE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
OFFER TO EXCHANGE ALL OUTSTANDING 12 1/2% SENIOR SUBORDINATED NOTES
DUE 2009 FOR 12 1/2% SENIOR SUBORDINATED
NOTES DUE 2009, WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT
UNCONDITIONALLY GUARANTEED ON A SENIOR
SUBORDINATED BASIS BY ST. JOHN KNITS, INC.,
ST. JOHN ITALY, INC., ST. JOHN TRADEMARKS, INC.
AND ST. JOHN HOME, LLC
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative, or
investigative (other than action by or in the right of the corporation a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceedings, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of derivative actions, and the statute requires court
approval before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statute provides
that it is not exclusive of other indemnification that may be granted by a
corporation's charter, by-laws, disinterested director vote, stockholder vote,
agreement or otherwise. The Registrant's by-laws provide that the Registrant
will indemnify any person to the fullest extent permitted by Delaware law who is
or was made, or threatened to be made, a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, including, without limitation, an action by or in the right of
the Registrant to procure a judgment in its favor, by reason of the fact that
the person, or a person of whom the person is the legal representative, is or
was a director or officer of the Registrant, or is or was serving in any
capacity at the request of the Registrant for any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against judgments, fines, penalties, excise taxes, amounts paid in settlement
and costs, charges and expenses (including attorneys' fees and disbursements).
Persons who are not directors or officers of the Registrant may be similarly
indemnified in respect of service to the Registrant or to any of the above other
entities at the request of the Registrant to the extent the board of directors
at any time specifies that those persons are entitled to the benefits of the
indemnification. Pursuant to the by-laws, the Registrant also has the power to
purchase officers' and directors' liability insurance which insures against
liabilities that officers and directors of the Registrant, in those capacities,
may incur.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duties as a director, except for liability (i) for any
transaction from which the director derives an improper personal benefit,
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (iii) for improper payment of
dividends or redemptions of shares, or (iv) for any breach of a director's duty
of loyalty to the company or its stockholders. Article Sixth of the Registrant's
certificate of incorporation includes this provision.
Under the Delaware Limited Liability Company Act (the "LLC Act"), a limited
liability company may, unless otherwise provided in its limited liability
company agreement, indemnify any member or manager of the limited liability
company or any other person from and against any and all claims and demands
whatsoever. The amended and restated limited liability company agreement of St.
John Home, LLC does not contain any provisions limiting the terms of the LLC
Act.
Under California law, a corporation generally has the power to indemnify any
agent who is a party to any action, other than an action by or in the right of
the corporation to procure a judgement in its favor, against expenses,
judgments, fines and settlements if that person acted in good faith and in a
manner that person reasonably believed to be in the best interests of the
corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe his or her conduct was unlawful. In
II-1
<PAGE>
addition, a corporation generally has the power to indemnify any agent who is a
party to any action by or in the right of the corporation, against expenses
actually and reasonably incurred by that person in connection with the defense
or settlement of the action if that person acted in good faith and in a manner
that person believed to be in the best interests of the corporation and its
shareholders. An agent of a corporation for purposes of the California General
Corporation Law (the "CGCL") includes directors, officers and employees of such
corporation. The bylaws of St. John Trademarks, Inc. provide for indemnification
of directors, officers, employees and agents of St. John Trademarks, Inc. to the
fullest extent permitted by law.
The indemnification authorized by the CGCL is not exclusive and a
corporation may grant its directors some additional rights to indemnification.
The restated Articles of Incorporation and restated bylaws of St. John Knits,
Inc. and the Articles of Incorporation and the bylaws of St. John Italy, Inc.
permit St. John Knits, Inc. and St. John Italy, Inc., respectively, to indemnify
each of their agents in excess of the indemnification otherwise permitted by the
CGCL with respect to actions for breach of duty to St. John Knits, Inc. and St.
John Italy, Inc., respectively, subject, in each case, to limitations imposed by
the CGCL.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits were filed pursuant to Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<C> <S>
*2.1 Agreement and Plan of Merger, dated as of February 2, 1999,
among St. John Knits, Inc., SJK Acquisition, Inc., St. John
Knits International, Incorporated and Acquisition Corp.
*3.1 Restated Certificate of Incorporation of St. John Knits
International, Incorporated.
*3.2 By-Laws of St. John Knits International, Incorporated
*3.3 Amended and Restated Articles of Incorporation of St. John
Knits, Inc.
*3.4 By-Laws of St. John Knits, Inc.
*3.5 Certificate of Determination of Preferences of Series A
Junior Participating Preferred Stock of St. John Knits, Inc.
*3.6 Articles of Incorporation of St. John Italy, Inc.
*3.7 By-Laws of St. John Italy, Inc.
*3.8 Articles of Incorporation of St. John Trademarks, Inc.
*3.9 Amended and Restated By-Laws of St. John Trademarks, Inc.
*3.10 Certificate of Formation of St. John Home, LLC
*3.11 Amended and Restated Limited Liability Company Agreement of
St. John Home, LLC
*3.12 Certificate of Designations for 15 1/4% Exchangeable
Preferred Stock due 2010 of St. John Knits International
*4.1 Indenture, dated as of July 7, 1999, by and among St. John
Knits International, Incorporated, the guarantors named
therein and The Bank of New York, as the Trustee
*4.2 Form of 12 1/2% Senior Subordinated Notes due 2009
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<C> <S>
*4.3 Exchange and Registration Rights Agreement, dated as of
July 7, 1999, by and among St. John Knits International, St.
John Knits, Inc., St. John Italy, Inc., St. John
Trademarks, Inc., St. John Home, LLC, Chase
Securities Inc., Bear, Stearns & Co. Inc. and PaineWebber
Incorporated.
*4.4 Certificate of Designations for 15 1/4% Exchangeable
Preferred Stock due 2010 of St. John Knits International
*4.5 Subscription Agreement, dated as of July 7, 1999, between
St. John Knits International and Vestar/SJK Investors LLC,
relating to the 15 1/4% Exchangeable Preferred Stock due
2010 of St. John Knits International.
**5 Opinion of Simpson Thacher & Bartlett
*10.1 Credit Agreement, dated July 7, 1999, by and among the
Company, the Lenders from time to time party thereto and The
Chase Manhattan Bank, as administrative agent
*10.2 Voting agreement, dated as of February 2, 1999, among Vestar
Capital Partners III, L.P., Vestar/Gray LLC and the parties
listed on Schedule A thereto
*10.3 Stockholders' Agreement, dated July 7, 1999, by and among
the Company, SJK, Vestar/ Gray Investors LLC, Vestar/SJK
Investors LLC and the members of Vestar/Gray Investors LLC
Signatory Thereto
**10.4 Amended and Restated Limited Liability Company Agreement of
Vestar/SJK Investors LLC, dated as of July 7, 1999
*10.5 Management Agreement among St. John Knits, Inc., St. John
Knits International and Vestar Capital Partners
*10.6 Letter Agreement dated April 27, 1999, between Vestar
Capital Partners and Robert E. Gray, attaching (i) a summary
of terms for the Grays' stock options, (ii) a form of St.
John Knits International, Incorporated 1999 Stock Option
Plan and (iii) a form of Stock option agreement
*10.7 Superior Court of the State of California County of Orange,
Central Justice Center Minute Order, dated April 30, 1999
*10.8 Lease Amendment Agreement dated April 1, 1997 between St.
John Knits, Inc. and G.M. Properties (increasing the space
of the corporate headquarters, warehousing and Manufacturing
facility)
*10.9 Agreement of Lease dated as of December 31, 1995 by and
between St. John Knits, Inc. and Rolex Realty Company, Inc.
(New York Boutique)
*10.10 Lease dated June 1, 1986 between G.M. Properties and St.
John Knits, Inc. (Corporate Headquarters)
*10.11 Industrial Real Estate Lease dated November 13, 1985 between
Alhambra Partners, a California Limited Partnership, and St.
John Knits, Inc., together with Amendment No. 1 to
Industrial Real Estate Lease dated November 13, 1985 and
Option to Extend Term dated November 13, 1985 (Assembling,
Sewing)
*10.12 Agreement of Lease dated January 11, 1991 by and between
Rolex Realty Company, Inc. and St. John Knits, Inc. together
with Lease Modification Agreement dated January 11, 1991 and
Second Lease Modification Agreement dated April 12, 1991
(New York Boutique)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<C> <S>
**10.13 Amended and Restated Agreement of Limited Partnership of SJA
1&2, Ltd. dated October 31, 1993 by and between St. John
Knits, Inc. and Ocean Air Charters, Inc.
**10.14 Amended and Restated Employment Agreement between St. John
Knits, Inc. and Robert E. Gray.
*10.15 Employment Agreement dated as of July 14, 1998 between St.
John Knits, Inc. and Marie St. John Gray
*10.16 Employment Agreement dated as of July 14, 1998 between St.
John Knits, Inc. and Kelly A. Gray
*10.17 Employment Agreement dated as of July 14, 1998 between St.
John Knits, Inc. and Roger G. Ruppert
*10.18 Employment Agreement dated as of July 14, 1998 between St.
John Knits, Inc. and Karla R. Guyer
*10.19 St. John Knits, Inc. Employees' Profit Sharing Plan dated as
of August 21, 1995
*10.20 Aircraft Lease dated April 1, 1998 by and between St. John
Knits, Inc. and Ocean Air Charters, Inc. as Trustee of the
SJA 1&2, Ltd. Trust (Lease for Company airplane)
**10.21 Form of Indemnity Agreement by and between St. John Knits,
Inc., St. John Knits International and each of their
directors and officers
*10.22 Distribution Agreement dated June 11, 1997 by and between
St. John Knits, Inc. and Gary Farn, Ltd.
*10.23 General Partnership Agreement of St. John-Varian Development
Company dated April 3, 1995 by and between St. John Knits,
Inc. and Varian Associates, a California General Partnership
*10.24 Lease Agreement dated April 3, 1995 by and between St. John
Knits, Inc. and St. John-Varian Development Company
(Knitting, Sewing, Finishing, Shipping, Administrative
Offices)
*10.25 Joint Venture Agreement dated July 17, 1997 between St. John
Knits, Inc. and Commercial Development Co., Ltd.
*10.26 Lease Extension Agreement dated February 6, 1996 between St.
John Knits, Inc. and G.M. Properties (extending the lease
for St. John Knits, Inc.'s current Corporate Headquarters)
*10.27 Lease Extension Agreement dated as of September 1, 1996
between St. John Knits, Inc. and Alhambra Partners
(extending the lease for one of the Company's Assembling and
Sewing facilities)
*10.28 License and Distribution Agreement dated as of August 1,
1997 between St. John Knits, Inc. and St. John Co., Ltd.
*10.29 Asset Purchase Agreement dated as of August 29, 1996 among
St. John Knits, Inc., Jakob Schlaepfer & Co. AG and Jakob
Schlaepfer, Inc.
*10.30 Manufacturing and Supply Agreement dated as of November 9,
1996 by and between St. John Knits, Inc. and Calzaturificio
M.A.B. S.p.A.
*10.31 Sales Representative Agreement dated November 13, 1996 by
and between St. John Knits, Inc. and Hilda Chang
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<C> <S>
*10.32 Unit Price Construction Agreement between St. John de
Mexico, S.A. de C.V. and Administration Tijuana Industrial,
S.A. de C.V.
**10.33 1999 St. John Knits International, Incorporated Stock Option
Plan
**10.34 Stock Option Agreement, dated as of July 7, 1999, between
St. John Knits International and Bob Gray
**10.35 Stock Option Agreement, dated as of July 7, 1999, between
St. John Knits International and Marie St. John Gray
**10.36 Stock Option Agreement, dated as of July 7, 1999, between
St. John Knits International and Kelly A. Gray
*21 Subsidiaries of St. John Knits International, Incorporated.
**23.1 Consent of Arthur Andersen LLP, Independent Auditors
**23.2 Consent of Simpson Thacher & Bartlett (contained in opinion
filed as Exhibit 5)
*24 Power of Attorney
*25 Form T-1 Statement of Eligibility under the Trust Indenture
Act of 1939 of The Bank of New York, as trustee
**27 Financial Data Schedules for the year ended November 1, 1998
and the 39 weeks ended August 1, 1999
**99.1 Form of Letter of Transmittal
**99.2 Form of Notice of Guaranteed Delivery
</TABLE>
- ------------------------
* Previously filed
** Filed herewith
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
this indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
these liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether the indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
the issue.
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-5
<PAGE>
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more that a
20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to this information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, in the State of
California, on November 22, 1999.
<TABLE>
<S> <C> <C>
ST. JOHN KNITS INTERNATIONAL,
INCORPORATED
By: /s/ ROGER G. RUPPERT
-----------------------------------------
Roger G. Ruppert
CHIEF FINANCIAL OFFICER AND SENIOR VICE
PRESIDENT, FINANCE
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated below on the 22nd day of November, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- ----------------------------------------------
<C> <S>
*
------------------------------------------- Chairman of the Board and Chief Executive
Bob Gray Officer (Principal Executive Officer)
*
------------------------------------------- Director and President
Kelly A. Gray
/s/ ROGER G. RUPPERT Chief Financial Officer and Senior Vice
------------------------------------------- President, Finance (Principal Financial
Roger G. Ruppert Officer and Principal Accounting Officer)
*
------------------------------------------- Director
Daniel O'Connell
*
------------------------------------------- Director
James Kelley
*
------------------------------------------- Director
Sander Levy
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROGER G. RUPPERT
--------------------------------------
Roger G. Ruppert,
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, in the State of
California, on November 22, 1999.
<TABLE>
<S> <C> <C>
ST. JOHN KNITS, INC.
By: /s/ ROGER G. RUPPERT
-----------------------------------------
Roger G. Ruppert
CHIEF FINANCIAL OFFICER AND SENIOR VICE
PRESIDENT, FINANCE
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated below on the 22nd day of November, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- ----------------------------------------------
<C> <S>
*
------------------------------------------- Chairman of the Board and Chief Executive
Bob Gray Officer (Principal Executive Officer)
*
------------------------------------------- Director and President
Kelly A. Gray
/s/ ROGER G. RUPPERT Chief Financial Officer and Senior Vice
------------------------------------------- President, Finance (Principal Financial
Roger G. Ruppert Officer and Principal Accounting Officer)
*
------------------------------------------- Director
Daniel O'Connell
*
------------------------------------------- Director
James Kelley
*
------------------------------------------- Director
Sander Levy
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROGER G. RUPPERT
--------------------------------------
Roger G. Ruppert,
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, in the State of
California, on November 22, 1999.
<TABLE>
<S> <C> <C>
ST. JOHN ITALY, INC.
By: /s/ ROGER G. RUPPERT
-----------------------------------------
Roger G. Ruppert
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND SECRETARY
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated below on the 22nd day of November, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* President, Chief Executive Officer and
- -------------------------------------------- Director (Principal Executive Officer)
Kelly A. Gray
/s/ ROGER G. RUPPERT Vice President, Chief Financial Officer,
- -------------------------------------------- Secretary and Director (Principal Financial
Roger G. Ruppert Officer and Principal Accounting Officer)
* Director
- --------------------------------------------
Bob Gray
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROGER G. RUPPERT
--------------------------------------
Roger G. Ruppert,
ATTORNEY-IN-FACT
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, in the State of
California, on November 22, 1999.
<TABLE>
<S> <C> <C>
ST. JOHN TRADEMARKS, INC.
By: /s/ ROGER G. RUPPERT
-----------------------------------------
Roger G. Ruppert
CHIEF FINANCIAL OFFICER,
VICE PRESIDENT AND SECRETARY
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated below on the 22nd day of November, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
*
------------------------------------------- President, Chief Executive Officer and
Bob Gray Director (Principal Executive Officer)
/s/ ROGER G. RUPPERT Chief Financial Officer, Vice President and
------------------------------------------- Secretary (Principal Financial Officer and
Roger G. Ruppert Principal Accounting Officer)
*
------------------------------------------- Director
Marie Gray
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROGER G. RUPPERT
--------------------------------------
Roger G. Ruppert,
ATTORNEY-IN-FACT
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, in the State of
California, on November 22, 1999.
<TABLE>
<S> <C> <C>
ST. JOHN HOME, LLC
By: ST JOHN KNITS, INC.
ITS SOLE MEMBER
By: /s/ ROGER G. RUPPERT
-----------------------------------------
Roger G. Ruppert
CHIEF FINANCIAL OFFICER AND SENIOR VICE
PRESIDENT, FINANCE
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated below on the 22nd day of November, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- ----------------------------------------------
<C> <S>
*
------------------------------------------- Chairman of the Board and Chief Executive
Bob Gray Officer (Principal Executive Officer)
*
------------------------------------------- Director and President
Kelly A. Gray
/s/ ROGER G. RUPPERT Chief Financial Officer and Senior Vice
------------------------------------------- President, Finance (Principal Financial
Roger G. Ruppert Officer and Principal Accounting Officer)
*
------------------------------------------- Director
Daniel O'Connell
*
------------------------------------------- Director
James Kelley
*
------------------------------------------- Director
Sander Levy
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROGER G. RUPPERT
--------------------------------------
Roger G. Ruppert,
ATTORNEY-IN-FACT
</TABLE>
II-11
<PAGE>
EXHIBIT 5
November 22, 1999
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
ST. JOHN KNITS, INC.
ST. JOHN ITALY, INC.
ST. JOHN TRADEMARKS, INC.
ST. JOHN HOME, LLC
c/o St. John Knits International, Incorporated
17422 Derian Avenue
Irvine, California 92614
Ladies and Gentlemen:
We have acted as special counsel to St. John Knits International,
Incorporated, a Delaware corporation (the "Company"), and to St. John Knits,
Inc., St. John Italy, Inc., St. John Trademarks, Inc., each a California
corporation, and St. John Home, LLC, a Delaware limited liability company,
(individually, a "Guarantor" and collectively, the "Guarantors"), in connection
with the Registration Statement on Form S-4 (the "Registration Statement") filed
by the Company and the Guarantors with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended, relating to the
issuance by the Company of $100,000,000 aggregate principal amount of its
12 1/2% Senior Subordinated Notes due 2009 (the "Exchange
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
ST. JOHN KNITS, INC.
ST. JOHN ITALY, INC.
ST. JOHN TRADEMARKS, INC.
ST. JOHN HOME, LLC
-2- November 22, 1999
Securities") and the issuance by the Guarantors of guarantees (the "Guarantees")
with respect to the Exchange Securities. The Exchange Securities and the
Guarantees thereof will be issued under an Indenture, dated as of July 7, 1999
(the "Indenture"), among the Company, the Guarantors and The Bank of New York,
as Trustee. The Exchange Securities will be offered by the Company in exchange
for $100,000,000 aggregate principal amount of its outstanding 12 1/2% Senior
Subordinated Notes due 2009 (the "Securities").
We have examined the Registration Statement and the Indenture,
which has been filed with the Commission as an exhibit to the Registration
Statement. We have also examined the originals, duplicates or certified or
conformed copies, of such corporate records, agreements, instruments and other
documents and have made such other and further investigations as we have deemed
relevant and necessary in connection with the opinions expressed herein. As to
questions of fact material to this opinion, we have relied upon certificates of
public officials and of officers and representatives of the Company and the
Guarantors.
In rendering the opinions set forth below, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as duplicates or certified
or conformed copies, and the authenticity of the originals of such latter
documents. We
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
ST. JOHN KNITS, INC.
ST. JOHN ITALY, INC.
ST. JOHN TRADEMARKS, INC.
ST. JOHN HOME, LLC
-3- November 22, 1999
have also assumed that the Indenture is the valid and legally binding obligation
of the Trustee. We have assumed further that (1) St. John Knits, Inc., St. John
Italy, Inc. and St. John Trademarks, Inc. have duly authorized, executed and
delivered the Indenture and (2) execution, delivery and performance by St. John
Knits, Inc., St. John Italy, Inc. and St. John Trademarks, Inc. of the Indenture
and the Guarantees do not and will not violate the laws of California or any
other applicable laws (excepting the laws of the State of New York and the
Federal laws of the United States).
Based upon the foregoing, and subject to the qualifications and
limitations stated herein, we are of the opinion that:
1. When the Exchange Securities have been duly executed,
authenticated, issued and delivered in accordance with the provisions of the
Indenture upon the exchange, the Exchange Securities will constitute valid and
legally binding obligations of the Company, enforceable against the Company in
accordance with their terms.
2. When (a) the Exchange Securities have been duly executed,
authenticated, issued and delivered in accordance with the provisions of the
Indenture upon the exchange and (b) the Guarantee of St. John Home, LLC has been
duly issued, the Guarantee of St. John Home, LLC will constitute a valid and
legally binding obligation of St. John Home, LLC, enforceable against St. John
Home, LLC in accordance with its terms.
Our opinions set forth above are subject to the effects of (1)
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
ST. JOHN KNITS, INC.
ST. JOHN ITALY, INC.
ST. JOHN TRADEMARKS, INC.
ST. JOHN HOME, LLC
-4- November 22, 1999
creditors' rights generally, (2) general equitable principles (whether
considered in a proceeding in equity or at law) and (3) an implied covenant of
good faith and fair dealing.
We are members of the Bar of the State of New York and we do not
express any opinion herein concerning any law other than the law of the State of
New York, the Federal law of the United States, the Delaware General Corporation
Law and the Delaware Limited Liability Company Act.
We hereby consent to the filing of this opinion letter as Exhibit
5 to the Registration Statement and to the use of our name under the caption
"Legal Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
/s/ SIMPSON THACHER & BARTLETT
------------------------------
SIMPSON THACHER & BARTLETT
<PAGE>
Exhibit 10.4
VESTAR/GRAY INVESTORS LLC
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT of
VESTAR/GRAY INVESTORS LLC, a Delaware limited liability company (the "LLC"),
dated as of July 7, 1999, by and among Vestar/SJK Investors LLC, a Delaware
limited liability company (the "VESTAR MEMBER"), the parties listed on Schedule
1 hereto (each a "GRAY MEMBER" and, collectively, the "GRAY MEMBERS") and such
other Persons as shall hereinafter become Members as hereinafter provided.
W I T N E S S E T H
WHEREAS, the LLC was formed pursuant to (i) a Certificate of
Formation dated as of January 29, 1999 (the "CERTIFICATE") and filed for
recordation in the office of the Secretary of State of the State of Delaware on
January 29, 1999 and (ii) a Limited Liability Company Agreement dated as of
January 29, 1999 by the Vestar Member (the "ORIGINAL AGREEMENT"); and
WHEREAS, the parties hereto desire to enter into this Amended and
Restated Limited Liability Company Agreement of the LLC to permit the admission
as Members (as defined below) of the parties listed on Schedule 1 hereto and
further to make the modifications hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and
agreements herein made and intending to be legally bound hereby, the parties
hereto agree to amend and restate the Original Agreement in its entirety to read
as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS. Unless the context otherwise requires, the
following terms shall have the following meanings for purposes of this
Agreement:
"ACQUISITION" means Pearl Acquisition Corp., a Delaware corporation
and a wholly-owned direct subsidiary of the LLC.
"ACQUISITION MERGER" shall have the meaning set forth in the Merger
Agreement.
"ADDITIONAL DEMAND REGISTRATIONS" shall have the meaning set forth
in Section 9.3(a)(iii).
"AFFILIATE" shall mean, (a) with respect to any Person, (i) any
Person that directly or indirectly controls, is controlled by or is under
common control with, such Person, or (ii) any director, officer, partner,
member or employee of such Person or any Person
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2
specified in clause (i) above, or (iii) any Immediate Family Member of any
Person specified in clause (i) or (ii) above; and (b) shall also include, with
respect to any Person who is an individual, a trust the beneficiaries of which,
or a corporation or partnership the stockholders or limited or general partners
of which, include only such individual and such individual's Immediate Family
Members. Notwithstanding the foregoing, the LLC will not be deemed to be an
Affiliate of any Person.
"AGREEMENT" shall mean this Amended and Restated Limited Liability
Company Agreement, as it may be amended, supplemented, modified or
restated from time to time.
"ALLOCATED SHARES" shall mean, in respect of each Member, the number
of Shares initially allocated to each Member, as set forth on Schedule 1
to this Agreement, minus the number of such Shares that have been the
subject of a Transfer (which does not include pledges) and plus the number
of additional shares received by the LLC in respect of such Shares.
"BUSINESS DAY" shall mean a day which is not a Saturday, Sunday or
other day on which banks in New York, New York or Los Angeles, California
are closed.
"CAPITAL ACCOUNT" shall have the meaning set forth in Section 6.3.
"CAPITAL CONTRIBUTION" shall mean the total amount of cash and the
agreed fair market value (net of liabilities) of all other assets
contributed to the LLC by a Member.
"CARRYING VALUE" shall mean, with respect to any asset of the LLC,
the asset's adjusted basis for federal income tax purposes, except that
the Carrying Values of all assets of the LLC shall be adjusted to equal
their respective fair market values, in accordance with the rules set
forth in Regulations section 1.704-1(b)(2)(iv)(f), except as otherwise
provided herein, as of: (a) the date of the acquisition of any additional
Interest by any new or existing Member in exchange for more than a DE
MINIMIS Capital Contribution; (b) the date of the distribution of more
than a DE MINIMIS amount of assets of the LLC to a Member; (c) the date an
Interest is relinquished to the LLC; PROVIDED, HOWEVER, that adjustments
pursuant to clauses (a), (b) and (c) above shall be made only if the
Managing Member reasonably determines that such adjustments are necessary
or appropriate to reflect the relative economic interests of the Members.
The Carrying Value of any asset of the LLC distributed to any Member shall
be adjusted immediately prior to such distribution to equal its fair
market value and depreciation shall be calculated by reference to Carrying
Value, instead of tax basis, once Carrying Value differs from tax basis.
The Carrying Value of any asset contributed (or deemed contributed under
Regulations section 1.704-1(b)(2)(iv)) by a Member to the LLC will be the
fair market value of the asset at the date of its contribution thereto.
"CERTIFICATE" shall have the meaning set forth in the recitals
hereto.
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3
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute. Any reference herein to a
particular provision of the Code shall mean, where appropriate, the
corresponding provision in any successor statute.
"COMMON STOCK REQUEST" shall have the meaning set forth in Section
9.3(a)(i).
"COMPANY" shall mean St. John Knits, Inc., a California corporation.
"COMPANY COMMON STOCK" shall mean the common stock, no par value per
share, of Company.
"DEMAND REQUEST" shall have the meaning set forth in Section
9.3(a)(i).
"DEMANDING MEMBER" shall have the meaning set forth in Section
9.3(a)(i).
"EFFECTIVE TIME" shall have the meaning set forth in the Merger
Agreement.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"FAIR MARKET VALUE" shall mean, as of any date (the "VALUATION
DATE"), with respect to each Share, prior to a Public Offering, the fair
market value thereof, disregarding any discount for minority interest or
marketability of shares, as determined by an independent appraiser,
accountant or investment banking firm (the "INITIAL APPRAISER") selected
by the Board of Directors of the Parent (and compensated by the Parent)
(the "INITIAL DETERMINATION"); PROVIDED, that if the selling Gray
Employee(s) disagree(s), in good faith, with the Initial Determination,
such selling Gray Employee(s) shall promptly notify the Parent of such
disagreement, in which event an independent appraiser, accountant or
investment banking firm (the "SECOND APPRAISER") selected by the selling
Gray Employee(s) shall make a determination of the fair market value
thereof, disregarding any discount for minority interest or marketability
of shares (the "SECOND DETERMINATION"), and if the Second Determination is
(i) not at least 110% of the Initial Determination, "FAIR MARKET VALUE"
shall be the average of the Initial Determination and the Second
Determination and the selling Gray Employee(s) shall pay the cost of the
Second Determination or (ii) 110% of the Initial Determination or greater,
an independent appraiser, accountant or investment banking firm (the
"THIRD APPRAISER"; the Second and Third Appraisers shall not be permitted
to see or otherwise have access to, or be informed of, the results of the
Initial Determination and the Second Determination, as applicable, or any
component of either appraiser's analysis that led to its conclusions and
each of the Parent and the Gray Employees agrees to comply with the
foregoing provision) jointly agreed upon and selected by the Initial
Appraiser and the Second Appraiser shall make a determination of the fair
market value thereof, disregarding any discount for minority interest or
marketability of shares (the "THIRD DETERMINATION"), and if the Third
Determination (i) falls within the range of values that is between the
Lower Appraised Amount (as defined below) and the Higher Appraised Amount
(as defined below), "FAIR MARKET VALUE" shall be the Third Determination
and the Parent and the selling Gray
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4
Employee(s) shall split the cost of the Second Appraiser and the Third
Appraiser, or (ii) is below the Lower Appraised Amount, "FAIR MARKET
VALUE" shall be the Lower Appraised Amount and the selling Gray
Employee(s) shall pay the cost of the Second Appraiser and the Third
Appraiser; or (iii) is above the Higher Appraised Amount, "FAIR MARKET
VALUE" shall be the Higher Appraised Amount and the Parent shall pay the
cost of the Second Appraiser and the Third Appraiser. Subsequent to a
Public Offering, the term "FAIR MARKET VALUE" shall mean the price per
share equal to the average of the last sales price of Parent Common Stock
on each of the last thirty trading days prior to the Valuation Date (the
"REPURCHASE CALCULATION PERIOD") on each exchange on which the Parent
Common Stock may at the time be listed or, if there shall have been no
sales on any of such exchanges during the Repurchase Calculation Period,
the average of the closing bid and asked prices on each such exchange on
each day during the Repurchase Calculation Period or, if there are no such
bid and asked prices during the Repurchase Calculation Period on the next
preceding five dates on which such bid and asked prices occurred or, if
the Parent Common Stock shall not be so listed, the average of the closing
sales prices as reported by Nasdaq during the Repurchase Calculation
Period in the over-the-counter market. As used herein, "Lower Appraised
Amount" means the lower of the Initial Determination and the Second
Determination and "Higher Appraised Amount" means the higher of the
Initial Determination and the Second Determination.
"FAMILY GROUP" shall have the meaning set forth in Section 8.2.
"FINANCING DEFAULT" shall mean an event which constitutes (or which
with notice or lapse of time or both would constitute) an event of default
(which event of default has not been cured or waived) under any of the
following as originally entered into or as they may be amended from time
to time: (i) any agreement under which an amount of indebtedness of the
Parent or the Company in excess of $5,000,000 is outstanding as of the
time of the aforementioned event, and any extensions, renewals,
refinancings or refundings thereof in whole or in part; (ii) any provision
of the Parent's or the Company's or any of their subsidiaries'
certificates of incorporation as in effect on the Closing Date; (iii) any
amendment of, supplement to or other modification of any of the
instruments referred to in clauses (i) or (ii) above; and (iv) any of the
securities issued pursuant to or whose terms are governed by the terms of
any of the agreements set forth in clauses (i) and (ii) above, and any
extensions, renewals, refinancings or refundings thereof in whole or in
part.
"FISCAL YEAR" shall mean the calendar year ending on October 31 of
each year.
"GAAP" shall mean generally accepted accounting principles in the
United States of America in effect from time to time.
"GRAY EMPLOYEES" shall have the meaning set forth in Section
9.13(a).
"GRAY MEMBERS" shall have the meaning set forth in the preamble
hereto.
<PAGE>
5
"IMMEDIATE FAMILY MEMBER" shall mean, with respect to any Person, a
spouse, parent, child or sibling of such Person.
"INCIDENTAL REGISTRATION" shall have the meaning set forth in
Section 9.2(a).
"INDEMNITEE" shall have the meaning set forth in Section 4.3.
"INITIAL MEMBERS" shall mean the Vestar Member and the Gray Members.
"INTEREST" shall mean a limited liability company interest in the
LLC as provided in this Agreement and under the LLC Act and includes any
and all rights and benefits to which the holder of such Interest may be
provided under this Agreement, together with all obligations of such
Person to comply with the terms and provisions of this Agreement.
Interests shall be expressed as a number of Units.
"JOINING MEMBER" shall have the meaning set forth in Section
9.3(a)(iv).
"LIQUIDATOR" shall have the meaning set forth in Section 7.3.
"LIQUIDITY EVENT" shall have the meaning set forth in Section
9.13(a).
"LLC" shall have the meaning set forth in the preamble hereto.
"LLC ACT" shall mean the Delaware Limited Liability Company Act, 6
DEL. C. ss.ss. 18-101, ET seq., as it may be amended from time to time,
and any successor to such statute.
"LLC ASSETS" shall mean all right, title and interest of the LLC in
and to all or any portion of the assets and other rights of the LLC and
any property (real or personal) or estate acquired in exchange therefor or
in connection therewith.
"MANAGING MEMBER" shall mean the Vestar Member and its successor or
assign in its capacity as managing member of the LLC.
"MEMBER" shall mean a Person (a) (i) who is an Initial Member or
(ii) who is a transferee of an Interest in accordance with the provisions
of Article VIII and (b) who has not resigned or withdrawn as a Member or
been dissolved. Reference to a "Member" shall be to any one of the
Members.
"MERGER AGREEMENT" shall mean the Agreement and Plan of Merger dated
as of February 2, 1999, among Parent, the Company, SJKAcquisition, Inc.
and Pearl Acquisition Corp., as the same may be amended, supplemented or
otherwise modified from time to time.
<PAGE>
6
"NET INCOME (LOSS)" for any Fiscal Period shall mean the taxable
income or loss of the LLC for such period as determined in accordance with
the accounting method used by the LLC for federal income tax purposes with
the following adjustments: (i) any income of the LLC that is exempt from
federal income taxation and not otherwise taken into account in computing
Net Income (Loss) shall be added to such taxable income or loss; (ii) if
the Carrying Value of any asset differs from its adjusted tax basis for
federal income tax purposes, any depreciation, amortization or gain
resulting from a disposition of such asset shall be calculated with
reference to such Carrying Value; (iii) upon an adjustment to the Carrying
Value of any asset, pursuant to the definition of Carrying Value, the
amount of the adjustment shall be included as gain or loss in computing
such taxable income or loss; and (iv) except for items in (i) above, any
expenditures of the LLC not deductible in computing taxable income or
loss, not properly capitalizable and not otherwise taken into account in
computing Net Income (Loss) pursuant to this definition shall be treated
as deductible items.
"90 DAY PERIOD" shall have the meaning set forth in Section
9.3(a)(iii).
"NON-DEMANDING MEMBERS" shall have the meaning set forth in Section
9.3(a)(ii).
"OFFER" shall have the meaning set forth in Section 9.7.
"OFFEREE" shall have the meaning set forth in Section 9.7.
"OFFEROR" shall have the meaning set forth in Section 9.7.
"ORGANIZATIONAL EXPENSES" shall mean all costs and expenses of the
LLC and the Managing Member arising out of or relating to this Agreement,
the Merger, the Merger Agreement or the transactions contemplated hereby
and thereby, including all fees and expenses of counsel to the LLC and the
Managing Member.
"ORIGINAL AGREEMENT" shall have the meaning set forth in the
recitals hereto.
"PARENT" shall mean St. John Knits International, Incorporated, a
Delaware corporation.
"PARENT COMMON STOCK" shall mean the common stock, $.01 par value
per share, of Parent.
"PERCENTAGE INTEREST" shall mean, with respect to any Member, such
Member's Interest expressed as a percentage of all Interests of all
Members, determined by dividing the number of Allocated Shares allocated
to such Member by the total number of Allocated Shares then outstanding
and allocated to all Members. The Percentage Interests of the Members
initially will be determined by reference to Schedule 1.
"PERMITTED TRANSFEREE" shall have the meaning set forth in Section
8.2.
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7
"PERSON" shall mean any individual, company, joint venture,
corporation, partnership, limited liability company, trust, unincorporated
organization or government or any department or agency thereof.
"POST OFFERING PURCHASE" shall have the meaning set forth in Section
9.3(a)(iii).
"PROCEEDS" shall have the meaning set forth in Section 5.2(a).
"PUBLIC OFFERING" shall mean the sale of Parent Common Stock to the
public pursuant to an effective registration statement filed under the
Securities Act, which results in an active trading market in such
securities (it being understood that such an active trading market shall
be deemed to exist if, without limitation, such securities are listed on a
national securities exchange or on the NASDAQ National Market).
"REGULATIONS" shall mean the regulations promulgated under the Code.
"RULE 144 REQUEST" shall have the meaning set forth in Section 9.8.
"SALE NOTICE" shall have the meaning set forth in Section 9.7.
"SEC" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act or the
Exchange Act.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SHARE PERMITTED TRANSFEREE" shall have the meaning set forth in
Section 9.9.
"SHARES" shall mean the Shares of Parent Common Stock owned by the
LLC following the Effective Time of the Acquisition Merger and shall
include the shares or other securities of Parent that are distributed in
respect of such Common Stock and the shares or other securities of any
other issuer for which such shares of Common Stock shall be exchanged or
into which such shares of Common Stock shall be converted.
"STOCKHOLDERS' AGREEMENT" shall mean that certain Stockholders'
Agreement dated as of the date hereof among the LLC, the Parent, the
Company, Vestar/SJK Investors LLC and the Gray Members.
"TAGGING STOCKHOLDER" shall have the meaning set forth in Section
9.4(a).
"TAGGING UNITHOLDER" shall have the meaning set forth in Section
8.3(a).
"TAX MATTERS MEMBER" shall have the meaning set forth 6.2.ection
"THIRD PARTY" shall mean any Person other than the Members, Parent,
the Company and their respective Affiliates.
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8
"TRANSFER" shall have the meaning set forth in Section 8.1.
"TRANSFER" shall have the meaning set forth in Section 9.1(a).
"TRANSFERRING STOCKHOLDER" shall have the meaning set forth in
Section 9.4(a).
"TRANSFERRING UNITHOLDER" shall have the meaning set forth in
Section 8.3(a).
"UNIT" shall mean a fractional share of the Interests of all
Members. The number of Units outstanding and the holders thereof are set
forth on Schedule 1, as such Schedule may be amended from time to time
pursuant to Section 3.1.
"VESTAR MEMBER" shall have the meaning set forth in the preamble
hereto.
ARTICLE II
GENERAL PROVISIONS
SECTION 2.1 FORMATION. The LLC was formed under the provisions of
the LLC Act. The Vestar Member is hereby appointed the Managing Member of the
LLC. The Members hereby agree to continue the LLC as a limited liability company
pursuant to the LLC Act, upon the terms and subject to the conditions set forth
in this Agreement. The Managing Member is hereby designated as an authorized
person, within the meaning of the LLC Act, to execute, deliver and file any
amendments and/or restatements of the Certificate and any other certificates
necessary for the LLC to qualify to do business in a jurisdiction in which the
LLC may wish to conduct business. The execution by the Managing Member alone of
any of the foregoing certificates (and any amendments and/or restatements
thereof) shall be sufficient.
