<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 333-73107
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Delaware 52-2061057
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification Number)
Organization)
17422 Derian Avenue, Irvine, California 92614
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (949) 863-1171
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
The number of outstanding shares of registrant's Common Stock, par value $0.01
per share, was 6,546,174 shares as of September 13, 1999.
================================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 1, November 1,
1999 1998
---------------- ----------------
ASSETS (unaudited)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 18,033,835 $ 14,336,872
Investments................................................................ 23,173 1,175,427
Accounts receivable, net................................................... 31,340,472 35,562,189
Inventories................................................................ 46,805,050 47,748,286
Prepaid income tax......................................................... 1,858,530 --
Deferred income tax benefit................................................ 7,743,961 7,743,961
Other...................................................................... 2,521,905 2,377,352
---------------- ----------------
Total current assets................................................... 108,326,926 108,944,087
---------------- ----------------
Property and equipment:
Machinery and equipment.................................................... 50,443,800 47,023,808
Leasehold improvements..................................................... 33,316,891 30,691,098
Buildings.................................................................. 17,880,244 17,883,700
Furniture and fixtures..................................................... 6,804,004 6,462,833
Land....................................................................... 5,786,857 5,786,857
Construction in progress................................................... 2,297,034 666,481
---------------- ----------------
116,528,830 108,514,777
Less-Accumulated depreciation and amortization............................. 46,985,297 38,627,543
---------------- ----------------
69,543,533 69,887,234
---------------- ----------------
Deferred financing costs.......................................................... 15,105,916 --
Other assets...................................................................... 2,771,448 3,558,347
---------------- ----------------
$ 195,747,823 $ 182,389,668
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable........................................................... $ 6,953,378 $ 8,303,874
Accrued expenses........................................................... 13,012,126 11,101,794
Income taxes payable....................................................... -- 120,657
Current portion of long-term debt.......................................... 3,229,572 227,979
---------------- ----------------
Total current liabilities.............................................. 23,195,076 19,754,304
Long-term debt, net of current portion............................................ 188,664,889 407,599
Subordinated notes, net of discount............................................... 98,625,611 --
---------------- ----------------
Total liabilities...................................................... 310,485,576 20,161,903
---------------- ----------------
Minority interest................................................................. 654,092 653,435
Mandatorily Redeemable Preferred Stock, $100 stated value: Authorized-3,000,000
shares, issued and outstanding-250,000 and none, respectively................... 25,000,000 --
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.... 65,462 502,799
Unrealized loss on securities.............................................. (30,318) (27,504)
Cumulative translation adjustment.......................................... 169,199 197,249
Additional paid-in capital................................................. 147,087,032 17,882,672
Retained earnings.......................................................... (287,683,220) 143,019,114
---------------- ----------------
Total stockholders' equity (deficit)................................... (140,391,845) 161,574,330
---------------- ----------------
$ 195,747,823 $ 182,389,668
================ ================
</TABLE>
See accompanying notes.
2
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------------------------------------------
August 1, August 2, August 1, August 2,
1999 1998 1999 1998
------------ ------------ ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales.................................................. $70,309,453 $67,726,764 $221,935,006 $206,293,273
Cost of sales.............................................. 30,595,866 28,298,475 97,381,765 86,210,644
------------ ------------ ------------- -------------
Gross profit............................................... 39,713,587 39,428,289 124,553,241 120,082,629
Selling, general and administrative expenses............... 29,584,083 27,466,146 91,175,121 76,857,692
Transaction fees and expenses.............................. 15,036,711 -- 15,211,711 --
------------ ------------ ------------- -------------
Operating income (loss).................................... (4,907,207) 11,962,143 18,166,409 43,224,937
Interest expense........................................... 2,041,068 -- 2,045,341 --
Other income............................................... 385,194 467,849 1,220,441 1,100,080
------------ ------------ ------------- -------------
Income (loss) before income taxes.......................... (6,563,081) 12,429,992 17,341,509 44,325,017
Income tax provision (benefit)............................. (2,695,136) 5,105,041 7,117,259 18,033,451
------------ ------------ ------------- -------------
Net income (loss).......................................... (3,867,945) 7,324,951 10,224,250 26,291,566
------------ ------------ ------------- -------------
Comprehensive income (loss), net of tax:
Foreign currency translation adjustments.............. 87,226 (77,067) (16,550) (147,292)
Unrealized loss on securities......................... (1,589) -- (1,660) --
------------ ------------ ------------- -------------
Comprehensive income (loss)................................ $(3,782,308) $ 7,247,884 $ 10,206,040 $ 26,144,274
============ ============ ============= =============
Net income (loss) per common share:
Basic................................................. $ (0.29) $ 0.44 $ 0.64 $ 1.57
============ ============ ============= =============
Diluted............................................... $ (0.29) $ 0.43 $ 0.63 $ 1.53
============ ============ ============= =============
Dividends per share........................................ $ 0.025 $ 0.025 $ 0.075 $ 0.075
============ ============ ============= =============
Shares used in the calculation of net income per share:
Basic................................................. 13,850,652 16,741,455 15,670,913 16,707,206
============ ============ ============= =============
Diluted............................................... 13,850,652 17,154,662 16,042,501 17,133,421
============ ============ ============= =============
</TABLE>
See accompanying notes.
