<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 January 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)
17422 Derian Avenue, Irvine, California 92614
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (949) 863-1171
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
The number of outstanding shares of registrant's Common Stock, par value $0.01
per share, was 6,546,174 shares as of March 10, 2000.
================================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
A S S E T S January 30, October 31,
----------- 2000 1999
------------------- -------------------
Current assets: (unaudited)
Cash and cash equivalents............................................................. $ 27,253,032 $ 32,443,815
Investments........................................................................... 19,872 25,412
Accounts receivable, net.............................................................. 29,275,572 33,562,573
Inventories........................................................................... 42,758,666 43,521,734
Deferred income tax benefit........................................................... 7,678,272 7,678,272
Other................................................................................. 2,499,846 2,634,127
------------- -------------
Total current assets............................................................... 109,485,260 119,865,933
------------- -------------
Property and equipment:
Machinery and equipment............................................................... 51,956,697 51,242,600
Leasehold improvements................................................................ 33,800,037 32,856,047
Buildings............................................................................. 19,386,536 17,913,064
Furniture and fixtures................................................................ 7,213,073 6,868,556
Land.................................................................................. 7,395,577 5,786,857
Construction in progress.............................................................. 2,836,738 4,132,267
------------- -------------
122,588,658 118,799,391
Less--Accumulated depreciation and amortization....................................... 51,678,342 49,211,044
------------- -------------
70,910,316 69,588,347
------------- -------------
Deferred financing costs................................................................ 13,960,092 14,585,755
Other assets............................................................................ 2,495,329 2 ,770,219
------------- -------------
$ 196,850,997 $ 206,810,254
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable...................................................................... $ 5,384,615 $ 6,805,079
Accrued expenses...................................................................... 11,274,431 11,275,809
Current portion of long-term debt..................................................... 4,965,642 2,564,352
Accrued interest expense.............................................................. 4,712,399 7,661,434
Dividends payable..................................................................... 2,226,065 1,228,472
Income taxes payable.................................................................. 1,976,460 1,190,888
------------- -------------
Total current liabilities.......................................................... 30,539,612 30,726,034
Long-term debt, net of current portion.................................................. 275,020,773 287,321,021
------------- -------------
Total liabilities.................................................................. 305,560,385 318,047,055
------------- -------------
Minority interest....................................................................... 716,343 693,391
------------- -------------
Mandatorily redeemable preferred stock, $100 stated value: Authorized--3,000,000
shares, issued and outstanding--250,000............................................. 25,000,000 25,000,000
------------- -------------
Stockholders' deficit:
Common stock, par value $0.01 per share : Authorized--30,000,000 shares, issued and
outstanding--6,546,174 shares....................................................... 65,462 65,462
Unrealized loss on securities......................................................... (33,876) (28,261)
Cumulative translation adjustment..................................................... 187,912 406,823
Additional paid-in capital............................................................ 147,141,194 147,141,194
Accumulated deficit................................................................... (281,786,423) (284,515,410)
------------- -------------
Total stockholders' deficit......................................................... (134,425,731) (136,930,192)
------------- -------------
$ 196,850,997 $ 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
-------------------------------------------
January 30, 2000 January 31, 1999
------------------- --------------------
(unaudited)
<S> <C> <C>
Net sales.......................................................... $79,588,253 $73,388,512
Cost of sales...................................................... 35,030,450 33,829,085
------------------- --------------------
Gross profit....................................................... 44,557,803 39,559,427
Selling, general and administrative expenses....................... 30,390,944 30,134,846
------------------- --------------------
Operating income................................................... 14,166,859 9,424,581
Interest expense................................................... 8,231,299 3,371
Other income....................................................... 432,560 429,766
------------------- --------------------
Income before income taxes......................................... 6,368,120 9,850,976
Income taxes....................................................... 2,628,486 4,026,680
------------------- --------------------
Net income......................................................... 3,739,634 5,824,296
------------------- --------------------
Comprehensive income, net of tax:
Foreign currency translation adjustments......................... (128,545) (67,970)
Unrealized loss on securities.................................... (3,297) (990)
------------------- --------------------
Comprehensive income............................................... $ 3,607,792 $ 5,755,336
=================== ====================
Net income per common share - basic................................ $ 0.42 $ 0.35
=================== ====================
Net income per common share - diluted.............................. $ 0.42 $ 0.34
=================== ====================
Dividends per share................................................ $ -- $ 0.025
=================== ====================
Shares used in the calculation of net income per share-basic....... 6,546,174 16,580,311
=================== ====================
Shares used in the calculation of net income per share-diluted..... 6,546,174 16,960,982
=================== ====================
</TABLE>
See accompanying notes.
