<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 333-73107
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Delaware 52-2061057
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification Number)
Organization)
17622 Armstrong Avenue, Irvine, California 92614
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (949) 863-1171
-----------------------------------------------------------
<TABLE>
<S> <C>
17422 Derian Avenue, Irvine, California 92614
(Former address of Principal Executive Offices) (Zip Code)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
The number of outstanding shares of registrant's Common Stock, par value $0.01
per share, was 6,546,174 shares as of September 12, 2000.
================================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
A S S E T S July 30, October 31,
----------- 2000 1999
---------------- -------------------
Current assets: (unaudited)
<S> <C> <C>
Cash and cash equivalents............................................................. $ 19,227,853 $ 32,443,815
Investments........................................................................... 17,851 25,412
Accounts receivable, net.............................................................. 29,716,142 33,562,573
Inventories........................................................................... 47,056,217 43,521,734
Deferred income tax benefit........................................................... 7,678,272 7,678,272
Other................................................................................. 2,455,297 2,634,127
------------- -------------
Total current assets............................................................... 106,151,632 119,865,933
------------- -------------
Property and equipment:
Machinery and equipment............................................................... 56,784,167 51,242,600
Leasehold improvements................................................................ 36,134,333 32,856,047
Buildings............................................................................. 22,919,880 17,913,064
Furniture and fixtures................................................................ 8,049,843 6,868,556
Land.................................................................................. 7,449,577 5,786,857
Construction in progress.............................................................. 1,640,463 4,132,267
------------- -------------
132,978,263 118,799,391
Less--Accumulated depreciation and amortization....................................... 57,489,020 49,211,044
------------- -------------
75,489,243 69,588,347
------------- -------------
Deferred financing costs................................................................ 12,833,696 14,585,755
Other assets............................................................................ 4,654,245 2,770,219
------------- -------------
$ 199,128,816 $ 206,810,254
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable...................................................................... $ 7,243,545 $ 6,805,079
Accrued expenses...................................................................... 14,499,615 11,275,809
Current portion of long-term debt..................................................... 5,263,562 2,564,352
Accrued interest expense.............................................................. 5,321,947 7,661,434
Dividends payable..................................................................... 4,312,848 1,228,472
Income taxes payable.................................................................. 146,860 1,190,888
------------- -------------
Total current liabilities.......................................................... 36,788,377 30,726,034
Long-term debt, net of current portion.................................................. 262,934,515 287,321,021
------------- -------------
Total liabilities.................................................................. 299,722,892 318,047,055
------------- -------------
Minority interest....................................................................... -- 693,391
------------- -------------
Mandatorily redeemable preferred stock, $100 stated value: Authorized--2,000,000
shares, issued and outstanding--250,000 shares...................................... 25,000,000 25,000,000
------------- -------------
Stockholders' deficit:
Common stock, par value $0.01 per share: Authorized--10,000,000 shares, issued and
outstanding--6,546,174 shares....................................................... 65,462 65,462
Unrealized loss on securities......................................................... (36,138) (28,261)
Cumulative translation adjustment..................................................... 146,414 406,823
Additional paid-in capital............................................................ 147,141,194 147,141,194
Accumulated deficit................................................................... (272,911,008) (284,515,410)
------------- -------------
Total stockholders' deficit......................................................... (125,594,076) (136,930,192)
------------- -------------
$ 199,128,816 $ 206,810,254
============= =============
</TABLE>
See accompanying notes.
2
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------------------- -----------------------------------------
July 30, August 1, July 30, August 1,
2000 1999 2000 1999
----------------- ----------------- ------------------- ------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales....................................... $ 83,401,372 $ 70,309,453 $ 248,174,489 $ 221,935,006
Cost of sales................................... 34,014,897 30,595,866 104,129,214 97,381,765
----------------- ----------------- ------------------- ------------------
Gross profit.................................... 49,386,475 39,713,587 144,045,275 124,553,241
Selling, general and administrative expenses.... 31,654,590 29,584,083 95,385,266 91,175,121
Transaction fees and expenses................... -- 15,036,711 -- 15,211,711
----------------- ----------------- ------------------- ------------------
Operating income (loss)......................... 17,731,885 (4,907,207) 48,660,009 18,166,409
Interest expense................................ 7,856,341 2,041,068 24,013,919 2,045,341
Other income (expense).......................... (27,820) 385,194 841,569 1,220,441
----------------- ----------------- ------------------- ------------------
Income (loss) before income taxes............... 9,847,724 (6,563,081) 25,487,659 17,341,509
Income tax provision (benefit).................. 4,187,158 (2,695,136) 10,779,423 7,117,259
----------------- ----------------- ------------------- ------------------
Net income (loss)............................... 5,660,566 (3,867,945) 14,708,236 10,224,250
----------------- ----------------- ------------------- ------------------
Comprehensive income (loss), net of tax:
Foreign currency translation adjustments... (16,241) 87,226 (150,275) (16,550)
Unrealized loss on securities.............. (550) (1,589) (4,546) (1,660)
----------------- ----------------- ------------------- ------------------
Comprehensive income (loss)..................... $ 5,643,775 $ (3,782,308) $ 14,553,415 $ 10,206,040
================= ================= =================== ==================
Net income (loss) per common share:
Basic...................................... $ 0.70 $ (0.29) $ 1.78 $ 0.64
================= ================= =================== ==================
Diluted.................................... $ 0.70 $ (0.29) $ 1.78 $ 0.63
================= ================= =================== ==================
Dividends per share............................. $ -- $ 0.025 $ -- $ 0.075
================= ================= =================== ==================
Shares used in the calculation of net income
per share:
Basic...................................... 6,546,174 13,850,652 6,546,174 15,670,913
================= ================= =================== ==================
Diluted.................................... 6,546,174 13,850,652 6,546,174 16,042,501
================= ================= =================== ==================
</TABLE>
See accompanying notes.
