<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-K/A
(Amendment No. 1)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended October 31, 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)
Delaware 52-2061057
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
17422 Derian Avenue
Irvine, California 92614
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 863-1171
Securities registered pursuant to Section 12(b) or 12(g) of the Act:
None
Securities registered pursuant to Section 15(d) of the Act:
Title of each class:
--------------------
12 1/2% Senior Subordinated Notes due 2009
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 ______*
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.*
* The Registrant is not subject to the reporting requirements of Item 405.
As of February 16, 2000, the Registrant had 6,546,174 shares of Common
Stock outstanding, and the aggregate market value of Registrant's Common Stock
held by nonaffiliates was $7,931,333 (based on the closing price of the Common
Stock on such date of $17.50 as reported on the OTC Bulletin Board quotation
system).
================================================================================
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements--See "Index to Consolidated
Financial Statements"
2. Consolidated Financial Statement Schedule--See "Index to
Consolidated Financial Statements"
3. Exhibits--See "Exhibit Index"
(b) Reports on Form 8-K
None
2
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.......................................................................... 4
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at October 31, 1999 and November 1, 1998............................................ 5
Consolidated Statements of Income for the years ended October 31, 1999, November 1, 1998 and
November 2, 1997.............................................................................................. 6
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended October 31, 1999,
November 1, 1998 and November 2, 1997......................................................................... 7
Consolidated Statements of Cash Flows for the years ended October 31, 1999, November 1, 1998
and November 2, 1997.......................................................................................... 8
Notes to Consolidated Financial Statements...................................................................... 10
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Account................................................................... 31
</TABLE>
3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To St. John Knits International, Incorporated:
We have audited the accompanying consolidated balance sheets of ST. JOHN KNITS
INTERNATIONAL, INCORPORATED (a Delaware corporation) and subsidiaries as of
October 31, 1999 and November 1, 1998, and the related consolidated statements
of income, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended October 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
St. John Knits International, Incorporated and subsidiaries as of October 31,
1999 and November 1, 1998, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 1999 in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Orange County, California
January 25, 2000
4
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, November 1,
A S S E T S 1999 1998
----------- ------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $ 32,443,815 $ 14,336,872
Investments........................................................................... 25,412 1,175,427
Accounts receivable, net.............................................................. 33,562,573 35,562,189
Inventories........................................................................... 43,521,734 47,748,286
Deferred income tax benefit........................................................... 7,678,272 7,743,961
Other................................................................................. 2,634,127 2,377,352
------------- ------------
Total current assets............................................................... 119,865,933 108,944,087
------------- ------------
Property and equipment:
Machinery and equipment............................................................... 51,242,600 47,023,808
Leasehold improvements................................................................ 32,856,047 30,691,098
Buildings............................................................................. 17,913,064 17,883,700
Furniture and fixtures................................................................ 6,868,556 6,462,833
Land.................................................................................. 5,786,857 5,786,857
Construction in progress.............................................................. 4,132,267 666,481
------------- ------------
118,799,391 108,514,777
Less--Accumulated depreciation and amortization....................................... 49,211,044 38,627,543
------------- ------------
69,588,347 69,887,234
------------- ------------
Deferred financing costs................................................................ 14,585,755 --
Other assets............................................................................ 2,770,219 3,558,347
------------- ------------
$ 206,810,254 $182,389,668
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable...................................................................... $ 6,805,079 $ 8,303,874
Current portion of long-term debt..................................................... 2,564,352 227,979
Accrued expenses...................................................................... 11,275,809 11,101,794
Accrued interest expense.............................................................. 7,661,434 --
Dividends payable..................................................................... 1,228,472 --
Income taxes payable.................................................................. 1,190,888 120,657
------------- ------------
Total current liabilities.......................................................... 30,726,034 19,754,304
Long-term debt, net of current portion.................................................. 287,321,021 407,599
------------- ------------
Total liabilities.................................................................. 318,047,055 20,161,903
------------- ------------
Minority interest....................................................................... 693,391 653,435
------------- ------------
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......................................................... (28,261) (27,504)
Cumulative translation adjustment..................................................... 406,823 197,249
Additional paid-in capital............................................................ 147,141,194 17,882,672
Retained earnings (deficit)........................................................... (284,515,410) 143,019,114
------------- ------------
Total stockholders' equity (deficit)................................................. (136,930,192) 161,574,330
------------- ------------
$ 206,810,254 $182,389,668
============= ============
</TABLE>
See accompanying notes.
5
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended
----------------------------------------------
October 31, November 1, November 2,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................................................... $300,283,000 $281,960,763 $242,100,843
Cost of sales........................................................... 130,130,588 120,882,597 99,545,173
------------ ------------ ------------
Gross profit............................................................ 170,152,412 161,078,166 142,555,670
Selling, general and administrative expenses............................ 120,995,893 107,025,666 84,544,884
Transaction fees and expenses........................................... 15,122,809 -- --
------------ ------------ ------------
Operating income........................................................ 34,033,710 54,052,500 58,010,786
Interest expense........................................................ 10,224,486 -- 42,266
Other income............................................................ 1,196,654 1,369,022 754,960
------------ ------------ ------------
Income before income taxes.............................................. 25,005,878 55,421,522 58,723,480
Income taxes............................................................ 10,316,811 22,000,904 24,299,829
------------ ------------ ------------
Net income.............................................................. 14,689,067 33,420,618 34,423,651
------------ ------------ ------------
Comprehensive income, net of tax:
Foreign currency translation adjustments............................. 123,649 127,794 (11,417)
Unrealized loss on securities........................................ (447) (16,227) --
------------ ------------ ------------
Comprehensive income.................................................... $ 14,812,269 $ 33,532,185 $ 34,412,234
============ ============ ============
Net income per common share:
Basic................................................................ $ 1.01 $ 2.00 $ 2.07
============ ============ ============
Diluted.............................................................. $ 0.98 $ 1.94 $ 2.01
============ ============ ============
Dividends per share..................................................... $ 0.075 $ 0.10 $ 0.10
============ ============ ============
Shares used in the calculation of net income per share:
Basic................................................................ 13,389,747 16,693,955 16,614,975
============ ============ ============
Diluted.............................................................. 13,668,638 17,234,630 17,133,631
============ ============ ============
</TABLE>
See accompanying notes.
6
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock
-----------------------
Number Additional Cumulative Unrealized Retained
Of Paid-In Translation Loss on Earnings
Shares Amount Capital Adjustment Securities (Deficit) Total
------ ------ ------- ---------- ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 3, 1996........ 16,599,064 $ 502,799 $ 18,085,151 $ -- $ -- $ 78,505,362 $ 97,093,312
Dividends declared
($.10 per share)............. -- -- -- -- -- (1,661,909) (1,661,909)
Shares issued upon
exercise of options
including tax benefit........ 35,484 -- 844,390 -- -- -- 844,390
Foreign currency
translation adjustment....... -- -- -- (19,351) -- -- (19,351)
Net income..................... -- -- -- -- -- 34,423,651 34,423,651
----------- --------- ------------ -------- ---------- ------------- -------------
Balance November 2, 1997......... 16,634,548 502,799 18,929,541 (19,351) -- 111,267,104 130,680,093
Dividends declared
($.10 per share)............. -- -- -- -- -- (1,668,608) (1,668,608)
Shares issued upon
exercise of options
including tax benefit........ 109,336 -- 1,832,969 -- -- -- 1,832,969
Shares repurchased............. (164,400) -- (2,879,838) -- -- -- (2,879,838)
Unrealized loss on securities.. -- -- -- -- (27,504) -- (27,504)
Foreign currency translation
adjustment................... -- -- -- 216,600 -- -- 216,600
Net income..................... -- -- -- -- -- 33,420,618 33,420,618
----------- --------- ------------ -------- ---------- ------------- -------------
Balance November 1, 1998......... 16,579,484 502,799 17,882,672 197,249 (27,504) 143,019,114 161,574,330
Dividends declared
($.075 per share)............ -- -- -- -- -- (1,244,545) (1,244,545)
Dividends accrued for
preferred stock.............. -- -- -- -- -- (1,228,472) (1,228,472)
Shares issued upon
exercise of options
including tax benefit........ 39,329 -- 796,510 -- -- -- 796,510
Unrealized loss on securities.. -- -- -- -- (757) -- (757)
Foreign currency translation
adjustment................... -- -- -- 209,574 -- -- 209,574
Recapitalization transaction... (10,072,639) (437,337) 128,407,850 -- -- (439,750,574) (311,780,061)
Reimbursement of
short-swing profit............ -- -- 54,162 -- -- -- 54,162
Net income..................... -- -- -- -- -- 14,689,067 14,689,067
----------- --------- ------------ -------- ---------- ------------- -------------
Balance October 31, 1999......... 6,546,174 $ 65,462 $147,141,194 $406,823 $(28,261) $(284,515,410) $(136,930,192)
=========== ========= ============ ======== ========== ============= =============
</TABLE>
See accompanying notes.
