<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 April 30, 2000
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)
Delaware 52-2061057
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
17422 Derian Avenue, Irvine, California 92614
(Address of Principal Executive Offices) (Zip Code)
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 June 12, 2000.
===============================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
A S S E T S April 30, October 31,
----------- 2000 1999
------------ -------------
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents.................... $ 18,539,577 $ 32,443,815
Investments.................................. 18,761 25,412
Accounts receivable, net..................... 28,266,346 33,562,573
Inventories.................................. 43,899,617 43,521,734
Deferred income tax benefit.................. 7,678,272 7,678,272
Other........................................ 2,326,852 2,634,127
------------- -------------
Total current assets...................... 100,729,425 119,865,933
------------- -------------
Property and equipment:
Machinery and equipment...................... 54,412,043 51,242,600
Leasehold improvements....................... 34,863,902 32,856,047
Buildings.................................... 19,412,523 17,913,064
Furniture and fixtures....................... 7,438,843 6,868,556
Land......................................... 7,395,577 5,786,857
Construction in progress..................... 4,553,533 4,132,267
-------------- -------------
128,076,421 118,799,391
Less--Accumulated depreciation
and amortization......................... 54,857,634 49,211,044
------------- -------------
73,218,787 69,588,347
------------- -------------
Deferred financing costs....................... 13,407,361 14,585,755
Other assets................................... 2,761,970 2,770,219
------------- -------------
$ 190,117,543 $ 206,810,254
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable............................. $ 6,575,461 $ 6,805,079
Accrued expenses............................. 12,649,605 11,275,809
Current portion of long-
term debt................................. 5,363,301 2,564,352
Accrued interest expense..................... 4,421,616 7,661,434
Dividends payable............................ 3,251,462 1,228,472
Income taxes payable......................... 36,993 1,190,888
------------- -------------
Total current liabilities................. 32,298,438 30,726,034
Long-term debt, net of current
portion................................... 262,983,150 287,321,021
------------- -------------
Total liabilities......................... 295,281,588 318,047,055
------------- -------------
Minority interest.............................. -- 693,391
------------- -------------
Mandatorily redeemable preferred stock,
$100 stated value: Authorized--3,000,000
shares, issued and outstanding--250,000... 25,000,000 25,000,000
------------- -------------
Stockholders' deficit:
Common stock, par value $0.01 per share:
Authorized--30,000,000 shares, issued and
outstanding--6,546,174 shares............. 65,462 65,462
Unrealized loss on securities................ (35,181) (28,261)
Cumulative translation adjustment............ 174,668 406,823
Additional paid-in capital................... 147,141,194 147,141,194
Accumulated deficit.......................... (277,510,188) (284,515,410)
------------- -------------
Total stockholders' deficit................ (130,164,045) (136,930,192)
------------- -------------
$ 190,117,543 $ 206,810,254
============= =============
</TABLE>
See accompanying notes.
2
<PAGE>
ST. JOHN KNITS INTERNATIONAL,INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------------------- ----------------------------------
April 30, May 2, April 30, May 2,
2000 1999 2000 1999
--------------- -------------- --------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales........................................ $85,184,865 $78,237,040 $164,773,117 $151,625,553
Cost of sales.................................... 35,083,867 32,956,813 70,114,317 66,785,899
--------------- -------------- --------------- --------------
Gross profit..................................... 50,100,998 45,280,227 94,658,800 84,839,654
Selling, general and administrative expenses..... 33,339,732 31,631,192 63,730,675 61,766,038
--------------- -------------- --------------- --------------
Operating income................................. 16,761,266 13,649,035 30,928,125 23,073,616
Interest expense................................. 7,926,279 247 16,157,578 3,618
Other income..................................... 436,829 404,826 869,388 834,592
--------------- -------------- --------------- --------------
Income before income taxes....................... 9,271,816 14,053,614 15,639,935 23,904,590
Income taxes..................................... 3,963,779 5,785,715 6,592,265 9,812,395
--------------- -------------- --------------- --------------
Net income....................................... 5,308,037 8,267,899 9,047,670 14,092,195
--------------- -------------- --------------- --------------
Comprehensive income, net of tax:
Foreign currency translation adjustments....... (7,582) (35,806) (134,301) (103,776)
Unrealized gain (loss) on securities........... (747) 919 (3,962) (71)
--------------- -------------- --------------- --------------
Comprehensive income............................. $ 5,299,708 $ 8,233,012 $ 8,909,407 $ 13,988,348
=============== ============== =============== ==============
Net income per common share - basic.............. $ 0.65 $ 0.50 $ 1.07 $ 0.85
=============== ============== =============== ==============
Net income per common share - diluted............ $ 0.65 $ 0.49 $ 1.07 $ 0.83
=============== ============== =============== ==============
Dividends per share.............................. $ -- $ 0.025 $ -- $ 0.05
=============== ============== =============== ==============
Shares used in the calculation of net income per
share - basic............................... 6,546,174 16,581,629 6,546,174 16,581,043
=============== ============== =============== ==============
Shares used in the calculation of net income per
share - diluted............................. 6,546,174 17,006,748 6,546,174 16,982,678
=============== ============== =============== ==============
</TABLE>
See accompanying notes.