3
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------------------------------
July 30, 2000 August 1, 1999
------------------- ---------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 14,708,236 $ 10,224,250
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................... 9,813,353 10,805,599
Amortization of discount on 12.5% notes due 2000............ 104,954 9,611
Amortization of deferred loan costs......................... 1,884,653 124,989
Loss on disposal of property and equipment.................. 349,427 963,949
Partnership losses.......................................... 180,479 184,594
Minority interest in income of consolidated subsidiaries.... 30,254 657
Book value in excess of purchase price of minority interest
in Japan subsidiary........................................ (495,188) --
Decrease in accounts receivable............................. 3,846,431 4,221,717
(Increase) decrease in inventories.......................... (3,534,483) 943,236
Increase in prepaid income taxes............................ -- (1,858,530)
(Increase) decrease in other current assets................. 178,830 (144,553)
Increase in other assets.................................... (192,511) (347,741)
Increase (decrease) in accounts payable..................... 438,466 (1,350,496)
Increase (decrease) in accrued expenses..................... 3,223,806 (385,483)
Increase (decrease) in accrued interest expense............. (2,339,487) 2,032,651
Decrease in income taxes payable............................ (1,044,028) (120,657)
------------------- ---------------------
Net cash provided by operating activities............... 27,153,192 25,303,793
------------------- ---------------------
Cash flows from investing activities:
Proceeds from sale of property and equipment................ 18,017 175,500
Purchase of property and equipment.......................... (15,906,772) (10,757,801)
Purchase of minority interest in Japan subsidiary........... (228,457) --
Purchase of foreign trademark............................... (70,000) --
Sale of short-term investments.............................. 7,561 1,152,254
Capital contributions to partnership........................ (2,115,415) --
Capital distributions from partnership...................... 138,500 106,500
------------------- ---------------------
Net cash used in investing activities................... (18,156,566) (9,323,547)
------------------- ---------------------
Cash flows from financing activities:
Proceeds from credit agreement.............................. -- 190,000,000
Proceeds from issuance of subordinated notes................ -- 98,616,000
Addition to long-term debt.................................. -- 1,427,000
Principal payments of long-term debt........................ (21,792,250) (169,710)
Recapitalization............................................ (19,458) (311,446,769)
Issuance of common stock.................................... -- 796,510
Issuance of preferred stock................................. -- 25,000,000
</TABLE>
4
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOW
(continued)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-------------------------------------------------
July 30, 2000 August 1, 1999
-------------------- ---------------------
(unaudited)
<S> <C> <C>
Financing fees and expenses................................. (132,594) (15,230,905)
Dividends paid.............................................. -- (1,244,545)
-------------------- ---------------------
Net cash used in financing activities................... (21,944,302) (12,252,419)
-------------------- ---------------------
Effect of exchange rate changes.................................. (260,409) (28,050)
-------------------- ---------------------
Unrealized loss on securities.................................... (7,877) (2,814)
-------------------- ---------------------
Net increase (decrease) in cash and cash equivalents............. (13,215,962) 3,696,963
Beginning balance, cash and cash equivalents..................... 32,443,815 14,336,872
-------------------- ---------------------
Ending balance, cash and cash equivalents........................ $ 19,227,853 $ 18,033,835
==================== =====================
Supplemental disclosures of cash flow information:
Cash received during the thirty-nine weeks for interest
income...................................................... $ 1,068,347 $ 984,558
==================== =====================
Cash paid during the thirty-nine weeks for:
Interest expense..................................... $ 24,363,777 $ 7,179
==================== =====================
Income taxes......................................... $ 11,841,466 $ 10,455,685
==================== =====================
Supplemental disclosure of noncash financing activity:
Dividends accrued on mandatorily redeemable preferred
stock....................................................... $ 3,084,376 $ 156,207
==================== =====================
</TABLE>
See accompanying notes.
5
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of St. John
Knits International, Incorporated ("SJKI") and its subsidiaries, including St.
John Knits, Inc. ("St. John"), reflect all adjustments (which include only
normal recurring adjustments) considered necessary to present fairly the
financial position, results of operations and cash flows of the Company for the
periods presented. SJKI and its subsidiaries are collectively referred to herein
as "the Company." It is suggested that the accompanying unaudited consolidated
financial statements and footnotes thereto be read in conjunction with the
financial statements and footnotes included in the Company's Annual Report on
Form 10-K for the year ended October 31, 1999 as filed with the Securities and
Exchange Commission on January 28, 2000.
On February 2, 1999, St. John entered into a merger agreement to be
acquired by a group consisting of Vestar Capital Partners III, L.P. ("Vestar")
and Bob Gray, Marie Gray and Kelly Gray at an offer price of $30 per share.
Pursuant to the agreement, on July 7, 1999, the Company consummated two mergers.
As a result of the mergers, St. John became a wholly owned subsidiary of SJKI.
The mergers were accounted for as a recapitalization. The operating results for
all periods prior to the mergers consist entirely of the historical results of
St. John and its subsidiaries.
The results of operations for the periods presented are not necessarily
indicative of the operating results that may be expected for the year ending
October 29, 2000.
2. Summary of Accounting Policies
a. Company Operations
The Company is a leading designer, manufacturer and marketer of women's
clothing and accessories. The Company's products are distributed primarily
through specialty retailers and Company owned retail boutiques and outlets. All
intercompany and interdivisional transactions and accounts have been eliminated.
b. Definition of Fiscal Year
The Company utilizes a 52-53 week fiscal year whereby the fiscal year ends
on the Sunday nearest to October 31. The quarters also end on the Sunday nearest
the end of the quarter, which accordingly were July 30, 2000 and August 1, 1999.
c. Reclassifications
Certain reclassifications have been made to the 1999 financial statements
in order to conform with the current year presentation.
3. Dividends
St. John paid approximately $1,245,000 in dividends to its shareholders
during fiscal 1999 prior to the mergers. SJKI does not anticipate the payment of
any cash dividends on its common stock in the future.