7
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended
------------------------------------------------
October 31, November 1, November 2,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................................ $ 14,689,067 $ 33,420,618 $ 34,423,651
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................................... 13,611,668 11,370,680 8,858,703
Amortization of discount on 12.5% notes due 2009........................ 44,596 -- --
Amortization of deferred loan costs..................................... 611,990 -- --
Net (increase) decrease in deferred income tax benefit.................. 65,689 (1,950,000) (300,000)
Loss on disposal of property and equipment.............................. 1,315,830 483,920 215,810
Partnership losses...................................................... 231,213 331,405 351,165
Write-off of trademark in Japan......................................... 620,077 -- --
Minority interest in income of consolidated subsidiaries................ 39,956 50,525 602,910
(Increase) decrease in accounts receivable.............................. 1,999,616 1,010,234 (8,478,817)
(Increase) decrease in inventories...................................... 4,226,552 (17,011,306) (7,117,926)
(Increase) decrease in other current assets............................. (256,775) 214,390 (1,322,360)
(Increase) decrease in other assets..................................... (472,032) (488,410) 6,700
Increase (decrease) in accounts payable................................. (1,498,795) (1,730,522) 4,629,995
Increase (decrease) in accrued expenses................................. 174,015 1,240,704 (1,004,422)
Increase in accrued interest expense.................................... 7,661,434 -- --
Increase (decrease) in income taxes payable............................. 1,070,231 (1,960,585) (262,758)
Decrease in deferred income tax liability............................... -- -- (143,941)
------------- ------------ ------------
Net cash provided by operating activities.............................. 44,134,332 24,981,653 30,458,710
------------- ------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment.............................. 183,860 10,499 84,641
Purchase of property and equipment........................................ (14,530,943) (23,648,032) (22,751,076)
Purchase of trademarks.................................................... -- -- (747,928)
Purchase of short-term investments........................................ -- -- (204,959)
Sale of short-term investments............................................ 1,150,015 1,176,338 2,075,710
Capital contributions to partnership...................................... -- -- (67,108)
Capital distributions from partnership.................................... 127,341 84,496 68,500
------------- ------------ ------------
Net cash used in investing activities.................................. (13,069,727) (22,376,699) (21,542,220)
------------- ------------ ------------
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............................................... 1,427,000 407,599 --
Principal payments of long-term debt...................................... (837,800) -- --
Recapitalization transaction.............................................. (311,780,061) -- --
Issuance of common stock.................................................. 796,510 1,832,969 844,390
Issuance of preferred stock............................................... 25,000,000 -- --
Financing fees and expenses............................................... (15,197,745) -- --
Cash dividends paid....................................................... (1,244,545) (2,084,472) (1,661,022)
Short-swing profit reimbursement.......................................... 54,162 -- --
Payment for the repurchase of common stock................................ -- (2,879,838) --
------------- ------------ ------------
Net cash used in financing activities.................................. (13,166,479) (2,723,742) (816,632)
------------- ------------ ------------
</TABLE>
8
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
For the years ended
-------------------------------------------------
October 31, November 1, November 2,
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Effect of exchange rate changes............................................ 209,574 216,600 (19,351)
------------- ------------ ------------
Unrealized loss on securities.............................................. (757) (27,504) --
------------- ------------ ------------
Net increase in cash and cash equivalents.................................. 18,106,943 70,308 8,080,507
Beginning balance, cash and cash equivalents............................... 14,336,872 14,266,564 6,186,057
------------- ------------ ------------
Ending balance, cash and cash equivalents.................................. $ 32,443,815 $ 14,336,872 $ 14,266,564
============= ============ ============
Supplemental disclosures of cash flow information:
Cash received during the year for interest income...................... $ 1,239,507 $ 1,154,834 $ 988,272
============= ============ ============
Cash paid during the year for:
Interest expense.................................................. $ 1,882,331 $ -- $ 46,954
============= ============ ============
Income taxes...................................................... $ 10,554,471 $ 25,286,040 $ 24,526,911
============= ============ ============
</TABLE>
See accompanying notes.
9
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, November 1, 1998 and November 2, 1997
1. Company Background and Basis of Presentation
The consolidated financial statements include the accounts of St. John
Knits International, Incorporated ("SJKI"), a Delaware corporation, and its
subsidiaries, including St. John Knits, Inc. ("St. John"). SJKI and its
subsidiaries are collectively referred to herein as "the Company." All
interdivisional and intercompany transactions and accounts have been eliminated
in consolidation. The Company is a leading designer, manufacturer and marketer
of women's clothing and accessories. The Company's products are distributed
primarily through specialty retailers and the Company's own retail boutiques and
outlets.
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.
During fiscal 1997, the Company formed St. John Company, Ltd. in Japan to
operate as a 51 percent owned subsidiary to distribute the Company's products in
Japan. During fiscal 1998, the Company increased its ownership percentage to 68
percent. During fiscal 1997, the Company also formed Amen Wardy Home Stores,
LLC, a 51 percent owned limited liability company. During fiscal 1999 the
Company changed the name of this subsidiary to St. John Home Stores, LLC and now
owns 100 percent of this entity. St. John Home operates two home furnishing
stores and one outlet store. The operations of both entities are included in
the accompanying consolidated financial statements.
2. Summary of Accounting Policies
a. Definition of Fiscal Year
The Company utilizes a 52-53 week fiscal year whereby the fiscal year ends
on the Sunday nearest to October 31. Accordingly, fiscal years 1999, 1998 and
1997 ended on October 31, November 1 and November 2, respectively. Fiscal years
1999, 1998 and 1997 were comprised of 52 weeks.
b. Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
c. Revenue Recognition
Revenue on sales to specialty retailers is recognized when the goods are
shipped. The Company establishes liabilities for estimated returns and
allowances at the time of shipment. The Company also provides for estimated
discounts when recording sales. Retail sales are recognized at the point of
sale. The Company establishes liabilities for estimated returns at the retail
stores. Accounts receivable are shown net of allowances for discounts and
uncollectible amounts of $2,270,000 and $1,205,000 in fiscal year 1999, and
$2,488,000 and $951,000 in fiscal year 1998, respectively.
10
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1999, November 1, 1998 and November 2, 1997
d. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market.
Inventories are comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw materials.......................................................... $11,940,108 $14,529,822
Work-in-process........................................................ 6,847,155 8,896,248
Finished products...................................................... 24,734,471 24,322,216
----------- -----------
$43,521,734 $47,748,286
=========== ===========
</TABLE>
e. Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method to provide for the retirement of
property and equipment at the end of their estimated useful lives, which range
from three to thirty-nine years.
f. Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents
include all liquid debt instruments purchased with a maturity of three months or
less.
g. Foreign Exchange Transactions and Contracts
The Company enters into foreign exchange contracts as a hedge against
exchange rate risk on the collection of certain accounts receivable denominated
in a foreign currency. The Company enters into contracts to sell foreign
currencies in the future only to protect the U.S. dollar value of certain
anticipated foreign currency transactions. The forward contracts are carried on
the balance sheet at their fair value with changes in their fair value initially
included in a separate component of stockholders' equity until the anticipated
transaction occurs. Such gains and losses then offset the related gains and
losses reported on the underlying transaction (Note 4).
h. Income Taxes
The Company utilizes the liability method of accounting for income taxes
required by Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes."
i. Earnings per Share
The Company adopted SFAS No. 128 "Earnings Per Share" during fiscal 1998.
Under the new requirement, primary earnings per share was replaced with basic
earnings per share. Basic earnings per share excludes the dilutive effect of
common stock equivalents, including stock options. Diluted earnings per share,
which replaced fully diluted earnings per share, includes all dilutive items.
Dilution is calculated based upon the treasury stock method, which assumes that
all dilutive securities were exercised and that the proceeds received were
applied to repurchase outstanding shares at the average market price during the
period.
As a result of the adoption of SFAS No. 128, primary earnings per share for
fiscal 1997 was restated from $2.01 to $2.07 to reflect the change to basic
earnings per share. The difference between basic and diluted earnings per share,
as shown on the Company's Consolidated Statements of Income, is due to the
dilutive effect of stock options outstanding.
11
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1999, November 1, 1998 and November 2, 1997
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 presented:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------
October 31, November 1, November 2,
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net income................................................... $ 14,689,067 $ 33,420,618 $ 34,423,651
Less: preferred stock dividends............................. 1,228,472 -- --
---------------- ---------------- ----------------
Income allocated to common stockholders...................... $ 13,460,595 $ 33,420,618 $ 34,423,651
================ ================ ================
Weighted average shares outstanding-basic.................... 13,389,747 16,693,955 16,614,975
================ ================ ================
Basic earnings per share..................................... $ 1.01 $ 2.00 $ 2.07
================ ================ ================
Add: dilutive effect of stock options....................... 278,891 540,675 518,656
---------------- ---------------- ----------------
Weighted average shares outstanding-diluted.................. 13,668,638 17,234,630 17,133,631
================ ================ ================
Diluted earnings per share................................... $ 0.98 $ 1.94 $ 2.01
================ ================ ================
</TABLE>
j. Foreign Currency Translation
The Company translates the financial statements of its foreign subsidiaries
from the local (functional) currencies to U.S. dollars in accordance with SFAS
No. 52 "Foreign Currency Translation". Substantially all assets and liabilities
of the Company's foreign subsidiaries are translated at year-end exchange rates,
while revenue and expenses are translated at average exchange rates prevailing
during the year. Adjustments for foreign currency translation fluctuations are
excluded from net income and are included as a separate component of
consolidated stockholders' equity.
k. Advertising and Promotion
All costs associated with advertising and promotion of the Company's
products are expensed as incurred.
l. Investments
The Company's investments are categorized as available-for-sale securities,
as defined by SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." Unrealized holding gains and losses are reflected as a net
amount in a separate component of stockholders' equity until realized. For the
purpose of computing realized gains and losses, cost is identified on a specific
identification basis.
m. 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.