3
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
------------------------------
April 30, 2000 May 2, 1999
-------------- ------------
<S> <C> <C>
(unaudited)
Cash flows from operating activities:
Net income................................... $ 9,047,670 $14,092,195
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 6,519,358 6,687,151
Amortization of discount on 12.5% notes
due 2009................................ 69,969 --
Amortization of deferred loan costs...... 1,310,988 --
Loss on disposal of property and
equipment............................... 33,051 355,664
Partnership losses....................... 90,088 136,836
Minority interest in income of
consolidated subsidiaries............... 30,254 500
Book value in excess of purchase
price of minority interest in Japan
subsidiary.............................. (495,188) --
Decrease in accounts receivable.......... 5,296,227 866,501
(Increase) decrease in inventories....... (377,883) 1,589,135
(Increase) decrease in other current
assets.................................. 307,275 (228,381)
Increase in other assets................. (102,495) (272,472)
Decrease in accounts payable............. (229,618) (4,052,416)
Increase in accrued expenses............. 1,373,796 497,274
Decrease in accrued interest expense..... (3,239,818) --
Increase (decrease) in income taxes
payable................................. (1,153,895) 3,619,036
------------ -----------
Net cash provided by operating
activities.......................... 18,479,779 23,291,023
------------ -----------
Cash flows from investing activities:
Proceeds from sale of property
and equipment........................... 13,017 120,000
Purchase of property and equipment....... (10,079,251) (7,869,832)
Purchase of minority interest in
Japan subsidiary........................ (228,457) --
Purchase of foreign trademark............ (70,000) --
Purchase of short-term investments....... -- (18,722)
Sale of short-term investments........... 6,651 --
Capital contributions to partnership..... (129,459) --
Capital distributions from
partnership............................. 103,500 53,000
------------ -----------
Net cash used in investing
activities..................... (10,383,999) (7,715,554)
------------ -----------
Cash flows from financing activities:
Principal payments on long-term debt..... (21,657,840) (122,961)
Proceeds from issuance of long-term
debt.................................... 48,949 --
Recapitalization costs................... (19,458) --
Issuance of common stock................. -- 54,861
Financing fees and expenses.............. (132,594) --
Dividends paid........................... -- (829,074)
------------ -----------
Net cash used in financing
activities.......................... (21,760,943) (897,174)
------------ -----------
</TABLE>
4
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
-----------------------------
April 30, 2000 May 2, 1999
-------------- ------------
(unaudited)
<S> <C> <C>
Effect of exchange rate changes............. (232,155) (175,891)
------------- -----------
Unrealized loss on securities............... (6,920) (120)
------------- -----------
Net increase (decrease) in cash and cash
equivalents................................ (13,904,238) 14,502,284
------------- -----------
Beginning balance, cash and cash
equivalents................................ 32,443,815 14,336,872
------------- -----------
Ending balance, cash and cash equivalents... $ 18,539,577 $28,839,156
============= ===========
Supplemental disclosures of cash flow
information:
Cash received during the twenty-six
weeks for interest income........... $ 744,483 $ 595,020
============= ===========
Cash paid during the twenty-six
weeks for:
Interest expense................ $ 17,963,381 $ 5,754
============= ===========
Income taxes.................... $ 7,766,242 $ 7,575,555
============= ===========
</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 ("SJKI") and its subsidiaries, including St.
John Knits, Inc. ("St. John"), 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. SJKI and its subsidiaries are collectively referred to herein
as "the Company." 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 Company's Annual Report on
Form 10-K for the year ended October 31, 1999 as filed with the Securities and
Exchange Commission on January 28, 2000.
On February 2, 1999, St. John 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 at an offer price of $30 per share. Pursuant to
the agreement, on July 7, 1999, the Company consummated two mergers. As a result
of the mergers, St. John became a wholly owned subsidiary of SJKI. The mergers
were accounted for as a recapitalization. The operating results for all periods
prior to the mergers consist entirely of the historical results of St. John and
its subsidiaries.
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 29, 2000.
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 April 30, 2000 and May 2, 1999.
3. Dividends
St. John paid approximately $1,245,000 in dividends to its shareholders
during fiscal 1999 prior to the mergers. SJKI does not anticipate the payment of
any cash dividends on its common stock in the future.