6
<PAGE>
4. Earnings Per Share
The Company accounts for earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". Under SFAS
No. 128, basic earnings per share includes the weighted average number of common
shares outstanding during the period and excludes the dilutive effect of common
stock equivalents, including stock options. Diluted earnings per share includes
all dilutive items. Dilution is calculated based upon the treasury stock method,
which assumes that all dilutive securities were exercised and that the proceeds
received were applied to repurchase outstanding shares at the average market
price during the period. Antidilutive options totaling 534,360 and 363,680 were
outstanding as of July 30, 2000 and August 1, 1999, respectively.
7
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
The following is a reconciliation of the Company's net income and weighted
average shares outstanding for the purpose of calculating basic and diluted
earnings per share for all periods:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------------------- --------------------------------------
July 30, 2000 August 1, 1999 July 30, 2000 August 1, 1999
----------------- ----------------- ------------------ -----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income (loss).................................... $5,660,566 $(3,867,945) $14,708,236 $10,224,250
Less: preferred stock dividends..................... 1,061,386 156,207 3,084,376 156,207
---------- ----------- ----------- -----------
Income (loss) allocated to common stockholders....... $4,599,180 $(4,024,152) $11,619,860 $10,068,043
========== =========== =========== ===========
Weighted average shares outstanding.................. 6,546,174 13,850,652 6,546,174 15,670,913
========== =========== =========== ===========
Basic earnings (loss) per share...................... $ 0.70 $ (0.29) $ 1.78 $ 0.64
========== =========== =========== ===========
Add: dilutive effect of stock options............... -- -- -- 371,588
---------- ----------- ----------- -----------
Shares used to calculate diluted earnings per share.. 6,546,174 13,850,652 6,546,174 16,042,501
========== =========== =========== ===========
Diluted earnings (loss) per share.................... $ 0.70 $ (0.29) $ 1.78 $ 0.63
========== =========== =========== ===========
</TABLE>
5. Comprehensive Income
The Company adopted SFAS No. 130 "Reporting Comprehensive Income" during
the first quarter of fiscal 1999. This statement requires that all items that
meet the definition of components of comprehensive income be reported in a
financial statement for the period in which they are recognized. Components of
comprehensive income include revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income
but excluded from net income.
6. Inventories
A summary of the components of inventories is as follows:
July 30, October 31,
2000 1999
----------- -----------
Raw materials........................ $11,422,534 $11,940,108
Work-in-process...................... 10,556,642 6,847,155
Finished products.................... 25,077,041 24,734,471
----------- -----------
$47,056,217 $43,521,734
=========== ===========
7. Supplemental Condensed Consolidated Financial Information
The Company's payment obligations under its senior subordinated notes are
guaranteed by certain of the Company's wholly owned subsidiaries (the "Guarantor
Subsidiaries"). Such guarantees are full, unconditional and joint and several.
Except for restrictions under applicable law, there are no material restrictions
on distributions from the Guarantor Subsidiaries to SJKI. Separate financial
statements of the Guarantor Subsidiaries are not presented because the Company's
management has determined that they would not be material to investors. The
following supplemental financial information sets forth, on an unconsolidated
basis, balance sheets, statement of operations, and statement of cash flows
information
8
<PAGE>
for the Parent Company (consisting of SJKI and St. John), for the Guarantor
Subsidiaries and for the Company's other subsidiaries (the Non-Guarantor
Subsidiaries). The supplemental financial information reflects the investments
of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the
equity method of accounting. The supplemental financial information is presented
for the periods as of July 30, 2000 and October 31, 1999, and for the three and
nine months ended July 30, 2000 and August 1, 1999.
9
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JULY 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
(Amounts in thousands) COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and investments $ 18,460 $ 190 $ 596 $ 19,246
Accounts receivable, net 28,256 214 1,246 29,716
Inventories (1) 44,111 1,406 1,539 47,056
Deferred income tax benefit 7,678 - 7,678
Other 2,347 91 18 2,456
Intercompany accounts receivable 1,556 - (1,556) -
-----------------------------------------------------------------------
Total current assets 102,408 1,901 3,399 (1,556) 106,152
Property and equipment, net 69,433 1,421 4,635 75,489
Investment in subsidiaries (2,355) - 2,355 -
Receivable from consolidated subsidiaries 16,404 - (16,404) -
Deferred financing costs 12,834 - 12,834
Other assets 3,545 147 962 4,654
-----------------------------------------------------------------------
Total assets $ 202,269 $ 3,469 $8,996 $(15,605) $ 199,129
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 6,850 $ 202 $ 191 $ 7,243
Accrued expenses 14,216 123 161 14,500
Current portion of long-term debt 4,981 282 5,263
Accrued interest expense 5,322 - 5,322
Dividends payable 4,313 - 4,313
Intercompany accounts payable 1,556 (1,556) -
Income taxes payable 3,958 (4,097) 286 147
-----------------------------------------------------------------------
Total current liabilities 39,640 (3,772) 2,476 (1,556) 36,788
Intercompany payable 12,579 3,825 (16,404) -
Long-term debt, net of current portion 262,919 16 262,935
-----------------------------------------------------------------------
Total liabilities 302,559 8,807 6,317 (17,960) 299,723
Minority interest - -
Preferred stock 25,000 - 25,000
Total stockholders' equity (deficit) (125,290) (5,338) 2,679 2,355 (125,594)
-----------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 202,269 $ 3,469 $8,996 $(15,605) $ 199,129
=======================================================================
</TABLE>
(1) Inventories are shown at cost for all entities
10
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1999
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
(Amounts in thousands) COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and investments $ 32,270 $ 80 $ 118 $ - $ 32,468
Accounts receivable, net 31,575 302 1,686 33,563
Inventories (1) 39,701 1,917 1,876 28 43,522
Deferred income tax benefit 7,678 - 7,678
Other 2,465 100 69 2,634
Intercompany accounts receivable 1,484 - (1,484) -
----------------------------------------------------------------------
Total current assets 115,173 2,399 3,749 (1,456) 119,865
Property and equipment, net 63,061 1,500 5,027 69,588
Investment in subsidiaries (1,837) - 1,837 -
Receivable from consolidated subsidiaries 16,112 - (16,112) -
Deferred financing costs 14,586 - 14,586
Other assets 1,399 88 1,283 2,770
----------------------------------------------------------------------
Total assets $ 208,494 $ 3,987 $10,059 $(15,731) $206,809