12
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1999, November 1, 1998 and November 2, 1997
n. Segment Reporting
The Company adopted SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information", effective in fiscal 1999. SFAS No. 131
established new standards for reporting information about business segments and
related disclosures about products, geographic areas and major customers. The
business segments of the Company are wholesale and retail sales. Information on
segment reporting is included at Note 14.
o. New Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 "Reporting on the Costs of Start-up
Activities". The Company will be required to adopt this standard in fiscal 2000.
The adoption of this standard is not expected to have a material impact on the
Company's financial position or results of operations.
3. Fair Value of Financial Instruments
The following methods and assumptions were used by management to estimate
the fair value of each class of financial instrument for which it is practicable
to estimate:
Cash and Cash Equivalents - The carrying amount is a reasonable estimate of
the fair value.
Investments - Investments consist primarily of municipal bonds with
maturity dates of less than six months and common stock, which are classified as
available-for-sale and reported at fair value.
Senior Credit Facility - The term debt related to the senior credit
facility approximates the market value as the interest rate on the debt is
variable and similar to what is currently available.
12.5% Senior Notes due 2009 - This issue was publicly traded (on a limited
basis) at October 31, 1999. Therefore, the fair value of this issue is based on
its quoted market price at that date.
Mandatorily Redeemable Preferred Stock - Based on current market
conditions, the fair value of this item approximates book value at October 31,
1999.
Foreign Currency Contracts - The fair value of foreign currency contracts
(used for hedging purposes) is estimated based on current market prices.
Interest Rate Collar - The fair value of this instrument is based upon the
present value of the estimated future cash flows.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------
Book Value Fair Value Book Value Fair Value
---------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents........................... $ 32,443,815 $ 32,443,815 $ 14,336,872 $ 14,336,872
Investments......................................... 25,412 25,412 1,175,427 1,175,427
Financial Liabilities:
Long-term debt:
Senior Credit Facility................ 189,250,000 189,250,000 -- --
12 1/2% Senior Subordinated Notes due 2009...... 98,660,596 87,000,000 -- --
Mandatorily Redeemable Preferred Stock.............. 25,000,000 25,000,000 -- --
</TABLE>
13
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1999, November 1, 1998 and November 2, 1997
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------
Notional Amount Fair Value Notional Amount Fair Value
----------------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Other:
Foreign currency contracts.......................... $ 3,191,185 $(59,972) $3,670,839 $197,187
Interest rate collar................................ 45,000,000 33,578 -- --
</TABLE>
4. Hedging Activities
During the fourth quarter of fiscal 1998, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and has
designated certain financial instruments as cash flow hedges which must be
reported in accordance with SFAS No. 133. The adoption of SFAS No. 133 did not
have a material effect on the Company's financial position or results of
operations.
It is the Company's policy to reduce the effects of fluctuations in foreign
currency exchange rates associated with its sale of goods denominated in a
foreign currency by entering into forward contracts. The Company enters into
contracts to sell foreign currencies in the future only to protect the U.S.
dollar value of certain anticipated foreign currency transactions. The forward
contracts are carried on the balance sheet at their fair value with changes in
their fair value initially included in a separate component of stockholders'
equity until the anticipated transaction occurs. Such gains and losses then
offset the related gains and losses reported on the underlying transaction. The
total net gain recorded during fiscal years 1999 and 1998 was $168,000 and
$321,000, respectively.
The Company holds various foreign exchange contracts. At October 31, 1999,
the Company had contracts maturing through February 29, 2000 to sell 2.2 million
Euros and 280,000 British pounds at rates ranging from 1.05 to 1.06 U.S. dollars
to the Euro and 1.57 to 1.67 U.S. dollars to the British pound. The Company also
held a contract which matures on November 30, 1999 to sell 700,000 deutsche
marks at a rate of 1.66 deutsche marks to the U.S. dollar. At November 1, 1998,
the Company had contracts maturing through May 28, 1999 to sell 5.4 million
deutsche marks and 365,000 British pounds at rates ranging from 1.71 to 1.77
deutsche marks to the U.S. dollar and 1.63 to 1.64 U.S. dollars to the British
pound. At October 31, 1999 and November 1, 1998 the fair value of these foreign
currency contracts has not been recorded as a component of stockholders' equity
as the amounts are not material.
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 has entered into an interest rate collar agreement with a
major financial institution to limit its exposure on $45 million of the
Company's variable rate debt and establishes a LIBOR cap at 8.50% and a LIBOR
floor at 5.37%. The agreement became effective on October 4, 1999 and will
expire on July 7, 2002.
The fair value of the interest rate collar agreement is included on the
balance sheet and the ineffective portion is included currently in interest
expense.
5. Accrued Expenses
Accrued expenses for fiscal years 1999 and 1998 are comprised of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Wages and benefits......................................................... $ 4,567,077 $ 5,135,454
Workers' compensation...................................................... 240,303 646,100
Profit-sharing plan contribution........................................... 500,000 500,000
Promotional and advertising allowance...................................... 2,136,492 1,896,955
Other...................................................................... 3,831,937 3,151,264
----------- -----------
$11,275,809 $11,329,773
=========== ===========
</TABLE>
14
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1999, November 1, 1998 and November 2, 1997
6. Income Taxes
The provision for income taxes for fiscal years 1999, 1998 and 1997,
consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal........................................ $ 9,248,127 $17,568,636 $18,878,088
State.......................................... 1,002,995 4,220,969 5,335,096
----------- ----------- -----------
10,251,122 21,789,605 24,213,184
Deferred provision.................................. 65,689 211,299 86,645
----------- ----------- -----------
$10,316,811 $22,000,904 $24,299,829
=========== =========== ===========
</TABLE>
The components of the deferred income tax provision for fiscal years 1999,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Allowance for uncollectible accounts............... $ 86,516 $ 16,718 $ 57,083
Inventory adjustments to market.................... (1,097,816) (431,311) 609,067
Accrued expenses................................... 157,138 663,042 (429,750)
Depreciation....................................... 919,851 (37,150) (149,755)
----------- ----------- -----------
$ 65,689 $ 211,299 $ 86,645
=========== =========== ===========
</TABLE>
The components of the Company's deferred income tax benefit as of October
31, 1999 and November 1, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred income tax benefit:
Tax basis adjustments to inventory............................ $ 948,780 $2,126,806
Allowance for uncollectible accounts.......................... 456,750 879,725
Inventory adjustments to market............................... 3,112,131 2,283,321
Accrued expenses.............................................. 3,160,611 2,454,109
---------- ----------
$7,678,272 $7,743,961
========== ==========
</TABLE>
The reported provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to the income before provision
for income taxes for fiscal years 1999, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income tax provision computed at statutory rate..... $ 8,752,057 $19,397,537 $20,553,218
State taxes, net of federal benefit................. 1,564,754 3,350,232 3,549,834
Tax credits and other............................... -- (746,865) 196,777
----------- ----------- -----------
Tax provision....................................... $10,316,811 $22,000,904 $24,299,829
=========== =========== ===========
</TABLE>
7. Benefit and Stock Option Plans
The Company is self-insured for a portion of its medical benefits programs.
Amounts charged to expense for health benefits were $3,917,000, $3,594,000 and
$3,110,000 for fiscal years 1999, 1998 and 1997, respectively, and were based on
actual claims and an estimate of claims incurred but not reported. The current
liability for health benefits is included in accrued expenses on the
accompanying consolidated balance sheets. The Company maintains excess insurance
coverage on an individual and an aggregate basis.
15
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1999, November 1, 1998 and November 2, 1997
The Company maintains a qualified profit-sharing plan for the benefit of
all eligible employees. This plan contemplates the sharing of profits annually
at the discretion of the Board of Directors and is funded by cash contributions.
The contribution to this plan was $500,000, in each of the fiscal years 1999,
1998 and 1997.
Prior to the mergers, the Company had one stock option plan, the 1993 St.
John Knits, Inc. Stock Option Plan (the "1993 Plan"). During fiscal 1999 the
Company terminated the 1993 Plan and adopted the 1999 St. John Knits
International, Incorporated Stock Option Plan (the "1999 Plan"). Options granted
under the 1999 Plan may be either incentive or nonstatutory stock options. The
Company accounts for the plans under Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees", under which no compensation cost has
been recognized for fiscal years 1999, 1998 and 1997.
SFAS No. 123 "Accounting for Stock-Based Compensation" was issued in 1995
and, if fully adopted, changes the methods for recognition of cost on plans
similar to that of the Company. Adoption of SFAS No. 123 is optional for
employee stock option grants, however pro forma disclosure as if the Company had
adopted the cost recognition method is required. Had compensation cost for stock
options awarded under the 1999 Plan or 1993 Plan been determined to be
consistent with SFAS No. 123, the Company's net income and earnings per share
would have reflected the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C> <C>
Net income: As reported...................................... $14,689,067 $33,420,618
Pro forma........................................ $12,253,026 $31,818,853
Net income per share-diluted: As reported...................................... $ 0.98 $ 1.94
Pro forma........................................ $ 0.81 $ 1.85
</TABLE>
The Company may grant up to 727,360 options under the 1999 Plan. The
Company has granted 498,519 options as of October 31, 1999 under the 1999 Plan.