3
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------------------------------
August 1, 1999 August 2, 1998
------------------ ------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 10,224,250 $ 26,291,566
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................. 10,930,588 8,275,770
Increase in deferred income tax benefit....................... -- (500,000)
Loss on disposal of property and equipment.................... 963,949 478,275
Partnership losses............................................ 184,594 252,113
Minority interest in income of consolidated subsidiaries...... 657 48,190
Decrease in accounts receivable............................... 4,221,717 4,117,122
(Increase) decrease in inventories............................. 943,236 (16,509,327)
Increase in prepaid income taxes.............................. (1,858,530) (1,092,178)
(Increase) decrease in other current assets.................... (144,553) 236,568
Increase in other assets...................................... (347,741) (48,414)
Decrease in accounts payable.................................. (1,350,496) (2,582,433)
Increase (decrease) in accrued expenses....................... 1,656,779 (1,230,303)
Decrease in income taxes payable.............................. (120,657) (2,081,242)
------------------ ------------------
Net cash provided by operating activities..................... 25,303,793 15,655,707
------------------ ------------------
Cash flows from investing activities:
Proceeds from sale of property and equipment.................. 175,500 10,499
Purchase of property and equipment............................ (10,757,801) (16,799,772)
Purchase of short-term investments............................ -- (150,271)
Sale of short-term investments................................ 1,152,254 --
Capital distributions from partnership........................ 106,500 58,996
------------------ ------------------
Net cash used in investing activities........................ (9,323,547) (16,880,548)
------------------ ------------------
Cash flows from financing activities:
Proceeds from credit agreement............................... 190,000,000 --
Proceeds from issuance of subordinated notes................. 98,616,000 --
Addition to long-term debt................................... 1,427,000 --
Principal payments of long-term debt......................... (169,710) --
Recapitalization............................................. (311,446,769) --
Issuance of common stock..................................... 796,510 1,832,968
Issuance of preferred stock.................................. 25,000,000 --
Financing fees and expenses.................................. (15,230,905) --
Dividends paid............................................... (1,244,545) (1,668,735)
------------------ ------------------
Net cash provided by (used in) financing activities.............. (12,252,419) 164,233
------------------ ------------------
</TABLE>
4
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------------------------------
August 1, 1999 August 2, 1998
------------------ -------------------
(unaudited)
<S> <C> <C>
Effect of exchange rate changes...................................... (28,050) (248,384)
------------------ -------------------
Unrealized loss on securities........................................ (2,814) --
------------------ -------------------
Net increase (decrease) in cash and cash equivalents................. 3,696,963 (1,308,992)
Beginning balance, cash and cash equivalents......................... 14,336,872 14,266,564
------------------ -------------------
Ending balance, cash and cash equivalents............................ $ 18,033,835 $ 12,957,572
================== ===================
Supplemental disclosures of cash flow information:
Cash received during the thirty-nine weeks for interest income..... $ 984,558 $ 1,115,220
================== ===================
Cash paid during the thirty-nine weeks for:
Interest expense............................................. $ 7,179 $ 338
================== ===================
Income taxes................................................. $ 10,455,685 $ 20,910,962
================== ===================
</TABLE>
See accompanying notes.
5
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of St. John
Knits International, Incorporated and its subsidiaries (collectively referred to
herein as "the Company") reflect all adjustments (which include only normal
recurring adjustments) considered necessary to present fairly the financial
position, results of operations and cash flows of the Company for the periods
presented. It is suggested that the accompanying unaudited consolidated
financial statements and footnotes thereto be read in conjunction with the
financial statements and footnotes included in the Annual Report on Form 10-K
for St. John Knits, Inc. ("St. John") for the year ended November 1, 1998 as
filed with the Securities and Exchange Commission on January 29, 1999. Prior to
July 7, 1999, the Company was a wholly owned subsidiary of St. John. On July 7,
1999, pursuant to the terms of the Agreement and Plan of Merger dated February
2, 1999 (the "Merger Agreement") by and among the Company, St. John,
SJKAcquisition, Inc. and Pearl Acquisition Corp., St. John became a wholly owned
subsidiary of the Company.
The results of operations for the periods presented are not necessarily
indicative of the operating results that may be expected for the year ending
October 31, 1999.
2. Summary of Accounting Policies
a. Company Operations
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 Company owned retail boutiques and outlets. All
intercompany and interdivisional transactions and accounts have been eliminated.
b. 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. The quarters also end on the Sunday nearest
the end of the quarter, which accordingly were August 1, 1999 and August 2,
1998.
3. Dividends
St. John declared a quarterly dividend of $0.025 per share on June 8, 1999
for all shareholders of record on June 24, 1999. The dividend was paid on July
22, 1999.