SECTION 2.2 NAME. The LLC shall conduct its activities under the
name of Vestar/Gray Investors LLC or such other name as the Managing Member
shall determine in accordance with this Section 2.2. The Managing Member shall
have the power at any time to change the name of the LLC; PROVIDED, that the
name shall always contain the words "Limited Liability Company" or the letters
"LLC". Prompt notice of any such change shall be given to each Member.
SECTION 2.3 TERM. The term of the LLC commenced on the date of the
filing of the Certificate and shall continue until the earlier of (a) December
31, 2009 and (b) such time as the Vestar Member does not own at least 10% of the
total number of Allocated Shares allocated to such Vestar Member immediately
following the Effective Time of the Acquisition Merger, unless sooner dissolved,
wound up and terminated in accordance with Article VII.
SECTION 2.4 PURPOSE; POWERS. (a) The purposes of the LLC shall be to
(i) acquire Shares of Company Common Stock from the Gray Members, (ii) hold
Shares that may be issued in exchange for Shares of Company Common Stock in the
Reorganization Merger
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9
referred to in the Merger Agreement, (iii) purchase and acquire 100% of the
capital stock of Acquisition, (iv) hold Shares that may be issued in exchange
for Shares of the capital stock of Acquisition in the Acquisition Merger
referred to in the Merger Agreement and (v) do all things necessary or
incidental to the foregoing, including exercising the rights of a holder of
shares of Company Common Stock and its rights under the Stockholders' Agreement.
(b) In furtherance of its purposes, the LLC shall have all powers
necessary, suitable or convenient for the accomplishment of its purposes, alone
or with others, including the following, subject to the terms of this Agreement:
(i) to receive, hold and otherwise exercise all rights, powers,
privileges and other incidents of ownership or possession with respect to
the Shares held by the LLC, including, but not limited to (A) exercising
all voting and other corporate governance rights available to holders of
Shares, (B) receiving and investing any cash dividends declared and paid
by Parent in respect of the Shares owned from time to time by the LLC or
any other cash or cash equivalents owned by the LLC from time to time and
(C) selling, pledging, transferring or otherwise disposing of the Shares
held by the LLC;
(ii) to open, maintain and close bank accounts and draw checks and
other orders for the payment of moneys;
(iii) to engage accountants, custodians, attorneys, investment
bankers and other advisors as may be necessary or advisable for the due
and proper administration of the LLC Assets, and to compensate them as may
be reasonably necessary or advisable;
(iv) to enter into, make and perform all contracts, agreements and
other undertakings as may be necessary or advisable or incident to
carrying out its purposes; and
(v) to distribute at any time and from time to time to Members cash
or investments or other property of the LLC, or any combination thereof.
SECTION 2.5 PLACE OF BUSINESS. The LLC shall maintain a registered
office at CT Corporation System, 1209 Orange Street, Wilmington, New Castle
County, Delaware 19801, or such other office within the State of Delaware as the
Managing Member determines. The LLC shall maintain an office and principal place
of business at 1225 17th Street, Suite 1660, Denver, Colorado 80202 or at such
other place as the Managing Member may from time to time determine to be its
principal place of business. The name and address of the LLC's registered agent
as of the date of this Agreement is CT Corporation System, 1209 Orange Street,
Wilmington, New Castle County, Delaware 19801.
SECTION 2.6 BUSINESS TRANSACTIONS OF A MEMBER WITH THE LLC. In
accordance with section 18-107 of the LLC Act, and except as otherwise provided
in this Agreement, a Member may (but shall be under no obligation to) lend money
to, borrow money from, act as surety, guarantor or endorser for, guarantee or
assume one or more specific obligations of,
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10
provide collateral for, and transact other business with, the LLC and, subject
to applicable law, shall have the same rights and obligations with respect to
any such matter as a person who is not a Member.
SECTION 2.7 FISCAL YEAR. The fiscal year of the LLC (the "FISCAL
YEAR") for financial statement and Federal income tax purposes shall, except as
otherwise required in accordance with the Code, end on October 31 of each year.
SECTION 2.8 NO STATE-LAW PARTNERSHIP. The Members intend that the
LLC not be a partnership (including, without limitation, a limited partnership)
or joint venture and that no Member be an agent, partner or joint venturer of
any other Member for any purposes other than Federal and state tax purposes, and
this agreement shall not be construed to suggest otherwise.
ARTICLE III
MEMBERS AND INTERESTS
SECTION 3.1 MEMBERS. Each Member's Interest in the LLC shall be
represented by Units. Schedule 1 hereto contains the name and address and number
of Units owned by each Member as of the date of this Agreement. Schedule 1 shall
be revised by the Managing Member from time to time to reflect the admission or
withdrawal of a Member or the issuance, transfer, assignment, redemption,
relinquishment to the LLC or other cancellation of Units in the LLC in
accordance with the terms of this Agreement and other modifications to or
changes in the information set forth therein.
SECTION 3.2 CERTIFICATES. Interests in the LLC may be evidenced by a
certificate of limited liability company interest issued by the LLC. Such
Certificates shall bear the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED
OR ASSIGNED TO ANY PERSON EXCEPT IN ACCORDANCE WITH ARTICLE VIII OF
THE AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF
VESTAR/GRAY INVESTORS LLC DATED AS OF JULY 7, 1999."
SECTION 3.3 LIABILITY OF MEMBERS. Except as otherwise expressly
required by law, all debts, obligations and liabilities of the LLC, whether
arising in contract, tort or otherwise, shall be solely the debts, obligations
and liabilities of the LLC, and no Member shall be obligated personally for any
such debt, obligation or liability of the LLC solely by reason of being a
Member.
SECTION 3.4 ACCESS TO AND CONFIDENTIALITY. (a) Each Member shall
have the right to obtain from the LLC from time to time upon reasonable demand
for any purpose
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11
reasonably related to the Member's interest as a Member of the LLC the documents
and other information described in section 18-305(a) of the LLC Act.
(b) Any demand by a Member pursuant to this Section 3.4 shall be in
writing and shall state the purpose of such demand.
ARTICLE IV
MANAGEMENT AND OPERATION OF THE LLC
SECTION 4.1 MANAGEMENT. (a) Except as set forth in Section 4.1(b),
the management, control and operation of the LLC shall be vested exclusively in
the Managing Member, and no other Member shall have any right to participate in
or exercise control or management power over the business and affairs of the
LLC. Except as set forth in Section 4.1(b), the Managing Member shall have full
power and authority and absolute discretion to do all things deemed necessary or
desirable by it to conduct the business of the LLC on behalf and in the name of
the LLC.
(b) Notwithstanding anything in this Agreement to the contrary, the
Managing Member shall not take any of the following actions on behalf of the LLC
without the prior written consent of the Gray Members:
(i) the conduct of any business by the LLC other than in accordance
with the purposes of the LLC enumerated in Section 2.4;
(ii) any Transfer of the Gray Members' Allocated Shares except
pursuant to this Agreement;
(iii) any voting of the Gray Members' Allocated Shares except
pursuant to this Agreement; and
(iv) the amendment of this Agreement other than pursuant to Section
10.8.
SECTION 4.2 CERTAIN DUTIES AND OBLIGATIONS OF THE MEMBERS. No Member
shall take any action so as to cause the LLC to be classified for federal income
tax purposes as an association taxable as a corporation and not as a
partnership.
SECTION 4.3 INDEMNIFICATION OF THE MANAGING MEMBER. The LLC shall
indemnify and hold harmless the Managing Member, its Affiliates and its
respective officers, directors, employees, partners and agents and the heirs,
executors, successors and assigns of each of the foregoing (individually, an
"INDEMNITEE") from and against any and all losses, claims, demands, costs,
damages, liabilities, joint and several, expenses of any nature (including
reasonable attorneys' fees and disbursements), judgments, fines, settlements and
other amounts arising from any and all claims, demands, actions, suits or
proceedings, whether civil, criminal, administrative or investigative, in which
the Indemnitee was involved or may be involved, or
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12
threatened to be involved, as a party or otherwise, arising out of or in
connection with the business of the LLC, the Managing Member's status as
Managing Member or any action taken by the Managing Member under this Agreement
or otherwise on behalf of the LLC, regardless of whether the Indemnitee
continues to be the Managing Member, an Affiliate, or an officer, director,
employee or agent of the Managing Member at the time any such liability or
expense is paid or incurred, to the fullest extent permitted by the LLC Act and
all other applicable laws; PROVIDED, that an Indemnitee shall be entitled to
indemnification hereunder only to the extent that such Indemnitee's conduct did
not constitute gross negligence or willful misconduct. The termination of any
proceeding by settlement, judgment, order, conviction, or upon a plea of NOLO
CONTENDERE or its equivalent shall not, of itself, create a presumption that
such Indemnitee's conduct constituted gross negligence or willful misconduct.
The right of any Indemnitee to the indemnification provided herein shall be
cumulative of, and in addition to, any and all rights to which such Indemnitee
may otherwise be entitled by contract or as a matter of law or equity and shall
extend to such Indemnitee's successors, assigns and legal representatives. Any
indemnification under this Section 4.3 (unless ordered by a court) shall be made
by the LLC except only in the specific case upon a determination, upon clear and
convincing evidence that indemnification of the Managing Member, officer,
director, employee, partner or agent is not proper in the circumstances because
he has not met the applicable standard of conduct as set forth in this Section
4.3.
SECTION 4.4 EXPENSES. Expenses incurred by an Indemnitee in
defending any claim, demand, action, suit or proceeding subject to Section 4.3
shall, from time to time, be advanced by the LLC prior to the final disposition
of such claim, demand, action, suit or proceeding upon receipt by the LLC of an
undertaking reasonably acceptable in form and substance to the Managing Member
by or on behalf of the Indemnitee to repay such amount if it shall be determined
that such Person is not entitled to be indemnified as authorized in Section 4.3.
Such expenses (including attorneys' fees) incurred by other employees and agents
may be so paid upon such terms and conditions, if any, as the Managing Member
deems appropriate.
SECTION 4.5 INDEMNIFICATION RIGHTS NON-EXCLUSIVE. The
Indemnification provided by Section 4.3 shall be in addition to any other rights
to which those indemnified may be entitled under any agreement as a matter of
law or equity or otherwise, both as to action in the Indemnitee's capacity as
the Managing Member, as an Affiliate or as an officer, director, employee or
agent of the Managing Member and as to any action in another capacity, and shall
continue as to an Indemnitee who has ceased to serve in such capacity and shall
inure to the benefit of the heirs, successors, assigns and administrators of the
Indemnitee.
SECTION 4.6 INSURANCE. The LLC may purchase and maintain insurance,
at the LLC's expense, on behalf of the Managing Member and such other Persons as
the Managing Member shall determine, against any liability that may be asserted
against, or any expense that may be incurred by, such Person in connection with
the activities of the LLC and/or the Managing Member's acts or omissions as the
Managing Member of the LLC regardless of whether the LLC would have the power to
indemnify such Person against such liability under the provisions of this
Agreement.
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SECTION 4.7 ASSETS OF THE LLC. Any indemnification under Section 4.3
shall be satisfied solely out of the assets of the LLC. No Member shall be
subject to personal liability or required to fund or cause to be funded any
obligation by reason of these indemnification provisions.
SECTION 4.8 LOANS TO THE LLC. In the event the Managing Member
determines at any time or from time to time that the LLC requires or will
shortly require additional funds to pay any costs and expenses of the LLC, the
Managing Member may advance funds to the LLC in the form of a loan, which loan
shall bear interest at the Vestar Member's cost of funds. Notwithstanding
anything in this Agreement to the contrary, all such loans shall be repaid in
full (including any interest accrued thereon) prior to the LLC making any cash
distributions to the Members pursuant this Agreement, including pursuant to
Section 5.2 or 7.3.
SECTION 4.9 VOTING OF SHARES
(a) PROPORTIONAL VOTING. Subject to Section 4.9(b), the Managing Member
shall vote the Shares and/or exercise any consents relating to the Shares as
directed in writing by the Members in proportion to their Percentage Interests.
(b) ELECTION OF DIRECTORS.
(A) The Managing Member hereby agrees that so long as this Agreement
shall remain in effect, it will vote all of the Shares so as to elect and,
during such period, to continue in office a Board of Directors of the Parent and
the Company, each consisting solely of the following:
(i) 3 designees of the Vestar Member (so long as the Vestar Member
and its Affiliates are allocated an aggregate number of
Allocated Shares not less than one-half (1/2) of the number of
Allocated Shares allocated to the Vestar Member on the date of
execution and delivery of this Agreement) or, if the foregoing
condition is not satisfied, 2 designees of the Vestar Member
(so long as the Vestar Member and its Affiliates are allocated
an aggregate number of Allocated Shares not less than
one-third (1/3) of the total number of Allocated Shares
allocated to the Vestar Member on the date of its execution
and delivery of this Agreement) or, if the foregoing condition
is not satisfied, 1 designee of the Vestar Member (so long as
the Vestar Member and its Affiliates are allocated an
aggregate number of Allocated Shares not less than one-tenth
(1/10) of the total number of Allocated Shares allocated to
the Vestar Member immediately following the Effective Time of
the Acquisition Merger), PROVIDED, HOWEVER, that so long as
the Gray Members have the right to appoint at least 1 designee
and the Vestar Member (and its Affiliates) has more Allocated
Shares allocated to it than the aggregate number of Allocated
Shares allocated to the Gray Members (and their Permitted
Transferees) the Vestar Member
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14
shall have the right to appoint at least as many designees as
the Gray Members; and
(ii) 2 designees of the Gray Members (so long as the Gray Members
and their respective Affiliates are allocated an aggregate
number of Allocated Shares not less than one-half (1/2) of the
number of Allocated Shares allocated to the Gray Members on
the date of their execution and delivery of this Agreement)
or, if the foregoing condition is not satisfied, 1 designee of
the Gray Members (so long as the Gray Members and their
respective Affiliates are allocated an aggregate number of
Allocated Shares not less than one-fifth (1/5) of the number
of Allocated Shares allocated to the Gray Members immediately
following the Effective Time of the Acquisition Merger).
(B) If at any time during the period specified in paragraph (A)
above, the Vestar Member or the Gray Members shall notify the other Stockholders
of its or their desire to remove, with or without Cause, any director of the
Parent or of the Company previously designated by it or them, each Member shall
vote all of the Allocated Shares attributable to it so as to remove such
director.
(C) If at any time during the period specified in paragraph (A)
above, any director previously designated by the Vestar Member or the Gray
Members ceases to serve on the Board of Directors of the Parent or the Company
(whether by reason of death, resignation, removal or otherwise), the Member who
designated such director shall be entitled to designate a successor director to
fill the vacancy created thereby.
(D) The parties hereto hereby acknowledge that any individual
designated as a director of the Parent or of the Company may be removed for
Cause pursuant to the Parent's (or the Company's) by-laws and applicable law
with or without the consent of the Member which designated such individual. No
such removal of an individual designated pursuant to this Section 4.9 shall
affect any of the Stockholders' rights to designate a different individual
pursuant to this Section 4.9.
(E) No fees shall be paid by the Parent or any of its subsidiaries
to any member of the Board of Directors in his capacity as such; PROVIDED that
the foregoing shall not limit reimbursement of expenses in accordance with the
expense reimbursement policy of the Parent and its subsidiaries; and PROVIDED
FURTHER, that it is understood that the Parent shall pay an advisory fee to
Vestar Capital Partners, an affiliate of the Vestar Member, in the amount of
$500,000 per year pursuant to an advisory agreement to be entered into between
Vestar Capital Partners and Parent.
(c) OTHER VOTING MATTERS. Each Member agrees that, so long as this
Agreement shall remain in effect and (i) the Vestar Member and its Affiliates
beneficially own not less than 50% of the Percentage Interest held by them on
the date hereof and (ii) the LLC holds Shares representing not less than 25% of
the voting power of Parent, each Member will direct the LLC
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15
to vote all of the Allocated Shares allocated to such Member to ratify, approve
and adopt any and all actions adopted or approved by the Board of Directors of
the Parent.
(d) Upon instruction received from any Member, the Managing Member, unless
the Managing Member reasonably believes that any such action would be unlawful,
or would have a material adverse effect upon the LLC, shall exercise, in
accordance with such Member's instructions, any rights of a stockholder with
respect to the Allocated Shares allocated to such Member, other than voting
(which is dealt with in Section 4.9(a), (b) and (c)) or transfer (which is dealt
with in Articles VIII and IX).
ARTICLE V
CAPITAL CONTRIBUTIONS; DISTRIBUTIONS
SECTION 5.1 CAPITAL CONTRIBUTIONS. No Member shall be required to
make a Capital Contribution to the LLC except as set forth in Schedule 2. No
Member shall have any obligation to restore any negative balance in the Member's
Capital Account upon liquidation of the LLC. No Member shall be entitled to
withdraw all or any part of its Capital Contributions except as expressly
provided in this Agreement. No interest shall be payable by the LLC on the
Capital Contributions of any Member except as otherwise provided herein.
SECTION 5.2 DISTRIBUTIONS.
(a) DISTRIBUTIONS WITH RESPECT TO ALLOCATED SHARES With respect to
any Transfer of Shares by the LLC pursuant to Article IX hereof, the LLC shall
distribute the proceeds it receives from such Transfer and any reimbursements it
receives in connection with such Transfer less any and all unreimbursed costs,
fees and expenses incurred and paid for by the LLC in connection with such
Transfer (the "PROCEEDS") to the Member(s) whose Allocated Shares were included
in such Transfer, PRO RATA on the basis of the number of Allocated Shares
actually included in such Transfer, and with respect to cash and any other
property received by the LLC as a distribution in respect of the Allocated
Shares (including any property received as consideration in respect of the
Shares in a merger or other business combination), the LLC shall distribute such
cash or other property PRO RATA to the Members to which such Allocated Shares
were allocated as of the date upon which the LLC received such distribution. All
distributions to be made pursuant to this Section 5.2(a) shall be made by the
LLC within three Business Days of its receipt of the Proceeds.
(b) OTHER PROPERTY. Distributions of property other than those
described in Section 5.2(a) shall be made if, as and when determined by the
Managing Member in its sole and absolute discretion. Each distribution of such
property shall be distributed to the Members in proportion to their respective
Percentage Interests at the time the cash or other property being distributed is
received by the LLC.
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(c) The parties hereto acknowledge and agree that notwithstanding
that the provisions of this Article V and Article VII hereof make reference only
to Members, the distributions and allocations provided for in this Article V and
Article VII hereof shall also apply to Permitted Transferees.
SECTION 5.3 LIMITATIONS ON DISTRIBUTIONS. The LLC shall not make a
distribution to a Member if such distribution would violate the LLC Act.
ARTICLE VI
BOOKS AND REPORTS; TAX MATTERS; CAPITAL ACCOUNTS; ALLOCATIONS
SECTION 6.1 GENERAL ACCOUNTING MATTERS. (a) Each Member shall be
supplied with the LLC information necessary to enable such Member to prepare in
a timely manner its Federal, state and local income tax returns and such other
financial or other statements and reports that the Managing Member deems
appropriate.
(b) The Managing Member shall keep or cause to be kept books and
records pertaining to the LLC's business showing all of its assets and
liabilities, receipts and disbursements, realized profits and losses, Members'
Capital Accounts and all transactions entered into by the LLC. Such books and
records of the LLC shall be kept at the office of the LLC and the Members and
their representatives shall at all reasonable times have free access thereto for
the purpose of inspecting or copying the same. The LLC's books of account shall
be kept on an accrual basis or as otherwise provided by the Managing Member and
otherwise in accordance with GAAP, except that for income tax purposes such
books shall be kept in accordance with applicable tax accounting principles.
(c) All determinations, valuations and other matters of judgment
required to be made for accounting and tax purposes under this Agreement shall
be made by or under the direction of the Managing Member and shall be conclusive
and binding on all Members, former Members, their successors or legal
representatives and any other Person except for manifest errors or fraud, and to
the fullest extent permitted by law no such Person shall have the right to an
accounting or an appraisal of the assets of the LLC or any successor thereto
except for manifest errors or fraud.
(d) The LLC shall promptly supply each Member with copies of all
information distributed to it by the Parent pursuant to Section 5.14 of the
Stockholders' Agreement.
SECTION 6.2 CERTAIN TAX MATTERS. The taxable year of the LLC shall
be the same as its Fiscal Year. The Tax Matters Member shall cause to be
prepared all federal, state and local tax returns of the LLC for each year for
which such returns are required to be filed and shall cause such returns to be
timely filed. The Tax Matters Member shall determine the appropriate treatment
of each item of income, gain, loss, deduction and credit of the LLC and the
accounting methods and conventions under the tax laws of the United States, the
several states
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and other relevant jurisdictions as to the treatment of any such item or any
other method or procedure related to the preparation of such tax returns. The
Tax Matters Member shall make the election to amortize Organizational Expenses
pursuant to section 709 of the Code and the regulation promulgated thereunder.
In addition, the Tax Matters Member, in its sole and absolute discretion, may
cause the LLC to make or refrain from making any and all other elections
permitted by the tax laws of the United States, the several states and other
relevant jurisdictions (including, but not limited to, the election provided for
in section 754 of the Code). The "tax matters partner" for purposes of section
6231(a)(7) of the Code (the "TAX MATTERS MEMBER") shall be the Managing Member.
The Tax Matters Member shall have all of the rights, duties, powers and
obligations provided for in sections 6221 through 6234 of the Code with respect
to the LLC.
SECTION 6.3 CAPITAL ACCOUNTS. There shall be established for each
Member on the books of the LLC as of the date hereof, or such later date on
which such Member is admitted to the LLC, a capital account (each being a
"CAPITAL ACCOUNT"). Each Capital Contribution shall be credited to the Capital
Account of such Member on the date such contribution of capital is paid to the
LLC. In addition, each Member's Capital Account shall be (a) credited with such
Member's allocable share of any Net Income of the LLC, (b) debited with (i)
distributions to such Member of cash or the fair market value of other property
and (ii) such Member's allocable share of Net Loss of the LLC and expenditures
of the LLC described or treated under section 704(b) of the Code as described in
section 705(a)(2)(B) of the Code and (c) otherwise maintained in accordance with
the provisions of the Code. Any other item which is required to be reflected in
a Member's Capital Account under section 704(b) of the Code or otherwise under
this Agreement shall be so reflected. Capital Accounts shall be appropriately
adjusted to reflect transfers of part (but not all) of a Member's Interest.
Interest shall not be payable on Capital Account balances. Notwithstanding
anything to the contrary contained in this Agreement, the LLC shall maintain the
Capital Accounts of the Members in accordance with the principles and
requirements set forth in section 704(b) of the Code and Regulations section
1.704-1(b)(2)(iv).
SECTION 6.4 ALLOCATIONS. (a) Net Income and Losses shall be
allocated among the Members in accordance with their Percentage Interests
PROVIDED, HOWEVER, that Net Income and Losses with respect to any Transfer of
Allocated Shares shall be allocated to the Member(s) whose Allocated Shares were
included in such Transfer, PRO RATA on the basis of the number of such Allocated
Shares included in such Transfer.
(b) For income tax purposes only, each item of income, gain, loss
and deduction of the LLC shall be allocated among the Members in the same manner
as the corresponding items of Net Income (Loss) and specially allocated items
are allocated for Capital Account purposes; PROVIDED that in the case of any
asset of the LLC the Carrying Value of which differs from its adjusted tax basis
for U.S. federal income tax purposes, income, gain, loss and deduction with
respect to such asset shall be allocated solely for income tax purposes in
accordance with the principles of sections 704(b) and (c) of the Code (in any
manner determined by the Managing Member) so as to take account of the
difference between Carrying Value and adjusted basis of such asset.
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ARTICLE VII
DISSOLUTION
SECTION 7.1 DISSOLUTION. (a) No Member shall have the right to
terminate this agreement or dissolve the LLC or withdraw or otherwise retire or
resign as a Member except pursuant to the prior written consent of (i) the
Managing Manager and (ii) Members representing more than 85% of the Percentage
Interests. Any purported withdrawal, retirement or resignation without such
prior written consent shall be void and of no effect. Except as expressly
provided for herein, a Member may not withdraw capital from the LLC.
(b) The LLC shall be dissolved and, except as specifically provided
herein, this Agreement shall terminate, upon the first to occur of any of the
following:
(i) December 31, 2009;
(ii) the bankruptcy, dissolution, resignation, or expulsion of the
Managing Member;
(iii) the sale, in one transaction or in a series of directly
related transactions, of all of the assets of the LLC;
(iv) the unanimous agreement of the Managing Member and the Gray
Members to dissolve the LLC; or
(v) on or after the earlier of (A) the consummation of a Public
Offering and (B) the fifth anniversary of the date hereof, upon the
request of the Vestar Member or the Gray Members.
Except as expressly set forth above, there are no other events pursuant to which
the LLC shall be dissolved and its affairs wound up. Furthermore, no Member,
except pursuant to the written consent of the Managing Member, shall wind up or
attempt to wind up the LLC. The LLC shall not be dissolved upon the bankruptcy,
any other bankruptcy event, if any, described in the LLC Act, dissolution,
death, insanity, retirement, resignation or expulsion of any Member which is not
the Managing Member. Each Member agrees not to apply for judicial dissolution
pursuant to Section 18-802 of the LLC Act prior to June 30, 2004.
SECTION 7.2 VOTES OF MEMBERS. If an act or other event described in
Section 7.1(b)(ii) hereof occurs and the Members owning a majority of the
profits interests and a majority of the capital interests owned by all the
Members (excluding the Managing Member) within 90 days of the date of such act
or event elect in writing to continue the business of the LLC, such event or
other act shall not constitute a dissolution of the LLC.
SECTION 7.3 WINDING-UP; FINAL DISTRIBUTIONS. (a) When the LLC is
dissolved, the business and property of the LLC shall be wound up and liquidated
by the Managing
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Member or, by such liquidating trustee as may be appointed by the Managing
Member (the Managing Member or such liquidating trustee, as the case may be,
being hereinafter referred to as the "LIQUIDATOR"). In the event of a
dissolution under the circumstances described in any of Section 7.1(b)(i), (iv)
or (v), after satisfying the obligations of clauses (i), (ii), (iii) and (iv)
below, the Shares shall be distributed pro rata to the Members in accordance
with their respective Percentage Interests. In all other circumstances, the
Liquidator shall use its best efforts to reduce to cash and cash equivalent
items such assets of the LLC as the Liquidator shall deem it advisable to sell,
subject to obtaining fair value for such assets and any tax or other legal
considerations. The Liquidator shall be responsible for winding up and
terminating the affairs of the LLC and shall determine all matters in connection
therewith (including, without limitation, the arrangements to be made with
creditors, to what extent and under what terms the assets of the LLC are to be
sold, and the amount or necessity of cash reserves to cover contingent
liabilities) as the Liquidator deems advisable and proper; and all decisions of
the Liquidator shall be made in accordance with the fiduciary duty owed by the
Liquidator to the LLC and each of the Members, and any disposition of the
properties of the LLC shall be by auction with prior notice to all Persons who
were Members at the time of the dissolution. The Liquidator shall thereafter
liquidate the assets of the LLC as promptly as is consistent with obtaining the
fair market value thereof, and the proceeds therefrom, to the extent sufficient
therefor, shall be applied and distributed in the following manner and order:
(i) to the payment of the expenses of the winding-up,
liquidation and dissolution of the LLC;
(ii) to pay all creditors of the LLC, other than Members,
either by the payment thereof or the making of reasonable provision
therefor;
(iii) to establish reserves, in amounts established by the
Members or such Liquidator, to meet other liabilities of the LLC;
and
(iv) to pay, in accordance with the provisions of this
agreement applicable to such loans or in accordance with the terms
agreed among them and otherwise on a PRO RATA basis, all creditors
of the LLC that are Members, either by the payment thereof or the
making of reasonable provisions therefor.
The remaining assets of the LLC shall be applied and distributed in
accordance with Section 5.2.
(b) Notwithstanding anything to the contrary in Section 7.3(a)
hereof, the Liquidator shall not sell any Allocated Shares of a Member without
the express written consent of such Member. Without such consent, any Allocated
Shares of such Member shall be distributed to such Member.
(c) After all of the assets of the LLC have been distributed, the
LLC shall terminate; if at any time thereafter any funds in any cash reserves
referred to in Section 7.3(a) hereof are released because the need for such cash
reserves has ended, such funds shall be
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distributed to the Members in the same manner as if such distribution had been
made pursuant to clauses (i) through (iv) of Section 7.3(a) hereof.
SECTION 7.4 FURTHER ASSURANCES. Following the dissolution of the LLC
other than under the circumstances described in Section 7.1(b)(iii), the Shares
shall be distributed to the Members in accordance with their respective
Percentage Interests, and the Member's rights thereto shall be governed by the
Stockholders' Agreement, and each Member agrees that so long as the
Stockholders' Agreement remains in effect, it will take all actions and execute
all amendments or modifications to the Stockholders' Agreement and all other
certificates, agreements or other documents reasonably necessary to effect the
intentions of this Agreement and to ensure that each Member shall remain bound
by the terms of the Stockholders' Agreement with respect to the Allocated Shares
allocated to such Member to the same extent as it is bound by this Agreement.
ARTICLE VIII
TRANSFER OF MEMBER'S UNITS
SECTION 8.1 TRANSFERS TO BE MADE ONLY AS PERMITTED OR REQUIRED BY
THIS AGREEMENT. Subject to Section 8.2, the Gray Members may not, directly or
indirectly, sell, assign, transfer, pledge or otherwise encumber or dispose of
(for purposes of this Article VIII, a "TRANSFER") any Interests, except as
specifically permitted or required by this Article VIII; any other purported
transfer shall be void and of no effect. The Vestar Member may transfer any
Interests freely, subject to Section 8.3 and, in the case of transfers to its
Affiliates, subject to written agreement by the transferee (in form and
substance reasonably satisfactory to the Managing Member) to be bound by this
Agreement as if the transferee were the transferring Member.
SECTION 8.2 PERMITTED TRANSFERS. The Gray Members may transfer any
of their Interests to (i) their respective beneficiaries, spouses, parents or
descendants or any executor, estate, trustee of the Gray Family Trust or the
Kelly Gray Trust (as applicable), guardian, committee, trustee or other
fiduciary acting as such on behalf or for the benefit of any such spouse, parent
or descendant (the Gray Members' "FAMILY GROUP") or (ii) any trust, corporation,
partnership or limited liability company, all of the beneficial interests in
which shall be held, directly or indirectly, by the Gray Members and/or one or
more of the Family Group of the Gray Members; PROVIDED, HOWEVER, that during the
period that any such trust, corporation, partnership or limited liability
company holds any right, title or interest in any Interest, no person other than
the Gray Members or the Family Group of the Gray Members may be or become
beneficiaries, stockholders or general partners or members thereof. No transfer
pursuant to this Section 8.2 shall be valid unless the transferee agrees in
writing (in form and substance reasonably satisfactory to the Managing Member)
to be bound by this Agreement as if the transferee were the transferring Member.
A transferee under Section 8.1 or 8.2 is referred to as a "PERMITTED
TRANSFEREE."
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SECTION 8.3 TAG-ALONG RIGHTS. (a) So long as this Agreement shall
remain in effect, unless a Public Offering shall have occurred, with respect to
any proposed transfer by the Vestar Member or any of its Affiliates (in such
capacity, a "TRANSFERRING UNITHOLDER") of Units (excluding any transfers by the
Vestar Member to its Affiliates), the Transferring Unitholder shall have the
obligation, and each other Member and its Permitted Transferees shall have the
right (such Member and its Permitted Transferees that exercise such right being
a "TAGGING UNITHOLDER") to require the proposed transferee to purchase from each
holder of Units a number of Units up to the product (rounded up to the nearest
whole number) of (i) the quotient determined by dividing (A) the aggregate
number of Units beneficially owned by such Tagging Unitholder and sought by the
Tagging Unitholder to be included in the contemplated transfer by (B) the
aggregate number of Units beneficially owned by the Transferring Unitholder and
the aggregate number of Units beneficially owned by all Tagging Unitholders and
sought by all Tagging Unitholders to be included in the contemplated transfer
and (ii) the total number of Units proposed to be acquired by the transferee in
the contemplated transfer, and at the same price per Unit and upon the same
terms and conditions (including, without limitation, time of payment and form of
consideration) as to be paid and given to the Transferring Unitholder, PROVIDED
that in order to be entitled to exercise its right to sell Units to the proposed
transferee pursuant to this Section 8.3, a Tagging Unitholder must agree to make
to the transferee the same representations, warranties, covenants, indemnities
and agreements as the Transferring Unitholder agrees to make in connection with
the proposed transfer of the Units by the Transferring Unitholder (except that
in the case of representations and warranties pertaining specifically to the
Transferring Unitholder, a Tagging Unitholder shall make the comparable
representations and warranties pertaining specifically to itself, and except
that in the case of covenants or agreements capable of performance only by
certain holders of Units, such covenants or agreements shall be made only by
such certain holders of Units); and PROVIDED FURTHER that all representations,
warranties, covenants, agreements and indemnities made by the Transferring
Unitholder and the Tagging Unitholders pertaining specifically to themselves
shall be made by each of them severally and not jointly; and PROVIDED FURTHER
that each of the Transferring Unitholder and each Tagging Unitholder shall be
severally (but not jointly) liable for breaches of representations, warranties,
covenants and agreements of or (in the case of representations and warranties)
pertaining to the LLC or Parent and its subsidiaries, as the case may be, and
for indemnification obligations arising out of or relating to any such breach or
otherwise pertaining to the LLC, on a pro rata basis, such liability of each
such Unitholder not to exceed such Unitholder's pro rata portion of the gross
proceeds of the sale.
(b) The Transferring Unitholder shall give notice to all relevant
holders of Units and their Permitted Transferees of each proposed transfer
giving rise to the rights of the Tagging Unitholders set forth in the first
sentence of Section 8.3(a) at least 30 days prior to the proposed consummation
of such transfer, setting forth the name of the Transferring Unitholder, the
number of Units proposed to be so transferred, the name and address of the
proposed transferee, the proposed amount and form of consideration and other
terms and conditions offered by the proposed transferee, and a representation
that the proposed transferee has been informed of the tag-along rights provided
for in this Section 8.3 and has agreed to purchase Units in accordance with the
terms hereof. The tag-along rights provided by this Section 8.3 must be
exercised by each Tagging Unitholder within 15 days following receipt of the
notice required by the preceding
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sentence, by delivery of a written notice to the Transferring Unitholder as the
case may be, indicating such Tagging Unitholder's desire to exercise its rights
and specifying the number of Units it desires to sell. If the proposed
transferee fails to purchase Units from any Tagging Unitholder that has properly
exercised its tag-along rights, then the Transferring Unitholder shall not be
permitted to make the proposed transfer, and any such attempted transfer shall
be void and of no effect.
(c) If any of the Tagging Unitholders exercise their rights under
Section 8.3(a), the closing of the purchase of Units with respect to which such
rights have been exercised shall take place concurrently with the closing of the
sale of the Transferring Unitholder's Units. No transfer shall occur pursuant to
this Section 8.3 unless the transferee shall agree in writing to become a party
to, and be bound by this Agreement to the same extent as its transferor.
SECTION 8.4 DRAG-ALONG RIGHTS. So long as this Agreement shall
remain in effect, if the Vestar Member or any of its Affiliates receives an
offer from a Third Party to purchase (whether pursuant to a sale of units, a
merger or otherwise) all, but not less than all, outstanding Units subject to
this Agreement and such offer is accepted by the Vestar Member, then each holder
of Units hereby agrees that it will, if requested by the Vestar Member, transfer
all Units owned by it to such Third Party on the terms of the offer so accepted
by the Vestar Member, including making the same representations, warranties,
covenants, indemnities and agreements that the Vestar Member agrees to make
(except that, in the case of representations and warranties pertaining
specifically to the Vestar Member, each other holder of Units shall make the
comparable representations and warranties pertaining specifically to itself, and
except that, in the case of covenants or agreements capable of performance only
by certain holders of Units, such covenants or agreements shall be made only by
such certain holders of Units, and provided that all representations,
warranties, covenants, agreements and indemnities made by the holders of Units
pertaining specifically to themselves shall be made by each of them severally
and not jointly and provided further that each holder of Units shall be
severally (but not jointly) liable for breaches of representations, warranties,
covenants and agreements of or (in the case of representations and warranties)
pertaining to the LLC, or the Parent and its subsidiaries, as the case may be,
and for indemnification obligations arising out of or relating to any such
breach or otherwise pertaining to the LLC, on a pro rata basis, such liability
of each such holder of Units not to exceed such holder of Units' pro rata
portion of the gross proceeds of the sale).
SECTION 8.5 NO TRANSFERS. Other than as set forth in this agreement,
no Member, without the prior written consent of the Managing Member (which
consent may be withheld in the sole discretion of the Managing Member), shall
(i) transfer all or any part of its direct or indirect Interest in the LLC or
(ii) resign as a Member. Without limiting the limitations set forth in this
Section 8.5, no transfer of any Interest in the LLC may be made unless the
transferring Member delivers to the LLC an opinion of counsel stating, or other
evidence satisfactory to the LLC, that (i) registration of the transferred
Interest in the LLC is not required under the Securities Act, and such transfer
shall not violate applicable state securities or blue sky registration
requirements in any respect and (ii) such transfer shall not cause the LLC to be
treated as an association taxable as a corporation rather than as a partnership
subject to the provisions of Subchapter K of the Code. Any such opinion of
counsel shall be rendered by
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counsel, and shall be in form and substance, reasonably acceptable to the
Managing Member and all costs and expenses thereof shall be borne by the
transferring Member. In no event shall any Interest in the LLC be transferred to
a minor (except pursuant to a bequest by a Member, PROVIDED that any right
exercised pursuant to this Agreement shall be exercised on behalf of such minor
by an appropriately appointed custodian under the Uniform Transfers to Minors
Act) or an incompetent or in violation of any state or Federal law. No consent
to a transfer pursuant to this Section 8.5 shall be construed as a consent to
any other transfer of the same or any other Interest or Member.