3
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-------------------------------------------------
January 30, 2000 January 31, 1999
-------------------- --------------------
<S> <C> <C>
(unaudited)
Cash flows from operating activities:
Net income....................................................... $ 3,739,634 $ 5,824,296
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................ 3,254,150 3,321,950
Amortization of discount on 12.5% notes due 2009............. 34,985 --
Amortization of deferred loan costs.......................... 736,955 --
(Gain) loss on disposal of property and equipment............ 21,570 (99,666)
Partnership losses........................................... 45,340 78,385
Minority interest in income (loss) of consolidated
subsidiaries................................................ 22,952 (11,021)
Decrease in accounts receivable.............................. 4,287,001 8,740,695
Decrease in inventories...................................... 763,068 18,465
(Increase) decrease in other current assets.................. 134,281 (382,320)
Decrease in other assets..................................... 128,191 4,676
Decrease in accounts payable................................. (1,420,464) (2,161,456)
Decrease in accrued expenses................................. (1,378) (175,259)
Decrease in accrued interest expense......................... (2,949,035) --
Increase in income taxes payable............................. 785,572 3,852,992
------------ -----------
Net cash provided by operating activities.................. 9,582,822 19,011,737
------------ -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment................. 13,017 120,000
Purchase of property and equipment........................... (4,552,400) (5,446,566)
Purchase of short-term investments........................... -- (3,460)
Sale of short-term investments............................... 5,540 --
Capital distributions from partnership....................... 43,052 22,000
------------ -----------
Net cash used in investing activities...................... (4,490,791) (5,308,026)
------------ -----------
Cash flows from financing activities:
Principal payments on long-term debt......................... (10,085,233) (58,201)
------------ -----------
Proceeds from issuance of long-term debt..................... 151,290 --
Recapitalization costs....................................... (13,053) --
Issuance of common stock..................................... -- 43,233
Financing fees and expenses.................................. (111,292) --
Dividends paid............................................... -- (414,537)
------------ -----------
Net cash used in financing activities...................... (10,058,288) (429,505)
Effect of exchange rate changes..................................... (218,911) (115,009)
------------ -----------
Unrealized loss on securities....................................... (5,615) (1,675)
------------ -----------
Net increase (decrease) in cash and cash equivalents................ (5,190,783) 13,157,522
Beginning balance, cash and cash equivalents........................ 32,443,815 14,336,872
------------ -----------
Ending balance, cash and cash equivalents........................... $ 27,253,032 $27,494,394
============ ===========
</TABLE>
4
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-------------------------------------------------
January 30, 2000 January 31, 1999
-------------------- --------------------
<S> <C> <C>
(unaudited)
Supplemental disclosures of cash flow information:
Cash received during the thirteen weeks for interest income.... $ 404,233 $ 94,158
============ ===========
Cash paid during the thirteen weeks for:
Interest expense............................................ $ 10,390,725 $ 2,644
============ ===========
Income taxes................................................ $ 1,865,427 $ 167,200
============ ===========
</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 January 30, 2000 and January 31,
1999.
3. Dividends
St. John paid approximately $1,245,000 in dividends to its shareholders
during fiscal 1999 prior to the mergers. SJKI does not anticipate the payment of
any cash dividends on its common stock in the future.