======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Account payable $ 6,414 $ 264 $ 127 $ - $ 6,805
Accrued expenses 10,819 279 150 28 11,276
Current portion of long-term debt 2,248 316 2,564
Acured interest expense 7,661 7,661
Dividends payable 1,228 1,228
Intercompany accounts payable - 1,484 (1,484) -
Income taxes payable 4,435 (3,413) 169 1,191
----------------------------------------------------------------------
Total current liabilities 32,805 (2,870) 2,246 (1,456) 30,725
Intercompany payable 11,244 4,868 (16,112) -
Long-term debt, net of current portion 287,082 239 287,321
----------------------------------------------------------------------
Total liabilities 319,887 8,987 7,353 (17,568) 318,046
Minority interest 693 693
Preferred stock 25,000 - 25,000
Total stockholders' equity (deficit) (136,393) (4,387) 2,013 1,837 (136,930)
----------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 208,494 $ 3,987 $10,059 $(15,731) $206,809
======================================================================
</TABLE>
(1) Inventories are shown at cost for all entities
11
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
THIRTEEN WEEKS ENDED JULY 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $ 80,323 $ 1,176 $ 1,902 $ - $ 83,401
Cost of sales 32,470 781 764 34,015
-----------------------------------------------------------------------------
Gross profit 47,853 395 1,138 - 49,386
Selling, general and administrative expenses 29,778 944 932 - 31,654
-----------------------------------------------------------------------------
Operating income (loss) 18,075 (549) 206 - 17,732
Interest expense 7,856 - - - 7,856
Other income/(expense) (44) (10) 26 - (28)
-----------------------------------------------------------------------------
Income (loss) before income taxes 10,175 (559) 232 - 9,848
Income taxes 4,322 (238) 103 - 4,187
-----------------------------------------------------------------------------
Income (loss) before equity in loss of
consolidated subsidiaries 5,853 (321) 129 - 5,661
Equity in loss of consolidated subsidiaries (192) - - 192 -
-----------------------------------------------------------------------------
Net income (loss) $ 5,661 $ (321) $ 129 $ 192 $ 5,661
=============================================================================
</TABLE>
12
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
THIRTEEN WEEKS ENDED AUGUST 1, 1999
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $ 67,617 $ 1,036 $ 1,657 $ - $ 70,310
Cost of sales 29,127 695 774 30,596
-------------------------------------------------------------------------------
Gross profit 38,490 341 883 - 39,714
Selling, general and administrative expenses 41,720 1,991 910 - 44,621
-------------------------------------------------------------------------------
Operating income (loss) (3,230) (1,650) (27) - (4,907)
Interest expense 2,041 - - 2,041
Other income/(expense) 552 (201) 34 - 385
-------------------------------------------------------------------------------
Income (loss) before income taxes (4,719) (1,851) 7 - (6,563)
Income taxes (1,936) (761) 2 (2,695)
-------------------------------------------------------------------------------
Income (loss) before equity in loss of
consolidated subsidiaries (2,783) (1,090) 5 - (3,868)
Equity in loss of consolidated subsidiaries (1,085) - - 1,085 -
-------------------------------------------------------------------------------
Net income (loss) $ (3,868) $(1,090) $ 5 $1,085 $ (3,868)
===============================================================================
</TABLE>
13
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
THIRTY-NINE WEEKS ENDED JULY 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $ 238,187 $ 3,864 $ 6,123 $ - $ 248,174
Cost of sales 99,163 2,539 2,427 104,129
---------------------------------------------------------------------------------
Gross profit 139,024 1,325 3,696 - 144,045
Selling, general and administrative expenses 89,507 2,958 2,921 - 95,386
Operating income (loss) 49,517 (1,633) 775 - 48,659
Interest expense 24,014 24,014
Other income/(expense) 818 (1) 55 (30) 842
---------------------------------------------------------------------------------
Income (loss) before income taxes 26,321 (1,634) 830 (30) 25,487
Income taxes 11,088 (684) 375 10,779
---------------------------------------------------------------------------------
Income (loss) before equity in loss of
consolidated subsidiaries 15,233 (950) 455 (30) 14,708
Equity in loss of consolidated subsidiaries (495) - - 495 -
---------------------------------------------------------------------------------
Net income (loss) $ 14,738 $ (950) $ 455 $ 465 $ 14,708
=================================================================================
</TABLE>
14
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
THIRTY-NINE WEEKS ENDED AUGUST 1, 1999
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $ 209,957 $ 7,503 $ 4,475 $ - $ 221,935
Cost of sales 90,852 4,515 2,015 97,382
------------------------------------------------------------------------------
Gross profit 119,105 2,988 2,460 - 124,553
Selling, general and administrative expenses 97,321 6,551 2,514 - 106,386
Operating income (loss) 21,784 (3,563) (54) - 18,167
Interest expense 2,045 2,045
Other income/(expense) 1,748 (593) 65 (1) 1,219
------------------------------------------------------------------------------
Income (loss) before income taxes 21,487 (4,156) 11 (1) 17,341
Income taxes 8,819 (1,706) 4 7,117
------------------------------------------------------------------------------
Income (loss) before equity in loss of
consolidated subsidiaries 12,668 (2,450) 7 (1) 10,224
Equity in loss of consolidated subsidiaries (2,444) - - 2,444 -
------------------------------------------------------------------------------
Net income (loss) $ 10,224 $ (2,450) $ 7 $ 2,443 $ 10,224
==============================================================================
</TABLE>
15
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING CASH FLOWS
THIRTY-NINE WEEKS ENDED JULY 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
OPERATING ACTIVITIES:
Net Income $ 14,738 $ (950) $ 455 $ 465 $ 14,708
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,556 87 170 9,813
Amortization of discount on 12.5% notes due 2009 105 105
Amortization of deferred loan costs 1,885 1,885
Loss on disposal of property and equipment 349 349
Partnership losses 180 180
Minority interest in income of consolidated
subsidiaries - 30 30
Book value in excess of purchase price of minority
interest in Japan subsidiary (495) (495)
Equity in loss of consolidated subsidiaries 495 (495) -
Cash provided by (used in) changes in operating assets
and liabilities
Accounts receivable 3,327 89 430 3,846
Intercompany receivables (net) (661) 1,334 (673) -
Inventories (4,383) 511 338 (3,534)
Other current assets 170 8 1 179
Other assets (324) (59) 191 (192)
Accounts payable 468 (30) 438
Accrued expenses 3,433 (218) 9 3,224
Accrued interest expense (2,339) (2,339)
Income taxes payable (474) (684) 114 (1,044)
-------------------------------------------------------------------------
Net cash provided by operating activities 26,030 118 1,005 - 27,153
-------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 18 18
Purchases of property and equipment (15,781) (8) (118) (15,907)
Purchase of minority interest in Japan subsidiary (229) (229)
Purchase of foreign trademark (70) (70)
Sale of short-term investments 7 7