SECTION 8.6 OTHER TRANSFER PROVISIONS. If any Interest is
transferred during any accounting period pursuant to this Agreement, each item
of income, gain, loss, expense, deduction and credit and all other items
attributable to such Interest for such period shall be divided and allocated
between the transferor and the transferee by taking into account their varying
Interests during such period in accordance with section 706(d) of the Code,
using any conventions permitted by law and selected by the Managing Member. All
distributions on or before the date of such transfer shall be made to the
transferor, and all distributions thereafter shall be made to the transferee.
ARTICLE IX
THE LLC'S REGISTRATION RIGHTS RELATING TO
SHARES OF PARENT COMMON STOCK AND RELATED RULE 144 SALES
SECTION 9.1 STOCKHOLDERS' AGREEMENT; TRANSFERS OF SHARES.
(a) The provisions of this Article IX are intended to govern the
LLC's exercise of its registration rights under the Stockholders' Agreement and
the sale or other disposition by the LLC (any such sale, assignment, transfer,
pledge or other encumbrance or disposition of Shares or any interest therein,
whether pursuant to a registration or otherwise a "TRANSFER") of the Shares.
(b) The LLC shall exercise its rights under the Stockholders'
Agreement and shall effect Transfers of Shares, only as provided in this Article
IX. Notwithstanding any other provision of this Agreement to the contrary, (i)
the rights and obligations of the Members and the LLC pursuant to this Article
IX with respect to the Stockholders' Agreement are subject to the provisions of
the Stockholders' Agreement and (ii) the rights and obligations of the Members
and the LLC with respect to the Stockholders' Agreement and all Transfers of
Shares shall be subject to all applicable laws including, without limitation,
the Securities Act, the Exchange Act and applicable state securities or blue sky
laws.
(c) Subject to Section 9.5, the rights of any Member to request the
registration or the Transfer of any Shares shall be limited to the Allocated
Shares allocated to such Member, and upon the Transfer by the LLC of all the
Allocated Shares allocated to such Member, and the
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24
distribution to such Member of any Proceeds relating to the Transfer of such
shares, all rights of such Member under this Article IX shall cease.
(d) Notwithstanding any provision in this Agreement to the contrary,
if the LLC receives advice from the Parent, or if the Managing Member determines
in its reasonable judgment, at the time that the LLC receives a request to
effect a registration or a Transfer (other than a Transfer to the Parent
pursuant to Section 9.13(a) or 9.13(b)), that, as a result of any such
registration or Transfer, (i) there would be an adverse effect on a then
contemplated public offering of Parent's securities, (ii) the registration and
offering would interfere with any material financing, acquisition, corporate
reorganization or other material corporate transaction or development involving
the Parent that is pending or imminent, (iii) the disclosures that would be
required to be made by Parent in connection with such registration or Transfer
would be materially harmful to Parent because of transactions then being
considered by, or other events then concerning, Parent or (iv) registration at
the time would require the inclusion of pro forma or other information, which
requirement Parent is reasonably unable to comply with, and the LLC promptly
gives notice of that determination to each Member that has requested such
registration or Transfer, which may be a general notice, then the LLC may defer
requesting such registration or effecting such Transfer. If the LLC shall so
postpone requesting a registration statement, the Demanding Member, in the case
of any registration referred to in Section 9.3 hereof, shall have the right to
withdraw its or his Demand Request by giving written notice to the LLC within 30
days after the receipt of the notice of the postponement and, in the event of
the withdrawal, the Demand Request that was withdrawn shall not be deemed to
have been made.
(e) Notwithstanding the fact that Sections 9.2, 9.3 and 9.4 pertain
only to Members, to the extent that any Member has transferred any Interests to
a Permitted Transferee, (i) such Permitted Transferee shall be deemed for the
purpose of this Article IX to have been apportioned a PRO RATA share of the
Allocated Shares allocated to such Member (based upon the amount of the Interest
transferred), (ii) all such Permitted Transferees shall receive any notice to be
provided under this Article IX to the Member and (iii) any notice given or
action to be taken by a Member other than an action under Section 9.4 or 9.5,
which action shall not require the majority referred to in this clause (iii) may
be given or taken by such Member and the Permitted Transferees of such Member
that have been apportioned a majority of the Allocated Shares of the Member and
the Permitted Transferees of such Member. Whenever this Article IX shall make a
PRO RATA allocation based upon the number of Allocated Shares allocated to a
Member, such allocation shall be made upon the basis of the Allocated Shares
allocated to such Member and the Permitted Transferees of such Member.
(f) When this Article IX states that the LLC shall cause the Parent
to take any action, it shall be interpreted to mean that the LLC shall take such
actions as the Managing Member reasonably believes is appropriate to cause the
Parent to take such action.
SECTION 9.2 EXERCISE OF INCIDENTAL REGISTRATION RIGHTS.
(a) RIGHT TO INCIDENTAL REGISTRATION. Whenever the LLC receives
notice that the Parent proposes to register any of its common stock (or
securities convertible into or
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25
exchangeable or exercisable for common stock) under the Securities Act for its
own account or the account of any stockholder of the Parent (other than
offerings pursuant to employee plans, a dividend reinvestment plan or a business
combination transaction, recapitalization or exchange offer) (an "INCIDENTAL
REGISTRATION"), the LLC shall give prompt written notice to each Member of the
intention of the Parent to effect such a registration and, subject to Section
9.2(c), shall use all reasonable efforts to cause the Parent to include in such
registration all the Shares with respect to which the LLC has received written
request specifying the number of Allocated Shares of a Member for inclusion
therein within 20 days after receipt of the LLC's notice by each Member (12 days
if the Parent gives telephonic notice to the LLC pursuant to Section 4.2(a) of
the Stockholders' Agreement).
(b) DESIGNATION OF PRICING. Any Member exercising its Incidental
Registration rights may designate a minimum offering price and maximum
underwriting or selling discounts at which the Allocated Shares allocated to
such Member may be sold.
(c) PRIORITY. If an Incidental Registration pursuant to this Section
9.2 involves an underwritten offering, the LLC shall not be required to cause
the Parent to register any Allocated Shares of any Member unless such Member
accepts the terms of the underwriting agreement, to the extent applicable to
such Member, and then only in such quantity as shall not, in the opinion of the
managing underwriter, exceed the maximum number of shares (or other securities)
that can be marketed without materially and adversely affecting the offering, if
any, by Parent or the stockholders of Parent, as the case may be. If the
managing underwriter advises the LLC in good faith that in its opinion the
number of securities requested to be included in such registration exceeds the
number that can be sold in such offering without having an adverse effect on
such offering, including the price at which such securities can be sold, then
the LLC shall cause Parent to include in such registration the maximum number of
Shares that such underwriter advises can be so sold, allocated as follows:
(i) if such registration was initiated by Parent, (x) first,
to the securities Parent proposes to sell, (y) second, among the Shares
requested to be included in such registration by the Members, PRO RATA, on
the basis of the number of Allocated Shares allocated to each Member, and
(z) third, among other securities, if any, requested and otherwise
eligible to be included in such registration; and
(ii) if such registration was initiated by the LLC at the
request of any Demanding Member pursuant to Section 9.3, (x) first, among
the Allocated Shares requested to be included in such registration by the
Members, PRO RATA, on the basis of the number of Allocated Shares
allocated to each Member (y) second, to any securities the Parent proposes
to sell, and (z) third, among other securities, if any, requested and
otherwise eligible to be included in such registration.
(d) DISTRIBUTION OF ALLOCATED SHARES. In the event that the Managing
Member determines in good faith that it would be in the best interests of the
LLC or of any of the Members that, in lieu of the LLC exercising its rights
under this Section 9.2 or Section 9.3 for the benefit of such Member, the shares
allocable to such Member should be distributed to such
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26
Member so that such Member may exercise such rights directly under Section 4 of
the Stockholders' Agreement, the Managing Member shall do so, provided that such
Member shall have first delivered a bona fide exercise of its rights under this
Section 9.2 or Section 9.3.
SECTION 9.3 EXERCISE OF DEMAND REGISTRATION RIGHTS.
(a) RIGHT TO DEMAND.
(i) At any time when the LLC is permitted by the Stockholders'
Agreement, any of (A) the Vestar Member or (B) no earlier than twelve
months following the consummation of a Public Offering, any Gray Member or
its Permitted Transferees (in each case a "DEMANDING MEMBER") may request
the LLC to exercise a "Common Stock Request" under the Stockholders'
Agreement (a "DEMAND REQUEST"), PROVIDED that in the case of a Gray
Member, either (x) such Demanding Member shall have proposed to register
together with all other Shares proposed to be registered at such time by
any other Demanding Member at least 10% of the outstanding Shares, or (y)
such Demanding Member shall have proposed to register, together with all
of the Shares proposed to be registered at such time by any other
Demanding Member, shares having an aggregate Fair Market Value of at least
$50 million.
(ii) Within 10 days after receipt of any Demand Request, the
Managing Member shall give written notice of the Demand Request to the
other Members (collectively, the "NON-DEMANDING MEMBERS") and shall,
subject to the provisions of the last paragraph of this Section 9.3(a),
use all reasonable efforts to exercise the Demand Registration Right with
respect to the Allocated Shares specified in the Demand Request and,
subject to Section 9.3(b), to cause the Parent to include in the
registration all the additional Shares with respect to which the LLC has
received written requests for inclusion therein within 60 days after the
receipt of the Demand Request by the Non-Demanding Members.
(iii) The LLC shall cause the Parent to effect not more than
four Demand Registrations on behalf of the Vestar Member and two Demand
Registrations in the aggregate on behalf of the Gray Members or their
Permitted Transferees pursuant to paragraph (i) of this Section 9.3(a),
PROVIDED that if for any reason the number of Demand Registrations
available to the LLC under the Stockholders' Agreement is not reduced as a
result of any Demand Request, such Demand Request shall not reduce the
number of Demand Requests that such Demanding Member may request under
this Section 9.3(a), PROVIDED, FURTHER, that in the event that any of the
Gray Employees is terminated without "Cause" by the Company or the Parent
or resigns for "Good Reason" from the Company and the Parent, as such
terms are defined in their current respective employment contracts with
the Company, then such Gray Employee, together with all other such
terminated or resigning Gray Employees, shall have the right, beginning
six months following the consummation of a Public Offering, to four
additional Demand Registrations (the "ADDITIONAL DEMAND REGISTRATIONS"),
which may be used no more often than once in any 12-month period following
such termination or resignation, and in which 25% of the
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27
Allocated Shares allocated to all such terminated or resigning Gray
Employees (or allocated to a trust of which such Gray Employee is a
beneficiary) on the date of their respective terminations or resignations,
in the aggregate, shall have first priority alone (without sharing such
priority with the Vestar Member); PROVIDED, FURTHER, that the Additional
Demand Registrations shall not be subject to the restrictions contained in
Section 9.3(a)(i) hereof, PROVIDED, FURTHER, that if a registration
statement filed pursuant to an Additional Demand Registration is not
effective within 90 days (the "90 DAY PERIOD") of the receipt by the
Parent of such Additional Demand Registration request, if the terminated
or resigning Gray Employee so elects, then, to the extent such Gray
Employee exercises its rights under Section 4.1(e) of the Stockholders'
Agreement and such Allocated Shares allocated to such Gray Employee are to
be acquired by the Parent (or, at the option of such Gray Employee, the
Company, to the extent that the Parent is precluded due to regulatory or
state law reasons) or exchanged for shares of preferred stock pursuant to
Section 3.12 of the Stockholders' Agreement, the LLC will distribute to
such Gray Employee such Allocated Shares, and the Parent or the Company
will purchase from such Gray Employee (a "POST OFFERING PURCHASE") the
Shares being registered in accordance with Section 4.1(e) of the
Stockholders' Agreement.
(iv) The LLC confirms and agrees that a Demanding Member (the
"JOINING MEMBER") that joins in a Demand Registration initiated by another
Demanding Member shall not by reason thereof be deemed to have used any of
the Demand Registrations provided herein for such Joining Member.
(b) PRIORITY. If a Demand Request pursuant to this Section 9.3
involves an underwritten offering, the LLC shall not be required to cause Parent
to register any Allocated Shares allocated to any Non-Demanding Member unless
such Non-Demanding Member accepts the terms of the underwriting agreement, to
the extent applicable to it, and then, only in such quantity as shall not, in
the written opinion of the managing underwriter, exceed the maximum shares of
common stock or other securities that can be marketed without materially
adversely affecting the offering, if any, by the Demanding Member. If the
managing underwriter advises the LLC in good faith that in its opinion the
number of securities requested to be included in such registration exceeds the
number which can be sold in such offering without having an adverse effect on
such offering, including the price at which such securities can be sold, then
the LLC shall cause the Parent to include in such registration the maximum
number of Shares that such underwriter advises can be so sold, allocated (x)
first, among the Allocated Shares requested to be included in such registration
by the Members, PRO RATA, on the basis of the number of Allocated Shares
allocated to each such Member, (y) second, to any securities that Parent
proposes to sell and (z) third, among other securities, if any, requested and
otherwise eligible to be included in such registration.
(c) SELECTION OF UNDERWRITERS. In connection with any Demand
Registration involving an underwritten offering, the Parent shall select a
managing underwriter or underwriters, which underwriter or underwriters shall be
nationally recognized and shall be reasonably acceptable to the Demanding
Member.
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SECTION 9.4 TAG-ALONG RIGHTS. (a) So long as this Agreement or the
Stockholders Agreement shall remain in effect and the Vestar Member (and its
Affiliates) has more Allocated Shares allocated to it than the aggregate number
of Allocated Shares allocated to the Gray Members and their Permitted
Transferees, unless a Public Offering shall have occurred, with respect to any
proposed Transfer by the LLC of the Vestar Member's or any of its Affiliates'
(in such capacity, a "TRANSFERRING STOCKHOLDER") Allocated Shares (excluding any
Transfers by the Vestar Member to its Affiliates), the Transferring Stockholder
shall have the obligation, and each other Member and its Permitted Transferees
shall have the right (such Member and its Permitted Transferees that exercise
such right shall be referred to as a "TAGGING STOCKHOLDER"), to require the LLC
to sell and the proposed transferee to purchase from the LLC a number of its
Allocated Shares up to the product (rounded up to the nearest whole number) of
(i) the quotient determined by dividing (A) the aggregate number of Allocated
Shares allocated to such Tagging Stockholder and sought by the Tagging
Stockholder to be included in the contemplated Transfer by (B) the sum of the
aggregate number of Allocated Shares allocated to such Transferring Stockholder
and the aggregate number of Allocated Shares allocated to such Tagging
Stockholders and sought by all Tagging Stockholders to be included in the
contemplated Transfer and (ii) the total number of Allocated Shares proposed to
be acquired by the transferee in the contemplated Transfer, and at the same
price per Allocated Share and upon the same terms and conditions (including
without limitation time of payment and form of consideration) as to be paid and
given to the Transferring Stockholder, PROVIDED that in order to be entitled to
exercise its right to sell Allocated Shares to the proposed transferee pursuant
to this Section 9.4, a Tagging Stockholder must agree to make to the transferee
the same representations, warranties, covenants, indemnities and agreements as
the Transferring Stockholder agrees to make in connection with the proposed
transfer of the Allocated Shares of the Transferring Stockholder (except that in
the case of representations and warranties pertaining specifically to the
Transferring Stockholder, a Tagging Stockholder shall make the comparable
representations and warranties pertaining specifically to itself, and except
that in the case of covenants or agreements capable of performance only by
certain Members, such covenants or agreements shall be made only by such certain
Members); and PROVIDED FURTHER that all representations, warranties, covenants,
agreements and indemnities made by the Transferring Stockholder and the Tagging
Stockholders pertaining specifically to themselves shall be made by each of them
severally and not jointly; and PROVIDED FURTHER that each of the Transferring
Stockholder and each Tagging Stockholder shall be severally (but not jointly)
liable for breaches of representations, warranties, covenants and agreements of
or (in the case of representations and warranties) pertaining to the LLC or
Parent and its subsidiaries, as the case may be, and for indemnification
obligations arising out of or relating to any such breach or otherwise
pertaining to the LLC, Parent and its subsidiaries, on a pro rata basis, such
liability of each such Stockholder not to exceed such Stockholder's pro rata
portion of the gross proceeds of the sale.
(b) The Transferring Stockholder shall give notice to each other
Member and their Permitted Transferees of each proposed Transfer giving rise to
the rights of the Tagging Stockholders set forth in the first sentence of
Section 9.4(a) at least 30 days prior to the proposed consummation of such
Transfer, setting forth the name of the Transferring Stockholder, the number of
Allocated Shares proposed to be so Transferred, the name and address of the
proposed transferee, the proposed amount and form of consideration and other
terms and conditions
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offered by the proposed transferee, and a representation that the proposed
transferee has been informed of the tag-along rights provided for in this
Section 9.4 and has agreed to purchase Allocated Shares in accordance with the
terms hereof. The tag-along rights provided by this Section 9.4 must be
exercised by each Tagging Stockholder within 15 days following receipt of the
notice required by the preceding sentence, by delivery of a written notice to
the Transferring Stockholder indicating such Tagging Stockholder's desire to
exercise its rights and specifying the number of Allocated Shares it desires to
sell. If the proposed transferee fails to purchase Allocated Shares from any
Tagging Stockholder that has properly exercised its tag-along rights, then the
Transferring Stockholder shall not be permitted to make the proposed Transfer,
and any such attempted Transfer shall be void and of no effect.
(c) If any of the Tagging Stockholders exercise their rights under
Section 9.4(a), the closing of the purchase of the Allocated Shares with respect
to which such rights have been exercised shall take place concurrently with the
closing of the sale of the Transferring Stockholder's Allocated Shares. No
Transfer shall occur pursuant to this Section unless the transferee shall agree
to become a party to, and be bound to the same extent as its transferor by the
terms of the Stockholders' Agreement.
SECTION 9.5 DRAG-ALONG RIGHTS. So long as this Agreement or the
Stockholders Agreement shall remain in effect and the Vestar Member (and its
Affiliates) has more Allocated Shares allocated to it than the aggregate number
of Allocated Shares allocated to the Gray Members or their Permitted
Transferees, if the Vestar Member or any of its Affiliates receives an offer
from a Third Party to purchase (whether pursuant to a sale of stock, a merger or
otherwise) all, but not less than all, of the Allocated Shares allocated to the
Vestar Member and its Affiliates (other than shares, if any, not being purchased
in order to preserve the availability of recapitalization accounting treatment)
and such offer is accepted by the Vestar Member or such Affiliate, then each
Member other than the Vestar Member hereby agrees that it will, if requested by
the Vestar Member, allow the LLC to Transfer all the Allocated Shares allocated
to such Member to such Third Party on the terms of the offer so accepted by the
Vestar Member, including making the same representations, warranties, covenants,
indemnities and agreements that the Vestar Member agrees to make (except that,
in the case of representations and warranties pertaining specifically to the
Vestar Member, each other Member shall make the comparable representations and
warranties pertaining specifically to itself, and except that, in the case of
covenants or agreements capable of performance only by certain Members, such
covenants or agreements shall be made only by such certain Members, and provided
that all representations, warranties, covenants, agreements and indemnities made
by the Members pertaining specifically to themselves shall be made by each of
them severally and not jointly and provided further that each Member shall be
severally (but not jointly) liable for breaches of representations, warranties,
covenants and agreements of or (in the case of representations and warranties)
pertaining to the LLC, or Parent or its subsidiaries, as the case may be, and
for indemnification obligations arising out of or relating to any such breach or
otherwise pertaining to the LLC, the Parent or its subsidiaries, on a pro rata
basis, such liability of each such Member not to exceed such Member's pro rata
portion of the gross proceeds of the sale.
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SECTION 9.6 PUBLIC OFFERINGS, ETC. The provisions of Sections 9.4,
9.5 and 9.7 shall not be applicable to Transfers in a Public Offering or
Transfers pursuant to Section 9.8.
SECTION 9.7 RIGHTS OF FIRST REFUSAL. If, at any time on or after the
date hereof, any Gray Member or any of their respective Permitted Transferees
(an "OFFEREE") receives a bona fide offer to purchase any or all of its
Allocated Shares (the "OFFER") (and, pursuant to such Offer, such Stockholder
could, without violating the terms of this Agreement, cause the LLC to Transfer
the Shares that are the subject of such Offer) from a Third Party (the
"OFFEROR") which such Offeree wishes to accept, such Offeree shall cause the
Offer to be reduced to writing and shall notify the Parent in writing of its
wish to accept the Offer (the "SALE NOTICE"). The Sale Notice shall contain an
irrevocable offer to sell such Allocated Shares to the Parent (in the manner set
forth below) at a purchase price equal to the price contained in, and otherwise
on the same terms and conditions of, the Stock Offer, and shall be accompanied
by a true copy of the Offer (which shall identify the Offeror). At any time
within 30 Business Days after the date of the receipt by the Parent of the Sale
Notice, the Parent shall have the right and option to commit to purchase, or to
arrange for one or more third parties designated by the Parent to purchase, all
of the Allocated Shares covered by the Offer either (i) for the same
consideration and on the same terms and conditions as the Offer or (ii) if the
Offer includes any consideration other than cash, then, at the sole option of
the Parent, at the equivalent all cash price, determined in good faith by a
nationally recognized independent investment banking firm, and otherwise on the
same terms and conditions as the Offer. If the option referred to in the
preceding sentence is exercised, on or prior to the 30th Business Day after the
date of receipt by the Parent of the Sale Notice, the Parent (or its designees)
shall pay the relevant cash consideration by delivering a certified bank check
or checks in (or, if the Offeree so elects at least three Business Days prior to
the closing date in a writing specifying the Offeree's bank account and other
wire transfer instructions, by wire transferring) the appropriate amount and
shall deliver the relevant non-cash consideration to the Offeree against
delivery to the Parent by the LLC of certificates representing the Allocated
Shares being purchased, appropriately endorsed by the Offeree. If, at the end of
the aforementioned 30 Business Day period, the Parent (or its designees) has not
exercised its option in the manner set forth above, the Offeree may during the
succeeding 30 Business Day period sell not less than all of the Allocated Shares
covered by the Offer to the Offeror at a price and on terms no less favorable to
the Offeree than those contained in the Offer. Such Offeror shall agree in a
writing in form and substance reasonably satisfactory to the Parent to become a
party hereto and be bound to the same extent as the Offeree by the provisions
hereof other than this Section 9.7. Promptly after such sale, the Offeree shall
notify the Parent of the consummation thereof and shall furnish such evidence of
the completion and time of completion of such sale and of the terms thereof as
may reasonably be requested by the Parent. If, at the end of 30 Business Days
following the expiration of the 30 Business Day period for the Parent (or its
designees) to commit to purchase the aforementioned Allocated Shares, the
Offeree has not completed the sale of such Allocated Shares as aforesaid, all
the restrictions on transfer contained herein shall again be in effect with
respect to such Allocated Shares.
SECTION 9.8 INITIATION OF A RULE 144 SALE. After a Public Offering,
any Member may request that all or any portion of the Allocated Shares of such
Member be the subject of a Transfer by the LLC in accordance with Rule 144 under
the Securities Act (a "RULE
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144 REQUEST"). A Rule 144 Request shall specify the number of Allocated Shares
that is subject to such request, PROVIDED that a Member shall not request the
inclusion of a number of Shares during any three-month period that is greater
than the maximum number of Shares that the LLC could sell pursuant to Rule 144
multiplied by a fraction, the numerator of which is the number of Allocated
Shares allocated to such Member (or in the case of any of the Gray Members or
their Permitted Transferees, all of the Gray Members and their Permitted
Transferees) and the denominator of which is the total number of Shares then
held by the LLC. Promptly upon receipt of a Rule 144 Request, the LLC shall give
each other Member notice of the Rule 144 Request and shall use its best efforts
to effect the Transfer of the Allocated Shares in respect of which the LLC
receives written requests for inclusion within 30 days after such Member shall
have received the LLC's notice pursuant to this Section 9.8. Any Transfer
proposed to be made pursuant to this Section 9.8 (i) shall be subject in all
respects to compliance by the LLC with the provisions of Rule 144, (ii) shall be
subject to interruption and termination as a result of any registration of
securities by Parent, regardless of whether initiated pursuant to the
Stockholders' Agreement and (iii) in the event such Transfer is proposed to be
made by a Gray Member employed by the Parent or so long as the Gray Members have
the right to designate directors, shall be subject to interruption and
termination for any of the reasons set forth in Section 9.1(d).
SECTION 9.9 INDIVIDUAL PRIVATE SALE. (A) In the case of the Gray
Members or their Permitted Transferees, after the earlier to occur of (i) a
Public Offering and (ii) the fifth anniversary of the date hereof, the Gray
Members may, and (B) in the case of the Vestar Member, at any time the Vestar
Member may, request that, to the extent that it may lawfully do so, the LLC
shall effect a Transfer of all or any portion of the Allocated Shares allocated
to such Member pursuant to any available exemption from the registration
requirement under the Securities Act, subject to written agreement by the
transferee (in form and substance reasonably satisfactory to the Managing
Member) to be bound by this Agreement as if the transferee were the transferring
Member. A transferee under this Section 9.9 is referred to as a "SHARE PERMITTED
TRANSFEREE". No transfer of any such Shares may be made unless such Member
delivers to the LLC an opinion of counsel stating, or other evidence
satisfactory to the LLC, that registration of such Shares is not required under
the Securities Act, and such transfer shall not violate applicable state
securities or blue sky laws. Any such opinion of counsel shall be rendered by
counsel, and shall be in form and substance, reasonably acceptable to the
Managing Member and all costs and expenses thereof shall be borne by such
Member. Notwithstanding the foregoing to the contrary, the LLC shall not take
the action referred to in the first sentence of this Section 9.9 if the Managing
Member reasonably believes that any such action would be unlawful, or could have
an adverse effect on Parent. The LLC agrees to use its reasonable best efforts
to take all actions reasonably requested by any Gray Member or its Permitted
Transferee to facilitate a Transfer pursuant to this Section 9.9.
SECTION 9.10 REDUCTION OF ALLOCATED SHARES. Upon the consummation by
the LLC of any Transfer of Shares, (i) the number of Allocated Shares of each
Member shall be reduced by the number of such Member's Allocated Shares that
were actually included in such Transfer, PROVIDED that such reduction shall be
made only on the basis of whole Shares and the LLC shall allocate any fractional
Shares among such Members by lot or pursuant to any other method that the LLC
deems, in its sole judgment, to be just and equitable and (ii) the Percentage
<PAGE>
32
Interests of the Members shall be adjusted to reflect the number of remaining
Allocated Shares that are allocated to each such Member.
SECTION 9.11 LIQUIDATION OF THE LLC. Upon the liquidation of the
LLC, (a) the Demand Registration rights provided for in Section 9.3(a) shall be
distributed to the Members and each Share Permitted Transferee to the extent
that such Demand Registration Rights have not been exercised and (b) the
incidental registration rights provided for in Section 9.2(a) hereof shall be
assigned to each Member and each Share Permitted Transferee thereof.
SECTION 9.12 TRANSFERS TO BE MADE ONLY AS PERMITTED OR REQUIRED BY
THIS AGREEMENT. Until the earlier to occur of (i) a Public Offering and (ii) the
fifth anniversary of the date hereof, except as permitted by this Article IX,
the Gray Members may not, directly or indirectly, request the Transfer of the
Allocated Shares allocated to each of them, except as specifically permitted or
required by this Article IX; any other purported transfer shall be void and of
no effect. The Vestar Member may request the Transfer of its Allocated Shares at
any time subject only to the restrictions in this Article IX.
SECTION 9.13 LIQUIDITY RIGHT.
(a) Prior to a Public Offering, as long as this Agreement or the
Stockholders' Agreement shall remain in effect, if Robert E. Gray ceases to
serve as Chairman or Chief Executive Officer of the Company or Parent or the
employment with the Company of any of Marie Gray or Kelly A. Gray (together with
Robert E. Gray, the "GRAY EMPLOYEES") ceases for any reason (including, but not
limited to, a cessation under the circumstances set forth in Section 9.13(b)
hereof) (a "LIQUIDITY EVENT"), then, to the extent such Gray Employee exercises
its rights under Section 3.11(a) of the Stockholders' Agreement and such
Allocated Shares allocated to such Gray Employee are to be acquired by the
Parent (or, at the option of such Gray Employee, the Company, to the extent that
the Parent is precluded due to regulatory or state law reasons) or exchanged for
shares of preferred stock pursuant to Section 3.12 of the Stockholders'
Agreement, the LLC will distribute to such Gray Employee such Allocated Shares,
and such Gray Employee shall have the right to sell to the Parent or the
Company, and the Parent or the Company shall be required to purchase (subject to
the provisions of Section 3.12 of the Stockholders' Agreement), such Allocated
Shares in accordance with Section 3.11(a) of the Stockholders' Agreement.
(b) Prior to a Public Offering, as long as this Agreement or the
Stockholders' Agreement shall remain in effect, in the event that any of the
Gray Employees is terminated by the Parent or the Company without "Cause" or
resigns from the Parent and the Company for "Good Reason", as such terms are
defined in their current respective employment contracts with the Company, then,
to the extent such Gray Employee exercises its rights under Section 3.11(b) of
the Stockholders' Agreement and such Allocated Shares allocated to such Gray
Employee are to be acquired by the Parent (or, at the option of such Gray
Employee, the Company, to the extent that the Parent is precluded due to
regulatory or state law reasons) or exchanged for shares of preferred stock
pursuant to Section 3.12 of the Stockholders' Agreement, the LLC will distribute
to such Gray Employee such Allocated Shares, and such Gray Employee shall have
the right to sell to the Parent or the Company, and the Parent or the Company
shall be required to
<PAGE>
33
purchase (subject to the provisions of Section 3.12 and on terms described in
Section 3.11(c) of the Stockholders' Agreement), such Allocated Shares in
accordance with Section 3.11(b) of the Stockholders' Agreement.
(c) Each Gray Employee desiring to sell Shares which may be sold
pursuant to this Section 9.13 or 9.3(a)(iii) shall send to the Managing Member
concurrently with its delivery to the Parent and Vestar a copy of such written
notice as is required to be delivered in accordance with Section 3.11(c) of the
Stockholders' Agreement.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 EQUITABLE RELIEF. The Members hereby confirm that
damages at law would be an inadequate remedy for a breach or threatened breach
of this Agreement and agree that, in the event of a breach or threatened breach
of any provision hereof, the respective rights and obligations hereunder shall
be enforceable by specific performance, injunction or other equitable remedy,
but, nothing herein contained is intended to, nor shall it, limit or affect any
right or rights at law or by statute or otherwise of a Member aggrieved as
against the other for a breach or threatened breach of any provision hereof, it
being the intention by this Section 10.1 to make clear the agreement of the
Members that the respective rights and obligations of the Members hereunder
shall be enforceable in equity as well as at law or otherwise and that the
mention herein of any particular remedy shall not preclude a Member from any
other remedy it or he might have, either in law or in equity.
SECTION 10.2 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts executed and to be performed in such State.
SECTION 10.3 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto, their respective
successors and assigns.
SECTION 10.4 NOTICES. Subject to Section 10.13, whenever notice is
required or permitted by this Agreement to be given, such notice may be in
writing (including facsimile) and if in writing shall be given to any Member at
its address or facsimile number shown in the LLC's books and records (including
Schedule 1 hereto).
SECTION 10.5 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, all of which together shall constitute a single
instrument.
SECTION 10.6 ENTIRE AGREEMENT. This Agreement and the Stockholders'
Agreement embody the entire agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, agreements, representations, warranties, covenants or undertakings
with respect to the subject matter hereof, other than those
<PAGE>
34
expressly set forth or referred to herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter hereof.
SECTION 10.7 EFFECTIVENESS OF AGREEMENT. This Agreement shall be and
become effective as of the Effective Time of the Acquisition Merger.
SECTION 10.8 AMENDMENTS. Any amendment to this Agreement shall be
effective only if such amendment is evidenced by a written instrument duly
executed and delivered by (a) the holders of a majority of the Units held by the
Gray Members, (b) the Managing Member and (c) the Vestar Member, and with
respect to the Parent, the Company and the relevant Gray Member.
SECTION 10.9 SECTION TITLES. Section titles are for descriptive
purposes only and shall not control or alter the meaning of this Agreement as
set forth in the text hereof.
SECTION 10.10 REPRESENTATIONS AND WARRANTIES. Each Member
represents, warrants and covenants to each other Member that:
(a) such Member, if not a natural Person, is duly formed and validly
existing under the laws of the jurisdiction of its organization with full
power and authority to conduct its business to the extent contemplated in
this Agreement;
(b) such Member, if a natural Person, has the capacity to enter into
and perform its obligations under this Agreement;
(c) this Agreement has been duly authorized (in the case of Members
that are not natural Persons), executed and delivered by such Member and
constitutes the valid and legally binding agreement of such Member
enforceable in accordance with its terms against such Member except as
enforceability hereof may be limited by bankruptcy, insolvency, moratorium
and other similar laws relating to creditors' rights generally and by
general equitable principles;
(d) the execution and delivery of this Agreement by such Member and
the performance of its duties and obligations hereunder do not result in a
breach of any of the terms, conditions or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, credit agreement,
note or other evidence of indebtedness, or any lease or other agreement,
or any license, permit, franchise or certificate, to which such Member is
a party or by which it is bound or to which its properties are subject, or
require any authorization or approval under or pursuant to any of the
foregoing, or violate any statute, regulation, law, order, writ,
injunction, judgment or decree to which such Member is subject;
(e) no consent, approval or authorization of, or filing,
registration or qualification with, any court or governmental authority on
the part of such Member is
<PAGE>
35
required for the execution and delivery of this Agreement by such Member
and the performance of its obligations and duties hereunder.
SECTION 10.11 SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. Each
of the parties hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement, to the non-exclusive general
jurisdiction of the Courts of the State of New York in New York County,
the Courts of the United States of America for the Southern District of
New York and the Central District of California, the Courts in the State
of California in the County of Orange and appellate courts from any
thereof;
(b) consents that any such action or proceeding may be brought in
such courts, and waives any objection that it may now or hereafter have to
the venue of any such action or proceeding in any such court or that such
action or proceeding was brought in an inconvenient court and agrees not
to plead or claim the same to the extent permitted by applicable law;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to the
party, as the case may be, at its address set forth in Schedule 1 or at
such other address of which the other party shall have been notified
pursuant thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction for recognition and enforcement of
any judgment or if jurisdiction in the courts referenced in paragraph (a)
hereof is not available despite the intentions of the parties hereto; and
(e) waives trial by jury in any litigation in any court with respect
to, in connection with, or arising out of this Agreement or any other
instrument or document delivered pursuant hereto, or any other claim or
dispute howsoever arising, to which the parties are party. This waiver is
informed and freely made.
SECTION 10.12 REIMBURSEMENT OF EXPENSES. Promptly after the date of
this Agreement, the LLC, to the extent it does not pay such costs and expenses
directly, will reimburse the Managing Member for Organizational Expenses
incurred by the Managing Member.
SECTION 10.13 GRAY REPRESENTATIVE. Each Gray Member hereby
designates and appoints (and each Permitted Transferee of each such Gray Member
shall be deemed to have so designated and appointed) Robert E. Gray, with full
power of substitution (the "Gray Representative") the representative of each
such Person to perform all such acts as are required, authorized or contemplated
by this Agreement to be performed by any such Person and hereby
<PAGE>
36
acknowledges that the Gray Representative shall be the only Person authorized to
take any action so required, authorized or contemplated by this Agreement by
each such Person, except that the foregoing shall not apply to the rights of any
Gray Employee pursuant to Sections 9.3(a)(iii), 9.13(a) and 9.13(b). Each such
Person further acknowledges that the foregoing appointment and designation shall
be deemed to be coupled with an interest and shall survive the death or
incapacity of such Person. Each such Person hereby authorizes (and each
Permitted Transferee shall be deemed to have authorized) the other parties
hereto to disregard any notice or other action taken by such Person pursuant to
this Agreement on any action so taken or any notice given by the Gray
Representative and are and will be entitled and authorized to give notices only
to the Gray Representative for any notice contemplated by this Agreement to be
given to any such Person. A successor to the Gray Representative may be chosen
by a majority of the Gray Employees, PROVIDED that written notice thereof is
given by the successor Gray Representative to the LLC. Whenever any action or
consent (but not any forbearance) is required to be taken or given by the Gray
Members, the action or consent of the Gray Representative shall be considered
the act or consent of all the Gray Members, and the Vestar Member and the
Managing Member shall be protected in relying on such act or consent.
SECTION 10.14 ADDITIONAL SECURITIES SUBJECT TO AGREEMENT. Each Member
agrees that any other Shares (or shares of capital stock of the Parent having
voting rights) which it shall hereafter acquire by means of a stock split, stock
dividend, distribution or other similar event (other than pursuant to a Public
Offering) shall be subject to the provisions of this Agreement to the same
extent as if held as Shares on the date hereof, and in the event of any such
stock split, combination, reclassification, reorganization or other similar
event, where appropriate, the numbers and percentages in this Agreement shall be
adjusted accordingly to replicate the intention of the parties on the date
hereof.
<PAGE>
37
IN WITNESS WHEREOF, the parties have executed this Amended and
Restated Limited Liability Company Agreement as of the day and year first above
written.
VESTAR/SJK INVESTORS LLC
By: Vestar Capital Partners III, L.P.,
its Managing Member
By: Vestar Associates III, L.P.,
its General Partner
By: Vestar Associates Corporation III,
its General Partner
By:
------------------------------------------
Name:
Title:
<PAGE>
------------------------------------------
BOB GRAY
------------------------------------------
MARIE GRAY
------------------------------------------
KELLY A. GRAY
------------------------------------------
GRAY FAMILY TRUST
By:
---------------------------------------
Name: Bob Gray
By:
---------------------------------------
Name: Marie Gray
KELLY ANN GRAY TRUST
By:
---------------------------------------
Name: Bob Gray
By:
---------------------------------------
Name: Marie Gray
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Number of Allocated
Gray Members Units Shares
- ------------ ----- ------
<S> <C> <C>
Vestar Capital Partners III, L.P. 8,409 5,121,222
1225 17th Street
Suite 1600
Denver, Colorado 80202
Robert E. Gray -- --
St. John Knits, Inc.
17422 Derian Avenue
Irvine, CA 92614
Marie Gray -- --
St. John Knits, Inc.
17422 Derian Avenue
Irvine, CA 92614
Kelly A. Gray 587 357,571
St. John Knits, Inc.
17422 Derian Avenue
Irvine, CA 92614
Gray Family Trust 914 556,772
c/o Robert E. Gray
St. John Knits, Inc.