4. Earnings Per Share
The Company accounts for earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". Under SFAS
No. 128, basic earnings per share includes the weighted average number of common
shares outstanding during the period and excludes the dilutive effect of common
stock equivalents, including stock options. 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.
6
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
The following is a reconciliation of the Company's net income (loss) and
weighted average shares outstanding for the purpose of calculating basic and
diluted earnings (loss) per share for all periods presented (in thousands,
except per share data):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------------- ----------------------------
August 1, August 2, August 1, August 2,
1999 1998 1999 1998
----------- ----------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income (loss)............................................. $(3,868) $ 7,325 $10,224 $26,292
Less: preferred stock dividends, net of tax.................. (156) -- (156) --
----------- ----------- ---------- -----------
Income (loss) allocated to common stockholders................ $(4,024) $ 7,325 $10,068 $26,292
=========== =========== ========== ===========
Weighted average shares outstanding........................... 13,851 16,741 15,671 16,707
=========== =========== ========== ===========
Basic earnings (loss) per share............................... $ (0.29) $ 0.44 $ 0.64 $ 1.57
=========== =========== ========== ===========
Add: dilutive effective stock options........................ -- 414 372 426
----------- ----------- ---------- -----------
Shares used to calculate diluted earnings (loss) per share.... 13,851 17,155 16,043 17,133
=========== =========== ========== ===========
Diluted earnings (loss) per share............................. $ (0.29) $ 0.43 $ 0.63 $ 1.53
=========== =========== ========== ===========
</TABLE>
5. 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 revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income
but excluded from net income.
6. Deferred Compensation
In accordance with the employment agreement between the Company and Robert
E. Gray, the Company's Chairman and CEO, a portion of the annual salary payable
to Robert E. Gray was deferred. The deferred portion of the compensation was
paid into an irrevocable "rabbi" trust and was expensed as it was earned. At
August 1, 1999, the balance in the trust and the corresponding liability were
approximately $2 million and are not reflected in the Consolidated Balance
Sheets.
7. Inventories
A summary of the components of inventories is as follows:
<TABLE>
<CAPTION>
August 1, November 1,
1999 1998
-------------- --------------
<S> <C> <C>
Raw materials........................................ $12,927,086 $14,529,822
Work in process...................................... 8,995,569 8,896,248
Finished products.................................... 24,882,395 24,322,216
------------- -----------
$46,805,050 $47,748,286
============= ===========
</TABLE>
7
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
8. Agreement and Plan of Merger
On July 7, 1999, (a) SJKAcquisition, Inc., a California corporation and
direct wholly owned subsidiary of the Company, merged with and into St. John,
with St. John surviving the merger (the "Reorganization Merger") and (b) Pearl
Acquisition Corp., a Delaware corporation and direct wholly owned subsidiary of
Vestar/Gray Investors LLC, a Delaware limited liability company ("Pearl"),
merged with and into the Company, with the Company surviving the merger (the
"Acquisition Merger" and together with the Reorganization Merger, the
"Mergers"), as contemplated by the Merger Agreement. As a result of the
Mergers, St. John became a wholly owned subsidiary of the Company. Immediately
after the Mergers, the Company was approximately 7% owned by former shareholders
of St. John, other than Robert E. Gray, Marie Gray and Kelly A. Gray (the
"Grays"), and approximately 93% owned by Vestar/Gray Investors LLC. Vestar/Gray
Investors LLC is approximately 84% owned by an affiliate of Vestar Capital
Partners III, L.P. and 16% owned by the Grays.
As a result of the Mergers, except for fractional shares and shares owned
by St. John, Pearl, Vestar/Gray Investors LLC and the Grays, and subject to
proration, each issued and outstanding share of St. John prior to the
Reorganization Merger was converted into the right to receive either $30 in cash
or, for each former issued and outstanding share of common stock of St. John
with respect to which an election had been made and not withdrawn in accordance
with the Merger Agreement, one fully paid and non-assessable share of the
Company's common stock, with a total of 455,969 shares (after elimination of
fractional shares) of the Company issued to former shareholders of St. John,
other than the Grays.
The aggregate cash consideration paid to Company stockholders in connection
with the Mergers was approximately $448.7 million. The Company financed the
Mergers with proceeds from senior secured credit facilities of $215.0 million,
an equity contribution by Vestar/Gray Investors LLC of $146.5 million, a
subordinated debt offering of $100.0 million and the issuance of preferred stock
of $25.0 million. The transaction was recorded as a recapitalization. Expenses
related to the new debt financing of approximately $15.2 million have been
recorded as deferred financing costs and are being amortized over the life of
the related debt. Expenses related to the purchase of the Company's outstanding
stock of approximately $9.3 million have been reflected as a reduction in
additional paid-in capital. Expenses totaling approximately $15.0 million were
incurred during the third quarter of fiscal 1999 related to the Mergers and are
included in the net loss. These expenses were primarily related to payments
made to settle the Company's outstanding stock options in connection with the
Mergers.