Capital contributions to partnership (2,115) (2,115)
Capital distributions from partnership 139 139
-------------------------------------------------------------------------
Net cash used in investing activities (18,031) (8) (118) - (18,157)
-------------------------------------------------------------------------
FINANCING ACTIVITIES:
Principle payments of long-term debt (21,535) (257) (21,792)
Proceeds from issuance of long-term debt - -
Recapitalization costs (19) (19)
Financing fees and expenses (133) (133)
-------------------------------------------------------------------------
Net cash used in financing activities (21,687) - (257) - (21,944)
-------------------------------------------------------------------------
Effect of exchange rate changes (107) (153) (260)
Unrealized loss on securities (8) (8)
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (13,803) 110 477 - (13,216)
Beginning balance, cash and cash equivalents 32,245 80 119 32,444
-------------------------------------------------------------------------
Ending balance, cash and cash equivalents $ 18,442 $ 190 $ 596 $ - $ 19,228
=========================================================================
Supplemental disclosures of cash flow information:
Cash received during the year for interest income $ 1,068 $ 1,068
Cash paid during the year for: =========================================================================
Interest expense $ 24,358 $ 6 $ 24,364
=========================================================================
Income taxes $ 11,565 $ 276 $ 11,841
Supplemental disclosure of noncash financing activity: =========================================================================
Dividends accrued on mandatorily redeemable preferred
stock $ 3,084 $ 3,084
=========================================================================
</TABLE>
16
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING CASH FLOWS
THIRTY-NINE WEEKS ENDED AUGUST 1, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
OPERATING ACTIVITIES:
Net Income $ 10,224 $ (2,450) $ 7 $ 2,443 $ 10,224
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,488 200 118 10,806
Amortization of discount on 12.5% notes due 2000 9 9
Amortization on deferred loan costs 125 125
Loss on disposal of property and equipment 7 957 964
Partnership losses 185 185
Minority Interest - 1 1
Equity in income (loss) of consolidated subsidiaries 2,444 (2,444) -
Cash provided by (used in) changes in operating assets
and liabilities:
Accounts receivable 4,330 (206) 98 4,222
Intercompany receivables (net) (3,025) 2,328 697 -
Inventories (958) 2,227 (326) 943
Prepaid income tax (1,859) (1,859)
Other current assets (166) 22 (1) (145)
Other assets (441) (23) 116 (348)
Accounts payable (1,346) (4) (1,350)
Accrued expenses (388) 3 (385)
Accrued interest expense 2,033 - 2,033
Income taxes payable 1,659 (1,706) (74) (121)
---------------------------------------------------------------------
Net cash provided by operating activities 23,321 1,349 634 - 25,304
---------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 176 176
Purchases of property and equipment (9,092) (1,382) (284) (10,758)
Sale of short-term investments 1,152 1,152
Capital distributions from partnership 106 106
---------------------------------------------------------------------
Net cash used in investing activities (7,658) (1,382) (284) - (9,324)
---------------------------------------------------------------------
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 - (170) (170)
Recapitalization (311,447) (311,447)
Issuance of common stock 797 797
Issuance of preferred stock 25,000 25,000
Financing fees and expenses (15,231) (15,231)
Dividends paid (1,244) (1,244)
---------------------------------------------------------------------
Net cash used in financing activities (12,082) - (170) - (12,252)
---------------------------------------------------------------------
Effect of exchange rate changes (21) (7) (28)
Unrealized loss on securities (3) (3)
---------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,557 (33) 173 - 3,697
Beginning Balance, cash and cash equivalents 14,096 155 86 14,337
---------------------------------------------------------------------
Ending Balance, cash and cash equivalents $ 17,653 $ 122 $ 259 $ - $ 18,034
=====================================================================
Supplemental disclosures of cash flow information:
Cash received during the thirty-nine weeks for
interest income $ 985 $ 985
=====================================================================
Cash paid during the thirty-nine weeks for:
Interest expense $ 7 $ 7
=====================================================================
Income taxes $ 10,456 $ 10,456
=====================================================================
Supplemental disclosure of noncash financing activity:
Dividends accrued on mandatorily redeemable
preferred stock $ 156 $ 156
=====================================================================
</TABLE>
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table is derived from the Company's Consolidated Statements
of Income and sets forth, for the periods indicated, the results of operations
as a percentage of net sales:
<TABLE>
<CAPTION>
Percent of Net Sales Percent of Net Sales
Thirteen Weeks Ended Thirty-Nine Weeks Ended
("Third Quarter") ("Nine Months")
------------------------------------ ------------------------------
(unaudited) (unaudited)
July 30, August 1, July 30, August 1,
2000 1999 2000 1999
------ ------ ------ -----
<S> <C> <C> <C> <C>
Net sales...................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................................. 40.8 43.5 42.0 43.9
------ ------ ------ -----
Gross profit................................................... 59.2 56.5 58.0 56.1
Selling, general and administrative expenses................... 38.0 42.1 38.4 41.1
Transaction fees and expenses.................................. -- 21.4 -- 6.9
------ ------ ------ -----
Operating income (loss)........................................ 21.2 (7.0) 19.6 8.1
Interest expense............................................... 9.4 2.9 9.7 0.9
Other income................................................... -- 0.5 0.4 0.5
------ ------ ------ -----
Income (loss) before income taxes.............................. 11.8 (9.4) 10.3 7.7
Income tax provision (benefit)................................. 5.0 (3.8) 4.3 3.2
------ ------- ------ -----
Net income (loss).............................................. 6.8% (5.6)% 6.0% 4.5%
====== ====== ====== =====
</TABLE>
18
<PAGE>
Third Quarter Fiscal 2000 Compared to Third Quarter Fiscal 1999
Net sales for the third quarter of fiscal 2000 increased by $13,092,000, or
18.6% over the third quarter of fiscal 1999. This increase was principally
attributable to (i) an increase in sales by company-owned retail stores of
approximately $5,671,000, due in part to increased sales at a number of the
retail boutiques, including significant increases for the boutiques located in
Palm Desert, California and New York City, and the addition of four retail
boutiques and one outlet store since the beginning of fiscal 2000 and (ii) an
increase in sales to existing domestic retail customers of approximately
$6,918,000, including an increase of $3,949,000 in sales of the Sport product
line to these customers. Net sales increased primarily as a result of increased
unit sales of various product lines.