17422 Derian Avenue
Irving, CA 92614
Kelly Ann Gray Trust 90 54,640
c/o Robert E. Gray
St. John Knits, Inc.
17422 Derian Avenue
Irving, CA 92614
Totals
</TABLE>
<PAGE>
SCHEDULE 2
Immediately prior to the Effective Time of the Reorganization Merger, Vestar
will make a capital contribution to the LLC of $153,636,664
<PAGE>
EXECUTION COPY
EXHIBIT A
================================================================================
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
OF
VESTAR/GRAY INVESTORS LLC
BY AND AMONG
VESTAR/SJK INVESTORS LLC
ROBERT E. GRAY
MARIE GRAY
KELLY A. GRAY
KELLY ANN GRAY TRUST
AND
GRAY FAMILY TRUST
Dated as of July 7, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
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ARTICLE I
Definitions...................................................................1
SECTION 1.1 Definitions......................................................1
ARTICLE II
General Provisions............................................................8
SECTION 2.1 Formation........................................................8
SECTION 2.2 Name.............................................................8
SECTION 2.3 Term.............................................................8
SECTION 2.4 Purpose; Powers..................................................8
SECTION 2.5 Place of Business................................................9
SECTION 2.6 Business Transactions of a Member with the LLC...................9
SECTION 2.7 Fiscal Year.....................................................10
SECTION 2.8 No State-Law Partnership........................................10
ARTICLE III
Members and Interests........................................................10
SECTION 3.1 Members.........................................................10
SECTION 3.2 Certificates....................................................10
SECTION 3.3 Liability of Members............................................10
SECTION 3.4 Access to and Confidentiality...................................10
ARTICLE IV
Management and Operation of the LLC..........................................11
SECTION 4.1 Management......................................................11
SECTION 4.2 Certain Duties and Obligations of the Members...................11
SECTION 4.3 Indemnification of the Managing Member..........................11
SECTION 4.4 Expenses........................................................12
SECTION 4.5 Indemnification Rights Non-Exclusive............................12
SECTION 4.6 Insurance.......................................................12
SECTION 4.7 Assets of the LLC...............................................13
SECTION 4.8 Loans to the LLC................................................13
SECTION 4.9 Voting of Shares................................................13
ARTICLE V
Capital Contributions; Distributions.........................................15
SECTION 5.1 Capital Contributions...........................................15
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<PAGE>
Page
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SECTION 5.2 Distributions...................................................15
SECTION 5.3 Limitations on Distributions....................................16
ARTICLE VI
Books and Reports; Tax Matters; Capital Accounts; Allocations................16
SECTION 6.1 General Accounting Matters......................................16
SECTION 6.2 Certain Tax Matters.............................................16
SECTION 6.3 Capital Accounts................................................17
SECTION 6.4 Allocations.....................................................17
ARTICLE VII
Dissolution..................................................................18
SECTION 7.1 Dissolution.....................................................18
SECTION 7.2 Votes of Members................................................18
SECTION 7.3 Winding-up; Final Distributions.................................18
SECTION 7.4 Further Assurances..............................................20
ARTICLE VIII
Transfer of Member's Units...................................................20
SECTION 8.1 Transfers to be Made Only as Permitted or Required by
this Agreement..................................................20
SECTION 8.2 Permitted Transfers.............................................20
SECTION 8.3 Tag-Along Rights................................................21
SECTION 8.4 Drag-Along Rights...............................................22
SECTION 8.5 No Transfers....................................................22
SECTION 8.6 Other Transfer Provisions.......................................23
ARTICLE IX
The LLC's Registration Rights Relating to
Shares of Parent Common Stock and Related Rule 144 Sales.....................23
SECTION 9.1 Stockholders' Agreement; Transfers of Shares....................23
SECTION 9.2 Exercise of Incidental Registration Rights......................24
SECTION 9.3 Exercise of Demand Registration Rights..........................26
SECTION 9.4 Tag-Along Rights................................................28
SECTION 9.5 Drag-Along Rights...............................................29
SECTION 9.6 Public Offerings, etc...........................................30
SECTION 9.7 Rights of First Refusal.........................................30
SECTION 9.8 Initiation of a Rule 144 Sale...................................30
SECTION 9.9 Individual Private Sale.........................................31
SECTION 9.10 Reduction of Allocated Shares..................................31
SECTION 9.11 Liquidation of the LLC.........................................32
SECTION 9.12 Transfers to be Made Only as Permitted or Required by
this Agreement.................................................32
SECTION 9.13 Liquidity Right................................................32
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<PAGE>
Page
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ARTICLE X
Miscellaneous................................................................33
SECTION 10.1 Equitable Relief...............................................33
SECTION 10.2 Governing Law..................................................33
SECTION 10.3 Successors and Assigns.........................................33
SECTION 10.4 Notices........................................................33
SECTION 10.5 Counterparts...................................................33
SECTION 10.6 Entire Agreement...............................................33
SECTION 10.7 Effectiveness of Agreement.....................................34
SECTION 10.8 Amendments.....................................................34
SECTION 10.9 Section Titles.................................................34
SECTION 10.10 Representations and Warranties................................34
SECTION 10.11 Submission to Jurisdiction; Waiver of Jury Trial..............35
SECTION 10.12 Reimbursement of Expenses.....................................35
SECTION 10.13 Gray Representative...........................................35
SECTION 10.14 Additional Securities Subject to Agreement....................36
Schedule 1 Member Information/Allocated Shares
Schedule 2 Vestar's Capital Contribution
-iii-
<PAGE>
Exhibit 10.13
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
SJA 1 & 2, LTD.,
A California Limited Partnership
This Amended and Restated Agreement of Limited Partnership (the
"Agreement"), dated as of October 31, 1993 is entered into by Ocean Air
Charters, a California corporation ("Ocean Air") as the General Partner and
those individuals and/or entities executing this Agreement on the signature page
hereof as the Limited Partners to amend and restate the original Agreement of
Limited Partnership of SJA 1&2, Ltd. ("Original Agreement").
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings set forth below:
1.1 Adjusted Capital Contribution. "Adjusted Capital Contribution means
the excess of (i) each Partner's contribution to the capital of the Partnership,
over (ii) distributions to the Partner under Section 6.8(b) (valued in
accordance with the principles of Section 1.2).
1.2 Capital Account. The "Capital Account" of a Partner means the capital
account of that Partner determined from the inception of the Partnership
strictly in accordance with the rules set forth in Section 1.704-1(b)(2)(iv) of
the Treasury Regulations.
Subject to the previous paragraph, "Capital Account" means:
(a) The amount of money contributed by the Partner to the
Partnership, increased by
(b) The fair market value of property contributed by the Partner to
the Partnership (net of liabilities secured by the property or to which the
property is subject), and
(c) The amount of income allocated to the Partner, and decreased by
(v) The amount of money distributed to the Partner,
-1-
<PAGE>
(w) The fair market value of property distributed to the
Partner by the Partnership (net of liabilities secured by the property or to
which the property is subject),
(x) The Partner's share of expenditures of the Partnership
described in Section 705(a)(2)(B) of the Code (including, for this purpose,
losses which are nondeductible under Section 267(a)(1) or Section 707(b) of the
Code),
(y) The Partner's share of amounts paid or incurred by the
Partnership to organize the Partnership or to promote the sale of (or to sell)
an interest in the Partnership (except to the extent properly amortizable for
tax purposes), and
(z) The amount of loss allocated to the Partner,
For this purpose, "income" refers to all items of income (including
all items of gain and including income exempt from tax) as properly determined
for "book" purposes, and "loss" refers to all items of loss (including
deductions) as properly determined for "book" purposes. "Book" income and loss
shall be determined based on the value of the Partnership's assets as set forth
on the books of the Partnership in accordance with the principles of Section
1.704-1(b)(2)(iv)(g) of the Treasury Regulations. Otherwise, income and loss
shall be determined strictly in accordance with federal income tax principles
(including rules governing depreciation and amortization), applied
hypothetically based on values of Partnership assets as set forth on the
Partnership books.
An assumption of a Partner's unsecured liability by the Partnership
shall be treated as a distribution of money to the Partner. An assumption of the
Partnership's unsecured liability by a Partner shall be treated as a cash
contribution to the Partnership. For this purpose, the assumption of a secured
liability in excess of the fair market value of the security shall be treated as
the assumption of an unsecured liability to the extent of that excess.
Capital Accounts shall be adjusted appropriately on account of
investment tax credit and investment tax credit recapture in accordance with the
principles of Section 48(q) of the Code.
In the event that assets of the Partnership other than cash are
distributed to a Partner in kind, Capital Accounts shall be adjusted for the
hypothetical "book" gain or loss that would have been realized by the
Partnership if the distributed assets had been sold for their fair market values
in a cash sale (in order to reflect unrealized gain or loss).
In the event of the liquidation of a Partner's interest in the
Partnership or
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<PAGE>
of the Partnership, Capital Accounts shall be adjusted for the hypothetical
"book" gain or loss that would have been realized by the Partnership if all
Partnership assets had been sold for their fair market values in a cash sale (in
order to reflect unrealized gain or loss).
Capital Accounts also shall be adjusted upon the constructive
termination of the Partnership as provided under Section 708 of the Code in
accordance with the method set forth in the immediately preceding paragraph (as
required by Section 1.704-1(b)(2)(iv)(1) of the Treasury Regulations).
In the event that Partner shall be both a General Partner and a
Limited Partner of the Partnership, a single Capital Account shall be maintained
for that Partner.
1.3 Capital Event. "Capital Event" means the sale or other disposition of
the Partnership's assets of a capital type, the receipt of insurance and other
proceeds derived from the involuntary conversion of the Partnership property,
the borrowing or refinanced borrowing upon the security of Partnership property,
or any similar event with respect to the property of the Partnership.
1.4 Code. "Code" means the Internal Revenue Code of 1986, as amended, and
any successor provision.
1.5 Distributable Cash. "Distributable Cash" for any period means such
portion of the cash in hand or in bank accounts of the Partnership as, in the
reasonable discretion of the General Partner, is available for distribution to
the Partners after reasonable provision has been made for the current
liabilities of the Partnership and a reasonable reserve has been allowed for
Partnership operating expenses.
1.6 General Partner. "General Partner" means Ocean Air Charters, a
California corporation.
1.7 Limited Partner. "Limited Partner" means those individuals and/or
entities whose signatures appear on the signature page hereof, individually and
collectively.
1.8 Minimum Gain. "Minimum Gain" with respect to any taxable year of the
Partnership means the minimum gain of the Partnership computed strictly in
accordance
-3-
<PAGE>
with the principles of Section 1.704-1(b)(4)(iv)(c) of the Treasury Regulations.
Subject to the previous sentence, "Minimum Gain" means the sum for
all Partnership assets of the amounts of taxable income or gain that would be
recognized if the asset were disposed of for the amount of Nonrecourse
Liabilities secured by the asset. For this purpose, where the asset is subject
to multiple secured liabilities of unequal priority, the adjusted basis of the
asset shall be allocated among the liabilities in order of priority from most
senior first to senior last. Where two or more secured liabilities are of equal
priority, basis shall be allocated among the liabilities pro-rata in accordance
with the amounts of the liabilities. For purposes of computing Minimum Gain, the
"book" value of an asset shall be substituted for its adjusted tax basis if the
two differ, but otherwise Minimum Gain shall be determined in accordance with
federal income tax principles.
1.9 Net Profits and Net Losses. The "Net Profits" and "Net Losses" of the
Partnership mean the net income and net losses, respectively, of the
Partnership; however, the following items shall be excluded from the computation
of Net Profits and Net Losses:
(a) Any gain or income specially allocated under Section 6.1 or
Section 6.2.
(b) Any net gain or loss from Capital Events specially allocated
under Section 6.5 or Section 6.6.
(c) Any Nonrecourse Deductions.
(d) Any Pseudo-Nonrecourse Deductions.
For purposes of computing Net Profits and Net Losses, the "book"
value of an asset shall be substituted for its adjusted tax basis if the two
differ, but otherwise Net Profits and Net Losses shall be determined in
accordance with federal income tax principles.
1.10 Nonrecourse Deductions. "Nonrecourse Deductions" in any fiscal year
means an amount of Partnership deductions that are characterized as "nonrecourse
deductions" under Section 1.704-1(b)(4)(iv)(b) of the Treasury Regulations.
Subject to the previous sentence, "Nonrecourse Deductions" means an
amount of Partnership deductions, losses and Section 705(a)(2)(B) expenditures,
as the case may be (all as computed for "book" purposes), equal to the increase
in the Partnership's Minimum Gain for the taxable year. If the net increase in
Minimum Gain
-4-
<PAGE>
during the Partnership taxable year exceeds the total amount of items of
Partnership loss, deduction and Section 705(a)(2)(B) expenditure for the year,
then the excess shall carry over and be treated as Minimum Gain of the
immediately subsequent year and all following years until cumulative Nonrecourse
Deductions shall equal the sum of the increases in Minimum Gain for all
Partnership years ending on or after the date of this Agreement.
This amount shall be comprised of Partnership items as provided in
Section 1.704-1(b)(4)(iv)(b) of the Treasury Regulations:
(a) First, depreciation or cost recovery deductions (as determined
for "book" purposes) with respect to items of Partnership property subject to
one or more Nonrecourse Liabilities to the extent of the increase in Minimum
Gain attributable to the Nonrecourse Liabilities to which each item is subject.
(b) Thereafter, a pro-rata portion of the Partnership's other items
determined for "book" purposes) of deduction, loss and Section 705(a)(2)(B)
expenditure for the year.
1.11 Nonrecourse Liabilities. "Nonrecourse Liabilities" means liabilities
of the Partnership treated as "nonrecourse liabilities" under Section
2.704-1(b)(4)(iv) of the Treasury Regulations.
Subject to the foregoing sentence, "Nonrecourse Liabilities" means
liabilities of the Partnership (or a portion thereof) with respect to which none
of the Partners has any risk of loss (other than through the Partner's indirect
interest as a Partner in the Partnership assets subject to the liability). Any
liability of the Partnership to a Partner any liability guaranteed by a Partner
or with respect to which a Partner has pledged personal assets (to the extent
the Partner may bear the burden of an economic loss attributable to the
liability) shall not be classified as a Nonrecourse Liability.
1.12 Partners. "Partners" means the General Partner and the Limited
Partner, collectively. Reference to a "Partner" means any one of the Partners.
1.13 Partnership. "Partnership" means the limited partnership created the
Original Agreement as amended and restated by this Agreement.
1.14 Percentage Interest. "Percentage Interest" of any Partner means the
percentage interest of each partner as set forth on the signature page hereof.
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<PAGE>
1.15 Pseudo-Nonrecourse Deductions. "Pseudo-Nonrecourse Deductions" means
the Partnership deductions, losses and Section 705(a)(2)(B) expenditures, as the
case may be (as computed for "book" purposes), that are treated as deductions,
losses and expenditures attributable to Pseudo-Nonrecourse Liabilities under
Section 1.704-1(b)(4)(iv)(g) of the Treasury Regulations.
1.16 Pseudo-Nonrecourse Liabilities. "Pseudo-Nonrecourse Liabilities"
means liabilities of the Partnership, if any, that are treated as nonrecourse
liabilities for purposes of Section 1001 of the Code by that are not treated as
nonrecourse liabilities under Section 1.704-1(b)(4)(iv) of the Treasury
Regulations.
1.17 Treasury Regulations. Treasury Regulations means the regulations of
the United States Treasury Department pertaining to the income tax, as amended,
and any successor provision.
ARTICLE 2
ORGANIZATION
2.1 Formation. The Partnership was formed under the Original Agreement
pursuant to the California Revised Limited Partnership Act. The Partnership
commenced on August 9, 1988, the date of the recordation of a Certificate of
Limited Partnership with the Secretary of State of the State of California.
2.2 Name. The name of the Partnership is SJA 1 & 2, Ltd., a California
Limited Partnership.
ARTICLE 3
PRINCIPAL PLACE OF BUSINESS
The principal place of business of the Partnership is located at 17422
Derian Avenue, Irvine, California.
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<PAGE>
ARTICLE 4
BUSINESS
The business of the Partnership is to own, operate, lease, charter and
maintain aircraft.
ARTICLE 5
CAPITAL CONTRIBUTIONS AND STATUS
5.1 Capital Contribution of the General Partner. The General Partner has
contributed cash in the amount set forth on the signature page hereof and the
General Partner shall be credited for such amount as its initial capital
contribution.
5.2 Capital Contributions of the Limited Partner. Upon the formation of
the Partnership, each Limited Partner contributed the amount set forth opposite
such Limited Partner's name on the signature page hereof and the Limited
Partners' shall be credited for such amount as their respective initial capital
contribution.
5.3 Additional Contributions of the Partners. To the extent the Partners
contribute additional capital to the Partnership, the Percentage Interests and
the amount of the capital contributions of the Partners reflected on the
signature page shall be adjusted to reflect such additional contributions as of
the date of such contributions so that the Percentage Interests of each Partner
reflect their respective prorata contribution to the capital of the Partnership.
ARTICLE 6
ALLOCATION OF NET PROFITS AND NET LOSSES; DISTRIBUTIONS
6.1 Minimum Gain Chargeback. In the event that there is a net decrease in
the Minimum Gain of the Partnership during a Partnership taxable year, all
Partners with deficit Capital Account balances at the end of the year shall be
allocated "book" income and gain for that taxable year (and, if necessary,
subsequent years) in the amount an in the proportion necessary to eliminate
these deficits as quickly as possible. The allocation required by this Section
6.1 shall be made prior to any other allocation for the year.
In the event that there should be an allocation to more than one
Partner
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<PAGE>
under this provision, that allocation shall be made in accordance with the ratio
of the deficit balances in the Partners' Capital Accounts.
Allocations of income and gain shall be made as required by Section
1.704-1(b)(4)(iv)(e) of the Treasury Regulations:
(a) First, from gains recognized from the disposition of Partnership
property subject to Nonrecourse Liabilities, to the extent of the Minimum Gain
attributable to these items of Partnership property.
(b) Thereafter, from a pro-rata portion of the Partnership's other
items of income and gain for the year.
"Book" income and gain shall be determined by reference to values
set forth on the books of the Partnership in accordance with the principles of
Section 1.2.
For purposes of this Section 6.1, Capital Accounts shall be adjusted
hypothetically as provided for in Section 1.704-1(b)(4)(iv)(e) of the Treasury
Regulations. These adjustments shall include the following:
(i) Each Partner's Capital Account shall be decreased by the
adjustments required by paragraphs (4), (5) and (6) of Section
1.704-1(b)(2)(ii)(d) of the Treasury Regulations.
(ii) Each Partner's Capital Account shall be increased by that
Partner's share of Minimum Gain, which shall be determined after the decrease in
Minimum Gain for the taxable year of the Partnership. Each Partner's share of
the Minimum Gain shall be determined under Section 1.704-1(b)(4)(iv)(f) of the
Treasury Regulations.
(iii) Each Partner's Capital Account shall be increased on
account of any amount that the Partner is obligated to restore on account of
deficit Capital Account under Section 1.704-1(b)(2)(ii)(c) of the Treasury
Regulations.
The Partners intend that the provisions set forth in this
Section 6.1 will constitute a "minimum gain chargeback" as described in Section
1.704-1(b)(4)(iv)(e) of the Treasury Regulations. The regulations shall control
in the case of any conflict between those regulations and this Section 6.1.
6.2 Qualified Income Offset. Any Partner who unexpectedly receives an
adjustment, allocation or distribution described in subparagraphs (4), (5) or
(6) of Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations, which
adjustment, allocation or distribution creates or increases a deficit balance in
that Partner's Capital Account, shall be allocated items of "book" income and
gain in an amount and manner sufficient to
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<PAGE>
eliminate the deficit balance in that Partner's Capital Account so created or
increased as quickly as possible.
Allocations under this Section 6.2 shall be comprised of a pro-rata
portion of each item of Partnership income (including gross income) and gain for
the year; however, items of income and gain allocated under Section 6.1 shall
be excluded from the operation of this Section 6.2.
"Book" income and gain shall be determined by reference to values
set forth on the books of the Partnership in accordance with the principles of
Section 1.2.
For purposes of this Section 6.2, Capital Accounts shall be adjusted
hypothetically as provided for in Sections 1.704-1(b)(2)(ii)(d) and
1.704-1(b)(4)(iv)(f) of the Treasury Regulations. These adjustments shall
include the adjustments set forth in Section 6.1 of this Agreement.
The Partners intend that the provision set forth in this Section 6.2
will constitute a "qualified income offset" as described in Section
1.704-1(b)(2)(ii)(d) of the Treasury Regulations. The regulations shall control
in the case of any conflict between those regulations and this Section 6.2.
6.3 Allocation of Net Profits. The Net Profits of the Partnership shall be
allocated to the Partners in accordance with their Percentage Interests.
6.4 Allocation of Net Losses. The Net Losses of the Partnership shall be
allocated to the Partners in accordance with their Percentage Interests.
6.5 Allocation of Net Gain From Capital Events. Net "book" gain and income
(in excess of deductions and loss) of the Partnership resulting from a Capital
Event, shall be allocated to the Partners in accordance with the following order
of priority:
(a) First, to those Partners with negative Capital Accounts, between
them in proportion to the ratio of their negative Capital Account balances,
until no Partner has a negative Capital Account.
(b) Second, to those Partners whose Adjusted Capital Contributions
are in excess of their Capital Accounts, between them in accordance with the
ratio of these excesses, until all of these excesses have been eliminated.
(c) Finally, to the Partners in accordance with their Percentage
Interests.
In computing net "book" gain and income of the Partnership resulting
from a Capital Event, the following items are excluded:
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<PAGE>
(i) Any losses that are characterized as Pseudo-Nonrecourse
Deductions or Nonrecourse Deductions.
(ii) Any income or gain of the Partnership that is specially
allocated under Section 6.1 or Section 6.2.
"Book" income and gain shall be determined by reference to values
set forth on the books of the Partnership in accordance with the principles of
Section 1.2.
6.6 Allocation of Net Loss from Capital Events. Net "book" loss and
deductions (in excess of income and gain) of the Partnership resulting from a
Capital Event, shall be allocated to the Partners in accordance with the
following order of priority:
(a) First, to the Partners with positive Capital Accounts, in
accordance with the ratio of their positive Capital Account balances, until no
Partner has a positive Capital Account.
(b) Thereafter, one hundred percent (100%) to the General Partner.
"Book" loss and deductions shall be determined by reference to
values set forth on the books of the Partnership in accordance with the
principles of Section 1.2.
In computing net "book" losses and deductions of the Partnership
resulting from a Capital Event, the following items are excluded:
(i) Any losses that are characterized as Pseudo-Nonrecourse
Deductions or Nonrecourse Deductions.
(ii) Any income or gain of the Partnership that is specially
allocated under Section 6.1 and Section 6.2.
For purposes of this Section 6.6, Capital Accounts shall be adjusted
hypothetically as provided for in Sections 1.704-1(b)(2)(ii)(d) and
1.704-1(b)(4)(iv)(f) of the Treasury Regulations. These adjustments shall
include the adjustments set forth in Section 6.1 of this Agreement.
6.7 Distributions of Cash from Operations. Subject to Section 7.2 (that
is, other than Distributable Cash being distributed upon the dissolution of the
Partnership), Distributable Cash resulting from the normal business operations
of the Partnership (as distinguished from a Capital Event) shall be distributed
between the Partners in accordance with their Percentage Interests.
6.8 Distributions of Cash from Capital Events. Subject to Section 7.2
(that is,
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<PAGE>
other than Distributable Cash being distributed upon the dissolution of the
Partnership), Distributable Cash resulting from a Capital Event (as
distinguished from the normal business operations of the Partnership) shall be
distributed between the Partners in accordance with the following order of
priority:
(a) First, to those Partners with positive Adjusted Capital
Contributions, in accordance with the ratio of their Adjusted Capital
Contribution.
(c) Finally, between the Partners in accordance with their
Percentage Interests.
6.9 Tax Allocations.
(a) To the extent permitted by Section 1.704-1(b)(4)(i) of the
Treasury Regulations, all items of income, gain, loss and deduction for federal
and state income tax purposes shall be allocated with the corresponding "book"
items; however, all items of income, gain, loss and deduction with respect to
property with respect to which there is a difference between "book" value and
adjusted tax basis shall be allocated in accordance with the principles of
Section 704(c) of the Code and Section 1.704-1(b)(4)(i) of the Treasury
Regulations.
(b) In the event that the Partnership has taxable income that is
characterized as ordinary income under the recapture provisions of the Code,
each Partner's distributive share of taxable gain or loss from the sale of
Partnership assets (to the extent possible) shall include a proportionate share
of this recapture income equal to that Partner's share of prior cumulative
depreciation deductions with respect to the assets that gave rise to the
recapture income.
6.10 Order of Application. The listed provisions shall be applied in the
order in which they are listed (from first to last):
(a) Section 6.7.
(b) Section 6.8.
(c) Section 6.1.
(d) Section 6.2.
(e) Section 6.3.
(f) Section 6.4.
(g) Section 6.6.
(h) Section 6.5.
(i) Section 7.2.
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<PAGE>
These provisions shall be applied as if all distributions and
allocations were made at the end of the Partnership's taxable year. Where any
provision depends on the Capital Account of any Partner, that Capital Account
shall be determined after the operation of all preceding provisions for the
year.
ARTICLE 7
DISSOLUTION AND WINDING UP OF THE PARTNERSHIP
7.1 Dissolution of Partnership. The Partnership shall be dissolved upon
the occurrence of any of the following events:
(a) The 25th anniversary of the formation of the Partnership.
(b) As otherwise provided by law.
7.2 Winding Up of the Partnership. Upon the dissolution of the
Partnership, the proceeds from the liquidation of the assets of the Partnership
and collection of the receivables of the Partnership together with assets
distributed in kind, to the extent sufficient, shall be applied and distributed
in the following order of priority:
(a) To the payment and discharge of all of the Partnership's debts
and liabilities and the expenses of liquidation;
(b) To the creation of any reserves that the General Partner deems
necessary for any contingent or unforeseen liabilities or obligations of the
Partnership;
(c) To the payment and discharge of all of the Partnership's debts
and liabilities owing to the Partners, but if the amount available for payment
is insufficient, then pro-rata in accordance with the amounts of these debts and
liabilities; and
(d) To the Partners with positive Capital Accounts in accordance
with the ratio of their Capital Accounts.
7.3 Deficit Capital Account. The Limited Partner shall have no liability
to the Partnership, to the other Partner or to the creditors of the Partnership
on account of any deficit balance in the Limited Partner's Capital Account.
If the General Partner has a deficit balance in its Capital Account
at the time of the liquidation of the Partnership or the liquidation of its
interest in the Partnership (after crediting allocations of income and debiting
allocations of loss to Capital Account), the General Partner must pay to the
Partnership the amount of the deficit balance. This amount, upon the liquidation
of the Partnership, shall be paid to the creditors of the
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<PAGE>
Partnership or distributed to the other Partner in accordance with its positive
Capital Account balance in accordance with Section 1.704-1(b)(2)(ii)(b)(3) of
the Treasury Regulations.
This payment must be made in immediately available funds. This
payment must be made no later than the end of the taxable year of the
liquidation of its interest in the Partnership (or, if later, within ninety (90)
days after the date of the liquidation).
For purposes of this Section 7.3:
(a) The term "liquidation" is used in the sense of Section
1.704-1(b)(2)(ii)(g) of the Treasury Regulations.
(b) The liquidated Partner's Capital Account shall be determined
after taking into account all Capital Account adjustments for the Partnership's
taxable year during which the liquidation occurs.
The Partners intend that the provision set forth in the second
paragraph this Section 7.3, will constitute an unconditional obligation to
restore deficit capital account as described in Section 1.704-1(b)(2)(ii)(b)(3)
of the Treasury Regulations. The regulations shall control in the case of any
conflict between those regulations and this Section 7.3.
ARTICLE 8
RIGHT OF FIRST REFUSAL
8.1 Offer. If any Partner wants to make an offer (Proposal) to assign,
transfer, sell, pledge or hypothecate its Partnership interest, that Partner
(Selling Partner) shall first give notice to the other Partners (the Offeree
Partners), so that the Offeree Partners may first purchase the interest. The
notice shall contain a full and complete copy of the Proposal.
8.2 Concurrence or Acceptance. The Offeree Partners, within thirty (30)
days of receipt of the notice described in Section 8.1 (Offer Period), shall, in
writing, either accept the offer to purchase the Selling Partner's interest for
the same price and on the same terms as in the Proposal, or reject the offer. If
more than one of the Offeree Partners elects to purchase, those electing to
purchase shall purchase the Selling Partner's interest pro rata according to
their Percentage Interest. If the Offeree Partners do not respond within the
Offer Period, the Selling Partner may sell its interest for the same price and
on the same terms as in the Proposal for a period of 90 days after the end of
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<PAGE>
the Offer Period. If the Selling Partner does not complete the sale of its
interest within that 90 day period, the provisions of Article 8 shall apply to
any sale or offer later proposed.
8.3 Rights of Buyer. A purchaser of the Selling Partner's interest,
if not already a Partner, shall be an assignee.
ARTICLE 9
DEATH, DISSOLUTION OR INCAPACITY OF A PARTNER
9.1 Limited Partners.
a. Death or Dissolution of a Limited Partner. When a Limited
Partner dies or dissolves, the Partnership shall not dissolve. The estate of the
deceased Limited Partner and the person or persons entitled to succeed to the
Partnership interest of a deceased or dissolved Limited Partner by law, under
the decedent's will or the laws of intestate succession shall be referred to as
the Successor. On the death or dissolution of a Limited Partner, its Successor
shall be deemed to be an assignee.
b. Incapacity of a Limited Partner. A Limited Partner shall be
deemed incapacitated if it becomes Bankrupt, is judicially declared incompetent
or insane, or has appointed a legal guardian or conservator ("Incapacity"). The
trustee in Bankruptcy, legal guardian or conservator shall be referred to as the
Successor. On the Incapacity of a Limited Partner, its Successor shall be deemed
to be an "Assignee".
9.2 General Partner. In the event of the death, dissolution, removal
or Incapacity of a General Partner the Partnership shall not dissolve but the
business of the Partnership shall be continued by a successor General Partner
elected by a Majority within ninety (90) days of such death, dissolution or
Incapacity. The compensation of any successor General Partner shall be an
expense of the Partnership. The Successor of a General Partner on death,
dissolution or Incapacity shall be deemed to be an Assignee.
9.3 Assignees. An Assignee of the Partnership interest of a Limited
Partner who does not become a substituted Limited Partner and the Assignee of
any General Partner shall have no right to require any information or account of
the Partnership's transactions, to inspect the Partnership's books or to vote on
any of the matters as to
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<PAGE>
which a Partner would be entitled to vote under this Agreement. Such Assignee
shall only be entitled to receive the share of the profits or other compensation
by way of income, or the return of its contributions, to which its assignor
would otherwise be entitled.
SECTION 10
MANAGEMENT
10.1 General Powers of the General Partner. In addition to the specific
rights and powers herein granted, the General Partner shall possess, enjoy and
may exercise all of the rights and powers of a general partner as more
particularly provided by the California Revised Limited Partnership Act. The
General Partner alone shall have the full and complete charge of all affairs of
the Partnership, and the management and control of the Partnership business
shall rest exclusively with the General Partner subject to the terms and
conditions of this Agreement. All conveyances of title to Partnership property
or interest therein; all loan documents, deeds of trust, agreements, contracts
and any and all other matters and documents affecting or relating to the
business of the Partnership may be executed on the Partnership's behalf by the
General Partner alone and without execution by the Limited Partners. The General
Partner shall use its best efforts to carry out the business of the Partnership
and shall devote such time to the Partnership as is necessary, in its reasonable
discretion, for the efficient operation of the Partnership business. Nothing
contained herein shall prevent the General Partner from devoting time to other
businesses, whether or not similar in nature to the business of the Partnership.
Without limiting the generality of the foregoing, the General Partner shall have
the responsibility for the following:
a. The employment, supervision and coordination on behalf of the
Partnership of pilots, mechanics and contractors for the operation and
maintenance of Partnership Property;
b. Acting in the capacity of charter manager for the use and
scheduling of Partnership Property;
c. Applying for any and all licenses, including without limitation,
business licenses as may be required in connection with the use and operation of
the Partnership Property;
d. Obtaining insurance for the protection of the Partners, the
Partnership and the Property;
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<PAGE>
e. To pay all organization expenses incurred in the creation of the
Partnership, and all operation expenses incurred in the operation of this
Partnership; and
f. Performing all other functions of a general and administrative
nature required under the provisions of this Partnership Agreement.
10.2 Limitation on General Partner's Authority. The General Partner shall
not have authority to:
a. Perform any act in contravention of this Agreement;
b. Perform any act that would make it impossible to carry on the
ordinary business of the Partnership;
c. Admit a Person as a General Partner without the approval of all
Partners;
d. Amend this Agreement without the approval of all Partners; and
e. Employ any agents on behalf of the Partnership at a rate in
excess of the going rate for similar services in the Orange County area.
10.3 Indemnification of General Partner. The Partnership, its receiver or
its trustee, shall indemnify, hold harmless, and pay all judgments and claims
against the General Partner, its employees, agents and assigns arising from any
liability, loss or damage incurred by them by reason of any act performed or
omitted to be performed by them in connection with the Partnership business,
including costs and attorneys' fees and any amounts expended in the settlements
of any claims of liability, loss or damage unless the loss, liability or damage
was caused by the gross negligence, fraud or criminal act of the indemnified
person.
SECTION 11
MISCELLANEOUS
11.1 Headings. The titles and headings of the various sections of this
Agreement are intended solely for convenience of reference and are not intended
to explain, modify or place any construction on any of the provisions of this
Agreement.
11.2 Time of Essence. All times and dates in this Agreement are of the
essence.
11.3 Entire Agreement. This Agreement, which includes the Exhibits,
contains
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all representations and the entire understanding and agreement between the
parties. Correspondence, memoranda or agreements, whether written or oral,
originating before the date of this Agreement, with respect to the Partnership,
are replaced in total by this Agreement unless otherwise expressly stated in
this Agreement.
11.4 Amendments. This Agreement may not be altered or modified except by a
writing signed by the General Partner and a Majority, provided that a Partner's
share of allocation or Distributions may not be reduced by an amendment unless
that Partner approves in writing.
11.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California that would apply if all
Partners were residents of California and the Agreement was made and performed
in California.
11.6 Attorneys' Fees. In any dispute between the Partners, whether or not
resulting in litigation, the prevailing party shall be entitled to recover from
the other party all reasonable costs, including, without limitation, reasonable
attorneys' fees.
11.7 Severability. If any part of this Agreement is determined to be
illegal or unenforceable, all other parts shall remain in effect.
11.8 Notices. Unless otherwise expressly stated in this Agreement, any
notices given under this Agreement shall be in writing and shall be served
either personally or delivered by U.S. mail, postage prepaid first class
registered or certified, return receipt requested. Notices shall be deemed
received at the earlier of actual receipt or five (5) days following deposit in
U.S. mail, postage prepaid. Notices shall be directed to the addresses shown on
the Certificate of Limited Partnership. Any Partner may change its address for
notice purposes by giving notice to all other Partners in accordance with
Section 11.8, provided that the address change shall not be effective until five
(5) days after notice of the change.
11.9 Gender and Number. As used in this Agreement, the masculine,
feminine, or neuter gender, and the singular or plural number, shall include the
others whenever the context so indicates.
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<PAGE>
11.10 Counterpart Copies. This Agreement may be signed in counterpart or
duplicate copies, and any signed counterpart or duplicate copy shall be
equivalent to a signed original for all purposes.
11.11 Cross-References. All cross-references in this Agreement, unless
specifically directed to another agreement or document, refer to provisions
within this Agreement, and shall not be deemed to be references to the overall
transaction or to any other agreements or documents.
11.12 Covenant to Sign Documents. Each Partner shall execute, with
acknowledgment or affidavit, if required, all documents and writings reasonably
necessary or expedient in the creation of this Partnership and the achievement
of its purpose.
11.14 Exhibits. The following Exhibits and any others referred to in this
Agreement as attached are incorporated in this Agreement in their entirety by
reference:
Exhibit "A" Aircraft Description
ARTICLE 12
SPECIAL POWER OF ATTORNEY
12.1 Grant of Power. Each Limited Partner grants the General Partner a
special power of attorney irrevocably appointing the General Partner as the
attorney-in-fact for the Limited Partners, with the power to act in their name
and on their behalf to execute, acknowledge, swear to and file documents,
including without limitation the following:
(a) Certificates of limited partnership, and any amendments to the
certificates, which the General Partner elects to file or are
required to be filed or recorded under the laws of the State of
California or the laws of any other state;
(b) Any documents the Partnership is required to file under the laws
of any state or by any governmental agency;
(c) Any documents that may be required to continue the Partnership,
admit
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<PAGE>
additional or substitute Limited Partners, dissolve and terminate
the Partnership, or reflect changes in the amounts of the Partners'
Invested Capital and Capital Accounts, provided that these documents
are in accord with this Agreement; and
(d) Any other documents the General Partner elects to file on behalf
of the Partnership or the Limited Partners.
12.2 Power Coupled With An Interest. This special power of attorney: (i)
is coupled with an interest, (ii) is irrevocable, (iii) shall survive the death,
dissolution or incapacity of the granting Limited Partner, and (iv) is limited
to the matters set forth in this Article 12. The General Partner may exercise
the special power of attorney on behalf of each Limited Partner by a facsimile
signature of the General Partner acting as an attorney-in-fact for all of the
Limited Partners.
IN WITNESS WHEREOF, the undersigned Partners have executed this Amended
and Restated Agreement as of October 31, 1993.
<TABLE>
<CAPTION>
GENERAL PARTNER: Cash Percentage
Contributed Interest
----------- --------
<S> <C> <C>
Ocean Air Charters $1,250,000 65.45%
By: /s/ Robert E. Gray
---------------------------
Robert E. Gray,
President
LIMITED PARTNERS:
St. John Knits, Inc. $ 689,581 35.55%
By: /s/ Robert C. Davis
---------------------------
Robert C. Davis,
President
</TABLE>
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<PAGE>
EXHIBIT "A"
AIRCRAFT DESCRIPTION
1 Rockwell International Sabreliner Model No. NA-265-65 Aircraft, Serial No.
465-026, FAA Registration No. N65D
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<PAGE>
AMENDMENT TO THE AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
SJA 1 & 2, LTD., A CALIFORNIA LIMITED PARTNERSHIP
The Amended and Restated Agreement of Limited Partnership dated as of
October 31, 1993 by and between OCEAN AIR CHARTERS, a California corporation, as
the General Partner and ST. JOHN KNITS, INC. as the Limited Partner, is hereby
amended to reflect the capital contributions of the partners and their
percentage interests as of December 31, 1993. Accordingly the cash contributed
and percentage interests are amended to read as follows:
<TABLE>
<CAPTION>
General Partner: Cash Contributed: Percentage Interest:
- --------------- ---------------- -------------------
<S> <C> <C>
Ocean Air Charters $ 1,250,000.00 63.45%
Limited Partner:
- ---------------
St. John Knits, Inc. $ 720,083.00 36.55%
</TABLE>
Except as set forth above, the Amended and Restated Agreement of Limited
Partnership of SJA 1 & 2, Ltd., a California limited partnership shall remain in
full force and effect.