Stock options are issued at the approximate fair market value. Options generally
vest over three to five years; are exercisable in whole or in installments; and
expire ten years from date of grant.
The following is a summary of the activity in the 1999 Plan and the 1993
Plan for fiscal years 1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year............................... 921,652 $15.42 842,988 $17.16 681,472 $ 9.45
Granted...................................................... 498,519 30.00 527,334 27.12 197,000 42.27
Exercised.................................................... (894,316) 15.42 (109,336) 9.79 (35,484) 8.50
Forfeited.................................................... (27,336) 18.50 (339,334) 39.44 -- --
--------- ------ -------- ------ -------- ------
Outstanding, end of year..................................... 498,519 $30.00 921,652 $15.42 842,988 $17.16
========= ======== ========
Exercisable, end of year..................................... -- -- 677,960 $14.37 668,644 $11.28
Weighted average fair value of options granted............... $ 8.92 $11.34 $17.93
</TABLE>
The options outstanding as of October 31, 1999 have an exercise price of
$30.00 and a weighted average remaining contractual life of 9.75 years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes pricing model with the following assumptions used for the
grants in fiscal years 1999 and 1998: weighted average risk-free interest rate
of 6.09% and 5.55%; weighted average volatility of 33.73% and 27.53%; expected
life of 6 years; and weighted average dividend yield of 0.00% and 0.26%.
Options granted in 1999 and 1998 have a weighted average contractual life of
9.75 and 9.61 years, respectively.
16
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1999, November 1, 1998 and November 2, 1997
8. Commitments
The Company has entered into various leases for manufacturing, showroom,
warehouse, retail and office locations, including leases with related parties
(Note 11). The leases expire at various dates through the year 2014 and certain
leases contain renewal options. Rental expense under these leases was
approximately $13,846,000, $12,052,000 and $9,474,000 in fiscal years 1999, 1998
and 1997, respectively.
The following is a schedule of future minimum rental payments required
under noncancellable operating leases as of October 31, 1999:
<TABLE>
<S> <C>
2000.................................................... $ 14,095,000
2001.................................................... 13,395,000
2002.................................................... 12,279,000
2003.................................................... 11,948,000
2004.................................................... 12,059,000
Thereafter.............................................. 67,830,000
------------
$131,606,000
============
</TABLE>
The Company has various employment contracts with certain key employees,
which expire at various times through June 1, 2000. These agreements provide for
total annual compensation aggregating $3,694,000 and the payment of severance
benefits upon the termination of employment.
As of October 31, 1999 and November 1, 1998, the Company's commitments to
purchase wool yarn were approximately $7,897,000 and $12,779,000, respectively.
The Company had a commitment to purchase computerized knitting machines totaling
approximately $569,000 at November 1, 1998.
9. Long-term Debt
<TABLE>
<CAPTION>
October 31, November 1,
Long-term debt consists of the following: 1999 1998
--------------- ----------------
<S> <C> <C>
Senior credit facility:
Tranche A.................................................... $ 74,250,000 $ --
Tranche B.................................................... 115,000,000 --
Revolving credit facility.................................... -- --
------------ --------
189,250,000 --
Senior subordinated notes, net of discount................... 98,660,596 --
Other.......................................................... 1,974,777 635,578
------------ --------
289,885,373 635,578
Less - Current portion........................................ 2,564,352 227,979
------------ --------
$287,321,021 $407,599
============ ========
</TABLE>
Senior Credit Facilities
Concurrent with the consummation of the mergers, the Company entered into a
Credit Agreement with a syndicate of lending institutions (the "Lenders"), which
agreement provides for an aggregate principal amount of loans of up to $215.0
million. Loans under the Credit Agreement consist of $190.0 million in
aggregate principal amount of term loans ("Term Loan Facility"), which facility
includes a $75.0 million tranche A term loan subfacility, a $115.0 million
tranche B term loan subfacility, and a $25.0 million revolving credit facility
("Revolving Credit Facility"). The Credit Agreement includes a subfacility for
swingline borrowings and a sublimit for letters of credit. The Company's
obligations under the Credit Agreement are secured by a security interest in
substantially all of the Company's assets. The Company used proceeds from the
Term Loan to provide a portion of the funding necessary to consummate the
mergers. There were no borrowings under the Revolving Credit Facility at
October 31, 1999.
17
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1999, November 1, 1998 and November 2, 1997
The tranche B term loan facility matures on July 31, 2007. The tranche A
term loan facility and the Revolving Credit Facility mature on July 31, 2005.
The Term Loan facility is subject to repayment according to quarterly
amortization of principal based upon the Scheduled Amortization (as defined in
the Credit Agreement). The Company may prepay the term loan facility.
Indebtedness under the Term Loan Facility and the Revolving Credit Facility
initially bears interest at a rate based (at the Company's option) upon (i)
LIBOR for one, two, three or six months, plus 3.00% with respect to the tranche
A term loan facility and the Revolving Credit Facility or plus 3.50% with
respect to the tranche B term loan facility, or (ii) the Alternate Base Rate
(8.25% at October 31, 1999) plus 2.00% with respect to the tranche A term loan
facility and the Revolving Credit Facility or plus 2.50% with respect to the
tranche B term loan facility; provided that, the interest rates for the
Revolving Credit Facility and tranche A and B term loans are subject to several
point reductions in the event the Company meets certain performance targets
beginning of the end of the first quarter of fiscal 2000.
Interest rates at October 31, 1999 were approximately 8.9% and 9.4% on
tranche A and tranche B term loans, respectively. Effective October 4, 1999,
the Company entered into an interest rate collar agreement with a major
financial institution. The agreement limits the Company's exposure on a portion
of the term loans by placing a cap on the rate for LIBOR contracts at 8.5%. The
contract also sets a minimum rate of 5.37%. The contract covers $45 million of
the term debt and will expire on July 7, 2002.
The Company is required to pay to the Lenders in the aggregate a commitment
fee equal to 0.5% per annum on the undrawn amount of the Revolving Credit
Facility during the preceding quarter.
Pursuant to the terms of the Agreement and the Revolving Credit Facility,
the Company is required to maintain certain financial ratios and minimum levels
of tangible net worth and working capital as well as to achieve certain levels
of earnings before interest, taxes, depreciation and amortization. In addition,
the Company is restricted from entering into certain transactions or making
certain payments and dividend distributions without the prior consent of the
lenders.
Senior Subordinated Notes
In connection with the Mergers, the Company obtained financing through the
issuance of $100 million in senior subordinated debt ("Subordinated Notes").
The Subordinated Notes bear interest at a rate of 12.5% per year and were issued
at 98.616% of the actual face value. The Subordinated Notes will mature on July
1, 2009. Interest on the Subordinated Notes is payable in cash semi-annually on
January 1 and July 1 of each year, commencing on January 1, 2000. The
Subordinated Notes are redeemable, in whole or in part, at the option of the
Company, at any time on or after July 1, 2004, at the redemption prices set
forth below, plus accrued and unpaid interest and liquidation damages, if any,
to the date of redemption.
<TABLE>
<CAPTION>
Redemption Year Price
--------------- -----
<S> <C>
2004.......................... 106.250%
2005.......................... 104.688%
2006.......................... 103.125%
2007.......................... 101.563%
2008 and thereafter........... 100.000%
</TABLE>
In addition, at any time on or before July 1, 2002, the Company may redeem
up to 35% of the original aggregate principal amount of the Subordinated Notes
with the net proceeds of an Initial Public Equity offering at a redemption price
equal to 112.5% of the principal amount thereof, plus accrued and unpaid
interest and liquidated damages, if any, to the date of redemption (subject to
the right of holders of record on the relevant record date to receive
interest due on the relevant interest payment date); provided, however, that
at least 65% of the originally issued aggregate principal amount of the notes
must remain outstanding immediately after giving effect to each such
redemption (excluding any notes held by SJKI or any of its affiliates). Notice
of any such redemption must be given within 60 days after the date of the
closing of the relevant public equity offering of SJKI. These notes are
subordinated to the Senior Credit Facility as discussed above.
18
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1999, November 1, 1998 and November 2, 1997
Fees associated with obtaining the Subordinated Notes and the tranche A and
tranche B term loans were $15.2 million, which are amortized over the terms of
the respective notes using the effective interest rate method. Amortization
expense of approximately $612,000 relating to such fees is included in interest
expense for the year ended October 31, 1999.
As of October 31, 1999, future maturities of long-term debt were as
follows:
<TABLE>
<S> <C>
2000.................................................. $ 2,564,352
2001.................................................. 6,263,465
2002.................................................. 11,024,032
2003.................................................. 14,774,032
2004.................................................. 26,774,032
Later years........................................... 229,824,864
------------
$291,224,777
============
</TABLE>
10. Mandatorily Redeemable Preferred Stock
The $25,000,000 Mandatorily Redeemable Preferred Stock consists of 250,000
shares of Preferred Stock with a liquidation preference of $100 per share and
ranks junior in right of payment to all liabilities and obligations (whether or
not for borrowed money) of SJKI (other than common stock of SJKI and any
preferred stock of SJKI which by its terms is on parity with or junior to the
Preferred Stock).
Holders of Preferred Stock will be entitled to receive, when, as and if
declared by the board of directors of SJKI, out of funds legally available
therefor, dividends on the Preferred Stock, at an annual rate equal to 15.25%,
provided that if dividends are not paid on a dividend payment date, dividends
shall continue to accrue on unpaid dividends.