4. Earnings Per Share
The Company accounts for earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". Under SFAS
No. 128, basic earnings per share includes the weighted average number of common
shares outstanding during the period and excludes the dilutive effect of common
stock equivalents, including stock options. Diluted earnings per share includes
all dilutive items. Dilution is calculated based upon the treasury stock method,
which assumes that all dilutive securities were exercised and that the proceeds
received were applied to repurchase outstanding shares at the average market
price during the period.
6
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
The following is a reconciliation of the Company's net income and weighted
average shares outstanding for the purpose of calculating basic and diluted
earnings per share for all periods:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------------------
January 30, January 31,
2000 1999
----------------- -----------------
(unaudited)
<S> <C> <C>
Net income........................................................ $3,739,634 $ 5,824,296
Less: preferred stock dividends.................................. 997,593 --
----------------- -----------------
Income allocated to common stockholders........................... $2,742,041 $ 5,824,296
================= ================-
Weighted average shares outstanding............................... 6,546,174 16,580,311
================= ================-
Basic earnings per share.......................................... $ 0.42 $ 0.35
================= ================-
Add: dilutive effect of stock options............................ -- 380,671
----------------- ----------------
Shares used to calculate diluted earnings per share............... 6,546,174 16,960,982
================= ================
Diluted earnings per share....................................... $ 0.42 $ 0.34
================= ================
</TABLE>
5. Comprehensive Income
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income"
during the first quarter of fiscal 1999. This statement requires that all items
that meet the definition of components of comprehensive income be reported in a
financial statement for the period in which they are recognized. Components of
comprehensive income include revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income
but excluded from net income.
6. Deferred Compensation
In accordance with the employment agreement between the Company and Robert
E. Gray, the Company's Chairman and CEO, a portion of the annual salary payable
to Robert E. Gray was deferred. The deferred portion of the compensation was
paid into an irrevocable "rabbi" trust and was expensed as it was earned. At
January 31, 1999, the balance in the trust and the corresponding liability were
approximately $1.8 million and are not reflected in the Consolidated Balance
Sheets. The total deferred compensation was paid to Mr. Gray during the fourth
quarter of fiscal 1999.
7. Inventories
A summary of the components of inventories is as follows:
<TABLE>
<CAPTION>
January 30, October 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Raw materials................................................ $12,547,773 $11,940,108
Work-in-process.............................................. 7,470,939 6,847,155
Finished products............................................ 22,739,954 24,734,471
----------- -----------
$42,758,666 $43,521,734
=========== ===========
</TABLE>
7
<PAGE>
8. Supplemental Condensed Consolidated Financial Information
The Company's payment obligations under its senior subordinated notes are
guaranteed by certain of the Company's wholly owned subsidiaries (the Guarantor
Subsidiaries). Such guarantees are full, unconditional and joint and several.
Except as may be required under applicable law, there are no material
restrictions on distributions from the Guarantor Subsidiaries to SJKI. Separate
financial statements of the Guarantor Subsidiaries are not presented because the
Company's management has determined that they would not be material to
investors. The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheets, statement of operations, and statement of
cash flows information for the Parent Company (consisting of SJKI and St. John),
for the Guarantor Subsidiaries and for the Company's other subsidiaries (the
Non-Guarantor Subsidiaries). The supplemental financial information reflects the
investments of the Parent Company in the Guarantor and Non-Guarantor
Subsidiaries using the equity method of accounting. The supplemental financial
information is presented for the periods as of January 30, 2000 and October 31,
1999, and for the three months ended January 30, 2000 and January 31, 1999.