9. Long-Term Debt
In order to finance a portion of the cash consideration paid pursuant to
the Mergers, the Company entered into a credit agreement with a group of
financial institutions, which provides for an aggregate principal amount of
loans totaling $215 million (the "Credit Agreement"). The Credit Agreement
consists of three facilities: (i) Tranche A facility totaling $75 million which
matures July 31, 2005, (ii) Tranche B facility totaling $115 million which
matures July 31, 2007 and (iii) the revolving credit facility totaling $25
million which matures July 31, 2005.
8
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
Borrowings under the Tranche A facility and the revolving credit facility
bear interest at a floating rate, which is based upon the leverage ratio of the
Company, but cannot exceed the banks' borrowing rate plus 2.0% or a Eurodollar
rate plus 3.0%. Borrowings under the Tranche B facility bear interest at a
floating rate, which is also based upon the leverage ratio of the Company, but
cannot exceed the banks' borrowing rate plus 2.5% or a Eurodollar rate plus
3.5%. In addition, the Company is required to pay a commitment fee on the
unused portion of the revolving credit facility of 0.5% per year.
Borrowings under the Tranche A facility mature quarterly beginning October
31, 1999, while borrowings under the Tranche B facility mature quarterly
beginning October 31, 2000. The term loans require a mandatory prepayment based
upon the excess cash flow of the Company beginning in fiscal year 2000.
The obligations of the Company under the Credit Agreement are guaranteed by
each domestic subsidiary of the Company, including St. John, and to the extent
no adverse tax consequences would result from such guarantees, each foreign
subsidiary of the Company. The Credit Agreement and the related guarantees are
secured by (a) a pledge of 100% of the capital stock of each domestic subsidiary
of the Company, including St. John, and 65% of each foreign subsidiary of the
Company and (b) a security interest in, and mortgage on, substantially all the
assets of the Company and each domestic subsidiary of the Company, including St.
John, and to the extent no adverse tax consequences would result therefrom, each
foreign subsidiary of the Company.
The Credit Agreement requires the Company to comply with specified
financial ratios, including a minimum interest coverage ratio, a maximum
leverage ratio and a minimum fixed charge coverage ratio. The Credit Agreement
also contains additional covenants that, among other things, restrict the
ability of the Company to dispose of assets, incur additional indebtedness, pay
dividends, create liens on assets, make investments, loans or advances and
engage in mergers or consolidations.
The Credit Agreement permits the Company to prepay loans and to permanently
reduce revolving credit commitments, in whole or in part, at any time. In
addition, the Company is required to make mandatory prepayments of Tranche A and
B facilities, 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 the Company or any of its subsidiaries (in each case, subject to certain
exceptions and subject to a reduction to zero based upon the Company's financial
performance).
In addition to the credit facilities described above, the Company sold $100
million of senior subordinated notes (the "Notes") to help finance the Mergers.
The Notes are unsecured and mature on July 1, 2009. The Notes bear interest at
a rate of 12.5% per year and were issued at 98.616% of the actual face value.
Interest on the Notes is payable semiannually to the holders of record. The
Notes are subject to redemption by the Company on or after July 1, 2004. In
addition, on or before July 1, 2002, the Company may redeem up to 35% of the
outstanding Notes with the net cash proceeds of certain equity offerings. The
indenture governing the Notes limits, among other things, the payment of
dividends, the incurrence of additional indebtedness and other restricted
payments. The Company will be obligated to pay certain liquidated damages to
holders of the Notes if the Company does not file a registration statement
providing for a registered exchange offer for the Notes, if the registration
9
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
statement is not declared effective or if the exchange offer for the Notes is
not consummated, in each case within certain specified times after the date of
issuance of the Notes. The Company filed such registration statement providing
for a registered exchange offer for the Notes on September 3, 1999. Such
registration statement has not yet been declared effective by the Securities and
Exchange Commission.
10. Mandatorily Redeemable Preferred Stock
In order to finance a portion of the cash consideration paid in the
Mergers, the Company issued 250,000 shares of 15 1/4% Mandatorily
Redeemable/Exchangeable Preferred Stock due 2010 (the "Preferred Stock") to
Vestar/SJK Investors LLC. The liquidation preference of the Preferred Stock is
$100 per share. The Preferred Stock ranks junior in right of payment to all
liabilities and obligations (whether or not for borrowed money) of the Company
(other than common stock of the Company and any preferred stock of the Company
which by its terms is on parity with or junior to the Preferred Stock). Holders
of the Preferred Stock will be entitled to receive, when, and if declared by the
Board of Directors of the Company, 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 will
continue to accrue on unpaid dividends. Dividends on the Preferred Stock may
only be paid in cash if permitted under the terms of the Company's senior
secured credit facilities, indenture and other contractual arrangements.