The Preferred Stock may be redeemed at any time on or after July 1, 2004,
in whole or in part, at the option of SJKI, at the redemption prices (expressed
in percentages of liquidation value) set forth below together with all
accumulated dividends to the date of redemption, if redeemed during the 12-month
period beginning on July 1 of the years indicated.
<TABLE>
<CAPTION>
Redemption Year Percentage
-------------- ----------
<S> <C>
2004............................................. 107.625%
2005............................................. 105.719%
2006............................................. 103.813%
2007............................................. 101.906%
2008 and thereafter.............................. 100.000%
</TABLE>
The Preferred Stock will also be redeemable in whole or in part, at the
option of SJKI at any time before July 1, 2004, at a redemption price equal
to the greater of (i) 100% of the liquidation value of the Preferred Stock and
(ii) the present values of the liquidation value at the mandatory
redemption date, discounted on a semi-annual basis at the Treasury Yield
plus 15 basis points. The "Treasury Yield" means, with respect to any
redemption date, the rate per annum equal to the semi-annual equivalent yield
to maturity for a comparable treasury issue.
In addition, at any time and from time to time on or prior to July 1, 2002,
SJKI may redeem in the aggregate up to 35% of the originally issued liquidation
value of the Preferred Stock with the net cash proceeds of one or more Public
Equity Offerings (as defined in the indenture) by SJKI at a redemption price
in cash equal to 115.25% of the liquidation value thereof,
19
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1999, November 1, 1998 and November 2, 1997
plus accumulated dividends thereon, if any, to the date of redemption;
provided, however, that at least 65% of the originally issued aggregate
liquidation value of the Preferred Stock must remain outstanding immediately
after giving effect to each such redemption (excluding any Preferred Stock
held by SJKI or any of its affiliates). Notice of any such redemption must be
given within 60 days after the date of the closing of the relevant public
equity offering of SJKI. The Preferred Stock may only be redeemed if permitted
under the terms of the senior credit facilities, the indenture and other
contractual arrangements of SJKI.
On July 1, 2010, SJKI will be required to redeem (subject to contractual
and other restrictions with respect thereto and to the legal availability of
funds therefor) all outstanding shares of Preferred Stock at a price equal to
the liquidation value thereof plus all accumulated dividends to the date of
redemption. Accordingly, the carrying value of such stock has been classified
outside of shareholders' equity.
SJKI may, at its option, exchange all but not less than all of the shares
of then outstanding Preferred Stock for debentures of SJKI in a principal amount
equal to the liquidation value of the Preferred Stock plus accumulated
dividends. The exchange debentures will bear interest at 15.25% per annum, have
a final stated maturity of July 1, 2010, have optional redemption provisions
comparable to the Preferred Stock and will have customary covenants and events
of default. SJKI may not cause the exchange of Preferred Stock for debentures
unless permitted under the terms of the senior credit facilities, the indenture
and other contractual arrangements of SJKI.
11. Related-Party Transactions
The Company entered into a management agreement with Vestar. Pursuant to
the management agreement, the Company paid to Vestar a transaction fee of $4.0
million at the closing of the mergers. The Company will also pay an annual fee
of $500,000 to Vestar for management services.
The Company leases its corporate headquarters/manufacturing facility and
one other manufacturing facility from partnerships in which a shareholder of the
Company is a significant partner. The annual payments on these leases were
approximately $1,014,000, $975,000 and $884,000 in fiscal years 1999, 1998 and
1997, respectively. The leases expire at various dates during fiscal year 2001
and are included in the future minimum rental payments disclosure (Note 8).
The Company periodically rents personal property provided by a company that
is owned by a shareholder. Rental payments for the use of such equipment were
approximately $8,000, $21,000 and $30,000 in fiscal years 1999, 1998 and 1997,
respectively.
At October 31, 1999 and November 1, 1998, the Company held a 50 percent
ownership interest in a partnership which leases transportation equipment to the
Company. The holder of the other 50 percent ownership interest is a corporation
which is wholly-owned by one of the Company's stockholders. At October 31,
1999 and November 1, 1998, the Company's investment in this partnership, net of
partnership losses, was approximately $496,000 and $854,000, respectively, and
is included in other assets on the accompanying consolidated balance sheets.
During fiscal years 1999, 1998 and 1997, the Company made lease payments to the
partnership of $1,038,000, $868,000 and $840,000, respectively. During the same
years, the Company reported net losses from the activities of the partnership of
$231,000, $331,000 and $351,000, respectively.
12. Current Vulnerability Due to Certain Concentrations
A substantial portion of the Company's sales are made to three major
customers. These three customers accounted for 15, 13 and 13 percent of net
sales during fiscal 1999, 17, 14 and 14 percent of net sales during fiscal 1998
and 17, 15 and 15 percent during fiscal 1997. The loss of any one of these
customers could have a materially adverse affect on the Company's business.
The Company sells primarily to specialty apparel retailers; thus, the risk
of collection losses is concentrated in this industry. Management believes that
the Company's credit and collection policies are adequate to prevent significant
collection losses and that the allowance for uncollectible accounts is adequate
at October 31, 1999 and November 1, 1998.
20
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1999, November 1, 1998 and November 2, 1997
13. Litigation
Securities Fraud Class Action
On January 23, 2000 the Company reached an agreement in principle to settle
a case filed in 1998 by Binary Traders, Inc. for $5 million, an amount the
company's insurance carrier has agreed to pay. On October 13, 1998, Binary
Traders, Inc. had filed a complaint on behalf of purchasers of publicly traded
securities of St. John during the period of February 25, 1998 to August 20, 1998
(the "Class Period") against St. John, Bob Gray, and Kelly Gray in the United
States District Court, Central District of California, Southern Division (Binary
Traders, Inc. v. St. John Knits, Inc. et al.). The complaint, which sought
class action certification, alleged that the defendants violated federal
securities laws by allegedly making fraudulent statements during the Class
Period and sought an unspecified amount of compensatory damages. The settlement
is subject to court approval, which is expected to occur in the spring.
Litigation Regarding the Transactions
The Company is also a party to six lawsuits that allege claims against some
of St. John's current and former directors for breach of fiduciary duty alleged
to have arisen in connection with the mergers. All of these lawsuits were filed
in the Superior Court of the State of California for the County of Orange. The
principal relief sought in the six actions is certification of the putative
class and a rescission of the mergers, damages, and attorneys' fees in an
unspecified amount. These six lawsuits were consolidated into one action on
February 24, 1999.
On April 15, 1999, the plaintiffs in this lawsuit filed a motion for a
preliminary injunction seeking to prevent the mergers from proceeding. The
preliminary injunction motion was heard by the California state court on April
28, 1999. On April 30, 1999, the court denied the plaintiffs' motion. In denying
the plaintiffs' request, the court ruled that the plaintiffs had not shown a
"reasonable probability" that they could succeed in proving at trial that the
$30.00 per share offer in the mergers is unfair. Similarly, the court ruled
that the plaintiffs were unlikely to show that the special committee of St.
John's board of directors that evaluated and approved the terms of the mergers
on behalf of St. John lacked independence or failed to "shop" St. John
adequately to other buyers.
While declining to grant the preliminary injunction, the court imposed a
constructive trust which prevents the Grays from receiving in the mergers any
amount for their St. John shares in excess of $30.00 per share until a full
trial on the merits is held. Prior to the determination of the final terms of
the stock options to be granted to the Grays after the mergers, the plaintiffs
had argued that these options represent additional consideration for the Grays'
St. John shares. It is the Company's belief that these employee stock options
represent incentive compensation for the Grays' services as officers of St. John
Knits International after the mergers and are not additional consideration for
their St. John shares.
The court also imposed a constructive trust preventing two of St. John's
former directors from exercising options that were repriced by the board of
directors in September 1998 until a full trial on the merits is held. It is the
Company's belief that the September 1998 option repricing was not improper. The
repricing was consistent with the repricing of options held by key employees of
St. John, excluding the Grays.
In imposing the constructive trusts, the court indicated that the
plaintiffs had shown "reasonable probability" that they could succeed at trial
in proving that the former St. John directors breached their fiduciary duties
with respect to the repricing of the director options and the alleged
preferential treatment of the Grays to the extent that the Grays receive a
higher price for their shares than the public shareholders in the mergers.
On January 20, 2000, the court issued a ruling denying summary judgment
motions brought by both the plaintiffs and the defendants, with the exception of
granting plaintiffs' motion to strike defendants' affirmative defense of
ratification and also with the exception of granting the defendants' motion to
dismiss plaintiffs' claim for unjust enrichment. Virtually all of the fact
discovery has been completed and the court has set a May 8, 2000 trial date.
21
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1999, November 1, 1998 and November 2, 1997
On September 9, 1999, three of the plaintiffs filed another lawsuit in the
Superior Court of the State of California, County of Orange, naming SJKI, Pearl
Acquisition Corp., Vestar/Gray Investors LLC, SJK Acquisition, Inc., Vestar
Capital Partners III, L.P., Vestar Capital Partners and Merrill Lynch, Pierce,
Fenner & Smith, Inc. The plaintiffs claim that each of the defendants aided and
abetted the breach of fiduciary duties alleged in their earlier actions against
St. John, Bob Gray and Kelly Gray. Since the claims in this litigation are
based exclusively on secondary liability and are completely contingent upon the
success of the claims in the earlier action, on November 16, 1999, at the
request of several defendants, the court stayed all proceedings in this
litigation pending the outcome of the earlier action.