8
<PAGE>
ST. JOHN INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 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 $ 26,831 $ 153 $ 289 $ 27,273
Accounts receivable, net 27,642 225 1,409 29,276
Inventories (1) 39,326 1,742 1,690 42,758
Deferred income tax benefit 7,678 - 7,678
Other 2,397 86 17 2,500
Intercompany accounts receivable 1,839 - (1,839) -
------------------------------------------------------------------------
Total current assets 105,713 2,206 3,405 (1,839) 109,485
Property and equipment, net 64,834 1,462 4,615 70,911
Investment in subsidiaries (2,057) - 2,057 -
Receivable from consolidated subsidiaries 15,366 - (15,366) -
Deferred financing costs 13,960 - 13,960
Other assets 1,313 103 1,079 2,495
------------------------------------------------------------------------
Total assets $ 199,129 $ 3,771 $ 9,099 $ (15,148) $196,851
========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 5,078 $ 237 $ 69 $ 5,384
Accrued expenses 10,828 320 127 11,275
Current portion of long-term debt 4,501 465 4,966
Accrued interest expense 4,712 - 4,712
Dividends payable 2,226 - 2,226
Intercompany accounts payable 1,839 (1,839) -
Income taxes payable 5,509 (3.656) 124 1,977
------------------------------------------------------------------------
Total current liabilities 32,854 (3,099) 2,624 (1,839) 30,540
Intercompany payable 11,606 3,760 (15,366) -
Long-term debt, net of current portion 274,861 160 275,021
------------------------------------------------------------------------
Total liabilities 307,715 8,507 6,544 (17,205) 305,561
Minority interest 716 716
Preferred stock 25,000 - 25,000
Total stockholders' equity (deficit) (133,586) (4,736) 1,839 2,057 134,426)
------------------------------------------------------------------------
Total liabilities and stockholders'
equity (deficit) $ $199,129 $ 3,771 $ 9,099 $ (15,148) $196,851
========================================================================
</TABLE>
(1) Inventories are shown at cost for all entities
9
<PAGE>
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 31, 1999
<TABLE>
<CAPTION>
(Amounts in thousands) PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and investments $ 32,270 $ 80 $ 118 $ - $ 32,468
Accounts receivable, net 31,575 302 1,686 33,563
Inventories (1) 39,701 1,917 1,876 28 43,522
Deferred income tax benefit 7,678 - 7,678
Other 2,465 100 69 2,634
Intercompany accounts receivable 1,484 - (1,484) -
----------------------------------------------------------------------
Total current assets 115,173 2,399 3,749 (1,456) 119,865
Property and equipment, net 63,061 1,500 5,027 69,588
Investment in subsidiaries (1,837) - 1,837 -
Receivable from consolidated subsidiaries 16,112 - (16,112) -
Deferred financing costs 14,586 - 14,586
Other assets 1,399 88 1,283 2,770
----------------------------------------------------------------------
Total assets $ 208,494 $ 3,987 $ 10,059 $ (15,731) $ 206,809
======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 6,414 $ 264 $ 127 $ - $ 6,805
Accrued expenses 10,819 279 150 28 11,276
Current portion of long-term debt 2,248 316 2,564
Acrrued interest expense 7,661 7,661
Dividends payable 1,228 1,228
Intercompany accounts payable - 1,484 (1,484) -
Income taxes payable 4,435 (3,413) 169 1,191
----------------------------------------------------------------------
Total current liabilities 32,805 (2,870) 2,246 (1,456) 30,725
Intercompany payable 11,244 4,868 (16,112) -
Long-term debt, net of current portion 287,082 239 287,321
----------------------------------------------------------------------
Total liabilities 319,887 8,374 7,353 (17,568) 318,046
Minority interest 693 693
Preferred stock 25,000 - 25,000
Total stockholders' equity (deficit) (136,393) (4,387) 2,013 1,837 (136,930)
----------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 208,494 $ 3,987 $ 10,059 $ (15,731) $ 206,809
======================================================================
(1) Inventories are shown at cost for all entities
</TABLE>
10
<PAGE>
ST. JOHN INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------------------
(Amounts in thousands) <C> <C> <C> <C> <C>
<S>
Net sales $ 75,860 $ 1,562 $ 2,166 $ - $ 79,588
Cost of sales 33,026 1,103 901 35,030
--------------------------------------------------------------------------------
Gross profit 42,834 459 1,265 - 44,558
Selling, general and administrative
expenses 28,315 1,055 1,021 - 30,391
--------------------------------------------------------------------------------
Operating income (loss) 14,519 (596) 244 - 14,167
Interest expense 8,231 8,231
Other income/(expense) 434 5 17 (23) 433
--------------------------------------------------------------------------------
Income (loss) before income taxes 6,722 (591) 261 (23) 6,369