General Partner:
OCEAN AIR CHARTERS
By: /s/ Robert E. Gray
--------------------------
Robert E. Gray, President
Limited Partner:
ST. JOHN KNITS, INC.
By: /s/ Robert C. Davis
--------------------------
Robert C. Davis, President
<PAGE>
AMENDMENT TO THE AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
SJA 1 & 2, LTD., A CALIFORNIA LIMITED PARTNERSHIP
The Amended and Restated Agreement of Limited Partnership dated as of
October 31, 1993 by and between OCEAN AIR CHARTERS, a California corporation, as
the General Partner and ST. JOHN KNITS, INC. as the Limited Partner, is hereby
amended to reflect the capital contributions of the partners and their
percentage interests as of March 1, 1994. Accordingly the cash contributed and
percentage interests are amended to read as follows:
<TABLE>
<CAPTION>
General Partner: Cash Contribution: Percentage Interest:
- --------------- ----------------- -------------------
<S> <C> <C>
Ocean Air Charters $ 1,250,000.00 58.14%
Limited Partner:
- ---------------
St. John Knits, Inc. $ 900,000.00 41.86%
</TABLE>
Except as set forth above, the Amended and Restated Agreement of Limited
Partnership of SJA 1 & 2, Ltd., a California limited partnership shall remain in
full force and effect.
General Partner:
OCEAN AIR CHARTERS
By: /s/ Robert E. Gray
--------------------------
Robert E. Gray, President
Limited Partner:
ST. JOHN KNITS, INC.
By: /s/ Robert C. Davis
--------------------------
Robert C. Davis, President
<PAGE>
AMENDMENT TO THE AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
SJA 1 & 2, LTD., A CALIFORNIA LIMITED PARTNERSHIP
The Amended and Restated Agreement of Limited Partnership dated as of
October 31, 1993 by and between OCEAN AIR CHARTERS, a California corporation,
as the General Partner and ST. JOHN KNITS, INC. as the Limited Partner, is
hereby amended to reflect the capital contributions of the partners and their
percentage interests as of October 31, 1994. Accordingly the cash contributed
and percentage interests are amended to read as follows:
<TABLE>
<CAPTION>
General Partner: Cash Contribution: Percentage Interest:
- --------------- ----------------- -------------------
<S> <C> <C>
Ocean Air Charters $ 1,250,000.00 50%
Limited Partner:
- ---------------
St. John Knits, Inc. $ 1,250,000.00 50%
</TABLE>
Except as set forth above, the Amended and Restated Agreement of Limited
Partnership of SJA 1 & 2, Ltd., a California limited partnership shall remain in
full force and effect.
General Partner:
OCEAN AIR CHARTERS
By: /s/ Robert E. Gray
--------------------------
Robert E. Gray, President
Limited Partner:
ST. JOHN KNITS, INC.
By: /s/ Robert C. Davis
--------------------------
Robert C. Davis, President
<PAGE>
Exhibit 10.14
SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Second Amended and Restated Employment Agreement ("Agreement"),
dated as of August 6, 1999, is by and between St. John Knits, Inc., a California
corporation ("Company"), and Robert E. Gray, an individual ("Executive"), and
amends and restates the terms of that certain Amended and Restated Employment
Agreement, dated as of July 13, 1998, between the Company and Executive (the
"1998 Agreement"). In consideration of the mutual covenants and agreements set
forth herein, the parties hereto agree as follows.
ARTICLE I
EMPLOYMENT
The Company hereby employs Executive and Executive accepts employment
with the Company upon the terms and conditions herein set forth.
1.1 EMPLOYMENT. The Company hereby employs Executive, and Executive
agrees to serve as the Company's Chairman of the Board and Chief Executive
Officer during the term of this Agreement, and as such shall assume, subject to
the powers of the Company's Board of Directors, general and active supervision
and management over the business of the Company and over its several officers,
assistants, agents and employees. Executive agrees to devote substantially his
full business time and attention and best efforts to the affairs of the Company
during the term of this Agreement.
1.2 TERM. The Employment of Executive by the Company under the terms
and conditions of this Agreement commenced on June 1, 1995 and will continue for
a period of five (5) years unless renewed or terminated sooner in accordance
with the provisions hereof.
1.3 TERMINATION OF PRIOR AGREEMENT. As of the date of this Agreement,
the 1998 Agreement shall terminate and shall be of no further force or effect.
ARTICLE II
COMPENSATION
2.1 ANNUAL SALARY. During the employment of Executive, the Company
shall pay to Executive a base salary at the annual rate of $1,475,000 (the "Base
Salary"). The Base Salary shall be payable in substantially equal monthly
installments.
2.2 NO DEFERRED COMPENSATION. Under the 1998 Agreement, the Company had
deposited on the first day of each month $41,667 of deferred compensation
payable to the Executive into an irrevocable "rabbi" trust (the "Trust"). On or
about August 6, 1999, the Trust's assets, including the Company's contributions
and any earnings thereon, were distributed to the Employee. From and after such
date, no portion of the annual compensation payable to the Employee hereunder
will be deferred.
2.3 REIMBURSEMENT OF EXPENSES. Executive shall be entitled to receive
prompt reimbursement of all reasonable expenses incurred by Executive in
performing services hereunder, including all expenses of travel, entertainment
and living expenses while away form
<PAGE>
home on business at the request of, or in the service of, the Company, provided
that such expenses are incurred and accounted for in accordance with the
policies and procedures established by the Company.
2.4 AUTOMOBILE ALLOWANCE. The Company shall pay directly, or reimburse
Executive for, all reasonable costs and expenses incurred by Executive in
connection with the operation and maintenance of an automobile (i.e. car
insurance, car license and general upkeep).
2.5 BENEFITS. Executive shall be entitled to participate in and be
covered by all health, insurance, pension and other employee plans and benefits
currently established for the employees of the Company (collectively referred to
as the "Company Benefit Plans") on at least the same terms as other employees of
the Company, subject to meeting applicable eligibility requirements.
2.6 VACATIONS AND HOLIDAYS. During Executive's employment with the
Company, Executive shall be entitled to an annual vacation leave of six (6)
weeks at full pay, or such greater vacation benefits as may be provided for by
the Company's vacation policies applicable to senior executives. Executive shall
be entitled to such holidays as are established by the Company for all
employees.
2.7 SECRETARIAL SERVICES AND OFFICE. During the period from June 1,
1995 through May 31, 2002, the Company shall provide Executive with his existing
office space at 17422 Derian Avenue, Irvine, California, or, if the lease for
such office space terminates and is not renewed, with equivalent office space
acceptable to Executive. In addition, during the period from June 1, 1995
through May 31, 2002, the Company shall also provide Executive with the
full-time executive secretarial services of Marianne Wunderlich, or such other
individual as Executive shall approve in his sole discretion.
2.8 AIRCRAFT. During Executive's employment with the Company, Executive
shall be entitled to use the Company's leased aircraft as he shall reasonably
determine is necessary in fulfilling his duties hereunder. In addition,
Executive shall be entitled to charter the aircraft for his personal use, but
shall reimburse the Company for the actual cost of such charter.
ARTICLE III
CONFIDENTIALITY AND NONDISCLOSURE
3.1 CONFIDENTIALITY. Executive will not during Executive's employment
by the Company or thereafter at any time disclose, directly or indirectly, to
any person or entity or use for Executive's own benefit any trade secrets or
confidential information relating to the Company's business operations,
marketing data, business plans, strategies, employees, negotiations and
contracts with other companies, or any other subject matter pertaining to the
business of the Company or any of its clients, customers, consultants, or
licensees, known, learned, or acquired by Executive during the period of
Executive's employment by the Company (collectively "Confidential Information"),
except as may be necessary in the ordinary course of performing Executive's
particular duties as an employee of the Company.
3.2 RETURN OF CONFIDENTIAL MATERIAL. Executive shall promptly deliver
to the Company on termination of Executive's employment with the Company,
whether or not for
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Cause and whatever the reason, or at any time the Company may so request, all
memoranda, notes, records, reports, manuals, drawings, blueprints, Confidential
Information and any other documents of a confidential nature belonging to the
Company, including all copies of such materials which Executive may then possess
or have under Executive's control. Upon termination of Executive's employment by
the Company, Executive shall not take any document, data, or other material of
any nature containing or pertaining to the proprietary information of the
Company.
3.3 Prohibition on Solicitation of Customers. During the term of
Executive's employment with the Company and for a period of one (1) year
thereafter Executive shall not, directly or indirectly, either for Executive or
for any other person or entity, solicit any person or entity to terminate such
person's or entity's contractual and/or business relationship with the Company,
nor shall Executive interfere with or disrupt or attempt to interfere with or
disrupt any such relationship. None of the foregoing shall be deemed a waiver of
any and all rights and remedies the Company may have under applicable law.
3.4 PROHIBITION ON SOLICITATION OF EMPLOYEES, AGENTS OR INDEPENDENT
CONTRACTORS AFTER TERMINATION. During the term of Executive's employment with
the Company and for a period of one (1) year following the termination of
Executive's employment with the Company, Executive will not solicit any of the
employees, agents, or independent contractors of the Company to leave the employ
of the Company for a competitive company or business. However, Executive may
solicit any employee, agent or independent contractor who voluntarily terminates
his or her employment with the Company after a period of 120 days have elapsed
since the termination date of such employee, agent or independent contractor.
None of the foregoing shall be deemed a waiver of any and all rights and
remedies the Company may have under applicable law.
3.5 RIGHT TO INJUNCTIVE AND EQUITABLE RELIEF. Executive's obligations
not to disclose or use Confidential Information and to refrain from the
solicitations described in this Article III are of a special and unique
character which gives them a peculiar value. The Company cannot be reasonably or
adequately compensated for damages in an action at law in the event Executive
breaches such obligations. Therefore, Executive expressly agrees that the
Company shall be entitled to injunctive and other equitable relief without bond
or other security in the event of such breach in addition to any other rights or
remedies which the Company may possess or be entitled to pursue. Furthermore,
the obligations of Executive and the rights and remedies of the Company under
this Article III are cumulative and in addition to, and not in lieu of, any
obligations, rights, or remedies created by applicable law relating to
misappropriation of theft of trade secrets or Confidential Information.
3.6 SURVIVAL OF OBLIGATIONS. Executive agrees that the terms of this
Article III shall survive the term of this Agreement and the termination of
Executive's employment by the Company.
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<PAGE>
ARTICLE IV
TERMINATION
4.1 For purposes of this Article IV, the following definitions shall
apply to the terms set forth below:
(a) CAUSE. "Cause" shall include the following:
(i) personal dishonesty or willful misconduct by Executive;
(ii) a breach of Executive's fiduciary duties to the Company
which involves personal profit or benefit to Executive;
(iii) willful violation and conviction of any law, rule or
regulation (other than traffic violations or similar offenses) or of
any final cease and desist order issued by any financial institution
regulatory authority against the Company; or
(iv) a material breach of this Agreement by Executive.
(b) GOOD REASON. "Good Reason" shall mean voluntary termination as a
result of:
(i) the assignment to Executive of duties inconsistent with
the position and status of Executive as set forth in this Agreement
without Executive's prior written consent;
(ii) a substantial alteration in the nature, status or
prestige of Executive's responsibilities or a change in Executive's
title or reporting level from that set forth in this Agreement;
(iii) the relocation of the Company's executive offices or
principal business location to a point more than fifty (50) miles from
the location of such offices or businesses as of the date of this
Agreement;
(iv) a reduction by the Company of Executive's Base Salary;
(v) a failure by the Company to obtain from any successor,
before the succession takes place, an agreement to assume and perform
this Agreement; or
(vi) an occurrence of a Change of Control Event. A "Change of
Control Event" shall mean and shall be deemed to have taken place if
any person or entity or group of affiliated persons or entities,
including a group which is deemed a "person" by Section 13(d)(3) of the
Securities Exchange Act of 1934, after the effective date of this
Agreement, acquires in one or more transactions ownership of 25% or
more of the outstanding shares of equity entitled to vote in the
election of directors of the Company without first receiving the
approval of the Company's then existing Board of Directors. As used
herein, "Ownership" means beneficial or record ownership, directly or
indirectly, other than (a) by a person owning such shares merely of
record (such as a
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<PAGE>
member of a securities exchange, a nominee, or a securities depository
system, (b) by a person as a bona fide pledgee of shares prior to a
default and determination to exercise powers as an owner of the shares,
or (c) by a person who is not required to file statements on Schedule
13D by virtue of Rule 13d-1(b) of the Securities and Exchange
Commission under the Securities Exchange Act of 1934. Without
limitation, the right to acquire beneficial or record ownership shall
not of itself constitute ownership of shares.
(c) DISABILITY. "Disability" shall mean a physical or mental incapacity
as a result of which Executive becomes unable to continue the proper performance
of his duties hereunder (reasonable absences because of sickness for up to two
(2) consecutive months excepted; provided, however, that any new period of
incapacity or absences shall be deemed to be part of a prior period of
incapacity or absences if the prior period terminated within ninety (90) days of
the beginning of the new period of incapacity or absence and the incapacity or
absence is determined by the Company's Board of Directors, in good faith, to be
related to the prior incapacity or absence.) A determination of Disability shall
be subject to the certification of a qualified medical doctor agreed to by the
Company and Executive or in the event of Executive's incapacity to designate a
doctor, Executive's legal representative. In the absence of agreement between
the Company and Executive, each party shall nominate a qualified medical doctor
and the two (2) doctors so nominated shall select a third doctor, who shall make
the determination as to Disability.
4.2 TERMINATION BY COMPANY. The Company may terminate Executive's
employment hereunder immediately for Cause. Subject to the other provisions
contained in this Agreement, the Company may terminate this Agreement for any
reason other than Cause upon thirty (30) days' written notice to Executive. The
effective date of termination ("Effective Date") shall be considered to be
thirty (30) days subsequent to written notice of termination; however, the
Company may elect to have Executive leave the Company immediately.
4.3 TERMINATION BY EXECUTIVE. Executive may terminate his employment
hereunder upon thirty (30) days' written notice to the Company. The effective
date of termination ("Effective Date") shall be considered to be thirty (30)
days subsequent to written notice of termination; however, the Company may elect
to have Executive leave the Company immediately.
4.4 DEATH OR DISABILITY OF EXECUTIVE. Executive's employment hereunder
shall terminate immediately upon the death or Disability of Executive.
4.5 SEVERANCE BENEFITS RECEIVED UPON TERMINATION.
(a) If Executive's employment is terminated by the Company for Cause,
or Executive terminates this Agreement pursuant to Section 4.3 other than for
Good Reason, then the Company shall pay Executive his Base Salary through the
Effective Date of such termination plus credit for any vacation earned but not
taken. The Company shall thereafter have no further obligations to Executive
under this Agreement.
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<PAGE>
(b) If Executive's employment is terminated by the Company without
Cause, or Executive terminates this Agreement for Good Reason, then the Company
shall provide Executive:
(i) a lump sum payment within thirty (30) days of the
Effective Date equal to Executive's then Base Salary through May 31,
2000; and
(ii) health insurance coverage as then in effect for
Executive, his spouse and dependent children for a period of eighteen
(18) months, subject to any employee contribution provisions as defined
in the Company Benefit Plans. Subsequent health insurance benefits will
be in accordance with COBRA.
(c) If Executive's employment is terminated by the Company as a result
of Disability, then the Company shall provide Executive:
(i) salary continuation in an amount equal to Executive's then
Base Salary for a period of eighteen (18) months, said sum to be paid
monthly in equal installments at the times salary payments are usually
made; and
(ii) health insurance coverage as then in effect for
Executive, his spouse and dependent children for a period of one month
for each full year Executive has been employed by the Company up to a
maximum of eighteen (18) months, subject to any employee contribution
provisions as defined in the Company Benefit Plans. Subsequent health
insurance benefits will be in accordance with COBRA.
(d) If Executive's employment is terminated by the Company as a result
of death, then the Company shall provide Executive's spouse or estate health
insurance coverage as then in effect for Executive, his spouse and dependent
children for a period of six (6) months, subject to any employee contribution
provisions as defined in the Company Benefit Plans. Health insurance benefits
subsequent to the salary continuation period will be in accordance with COBRA.
(e) In the event Executive's employment is terminated for Good Reason
pursuant to either Sections 4.1(b)(v) or 4.1(b)(vi), then in addition to those
payments required by Section 4.5(b) above, the Company shall also provide to
Executive a lump sum payment within thirty (30) days of the Effective Date equal
to twice Executive's Base Salary, or $1,950,000.
(f) This Section 4.5(f) is intended to put Executive in the same
economic position as Executive would have had no Section 4999 Taxes and Expenses
(as defined below) been imposed upon or incurred as a result of any payment,
distribution, benefit or transfer (each a "Payment" and collectively the
"Payments") made pursuant to the terms of this Agreement or otherwise. In the
event it is determined that any Payments to or for the benefit of Executive is
or was subject to the excise tax imposed by Section 4999 of the Internal Revenue
Code of 1986, as amended, any successor provision, or any comparable provision
of state or local income tax law, or any interest, penalties, additions to tax,
or costs are or were incurred by Executive with respect to any such excise taxes
(such taxes, penalties, interest, additions to tax and costs (including
professional fees) are hereinafter referred to as "Section 4999 Taxes and
Expenses"), then within ten (10) days after such determination, the Company
shall pay to Executive an additional cash
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<PAGE>
payment, which after payment of or withholding for any taxes (including, without
limitation, any excise and income taxes), interest, penalties, additions to tax
or costs imposed or incurred with respect to such additional cash payment, is
equal to the Section 4999 Taxes and Expenses. The determination that a Payment
is subject to Section 4999 Taxes and Expenses shall be made in writing by a
certified public accounting firm selected by Executive.
ARTICLE V
GENERAL PROVISIONS
5.1 NOTICE. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to the Company: St. John Knits, Inc.
17422 Derian Avenue
Irvine, CA 92614
Attn: President
With a copy to: David A. Krinsky, Esq.
O'Melveny & Myers LLP
610 Newport Center Drive
Suite 1700
Newport Beach, CA 92660
If to Executive: Robert E. Gray
c/o St. John Knits, Inc.
17422 Derian Avenue
Irvine, CA 92614
With a copy to: Paul A. Rowe, Esq.
Hewitt & McGuire
19900 MacArthur Blvd.
Suite 1050
Irvine, CA 92612
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
5.2 NO WAIVERS. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by Executive and the Company. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
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<PAGE>
5.3 BENEFICIAL INTERESTS. This Agreement shall inure to the benefit of
and be enforceable by Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive should die while any amounts are still payable to him hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to Executive's devisee, legatee, or other designee
or, if there be no such designee, to Executive's estate.
5.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
5.5 SEVERABILITY OR PARTIAL INVALIDITY. The invalidity or
unenforceability of any provisions of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
5.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
5.7 LEGAL FEES AND EXPENSES. Should any party institute any action or
proceeding to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder, the prevailing party in any such action
or proceeding shall be entitled to receive from the other party all costs and
expenses, including reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.
5.8 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties and supersedes all prior written or oral and all contemporaneous
oral agreements, understandings, and negotiations between the parties with
respect to the subject matter hereof. This Agreement is intended by the parties
as the final expression of their agreement with respect to such terms as are
included in this Agreement and may not be contradicted by evidence of any prior
or contemporaneous agreement. The parties further intend that this Agreement
constitutes the complete and exclusive statement of its terms and that no
extrinsic evidence may be introduced in any judicial proceeding involving this
Agreement.
5.9 ASSIGNMENT. This Agreement and the rights, duties, and obligations
hereunder may not be assigned or delegated by any party without the prior
written consent of the other party and any attempted assignment or delegation
without such prior written consent shall be void and be of no effect.
Notwithstanding the foregoing provisions of this Section 5.9, the Company may
assign or delegate its rights, duties, and obligations hereunder to any
Affiliate or to any person or entity which succeeds to all or substantially all
of the business of the Company through merger, consolidation, reorganization, or
other business combination or by acquisition of all or substantially all of the
assets of the Company.
5.10 ARBITRATION. Any controversy, dispute, claim or other matter in
question arising out of or relating to this Agreement shall be settled, at the
request of either party, by binding arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association ("AAA"),
and judgment upon the award rendered by the arbitrators may
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be entered in any court having jurisdiction thereof, subject to the following
terms, conditions and exceptions:
(a) Notice of the demand for arbitration shall be filed in writing with
the other party and with the AAA. There shall be a panel of three (3)
arbitrators whose selection shall be made in accordance with the procedures then
existing for the selection of such arbitrators by the AAA.
(b) Reasonable discovery shall be allowed in arbitration.
(c) Except as otherwise provided in Section 5.7 hereof, the costs and
fees of the arbitration shall be allocated by the arbitrators.
[Signature page follows]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
"Company"
St. John Knits, Inc.,
a California corporation
By:
-------------------------------
Roger Ruppert
Chief Financial Officer
"Executive"
-----------------------------------
Bob Gray
S-1
<PAGE>
Exhibit 10.21
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this "Agreement") is made as
of the ____ day of August 1999, among St. John Knits, a California corporation
("St. John"), St. John Knits International, Incorporated, a Delaware corporation
("SJKI") and ______________________ ("Indemnitee").
BACKGROUND FACTS
The Indemnitee currently is serving as a director and/or
officer of St. John and/or of SJKI, and the Company (which term as used herein
shall refer to, jointly and severally, St. John and SJKI) wishes the Indemnitee
to continue in such capacity. In order to induce the Indemnitee to continue to
serve as a director and/or officer for St. John and SJKI and in consideration of
Indemnitee's continued service, St. John and SJKI and the Indemnitee hereby
agree as follows:
SECTION 1: DEFINITIONS
As used in this Agreement:
1.1 PROCEEDING. The term "Proceeding" includes any threatened,
pending or completed action, suit or proceeding, any appeal therefrom and any
inquiry or investigation, whether conducted by the Company or otherwise, that
the Indemnitee in good faith believes might lead to the institution of any such
action, suit or proceeding, whether brought by or in the right of the Company to
procure a judgment in its favor or brought by any third party or otherwise and
whether civil, criminal, administrative or investigative, in which the
Indemnitee is or may be or may have been involved as a party or otherwise by
reason of any action taken by Indemnitee or of any inaction on Indemnitee's part
while acting as a director or officer of the any, or while acting at the request
of the Company as a director, officer, employee, partner, trustee or agent of
any other corporation, partnership, joint venture, trust or other enterprise (as
defined in Section 1.3, below), regardless of whether Indemnitee is acting or
serving in any such capacity at the time any Expenses (as defined in Section
1.2, below) are incurred for which indemnification may be provided under this
Agreement.
1.2 EXPENSES. The term "Expenses" includes expenses actually
and reasonably incurred by or on behalf of the Indemnitee in connection with any
Proceeding, including amounts paid in settlement by or on behalf of the
Indemnitee, attorneys' fees and disbursements, and any expenses actually and
reasonably incurred by or on behalf of the Indemnitee in connection with
establishing a right to indemnification under this Agreement, but shall not
include (i) any judgments and fines and similar penalties against the Indemnitee
or (ii) any expenses, amounts paid in settlement, attorneys' fees or
disbursements, judgments, fines and similar penalties or any other costs
whatsoever incurred in connection with any Proceeding insofar as such Proceeding
is based on a violation by the Indemnitee of Section 16 of the Securities
Exchange Act of 1934, as amended.
<PAGE>
1.3 OTHER TERMS. The term "other enterprise" includes employee
benefit plans; the term "fines" includes any excise tax assessed with respect to
any employee benefit plan; the term "serving at the request of the Company"
includes any service as a director, officer, employee or agent of the Company or
any of its subsidiaries that imposes duties on, or involves services by such
director, officer, employee or agent with respect to an employee benefit plan,
its participants or beneficiaries; and a person who acted in good faith and in a
manner such person reasonably believed to be in the interests of the
participants and beneficiaries of any employee benefit plan shall be deemed to
have acted in a manner "reasonably believed to be in the best interests" of the
Company or any of its subsidiaries as such term is used in this Agreement.
SECTION 2: GENERAL RIGHT TO INDEMNIFICATION
The Company shall indemnify the Indemnitee against Expenses,
judgments and fines and other amounts actually and reasonably incurred in
connection with any Proceedings to the full extent permitted by the laws of the
State of Delaware or California, as the case may be, as from time to time in
effect. Without limiting the generality of the foregoing, the Company shall also
indemnify the Indemnitee in accordance with the provisions set forth below.
SECTION 3: PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE COMPANY
If the Indemnitee was or is a party or is threatened to be
made a party to any Proceeding (other than an action by or in the right of the
Company to procure a judgment in its favor), the Company shall indemnify
Indemnitee against all Expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with such Proceeding if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the best interests of the Company and, in the case of a criminal
proceeding, had no reasonable cause to believe Indemnitee's conduct was
unlawful. The termination of any Proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the Indemnitee did not act in good faith and
in a manner the Indemnitee reasonably believed to be in the best interests of
the Company or that the Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
SECTION 4: PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY
If the Indemnitee was or is a party or is threatened to be
made a party to any Proceeding by or in the right of the Company to procure a
judgment in its favor, the Company shall indemnify Indemnitee against all
Expenses relating to the Proceeding if Indemnitee acted in good faith in a
manner Indemnitee reasonably believed to be in the best interests of the Company
and its shareholders; however, no indemnification shall be made with respect to
any claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Company in the performance of Indemnitee's duty to the Company and
its shareholders unless the court in which such Proceeding is or was pending
shall determine upon application that in view of all the
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circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnity for Expenses, and then only to the extent that the court shall
determine. In addition, with respect to the directors and officers of St. John,
no indemnification shall be made (i) with respect to amounts paid in settling or
otherwise disposing of a pending action without court approval and (ii) with
respect to Expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval, in each case, as required by
California law.
SECTION 5: INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY
Notwithstanding the other provisions of this Agreement, to the
extent that Indemnitee has been successful on the merits in defense of any
Proceeding or of any claim, issue or matter forming part of any Proceeding,
Indemnitee shall be indemnified against Expenses actually and reasonably
incurred by Indemnitee in connection therewith.
SECTION 6: ADVERSE DETERMINATION
Any indemnification under Sections 3 and 4 hereof shall be
paid by the Company in accordance with Section 8 unless (i) a determination is
made that indemnification is not proper because the Indemnitee has not met the
applicable standard of conduct set forth in Sections 3 and 4, such determination
being made no later than the end of the sixty-day period set forth in Section
8.2 or (ii) with respect to indemnification under Section 4, the Indemnitee
shall have been adjudged to be liable to the Company, and the court in which
such Proceeding is or was pending has determined upon application that, in view
of all the circumstances of the case, the Indemnitee is not entitled to
indemnity. For purposes of a determination described in subsection (i) of this
Section 6, (x) with respect to the directors and officers of St. John, such
determination may be made by any of the following: (a) a majority vote of a
quorum consisting of directors who are not parties to such Proceeding, (b) if
such a quorum of directors is not obtainable, by independent legal counsel in a
written opinion, (c) approval of the shareholders with the shares owned by the
Indemnitee not being entitled to vote thereon or (d) the court in which such
Proceeding is or was pending, if such is the case, upon application made by the
Company or the Indemnitee or the attorney or other person rendering services in
connection with the defense, whether or not such application by the Indemnitee,
attorney or other person is opposed by the company and (y) with respect to the
directors and officers of SJKI, such a determination shall be made (a) by a
majority vote of the directors who are not parties to such Proceeding, even
though less than a quorum, (b) by a committee of such directors designated by
majority vote of such directors, even though less than a quorum, (c) if there
are no such directors, or if such directors so direct, by independent legal
counsel in a written opinion or (d) by the stockholders.
SECTION 7: RELIANCE ON BOOKS, RECORDS AND OTHER INFORMATION
The Indemnitee shall be deemed to have acted in good faith and
in a manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, or, with respect to any criminal action or proceeding,
to have had no reasonable cause to believe Indemnitee's conduct was unlawful, if
Indemnitee's action is or was based on the records or books of account of the
Company or of any other enterprise with respect to which the Indemnitee may be
affected by a Proceeding, including financial statements, or on information
supplied to
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<PAGE>
Indemnitee by officers of the Company or of any such other enterprise in the
course of their duties, or on the advice of legal counsel for the Company or for
any such other enterprise or on information or records given or reports made to
the Company or to any such other enterprise by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by
the Company or by such other enterprise. The provisions of this Section shall
not be deemed exclusive or to limit in any way the other circumstances in which
the Indemnitee may be deemed to have met any applicable standard of conduct.
SECTION 8: PROCEDURE FOR INDEMNIFICATION
8.1 ADVANCES. Expenses to which an Indemnitee is entitled to
indemnity under Sections 2, 3 and 4 shall be paid by Company in advance of any
final disposition of the Proceeding upon receipt by the Company of written
documentation of the Indemnitee's obligation to pay such Expenses. Indemnitee
hereby undertakes to repay all amounts so advanced if it shall be determined
ultimately that the Indemnitee is not entitled to be indemnified pursuant to
this Agreement.
8.2 PAYMENT WITHIN 60 DAYS. After the final disposition of any
Proceeding, the Indemnitee may send to the Company a written request for
indemnification, accompanied by written documentation of the Indemnitee's
obligation to pay the Expenses, judgments and fines and similar penalties for
which indemnification is requested. No later than 60 days following receipt by
the Company of such request, the Company shall pay the Expenses, judgments and
fines and similar penalties or reimburse the Indemnitee therefor (as the case
may be) unless, during such 60-day period (i) the Company determines that the
indemnification request is not permitted by the laws of the State of Delaware or
California in effect as the case may be, or (ii) with respect to indemnification
under Sections 3 and 4, the adverse determination described in Section 6 is
made.
8.3 ACTIONS TO ENFORCE THIS AGREEMENT. In any action by the
Indemnitee to enforce this Agreement, the Company shall bear the burden of
proving that any applicable standard of conduct has not been met by the
Indemnitee. Neither the failure of the Company to have made the determination
required pursuant to Section 6, nor any determination made pursuant to Section 6
create a presumption that the Indemnitee has or has not met any applicable
standard of conduct.
SECTION 9: OTHER RIGHTS
The rights of the Indemnitee under this Agreement shall not be
deemed exclusive of any other rights to which Indemnitee may be entitled under
any law (common or statutory), provision of the Company's Articles of
Incorporation or Bylaws (or comparable organizational documents), vote of
shareholders or Board of Directors of the Company or otherwise, both as to
action in Indemnitee's official capacity and as to act in another capacity while
holding such office or while employed by or acting as agent for the Company in
any capacity.
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<PAGE>
SECTION 10: NOTICE TO THE COMPANY; DEFENSE OF PROCEEDING
10.1 NOTICE. The Indemnitee shall, as a condition precedent to
Indemnitee's right to indemnification hereunder, provide prompt written notice
to the Company of any Proceeding in connection with which Indemnitee may assert
a right to be indemnified under this Agreement. Such notice shall be deemed to
have been provided if mailed by domestic certified mail, postage prepaid, to St.
John Knits, Inc., 17422 Derian Avenue, Irvine, California 92713 (or to such
other address as the Company may specify in writing to the Indemnitee).
Indemnitee shall give the Company such information and cooperation as it may
reasonably require.
10.2 DEFENSE OF PROCEEDING. With respect to any Proceeding:
(i) the Company shall be entitled to participate in the
Proceeding at its own expense; and
(ii) except as otherwise provided below, the Company
shall be entitled to assume the defense of such Proceeding to the
extent that it may wish. After notice from the Company to the
Indemnitee of such assumption, the Company shall not be liable to
the Indemnitee under this Agreement for any Expenses subsequently
incurred by Indemnitee in connection with such defense. The
Indemnitee shall have the right to employ separate counsel in the
Proceeding, but the fees and expenses of such counsel incurred after
such assumption shall be at the expense of the Indemnitee, unless
(a) such employment has been authorized in writing by the Company,
or (b) the Indemnitee shall have reasonably concluded that there may
be a conflict of interest between the Company and the Indemnitee in
the conduct of the defense of the Proceeding.
The Company shall not be required to indemnify the Indemnitee under this
Agreement for any amounts paid in settlement of any Proceeding effected without
its prior written consent. If the Indemnitee does not promptly offer to settle a
Proceeding on a basis that the Board of Directors has approved, the Company
shall not be liable to pay any Expenses incurred thereafter in connection with
that Proceeding.
SECTION 11: EXCEPTIONS
Any other provision herein to the contrary notwithstanding:
11.1 CLAIMS INITIATED BY INDEMNITEE. The Company shall not be
obligated to indemnify or advance Expenses to Indemnitee with respect to
Proceedings initiated or brought voluntarily by Indemnitee and not by way of
defense, except with respect to Proceedings brought to establish or enforce a
right to indemnification under this Agreement or any other statute or law
-5-
<PAGE>
or otherwise as required under Section 317 of the California Corporation Law or
Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of Expenses may be provided by the Company in specific cases if the
Board of Directors has approved the initiation or bringing of such Proceeding.
11.2 LACK OF GOOD FAITH. The Company shall not be obligated to
indemnify Indemnitee for any Expenses incurred by the Indemnitee with respect to
any Proceeding instituted by Indemnitee to enforce or interpret this Agreement
if a court of competent jurisdiction determines that each of the material
assertions made by the Indemnitee in such Proceeding was not made in good faith
or was frivolous.
SECTION 12 MISCELLANEOUS
12.1 AMENDMENTS. This Agreement may be amended only by means
of a writing signed by both the Company and the Indemnitee.
12.2 RETROACTIVE EFFECT. This Agreement covers all Proceedings
that either now have been or later may be commenced, including any Proceeding
relating to any past act or omission of the Indemnitee that has not yet resulted
in commencement or threat of a Proceeding.
12.3 SAVINGS CLAUSE. Each provision of this Agreement is a
separate and distinct agreement, independent of all other provisions. If this
Agreement or any such provision shall be deemed invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions shall not be affected or impaired in any way, and the
Company shall nevertheless indemnify the Indemnitee as to Expenses, judgments
and fines and similar penalties with respect to any Proceeding to the full
extent permitted by any applicable portion of this Agreement that shall not have
been invalidated and to the full extent permitted by applicable law. In the
event of any whole or partial invalidation, illegality or unenforceability of
this Agreement, there shall be added automatically to this Agreement a provision
or provisions as similar to such invalid, illegal or unenforceable provision,
both in terms and effect, as may be possible and be valid, legal and
enforceable.
12.4 MUTUAL ACKNOWLEDGEMENT. Both the Company and Indemnitee
acknowledge that in certain instances, federal law or applicable public policy
may prohibit the Company from indemnifying Indemnitee under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake to the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
12.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
on, and inure to the benefit of, the successors and assigns of the Company,
whether by operation of law or otherwise, and the estate, heirs and personal
representatives of the Indemnitee.
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<PAGE>
12.6 GOVERNING LAW. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the laws of this
State of California, except as to matters involving the obligation of SJKI or
any other corporation incorporated in Delaware, where it shall be governed in
all respects by the laws of the State of Delaware.
12.7 MERGER CLAUSE. Except for St. John's Articles of
Incorporation and Bylaws and SJKI's Certificate of Incorporation and Bylaws,
this Agreement constitutes the entire understanding of the parties and
supersedes all prior understandings and agreements, written or oral, between the
parties with respect to the subject matter of this Agreement.
12.8 NO DUPLICATION OF PAYMENTS. The Company shall not be
liable under this Agreement to make any payment in connection with any claim
made against the Indemnitee to the extent that the Indemitee has otherwise
received payment (under any insurance policy, Bylaw, or otherwise) of the
amounts otherwise indemnifiable hereunder.
12.9 SUBROGATION. In the event of payment under this
Agreement, the Company shall be subrogated to the extent of such payment to all
of the rights of recovery of the Indemnitee, who shall execute all papers
required and shall do everything that may be necessary or appropriate to enable
the Company effectively to bring suit to enforce such rights.
12.10 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute but one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
ST JOHN KNITS, INC., a California
corporation
By:
---------------------------------
ST JOHN KNITS INTERNATIONAL,
INCORPORATED, a Delaware corporation
By:
---------------------------------
INDEMNITEE
By:
---------------------------------
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<PAGE>
Exhibit 10.33
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
1999 STOCK OPTION PLAN
ST. JOHN KNITS INTERNATIONAL, INCORPORATED, a Delaware corporation
(together with its successors, the "Company"), hereby adopts this Stock Option
Plan for Employees (as defined below) of the Company and its affiliates. The
purposes of this Plan are as follows:
To further the growth, development and financial success of the
Company by providing additional incentives to certain of its Employees, by
assisting them to become owners of capital stock of the Company and thus to
benefit directly from its growth, development and financial success.
To enable the Company to obtain and retain the services of Employees
considered essential to the long range success of the Company by providing and
offering them an opportunity to become owners of capital stock of the Company
under Options.
ARTICLE I
DEFINITIONS
SECTION 1.1 - GENERAL. Whenever the following terms are used in this
Plan they shall have the meaning specified below unless the context clearly
indicates to the contrary.
SECTION 1.2 - BOARD. "Board" shall mean the Board of Directors of
the Company.
SECTION 1.3 - CODE. "Code" shall mean the Internal Revenue Code of
1986, as amended.
SECTION 1.4 - COMMITTEE. "Committee" shall mean the Compensation
Committee of the Board determined as provided in Section 6.1.
SECTION 1.5 - COMMON STOCK. "Common Stock" shall mean the common
stock, par value $0.01 per share, of the Company.
SECTION 1.6 - COMMON STOCK EQUIVALENTS. "Common Stock Equivalents"
shall mean any stock, warrants, rights, calls, options or other securities
exchangeable or exercisable for or convertible into Common Stock.