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 and weighted
average shares outstanding for the purpose of calculating basic and diluted
earnings per share for all periods:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
---------------------------------------- ----------------------------------
April 30, 2000 May 2, 1999 April 30, 2000 May 2, 1999
------------------ ----------------- ---------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income............................... $5,308,037 $8,267,899 $9,047,670 $14,092,195
Less: preferred stock dividends......... 1,025,397 -- 2,022,990 --
------------------ ----------------- ---------------- -------------
Income allocated to common stockholders.. $4,282,640 $8,267,899 $7,024,680 $14,092,195
================== ================= ================ =============
Weighted average shares outstanding...... 6,546,174 16,581,629 6,546,174 16,581,043
================== ================= ================ =============
Basic earnings per share................. $ 0.65 $ 0.50 $ 1.07 $ 0.85
================== ================= ================ =============
Add: dilutive effect of stock options... -- 425,119 -- 401,635
------------------ ----------------- ---------------- -------------
Shares used to calculate diluted earnings
per share............................... 6,546,174 17,006,748 6,546,174 16,982,678
================== ================= ================ =============
Diluted earnings per share............... $ 0.65 $ 0.49 $ 1.07 $ 0.83
================== ================= ================ =============
</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 May 2,
1999, the balance in the trust and the corresponding liability were
approximately $2.0 million and are not reflected in the Consolidated Balance
Sheets. The total deferred compensation was paid to Mr. Gray during the fourth
quarter of fiscal 1999.
7. Inventories
A summary of the components of inventories is as follows:
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
-------------- --------------
<S> <C> <C>
Raw materials............................................. $11,852,342 $11,940,108
Work-in-process........................................... 7,953,532 6,847,155
Finished products......................................... 24,093,743 24,734,471
-------------- --------------
$43,899,617 $43,521,734
============== ==============
</TABLE>
7
<PAGE>
8. Supplemental Condensed Consolidated Financial Information
The Company's payment obligations under its senior subordinated notes are
guaranteed by certain of the Company's wholly owned subsidiaries (the Guarantor
Subsidiaries). Such guarantees are full, unconditional and joint and several.
Except as may be required under applicable law, there are no material
restrictions on distributions from the Guarantor Subsidiaries to SJKI. Separate
financial statements of the Guarantor Subsidiaries are not presented because the
Company's management has determined that they would not be material to
investors. The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheets, statement of operations, and statement of
cash flows information for the Parent Company (consisting of SJKI and St. John),
for the Guarantor Subsidiaries and for the Company's other subsidiaries (the
Non-Guarantor Subsidiaries). The supplemental financial information reflects the
investments of the Parent Company in the Guarantor and Non-Guarantor
Subsidiaries using the equity method of accounting. The supplemental financial
information is presented for the periods as of April 30, 2000 and October 31,
1999, and for the three and six months ended April 30, 2000 and May 2, 1999.
8
<PAGE>
ST. JOHN INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
(Amounts in thousands) COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
investments $ 17,898 $ 124 $ 537 $ 18,559
Accounts receivable, net 26,667 239 1,360 28,266
Inventories (1) 40,652 1,722 1,526 43,900
Deferred income tax benefit 7,678 - 7,678
Other 2,191 85 51 2,327
Intercompany accounts receivable 1,739 (1,739) -
---------------------------------------------------------------------
Total current assets 96,825 2,170 3,474 (1,739) 100,730
Property and equipment, net 67,699 1,475 4,045 73,219
Investment in subsidiaries (2,163) - 2,163 -
Receivable from consolidated
subsidiaries 15,478 - (15,478) -
Deferred financing costs 13,407 - 13,407
Other assets 1,608 132 1,022 2,762
---------------------------------------------------------------------
Total assets $ 192,854 $ 3,777 $8,541 $(15,054) $ 190,118
=====================================================================
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 6,233 $ 227 $ 116 $ 6,576
Accrued expenses 12,331 166 153 12,650
Current portion of long-term debt 4,999 364 5,363
Accrued interest expense 4,422 - 4,422
Dividends payable 3,251 - 3,251
Intercompany accounts payable 1,739 (1,739) -
Income taxes payable 3,612 (3,860) 284 36
---------------------------------------------------------------------
Total current liabilities 34,848 (3,467) 2,656 (1,739) 32,298
Intercompany payable 12,260 3,218 (15,478) -
Long-term debt, net of current
portion 262,896 88 262,984
---------------------------------------------------------------------
Total liabilities 297,744 8,793 5,962 (17,217) 295,282
Minority interest - -
Preferred stock 25,000 - 25,000
Total stockholders' equity
(deficit) (129,890) (5,016) 2,579 2,163 (130,164)
---------------------------------------------------------------------
Total liabilities and
stockholders' equity
(deficit) $ 192,854 $ 3,777 $8,541 $ (15,054) $ 190,118
=====================================================================
</TABLE>
(1) Inventories are shown at cost for all entities