Income taxes 2,763 (242) 108 2,629
--------------------------------------------------------------------------------
Income (loss) before equity in loss of
consolidated subsidiaries 3,959 (349) 153 (23) 3,740
Equity in loss of consolidated subsidiaries (220) - - 220 -
--------------------------------------------------------------------------------
Net income (loss) $ 3,739 $ (349) $153 $ 197 $ 3,740
================================================================================
</TABLE>
11
<PAGE>
ST. JOHN INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
Net sales $ 68,596 $ 3,457 $ 1,336 $ - $ 73,389
Cost of sales 31,221 1,936 672 33,829
----------------------------------------------------------------------------
Gross profit 37,375 1,521 664 - 39,560
Selling, general and administrative expenses 27,493 1,880 762 - 30,135
Operating income (loss) 9,882 (359) (98) - 9,425
Other income/(expense) 588 (192) 19 11 426
----------------------------------------------------------------------------
Income (loss) before income taxes 10,470 (551) (79) 11 9,851
Income taxes 4,298 (226) (45) 4,027
----------------------------------------------------------------------------
Income (loss) before equity in loss of
consolidated subsidiaries 6,172 (325) (34) 11 5,824
Equity in loss of consolidated subsidiaries (186) - - 186 -
----------------------------------------------------------------------------
Net income (loss) $ 5,986 $ (325) $ (34) $ 197 $ 5,824
============================================================================
</TABLE>
12
<PAGE>
ST. JOHN INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING CASH FLOWS
THREE MONTHS ENDED JANUARY 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
OPERATING ACTIVITIES:
Net Income $ 3,740 $ (349) $ 152 $ 197 $ 3,740
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,160 39 55 3,254
Amortization of discount on 12.5% notes due 2009 35 35
Amortization of deferred loan costs 737 737
Loss on disposal of property and equipment 21 21
Partnership losses 45 45
Minority interest in income of consolidated subsidiaries - 23 23
Equity in loss of consolidated subsidiaries 220 (220) -
Cash provided by (used in) changes in operating assets
and liabilities
Accounts receivable 3,939 78 270 4,287
Intercompany receivables (net) (48) 362 (314) -
Inventories 401 176 186 763
Other current assets 122 12 134
Other assets 70 (16) 74 128
Accounts payable (1,420) (1,420)
Accrued expenses (87) 14 72 (1)
Accrued interest expense (2,949) (2,949)
Income taxes payable 1,075 (243) (46) 786
-----------------------------------------------------------------------
Net cash provided by operating activities 9,061 73 449 - 9,583
-----------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 13 13
Purchases of property and equipment (4,465) (87) (4,552)
Sale of short-term investments 5 5
Capital distributions from partnership 43 43
-----------------------------------------------------------------------
Net cash used in investing activities (4,404) - (87) - (4,491)
-----------------------------------------------------------------------
FINANCING ACTIVITIES:
Principle payments of long-term debt (9,997) (88) (10,085)
Proceeds from issuance of long-term debt 151 151
Recapitalization costs (13) (13)
Financing fees and expenses (111) (111)
-----------------------------------------------------------------------
Net cash used in financing activities (9,970) - (88) - (10,058)
-----------------------------------------------------------------------
Effect of exchange rate changes (115) (104) (219)
Unrealized loss on securities (6) (6)
-----------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (5,434) 73 170 - (5,191)
Beginning balance, cash and cash equivalents 32,245 80 119 32,444
-----------------------------------------------------------------------
Ending balance, cash and cash equivalents $ 26,811 $ 153 $ 289 $ - $ 27,253
=======================================================================
Supplemental disclosures of cash flow information:
Cash received during the year for interest income $ 404 $ 404
=======================================================================
Cash paid during the year for:
Interest expense $ 10,391 $ 10,391
=======================================================================
Income taxes $ 1,865 $ 1,865
=======================================================================
</TABLE>
13
<PAGE>
ST. JOHN INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Amounts in thousands)
OPERATING ACTIVITIES:
Net Income $ 5,986 $ (325) $ (34) $ 197 $ 5,824
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,239 66 17 3,322
Loss on disposal of property and equipment (102) 2 (100)
Partnership losses 78 78