Dividends accrue from the date of issuance and are payable semi-annually in
arrears on January 1 and July 1 of each year, commencing on January 1, 2000. If
permitted under the terms of the Company's senior secured credit facilities, the
indenture and other contractual arrangements, the Preferred Stock may be
redeemed at any time, in whole or in part, at the option of the Company at
specified redemption prices. On July 1, 2010, the Company is 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. The Company may, at its option, exchange all, but not
less than all, of the shares of the then outstanding Preferred Stock for
debentures of the Company 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 year, 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. The Company may not cause the
exchange of the Preferred Stock for debentures unless permitted under the terms
of the Company's senior secured credit facilities, the indenture and other
contractual arrangements.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table is derived from the Company's Consolidated Statements
of Operations and sets forth, for the periods indicated, the results of
operations as a percentage of net sales:
<TABLE>
<CAPTION>
Percent of Net Sales Percent of Net Sales
Thirteen Weeks Ended Thirty-Nine Weeks Ended
("Third Quarter") ("Nine Months")
----------------------------------- -------------------------------
August 1, August 2, August 1, August 2,
1999 1998 1999 1998
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................................... 43.5 41.8 43.9 41.8
-------------- ------------- -------------- -------------
Gross profit.......................................... 56.5 58.2 56.1 58.2
Selling, general and administrative expenses.......... 42.1 40.6 41.1 37.3
Transaction fees and expenses......................... 21.4 -- 6.9 --
-------------- ------------- -------------- -------------
Operating income (loss)............................... (7.0) 17.6 8.1 20.9
Interest expense...................................... 2.9 -- 0.9 --
Other income.......................................... 0.5 0.7 0.5 0.5
-------------- ------------- -------------- -------------
Income (loss) before income taxes..................... (9.4) 18.3 7.7 21.4
Income tax provision (benefit)........................ (3.8) 7.5 3.2 8.7
-------------- ------------- -------------- -------------
Net income (loss)..................................... (5.6)% 10.8% 4.5% 12.7%
============== ============= ============== =============
</TABLE>
11
<PAGE>
Third quarter fiscal 1999 compared to third quarter fiscal 1998
Net sales for the third quarter of fiscal 1999 increased by $2,583,000, or
3.8% over the third quarter of fiscal 1998. This increase was principally
attributable to (i) an increase in sales by Company owned retail stores of
approximately $2,817,000, 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 the third quarter of fiscal 1998 and
(ii) an increase in international sales of $1,954,000, which includes the sales
of St. John Company, Ltd., a majority owned subsidiary which commenced
operations in Japan during the fourth quarter of fiscal 1997 ("St. John Company,
Ltd."). These increases were offset by a net decrease of $2,188,000 in sales to
existing domestic retail customers, primarily due to the discontinuance of the
SJK line, the closure of three St. John Home stores and the transfer of one
store to a former joint venture partner. Net sales increased primarily as a
result of increased unit sales of various product lines.
Gross profit for the third quarter of fiscal 1999 increased by $285,000, or
.7% as compared with the third quarter of fiscal 1998, and decreased as a
percentage of net sales to 56.5% 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.
Selling, general and administrative expenses for the third quarter of
fiscal 1999 increased by $2,118,000, or 7.7% over the third quarter of fiscal
1998, and increased as a percentage of net sales to 42.1% from 40.6%. This
increase was primarily due to 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 Agreement and Plan of Merger described below, including
$13,792,000 of costs related to payments made to settle the Company's
outstanding stock options.
Operating income for the third quarter of fiscal 1999 decreased by
$16,869,000, or 141.0% over the third quarter of fiscal 1998. Operating income
as percentage of net sales decreased to -7.0% from 17.6% 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 third quarter of fiscal 1999 increased to
$2,041,000. 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.
First nine months fiscal 1999 compared to first nine months fiscal 1998
Net sales for the first nine months of fiscal 1999 increased by
$15,642,000, or 7.6% over the first nine months 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
12
<PAGE>
increase in international sales of $3,788,000, which includes the sales of St.
John Company, Ltd. 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 nine months of fiscal 1999 increased by
$4,471,000, or 3.7% as compared with the first nine months 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 the Company'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 nine months of
fiscal 1999 increased by $14,317,000, or 18.6% over the first nine months 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 Agreement and Plan of Merger described below, including
$13,792,000 of costs related to payments made to settle the Company's
outstanding stock options.
Operating income for the first nine months of fiscal 1999 decreased by
$25,059,000, or 58.0% over the first nine months 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 nine months 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.