9
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1999
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
(Amounts in thousands) COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and investments $ 32,270 $ 80 $ 118 $ - $ 32,468
Accounts receivable, net 31,575 302 1,686 33,563
Inventories (1) 39,701 1,917 1,876 28 43,522
Deferred income tax benefit 7,678 - 7,678
Other 2,465 100 69 2,634
Intercompany accounts receivable 1,484 - (1,484) -
------------------------------------------------------------------------------------
Total current assets 115,173 2,399 3,749 (1,456) 119,865
Property and equipment, net 63,061 1,500 5,027 69,588
Investment in subsidiaries (1,837) - 1,837 -
Receivable from consolidated
subsidiaries 16,112 - (16,112) -
Deferred financing costs 14,586 - 14,586
Other assets 1,399 88 1,283 2,770
-------------------------------------------------------------------------------------
Total assets $ 208,494 $ 3,987 $10,059 $ (15,731) $ 206,809
=====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 6,414 $ 264 $ 127 $ - $ 6,805
Accrued expenses 10,819 279 150 28 11,276
Current portion of long-term debt 2,248 316 2,564
Acured interest expense 7,661 7,661
Dividends payable 1,228 1,228
Intercompany accounts payable - 1,484 (1,484) -
Income taxes payable 4,435 (3,413) 169 1,191
-------------------------------------------------------------------------------------
Total current liabilities 32,805 (2,870) 2,246 (1,456) 30,725
Intercompany payable 11,244 4,868 (16,112) -
Long-term debt, net of current portion 287,082 239 287,321
-------------------------------------------------------------------------------------
Total liabilities 319,887 8,374 7,353 (17,568) 318,046
Minority interest 693 693
Preferred stock 25,000 - 25,000
Total stockholders' equity (deficit) (136,393) (4,387) 2,013 1,837 (136,930)
-------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity (deficit) $ 208,494 $ 3,987 $10,059 $ (15,731) $ 206,809
=====================================================================================
</TABLE>
(1) Inventories are shown at cost for all entities
10
<PAGE>
ST. JOHN INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED APRIL 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
Net sales $ 82,004 $ 1,126 $ 2,055 $ - $ 85,185
Cost of sales 33,666 655 762 35,083
--------------------------------------------------------------------------------
Gross profit 48,338 471 1,293 - 50,102
Selling, general and administrative expenses 31,413 959 968 - 33,340
--------------------------------------------------------------------------------
Operating income (loss) 16,925 (488) 325 - 16,762
Interest expense 7,927 7,927
Other income/(expense) 427 4 12 (7) 436
--------------------------------------------------------------------------------
Income (loss) before income taxes 9,425 (484) 337 (7) 9,271
Income taxes 4,003 (204) 164 3,963
--------------------------------------------------------------------------------
Income (loss) before equity in loss of
consolidated subsidiaries 5,422 (280) 173 (7) 5,308
Equity in loss of consolidated subsidiaries (83) - - 83 -
--------------------------------------------------------------------------------
Net income (loss) $ 5,339 $ (280) $ 173 $ 76 $ 5,308
================================================================================
</TABLE>
11
<PAGE>
ST. JOHN INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED MAY 2, 1999
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C>NON- <C> <C>
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------------------------
(Amounts in thousands)
Net sales $73,745 $3,010 $1,482 $ - $78,237
Cost of sales 30,504 1,884 569 - 32,957
-----------------------------------------------------------------------------------------
Gross profit 43,241 1,126 913 - 45,280
Selling, general and administrative 28,108 2,680 842 - 31,630
expenses
-----------------------------------------------------------------------------------------
Operating income (loss) 15,133 (1,554) 71 - 13,650
Other income/(expense) 604 (200) 12 (12) 404
-----------------------------------------------------------------------------------------
Income (loss) before income taxes 15,737 (1,754) 83 (12) 14,054
Income taxes 6,458 (719) 47 5,786
-----------------------------------------------------------------------------------------
Income (loss) before equity in loss of
consolidated subsidiaries 9,279 (1,035) 36 (12) 8,268
Equity in loss of consolidated
subsidiaries (495) - - 495 -
-----------------------------------------------------------------------------------------
Net income (loss) $ 8,784 $(1,035) $ 36 $483 $ 8,268
=========================================================================================
</TABLE>
12
<PAGE>
ST. JOHN INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED APRIL 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
(Amounts in thousands) COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $157,864 $ 2,688 $4,221 $ - $164,773
Cost of sales 66,692 1,758 1,663 70,113
------------------------------------------------------------------------------
Gross profit 91,172 930 2,558 - 94,660
Selling, general and administrative expenses 59,728 2,014 1,989 - 63,731
------------------------------------------------------------------------------
Operating income (loss) 31,444 (1,084) 569 - 30,929
Interest expense 16,158 16,158
Other income/(expense) 861 9 29 (30) 869
------------------------------------------------------------------------------
Income (loss) before income taxes 16,147 (1,075) 598 (30) 15,640
Income taxes 6,766 (446) 272 6,592
------------------------------------------------------------------------------