Minority interest in loss of consolidated subsidiaries - (11) (11)
Equity in loss of consolidated subsidiaries 186 (186) -
Cash provided by (used in) changes in operating assets
and liabilities
Accounts receivable 8,298 197 246 8,741
Intercompany receivables (net) (1,553) 1,725 (172) -
Inventories (450) 406 62 18
Other current assets (389) 7 (382)
Other assets (47) 52 5
Accounts payable (2,161) (2,161)
Accrued expenses (534) 271 88 (175)
Income taxes payable 4,187 (226) (108) 3,853
---------------------------------------------------------------------------
Net cash provided by operating activities 16,738 2,123 151 - 19,012
---------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 120 120
Purchases of property and equipment (4,379) (1,049) (19) (5,447)
Purchase of short-term investments (3) (3)
Capital distributions from partnership 22 22
---------------------------------------------------------------------------
Net cash used in investing activities (4,240) (1,049) (19) - (5,308)
---------------------------------------------------------------------------
FINANCING ACTIVITIES:
Principle payments of long-term debt - (58) (58)
Issuance of common stock 43 43
Cash dividends paid (415) (415)
---------------------------------------------------------------------------
Net cash used in financing activities (372) - (58) - (430)
---------------------------------------------------------------------------
Effect of exchange rate changes (85) (30) (115)
Unrealized loss on securities (2) (2)
---------------------------------------------------------------------------
Net increase in cash and cash equivalents 12,039 1,074 44 - 13,157
Beginning balance, cash and cash equivalents 14,096 155 86 14,337
---------------------------------------------------------------------------
Ending balance, cash and cash equivalents $ 26,135 $ 1,229 $ 130 $ - $ 27,494
===========================================================================
Supplemental disclosures of cash flow information:
Cash received during the year for interest income $ 94 $ 94
===========================================================================
Cash paid during the year for:
Interest expense $ 3 $ 3
===========================================================================
Income taxes $ 167 $ 167
===========================================================================
</TABLE>
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table is derived from the Company's Consolidated Statements
of Operations and sets forth, for the periods indicated, the results of
operations as a percentage of net sales:
<TABLE>
<CAPTION>
Percent of Net Sales
Thirteen Weeks Ended
("First Quarter")
---------------------------------
January 30, January 31,
2000 1999
-------------- -------------
<S> <C> <C>
Net sales............................................................ 100.0% 100.0%
Cost of sales........................................................ 44.0 46.1
------------- -------------
Gross profit......................................................... 56.0 53.9
Selling, general and administrative expenses......................... 38.2 41.1
------------- -------------
Operating income..................................................... 17.8 12.8
Interest expense..................................................... 10.3 --
Other income......................................................... 0.5 0.6
------------- -------------
Income before income taxes........................................... 8.0 13.4
Income taxes......................................................... 3.3 5.5
------------- -------------
Net income........................................................... 4.7% 7.9%
============= =============
</TABLE>
15
<PAGE>
First quarter fiscal 2000 compared to first quarter fiscal 1999
Net sales for the first quarter of fiscal 2000 increased by $6,200,000, or
8.4% over the first quarter of fiscal 1999. This increase was principally
attributable to (i) an increase in sales by company-owned retail stores of
approximately $5,838,000, due in part to the expansion of the Hawaii boutique
which was completed in December 1999, increased sales for the boutiques located
in Las Vegas, New York City and Palm Desert, California, and the addition of one
retail boutique and one outlet store since the beginning of fiscal 2000 and (ii)
an increase in sales to existing domestic retail customers of approximately
$2,835,000, including an increase of $1,478,000 in sales of the Sport product
line to these customers. These increases in net sales were offset primarily 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, and also by a decrease in international sales. Net sales
increased primarily as a result of increased unit sales of various product
lines.