SECTION 1.7 - EMPLOYEE. "Employee" shall mean any employee (as
defined in accordance with the regulations and revenue rulings then applicable
under Section 3401(c) of the
<PAGE>
2
Code) of the Company or an affiliate, whether such employee is so employed at
the time this Plan is adopted or becomes so employed subsequent to the adoption
of this Plan.
SECTION 1.8 - GRANT DATE. "Grant Date" shall mean the date on which
an Option is granted under the Plan.
SECTION 1.9 - OPTION. "Option" shall mean an option granted under
the Plan to purchase Common Stock. Options include only options which are not
intended to be "incentive stock options" under Section 422 of the Code.
SECTION 1.10 - OPTION PRICE. "Option Price" shall have the meaning
given in Section 4.2.
SECTION 1.11 - OPTIONEE. "Optionee" shall mean an Employee to whom
an Option is granted under the Plan.
SECTION 1.12 - PERMITTED TRANSFEREE. "Permitted Transferee" shall
have the meaning set forth in the Option Agreement.
SECTION 1.13 - PLAN. "Plan" shall mean the St. John Knits
International, Incorporated 1999 Stock Option Plan.
SECTION 1.14 - PRONOUNS. The masculine pronoun shall include the
feminine and neuter and the singular shall include the plural, where the context
so indicates.
SECTION 1.15 - SECRETARY. "Secretary" shall mean the Secretary of
the Company.
SECTION 1.16 - STOCK OPTION AGREEMENT. "Stock Option Agreement"
shall mean any agreement between the Optionee and the Company providing for the
granting of an Option.
SECTION 1.17 - TERMINATION OF EMPLOYMENT. "Termination of
Employment" shall mean the time when the Optionee's employment with the Company
is terminated for any reason whatsoever. The Board, in its absolute discretion,
shall determine the effect of all matters and questions relating to Termination
of Employment, including, but not by way of limitation, all questions of whether
particular leaves of absence constitute Terminations of Employment.
<PAGE>
3
ARTICLE II
SHARES SUBJECT TO PLAN
SECTION 2.1 - SHARES SUBJECT TO PLAN. The shares of capital stock
subject to Options shall be shares of Common Stock of the Company. The aggregate
number of shares of Common Stock which may be issued upon exercise of Options
under the Plan shall not exceed 727,360.
SECTION 2.2 - UNEXERCISED OPTIONS. If any Option expires or is
canceled without having been fully exercised the number of shares subject to
such Option but as to which such Option was not exercised prior to its
expiration or cancellation may again be optioned hereunder, subject to the
limitations of Section 2.1.
SECTION 2.3 - CHANGES IN COMMON STOCK. If the outstanding shares of
Common Stock are hereafter changed into or exchanged for a different number or
kind of shares of capital stock or other securities of the Company, or of
another corporation, by reason of a reorganization, merger, consolidation,
recapitalization, reclassification, stock split-up, stock dividend, combination
of shares or otherwise, appropriate adjustments shall be made by the Committee
in the number and kind of shares for the purchase of which Options may be
granted, including adjustment of the limitations of Section 2.1 on the maximum
number and kind of shares which may be issued upon exercise of Options.
ARTICLE III
GRANTING OF OPTIONS
SECTION 3.1 - ELIGIBILITY. Any Employee shall be eligible to be
granted Options.
SECTION 3.2 - GRANTING OF OPTIONS. The Committee shall from time to
time, in its absolute discretion:
(i) determine which Employees shall be granted Options under the
Plan; and
(ii) determine the number of shares to be subject to such Options
granted to such Employees; and
(iii) determine the terms and conditions of such Options, consistent
with the Plan; and
(iv) establish such conditions as to the manner of exercise of such
Options as it may deem necessary, including but not limited to requiring
Optionees to
<PAGE>
4
enter into agreements regarding transferability and other restrictions
with respect to shares issuable upon exercise of such Options.
ARTICLE IV
TERMS OF OPTIONS
SECTION 4.1 - OPTION AGREEMENT. Each Option shall be evidenced by a
written Stock Option Agreement, which shall be executed by the Optionee and an
authorized officer of the Company, and which shall contain such terms and
conditions as the Committee shall determine, consistent with the Plan.
SECTION 4.2 - OPTION PRICE. The price per share of the Common Stock
subject to each Option shall be set by the Committee on the Grant Date and may
be at, above or below the fair market value (but not below par value) of a share
of Common Stock.
SECTION 4.3 - COMMENCEMENT OF EXERCISABILITY. Subject to the
provisions of Section 7.2, Options shall become exercisable at such times and in
such installments (which may be cumulative) as the Committee shall provide in
the terms of each individual Stock Option Agreement; provided, however, that by
a resolution adopted after an Option is granted the Committee may, on such terms
and conditions as it may determine to be appropriate and subject to Section 7.2,
accelerate the time at which such Option or any portion thereof may be
exercised.
SECTION 4.4 - EXPIRATION OF OPTIONS. The Committee shall provide, in
the terms of each individual Stock Option Agreement, when such Option expires
and becomes unexercisable, except that no Option may be exercised to any extent
by anyone after, and every Option shall expire no later than, the expiration of
ten (10) years and one (1) day from the Grant Date.
SECTION 4.5 - ADJUSTMENTS IN OUTSTANDING OPTIONS. If the outstanding
shares of Common Stock subject to Options are, from time to time, changed into
or exchanged for a different number or kind of shares of capital stock or other
securities of the Company, or of another corporation, by reason of a
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, stock dividend, combination of shares or otherwise, the Committee
shall make an appropriate adjustment in the aggregate number and kind of shares
which may be issued pursuant to Section 2.1 hereof and the number and kind of
shares as to which all outstanding Options, or portions thereof then
unexercised, shall be exercisable. Such adjustment in an outstanding Option
shall be made without change in the total price applicable to the Option or the
unexercised portion of the Option (except for any change in the aggregate price
resulting from rounding-off of share quantities or prices) and with any
necessary corresponding adjustment in Option Price per share.
<PAGE>
5
SECTION 4.6 - MERGER, CONSOLIDATION, EXCHANGE, ACQUISITION,
LIQUIDATION OR DISSOLUTION. In its absolute discretion, and on such terms and
conditions as it deems appropriate, coincident with or after the grant of any
Option, the Committee may provide by the terms of any Option that such Option
cannot be exercised after the merger or consolidation of the Company into
another corporation, the exchange of all or substantially all of the assets of
the Company for the securities of another corporation, the acquisition by
another corporation of 80% or more of the Company's then outstanding shares of
voting stock or the liquidation or dissolution of the Company, and if the
Committee so provides, it will also provide either by the terms of such Option
or by a resolution adopted prior to the occurrence of such merger,
consolidation, exchange, acquisition, liquidation or dissolution, that, for ten
business days prior to such event, such Option shall be exercisable as to all
shares subject thereto, notwithstanding anything to the contrary in Section 4.3
or in any installment provisions of such Option (but subject to the provisions
of Section 4.4) and that, upon the occurrence of such event, such Option shall
terminate and be of no further force or effect; provided, however, that the
Committee may also provide, in its absolute discretion, that even if the Option
shall remain exercisable after any such event, from and after such event, any
such Option shall be exercisable only for the kind and amount of securities and
other property (including cash), or the cash equivalent thereof, receivable as a
result of such event by the holder of a number of shares of stock for which such
Option could have been exercised immediately prior to such event.
ARTICLE V
EXERCISE OF OPTIONS
SECTION 5.1 - PERSONS ELIGIBLE TO EXERCISE. During the lifetime of
the Optionee, only he or his guardian may exercise an Option granted to him, or
any portion thereof. After the death of the Optionee, any exercisable portion of
an Option may, prior to the time when such portion becomes unexercisable under
Section 4.4 or Section 4.6, be exercised by his personal representative or by
any person empowered to do so under the deceased Optionee's will or under the
then applicable laws of descent and distribution.
SECTION 5.2 - PARTIAL EXERCISE. At any time and from time to time
prior to the time when any exercisable Option or exercisable portion thereof
expires or becomes unexercisable under Section 4.4 or Section 4.6, such Option
or portion thereof may be exercised in whole or in part; provided, however, that
the Company shall not be required to issue fractional shares and the Committee
may, by the terms of any Option, require any partial exercise to be with respect
to a specified minimum number of shares.
SECTION 5.3 - MANNER OF EXERCISE. An exercisable Option, or any
exercisable portion thereof, may be exercised solely by delivery to the
Secretary or his office of all of the following prior to the time when such
Option or such portion becomes unexercisable under Section 4.4 or Section 4.6:
<PAGE>
6
(i) Notice in writing signed by the Optionee or other person then
entitled to exercise such Option or portion thereof, stating that such
Option or portion thereof is exercised; and
(ii) Full payment of the Option Price (in cash or by check) for the
shares with respect to which such Option or portion thereof is thereby
exercised, together with payment or arrangement for payment of any federal
income or other tax required to be withheld by the Company with respect to
such shares; and
(iii) Such representations and documents as the Committee reasonably
deems necessary or advisable to effect compliance with all applicable
provisions of the Securities Act of 1933, as amended, and any other
federal, state or foreign securities laws or regulations. The Committee
may, in its absolute discretion, also take whatever additional actions it
deems appropriate to effect such compliance, including, without
limitation, placing legends on share certificates, issuing stop-transfer
orders to transfer agents and registrars and requiring execution of an
agreement as described in Section 5.5 hereof; and
(iv) In the event that the Option or portion thereof shall be
exercised pursuant to Section 5.1 by any person or persons other than the
Optionee, appropriate proof of the right of such person or persons to
exercise the Option or portion thereof.
SECTION 5.4 - RIGHTS AS STOCKHOLDERS. The holders of Options shall
not be, nor have any of the rights or privileges of, stockholders of the Company
in respect of any shares purchasable upon the exercise of any part of an Option
unless and until certificates representing such shares have been issued by the
Company to such holders and the Company agrees to issue any such certificates on
a timely basis.
SECTION 5.5 - TRANSFER RESTRICTIONS. The transferability of the
shares of Common Stock purchasable upon the exercise of any part of an Option
shall be subject to the restrictions which are set forth in the Stock Option
Agreement, any agreement referred to in Section 7.3 and any agreement referenced
in any thereof.
ARTICLE VI
ADMINISTRATION
SECTION 6.1 - COMMITTEE. The Committee, when appointed by the Board,
shall consist of at least three Directors and shall serve at the pleasure of the
Board. Appointment of Committee members shall be effective upon acceptance of
appointment. Committee members may resign at any time by delivering written
notice to the Board. Vacancies in the Committee shall be filled by the Board.
<PAGE>
7
In the event that the Board does not specifically appoint a Committee hereunder,
the Board shall be deemed to be the Committee for purposes of administration of
the Plan and all references herein to the Committee shall be deemed to be
references to the Board acting with respect to the Plan in lieu of the
Committee.
SECTION 6.2 - DUTIES AND POWERS OF COMMITTEE. It shall be the duty
of the Committee to conduct the general administration of the Plan in accordance
with its provisions. The Committee shall have the power to interpret the Plan
and to adopt such rules for the administration, interpretation, and application
of the Plan as are consistent herewith and to interpret, amend or revoke any
such rules. Any such interpretations and rules shall be consistent with the
basic purpose of the Plan to grant Options. The Board may, in its absolute
discretion, at any time and from time to time, exercise any and all rights and
duties of the Committee under the Plan.
SECTION 6.3 - MAJORITY RULE. The Committee shall act by a majority
of its members in office and the Committee may act either by vote at a
telephonic or other meeting or by a memorandum or other written instrument
signed by a majority of the Committee.
SECTION 6.4 - COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH
ACTIONS. Members of the Committee shall not receive compensation for their
services as members, but all expenses and liabilities they incur in connection
with the administration of the Plan shall be borne by the Company. The Committee
may employ attorneys, consultants, accountants, appraisers, brokers or other
persons in connection with the administration of the Plan. The Committee, the
Company and the officers and directors of the Company shall be entitled to rely
upon the advice, opinions or valuations of any such persons. All actions taken
and all interpretations and determinations made by the Committee in good faith
shall be final and binding upon all Employees, the Company and all other
interested persons. No member of the Committee shall be personally liable for
any action, determination or interpretation made in good faith with respect to
the Plan, and all members of the Committee shall be fully protected by the
Company in respect to any such action, determination or interpretation.
ARTICLE VII
MISCELLANEOUS PROVISIONS
SECTION 7.1 - OPTIONS NOT TRANSFERABLE. No Option or interest or
right therein shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means, whether such
disposition be voluntary or involuntary or by operation of law or by judgment,
levy, attachment, garnishment or any other legal or equitable proceeding
(including bankruptcy), and any attempted disposition thereof shall be null and
void and of no effect; provided, however, that nothing in this Section 7.1 shall
prevent transfers otherwise permitted by any Stock Option Agreement, by will or
by the applicable laws of descent and distribution.
<PAGE>
8
SECTION 7.2 - AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN. The
Plan may be wholly or partially amended or otherwise modified, suspended or
terminated at any time or from time to time by the Board. However, without
approval of the Company's stockholders given within 12 months before or after
the action by the Committee, no action of the Committee or the Board may, except
as provided in Section 2.3, increase any limit imposed in Section 2.1 on the
maximum number of shares which may be issued upon exercise of Options or extend
the limit imposed in this Section 7.2 on the period during which Options may be
granted. Neither the amendment, suspension nor termination of the Plan shall,
without the consent of the Employee, alter or impair any rights or obligations
under any Option theretofore granted. No Option may be granted during any period
of suspension nor after termination of the Plan, and in no event may any Option
be granted under this Plan after the expiration of ten years from the date the
Plan is adopted or the date the stockholders of the Company approve this Plan,
if earlier.
SECTION 7.3 - SECURITYHOLDER AGREEMENTS. Except as otherwise
consented to in writing by the Board of Directors of the Company, prior to the
grant of any Option hereunder, the Optionee shall become a party to all voting
agreements, stock transfer agreements, registration rights agreements and other
securityholder agreements to which any holder of Common Stock or Common Stock
Equivalents is a party, as provided therein. Any Permitted Transferee of the
Optionee shall become a party to such agreements and shall be bound by the terms
thereof as provided therein.
SECTION 7.4 - EFFECT OF PLAN UPON OTHER COMPENSATION PLANS. The
adoption of the Plan shall not affect any other compensation or incentive plans
in effect for the Company. Nothing in this Plan shall be construed to limit the
right of the Company to establish any other forms of incentives or compensation
for Employees of the Company; or to grant or assume options or other awards
otherwise than under the Plan in connection with any proper corporate purpose,
including, but not by way of limitation, the grant or assumption of options or
other awards in connection with the acquisition by purchase, lease, merger,
consolidation or otherwise, of the business, stock or assets of any corporation,
firm or association.
SECTION 7.5 - NO RIGHT TO CONTINUE IN EMPLOYMENT. Nothing in this
Plan or in any Stock Option Agreement hereunder shall confer upon any Employee
any right to continue in the employ or service of the Company or shall interfere
with or restrict in any way the rights of the Company, which are hereby
expressly reserved, to discharge any Employee at any time for any reason
whatsoever, with or without good cause.
SECTION 7.6 - TITLES. Titles are provided herein for convenience
only and are not to serve as a basis for interpretation or construction of the
Plan.
<PAGE>
9
I hereby certify that the foregoing Plan was duly adopted by the
Board of Directors of the Company on __________ __, 1999.
Executed on this __th day of ______, 1999.
-----------------------------
Secretary
<PAGE>
Exhibit 10.34
STOCK OPTION AGREEMENT
This Stock Option Agreement (this "Agreement"), dated as of
July 7, 1999 (the "Grant Date"), is made by and between ST. JOHN KNITS
INTERNATIONAL, INCORPORATED (the "Company"), a Delaware corporation, and the
employee of the Company or its subsidiary whose name appears on the signature
page hereof, hereinafter referred to as the "Optionee".
WHEREAS, the Company wishes, pursuant to the St. John Knits
International, Incorporated 1999 Stock Option Plan (the "Plan") (a copy of which
is attached hereto and the terms of which are hereby incorporated by reference),
to grant to Optionee an Option to purchase the number of shares of Common Stock
set forth on Schedule 1 in accordance with the terms of this Agreement; and
WHEREAS, the Board of Directors of the Company has determined
that it would be to the advantage and best interest of the Company and its
stockholders to sell the shares and grant the Option provided for herein.
NOW, THEREFORE, in consideration of the mutual covenants
herein contained and other good and valuable consideration, receipt of which is
hereby acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever capitalized terms are used in this Agreement as
defined terms, they shall have the meaning set forth in the Plan or the meaning
specified below unless the context clearly indicates to the contrary.
SECTION 1.1 - CAUSE. "Cause" used in connection with the
Termination of Employment of the Optionee shall mean either (a) the definition
of "Cause" as set forth in any employment agreement executed between the
Optionee and the Company or any of its affiliates or, if no such agreement or
definition therein exists, (b) a Termination of Employment of the Optionee by
the Company or any affiliate thereof due to (i) willful malfeasance or willful
misconduct by Optionee in connection with his employment, (ii) continuing
refusal by Optionee to perform his duties, after notice of any such refusal to
perform such duties or direction was given to Optionee, (iii) any breach by the
Optionee of a confidentiality or noncompete covenant made in favor of the
Company or an affiliate or any material breach by the Optionee of an employment
agreement between the Company or an affiliate and the Optionee or (iv) the
commission by Optionee of (a) any felony or (b) a misdemeanor involving moral
turpitude.
<PAGE>
2
SECTION 1.2 - CHANGE OF CONTROL. "Change of Control" shall
mean (i) prior to an initial Public Offering of Common Stock, the date Vestar:
(A) ceases to be the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act, which shall in any event
include having the power to vote (or cause to be voted at
Vestar's direction) pursuant to contract, irrevocable proxy or
otherwise)), directly or indirectly, of a majority in the
aggregate of the total voting power of the Company, whether as
a result of the issuance of securities of the Company, any
merger, consolidation, liquidation or dissolution of the
Company, any direct or indirect transfer of securities by the
Company or otherwise, and
(B) does not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of
the Board;
(ii) coincident with or subsequent to an initial Public
Offering of Common Stock, the date that:
(A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than Vestar, is or becomes the
beneficial owner (as defined in clause (i)(A) above, except
that such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more
than 35% of the total voting power of the Company; and
(B) Vestar "beneficially owns" (as defined in clause (i)(A)
above), directly or indirectly, in the aggregate a lesser
percentage of the total voting power of the Company than such
other person and does not have the right or ability by voting
power, contract or otherwise to elect or designate for
election a majority of the Board; or
(iii) the date, following the expiration of any period of two
consecutive years, that individuals, who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors, or whose nomination for
election by the shareholders of the Company, was approved by a vote of 66-2/3%
of the directors of the Company then still in office who were either directors
at the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office.
For purposes of clauses (i) and (ii), Vestar shall be deemed
to beneficially own voting power of a corporation held by any other corporation
(the "parent corporation") so long as Vestar beneficially owns (as so defined),
directly or indirectly, in the aggregate, a majority of the voting power of the
parent corporation. For purposes hereof, Vestar shall be deemed to have voting
power over each share of Common Stock owned by any Employee.
<PAGE>
3
SECTION 1.3 - CLOSING DATE. "Closing Date" shall mean July 7,
1999.
SECTION 1.4 - COMMON STOCK EQUIVALENTS. "Common Stock
Equivalents" shall mean any stock, warrants, rights, calls, options or other
securities exchangeable or exercisable for or convertible into Common Stock.
SECTION 1.5 - DISABILITY. "Disability" of the Optionee shall
mean the inability of the Optionee to perform the essential functions of his
job, with or without reasonable accommodation, by reason of a physical or mental
infirmity, (i) for a continuous period of six (6) months or (ii) at such earlier
time as the Company receives satisfactory medical evidence that the Optionee has
a physical or mental disability or infirmity which is reasonably likely to
prevent him from returning to the performance of his work duties for six (6)
months or longer. The date of such Disability shall be on the last day of such
six-month period or the fifteenth day following the day on which the Company
receives such satisfactory medical evidence, as the case may be.
SECTION 1.6 - EBITDA - "EBITDA" shall have the same meaning as
"Consolidated EBITDA", as such term is defined in the Credit Agreement dated as
of July 7, 1999, among the Company, the Lenders party thereto, and The Chase
Manhattan Bank, as Administrative Agent, as such Agreement shall from time to
time be amended.
SECTION 1.7 - LLC AGREEMENT. "LLC Agreement" shall mean the
Amended and Restated Limited Liability Company Agreement of Vestar/Gray
Investors LLC by and among Vestar Capital Partners III, L.P., Robert Gray, Marie
Gray, Kelly A. Gray, Kelly Ann Gray Trust, Gray Family Trust and St. John Knits
International, Incorporated, dated as of July 7, 1999, as such Agreement shall
from time to time be amended.
SECTION 1.8 - OPTION. "Option" shall mean the Option described
in Section 3.1 hereof.
SECTION 1.9 - OPTION SHARES. "Option Shares" shall mean the
shares of Common Stock subject to an unexercised Option.
SECTION 1.10 - OPTION STOCK. "Option Stock" shall mean the
shares of Common Stock received upon the exercise of the Option.
SECTION 1.11 - OPTION TERMINATION EVENT. "Option Termination
Event" shall mean either (i) a Public Offering wherein the price of the shares
of Common Stock in the Public Offering would, if Vestar sold shares of Vestar
Stock in the Public Offering, result in Vestar failing to achieve the Vestar
Return on any such sale or (ii) a Change of Control wherein the consideration
for the shares of Vestar Stock sold or otherwise disposed of in the Change of
Control results in Vestar failing to achieve the Vestar Return upon such sale or
other disposition.
SECTION 1.12 - PUBLIC OFFERING. "Public Offering" shall mean
the sale of Securities to the public after the Closing Date (i) pursuant to an
effective registration statement filed under the Securities
<PAGE>
4
Act (excluding any registration of Securities on a Form S-4 or Form S-8) and
(ii) which results in an active trading market in such Securities (it being
understood that such an active trading market shall be deemed to exist if, among
other things, such Securities are listed on a national securities exchange or on
NASDAQ).
SECTION 1.13 - SECURITIES. "Securities" shall mean shares of
Common Stock or Common Stock Equivalents or other voting securities of the
Company, whether owned on the date hereof or hereafter acquired.
SECTION 1.14 - SECURITIES ACT. "Securities Act" shall mean the
Securities Act of 1933, as amended, and all rules and regulations promulgated
thereunder, as the same may be amended from time to time.
SECTION 1.15 - SECURITYHOLDER AGREEMENTS. "Securityholder
Agreements" shall mean any securityholder agreements to which any holder of
Common Stock, Common Stock Equivalents, or Securities is a party, including, but
not limited to, all voting agreements, stock transfer rights agreements and
registration rights agreements, which shall include the LLC Agreement.
SECTION 1.16 - VESTAR. "Vestar" shall mean Vestar Capital
Partners III, L.P., any investor therein or any affiliate thereof.
SECTION 1.17 - VESTAR CHANGE OF CONTROL. "Vestar Change of
Control" shall mean a Change of Control wherein the consideration for the shares
of Vestar Stock sold or otherwise disposed of in the Change of Control results
in Vestar achieving at least the Vestar Return upon such sale or other
disposition.
SECTION 1.18 - VESTAR EQUITY VALUE. "Vestar Equity Value"
shall mean the sum of:
(i) all amounts actually received by Vestar from time to time
(or, in the event of a Vestar IPO, all amounts which would be received if Vestar
sold shares of Vestar Stock in the Vestar IPO) on a cumulative basis through the
date of determination of (A) cash (x) through any cash dividend or other
distribution on account of the Vestar Stock or (y) in connection with either (1)
a disposition (including by way of redemption, repurchase or repayment) of all
or part of the Vestar Stock or of Securities or other non-cash property
previously received by way of a dividend or other distribution on account of the
Vestar Stock, but only to the extent Vestar Stock or other securities or
non-cash property is so disposed, (2) a disposition of any or all of the assets
of the Company or any of its subsidiaries, or (3) a recapitalization of the
Company or its subsidiaries, or (B) securities or other non-cash property
(valued at their fair market value) in connection with either (x) a disposition
of all or part of the Vestar Stock to a third party, but only to the extent
Vestar Stock is so disposed, or (y) a disposition of any or all of the assets of
the Company or any of its subsidiaries (it being understood that for purposes of
this clause (i), the terms "disposition," "dispose," and "disposed" shall not
include the creation of a pledge, lien or other similar encumbrance); PLUS
<PAGE>
5
(ii) an amount with respect to all shares of preferred stock
of the Company held by Vestar as of the determination date (including preferred
stock issued in payment of dividends and all accrued and unpaid dividends
thereon to the date of determination) equal to the aggregate liquidation
preference in respect thereof, determined as of such date in accordance with the
terms of such preferred stock (whether or not funds would be legally available
for the payment of such liquidation preference).
SECTION 1.19 - VESTAR IPO. "Vestar IPO" shall mean a Public
Offering wherein the price of the shares of Common Stock sold in the Public
Offering would, if Vestar sold shares of Vestar Stock in the Public Offering,
result in Vestar achieving at least the Vestar Return on any such sale.
SECTION 1.20 - VESTAR RETURN. "Vestar Return" shall mean the
"internal rate of return" for Vestar, which shall be deemed to have occurred on
the earliest date when the Vestar Equity Value with respect to Vestar Stock is
equal to or greater than, as of the date of determination, the amount determined
by increasing the amount of Vestar's initial investment in the Company (the
"INITIAL INVESTMENT") plus the amount of additional cash invested by Vestar in
Vestar Stock after the Closing Date at a compounded annual rate of 20%
commencing on the Closing Date (with respect to the Initial Investment made by
Vestar in Vestar Stock on the Closing Date) and the date of any subsequent cash
investment by Vestar (with respect to Vestar Stock acquired by Vestar after the
Closing Date) through and including such date of determination.
SECTION 1.21 - VESTAR STOCK. "Vestar Stock" shall mean issued
and outstanding shares of capital stock of any class or series of the Company,
so long as such shares were originally acquired by Vestar from the Company.
ARTICLE II
GRANT OF OPTION
SECTION 2.1 - GRANT OF OPTION. For good and valuable
consideration, receipt of which is hereby acknowledged, on and as of the date
hereof, the Company irrevocably grants to the Optionee the Options to purchase
any part or all of an aggregate of the number of shares set forth on Schedule 1
hereof of its Common Stock upon the terms and conditions set forth in this
Agreement.
SECTION 2.2 - OPTION PRICE. The initial Option Price per share
of Common Stock subject to Options on the Grant Date and for the term of the
Options is set forth on Schedule 1.
SECTION 2.3 - ADJUSTMENTS TO OPTIONS. Subject to Section 4.5
of the Plan, in the event that the outstanding shares of the Common Stock
subject to the Options are changed into or exchanged for a different number or
kind of shares of capital stock or other securities of the Company, or of
another corporation, by reason of a reorganization, merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, combination of
shares or otherwise, the Committee shall
<PAGE>
6
make an appropriate adjustment in the number and kind of shares as to which the
Options, or portions thereof then exercised, shall be exercisable. Such
adjustment in the Options shall be made without change in the total price
applicable to the unexercised portion of the Options (except for any change in
the aggregate price resulting from rounding-off of shares, quantities or prices)
and with any necessary corresponding adjustment in the Option Price. Any such
adjustment made by the Committee shall be final and binding upon the Optionee,
the Company and all other interested persons.
ARTICLE III
EXERCISABILITY OF OPTION
SECTION 3.1 - EXERCISABILITY.
(a) VESTING AND EXERCISABILITY. The Option shall become vested with
respect to one-third of the Option Shares on each of the first three
anniversaries of the Grant Date; PROVIDED, HOWEVER, that the Option shall only
become exercisable if and to the extent that the Option is vested and either of
the following occurs:
(i) the Company achieves certain EBITDA Targets for certain fiscal
years of the Company (each, a "FISCAL YEAR"), as set forth below:
Fiscal Year 1999 - $70.4 million
Fiscal Year 2000 - $76.2 million
Fiscal Year 2001 - $82.4 million
or, (ii) in the event that all such EBITDA Targets have not been achieved and
the Optionee continues to be employed with the Company through the end of Fiscal
Year 2001, upon the occurrence of a Vestar IPO or a Vestar Change of Control.
(b) DEATH AND DISABILITY. In the event that the Optionee dies or
becomes disabled prior to the end of Fiscal Year 2001, the Optionee's Option
will remain outstanding and be treated in the same manner as the Option would
have been treated if the Optionee had continued to be employed with the Company
though the end of the Fiscal Year 2001.
(c) OTHER TERMINATIONS OF EMPLOYMENT. In the event that the Optionee's
employment terminates for any reason (other than for Cause, death or Disability)
prior to Fiscal Year 2001, upon the occurrence of either of the events set forth
in (a)(i) and (ii), above, the Option will only be exercisable in respect of the
portion of the Option in which the Optionee had vested prior to such
terminations of employment.
SECTION 3.2 - EXPIRATION OF OPTION. The Option shall expire
and may not be exercised to any extent by anyone on the earliest to occur of the
following events:
<PAGE>
7
(a) the tenth anniversary of the Grant Date;
(b) in the event of either a Public Offering or a Change of Control,
with respect to any exercisable portion of the Option (or with respect to any
portion of an Option that becomes exercisable upon a Vestar IPO or a Vestar
Change of Control), thirty (30) days after the occurrence of either of such
events;
(c) immediately after a Termination of Employment for Cause;
(d) with respect to the then exercisable portion of the Option only,
three months after a Termination of Employment by the Company other than for
Cause, death or Disability;
(e) with respect to the unvested portion of the Option only, any
Termination of Employment other than for death or Disability;
(f) immediately after an Option Termination Event (unless the Option
has become exercisable pursuant to Section 3.1(a)(i)); or
(g) if the Committee so determines pursuant to Section 4.6 of the Plan,
upon the occurrence of any event described in that Section.
ARTICLE IV
EXERCISE OF OPTION
SECTION 4.1 - PERSONS ELIGIBLE TO EXERCISE. During the
lifetime of the Optionee, only the Optionee may exercise the Option or any
portion thereof. After the death of the Optionee, any portion of the Option may,
prior to the time when the Option becomes unexercisable under Section 3.2, be
exercised by the Optionee's personal representative or by any person empowered
to do so under the Optionee's will or under the then applicable laws of descent
and distribution.
SECTION 4.2 - PARTIAL EXERCISE. Any exercisable portion of the
Option or the entire Option, if then wholly exercisable, may be exercised in
whole or in part at any time prior to the time when the Option or portion
thereof becomes unexercisable under Section 3.2; PROVIDED, HOWEVER, that any
partial exercise shall be for whole shares only.
SECTION 4.3 - MANNER OF EXERCISE. The Option, or any
exercisable portion thereof, may be exercised solely by delivery to the
Secretary or his office all of the following prior to the time when the Option
or such portion becomes unexercisable under Section 4.2:
<PAGE>
8
(a) Notice in writing signed by the Optionee or the other person then
entitled to exercise the Option or portion thereof, stating that the Option or
portion thereof is thereby exercised, such notice complying with all applicable
rules established by the Committee; and
(b) Full payment (in cash, by certified check or by a combination
thereof) for the shares with respect to which such Option or portion thereof is
exercised; and
(c) Full payment to the Company of all amounts which, under federal,
state or local law, it is required to withhold upon exercise of the Option; and
(d) Execution of all necessary Securityholder Agreements, which
Agreements shall include a Stockholder's Agreement containing terms regarding
transfer restrictions, put rights, piggyback registration rights, and other
rights relating to the Option and Option Stock, by the Optionee; and
(e) If the Option or portion thereof shall be exercised pursuant to
Section 4.1 by any person or persons other than the Optionee, appropriate proof
of the right of such person or persons to exercise the Option.
SECTION 4.4 - RIGHTS AND OBLIGATIONS UPON EXERCISE. Upon
exercise of the Option, the rights and obligations set forth in the
Securityholder Agreements shall be applicable to all shares of Option Stock
(including, but not limited to, the legend requirements and transfer
restrictions set forth therein).
SECTION 4.5 - RIGHTS AS STOCKHOLDER. The holder of the Option
shall not be, nor have any of the rights or privileges of, a stockholder of the
Company in respect of any shares purchasable upon the exercise of the Option or
any portion thereof unless and until certificates representing such shares shall
have been issued by the Company to such holder and the Company agrees to issue
any such certificates on a timely basis.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 - OPTIONS NOT TRANSFERABLE. Neither the Options
nor any interest or right therein or part thereof shall be liable for the debts,
contracts or engagements of the Optionee or his successors in interest or shall
be subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect; provided,
however, that this Section 5.1 shall not prevent transfers by will or by the
applicable laws of descent and distribution.
<PAGE>
9
SECTION 5.2 - NOTICES. Any notice to be given under the terms
of this Agreement to the Company shall be addressed to the Company in care of
its Secretary, and any notice to be given to the Optionee shall be addressed to
him at the address given beneath his signature hereto. By a notice given
pursuant to this Section 5.2, either party may hereafter designate a different
address for notices to be given to him. Any notice which is required to be given
to the Optionee shall, if the Optionee is then deceased, be given to the
Optionee's personal representative if such representative has previously
informed the Company of his status and address by written notice under this
Section 5.2. Any notice shall have been deemed duly given when enclosed in a
properly sealed envelope or wrapper addressed as aforesaid, deposited (with
postage prepaid) in a post office or branch post office regularly maintained by
the United States Postal Service.
SECTION 5.3 - TITLES. Titles are provided herein for
convenience only and are not to serve as a basis for interpretation or
construction of this Agreement.
SECTION 5.4 - AMENDMENT. This Agreement may be amended only by
a writing executed by the parties hereto which specifically states that it is
amending this Agreement.
SECTION 5.5 - NO RIGHT TO EMPLOYMENT. Nothing in this
Agreement or in the Plan shall confer upon the Employee any right to continue in
the employ or service of the Company or shall interfere with or restrict in any
way the rights of the Company, which are hereby expressly reserved, to discharge
the Employee at any time for any reason whatsoever.
SECTION 5.6 - GOVERNING LAW. This Agreement shall be construed
under and governed by the laws of the State of Delaware applicable to contracts
made and to be performed therein. Any action to enforce, which arises out of or
in any way relates to, any of the provisions of this Agreement may be brought
and prosecuted in such court or courts located within the State of Delaware as
provided by law; and the parties consent to the jurisdiction of such court or
courts located within the State of Delaware and to service of process by
registered mail, return receipt requested, or by any other manner provided by
Delaware law.
<PAGE>
10
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto.
ST. JOHN KNITS INTERNATIONAL,
INCORPORATED:
By:____________________________
Name:
Title:
OPTIONEE:
_________________________
Bob Gray
Address:
Optionee's Taxpayer
Identification Number:
_________________________
<PAGE>
11
SCHEDULE 1
BOB GRAY
<TABLE>
<S> <C>
NUMBER OF SHARES SUBJECT TO OPTION: 109,104
OPTION PRICE PER SHARE: $30.00
GRANT DATE: 7/7/99
</TABLE>
<PAGE>
EXHIBIT 10.35
STOCK OPTION AGREEMENT
This Stock Option Agreement (this "Agreement"), dated as of
July 7, 1999 (the "Grant Date"), is made by and between ST. JOHN KNITS
INTERNATIONAL, INCORPORATED (the "Company"), a Delaware corporation, and the
employee of the Company or its subsidiary whose name appears on the signature
page hereof, hereinafter referred to as the "Optionee".
WHEREAS, the Company wishes, pursuant to the St. John Knits
International, Incorporated 1999 Stock Option Plan (the "Plan") (a copy of which
is attached hereto and the terms of which are hereby incorporated by reference),
to grant to Optionee an Option to purchase the number of shares of Common Stock
set forth on Schedule 1 in accordance with the terms of this Agreement; and
WHEREAS, the Board of Directors of the Company has determined
that it would be to the advantage and best interest of the Company and its
stockholders to sell the shares and grant the Option provided for herein.
NOW, THEREFORE, in consideration of the mutual covenants
herein contained and other good and valuable consideration, receipt of which is
hereby acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever capitalized terms are used in this Agreement as
defined terms, they shall have the meaning set forth in the Plan or the meaning
specified below unless the context clearly indicates to the contrary.
SECTION 1.1 - CAUSE. "Cause" used in connection with the
Termination of Employment of the Optionee shall mean either (a) the definition
of "Cause" as set forth in any employment agreement executed between the
Optionee and the Company or any of its affiliates or, if no such agreement or
definition therein exists, (b) a Termination of Employment of the Optionee by
the Company or any affiliate thereof due to (i) willful malfeasance or willful
misconduct by Optionee in connection with his employment, (ii) continuing
refusal by Optionee to perform his duties, after notice of any such refusal to
perform such duties or direction was given to Optionee, (iii) any breach by the
Optionee of a confidentiality or noncompete covenant made in favor of the
Company or an affiliate or any material breach by the Optionee of an employment
agreement between the Company or an affiliate and the Optionee or (iv) the
commission by Optionee of (a) any felony or (b) a misdemeanor involving moral
turpitude.
<PAGE>
2
SECTION 1.2 - CHANGE OF CONTROL. "Change of Control" shall
mean (i) prior to an initial Public Offering of Common Stock, the date Vestar:
(A) ceases to be the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act, which shall in any event
include having the power to vote (or cause to be voted at
Vestar's direction) pursuant to contract, irrevocable proxy or
otherwise)), directly or indirectly, of a majority in the
aggregate of the total voting power of the Company, whether as
a result of the issuance of securities of the Company, any
merger, consolidation, liquidation or dissolution of the
Company, any direct or indirect transfer of securities by the
Company or otherwise, and
(B) does not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of
the Board;
(ii) coincident with or subsequent to an initial Public
Offering of Common Stock, the date that:
(A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than Vestar, is or becomes the
beneficial owner (as defined in clause (i)(A) above, except
that such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more
than 35% of the total voting power of the Company; and
(B) Vestar "beneficially owns" (as defined in clause (i)(A)
above), directly or indirectly, in the aggregate a lesser
percentage of the total voting power of the Company than such
other person and does not have the right or ability by voting
power, contract or otherwise to elect or designate for
election a majority of the Board; or
(iii) the date, following the expiration of any period of two
consecutive years, that individuals, who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors, or whose nomination for
election by the shareholders of the Company, was approved by a vote of 66-2/3%
of the directors of the Company then still in office who were either directors
at the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office.