Agreement and Plan of Merger
On July 7, 1999, (a) SJKAcquisition, Inc., a California corporation ("SJK
Acquisition") and direct wholly owned subsidiary of the Company, merged with and
into St. John Knits, Inc., a California corporation ("St. John"), with St. John
surviving the merger (the "Reorganization Merger") and (b) Pearl Acquisition
Corp., a Delaware corporation and direct wholly owned subsidiary of Vestar/Gray
Investors LLC, a Delaware limited liability company ("Pearl"), merged with and
into the Company, with the Company surviving the merger (the "Acquisition
Merger" and together with the Reorganization Merger, the "Mergers"), as
contemplated by the Agreement and Plan of Merger, dated as of February 2, 1999,
among the Company, St. John, SJKAcquisition and Pearl. As a result of the
Mergers, St. John became a wholly owned subsidiary of the Company. Immediately
after the Mergers, the Company was approximately 7% owned by former shareholders
of St. John, other than Robert E. Gray, Marie Gray and Kelly A. Gray (the
"Grays"), and approximately 93% owned by Vestar/Gray Investors LLC. Vestar/Gray
Investors LLC is approximately 84% owned by an affiliate of Vestar
13
<PAGE>
Capital Partners III, L.P. and 16% owned by the Grays. The Reorganization Merger
was approved by the shareholders of St. John at a Special Meeting of
Shareholders on June 28, 1999.
As a result of the Mergers, except for fractional shares and shares owned by
St. John, Pearl, Vestar/Gray Investors LLC and the Grays, and subject to
proration, each issued and outstanding share of St. John prior to the
Reorganization Merger was converted into the right to receive either $30 in cash
or, for each former issued and outstanding share of common stock of St. John
with respect to which an election had been made and not withdrawn in accordance
with the Merger Agreement, one fully paid and non-assessable share of the
Company's common stock, with a total of 455,969 shares (after elimination of
fractional shares) of the Company issued to former shareholders of St. John,
other than the Grays.
Liquidity and Capital Resources
St. John Knits International, Incorporated 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.
The Company's primary cash requirements are to fund payments required to
service the Company's debt, to fund the Company's working capital needs,
primarily inventory and accounts receivable, and for the purchase of property
and equipment. During the first nine months 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 nine months 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 nine months 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.
The Company 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
the Company's computer systems, expansion of the retail 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, the Company had approximately $85,132,000 in working
capital and $18,057,000 in cash and marketable securities. The Company's
principal source of liquidity is internally generated funds. The Company also
has a $25,000,000 revolving commitment from a bank ("Revolving Commitment")
which expires on July 31, 2005. The Revolving Commitment is secured and
borrowings thereunder bear interest at the Company'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 Commitment is subject to the
Company's continued compliance with certain covenants, including a covenant that
sets the maximum amount the Company 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. As of August 1,
14
<PAGE>
1999, no amounts were outstanding under the Revolving Commitment. The Company
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 Mergers completed on July 7, 1999. The Company's
outstanding debt is comprised of bank borrowings of $191.9 million and senior
subordinated notes of $98.6 million. Note 9 to the Consolidated Financial
Statements outlines certain terms and conditions of the Company's senior secured
credit facilities and senior subordinated notes. In addition, Note 10 outlines
certain terms and conditions of the Company's 15 1/4% Exchangeable Preferred
Stock issued in connection with the Mergers.
The Company's primary ongoing cash requirements will be for debt service and
capital expenditures. The Company's debt service requirements consist primarily
of principal and interest payments on bank borrowings and interest on its senior
subordinated notes. The Company 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 Company's revolving credit
facility.
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.
As a result of the Mergers, the Company's ability to pay dividends is restricted
by the terms of the Company's senior secured credit facilities and senior
subordinated note indenture. The Company does not anticipate the payment of any
cash dividends on its common stock in the future.
The Company'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 nine months of
fiscal 1999 and 1998, respectively. The credit agreement is filed as Exhibit
(a)(1) to the Company'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
Generally Accepted Accounting Principles (GAAP) and is not an alternative to
operating income or cash flow from operations as determined under GAAP. The
Company 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 the Company's operating performance or as a measure of
liquidity.
Year 2000
The Company uses various types of technology in the operations 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.
The Company is continuing to monitor the impact of Year 2000 issues on its
information and non-information technology systems. As part of this process, the
Company retained the services of an independent contractor with experience in
analyzing and addressing Year 2000 issues. In addition, the Company developed a
five-phased plan with respect to the Year 2000 readiness of its internal
technology systems. This plan involves (i) creating awareness inside the Company
of Year 2000 issues, (ii) analyzing the Company'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
the Company's business. The Company has substantially completed all five phases
of the plan.
15
<PAGE>
The Company has also developed a plan to address the impact that Year 2000
issues of its vendors and customers may have on the Company's operations. The
Company is finalizing its evaluation of the materiality of its vendor and
customer relationships and has initiated communications with certain of its
significant vendors and customers to identify and minimize disruptions to the
Company's operations and to assist in resolving Year 2000 issues. The Company
has substantially completed its evaluation; however there can be no assurances
that the Year 2000 compliance efforts will be successful or that the systems and
products of other companies on which the Company relies will not have an adverse
effect on the Company's business, operations or financial condition. In the
event that satisfactory completion of the Company's Year 2000 evaluation of its
vendors and customers is not assured by the end of fiscal 1999, the Company
intends to determine appropriate contingency plans.