Gross profit for the first quarter of fiscal 2000 increased by $4,998,000,
or 12.6% as compared with the first quarter of fiscal 1999, and increased as a
percentage of net sales to 56.0% from 53.9%. This increase in the gross profit
margin was primarily due to an increase in the gross margin for the Knitwear and
Sport product lines reflecting an improvement in manufacturing efficiency from
the first quarter of fiscal 1999.
Selling, general and administrative expenses for the first quarter of
fiscal 2000 increased by $256,000, or 0.8% over the first quarter of fiscal
1999, and decreased as a percentage of net sales to 38.2% from 41.1%. This
decrease was primarily the result of a decrease in selling expenses due to a
reduction in the costs of promoting and marketing the Company's product lines to
its major customers and a decrease in operating costs 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.
Operating income for the first quarter of fiscal 2000 increased by
$4,742,000, or 50.3% over the first quarter of fiscal 1999. Operating income as
percentage of net sales increased to 17.8% from 12.8% during the same period.
This increase in the operating income as a percentage of net sales was due to an
increase in the gross profit margin and a decrease in selling, general and
administrative expenses as a percentage of net sales.
Interest expense for the first quarter of fiscal 2000 increased by
$8,228,000 over the first 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.
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 three months of fiscal 2000, cash provided by
operating activities was $9,583,000. Cash provided by operating activities was
primarily generated by net income and a decrease in accounts receivable, while
cash used in operating activities was primarily used to fund a decrease in
accrued interest expense and accounts payable. Cash
16
<PAGE>
used in investing activities was $4,491,000 during the first three months of
fiscal 2000. The principal use of cash in investing activities was for 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 $10,058,000 during the first three months
of fiscal 2000, primarily due to a prepayment made on the senior secured debt of
$10 million.
The Company anticipates purchasing property and equipment of approximately
$17.0 million during the remainder of fiscal 2000. The estimated $17.0 million
will be used principally for upgrades to the Company's computer systems, the
purchase of electronic knitting machines, the expansion of the boutique location
in Palm Desert, California and the construction of leasehold improvements for
three additional retail boutiques.
As of January 30, 2000, the Company had approximately $78,946,000 in
working capital and $27,273,000 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 2.0% (8.5% at January 30, 2000) or a Eurodollar rate plus
3.0%. The availability of funds under the Revolving Commitment is subject to the
Company's continued compliance with certain covenants, including a covenant that
sets the maximum amount the Company can spend annually on the acquisition of
fixed or capital assets, and certain financial covenants, including a maximum
leverage ratio, a minimum fixed charge coverage ratio and a minimum interest
expense coverage ratio. As of January 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 $9,899,000 to $279,986,000 at January 30,
2000. The Company's outstanding debt is comprised of bank borrowings of
$181,290,000 and senior subordinated notes of $98,696,000.
The Company's primary ongoing cash requirements will be for debt service
and capital expenditures. The Company's debt service requirements consist
primarily of principal and interest payments on bank borrowings and interest on
its senior subordinated notes. The Company believes it will be able to finance
its debt service and capital expenditure requirements for the foreseeable future
with internally generated funds and availability under the Company's revolving
credit facility.
St. John Knits International, Incorporated must rely on distributions,
loans and other intercompany cash flows from its affiliates and subsidiaries to
generate the funds necessary to satisfy the repayment of its outstanding loans.
Except as may be required under applicable law, there are no material
restrictions on distributions to the Company from the Company's wholly owned
subsidiaries that have guaranteed the Company's payment obligations under its
senior subordinated notes. See footnote 8 to the Company's unaudited
consolidated financial statements contained herein.