The company intends to contest these lawsuits vigorously if the plaintiffs
elect to proceed with their actions. The company expects to incur legal and
other defense costs as a result of such proceedings in an amount which it can
not currently estimate. These proceedings could involve a substantial diversion
of the time of some of the members of management, and an adverse determination
in, or settlement of, such litigation could involve payment of significant
amounts, which could have an adverse impact on the company's business, financial
condition, results of operations and cash flows. The Company does not believe it
is not a party to any other litigation which is individually or in the aggregate
material to its business.
Amen Wardy Home Stores Litigation
In May 1999, the Company settled litigation relating to the Amen Wardy Home
Stores joint venture. In connection with this settlement, the Company
transferred ownership of the Las Vegas home furnishing store and the Amen Wardy
name to its former partner in the joint venture. The Company also transferred
certain property and agreed to pay certain expenses in connection with the
settlement.
14. Segment Information
The Company has two reportable business segments, wholesale and retail
sales. The Company's wholesale sales business consists primarily of six
divisions, Knitwear, Sport, Shoes, Accessories, Griffith & Gray and Fragrance.
Retail sales are generated through the Company's 19 St. John boutiques, 10 St.
John outlet stores, two St. John Home stores and one St. John Home outlet store.
Management evaluates segment performance based primarily on revenue and earnings
from operations.
Segment information is summarized as follows for fiscal years 1999, 1998
and 1997 (in 000's):
<TABLE>
<CAPTION>
Wholesale Retail Corporate Eliminations Total
--------- ------- --------- ------------- --------
<S> <C> <C> <C> <C> <C>
Fiscal 1999
Net sales............................................................. $250,846 $98,129 $ -- $(48,692) $300,283
Segment operating income.............................................. 47,646 1,511 (15,123) 34,034
Segment assets........................................................ 137,209 46,842 22,759 206,810
Fiscal 1998
Net sales............................................................. $246,646 $80,590 $ -- $(45,275) $281,961
Segment operating income.............................................. 53,993 60 -- 54,053
Segment assets........................................................ 130,130 43,662 8,598 182,390
Fiscal 1997
Net sales............................................................. $208,395 $64,447 $ -- $(30,741) $242,101
Segment operating income.............................................. 51,716 6,295 -- 58,011
Segment assets........................................................ 119,068 27,772 7,064 153,904
</TABLE>
22
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1999, November 1, 1998 and November 2, 1997
The table below presents information related to geographic areas in which
the Company operated during fiscal years 1999, 1998 and 1997 (in 000's):
<TABLE>
<CAPTION>
Fiscal Years
--------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales:
United States......................................................... $275,813 $260,679 $223,633
Asia.................................................................. 13,344 9,877 9,451
Europe................................................................ 6,909 7,113 6,268
Other................................................................. 4,217 4,292 2,749
-------- -------- --------
$300,283 $281,961 $242,101
======== ======== ========
</TABLE>
15. Supplemental Condensed Consolidated Financial Information
The Company's payment obligations under the 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 restrictions on the
transfer of funds or assets 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 sheet, statement of operations, and statement of
cash flows information for the Parent Company (consisting of St. John Knits
International, Incorporated and St. John Knits, Inc.), 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 October 31, 1999 and November 1, 1998, and for the years
ended October 31, 1999 and November 1, 1998. Supplemental financial
information has not been presented as of November 2, 1997 as the Non-Guarantor
Subsidiaries are inconsequential and, accordingly, the historical consolidated
financial statements for this period represents, in substance, the combined
financial information for the Guarantor Subsidiaries.
23
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1999
<TABLE>
<CAPTION>
(in 000's) PARENT GUARANTOR NON-GUARANTOR
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
Prepaid income tax - -
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
Acured interest expense 7,661 7,661
Dividends payable 1,228 1,228
Curent portion of long-term debt 2,248 316 2,564
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) 318,112
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
24
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
NOVEMBER 1, 1998
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
(in 000's) COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and investments $ 15,273 $ 154 $ 86 $ - $ 15,513
Accounts receivable, net 33,926 201 1,435 35,562
Inventories (1) 42,922 4,090 736 47,748
Deferred income tax benefit 7,744 7,744
Other 2,091 287 2,378
Intercompany accounts receivable 72 (72) -
-----------------------------------------------------------------------
Total current assets 102,028 4,732 2,257 (72) 108,945
Property and equipment, net 64,227 1,859 3,801 69,887
Investment in subsidiaries 855 (855) -
Receivable from consolidated subsidiaries 12,528 (12,526) -
Other assets 2,308 2 1,248 3,558
-----------------------------------------------------------------------
Total Assets $181,944 $ 6,593 $7,306 $(13,453) $182,390
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 7,832 $ 373 $ 99 $ - $ 8,304
Accrued expenses 10,991 24 87 11,102
Current portion of long-term debt 228 228
Intercompany accounts payable 72 (72) -
Income taxes payable 1,181 (1,144) 84 121
-----------------------------------------------------------------------
Total current liabilities 20,004 (747) 570 (72) 19,755
Intercompany payable 8,468 4,058 (12,526) -
Long-term debt, net of current portion 408 408
-----------------------------------------------------------------------
Total liabilities 20,004 7,721 5,036 (12,598) 20,163
Minority interest 653 653
Total stockholders' equity (deficit) 161,940 (1,128) 1,617 (855) 161,574
-----------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $181,944 $ 6,593 $7,306 $(13,453) $182,390
=======================================================================
</TABLE>
(1) Inventories are shown at cost for all entities.
25
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FISCAL YEAR ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------
(in 000's)
<S> <C> <C> <C> <C> <C>
Net sales $285,427 $ 8,552 $6,304 $ - $300,283
Cost of sales 122,240 5,255 2,636 130,131
------------------------------------------------------------------------
Gross profit 163,187 3,297 3,668 - 170,152
Selling, general and administrative expenses 109,446 7,576 3,974 - 120,996
Transaction fees and expenses 15,123 15,123
------------------------------------------------------------------------
Operating income 38,618 (4,279) (306) - 34,033
Interest expense 10,224 10,224
Other income/(expense) 2,321 (1,251) 167 (40) 1,197
------------------------------------------------------------------------
Income (loss) before income taxes 30,715 (5,530) (139) (40) 25,006
Income taxes 12,648 (2,270) (61) 10,317
------------------------------------------------------------------------
Income (loss) before equity in loss of
consolidated subsidiaries 18,068 (3,260) (79) (40) 14,689
Equity in income of consolidated subsidiaries (2,692) - - 2,692 -
------------------------------------------------------------------------
Net income (loss) $ 15,376 ($3,260) ($79) $2,652 $ 14,689
========================================================================
</TABLE>
26
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FISCAL YEAR ENDED NOVEMBER 1, 1998
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
(in 000's)
<S> <C> <C> <C> <C> <C>
Net sales $271,286 $ 6,260 $4,415 $ - $281,961
Cost of sales 115,875 3,100 1,908 120,883
-------------------------------------------------------------------------
Gross profit 155,411 3,160 2,507 - 161,078
Selling, general and administrative expenses 99,061 5,283 2,682 107,026
-------------------------------------------------------------------------
Operating income (loss) 56,350 (2,123) (175) - 54,052
Other income (expense) 1,797 (423) 45 (50) 1,369
-------------------------------------------------------------------------
Income (loss) before income taxes 58,147 (2,546) (130) (50) 55,421
Income taxes 23,116 (1,051) (64) 22,001
-------------------------------------------------------------------------
Income (loss) before equity in loss of
consolidated subsidiaries 35,031 (1,495) (66) (50) 33,420
Equity in loss of consolidated subsidiaries (656) 656 -
-------------------------------------------------------------------------
Net income (loss) $ 34,375 $(1,495) $ (66) $606 $ 33,420
=========================================================================
</TABLE>
27
<PAGE>
ST. JOHN INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
(in 000's) COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 15,376 $ (3,260) $ (79) $ 2,652 $ 14,689
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,165 266 181 13,612
Amortization of discount on 12.5% notes due 2009 45 45
Amortization of deferred loan costs 612 612
Increase in deferred income tax benefit 66 66
Loss on disposal of property and equipment (209) 1,525 1,316
Partnership losses 231 231
Write off of trademark in Japan 620 620
Minority interest in income of consolidated subsidiaries - 40 40
Equity in income(loss) of consolidated subsidiaries 2,692 (2,692) -
Cash provided by (used in) changes in operating assets
and liabilities
Accounts receivable 2,360 (103) (257) 2,000
Intercompany receivables (net) (3,674) 3,027 647 -
Inventories 2,457 2,173 (404) 4,226
Other current assets (443) 189 (3) (257)
Other assets (481) (85) 94 (472)
Accounts payable (1,499) (1,499)
Accrued expenses 230 (105) 49 174
Accrued interest expense 7,662 7,662
Income taxes payable 3,249 (2,269) 90 1,070
-------------------------------------------------------------------
Net cash provided by operating activities 42,459 1,358 318 - 44,135