For purposes of clauses (i) and (ii), Vestar shall be deemed
to beneficially own voting power of a corporation held by any other corporation
(the "parent corporation") so long as Vestar beneficially owns (as so defined),
directly or indirectly, in the aggregate, a majority of the voting power of the
parent corporation. For purposes hereof, Vestar shall be deemed to have voting
power over each share of Common Stock owned by any Employee.
<PAGE>
3
SECTION 1.3 - CLOSING DATE. "Closing Date" shall mean July 7,
1999.
SECTION 1.4 - COMMON STOCK EQUIVALENTS. "Common Stock
Equivalents" shall mean any stock, warrants, rights, calls, options or other
securities exchangeable or exercisable for or convertible into Common Stock.
SECTION 1.5 - DISABILITY. "Disability" of the Optionee shall
mean the inability of the Optionee to perform the essential functions of his
job, with or without reasonable accommodation, by reason of a physical or mental
infirmity, (i) for a continuous period of six (6) months or (ii) at such earlier
time as the Company receives satisfactory medical evidence that the Optionee has
a physical or mental disability or infirmity which is reasonably likely to
prevent him from returning to the performance of his work duties for six (6)
months or longer. The date of such Disability shall be on the last day of such
six-month period or the fifteenth day following the day on which the Company
receives such satisfactory medical evidence, as the case may be.
SECTION 1.6 - EBITDA - "EBITDA" shall have the same meaning as
"Consolidated EBITDA", as such term is defined in the Credit Agreement dated as
of July 7, 1999, among the Company, the Lenders party thereto, and The Chase
Manhattan Bank, as Administrative Agent, as such Agreement shall from time to
time be amended.
SECTION 1.7 - LLC AGREEMENT. "LLC Agreement" shall mean the
Amended and Restated Limited Liability Company Agreement of Vestar/Gray
Investors LLC by and among Vestar Capital Partners III, L.P., Robert Gray, Marie
Gray, Kelly A. Gray, Kelly Ann Gray Trust, Gray Family Trust and St. John Knits
International, Incorporated, dated as of July 7, 1999, as such Agreement shall
from time to time be amended.
SECTION 1.8 - OPTION. "Option" shall mean the Option described
in Section 3.1 hereof.
SECTION 1.9 - OPTION SHARES. "Option Shares" shall mean the
shares of Common Stock subject to an unexercised Option.
SECTION 1.10 - OPTION STOCK. "Option Stock" shall mean the
shares of Common Stock received upon the exercise of the Option.
SECTION 1.11 - OPTION TERMINATION EVENT. "Option Termination
Event" shall mean either (i) a Public Offering wherein the price of the shares
of Common Stock in the Public Offering would, if Vestar sold shares of Vestar
Stock in the Public Offering, result in Vestar failing to achieve the Vestar
Return on any such sale or (ii) a Change of Control wherein the consideration
for the shares of Vestar Stock sold or otherwise disposed of in the Change of
Control results in Vestar failing to achieve the Vestar Return upon such sale or
other disposition.
SECTION 1.12 - PUBLIC OFFERING. "Public Offering" shall mean
the sale of Securities to the public after the Closing Date (i) pursuant to an
effective registration statement filed under the Securities
<PAGE>
4
Act (excluding any registration of Securities on a Form S-4 or Form S-8) and
(ii) which results in an active trading market in such Securities (it being
understood that such an active trading market shall be deemed to exist if, among
other things, such Securities are listed on a national securities exchange or on
NASDAQ).
SECTION 1.13 - SECURITIES. "Securities" shall mean shares of
Common Stock or Common Stock Equivalents or other voting securities of the
Company, whether owned on the date hereof or hereafter acquired.
SECTION 1.14 - SECURITIES ACT. "Securities Act" shall mean the
Securities Act of 1933, as amended, and all rules and regulations promulgated
thereunder, as the same may be amended from time to time.
SECTION 1.15 - SECURITYHOLDER AGREEMENTS. "Securityholder
Agreements" shall mean any securityholder agreements to which any holder of
Common Stock, Common Stock Equivalents, or Securities is a party, including, but
not limited to, all voting agreements, stock transfer rights agreements and
registration rights agreements, which shall include the LLC Agreement.
SECTION 1.16 - VESTAR. "Vestar" shall mean Vestar Capital
Partners III, L.P., any investor therein or any affiliate thereof.
SECTION 1.17 - VESTAR CHANGE OF CONTROL. "Vestar Change of
Control" shall mean a Change of Control wherein the consideration for the shares
of Vestar Stock sold or otherwise disposed of in the Change of Control results
in Vestar achieving at least the Vestar Return upon such sale or other
disposition.
SECTION 1.18 - VESTAR EQUITY VALUE. "Vestar Equity Value"
shall mean the sum of:
(i) all amounts actually received by Vestar from time to time
(or, in the event of a Vestar IPO, all amounts which would be received if Vestar
sold shares of Vestar Stock in the Vestar IPO) on a cumulative basis through the
date of determination of (A) cash (x) through any cash dividend or other
distribution on account of the Vestar Stock or (y) in connection with either (1)
a disposition (including by way of redemption, repurchase or repayment) of all
or part of the Vestar Stock or of Securities or other non-cash property
previously received by way of a dividend or other distribution on account of the
Vestar Stock, but only to the extent Vestar Stock or other securities or
non-cash property is so disposed, (2) a disposition of any or all of the assets
of the Company or any of its subsidiaries, or (3) a recapitalization of the
Company or its subsidiaries, or (B) securities or other non-cash property
(valued at their fair market value) in connection with either (x) a disposition
of all or part of the Vestar Stock to a third party, but only to the extent
Vestar Stock is so disposed, or (y) a disposition of any or all of the assets of
the Company or any of its subsidiaries (it being understood that for purposes of
this clause (i), the terms "disposition," "dispose," and "disposed" shall not
include the creation of a pledge, lien or other similar encumbrance); PLUS
<PAGE>
5
(ii) an amount with respect to all shares of preferred stock
of the Company held by Vestar as of the determination date (including preferred
stock issued in payment of dividends and all accrued and unpaid dividends
thereon to the date of determination) equal to the aggregate liquidation
preference in respect thereof, determined as of such date in accordance with the
terms of such preferred stock (whether or not funds would be legally available
for the payment of such liquidation preference).
SECTION 1.19 - VESTAR IPO. "Vestar IPO" shall mean a Public
Offering wherein the price of the shares of Common Stock sold in the Public
Offering would, if Vestar sold shares of Vestar Stock in the Public Offering,
result in Vestar achieving at least the Vestar Return on any such sale.
SECTION 1.20 - VESTAR RETURN. "Vestar Return" shall mean the
"internal rate of return" for Vestar, which shall be deemed to have occurred on
the earliest date when the Vestar Equity Value with respect to Vestar Stock is
equal to or greater than, as of the date of determination, the amount determined
by increasing the amount of Vestar's initial investment in the Company (the
"INITIAL INVESTMENT") plus the amount of additional cash invested by Vestar in
Vestar Stock after the Closing Date at a compounded annual rate of 20%
commencing on the Closing Date (with respect to the Initial Investment made by
Vestar in Vestar Stock on the Closing Date) and the date of any subsequent cash
investment by Vestar (with respect to Vestar Stock acquired by Vestar after the
Closing Date) through and including such date of determination.
SECTION 1.21 - VESTAR STOCK. "Vestar Stock" shall mean issued
and outstanding shares of capital stock of any class or series of the Company,
so long as such shares were originally acquired by Vestar from the Company.
ARTICLE II
GRANT OF OPTION
SECTION 2.1 - GRANT OF OPTION. For good and valuable
consideration, receipt of which is hereby acknowledged, on and as of the date
hereof, the Company irrevocably grants to the Optionee the Options to purchase
any part or all of an aggregate of the number of shares set forth on Schedule 1
hereof of its Common Stock upon the terms and conditions set forth in this
Agreement.
SECTION 2.2 - OPTION PRICE. The initial Option Price per share
of Common Stock subject to Options on the Grant Date and for the term of the
Options is set forth on Schedule 1.
SECTION 2.3 - ADJUSTMENTS TO OPTIONS. Subject to Section 4.5
of the Plan, in the event that the outstanding shares of the Common Stock
subject to the Options are changed into or exchanged for a different number or
kind of shares of capital stock or other securities of the Company, or of
another corporation, by reason of a reorganization, merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, combination of
shares or otherwise, the Committee shall
<PAGE>
6
make an appropriate adjustment in the number and kind of shares as to which the
Options, or portions thereof then exercised, shall be exercisable. Such
adjustment in the Options shall be made without change in the total price
applicable to the unexercised portion of the Options (except for any change in
the aggregate price resulting from rounding-off of shares, quantities or prices)
and with any necessary corresponding adjustment in the Option Price. Any such
adjustment made by the Committee shall be final and binding upon the Optionee,
the Company and all other interested persons.
ARTICLE III
EXERCISABILITY OF OPTION
SECTION 3.1 - EXERCISABILITY.
(a) VESTING AND EXERCISABILITY. The Option shall become vested with
respect to one-third of the Option Shares on each of the first three
anniversaries of the Grant Date; PROVIDED, HOWEVER, that the Option shall only
become exercisable if and to the extent that the Option is vested and either of
the following occurs:
(i) the Company achieves certain EBITDA Targets for certain fiscal
years of the Company (each, a "FISCAL YEAR"), as set forth below:
Fiscal Year 1999 - $70.4 million
Fiscal Year 2000 - $76.2 million
Fiscal Year 2001 - $82.4 million
or, (ii) in the event that all such EBITDA Targets have not been achieved and
the Optionee continues to be employed with the Company through the end of Fiscal
Year 2001, upon the occurrence of a Vestar IPO or a Vestar Change of Control.
(b) DEATH AND DISABILITY. In the event that the Optionee dies or
becomes disabled prior to the end of Fiscal Year 2001, the Optionee's Option
will remain outstanding and be treated in the same manner as the Option would
have been treated if the Optionee had continued to be employed with the Company
though the end of the Fiscal Year 2001.
(c) OTHER TERMINATIONS OF EMPLOYMENT. In the event that the Optionee's
employment terminates for any reason (other than for Cause, death or Disability)
prior to Fiscal Year 2001, upon the occurrence of either of the events set forth
in (a)(i) and (ii), above, the Option will only be exercisable in respect of the
portion of the Option in which the Optionee had vested prior to such
terminations of employment.
SECTION 3.2 - EXPIRATION OF OPTION. The Option shall expire
and may not be exercised to any extent by anyone on the earliest to occur of the
following events:
<PAGE>
7
(a) the tenth anniversary of the Grant Date;
(b) in the event of either a Public Offering or a Change of Control,
with respect to any exercisable portion of the Option (or with respect to any
portion of an Option that becomes exercisable upon a Vestar IPO or a Vestar
Change of Control), thirty (30) days after the occurrence of either of such
events;
(c) immediately after a Termination of Employment for Cause;
(d) with respect to the then exercisable portion of the Option only,
three months after a Termination of Employment by the Company other than for
Cause, death or Disability;
(e) with respect to the unvested portion of the Option only, any
Termination of Employment other than for death or Disability;
(f) immediately after an Option Termination Event (unless the Option
has become exercisable pursuant to Section 3.1(a)(i)); or
(g) if the Committee so determines pursuant to Section 4.6 of the Plan,
upon the occurrence of any event described in that Section.
ARTICLE IV
EXERCISE OF OPTION
SECTION 4.1 - PERSONS ELIGIBLE TO EXERCISE. During the
lifetime of the Optionee, only the Optionee may exercise the Option or any
portion thereof. After the death of the Optionee, any portion of the Option may,
prior to the time when the Option becomes unexercisable under Section 3.2, be
exercised by the Optionee's personal representative or by any person empowered
to do so under the Optionee's will or under the then applicable laws of descent
and distribution.
SECTION 4.2 - PARTIAL EXERCISE. Any exercisable portion of the
Option or the entire Option, if then wholly exercisable, may be exercised in
whole or in part at any time prior to the time when the Option or portion
thereof becomes unexercisable under Section 3.2; PROVIDED, HOWEVER, that any
partial exercise shall be for whole shares only.
SECTION 4.3 - MANNER OF EXERCISE. The Option, or any
exercisable portion thereof, may be exercised solely by delivery to the
Secretary or his office all of the following prior to the time when the Option
or such portion becomes unexercisable under Section 4.2:
<PAGE>
8
(a) Notice in writing signed by the Optionee or the other person then
entitled to exercise the Option or portion thereof, stating that the Option or
portion thereof is thereby exercised, such notice complying with all applicable
rules established by the Committee; and
(b) Full payment (in cash, by certified check or by a combination
thereof) for the shares with respect to which such Option or portion thereof is
exercised; and
(c) Full payment to the Company of all amounts which, under federal,
state or local law, it is required to withhold upon exercise of the Option; and
(d) Execution of all necessary Securityholder Agreements, which
Agreements shall include a Stockholder's Agreement containing terms regarding
transfer restrictions, put rights, piggyback registration rights, and other
rights relating to the Option and Option Stock, by the Optionee; and
(e) If the Option or portion thereof shall be exercised pursuant to
Section 4.1 by any person or persons other than the Optionee, appropriate proof
of the right of such person or persons to exercise the Option.
SECTION 4.4 - RIGHTS AND OBLIGATIONS UPON EXERCISE. Upon
exercise of the Option, the rights and obligations set forth in the
Securityholder Agreements shall be applicable to all shares of Option Stock
(including, but not limited to, the legend requirements and transfer
restrictions set forth therein).
SECTION 4.5 - RIGHTS AS STOCKHOLDER. The holder of the Option
shall not be, nor have any of the rights or privileges of, a stockholder of the
Company in respect of any shares purchasable upon the exercise of the Option or
any portion thereof unless and until certificates representing such shares shall
have been issued by the Company to such holder and the Company agrees to issue
any such certificates on a timely basis.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 - OPTIONS NOT TRANSFERABLE. Neither the Options
nor any interest or right therein or part thereof shall be liable for the debts,
contracts or engagements of the Optionee or his successors in interest or shall
be subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect; provided,
however, that this Section 5.1 shall not prevent transfers by will or by the
applicable laws of descent and distribution.
<PAGE>
9
SECTION 5.2 - NOTICES. Any notice to be given under the terms
of this Agreement to the Company shall be addressed to the Company in care of
its Secretary, and any notice to be given to the Optionee shall be addressed to
him at the address given beneath his signature hereto. By a notice given
pursuant to this Section 5.2, either party may hereafter designate a different
address for notices to be given to him. Any notice which is required to be given
to the Optionee shall, if the Optionee is then deceased, be given to the
Optionee's personal representative if such representative has previously
informed the Company of his status and address by written notice under this
Section 5.2. Any notice shall have been deemed duly given when enclosed in a
properly sealed envelope or wrapper addressed as aforesaid, deposited (with
postage prepaid) in a post office or branch post office regularly maintained by
the United States Postal Service.
SECTION 5.3 - TITLES. Titles are provided herein for
convenience only and are not to serve as a basis for interpretation or
construction of this Agreement.
SECTION 5.4 - AMENDMENT. This Agreement may be amended only by
a writing executed by the parties hereto which specifically states that it is
amending this Agreement.
SECTION 5.5 - NO RIGHT TO EMPLOYMENT. Nothing in this
Agreement or in the Plan shall confer upon the Employee any right to continue in
the employ or service of the Company or shall interfere with or restrict in any
way the rights of the Company, which are hereby expressly reserved, to discharge
the Employee at any time for any reason whatsoever.
SECTION 5.6 - GOVERNING LAW. This Agreement shall be construed
under and governed by the laws of the State of Delaware applicable to contracts
made and to be performed therein. Any action to enforce, which arises out of or
in any way relates to, any of the provisions of this Agreement may be brought
and prosecuted in such court or courts located within the State of Delaware as
provided by law; and the parties consent to the jurisdiction of such court or
courts located within the State of Delaware and to service of process by
registered mail, return receipt requested, or by any other manner provided by
Delaware law.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto.
ST. JOHN KNITS INTERNATIONAL,
INCORPORATED:
By:____________________________
Name:
Title:
OPTIONEE:
__________________________
Marie St. John Gray
Address:
Optionee's Taxpayer
Identification Number:
__________________________
<PAGE>
11
SCHEDULE 1
MARIE ST. JOHN GRAY
<TABLE>
<S> <C>
NUMBER OF SHARES SUBJECT TO OPTION: 109,104
OPTION PRICE PER SHARE: $30.00
GRANT DATE: 7/7/99
</TABLE>
<PAGE>
EXHIBIT 10.36
STOCK OPTION AGREEMENT
This Stock Option Agreement (this "Agreement"), dated as of
July 7, 1999 (the "Grant Date"), is made by and between ST. JOHN KNITS
INTERNATIONAL, INCORPORATED (the "Company"), a Delaware corporation, and the
employee of the Company or its subsidiary whose name appears on the signature
page hereof, hereinafter referred to as the "Optionee".
WHEREAS, the Company wishes, pursuant to the St. John Knits
International, Incorporated 1999 Stock Option Plan (the "Plan") (a copy of which
is attached hereto and the terms of which are hereby incorporated by reference),
to grant to Optionee an Option to purchase the number of shares of Common Stock
set forth on Schedule 1 in accordance with the terms of this Agreement; and
WHEREAS, the Board of Directors of the Company has determined
that it would be to the advantage and best interest of the Company and its
stockholders to sell the shares and grant the Option provided for herein.
NOW, THEREFORE, in consideration of the mutual covenants
herein contained and other good and valuable consideration, receipt of which is
hereby acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever capitalized terms are used in this Agreement as
defined terms, they shall have the meaning set forth in the Plan or the meaning
specified below unless the context clearly indicates to the contrary.
SECTION 1.1 - CAUSE. "Cause" used in connection with the
Termination of Employment of the Optionee shall mean either (a) the definition
of "Cause" as set forth in any employment agreement executed between the
Optionee and the Company or any of its affiliates or, if no such agreement or
definition therein exists, (b) a Termination of Employment of the Optionee by
the Company or any affiliate thereof due to (i) willful malfeasance or willful
misconduct by Optionee in connection with his employment, (ii) continuing
refusal by Optionee to perform his duties, after notice of any such refusal to
perform such duties or direction was given to Optionee, (iii) any breach by the
Optionee of a confidentiality or noncompete covenant made in favor of the
Company or an affiliate or any material breach by the Optionee of an employment
agreement between the Company or an affiliate and the Optionee or (iv) the
commission by Optionee of (a) any felony or (b) a misdemeanor involving moral
turpitude.
<PAGE>
2
SECTION 1.2 - CHANGE OF CONTROL. "Change of Control" shall
mean (i) prior to an initial Public Offering of Common Stock, the date Vestar:
(A) ceases to be the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act, which shall in any event
include having the power to vote (or cause to be voted at
Vestar's direction) pursuant to contract, irrevocable proxy or
otherwise)), directly or indirectly, of a majority in the
aggregate of the total voting power of the Company, whether as
a result of the issuance of securities of the Company, any
merger, consolidation, liquidation or dissolution of the
Company, any direct or indirect transfer of securities by the
Company or otherwise, and
(B) does not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of
the Board;
(ii) coincident with or subsequent to an initial Public
Offering of Common Stock, the date that:
(A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than Vestar, is or becomes the
beneficial owner (as defined in clause (i)(A) above, except
that such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more
than 35% of the total voting power of the Company; and
(B) Vestar "beneficially owns" (as defined in clause (i)(A)
above), directly or indirectly, in the aggregate a lesser
percentage of the total voting power of the Company than such
other person and does not have the right or ability by voting
power, contract or otherwise to elect or designate for
election a majority of the Board; or
(iii) the date, following the expiration of any period of two
consecutive years, that individuals, who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors, or whose nomination for
election by the shareholders of the Company, was approved by a vote of 66-2/3%
of the directors of the Company then still in office who were either directors
at the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company then in office.
For purposes of clauses (i) and (ii), Vestar shall be deemed
to beneficially own voting power of a corporation held by any other corporation
(the "parent corporation") so long as Vestar beneficially owns (as so defined),
directly or indirectly, in the aggregate, a majority of the voting power of the
parent corporation. For purposes hereof, Vestar shall be deemed to have voting
power over each share of Common Stock owned by any Employee.
<PAGE>
3
SECTION 1.3 - CLOSING DATE. "Closing Date" shall mean July 7,
1999.
SECTION 1.4 - COMMON STOCK EQUIVALENTS. "Common Stock
Equivalents" shall mean any stock, warrants, rights, calls, options or other
securities exchangeable or exercisable for or convertible into Common Stock.
SECTION 1.5 - DISABILITY. "Disability" of the Optionee shall
mean the inability of the Optionee to perform the essential functions of his
job, with or without reasonable accommodation, by reason of a physical or mental
infirmity, (i) for a continuous period of six (6) months or (ii) at such earlier
time as the Company receives satisfactory medical evidence that the Optionee has
a physical or mental disability or infirmity which is reasonably likely to
prevent him from returning to the performance of his work duties for six (6)
months or longer. The date of such Disability shall be on the last day of such
six-month period or the fifteenth day following the day on which the Company
receives such satisfactory medical evidence, as the case may be.
SECTION 1.6 - EBITDA - "EBITDA" shall have the same meaning as
"Consolidated EBITDA", as such term is defined in the Credit Agreement dated as
of July 7, 1999, among the Company, the Lenders party thereto, and The Chase
Manhattan Bank, as Administrative Agent, as such Agreement shall from time to
time be amended.
SECTION 1.7 - LLC AGREEMENT. "LLC Agreement" shall mean the
Amended and Restated Limited Liability Company Agreement of Vestar/Gray
Investors LLC by and among Vestar Capital Partners III, L.P., Robert Gray, Marie
Gray, Kelly A. Gray, Kelly Ann Gray Trust, Gray Family Trust and St. John Knits
International, Incorporated, dated as of July 7, 1999, as such Agreement shall
from time to time be amended.
SECTION 1.8 - OPTION. "Option" shall mean the Option described
in Section 3.1 hereof.
SECTION 1.9 - OPTION SHARES. "Option Shares" shall mean the
shares of Common Stock subject to an unexercised Option.
SECTION 1.10 - OPTION STOCK. "Option Stock" shall mean the
shares of Common Stock received upon the exercise of the Option.
SECTION 1.11 - OPTION TERMINATION EVENT. "Option Termination
Event" shall mean either (i) a Public Offering wherein the price of the shares
of Common Stock in the Public Offering would, if Vestar sold shares of Vestar
Stock in the Public Offering, result in Vestar failing to achieve the Vestar
Return on any such sale or (ii) a Change of Control wherein the consideration
for the shares of Vestar Stock sold or otherwise disposed of in the Change of
Control results in Vestar failing to achieve the Vestar Return upon such sale or
other disposition.
SECTION 1.12 - PUBLIC OFFERING. "Public Offering" shall mean
the sale of Securities to the public after the Closing Date (i) pursuant to an
effective registration statement filed under the Securities
<PAGE>
4
Act (excluding any registration of Securities on a Form S-4 or Form S-8) and
(ii) which results in an active trading market in such Securities (it being
understood that such an active trading market shall be deemed to exist if, among
other things, such Securities are listed on a national securities exchange or on
NASDAQ).
SECTION 1.13 - SECURITIES. "Securities" shall mean shares of
Common Stock or Common Stock Equivalents or other voting securities of the
Company, whether owned on the date hereof or hereafter acquired.
SECTION 1.14 - SECURITIES ACT. "Securities Act" shall mean the
Securities Act of 1933, as amended, and all rules and regulations promulgated
thereunder, as the same may be amended from time to time.
SECTION 1.15 - SECURITYHOLDER AGREEMENTS. "Securityholder
Agreements" shall mean any securityholder agreements to which any holder of
Common Stock, Common Stock Equivalents, or Securities is a party, including, but
not limited to, all voting agreements, stock transfer rights agreements and
registration rights agreements, which shall include the LLC Agreement.
SECTION 1.16 - VESTAR. "Vestar" shall mean Vestar Capital
Partners III, L.P., any investor therein or any affiliate thereof.
SECTION 1.17 - VESTAR CHANGE OF CONTROL. "Vestar Change of
Control" shall mean a Change of Control wherein the consideration for the shares
of Vestar Stock sold or otherwise disposed of in the Change of Control results
in Vestar achieving at least the Vestar Return upon such sale or other
disposition.
SECTION 1.18 - VESTAR EQUITY VALUE. "Vestar Equity Value"
shall mean the sum of:
(i) all amounts actually received by Vestar from time to time
(or, in the event of a Vestar IPO, all amounts which would be received if Vestar
sold shares of Vestar Stock in the Vestar IPO) on a cumulative basis through the
date of determination of (A) cash (x) through any cash dividend or other
distribution on account of the Vestar Stock or (y) in connection with either (1)
a disposition (including by way of redemption, repurchase or repayment) of all
or part of the Vestar Stock or of Securities or other non-cash property
previously received by way of a dividend or other distribution on account of the
Vestar Stock, but only to the extent Vestar Stock or other securities or
non-cash property is so disposed, (2) a disposition of any or all of the assets
of the Company or any of its subsidiaries, or (3) a recapitalization of the
Company or its subsidiaries, or (B) securities or other non-cash property
(valued at their fair market value) in connection with either (x) a disposition
of all or part of the Vestar Stock to a third party, but only to the extent
Vestar Stock is so disposed, or (y) a disposition of any or all of the assets of
the Company or any of its subsidiaries (it being understood that for purposes of
this clause (i), the terms "disposition," "dispose," and "disposed" shall not
include the creation of a pledge, lien or other similar encumbrance); PLUS
<PAGE>
5
(ii) an amount with respect to all shares of preferred stock
of the Company held by Vestar as of the determination date (including preferred
stock issued in payment of dividends and all accrued and unpaid dividends
thereon to the date of determination) equal to the aggregate liquidation
preference in respect thereof, determined as of such date in accordance with the
terms of such preferred stock (whether or not funds would be legally available
for the payment of such liquidation preference).
SECTION 1.19 - VESTAR IPO. "Vestar IPO" shall mean a Public
Offering wherein the price of the shares of Common Stock sold in the Public
Offering would, if Vestar sold shares of Vestar Stock in the Public Offering,
result in Vestar achieving at least the Vestar Return on any such sale.
SECTION 1.20 - VESTAR RETURN. "Vestar Return" shall mean the
"internal rate of return" for Vestar, which shall be deemed to have occurred on
the earliest date when the Vestar Equity Value with respect to Vestar Stock is
equal to or greater than, as of the date of determination, the amount determined
by increasing the amount of Vestar's initial investment in the Company (the
"INITIAL INVESTMENT") plus the amount of additional cash invested by Vestar in
Vestar Stock after the Closing Date at a compounded annual rate of 20%
commencing on the Closing Date (with respect to the Initial Investment made by
Vestar in Vestar Stock on the Closing Date) and the date of any subsequent cash
investment by Vestar (with respect to Vestar Stock acquired by Vestar after the
Closing Date) through and including such date of determination.
SECTION 1.21 - VESTAR STOCK. "Vestar Stock" shall mean issued
and outstanding shares of capital stock of any class or series of the Company,
so long as such shares were originally acquired by Vestar from the Company.
ARTICLE II
GRANT OF OPTION
SECTION 2.1 - GRANT OF OPTION. For good and valuable
consideration, receipt of which is hereby acknowledged, on and as of the date
hereof, the Company irrevocably grants to the Optionee the Options to purchase
any part or all of an aggregate of the number of shares set forth on Schedule 1
hereof of its Common Stock upon the terms and conditions set forth in this
Agreement.
SECTION 2.2 - OPTION PRICE. The initial Option Price per share
of Common Stock subject to Options on the Grant Date and for the term of the
Options is set forth on Schedule 1.
SECTION 2.3 - ADJUSTMENTS TO OPTIONS. Subject to Section 4.5
of the Plan, in the event that the outstanding shares of the Common Stock
subject to the Options are changed into or exchanged for a different number or
kind of shares of capital stock or other securities of the Company, or of
another corporation, by reason of a reorganization, merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, combination of
shares or otherwise, the Committee shall
<PAGE>
6
make an appropriate adjustment in the number and kind of shares as to which
the Options, or portions thereof then exercised, shall be exercisable. Such
adjustment in the Options shall be made without change in the total price
applicable to the unexercised portion of the Options (except for any change
in the aggregate price resulting from rounding-off of shares, quantities or
prices) and with any necessary corresponding adjustment in the Option Price.
Any such adjustment made by the Committee shall be final and binding upon the
Optionee, the Company and all other interested persons.
ARTICLE III
EXERCISABILITY OF OPTION
SECTION 3.1 - EXERCISABILITY.
(a) VESTING AND EXERCISABILITY. The Option shall become vested with
respect to one-third of the Option Shares on each of the first three
anniversaries of the Grant Date; PROVIDED, HOWEVER, that the Option shall only
become exercisable if and to the extent that the Option is vested and either of
the following occurs:
(i) the Company achieves certain EBITDA Targets for certain fiscal
years of the Company (each, a "FISCAL YEAR"), as set forth below:
Fiscal Year 1999 - $70.4 million
Fiscal Year 2000 - $76.2 million
Fiscal Year 2001 - $82.4 million
or, (ii) in the event that all such EBITDA Targets have not been achieved and
the Optionee continues to be employed with the Company through the end of Fiscal
Year 2001, upon the occurrence of a Vestar IPO or a Vestar Change of Control.
(b) DEATH AND DISABILITY. In the event that the Optionee dies or
becomes disabled prior to the end of Fiscal Year 2001, the Optionee's Option
will remain outstanding and be treated in the same manner as the Option would
have been treated if the Optionee had continued to be employed with the Company
though the end of the Fiscal Year 2001.
(c) OTHER TERMINATIONS OF EMPLOYMENT. In the event that the Optionee's
employment terminates for any reason (other than for Cause, death or Disability)
prior to Fiscal Year 2001, upon the occurrence of either of the events set forth
in (a)(i) and (ii), above, the Option will only be exercisable in respect of the
portion of the Option in which the Optionee had vested prior to such
terminations of employment.
SECTION 3.2 - EXPIRATION OF OPTION. The Option shall expire
and may not be exercised to any extent by anyone on the earliest to occur of the
following events:
<PAGE>
7
(a) the tenth anniversary of the Grant Date;
(b) in the event of either a Public Offering or a Change of Control,
with respect to any exercisable portion of the Option (or with respect to any
portion of an Option that becomes exercisable upon a Vestar IPO or a Vestar
Change of Control), thirty (30) days after the occurrence of either of such
events;
(c) immediately after a Termination of Employment for Cause;
(d) with respect to the then exercisable portion of the Option only,
three months after a Termination of Employment by the Company other than for
Cause, death or Disability;
(e) with respect to the unvested portion of the Option only, any
Termination of Employment other than for death or Disability;
(f) immediately after an Option Termination Event (unless the Option
has become exercisable pursuant to Section 3.1(a)(i)); or
(g) if the Committee so determines pursuant to Section 4.6 of the Plan,
upon the occurrence of any event described in that Section.
ARTICLE IV
EXERCISE OF OPTION
SECTION 4.1 - PERSONS ELIGIBLE TO EXERCISE. During the
lifetime of the Optionee, only the Optionee may exercise the Option or any
portion thereof. After the death of the Optionee, any portion of the Option may,
prior to the time when the Option becomes unexercisable under Section 3.2, be
exercised by the Optionee's personal representative or by any person empowered
to do so under the Optionee's will or under the then applicable laws of descent
and distribution.
SECTION 4.2 - PARTIAL EXERCISE. Any exercisable portion of the
Option or the entire Option, if then wholly exercisable, may be exercised in
whole or in part at any time prior to the time when the Option or portion
thereof becomes unexercisable under Section 3.2; PROVIDED, HOWEVER, that any
partial exercise shall be for whole shares only.
SECTION 4.3 - MANNER OF EXERCISE. The Option, or any
exercisable portion thereof, may be exercised solely by delivery to the
Secretary or his office all of the following prior to the time when the Option
or such portion becomes unexercisable under Section 4.2:
<PAGE>
8
(a) Notice in writing signed by the Optionee or the other person then
entitled to exercise the Option or portion thereof, stating that the Option or
portion thereof is thereby exercised, such notice complying with all applicable
rules established by the Committee; and
(b) Full payment (in cash, by certified check or by a combination
thereof) for the shares with respect to which such Option or portion thereof is
exercised; and
(c) Full payment to the Company of all amounts which, under federal,
state or local law, it is required to withhold upon exercise of the Option; and
(d) Execution of all necessary Securityholder Agreements, which
Agreements shall include a Stockholder's Agreement containing terms regarding
transfer restrictions, put rights, piggyback registration rights, and other
rights relating to the Option and Option Stock, by the Optionee; and
(e) If the Option or portion thereof shall be exercised pursuant to
Section 4.1 by any person or persons other than the Optionee, appropriate proof
of the right of such person or persons to exercise the Option.
SECTION 4.4 - RIGHTS AND OBLIGATIONS UPON EXERCISE. Upon
exercise of the Option, the rights and obligations set forth in the
Securityholder Agreements shall be applicable to all shares of Option Stock
(including, but not limited to, the legend requirements and transfer
restrictions set forth therein).
SECTION 4.5 - RIGHTS AS STOCKHOLDER. The holder of the Option
shall not be, nor have any of the rights or privileges of, a stockholder of the
Company in respect of any shares purchasable upon the exercise of the Option or
any portion thereof unless and until certificates representing such shares shall
have been issued by the Company to such holder and the Company agrees to issue
any such certificates on a timely basis.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 - OPTIONS NOT TRANSFERABLE. Neither the Options
nor any interest or right therein or part thereof shall be liable for the debts,
contracts or engagements of the Optionee or his successors in interest or shall
be subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect; provided,
however, that this Section 5.1 shall not prevent transfers by will or by the
applicable laws of descent and distribution.
<PAGE>
9
SECTION 5.2 - NOTICES. Any notice to be given under the terms
of this Agreement to the Company shall be addressed to the Company in care of
its Secretary, and any notice to be given to the Optionee shall be addressed to
him at the address given beneath his signature hereto. By a notice given
pursuant to this Section 5.2, either party may hereafter designate a different
address for notices to be given to him. Any notice which is required to be given
to the Optionee shall, if the Optionee is then deceased, be given to the
Optionee's personal representative if such representative has previously
informed the Company of his status and address by written notice under this
Section 5.2. Any notice shall have been deemed duly given when enclosed in a
properly sealed envelope or wrapper addressed as aforesaid, deposited (with
postage prepaid) in a post office or branch post office regularly maintained by
the United States Postal Service.
SECTION 5.3 - TITLES. Titles are provided herein for
convenience only and are not to serve as a basis for interpretation or
construction of this Agreement.
SECTION 5.4 - AMENDMENT. This Agreement may be amended only by
a writing executed by the parties hereto which specifically states that it is
amending this Agreement.
SECTION 5.5 - NO RIGHT TO EMPLOYMENT. Nothing in this
Agreement or in the Plan shall confer upon the Employee any right to continue in
the employ or service of the Company or shall interfere with or restrict in any
way the rights of the Company, which are hereby expressly reserved, to discharge
the Employee at any time for any reason whatsoever.
SECTION 5.6 - GOVERNING LAW. This Agreement shall be construed
under and governed by the laws of the State of Delaware applicable to contracts
made and to be performed therein. Any action to enforce, which arises out of or
in any way relates to, any of the provisions of this Agreement may be brought
and prosecuted in such court or courts located within the State of Delaware as
provided by law; and the parties consent to the jurisdiction of such court or
courts located within the State of Delaware and to service of process by
registered mail, return receipt requested, or by any other manner provided by
Delaware law.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto.
ST. JOHN KNITS INTERNATIONAL,
INCORPORATED:
By:________________________________
Name:
Title:
OPTIONEE:
___________________________
Kelly Ann Gray
Address:
Optionee's Taxpayer
Identification Number:
___________________________
<PAGE>
11
SCHEDULE 1
KELLY ANN GRAY
<TABLE>
<S> <C>
NUMBER OF SHARES SUBJECT TO OPTION: 145,472
OPTION PRICE PER SHARE: $30.00
GRANT DATE: 7/7/99
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As indpendent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
---------------------------------------
ARTHUR ANDERSEN LLP
Orange County, California
November 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001080280
<NAME> ST.JOHN KNITS INTERNATIONAL, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> NOV-01-1998 NOV-01-1998
<PERIOD-START> NOV-03-1997 NOV-02-1998
<PERIOD-END> NOV-01-1998 AUG-01-1999
<CASH> 14,337 18,034
<SECURITIES> 1,175 23
<RECEIVABLES> 35,562 31,340
<ALLOWANCES> 0 0
<INVENTORY> 47,748 46,805
<CURRENT-ASSETS> 108,944 108,327
<PP&E> 108,515 116,529
<DEPRECIATION> 38,628 46,985
<TOTAL-ASSETS> 182,390 195,748
<CURRENT-LIABILITIES> 19,754 23,195
<BONDS> 0 0
0 0
0 25,000
<COMMON> 503 65
<OTHER-SE> 161,072 (140,392)
<TOTAL-LIABILITY-AND-EQUITY> 182,390 195,748
<SALES> 281,961 221,935
<TOTAL-REVENUES> 281,961 221,935
<CGS> 120,883 97,382
<TOTAL-COSTS> 120,883 97,382
<OTHER-EXPENSES> 107,026 106,387
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 2,045
<INCOME-PRETAX> 55,422 17,342
<INCOME-TAX> 22,001 7,117
<INCOME-CONTINUING> 33,421 10,224
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 33,421 10,224
<EPS-BASIC> 2.00 0.64
<EPS-DILUTED> 1.94 0.63
</TABLE>
<PAGE>
LETTER OF TRANSMITTAL
FOR
TENDER OF ALL OUTSTANDING
12 1/2% SENIOR SUBORDINATED NOTES DUE 2009
IN EXCHANGE FOR
NEW 12 1/2% SENIOR SUBORDINATED NOTES DUE 2009
OF
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
- ----------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON DECEMBER 27, 1999 (THE "EXPIRATION DATE") UNLESS EXTENDED BY
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
- --------------------------------------------------------------------------------
THE EXCHANGE AGENT IS:
THE BANK OF NEW YORK
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: BY HAND DELIVERY:
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street
New York, New York 10286 New York, New York 10286
Attn: Reorganization Unit Attn: Reorganization Unit
BY OVERNIGHT DELIVERY: BY FACSIMILE:
The Bank of New York The Bank of New York
101 Barclay Street Facsimile No. (212) 815-6339
New York, New York 10286 Attn: Reorganization Unit
Attn: Reorganization Unit
CONFIRM BY TELEPHONE:
(212) 815-5788
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus dated November 22,
1999 (the "Prospectus") of St. John Knits International, Incorporated (the
"Company"), and this Letter of Transmittal (the "Letter of Transmittal"), which
together describe the Company's offer (the "Exchange Offer") to exchange its
12 1/2% Senior Subordinated Notes due 2009, which have been registered under the
Securities Act of 1933, as amended (the "Securities Act") (the "Exchange Notes")
for each of its outstanding 12 1/2% Senior Subordinated Notes due 2009 (the
"Outstanding Notes" and, together with the Exchange Notes, the "Notes") from the
holders thereof.