Income (loss) before equity in loss of
consolidated subsidiaries 9,381 (629) 326 (30) 9,048
Equity in loss of consolidated subsidiaries (303) - - 303 -
------------------------------------------------------------------------------
Net income (loss) $ 9,078 $ (629) $ 326 $273 $ 9,048
==============================================================================
</TABLE>
13
<PAGE>
ST. JOHN INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED MAY 2, 1999
(Unaudited)
<TABLE>
<CAPTION> PARENT GUARANTOR NON-GUARANTOR
(Amounts in thousands) COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $142,341 $ 6,467 $2,818 $ - $151,626
Cost of sales 61,725 3,820 1,241 66,786
----------------------------------------------------------------------
Gross profit 80,616 2,647 1,577 - 84,840
Selling, general and administrative
expenses 55,601 4,560 1,604 - 61,765
----------------------------------------------------------------------
Operating income (loss) 25,015 (1,913) (27) - 23,075
Other income/(expense) 1,192 (392) 31 (1) 830
----------------------------------------------------------------------
Income (loss) before income taxes 26,207 (2,305) 4 (1) 23,905
Income taxes 10,756 (945) 2 9,813
----------------------------------------------------------------------
Income (loss) before equity in loss
of consolidated subsidiaries 15,451 (1,360) 2 (1) 14,092
Equity in loss of consolidated
subsidiaries (681) - - 681 -
----------------------------------------------------------------------
Net income (loss) $ 14,770 $ (1,360) $ 2 $680 $ 14,092
======================================================================
</TABLE>
14
<PAGE>
ST. JOHN INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
(Amounts in thousands) COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 9,078 $(629) $ 326 $ 273 $ 9,048
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 6,329 79 111 6,519
Amortization of discount on
12.5% notes due 2009 70 70
Amortization of deferred loan
costs 1,311 1,311
Loss on disposal of property
and equipment 33 33
Partnership losses 90 90
Minority interest in income of
consolidated subsidiaries - 30 30
Book value in excess of purchase
price of minority interest in
Japan subsidiary (495) (495)
Equity in loss of consolidated
subsidiaries 303 (303) -
Cash provided by (used in) changes
in operating assets and liabilities
Accounts receivable 4,950 64 282 5,296
Intercompany receivables (net) (456) 1,016 (560) -
Inventories (923) 195 350 (378)
Other current assets 295 12 307
Other assets (188) (45) 131 (102)
Accounts payable (229) (229)
Accrued expenses 1,479 (149) 44 1,374
Accrued interest expense (3,240) (3,240)
Income taxes payable (824) (446) 116 (1,154)
-----------------------------------------------------------------
Net cash provided by
operating activities 17,583 97 800 - 18,480
-----------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of property
and equipment 13 13
Purchases of property and equipment (9,930) (53) (96) (10,079)
Purchase of minority interest in
Japan subsidiary (229) (229)
Purchase of foreign trademark (70) (70)
Sale of short-term investments 7 7
Capital contributions to partnership (130) (130)
Capital contributions from partnership 104 104
-----------------------------------------------------------------
Net cash used in investing
activities (10,235) (53) (96) - (10,384)
-----------------------------------------------------------------
FINANCING ACTIVITIES:
Principle payments of long-term debt (21,446) (212) (21,658)
Proceeds from issuance of long-term debt - 49 49
Recapitalization costs (19) (19)
Financing fees and expenses (133) (133)
-----------------------------------------------------------------
Net cash used in financing
activities (21,598) - (163) - (21,761)
-----------------------------------------------------------------
Effect of exchange rate changes (109) (123) (232)
Unrealized loss on securities (7) (7)
-----------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (14,366) 44 418 - (13,904)
Beginning balance, cash and cash
equivalents 32,245 80 119 32,444
-----------------------------------------------------------------
Ending balance, cash and cash equivalents $ 17,879 $ 124 $ 537 $ - $ 18,540
=================================================================
Supplemental disclosures of cash flow
information:
Cash received during the year for
interest income $ 744 $ 744
=================================================================
Cash paid during the year for:
Interest expense $ 17,959 $ 4 $ 17,963
=================================================================
Income taxes $ 7,766 $ 7,766
=================================================================
</TABLE>
15
<PAGE>
ST. JOHN INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING CASH FLOWS
SIX MONTHS ENDED MAY 2, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
(Amounts in thousands) -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $14,770 $ (1,360) $ 2 $ 680 $14,092
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,540 83 64 6,687
Loss on disposal of property and equipment (81) 437 356
Partnership losses 137 137
Minority interest in loss of consolidated
subsidiaries (1) 1 -
Equity in loss of consolidated subsidiaries 681 (681) -
Cash provided by (used in) changes in operating assets
and liabilities
Accounts receivable 748 (105) 223 866
Intercompany receivables (net) (1,159) 1,018 141 -
Inventories (385) 1,985 (11) 1,589
Other current assets (296) 68 228
Other assets (391) 119 (272)
Accounts payable (4,052) (4,052)
Accrued expenses 218 76 203 497
Income taxes payable 4,626 (946) (61) 3,619
-------------------------------------------------------------------
Net cash provided by operating activities 21,355 1,256 680 - 23,291