Gross profit for the third quarter of fiscal 2000 increased by $9,673,000, or
24.4% as compared with the third quarter of fiscal 1999, and increased as a
percentage of net sales to 59.2% from 56.5%. This increase in the gross profit
margin was primarily the result of an increase in the gross profit margin for
the Knit division, due to an increase in the number of garments being
manufactured and sold without a corresponding increase in the production costs
and an improvement in manufacturing efficiency.
Selling, general and administrative expenses for the third quarter of fiscal
2000 increased by $2,071,000, or 7.0% over the third quarter of fiscal 1999, and
decreased as a percentage of net sales to 38.0% from 42.1%. This decrease in
selling, general and administrative expenses as a percent of sales was primarily
due to an increase in net sales without a corresponding increase in selling,
general and administrative expenses.
Transaction fees and expenses for the third quarter of fiscal 1999 represent
costs directly associated with the completion of the mergers which are described
above in footnote 1 of the Notes to Consolidated Financial Statements, including
$13,792,000 of costs related to payments made to settle the Company's
outstanding stock options.
Operating income for the third quarter of fiscal 2000 increased by
$22,639,000, to $17,732,000 from a loss of $4,907,000 reported in the third
quarter of fiscal 1999. Operating income as a percentage of net sales increased
to 21.2% from -7.0% during the same period. This increase in operating income
as a percentage of net sales was primarily due to transaction fees and expenses
which were recorded during the third quarter of fiscal 1999, and an increase in
the gross profit margin and a decrease in selling, general and administrative
expenses as a percentage of net sales.
Interest expense for the third quarter of fiscal 2000 increased by $5,815,000
over the third quarter of fiscal 1999. This increase was due to the borrowings
under the senior credit facility and senior subordinated notes incurred during
the third quarter of fiscal 1999 in connection with the completion of the
mergers in July 1999.
First Nine Months Fiscal 2000 Compared to First Nine Months Fiscal 1999
Net sales for the first nine months of fiscal 2000 increased by $26,239,000,
or 11.8% over the first nine months of fiscal 1999. This increase was
principally attributable to (i) an increase in sales by Company owned retail
stores of approximately $18,771,000, due in part to increased sales at a number
of the retail boutiques, including significant increases at the boutiques
located in New York City, Palm Desert, California and Las Vegas, and the
addition of four retail boutique and one outlet store since the
19
<PAGE>
beginning of fiscal 2000 and (ii) an increase in sales to existing domestic
retail customers of approximately $9,459,000, including an increase of
$7,386,000 in sales of the Sport product line to these customers. These
increases in net sales were primarily offset by a decrease in net sales for St.
John Home, due to the closure of three stores and the transfer of one store to
the former joint venture partner during the second quarter of fiscal 1999. Net
sales increased primarily as a result of increased unit sales of various product
lines.
Gross profit for the first nine months of fiscal 2000 increased by
$19,492,000, or 15.7% as compared with the first nine months of fiscal 1999, and
increased as a percentage of net sales to 58.0% from 56.1%. This increase in
the gross profit margin was primarily due to (i) an increase in the gross profit
margin for the Knit and Sport divisions, resulting from an increase in the
number of garments being manufactured and sold without a corresponding increase
in the production costs and an improvement in manufacturing efficiency and (ii)
an increase in the gross margin for the retail boutiques due to a decrease in
the point of sale markdowns.
Selling, general and administrative expenses for the first nine months of
fiscal 2000 increased by $4,210,000, or 4.6% over the first nine months of
fiscal 1999, and decreased as a percentage of net sales to 38.4% from 41.1%.
This decrease was primarily due to (i) the reduction in selling, general and
administrative expenses related to the closure of three Home stores and the
transfer of one Home store to the former joint venture partner during the second
quarter of fiscal 1999, (ii) non-recurring expenses totaling approximately $1.7
million incurred during the second quarter of fiscal 1999 related to the closure
of the three stores and transfer of one store to the former joint venture
partner and (iii) a decrease in costs of promoting and marketing the Company's
product line to its major customers of approximately $1.4 million. This
decrease was offset by non-recurring costs incurred related to the litigation
involving the mergers totaling approximately $1.5 million and costs incurred to
repair the Company airplane of $1.0 million.