The form and terms of the Exchange Notes will be substantially identical to
the form and terms of the Outstanding Notes, except that the Exchange Notes will
be freely tradeable by virtue of their registration under the Securities Act of
1933, will not bear legends restricting their transfer, will not be subject to
any additional obligations regarding registration under the Securities Act of
1933, and will not be subject to the special interest payments resulting from a
failure to meet certain registration obligations. The Exchange Notes will be
issued under and entitled to the benefits of the same indenture that authorized
the issuance
<PAGE>
of the Outstanding Notes. Consequently, both series will be treated as a single
class of debt securities under that indenture.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus.
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS
INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND
REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS
LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
2
<PAGE>
PLEASE READ THE ENTIRE
LETTER OF TRANSMITTAL AND THE PROSPECTUS
CAREFULLY BEFORE CHECKING ANY BOX BELOW.
List below the Outstanding Notes to which this Letter of Transmittal
relates. If the space provided below is inadequate, the certificate numbers and
aggregate principal amounts should be listed on a separate signed schedule
affixed hereto.
<TABLE>
<S> <C> <C> <C>
DESCRIPTION OF OUTSTANDING NOTES TENDERED HEREWITH
AGGREGATE
PRINCIPAL AMOUNT
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) CERTIFICATE REPRESENTED BY PRINCIPAL
(PLEASE FILL IN) NUMBER(S)* OUTSTANDING NOTES* AMOUNT TENDERED**
<S> <C> <C> <C>
TOTAL
</TABLE>
* Need not be completed by book-entry holders.
** Unless otherwise indicated, the holder will be deemed to have tendered the
full aggregate principal amount represented by such Outstanding Notes. See
instruction 2.
Holders of Outstanding Notes whose Outstanding Notes are not immediately
available or who cannot deliver all other required documents to the Exchange
Agent on or prior to the Expiration Date or who cannot complete the procedures
for book-entry transfer on or prior to the Expiration Date or who cannot comply
with the applicable procedures under the Depository Trust Company's Automated
Tender Offer Program on or prior to the Expiration Date, must tender their
Outstanding Notes according to the guaranteed delivery procedures set forth in
the Prospectus.
Unless the context otherwise requires, the term "holder" for purposes of
this Letter of Transmittal means any person in whose name Outstanding Notes are
registered or any other person who has obtained a properly completed bond power
from the registered holder or any person whose Outstanding Notes are held of
record by The Depository Trust Company ("DTC").
/ / CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s) _______________________________________________
Name of Eligible Institution that Guaranteed Delivery ______________________
Date of Execution of Notice of Guaranteed Delivery _________________________
If Delivered by Book-Entry Transfer:
Name of Tendering Institution ______________________________________________
Account Number _____________________________________________________________
Transaction Code Number ____________________________________________________
3
<PAGE>
/ / CHECK HERE IF EXCHANGE NOTES ARE TO BE DELIVERED TO PERSON OTHER THAN
PERSON SIGNING THIS LETTER OF TRANSMITTAL:
Name _______________________________________________________________________
Address ____________________________________________________________________
/ / CHECK HERE IF EXCHANGE NOTES ARE TO BE DELIVERED TO ADDRESS DIFFERENT FROM
THAT LISTED ELSEWHERE IN THIS LETTER OF TRANSMITTAL:
Name _______________________________________________________________________
Address ____________________________________________________________________
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: ______________________________________________________________________
Address: ___________________________________________________________________
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Outstanding Notes that were acquired
as a result of market-making activities or other trading activities, it
acknowledges that it will deliver a prospectus in connection with any resale of
such Exchange Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. A broker-dealer may not
participate in the Exchange Offer with respect to Outstanding Notes acquired
other than as a result of market-making activities or other trading activities.
Any holder who is an "affiliate" of the Company or who has an arrangement or
understanding with respect to, is engaged in, or intends to engage in, the
distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer, or any broker-dealer who purchased Outstanding Notes from the Company to
resell pursuant to Rule 144A under the Securities Act or any other available
exemption under the Securities Act must comply with the registration and
prospectus delivery requirements under the Securities Act.
4
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the principal amount of the
Outstanding Notes indicated above. Subject to, and effective upon, the
acceptance for exchange of all or any portion of the Outstanding Notes tendered
herewith in accordance with the terms and conditions of the Exchange Offer
(including, if the Exchange Offer is extended or amended, the terms and
conditions of any such extension or amendment), the undersigned hereby
exchanges, assigns and transfers to, or upon the order of, the Company all
right, title and interest in and to such Outstanding Notes as are being tendered
herewith. The undersigned hereby irrevocably constitutes and appoints the
Exchange Agent as its true and lawful agent and attorney-in-fact of the
undersigned (with full knowledge that the Exchange Agent also acts as the agent
of the Company, in connection with the Exchange Offer) to cause the Outstanding
Notes to be assigned, transferred and exchanged.
The undersigned represents and warrants that it has full power and authority
to tender, exchange, assign and transfer the Outstanding Notes and to acquire
Exchange Notes issuable upon the exchange of such tendered Outstanding Notes,
and that, when the same are accepted for exchange, the Company will acquire good
and unencumbered title to the tendered Outstanding Notes, free and clear of all
liens, restrictions, charges and encumbrances and not subject to any adverse
claim. The undersigned also warrants that it will, upon request, execute and
deliver any additional documents deemed by the Exchange Agent or the Company to
be necessary or desirable to complete the exchange, assignment and transfer of
the tendered Outstanding Notes or transfer ownership of such Outstanding Notes
on the account books maintained by the book-entry transfer facility. The
undersigned further agrees that acceptance of any and all validly tendered
Outstanding Notes by the Company and the issuance of Exchange Notes in exchange
therefor shall constitute performance in full by the Company and its
subsidiaries guaranteeing the Outstanding Notes of their obligations under the
Exchange and Registration Rights Agreement dated July 7, 1999, among St. John
Knits International, Incorporated, St. John Knits, Inc.,, St. John
Trademarks, Inc., St. John Italy, Inc. and St. John Home, LLC, on the one hand,
and Chase Securities Inc., Bear, Stearns & Co. Inc. and PaineWebber
Incorporated, as representatives for the several initial purchasers, on the
other hand (the "Registration Rights Agreement"), and that the Company shall
have no further obligations or liabilities thereunder except as provided in the
first paragraph of Section 2 of such agreement. The undersigned will comply with
its obligations under the Registration Rights Agreement. The undersigned has
read and agrees to all terms of the Exchange Offer.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer--Conditions to the Exchange
Offer." The undersigned recognizes that as a result of these conditions (which
may be waived, in whole or in part, by the Company), as more particularly set
forth in the Prospectus, the Company may not be required to accept for exchange
or exchange any of the Outstanding Notes tendered hereby and, in such event, the
Outstanding Notes not exchanged will be returned to the undersigned at the
address shown above, as soon as practicable following the expiration or
termination of the Exchange Offer. In addition, the Company may amend or
terminate the Exchange Offer at any time prior to the Expiration Date if any of
the conditions set forth under "The Exchange Offer--Conditions to the Exchange
Offer" occur.
The undersigned understands that tenders of Outstanding Notes pursuant to
any one of the procedures described in the Prospectus and in the instructions
attached hereto will, upon the Company's acceptance for exchange of such
tendered Outstanding Notes, constitute a binding agreement between the
undersigned and the Company upon the terms and subject to the conditions of the
Exchange Offer. The undersigned recognizes that, under circumstances set forth
in the Prospectus, the Company may not be required to accept for exchange any of
the Outstanding Notes.
5
<PAGE>
By tendering Outstanding Notes and executing this Letter of Transmittal, the
undersigned represents that Exchange Notes received in the exchange will be
acquired in the ordinary course of business of the undersigned, that the
undersigned has no arrangement or understanding with any person to participate
in, and does not intend to engage in, a distribution (within the meaning of the
Securities Act) of such Exchange Notes, that the undersigned is not an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act and that if the undersigned or the person receiving such Exchange Notes is
an affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the undersigned
or the person receiving such Exchange Notes, whether or not such person is the
undersigned, is not a broker-dealer, the undersigned represents that it is not
engaged in, and does not intend to engage in, a distribution of Exchange Notes.
If the undersigned or the person receiving such Exchange Notes, whether or not
such person is the undersigned, is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Outstanding Notes that were acquired
as a result of market-making activities or other trading activities, it
acknowledges that it will deliver a prospectus in connection with any resale of
such Exchange Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. If the undersigned is a
person in the United Kingdom, the undersigned represents that its ordinary
activities involve it in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of its business.
Any holder of Outstanding Notes using the Exchange Offer to participate in a
distribution of the Exchange Notes (i) cannot rely on the position of the staff
of the Securities and Exchange Commission enunciated in its interpretive letter
with respect to Exxon Capital Holdings Corporation (available April 13, 1989) or
similar interpretive letters and (ii) must comply with the registration and
prospectus requirements of the Securities Act in connection with a secondary
resale transaction.
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, legal representatives, successors,
assigns, executors and administrators of the undersigned. Tendered Outstanding
Notes may be withdrawn at any time prior to the Expiration Date in accordance
with the terms of this Letter of Transmittal. Except as stated in the
Prospectus, this tender is irrevocable.
Certificates for all Exchange Notes delivered in exchange for tendered
Outstanding Notes and any Outstanding Notes delivered herewith but not
exchanged, and registered in the name of the undersigned, shall be delivered to
the undersigned at the address shown below the signature of the undersigned.
The undersigned, by completing the box entitled "Description of Outstanding
Notes Tendered Herewith" above and signing this letter, will be deemed to have
tendered the Outstanding Notes as set forth in such box.
6
<PAGE>
TENDERING HOLDER(S) SIGN HERE
(Complete accompanying substitute Form W-9)
MUST BE SIGNED BY REGISTERED HOLDER(S) EXACTLY AS NAME(S) APPEAR(S) ON
CERTIFICATE(S) FOR OUTSTANDING NOTES HEREBY TENDERED OR IN WHOSE NAME
OUTSTANDING NOTES ARE REGISTERED ON THE BOOKS OF DTC OR ONE OF ITS
PARTICIPANTS, OR BY ANY PERSON(S) AUTHORIZED TO BECOME THE REGISTERED
HOLDER(S) BY ENDORSEMENTS AND DOCUMENTS TRANSMITTED HEREWITH. IF SIGNATURE IS
BY A TRUSTEE, EXECUTOR, ADMINISTRATOR, GUARDIAN, ATTORNEY-IN-FACT, OFFICER OF
A CORPORATION OR OTHER PERSON ACTING IN A FIDUCIARY OR REPRESENTATIVE
CAPACITY, PLEASE SET FORTH THE FULL TITLE OF SUCH PERSON. SEE INSTRUCTION 3.
______________________________________________________________________________
______________________________________________________________________________
(SIGNATURE(S) OF HOLDER(S))
Date ________________________
Name(s) ______________________________________________________________________
(PLEASE PRINT)
Capacity (full title) ________________________________________________________
Address ______________________________________________________________________
______________________________________________________________________________
(INCLUDING ZIP CODE)
Daytime Area Code and Telephone No. __________________________________________
Taxpayer Identification No. __________________________________________________
7
<PAGE>
- -------------------------------------------
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED--SEE INSTRUCTION 3)
Authorized Signature _______________________________________________________
Dated ______________________________________________________________________
Name _______________________________________________________________________
Title ______________________________________________________________________
Name of Firm _______________________________________________________________
Address ____________________________________________________________________
____________________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone No. ________________________________________________
____________________________________________________________________________
- -------------------------------------------
- -------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if Exchange Notes or Outstanding Notes not tendered
are to be issued in the name of someone other than the registered holder of
the Outstanding Notes whose name(s) appear(s) above.
Issue
/ / Outstanding Notes not tendered to:
/ / Exchange Notes to:
Name(s) ____________________________________________________________________
Address ____________________________________________________________________
___________________________________________________________________________
(INCLUDE ZIP CODE)
Daytime Area Code and Telephone No.
___________________________________________________________________________
Tax Identification No. _____________________________________________________
----------------------------------------------
8
<PAGE>
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if Exchange Notes or Outstanding Notes not tendered
are to be sent to someone other than the registered holder of the Outstanding
Notes whose name(s) appear(s) above, or such registered holder(s) at an
address other than that shown above.
Mail
/ / Outstanding Notes not tendered to:
/ / Exchange Notes to:
Name(s) ______________________________________________________________________
Address ______________________________________________________________________
______________________________________________________________________________
(Include Zip Code)
Area Code and Telephone No. __________________________________________________
9
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES.
A holder of Outstanding Notes may tender the same by (i) properly completing
and signing this Letter of Transmittal or a facsimile hereof (all references in
the Prospectus to the Letter of Transmittal shall be deemed to include a
facsimile thereof) and delivering the same, together with the certificate or
certificates, if applicable, representing the Outstanding Notes being tendered
and any required signature guarantees and any other documents required by this
Letter of Transmittal, to the Exchange Agent at its address set forth above on
or prior to the Expiration Date, or (ii) complying with the procedure for
book-entry transfer described below, or (iii) complying with the guaranteed
delivery procedures described below.
Holders of Outstanding Notes may tender Outstanding Notes by book-entry
transfer by crediting the Outstanding Notes to the Exchange Agent's account at
DTC in accordance with DTC's Automated Tender Offer Program ("ATOP") and by
complying with applicable ATOP procedures with respect to the Exchange Offer.
DTC participants that are accepting the Exchange Offer should transmit their
acceptance to DTC, which will edit and verify the acceptance and execute a
book-entry delivery to the Exchange Agent's account at DTC. DTC will then send a
computer-generated message (an "Agent's Message") to the Exchange Agent for its
acceptance in which the holder of the Outstanding Notes acknowledges and agrees
to be bound by the terms of, and makes the representations and warranties
contained in, this Letter of Transmittal, the DTC participant confirms on behalf
of itself and the beneficial owners of such Outstanding Notes all provisions of
this Letter of Transmittal (including any representations and warranties)
applicable to it and such beneficial owner as fully as if it had completed the
information required herein and executed and transmitted this Letter of
Transmittal to the Exchange Agent. Delivery of the Agent's Message by DTC will
satisfy the terms of the Exchange Offer as to execution and delivery of a Letter
of Transmittal by the participant identified in the Agent's Message. DTC
participants may also accept the Exchange Offer by submitting a Notice of
Guaranteed Delivery through ATOP.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OUTSTANDING NOTES
AND ANY OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER, AND
EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN
ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. RATHER THAN MAIL THESE
ITEMS, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IF SUCH
DELIVERY IS BY MAIL, IT IS SUGGESTED THAT REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, BE USED. IN ALL CASES SUFFICIENT TIME SHOULD BE
ALLOWED TO PERMIT TIMELY DELIVERY. NO OUTSTANDING NOTES OR LETTERS OF
TRANSMITTAL SHOULD BE SENT TO THE COMPANY.
Holders whose Outstanding Notes are not immediately available or who cannot
deliver their Outstanding Notes and all other required documents to the Exchange
Agent on or prior to the Expiration Date or comply with book-entry transfer
procedures on or prior to the Expiration Date or who cannot comply with the
applicable ATOP procedures on or prior to the Expiration Date must tender their
Outstanding Notes pursuant to the guaranteed delivery procedure set forth in the
Prospectus. Pursuant to such procedure: (i) such tender must be made by or
through an Eligible Institution (as defined below); (ii) on or prior to the
Expiration Date, the Exchange Agent must have
received from such Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery by facsimile transmission (receipt
confirmed by telephone and an original delivered by guaranteed overnight
courier), mail or hand delivery setting forth the name and address of the
tendering holder, the names in which such Outstanding Notes are registered, and,
if applicable, the certificate numbers of the Outstanding Notes to be tendered,
stating that a tender of the Outstanding Notes is being made, and guaranteeing
that, within three New York State Exchange trading days after the Expiration
Date of the
10
<PAGE>
Exchange Offer, this Letter of Transmittal, together with the Outstanding Notes
or a book-entry confirmation, and any other documents required by this Letter of
Transmittal will be deposited by the Eligible Institution to the Exchange Agent;
and (iii) all tendered Outstanding Notes (or a confirmation of any book-entry
transfer of such Outstanding Notes into the Exchange Agent's account at a
book-entry transfer facility) as well as this Letter of Transmittal and all
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent within three New York Stock Exchange trading days after the date
of execution of such Notice of Guaranteed Delivery, all as provided in the
Prospectus.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Outstanding Notes for exchange.
2. PARTIAL TENDERS; WITHDRAWALS.
If less than the entire principal amount of Outstanding Notes evidenced by a
submitted certificate is tendered, the tendering holder must fill in the
aggregate principal amount of Outstanding Notes tendered in the box entitled
"Description of Outstanding Notes Tendered Herewith." A newly issued certificate
for the Outstanding Notes submitted but not tendered will be sent to such holder
as soon as practicable after the Expiration Date. All Outstanding Notes
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise clearly indicated.
If not yet accepted, a tender pursuant to the Exchange Offer may be
withdrawn prior to the Expiration Date.
To be effective with respect to the tender of Outstanding Notes, a written
notice of withdrawal must: (i) be received by the Exchange Agent at one of the
addresses for the Exchange Agent set forth above before the Company notifies the
Exchange Agent that it has accepted the tender of Outstanding Notes pursuant to
the Exchange Offer; (ii) specify the name of the person who tendered the
Outstanding Notes to be withdrawn; (iii) identify the Outstanding Notes to be
withdrawn (including the principal amount of such Outstanding Notes, or, if
applicable, the certificate numbers shown on the particular certificates
evidencing such Outstanding Notes and the principal amount of Outstanding Notes
represented by such certificates); (iv) include a statement that such holder is
withdrawing its election to have such Outstanding Notes exchanged; and (v) be
signed by the holder in the same manner as the original signature on this Letter
of Transmittal (including any required signature guarantee). The Exchange Agent
will return the properly withdrawn Outstanding Notes as soon as practicable
following receipt of notice of withdrawal. If Outstanding Notes have been
tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at the book-entry
transfer facility to be credited with the withdrawn Outstanding Notes and
otherwise comply with the book-entry transfer facility's procedures. All
questions as to the validity of notices of withdrawals, including time of
receipt, will be determined by the Company, and such determination will be final
and binding on all parties.
Any Outstanding Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Outstanding Notes
which have been tendered for exchange but which are not exchanged for any reason
will be returned to the holder thereof without cost to such holder (or, in the
case of Outstanding Notes tendered by book-entry transfer into the Exchange
Agent's account at the book entry transfer facility pursuant to the book-entry
transfer procedures described above, such Outstanding Notes will be credited to
an account with such book-entry transfer facility specified by the holder) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Outstanding Notes may be retendered by
following one of the procedures described under the caption "The Exchange
Offer--Procedures for Tendering" in the Prospectus at any time prior to the
Expiration Date.
11
<PAGE>
3. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES.
If this Letter of Transmittal is signed by the registered holder(s) of the
Outstanding Notes tendered hereby, the signature must correspond with the
name(s) as written on the face of the certificates without alteration,
enlargement or any change whatsoever.
If any of the Outstanding Notes tendered hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If a number of Outstanding Notes registered in different names are tendered,
it will be necessary to complete, sign and submit as many separate copies of
this Letter of Transmittal as there are different registrations of Outstanding
Notes.
When this Letter of Transmittal is signed by the registered holder or
holders (which term, for the purposes described herein, shall include the
book-entry transfer facility whose name appears on a security listing as the
owner of the Outstanding Notes) of Outstanding Notes listed and tendered hereby,
no endorsements of certificates or separate written instruments of transfer or
exchange are required.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of the Outstanding Notes listed, such Outstanding
Notes must be endorsed or accompanied by separate written instruments of
transfer or exchange in form satisfactory to the Company and duly executed by
the registered holder, in either case signed exactly as the name or names of the
registered holder or holders appear(s) on the Outstanding Notes.
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Endorsements on certificates or signatures on separate written instruments
of transfer or exchange required by this Instruction 3 must be guaranteed by an
Eligible Institution.
Signatures on this Letter of Transmittal must be guaranteed by an Eligible
Institution, unless Outstanding Notes are tendered: (i) by a holder who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on this Letter of Transmittal; or (ii) for the account of an
Eligible Institution (as defined below). In the event that the signatures in
this Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by an eligible guarantor
institution which is a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., a commercial bank or
trust company having an office or correspondent in the United States or another
"eligible institution" within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (an "Eligible Institution"). If Outstanding
Notes are registered in the name of a person other than the signer of this
Letter of Transmittal, the Outstanding Notes surrendered for exchange must be
endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by the Company, in its
sole discretion, duly executed by the registered holder with the signature
thereon guaranteed by an Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders should indicate, as applicable, the name and address to
which the Exchange Notes or certificates for Outstanding Notes not exchanged are
to be issued or sent, if different from the name and address of the person
signing this Letter of Transmittal. In the case of issuance in a different name,
the tax identification number of the person named must also be indicated.
Holders tendering Outstanding Notes
12
<PAGE>
by book-entry transfer may request that Outstanding Notes not exchanged be
credited to such account maintained at the book-entry transfer facility as such
holder may designate.
5. TRANSFER TAXES.
The Company shall pay all transfer taxes, if any, applicable to the transfer
and exchange of Outstanding Notes to it or its order pursuant to the Exchange
Offer. If, however, certificates representing Outstanding Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or are to
be issued in the name of, any person other than the registered holder of the
Outstanding Notes tendered, or tendered Outstanding Notes are registered in the
name of any person other than the person signing this Letter of Transmittal, or
a transfer tax is imposed for any reason other than the transfer and exchange of
Outstanding Notes to the Company or its order pursuant to the Exchange Offer,
the amount of any such transfer taxes (whether imposed on the registered holder
or any other person) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exception therefrom is not submitted
herewith the amount of such transfer taxes will be billed directly to such
tendering holder.
6. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive, in whole or in part, any
of the conditions to the Exchange Offer set forth in the Prospectus.
7. MUTILATED, LOST, STOLEN OR DESTROYED SECURITIES.
Any holder whose Outstanding Notes have been mutilated, lost, stolen or
destroyed, should contact the Exchange Agent at the address indicated below for
further instructions.
8. SUBSTITUTE FORM W-9
Each holder of Outstanding Notes whose Outstanding Notes are accepted for
exchange (or other payee) is required to provide a correct taxpayer
identification number ("TIN"), generally the holder's Social Security or federal
employer identification number, and certain other information, on Substitute
Form W-9, which is provided under "Important Tax Information" below, and to
certify that the holder (or other payee) is not subject to backup withholding.
Failure to provide the information on the Substitute Form W-9 may subject the
holder (or other payee) to a $50 penalty imposed by the Internal Revenue Service
and 31% federal income tax backup withholding on payments made in connection
with the Outstanding Notes. The box in Part 3 of the Substitute Form W-9 may be
checked if the holder (or other payee) has not been issued a TIN and has applied
for a TIN or intends to apply for a TIN in the near future. If the box in
Part 3 is checked and a TIN is not provided by the time any payment is made in
connection with the Outstanding Notes, 31% of all such payments will be withheld
until a TIN is provided.
9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering may be directed to the
Exchange Agent at the address and telephone number set forth above. In addition,
all questions relating to the Exchange Offer, as well as requests for assistance
or additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent at the address and telephone number indicated
above.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE OR COPY THEREOF
(TOGETHER WITH CERTIFICATES OF OUTSTANDING NOTES OR CONFIRMATION OF BOOK-ENTRY
TRANSFER AND ALL OTHER REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY
MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
13
<PAGE>
IMPORTANT TAX INFORMATION
Under U.S. Federal income tax law, a holder of Outstanding Notes whose
Outstanding Notes are accepted for exchange may be subject to backup withholding
unless the holder provides The Bank of New York, as Paying Agent (the "Paying
Agent"), through the Exchange Agent, with either (i) such holder's correct
taxpayer identification number ("TIN") on Substitute Form W-9 attached hereto,
certifying that the TIN provided on Substitute Form W-9 is correct (or that such
holder of Outstanding Notes is awaiting a TIN) and that (A) the holder of
Outstanding Notes has not been notified by the Internal Revenue Service that he
or she is subject to backup withholding as a result of a failure to report all
interest or dividends or (B) the Internal Revenue Service has notified the
holder of Outstanding Notes that he or she is no longer subject to backup
withholding; or (ii) an adequate basis for exemption from backup withholding. If
such holder of Outstanding Notes is an individual, the TIN is such holder's
social security number. If the Paying Agent is not provided with the correct
TIN, the holder of Outstanding Notes may be subject to certain penalties imposed
by the Internal Revenue Service.
Certain holders of Outstanding Notes (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. However, exempt holders of Outstanding
Notes should indicate their exempt status on Substitute Form W-9. For example, a
corporation must complete the Substitute Form W-9, providing its TIN and
indicating that it is exempt from backup withholding. In order for a foreign
individual to qualify as an exempt recipient, the holder must submit a
Form W-8, signed under penalties of perjury, attesting to that individual's
exempt status. A Form W-8 can be obtained from the Paying Agent. See the
enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9" for more instructions.
If backup withholding applies, the Paying Agent is required to withhold 31%
of any such payments made to the holder of Outstanding Notes or other payee.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the Internal Revenue Service.
The box in Part 3 of the Substitute Form W-9 may be checked if the
surrendering holder of Outstanding Notes has not been issued a TIN and has
applied for a TIN or intends to apply for a TIN in the near future. If the box
in Part 3 is checked, the holder of Outstanding Notes or other payee must also
complete the Certificate of Awaiting Taxpayer Identification Number below in
order to avoid backup withholding. Notwithstanding that the box in Part 3 is
checked and the Certificate of Awaiting Taxpayer Identification Number is
completed, the Paying Agent will withhold 31% of all payments made prior to the
time a properly certified TIN is provided to the Paying Agent.
The holder of Outstanding Notes is required to give the Paying Agent the TIN
(e.g., social security number or employer identification number) of the record
owner of the Outstanding Notes. If the Outstanding Notes are in more than one
name or are not in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional guidance on which number to report.
14
<PAGE>
<TABLE>
<S> <C> <C>
PAYER'S NAME:
SUBSTITUTE PART 1--PLEASE PROVIDE YOUR TIN IN THE BOX AT ------------------------
FORM W-9 RIGHT AND CERTIFY BY SIGNING AND DATING BELOW. Social Security Number
------------------------
Employer Identification
Number
DEPARTMENT OF THE PART 2 PART 3--
TREASURY CERTIFICATION--Under the penalties of perjury, I / / Awaiting TIN
INTERNAL REVENUE SERVICE certify that:
PAYER'S REQUEST FOR (1) The number shown on this form is my correct
TAXPAYER IDENTIFICATION Taxpayer Identification Number (or I am
NUMBER (TIN) waiting for a number to be issued to me), and
(2) I am not subject to backup withholding because
(a) I am exempt from backup withholding, or (b) I
have not been notified by the Internal Revenue
Service (the "IRS") that I am subject to
backup withholding as a result of a failure to
report all interest or dividends, or (c) the
IRS has notified me that I am no longer
subject to backup withholding.
CERTIFICATE INSTRUCTIONS--You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to backup withholding because
of under-reporting interest or dividends on your tax return. However, if after
being notified by the IRS that you were subject to backup withholding you received
another notification from the IRS that you are no longer subject to backup
withholding, do not cross out such item (2).
SIGNATURE
SIGN HERE T
DATE
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER, PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF
THE SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office, or
(2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of payment, 31% of all reportable payments made to me will be withheld.
Signature
------------------------------------------ Date
--------------------------, 1999
15
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number for the Payee (You)
to Give the Payer.--Social security numbers have nine digits separated by two
hyphens: i.e., 000-00-0000. Employee identification numbers have nine digits
separated by only one hyphen: i.e., 00-0000000. The table below will help
determine the number to give the payer. All "Section" references are to the
Internal Revenue Code of 1986, as amended. "IRS" is the Internal Revenue
Service.
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
GIVE THE SOCIAL SECURITY NUMBER
FOR THIS TYPE OF ACCOUNT: OF--
<S> <C> <C>
- -------------------------------------------------------------------
1. Individual The individual
2. Two or more individuals The actual owner of the account
(joint account) or, if combined funds, the
first individual on the
account(1)
3. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
4. a. The usual revocable The grantor-trustee(1)
savings trust account
(grantor is also trustee)
b. So-called trust account The actual owner(1)
that is not a legal or valid
trust under state law
5. Sole proprietorship The owner(3)
- -------------------------------------------------------------------
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION NUMBER OF--
- -------------------------------------------------------------------
6. Sole proprietorship The owner(3)
7. A valid trust, estate, or The legal entity(4)
pension trust
8. Corporate The corporation
9. Association, club, religious, The organization
charitable, educational, or
other tax-exempt organization
account
10. Partnership The partnership
11. A broker or registered The broker or nominee
nominee
12. Account with the Department The public entity
of Agriculture in the name of
a public entity (such as a
state or local government,
school district, or prison)
that receives agricultural
program payments
</TABLE>
- ---------------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has a social security number, that
person's number must be furnished.
(2) Circle the minor's name and furnish the minor's social security number.
(3) You must show your individual name, but you may also enter your business
or "doing business as" name. You may use either your social security number
or your employer identification number (if you have one).
(4) List first and circle the name of the legal trust, estate, or pension
trust. (Do not furnish the taxpayer identification number of the personal
representative or trustee unless the legal entity itself is not designated
in the account title.)
NOTE: IF NO NAME IS CIRCLED WHEN THERE IS MORE THAN ONE NAME, THE NUMBER WILL BE
CONSIDERED TO BE THAT OF THE FIRST NAME LISTED.
- ---------------------------------------------------------------
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5. Application for a Social Security Card, at the local
Social Administration office, or Form SS-4, Application for Employer
Identification Number, by calling 1 (800) TAX-FORM, and apply for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
PAYEES SPECIFICALLY EXEMPTED FROM WITHHOLDING INCLUDE:
- - An organization exempt from tax under Section 501(a), an individual retirement
account (IRA), or a custodial account under Section 403(b)(7), if the account
satisfies the requirements of Section 401(f)(2).
- - The United States or a state thereof, the District of Columbia, a possession
of the United States, or a political subdivision or wholly-owned agency or
instrumentality of any one or more of the foregoing.
- - An international organization or any agency or instrumentality thereof.
- - A foreign government and any political subdivision, agency or instrumentality
thereof.
- - Payees that may be exempt from backup withholding include:
- - A corporation.
- - A financial institution.
- - A dealer in securities or commodities required to register in the United
States, the District of Columbia, or a possession of the United States.
- - A real estate investment trust.
- - A common trust fund operated by a bank under Section 584(a).
- - An entity registered at all times during the tax year under the Investment
Company Act of 1940.
- - A middleman known in the investment community as a nominee or who is listed in
the most recent publication of the American Society of Corporate
Secretaries, Inc., Nominee List.
- - A futures commission merchant registered with the Commodity Futures Trading
Commission.
- - A foreign central bank of issue.
PAYMENTS OF DIVIDENDS AND PATRONAGE DIVIDENDS GENERALLY EXEMPT FROM BACKUP
WITHHOLDING INCLUDE:
- - Payments to nonresident aliens subject to withholding under Section 1441.
- - Payments to partnerships not engaged in a trade or business in the United
States and that have at least one nonresident alien partner.
- - Payments of patronage dividends not paid in money.
- - Payments made by certain foreign organizations.
- - Section 404(k) payments made by an ESOP.
PAYMENTS OF INTEREST GENERALLY EXEMPT FROM BACKUP WITHHOLDING INCLUDE:
- - Payments of interest on obligations issued by individuals. NOTE: You may be
subject to backup withholding if this interest is $600 or more and you have
not provided your correct taxpayer identification number to the payer.
- - Payments of tax-exempt interest (including exempt-interest dividends under
Section 852).
- - Payments described in Section 6049(b)(5) to nonresident aliens.
- - Payments on tax-free covenant bonds under Section 1451.
- - Payments made by certain foreign organizations.
- - Mortgage interest paid to you.
Certain payments, other than payments of interest, dividends, and patronage
dividends, that are exempt from information reporting are also exempt from
backup withholding. For details, see the regulations under sections 6041, 6041A,
6042, 6044, 6045, 6049, 6050A and 6050N.
EXEMPT PAYEES DESCRIBED ABOVE MUST FILE FORM W-9 OR A SUBSTITUTE FORM W-9 TO
AVOID POSSIBLE ERRONEOUS BACKUP WITHHOLDING. FILE THIS FORM WITH THE PAYER,
FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" IN PART II OF THE
FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE OF INTEREST, DIVIDENDS, OR
PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM.
PRIVACY ACT NOTICE.--Section 6109 requires you to provide your correct taxpayer
identification number to payers, who must report the payments to the IRS. The
IRS uses the number for identification purposes and may also provide this
information to various government agencies for tax enforcement or litigation
purposes. Payers must be given the numbers whether or not recipients are
required to file tax returns. Payers must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
taxpayer identification number to payer. Certain penalties may also apply.
PENALTIES
(1) FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail to furnish
your taxpayer identification number to a payer, you are subject to a penalty of
$50 for each such failure unless your failure is due to reasonable cause and not
to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis that results in no backup
withholding, you are subject to a $500 penalty.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
<PAGE>
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF ALL OUTSTANDING
12 1/2% SENIOR SUBORDINATED NOTES DUE 2009
IN EXCHANGE FOR
NEW 12 1/2% SENIOR SUBORDINATED NOTES DUE 2009
OF
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
Registered holders of outstanding 12 1/2% Senior Subordinated Notes due 2009
(the "Outstanding Notes") who wish to tender their Outstanding Notes in exchange
for a like principal amount of new 12 1/2% Senior Subordinated Notes due 2009
(the "Exchange Notes") and whose Outstanding Notes are not immediately available
or who cannot deliver their Outstanding Notes and Letter of Transmittal (and any
other documents required by the Letter of Transmittal) to The Bank of New York
(the "Exchange Agent") prior to the Expiration Date or who cannot complete the
procedures for book-entry transfer prior to the Expiration Date or who cannot
comply with the applicable procedures under the Depository Trust Company's
Automated Tender Offer Program prior to the Expiration Date, as applicable, may
use this Notice of Guaranteed Delivery or one substantially equivalent hereto.
This Notice of Guaranteed Delivery may be delivered by hand or sent by facsimile
transmission (receipt confirmed by telephone and an original delivered by
guaranteed overnight courier) or mail to the Exchange Agent. See "The Exchange
Offer--Procedures for Tendering" in the Prospectus.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
<TABLE>
<S> <C>
BY HAND DELIVERY: BY MAIL:
The Bank of New York (insured or registered recommended)
101 Barclay Street The Bank of New York
New York, New York 10286 101 Barclay Street
Attn: Carolle Montreuil, New York, New York 10286
Reorganization Unit Attn: Carolle Montreuil,
Reorganization Unit
BY OVERNIGHT COURIER: BY FACSIMILE:
The Bank of New York (212) 815-6339
101 Barclay Street Attn: Carolle Montreuil,
New York, New York 10286 Reorganization Unit
Attn: Carolle Montreuil,
Reorganization Unit Confirm by Telephone:
(212) 815-5788
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER
THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an eligible institution (as defined in the Prospectus), such
signature guarantee must appear in the applicable space provided on the Letter
of Transmittal for Guarantee of Signatures.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders the principal amount of Outstanding Notes
indicated below, upon the terms and subject to the conditions contained in the
Prospectus dated November 22, 1999 of St. John Knits International, Incorporated
(the "Prospectus"), receipt of which is hereby acknowledged.
DESCRIPTION OF OUTSTANDING NOTES TENDERED
<TABLE>
<CAPTION>
NAME AND ADDRESS OF CERTIFICATE NUMBER(S)
REGISTERED HOLDER AS IT OF OUTSTANDING NOTES
APPEARS ON THE TENDERED (OR ACCOUNT PRINCIPAL AMOUNT OF
NAME OF TENDERING OUTSTANDING NOTES NUMBER AT BOOK-ENTRY OUTSTANDING NOTES
HOLDER (PLEASE PRINT) FACILITY) TENDERED
<S> <C> <C> <C>
- --------------------- ---------------------- --------------------- ---------------------
- --------------------- ---------------------- --------------------- ---------------------
- --------------------- ---------------------- --------------------- ---------------------
- --------------------- ---------------------- --------------------- ---------------------
</TABLE>
SIGN HERE
NAME OF REGISTERED OR ACTING HOLDER: ___________________________________________
SIGNATURE(S): __________________________________________________________________
NAME(S) (PLEASE PRINT): ________________________________________________________
ADDRESS: _______________________________________________________________________
- --------------------------------------------------------------------------------
TELEPHONE NUMBER: ______________________________________________________________
DATE: __________________________________________________________________________
IF SHARES OF OUTSTANDING NOTES WILL BE TENDERED BY BOOK-ENTRY TRANSFER, PROVIDE
THE FOLLOWING INFORMATION:
DTC ACCOUNT NUMBER: ________________________________________________________
DATE: ______________________________________________________________________
THE FOLLOWING GUARANTEE MUST BE COMPLETED
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended, hereby guarantees to deliver to the Exchange Agent at one of
its addresses set forth on the reverse hereof, the certificates representing the
Outstanding Notes (or a confirmation of book-entry transfer of such Outstanding
Notes into the Exchange Agent's account at the book-entry transfer facility),
together with a properly completed and duly executed Letter of Transmittal (or
facsimile thereof), with any required signature guarantees, and any other
documents required by the Letter of Transmittal within three New York Stock
Exchange trading days after the Expiration Date (as defined in the Letter of
Transmittal).
<TABLE>
<S> <C>
Name of Firm:
(Authorized Signature)
Address: Title:
Name:
(Zip Code) (Please type or print)
Area Code and Telephone No.: Date:
</TABLE>
NOTE: DO NOT SEND OUTSTANDING NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY.
OUTSTANDING NOTES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