-------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 120 120
Purchases of property and equipment (6,520) (1,033) (317) (7,870)
Purchase of short-term investments (19) (19)
Capital distributions from partnership 53 53
-------------------------------------------------------------------
Net cash used in investing activities (6,366) (1,033) (317) - (7,716)
-------------------------------------------------------------------
FINANCING ACTIVITIES:
Principle payments of long-term debt - (123) (123)
Issuance of common stock 55 55
Cash dividends paid (829) (829)
-------------------------------------------------------------------
Net cash used in financing activities (774) - (123) - (897)
-------------------------------------------------------------------
Effect of exchange rate changes (95) (81) (176)
Unrealized loss on securities - -
Net increase in cash and cash equivalents 14,120 223 159 - 14,502
Beginning balance, cash and cash equivalents 14,096 155 86 14,337
===================================================================
Ending balance, cash and cash equivalents $28,216 $ 378 $ 245 $ - $28,839
===================================================================
Supplemental disclosures of cash flow information:
Cash received during the year for interest income $ 595 $595
===================================================================
Cash paid during the year for:
Interest expense $ 6 $ 6
===================================================================
Income taxes $ 7,576 $ 7,576
===================================================================
</TABLE>
16
<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
Income 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 Twenty-Six Weeks Ended
("Second Quarter") ("Six Months")
------------------------------- ------------------------------
April 30, May 2, April 30, May 2,
2000 1999 2000 1999
------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales...................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................................. 41.2 42.1 42.6 44.0
------------- --------------- -------------- --------------
Gross profit................................................... 58.8 57.9 57.4 56.0
Selling, general and administrative expenses................... 39.1 40.4 38.6 40.7
------------- --------------- -------------- --------------
Operating income............................................... 19.7 17.5 18.8 15.3
Interest expense............................................... 9.3 -- 9.8 --
Other income................................................... 0.5 0.5 0.5 0.5
------------- --------------- -------------- --------------
Income before income taxes..................................... 10.9 18.0 9.5 15.8
Income taxes................................................... 4.7 7.4 4.0 6.5
------------- --------------- -------------- --------------
Net income..................................................... 6.2% 10.6% 5.5% 9.3%
============= =============== ============== ==============
</TABLE>
17
<PAGE>
Second Quarter Fiscal 2000 Compared to Second Quarter Fiscal 1999
Net sales for the second quarter of fiscal 2000 increased by $6,948,000, or
8.9% over the second quarter of fiscal 1999. This increase was principally
attributable to (i) an increase in sales by company-owned retail stores of
approximately $7,262,000, due in part to increased sales at a number of the
retail boutiques, including significant increases for the boutiques located in
New York City, Las Vegas and Palm Beach, Florida, and the addition of two retail
boutiques and one outlet store since the beginning of the second quarter of
fiscal 2000 and (ii) an increase in sales of the Sport product line to existing
domestic retail customers of approximately $1,985,000. These increases in net
sales were offset by a decrease in net sales for St. John Home ("Home"), due to
the closure of three stores and the transfer of one store to the former joint
venture partner during the second quarter of fiscal 1999. Net sales increased
primarily as a result of increased unit sales of various product lines.
Gross profit for the second quarter of fiscal 2000 increased by $4,821,000, or
10.6% as compared with the second quarter of fiscal 1999, and increased as a
percentage of net sales to 58.8% from 57.9%. This increase in the gross profit
margin was primarily the result of an increase in the gross margin for the
retail boutiques due to a decrease in the point of sale markdowns and an
increase in the gross margin for the Sport product line reflecting an
improvement in manufacturing efficiency.
Selling, general and administrative expenses for the second quarter of fiscal
2000 increased by $1,709,000, or 5.4% over the second quarter of fiscal 1999,
and decreased as a percentage of net sales to 39.1% from 40.4%. This decrease in
selling, general and administrative expenses as a percentage of net sales was
primarily due to non-recurring expenses totaling approximately $1.7 million
incurred during the second quarter of fiscal 1999 related to the closure of the
three Home stores and transfer of one Home store to the former joint venture
partner and the corresponding reduction in selling, general and administrative
expenses. This decrease was offset by non-recurring costs incurred during the
second quarter of fiscal 2000 related to the litigation involving the mergers
totaling approximately $1.2 million and costs incurred to repair the corporate
airplane of $1.0 million.
Operating income for the second quarter of fiscal 2000 increased by
$3,112,000, or 22.8% over the second quarter of fiscal 1999. Operating income
as percentage of net sales increased to 19.7% from 17.5% during the same period.