-------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 184 184
Purchases of property and equipment (12,769) (1,433) (329) (14,531)
Sale of short-term investments 1,150 1,150
Capital distributions from partnership 127 127
-------------------------------------------------------------------
Net cash used in investing activities (11,308) (1,433) (329) - (13,070)
-------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from credit agreement 190,000 190,000
Proceeds from issuance of subordinated notes 98,616 98,616
Addition to long-term debt 1,427 1,427
Principle payments of long-term debt (670) (168) (838)
Recapitalization (311,780) (311,780)
Issuance of common stock 797 797
Issuance of preferred stock 25,000 25,000
Financing fees and expenses (15,198) (15,198)
Cash dividends paid (1,245) (1,245)
Short-swing profit reimbursement 54 54
-------------------------------------------------------------------
Net cash used in financing activities (12,999) - (168) - (13,167)
-------------------------------------------------------------------
Effect of exchange rate changes (2) 212 210
Unrealized loss on securities (1) (1)
-------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 18,149 (75) 33 - 18,107
Beginning balance, cash and cash equivalents 14,096 155 86 14,337
-------------------------------------------------------------------
Ending balance, cash and cash equivalents $ 32,245 $ 80 $ 119 $ - $ 32,444
===================================================================
Supplemental disclosures of cash flow information:
Cash received during the year for interest income $ 1,240 $ 1,240
===================================================================
Cash paid during the year for:
Interest Expense $ 1,701 $ 1,701
===================================================================
Income taxes $ 10,554 $ 10,554
===================================================================
</TABLE>
28
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED NOVEMBER 1, 1998
<TABLE>
<CAPTION>
(in 000's) NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 34,375 $ (1,495) $ (66) $ 608 $ 33,420
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 11,039 232 100 11,371
Increase in deferred income tax benefit (1,950) (1,950)
Loss on disposal of property and equipment 484 484
Partnership losses 331 331
Minority interest in income of consolidated subsidiaries - 50 50
Equity in income(loss) of consolidated subsidiaries 656 (656) -
Cash provided by (used by) changes in operating assets
and liabilities:
Accounts receivable 1,092 (201) 119 1,010
Intercompany receivables (net) (11,074) 6,714 4,360 -
Inventories (13,078) (3,107) (826) (17,011)
Other current assets (194) 395 13 214
Other assets (51) (437) (488)
Accounts payable and other accrued expenses (742) 139 114 (488)
Income taxes payable (582) (1,051) (328) (1,961)
------------------------------------------------------------------
Net cash provided by operation activities 20,306 1,626 3,049 - 24,981
------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property and equipment (17,640) (1,580) (4,428) (23,648)
Short-term investments 1,176 1,176
Other 95 95
------------------------------------------------------------------
Net cash used in investing activities (16,369) (1,580) (4,428) - (22,377)
------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of common stock 1,233 600 1,833
Payments for the repurchase of common stock (2,880) (2,880)
Addition to long-term debt - 407 407
Dividends paid (2,084) (2,084)
------------------------------------------------------------------
Net cash provided by (used in) financing activities (3,731) - 1,007 - (2,724)
------------------------------------------------------------------
Effect of exchange rate changes 69 148 217
Unrealized loss on securities (27) (27)
------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 248 46 (224) - 70
Beginning balance, cash and cash equivalents 13,849 108 310 14,267
------------------------------------------------------------------
Ending balance, cash and cash equivalents $ 14,097 $ 154 $ 86 $ - $ 14,337
==================================================================
Supplemental disclosures of cash flow information:
Cash received during the year for interest income $ 1,155 $ 1,155
==================================================================
Cash paid during the year for:
Interest expense $ - $ -
==================================================================
Income taxes $ 25,286 $ 25,286
==================================================================
</TABLE>
29
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 31, 1999, November 1, 1998 and November 2, 1997
16. Results by Quarter (Unaudited)
The unaudited results by quarter for fiscal years 1999 and 1998 are shown
below:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Year ended October 31, 1999
Net sales.................................................................. $73,389 $78,237 $70,309 $78,348
Gross profit............................................................... 39,559 45,280 39,714 45,599
Net income (loss).......................................................... 5,824 8,268 (3,868) 4,465
Net income (loss) per common share-diluted................................. 0.34 0.49 (0.29)/(1)/ 0.53
Year ended November 1, 1998
Net sales.................................................................. $68,761 $69,806 $67,727 $75,667
Gross profit............................................................... 39,778 40,876 39,428 40,996
Net income................................................................. 9,220 9,746 7,325 7,129
Net income per common share-diluted........................................ 0.54 0.57 0.43 0.42
</TABLE>
________________
(1) Consummation of recapitalization transaction.
30
<PAGE>
SCHEDULE II
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
VALUATION AND QUALIFYING ACCOUNT
For the Fiscal Years Ended October 31, 1999,
November 1, 1998 and November 2, 1997
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning of Costs and End of
Fiscal Year Expenses Deductions Fiscal Year
----------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for Uncollectible Accounts:
Fiscal year ended October 31, 1999.................................. $ 950,757 $395,181 $ 140,977 $ 1,204,961
Fiscal year ended November 1, 1998.................................. $ 905,000 $283,826 $ 238,099 $ 950,727
Fiscal year ended November 2, 1997.................................. $ 750,000 $369,987 $ 214,987 $ 905,000
</TABLE>
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: February 23, 2000
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
(Registrant)
By: /s/ BOB GRAY
----------------------------------------------
Bob Gray
Chairman of the Board and
Chief Executive Officer
32
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.1 Agreement and Plan of Merger, dated as of February 2, 1999, among
St. John Knits, Inc., SJK Acquisition, Inc., St. John Knits
International, Incorporated and Acquisition Corp. (incorporated
by reference to Exhibit 2.1 to St. John Knits International's
Registration Statement on Form S-4 dated March 1, 1999).
3.1 Restated Certificate of Incorporation of St. John Knits
International, Incorporated (incorporated by reference to Exhibit
3.1 to St. John Knits International's Registration Statement on
Form S-4 dated September 3, 1999).
3.2 By-Laws of St. John Knits International, Incorporated
(incorporated by reference to Exhibit 3.2 to Amendment No. 2 to
St. John Knits International's Registration Statement on Form S-4
dated May 17, 1999).
3.3 Certificate of Designation for 15.25% Exchangeable Preferred
Stock due 2010 of St. John Knits International, Incorporated
(incorporated by reference to Exhibit (a)(3) to St. John Knits
International's Amendment No. 4 to Rule 13e-3 Transaction
Statement on Schedule 13E-3 dated July 12, 1999).
4.1 Indenture, dated as of July 7, 1999, by and among St. John Knits
International, Incorporated, the guarantors named therein and The
Bank of New York, as the trustee (incorporated by reference to
Exhibit (a)(2) to St. John Knits International's Amendment No. 4
to Rule 13e-3 Transaction Statement on Schedule 13E-3 dated July
12, 1999).
4.2 Form of 12.5% Senior Subordinated Notes due 2009 (included as
part of the Indenture filed as Exhibit 4.1 hereto).
4.3 Exchange and Registration Rights Agreement, dated as of July 7,
1999, by and among St. John Knits International, Incorporated,
St. John Knits, Inc., St. John Italy, Inc., St. John Trademarks,
Inc., St. John Home, LLC, Chase Securities Inc., Bear, Stearns &
Co. Inc. and PaineWebber Incorporated (incorporated by reference
to Exhibit 4.3 to St. John Knits International's Registration
Statement on Form S-4 dated September 3, 1999).
4.4 Subscription Agreement, dated as of July 7, 1999, between St.
John Knits International, Incorporated and Vestar/SJK Investors
LLC, relating to the 15.25% Exchangeable Preferred Stock due 2010
of St. John Knits International, Incorporated (incorporated by
reference to Exhibit 4.5 of St. John Knits International's
Registration Statement on Form S-4 dated September 3, 1999).
10.1 Credit Agreement, dated July 7, 1999, by and among the Company,
the Lenders from time to time party thereto and The Chase
Manhattan Bank, as administrative agent (incorporated by
reference to Exhibit (a)(1) to St. John Knits International's
Amendment No. 4 to Rule 13e-3 Transaction Statement on Schedule
13E-3 dated July 12, 1999).
10.2 Voting Agreement, dated as of February 2, 1999, among Vestar
Capital Partners III, L.P., Vestar/Gray LLC and the parties
listed on Schedule A thereto (incorporated by reference to
Exhibit 10.1 to St. John Knits International's Registration
Statement on Form S-4 dated March 1, 1999).
10.3 Stockholders' Agreement, dated July 7, 1999, by and among the
Company, SJK, Vestar/Gray Investors LLC, Vestar/SJK Investors LLC
and the members of Vestar/Gray Investors LLC signatory thereto
(incorporated by reference to Exhibit 99.3 of St. John Knits
International's Form 8-K dated July 7, 1999).
10.4 Amended and Restated Limited Liability Company Agreement of
Vestar/SJK Investors LLC, dated as of July 7, 1999 (incorporated
by reference to Exhibit 10.4 to St. John Knits International's
Amendment No. 1 to the Registration Statement on Form S-4 dated
November 12, 1999).
10.5 Management Agreement among St. John Knits, Inc., St. John Knits
International, Incorporated and Vestar Capital Partners
(incorporated by reference to Exhibit 10.4 to Amendment No. 1 to
St. John Knits International's Registration Statement on Form S-4
dated April 28, 1999).