Transaction fees and expenses for the first nine months of fiscal 1999
represent costs directly associated with the completion of the mergers which are
described above in footnote 1 of the Notes to Consolidated Financial Statements,
including $13,792,000 of costs related to payments made to settle the Company's
outstanding stock options.
Operating income for the first nine months of fiscal 2000 increased by
$30,494,000, or 167.9% over the first nine months of fiscal 1999. Operating
income as a percentage of net sales increased to 19.6% from 8.2% during the same
period. This increase in the operating income as a percentage of net sales was
primarily due to transaction fees and expenses which were recorded during the
third quarter of fiscal 1999, and an increase in the gross profit margin and a
decrease in selling, general and administrative expenses as a percentage of net
sales.
Interest expense for the first nine months of fiscal 2000 increased by
$21,969,000 over the first nine months of fiscal 1999. This increase was due to
the borrowings under the senior credit facility and senior subordinated notes
incurred during the third quarter of fiscal 1999 in connection with the
completion of the mergers in July 1999.
Liquidity and Capital Resources
The Company's primary cash requirements are to fund payments required to
service the Company's debt, to fund the Company's working capital needs,
primarily inventory and accounts receivable, and for the purchase of property
and equipment. During the first nine months of fiscal 2000, cash provided by
operating activities was $ 27,153,000. Cash provided by operating activities
20
<PAGE>
was primarily generated by net income, a decrease in accounts receivable and an
increase in accrued expenses, while cash used in operating activities was
primarily used to fund an increase in inventory and a decrease in accrued
interest expense. Cash used in investing activities was $ 18,157,000 during the
first nine months of fiscal 2000. The principal use of cash in investing
activities was for the purchase of 16 electronic knitting machines, the
construction of improvements for a new corporate headquarters in Irvine,
California, the construction of improvements for a new manufacturing facility
located in Irvine, California, the construction of leasehold improvements for a
new boutique location in Hawaii and the purchase of a condominium located in New
York City. Cash used in financing activities was $21,944,000 during the first
nine months of fiscal 2000, primarily used to fund prepayments made on the
senior secured debt of $20 million.
The Company anticipates purchasing property and equipment of approximately
$16 million during the remainder of fiscal 2000. The estimated $16 million will
be used principally for the purchase of electronic knitting machines, upgrades
to the Company's computer systems and the expansion of the boutique location in
Palm Desert, California.
As of July 30, 2000, the Company had approximately $69,363,000 in working
capital and $19,246,000 in cash and marketable securities. The Company's
principal source of liquidity is internally generated funds. The Company also
has a $25.0 million revolving commitment from a bank ("Revolving Commitment")
which expires on July 31, 2005. The Revolving Commitment is secured and
borrowings thereunder bear interest at the Company's choice of the bank's
borrowing rate plus 1.25% (9.5% at July 30, 2000) or a Eurodollar rate plus
2.25%. The availability of funds under the Revolving Commitment is subject to
the Company's continued compliance with certain covenants, including a covenant
that sets the maximum amount the Company can spend annually on the acquisition
of fixed or capital assets, and certain financial covenants, including a maximum
leverage ratio, a minimum fixed charge coverage ratio and a minimum interest
expense coverage ratio. As of July 30, 2000, no amounts were outstanding under
the Revolving Commitment. The Company invests its excess cash primarily in a
money market fund and investment grade commercial paper.
Total debt outstanding decreased $21,687,000 to $268,198,000 at July 30,
2000. The Company's outstanding debt is comprised of bank borrowings of
$169,432,000 and senior subordinated notes of $98,766,000.
The Company's primary ongoing cash requirements will be for debt service and
capital expenditures. The Company's debt service requirements consist primarily
of principal and interest payments on bank borrowings and interest on its senior
subordinated notes. The Company believes it will be able to finance its debt
service and capital expenditure requirements for the foreseeable future with
internally generated funds and funds available under the Company's revolving
credit facility.
St. John Knits International, Incorporated must rely on distributions, loans
and other intercompany cash flows from its affiliates and subsidiaries to
generate the funds necessary to satisfy the repayment of its outstanding loans.
Except for restrictions under applicable law, there are no material restrictions
on distributions to the Company from the Company's wholly owned subsidiaries
that have guaranteed the Company's payment obligations under its senior
subordinated notes. See footnote 7 to the Company's unaudited consolidated
financial statements contained herein.
The Company paid cash dividends of approximately $1,245,000 during fiscal
1999 prior to the mergers. The Company's ability to pay dividends is restricted
by the terms of the Company's senior secured credit facilities and senior
subordinated note indenture. The Company does not anticipate the payment of any
cash dividends on its common stock in the future.
21
<PAGE>
The Company's EBITDA as defined in its credit agreement for its senior secured
credit facilities was $59,800,000 and $47,309,000 for the first nine months of
fiscal 2000 and 1999, respectively, and $21,168,000 and $15,004,000 for the
third quarter of fiscal 2000 and 1999, respectively. The credit agreement is
filed as Exhibit (a)(1) to the Company's Amendment No. 4 to the Rule 13e-3
Transaction Statement on Schedule 13E-3 dated July 12, 1999. EBITDA is not a
defined term under Generally Accepted Accounting Principles ("GAAP") and is not
an alternative to operating income or cash flow from operations as determined
under GAAP. The Company believes that EBITDA provides additional information
for determining its ability to meet future debt service requirements; however,
EBITDA does not reflect cash available to fund cash requirements and should not
be construed as an indication of the Company's operating performance or as a
measure of liquidity.
Year 2000
The Company undertook many actions intended to assure that its computer
systems and other equipment were capable of functioning in, and processing for,
the Year 2000 and beyond. These actions were generally described in the
Company's report on Form 10-Q for the quarter ended August 1, 1999. The Company
implemented a program intended to address, on a timely basis, "Year 2000
Readiness" (the need for computer applications and other systems used by the
Company to function in and after the Year 2000 and to recognize and properly
perform date sensitive functions involving dates after December 31, 1999).