This increase in the operating income as a percentage of net sales was due to an
increase in the gross profit margin and a decrease in selling, general and
administrative expenses as a percentage of net sales.
Interest expense for the second quarter of fiscal 2000 increased by
$7,926,000 over the second quarter of fiscal 1999. This increase was due to the
borrowings under the senior credit facility and senior subordinated notes
incurred during the third quarter of fiscal 1999 in connection with the
completion of the mergers in July 1999.
First Six Months Fiscal 2000 Compared to First Six Months Fiscal 1999
Net sales for the first six months of fiscal 2000 increased by $13,148,000,
or 8.7% over the first six months of fiscal 1999. This increase was principally
attributable to (i) an increase in sales by Company owned retail stores of
approximately $13,101,000, due in part to increased sales at a number of the
retail boutiques, including significant increases at the boutiques located in
New York City, Las Vegas and Palm Beach, Florida, and the addition of two retail
boutiques and one outlet store since the beginning of fiscal 2000 and (ii) an
increase in sales of the Sport product line to existing domestic retail
customers of approximately $3,437,000. These increases in net sales were offset
by a decrease in net sales for St. John Home, due to the closure of three stores
and the transfer of one store to the former
18
<PAGE>
joint venture partner during the second quarter of fiscal 1999. Net sales
increased primarily as a result of increased unit sales of various product
lines.
Gross profit for the first six months of fiscal 2000 increased by $9,819,000,
or 11.6% as compared with the first six months of fiscal 1999, and increased as
a percentage of net sales to 57.4% from 56.0%. This increase in the gross profit
margin was primarily the result of an increase in the gross margin for the
retail boutiques due to a decrease in the point of sale markdowns and an
increase in the gross margin for the Sport product line reflecting an
improvement in manufacturing efficiency.
Selling, general and administrative expenses for the first six months of
fiscal 2000 increased by $1,965,000, or 3.2% over the first six months of fiscal
1999, and decreased as a percentage of net sales to 38.6% from 40.7%. This
decrease in selling, general and administrative expenses as a percentage of net
sales was primarily due to (i) non-recurring expenses totaling approximately
$1.7 million incurred during the second quarter of fiscal 1999 related to the
closure of the three Home stores and transfer of one Home store to the former
joint venture partner, (ii) a decrease in costs of promoting and marketing the
Company's product line to its major customers of approximately $1.4 million and
(iii) the reduction in selling, general and administrative expenses related to
the closure of the three Home stores and the transfer of one Home store to the
former joint venture partner during the second quarter of fiscal 1999. This
decrease was offset by non-recurring costs incurred during the first six months
of fiscal 2000 related to the litigation involving the mergers totaling
approximately $1.4 million and costs incurred to repair the corporate airplane
of $1.0 million.
Operating income for the first six months of fiscal 2000 increased by
$7,855,000, or 34.0% over the first six months of fiscal 1999. Operating income
as percentage of net sales increased to 18.8% from 15.3% during the same period.
This increase in the operating income as a percentage of net sales was due to
the increase in the gross profit margin and a decrease in selling, general and
administrative expenses as a percentage of net sales.
Interest expense for the first six months of fiscal 2000 increased by
$16,154,000 over the first six months of fiscal 1999. This increase was due to
the borrowings under the senior credit facility and senior subordinated notes
incurred during the third quarter of fiscal 1999 in connection with the
completion of the mergers in July 1999.
Liquidity and Capital Resources
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 six months of fiscal 2000, cash provided by
operating activities was $18,480,000. Cash provided by operating activities was
primarily generated by net income and a decrease in accounts receivable, while
cash used in operating activities was primarily used to fund a decrease in
accrued interest expense. Cash used in investing activities was $10,384,000
during the first six months of fiscal 2000. The principal use of cash in
investing activities was for the purchase of 12 electronic knitting machines,
the construction of improvements for a new manufacturing facility located in
Irvine, California, the construction of leasehold improvements for a new
boutique location in Hawaii and the purchase of a condominium located in New
York City. Cash used in financing activities was $21,761,000 during the first
six months of fiscal 2000, primarily used to fund prepayments made on the senior
secured debt of $20 million.
19
<PAGE>
The Company anticipates purchasing property and equipment of approximately
$14 million during the remainder of fiscal 2000. The estimated $14 million will
be used principally for the purchase of electronic knitting machines, upgrades
to the Company's computer systems, the construction of improvements for a new
corporate headquarters in Irvine, California, the expansion of the boutique
location in Palm Desert, California and the construction of leasehold
improvements for one additional retail boutique.
As of April 30, 2000, the Company had approximately $68,431,000 in working
capital and $18,558,000 in cash and marketable securities. The Company's
principal source of liquidity is internally generated funds. The Company also
has a $25.0 million 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 1.25% (9.0% at April 30, 2000) or a Eurodollar rate plus
2.25%. 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 April 30, 2000, 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 decreased $21,539,000 to $268,346,000 at April 30,
2000. The Company's outstanding debt is comprised of bank borrowings of
$169,615,000 and senior subordinated notes of $98,731,000.