10.6 Letter Agreement dated April 27, 1999, between Vestar Capital
Partners and Robert E. Gray, attaching (i) a summary of terms for
the Grays' stock options, (ii) a form of St. John Knits
International, Incorporated 1999 Stock Option Plan and (iii) a
form of stock option agreement (incorporated by reference to
Exhibit 10.5 to Amendment No. 1 to St. John Knits International's
Registration Statement on Form S-4 dated April 28, 1999).
10.7 Superior Court of the State of California County of Orange,
Central Justice Center Minute Order, dated April 30, 1999
(incorporated by reference to Exhibit 10.8 to Amendment No. 2 to
St. John Knits International's Registration Statement on Form S-4
dated May 17, 1999).
10.8 Lease Amendment Agreement dated April 1, 1997 between St. John
Knits, Inc. and G.M. Properties (increasing the space of the
corporate headquarters, warehousing and manufacturing facility)
(incorporated by reference to Exhibit 10.1 to St. John Knits,
Inc.'s Report on Form 10-K for the fiscal year ended November 2,
1997).
10.9 Agreement of Lease dated as of December 31, 1995 by and between
St. John Knits, Inc. and Rolex Realty Company, Inc. (New York
Boutique) (incorporated by reference to Exhibit 10.3 to St. John
Knits, Inc.'s Report on Form 10-K for the fiscal year ended
October 29, 1995).
33
<PAGE>
10.10 Lease dated June 1, 1986 between G.M. Properties and St. John Knits,
Inc. (Corporate Headquarters) (incorporated by reference to Exhibit
10.4 to St. John Knits, Inc.'s Registration Statement on Form S-1, as
amended (file no. 33-57128)).
10.11 Industrial Real Estate Lease dated November 13, 1985 between Alhambra
Partners, a California Limited Partnership, and St. John Knits, Inc.,
together with Amendment No. 1 to Industrial Real Estate Lease dated
November 13, 1985 and Option to Extend Term dated November 13, 1985
(Assembling, Sewing) (incorporated by reference to Exhibit 10.5 to St.
John Knits, Inc.'s Registration Statement on Form S-1, as amended
(file no. 33-57128)).
10.12 Agreement of Lease dated January 11, 1991 by and between Rolex Realty
Company, Inc. and St. John Knits, Inc. together with Lease
Modification Agreement dated January 11, 1991 and Second Lease
Modification Agreement dated April 12, 1991 (New York Boutique)
(incorporated by reference to Exhibit 10.9 to St. John Knits, Inc.'s
Registration Statement on Form S-1, as amended (file no. 33-57128)).
10.13 Amended and Restated Agreement of Limited Partnership of SJA 1&2, Ltd.
dated October 31, 1993 by and between St. John Knits, Inc. and Ocean
Air Charters, Inc. (incorporated by reference to Exhibit 10.13 to St.
John Knits International's Amendment No. 1 to the Registration
Statement on Form S-4 dated November 12, 1999).
10.14 Amended and Restated Employment Agreement between St. John Knits, Inc.
and Robert E. Gray (incorporated by reference to Exhibit 10.14 to St.
John Knits International's Amendment No. 1 to the Registration
Statement on Form S-4 dated November 12, 1999).
10.15 Employment Agreement dated as of July 14, 1998 between St. John Knits,
Inc. and Marie St. John Gray (incorporated by reference to Exhibit
10.4 to St. John Knits, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended August 2, 1998).
10.16 Employment Agreement dated as of July 14, 1998 between St. John Knits,
Inc. and Kelly A. Gray (incorporated by reference to Exhibit 10.5 to
St. John Knits, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended August 2, 1998).
10.17 Employment Agreement dated as of July 14, 1998 between St. John Knits,
Inc. and Roger G. Ruppert (incorporated by reference to Exhibit 10.6
to St. John Knits, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended August 2, 1998).
10.18 Employment Agreement dated as of July 14, 1998 between St. John Knits,
Inc. and Karla R. Guyer (incorporated by reference to Exhibit 10.8 to
St. John Knits, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended August 2, 1998).
10.19 St. John Knits, Inc. Employees' Profit Sharing Plan dated as of August
21, 1995 (incorporated by reference to Exhibit 10.18 to St. John
Knits, Inc.'s Report on Form 10-K for the fiscal year ended October
29, 1995).
10.20 Aircraft Lease dated April 1, 1998 by and between St. John Knits, Inc.
and Ocean Air Charters, Inc. as Trustee of the SJA 1&2, Ltd. Trust
(Lease for Company airplane) (incorporated by reference to Exhibit
10.1 to St. John Knits, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended May 3, 1998).
10.21 Form of Indemnity Agreement by and between St. John Knits, Inc., St.
John Knits International, Incorporated and each of their directors and
officers (incorporated by reference to Exhibit 10.21 to St. John Knits
International's Amendment No. 1 to the Registration Statement on Form
S-4 dated November 12, 1999).
10.22 Distribution Agreement dated June 11, 1997 by and between St. John
Knits, Inc. and Gary Farn, Ltd. (incorporated by reference to Exhibit
10.26 to St. John Knits, Inc.'s Report on Form 10-K for the fiscal
year ended November 2, 1997).
10.23 General Partnership Agreement of St. John-Varian Development Company
dated April 3, 1995 by and between St. John Knits, Inc. and Varian
Associates, a California General Partnership (incorporated by
reference to Exhibit 10.28 to St. John Knits, Inc.'s Report on Form
10-K for the fiscal year ended October 29, 1995).
10.24 Lease Agreement dated April 3, 1995 by and between St. John Knits,
Inc. and St. John-Varian Development Company (Knitting, Sewing,
Finishing, Shipping, Administrative Offices) (incorporated by
reference to Exhibit 10.29 to St. John Knits, Inc.'s Report on Form
10-K for the fiscal year ended October 29, 1995).
10.25 Joint Venture Agreement dated July 17, 1997 between St. John Knits,
Inc. and Commercial Development Co., Ltd. (incorporated by reference
to Exhibit 10.30 to St. John Knits, Inc.'s Report on Form 10-K for the
fiscal year ended November 2, 1997).
10.26 Lease Extension Agreement dated February 6, 1996 between St. John
Knits, Inc. and G.M. Properties (extending the lease for St. John
Knits, Inc.'s current corporate headquarters) (incorporated by
reference to Exhibit 10.32 to St. John Knits, Inc.'s Report on Form
10-K for the fiscal year ended November 3, 1996).
10.27 Lease Extension Agreement dated as of September 1, 1996 between St.
John Knits, Inc. and Alhambra Partners (extending the lease for one of
the Company's assembling and sewing facilities) (incorporated by
reference to Exhibit 10.34 to St. John Knits, Inc.'s Report on Form
10-K for the fiscal year ended November 3, 1996).
34
<PAGE>
10.28 License and Distribution Agreement dated as of August 1, 1997 between
St. John Knits, Inc. and St. John Co., Ltd. (incorporated by reference
to Exhibit 10.35 to St. John Knits, Inc.'s Report on Form 10-K for the
fiscal year ended November 2, 1997).
10.29 Asset Purchase Agreement dated as of August 29, 1996 among St. John
Knits, Inc., Jakob Schlaepfer & Co. AG and Jakob Schlaepfer, Inc.
(incorporated by reference to Exhibit 10.39 to St. John Knits, Inc.'s
Report on Form 10-K for the fiscal year ended November 3, 1996).
10.30 Manufacturing and Supply Agreement dated as of November 9, 1996 by and
between St. John Knits, Inc. and Calzaturificio M.A.B. S.p.A.
(incorporated by reference to Exhibit 10.41 to St. John Knits, Inc.'s
Report on Form 10-K for the fiscal year ended November 3, 1996).
10.31 Sales Representative Agreement dated November 13, 1996 by and between
St. John Knits, Inc. and Hilda Chang (incorporated by reference to
Exhibit 10.43 to St. John Knits, Inc.'s Report on Form 10-K for the
fiscal year ended November 3, 1996).
10.32 Unit Price Construction Agreement between St. John de Mexico, S.A. de
C.V. and Administration Tijuana Industrial, S.A. de C.V. (incorporated
by reference to Exhibit 10.50 to St. John Knits, Inc.'s Report on Form
10-K for the fiscal year ended November 2, 1997).
10.33 1999 St. John Knits International, Incorporated Stock Option Plan
(incorporated by reference to Exhibit 10.33 to St. John Knits
International's Amendment No. 1 to the Registration Statement on Form
S-4 dated November 12, 1999).
10.34 Stock Option Agreement, dated as of July 7, 1999, between St. John
Knits International and Bob Gray (incorporated by reference to Exhibit
10.34 to St. John Knits International's Amendment No. 1 to the
Registration Statement on Form S-4 dated November 12, 1999).
10.35 Stock Option Agreement, dated as of July 7, 1999, between St. John
Knits International and Marie St. John Gray (incorporated by reference
to Exhibit 10.35 to St. John Knits International's Amendment No. 1 to
the Registration Statement on Form S-4 dated November 12, 1999).
10.36 Stock Option Agreement, dated as of July 7, 1999, between St. John
Knits International and Kelly A. Gray (incorporated by reference to
Exhibit 10.36 to St. John Knits International's Amendment No. 1 to the
Registration Statement on Form S-4 dated November 12, 1999).
23.1 Consent of Arthur Anderson LLP, Independent Public Accountants
*27 Financial Data Schedule
________________
*Previously filed
35
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-76376.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Orange County, California
February 24, 2000