As of August 1, 1999, the Company had incurred approximately $619,000 in costs
related to the Year 2000 issue. The Company believes that additional costs
related to the Year 2000 issue will not be material to the Company's business,
operations or financial condition. 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. The
Company anticipates that it will fund its additional Year 2000 costs from
current working capital.
Forward Looking Statements
This Quarterly Report on Form 10-Q contains certain statements which describe
the Company's beliefs concerning future business conditions and the outlook for
the Company based on currently available information. Wherever possible the
Company has identified these "forward looking" statements (as defined in Section
21E of the Securities Exchange Act of 1934) by words such as "anticipates,"
"believes," "estimates," "expects" and other similar expressions. The forward
looking statements and associated risks set forth herein may include or relate
to: (i) the Company's anticipated purchases of property and equipment during the
remainder of fiscal 1999, (ii) the Company's belief that it will be able to fund
its working capital and capital expenditure requirements with internally
generated funds and the use of its revolving credit facility, (iii) the
Company's anticipation that it will not pay cash dividends on its common stock
in the future, (iv) the Company's anticipated completion of its Year 2000
readiness plans and (v) the costs and source of funds to address the Company's
Year 2000 issues.
These forward looking statements are subject to risks, uncertainties and other
factors which could cause the Company's actual results, performance or
achievements to differ materially from those expressed in, or implied by, these
statements. These risks, uncertainties and other factors include, but are not
limited to, the following: (i) the financial strength of the retail industry and
the level of consumer spending for apparel and accessories, (ii) the Company's
ability to develop, market and sell its products, (iii) increased competition
from other manufacturers and retailers of women's clothing and accessories, (iv)
general economic conditions and (v) any unanticipated problems or delays in the
completion by the Company to become Year 2000 ready or the failure of the
Company's vendors or customers to do so.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has exposure to fluctuations in foreign currency exchange rates
for the revenues derived from sales to its foreign customers denominated in
foreign currency. In order to reduce the effects of such fluctuations, under
established procedures and controls, the Company enters into forward contracts.
These contractual arrangements are entered with a major financial institution.
The
16
<PAGE>
Company does not hold derivative financial instruments for trading.
The primary business objective of this hedging program is to secure the
anticipated profit on sales denominated in foreign currencies. Forward contracts
are entered into at the time the Company prices its products. The Company's
primary exposure to foreign exchange fluctuation is on the deutsche mark and the
Euro. At August 1, 1999, the Company had contracts maturing through November 30,
1999 to sell 3.5 million deutsche marks at a rate of 1.66 deutsche marks to the
U.S. dollar. The Company also had contracts maturing through February 29, 2000
to sell 2.2 million Euros at rates ranging from 1.05 to 1.06 U.S. dollars to the
Euro.
The Company is exposed to market risks related to fluctuations in interest
rates on its variable rate debt which consists of bank borrowings related to the
Mergers. The Company also holds fixed rate subordinated notes. The Company is
not currently utilizing any type of derivative financial instruments to control
its interest rate risk.
For fixed rate debt, changes in interest rates generally affect the fair
market value, but not earnings or cash flows. Conversely, for variable rate
debt, changes in interest rates generally do not influence fair market value,
but do affect future earnings and cash flows. The Company has managed its
exposure to changes in interest rates by issuing part of its debt with a fixed
interest rate. Holding the variable rate debt balance constant, each one
percentage point increase in interest rates occurring on the first day of the
year would result in an increase in interest expense for the coming year of
approximately $1.9 million.
17
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
Prior to the consummation of the Mergers, the Company's certificate of
incorporation was amended to increase the authorized shares of the Company's
common stock from 10,000 shares to 30,000,000 shares and to increase the
authorized shares of the Company's preferred stock from no shares to 3,000,000
shares. On July 7, 1999, in order to finance a portion of the cash consideration
paid in the Mergers, the Company issued 250,000 shares of 15 1/4% Exchangeable
Preferred Stock due 2010 (the "Preferred Stock") to Vestar/SJK Investors LLC for
$25,000,000 in cash. The issuance of Preferred Stock was deemed to be exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering.
Item 4. Submission of matters to a Vote of Security-Holders
A special meeting of the shareholders of St. John was held on June 28, 1999.
At the special meeting of the shareholders, the shareholders approved the
principal terms of the Reorganization Merger found in the Agreement and Plan of
Merger. Voting at the meeting was as follows:
For 12,152,763
Against 1,049,414
Withheld 21,259
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
10.1 Wool Yarn Purchase Agreement dated March 4, 1999 by and between the
Company and Kent Manufacturing Company
10.2 Form of Indemnity Agreement by and between St. John Knits, Inc., St.
John Knits International and each of their directors and officers
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
1. On June 10, 1999, St. John filed a Form 8-K with the Securities and
Exchange Commission reporting earnings for the second quarter ended
May 2, 1999 and the six month period then ended.
2. On June 11, 1999, St. John filed a Form 8-K with the Securities and
Exchange Commission disclosing certain proforma financial information.
3. On June 30, 1999, St. John filed a Form 8-K with the Securities and
Exchange Commission reporting that the shareholders had approved the
Reorganization Merger.