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 Knits International, Incorporated 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.
Except as may be required under applicable law, there are no material
restrictions on distributions to the Company from the Company's wholly owned
subsidiaries that have guaranteed the Company's payment obligations under its
senior subordinated notes. See footnote 8 to the Company's unaudited
consolidated financial statements contained herein.
The Company paid cash dividends of approximately $1,245,000 during fiscal 1999
prior to 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 $38,761,000 and $32,317,000 for the first six months of
fiscal 2000 and 1999, respectively, and $21,136,000 and $19,280,000 for the
second quarter of fiscal 2000 and 1999, 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
20
<PAGE>
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 undertook many actions intended to assure that its computer
systems and other equipment were capable of functioning in, and processing for,
the Year 2000 and beyond. These actions were generally described in the
Company's report on Form 10-Q for the quarter ended August 1, 1999. The Company
implemented a program intended to address, on a timely basis, "Year 2000
Readiness" (the need for computer applications and other systems used by the
Company to function in and after the Year 2000 and to recognize and properly
perform date sensitive functions involving dates after December 31, 1999).
As of June 12, 2000, the Company has not experienced any material
consequences of failure of Year 2000 Readiness, either by the Company, its
suppliers, or its customers. However, Year 2000 Readiness has many elements and
potential consequences, some of which may not be foreseeable or may be realized
in future periods. Therefore, there can be no assurance that unforeseen
circumstances could still not arise, or that the Company will not in the future
identify equipment or systems which are not Year 2000 ready.
The Company's Year 2000 costs were approximately $716,000.
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 2000, (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 and (iii) the
Company's anticipation that it will not pay cash dividends on its common stock
in the future.
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) the inability of the Company to meet the
financial covenants under its senior secured credit facilities and subordinated
note indenture. The potential adverse impact on the Company of these and other
risks is discussed in more detail in the Company's Form 10-K for the year ended
October 31, 1999 and the risk factors described therein are incorporated herein
by reference.
21
<PAGE>
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 currencies. In order to reduce the effects of such fluctuations, under
established procedures and controls, the Company enters into forward contracts.
These contractual arrangements are placed with a major financial institution.
The 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 typically entered into at the time the Company prices its
products. The Company's primary exposure to foreign currency exchange rate
fluctuation is on the Euro and the British pound. At April 30, 2000, the Company
had contracts maturing through July 31, 2000 to sell 1.2 million Euros at a rate
of 0.94 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 has
entered into an interest rate collar agreement with a major financial
institution to limit its exposure on the variable rate debt. The agreement
became effective on October 4, 1999 and will expire on July 7, 2002. The
agreement sets a cap rate for libor contracts at 8.5%. The agreement also sets
a minimum rate of 5.37%. The agreement covers $45 million of the Company's
variable rate debt.
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 $1.8 million.
22
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to certain legal proceedings, which are described in the
Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1999
filed with the Securities and Exchange Commission on January 28, 2000. During
the second quarter of fiscal 2000, the following material developments occurred
with respect to certain of these legal proceedings.
Securities Fraud Class Action
The settlement which was reached on January 23, 2000, between the Company and
Binary Traders, Inc. received final approval from the court on April 24, 2000.
Litigation Regarding The Mergers
The Company announced on June 9, 2000 that it reached an agreement to settle
the class action shareholders' lawsuit arising from the mergers. The terms of
the settlement agreement, which remains subject to final court approval, calls
for payment of $13.75 million to the Company's former public shareholders and
their attorneys. Nearly all of this payment will be funded by the Company's
insurance carriers. Additionally, in the event of a future sale, merger or
public offering of the Company, the Company has agreed to provide these former
shareholders with an opportunity to receive a specified percentage of proceeds
from such an event under certain limited circumstances. The court preliminarily
approved the settlement on June 12, 2000 and set a hearing to consider final
approval on August 1, 2000.
Item 5. Other Information
Affiliate Purchases of Company Securities
The Company has been informed by certain stockholders and officers who are
affiliates of the Company that they may, from time to time, purchase outstanding
debt or equity securities of the Company from existing holders pursuant to
customary transactions, to the extent permitted under applicable federal and
state laws.
Extension of Employment Agreement
The Board of Directors has approved the extension of the employment agreement
between the Company and Robert E. Gray for one additional year to expire on May
31, 2001. The previous amended and restated employment agreement is filed as
Exhibit 10.14 to the Company's annual report on Form 10-K for the year ended
October 31, 1999. The amendment reflecting the extension has not yet been
executed by the parties.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
None
23
<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.
June 12, 2000 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)
24
<PAGE>
EXHIBIT INDEX
Exhibit Sequentially
Number Description of Exhibit Numbered Page
------ ----------------------- -------------
27.1 Financial Data Schedule
25