As of September 12, 2000, the Company has not experienced any material
consequences of failure of Year 2000 Readiness, either by the Company, its
suppliers, or its customers. However, Year 2000 Readiness has many elements and
potential consequences, some of which may not be foreseeable or may be realized
in future periods. Therefore, there can be no assurance that unforeseen
circumstances could still not arise, or that the Company will not in the future
identify equipment or systems which are not Year 2000 ready.
The Company's Year 2000 costs were approximately $716,000.
Forward Looking Statements
This Quarterly Report on Form 10-Q contains certain statements which describe
the Company's beliefs concerning future business conditions and the outlook for
the Company based on currently available information. Wherever possible the
Company has identified these "forward looking" statements (as defined in Section
21E of the Securities Exchange Act of 1934) by words such as "anticipates,"
"believes," "estimates," "expects" and other similar expressions. The forward
looking statements and associated risks set forth herein may include or relate
to: (i) the Company's anticipated purchases of property and equipment during the
remainder of fiscal 2000, (ii) the Company's belief that it will be able to fund
its working capital and capital expenditure requirements with internally
generated funds and the use of its revolving credit facility and (iii) the
Company's anticipation that it will not pay cash dividends on its common stock
in the future.
22
<PAGE>
These forward looking statements are subject to risks, uncertainties and other
factors which could cause the Company's actual results, performance or
achievements to differ materially from those expressed in, or implied by, these
statements. These risks, uncertainties and other factors include, but are not
limited to, the following: (i) the financial strength of the retail industry and
the level of consumer spending for apparel and accessories, (ii) the Company's
ability to develop, market and sell its products, (iii) increased competition
from other manufacturers and retailers of women's clothing and accessories, (iv)
general economic conditions and (v) the inability of the Company to meet the
financial covenants under its senior secured credit facilities and subordinated
note indenture. The potential adverse impact on the Company of these and other
risks is discussed in more detail in the Company's Form 10-K for the year ended
October 31, 1999 and the risk factors described therein are incorporated herein
by reference.
23
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has exposure to fluctuations in foreign currency exchange rates
for the revenues derived from sales to its foreign customers denominated in
foreign currencies. In order to reduce the effects of such fluctuations, under
established procedures and controls, the Company enters into forward contracts.
These contractual arrangements are placed with a major financial institution.
The Company does not hold derivative financial instruments for trading. At July
30, 2000, the Company did not have any outstanding forward contracts.
The Company is exposed to market risks related to fluctuations in interest
rates on its variable rate debt which consists of bank borrowings related to the
mergers. The Company also holds fixed rate subordinated notes. The Company has
entered into an interest rate collar agreement with a major financial
institution to limit its exposure on the variable rate debt. The agreement
became effective on October 4, 1999 and will expire on July 7, 2002. The
agreement sets a cap rate for libor contracts at 8.5%. The agreement also sets
a minimum rate of 5.37%. The agreement covers $45 million of the Company's
variable rate debt.
For fixed rate debt, changes in interest rates generally affect the fair
market value, but not earnings or cash flows. Conversely, for variable rate
debt, changes in interest rates generally do not influence fair market value,
but do affect future earnings and cash flows. The Company has managed its
exposure to changes in interest rates by issuing part of its debt with a fixed
interest rate. Holding the variable rate debt balance constant, each one
percentage point increase in interest rates occurring on the first day of the
year would result in an increase in interest expense for the coming year of
approximately $1.7 million.
24
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company was party to certain legal proceedings, which are described in the
Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1999
filed with the Securities and Exchange Commission on January 28, 2000 and to the
Quarterly Reports on Form 10-Q for the periods ended January 30, 2000 and April
30, 2000. On August 1, 2000, the previously announced settlement of the class
action shareholders lawsuit arising from the mergers received final approval
from the court. On September 1, 2000, one of the plaintiffs in this lawsuit
filed a notice of appeal from the judgment approving the settlement and the
court order regarding application for attorney's fees.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
10.1 First Amendment to Second Amended and Restated Employment Agreement,
effective as of May 4, 2000, between Bob Gray and St. John Knits, Inc.
10.2 First Amendment to Amended and Restated Employment Agreement,
effective as of May 4, 2000, between Kelly A. Gray and St. John Knits,
Inc.
10.3 First Amendment to Amended and Restated Employment Agreement,
effective as of May 4, 2000, between Marie St. John Gray and St. John
Knits, Inc.
10.4 Amended and Restated St. John Knits International, Incorporated 1999
Stock Option Plan, executed May 15, 2000
10.5 Amendment, dated May 15, 2000, to the Management Stockholders'
Agreement dated as of September 21, 1999 among St. John Knits
International, Incorporated, Vestar/Gray Investors LLC, Vestar/SJK
Investors LLC and the Management Investors
27.1 Financial Data Schedule
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
September 12, 2000 ST. JOHN KNITS INTERNATIONAL, INCORPORATED
By: /s/Bob Gray
-------------------------------------
Bob Gray
Chairman of the Board and
Chief Executive Officer
By: /s/Roger G. Ruppert
--------------------------------------
Roger G. Ruppert
Senior Vice President - Finance,
Chief Financial Officer
(Principal Financial Officer)
26
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
10.1 First Amendment to Second Amended and Restated Employment Agreement,
effective as of May 4, 2000, between Bob Gray and St. John Knits, Inc.
10.2 First Amendment to Amended and Restated Employment Agreement,
effective as of May 4, 2000, between Kelly A. Gray and St. John Knits,
Inc.
10.3 First Amendment to Amended and Restated Employment Agreement,
effective as of May 4, 2000, between Marie St. John Gray and St. John
Knits, Inc.
10.4 Amended and Restated St. John Knits International, Incorporated 1999
Stock Option Plan, executed May 15, 2000
10.5 Amendment, dated May 15, 2000, to the Management Stockholders'
Agreement dated as of September 21, 1999 among St. John Knits
International, Incorporated, Vestar/Gray Investors LLC, Vestar/SJK
Investors LLC and the Management Investors
27.1 Financial Data Schedule
27