4. On July 13, 1999, St. John and the Company each filed a Form 8-K with
the Securities and Exchange Commission reporting that on July 7, 1999
there was a change in control of St. John and the Company.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
September 13, 1999 ST. JOHN KNITS INTERNATIONAL, INCORPORATED
By: /s/ Bob Gray
------------------------------
Bob Gray
Chairman of the Board and
Chief Executive Officer
By: /s/ Roger G. Ruppert
------------------------------
Roger G. Ruppert
Senior Vice President-Finance,
Chief Financial Officer
(Principal Financial Officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit Sequentially
Number Description of Exhibit Numbered Page
------ ---------------------- -------------
10.1 Wool Yarn Purchase Agreement dated March 4, 1999
by and between the Company and Kent Manufacturing
Company
10.2 Form of Indemnity Agreement by and between St. John
Knits, Inc., St. John Knits International and each
of their directors and officers
27.1 Financial Data Schedule
20
<PAGE>
EXHIBIT 10.1
THE KENT MANUFACTURING COMPANY
ORDER NO. 3283 P.O. BOX 67 -- PHONE 803-878-6367 SALESMAN 60-5895
---- -------
FAX 803-878-2723
- --------------------------------------------------------------------------------
PICKENS, S.C. 29671
SOLD TO DATE March 4, 1999
-------------
Novita Yarns Ltd. TERMS 1.5% 30, Net 60
Div. of St. John Knits CUSTOMER P.O. M009486
17422 Derian Avenue CONTRACT NO. 3283
Irvine, CA 92713
<TABLE>
<CAPTION>
==============================================================================================================================
<S> <C> <C> <C> <C> ______________________________________________
QUANTITY COUNT GRADE DESCRIPTION PRICE
______________________________________________
1,000,000 lbs 1/21 Type A 64 Australian Wool Natural yarn
on cones $6.89/lb ______________________________________________
FOB Pickens, SC ______________________________________________
______________________________________________
1/19 - 10.9 TPI - $6.77/lb ______________________________________________
1/19 - 8.0 TPI - $6.67/lb
1/30 - 14.7 TPI - $7.43/lb ______________________________________________
1/36 - $7.79/lb
______________________________________________
Ship to: above
via Cranston ______________________________________________
______________________________________________
SHIPPING INSTRUCTIONS Delivery: As called for by Novita
______________________________________________
The terms of this contract shall be at terms noted above from date of ______________________________________________
invoice. No redating.
______________________________________________
On specifications for stub or package dyed yarns of less than 1,000lbs. to
a color the seller shall charge small lot premium. ______________________________________________
This order will become a contract only when confirmed in writing by the ______________________________________________
seller and buyer or, in any event, when buyer accepts whole or partial delivery.
The contract shall be deemed dated as of the date of such confirmation or ______________________________________________
acceptance.
______________________________________________
The undersigned buyer hereby orders the above goods upon the terms as
stated, including the terms and conditions printed on the back of this contract ______________________________________________
and owning a part hereof.
______________________________________________
Please sign in duplicate and return both copies to The Kent Manufacturing
Company. ______________________________________________
Accepted by purchaser: Acknowledged by seller: ______________________________________________
______________________________________________
________________________________________ The Kent Manufacturing Company ______________________________________________
________________________________________ ______________________________________________
PER ____________________________________ PER _________________________ ______________________________________________
______________________________________________
______________________________________________
</TABLE>
<PAGE>
EXHIBIT 10.2
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (this "Agreement") is made as of the
28th day of June 1999, between St. John Knits, Inc., a California corporation
(the "Company"), and {NAME} ("Indemnitee").
BACKGROUND FACTS
----------------
The Indemnitee currently is serving as a director and/or officer of
the Company and the Company 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 the Company and in consideration of Indemnitee's continued service,
the Company 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 Company, 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' 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.
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
-1-
<PAGE>
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 California 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 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, 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.
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
-2-
<PAGE>
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 a determination being
made no later than the end of the sixty-day period set forth in Section 8.2 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; 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.
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 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 the 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.
-3-
<PAGE>
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 California
in effect, 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
shall 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, 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.
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 92614 (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
-4-
<PAGE>
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.
(iii) 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 or
otherwise as required under Section 317 of the California 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.
-5-
<PAGE>
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.
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.
12.7 Merger Clause. Except for the Company's Articles 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.
-6-
<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:
______________________________________
Roger Ruppert, Chief Financial Officer
INDEMNITEE
By:
______________________________________
{NAME}
-7-
<PAGE>
The following directors and officers of St. John Knits International,
Incorporated and St. John Knits, Inc. are parties to the form of Indemnity
Agreement:
Robert Gray
Marie Gray
Kelly Gray
Bruce Fetter
Roger Ruppert
Karla Guyer
Joe Joffrion
Daniel O'Connell
James Kelley
Sander Levy
<TABLE> <S> <C>
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<PERIOD-START> NOV-02-1998
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