The Company paid cash dividends of approximately $1,245,000 during fiscal
1999 prior to the mergers. The Company's ability to pay dividends is restricted
by the terms of the Company's senior secured credit facilities and senior
subordinated note indenture. The Company does not anticipate the payment of any
cash dividends on its common stock in the future.
The Company's EBITDA as defined in its credit agreement for its senior
secured credit facilities was $17,814,986 and $13,036,945 for the first three
months 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.
17
<PAGE>
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 July 31, 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 March 10, 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, (iii)
the Company's anticipation that it will not pay cash dividends on its common
stock in the future and (iv) the Company's expectation that the final settlement
in the Securities Fraud Class Action litigation (described below) will receive
final approval in the spring of 2000.
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.
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
18
<PAGE>
effects of such fluctuations, under established procedures and controls, the
Company enters into forward contracts. These contractual arrangements are placed
with a major financial institution. The Company does not hold derivative
financial instruments for trading.
The primary business objective of this hedging program is to secure the
anticipated profit on sales denominated in foreign currencies. Forward
contracts are typically entered into at the time the Company prices its
products. The Company's primary exposure to foreign currency exchange rate
fluctuation is on the Euro and the British pound. At January 30, 2000, the
Company had contracts maturing through February 29, 2000 to sell 900,000 Euros
and 95,000 British pounds at a rate of 1.06 U.S. dollars to the Euro and 1.58
U.S. dollars to the British pound.
The Company is exposed to market risks related to fluctuations in interest
rates on its variable rate debt which consists of bank borrowings related to the
mergers. The Company also holds fixed rate subordinated notes. The Company has
entered into an interest rate collar agreement with a major financial
institution to limit its exposure on the variable rate debt. The agreement
became effective on October 4, 1999 and will expire on July 7, 2002. The
agreement sets a cap rate for libor contracts at 8.5%. The agreement also sets
a minimum rate of 5.37%. The agreement covers $45 million of the Company's
variable rate debt.
For fixed rate debt, changes in interest rates generally affect the fair
market value, but not earnings or cash flows. Conversely, for variable rate
debt, changes in interest rates generally do not influence fair market value,
but do affect future earnings and cash flows. The Company has managed its
exposure to changes in interest rates by issuing part of its debt with a fixed
interest rate. Holding the variable rate debt balance constant, each one
percentage point increase in interest rates occurring on the first day of the
year would result in an increase in interest expense for the coming year of
approximately $1.8 million.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to certain legal proceedings, which are described in
the Company's Annual Report on Form 10-K for the fiscal year ended October 31,
1999 filed with the Securities and Exchange Commission on January 28, 2000.
During the first quarter of fiscal 2000, the following developments occurred
with respect to certain of these legal proceedings:
Securities Fraud Class Action
The settlement which was reached on January 23, 2000, between the Company
and Binary Traders, Inc. has been preliminarily approved by the court. Final
approval is expected to occur in the spring of 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
None
20
<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.
March 10, 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)
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibit Numbered Page
------ ---------------------- -------------
<S> <C> <C>
27.1 Financial Data Schedule
</TABLE>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-30-2000
<CASH> 27,253
<SECURITIES> 20
<RECEIVABLES> 29,276
<ALLOWANCES> 0
<INVENTORY> 42,759
<CURRENT-ASSETS> 109,485
<PP&E> 122,589
<DEPRECIATION> 51,678
<TOTAL-ASSETS> 196,851
<CURRENT-LIABILITIES> 30,540
<BONDS> 0
25,000
0
<COMMON> 65
<OTHER-SE> (134,491)
<TOTAL-LIABILITY-AND-EQUITY> 196,851
<SALES> 79,588
<TOTAL-REVENUES> 79,588
<CGS> 35,030
<TOTAL-COSTS> 35,030
<OTHER-EXPENSES> 30,391
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,231
<INCOME-PRETAX> 6,368
<INCOME-TAX> 2,628
<INCOME-CONTINUING> 3,740
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,740
<EPS-BASIC> 0.42
<EPS-DILUTED> 0.42
</TABLE>
