<PAGE>
CONFORMED COPY
================================================================================
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 28, 1996
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 1-11752
ST. JOHN KNITS, INC.
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 95-2245070
(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification Number)
17422 DERIAN AVENUE, IRVINE, CALIFORNIA 92614
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (714) 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, no par value, was
16,584,232 shares as of September 3, 1996.
================================================================================
No. of Pages: __
Exhibit Index located at page 11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ST. JOHN KNITS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 28, OCTOBER 29,
1996 1995
------------- -----------
<S> <C> <C>
(unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents.............................................. $ 10,504,499 $ 8,711,613
Investments............................................................ 6,690,328 6,399,692
Accounts receivable, net............................................... 19,263,480 21,124,306
Inventories............................................................ 21,716,042 14,909,042
Deferred income tax benefit............................................ 3,774,291 3,454,291
Other.................................................................. 717,029 247,236
------------ -----------
Total current assets................................................ 62,665,669 54,846,180
------------ -----------
Property and equipment:
Machinery and equipment................................................ 29,015,923 23,614,437
Leasehold improvements................................................. 21,246,838 19,132,496
Furniture and fixtures................................................. 4,046,930 3,756,202
Construction in progress............................................... 6,263,518 350,950
------------ -----------
60,573,209 46,854,085
Less--Accumulated depreciation and amortization........................ 21,946,765 17,245,028
------------ -----------
38,626,444 29,609,057
------------ -----------
Other assets............................................................ 2,239,694 1,517,483
------------ -----------
$103,531,807 $85,972,720
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable...................................................... $ 4,281,349 $ 4,480,794
Accrued expenses...................................................... 9,803,637 9,162,096
Income taxes payable.................................................. 982,270 3,073,125
------------ -----------
Total current liabilities.......................................... 15,067,256 16,716,015
------------ -----------
Deferred income tax liability......................................... 29,465 29,465
------------ -----------
Shareholders' equity:
Preferred Stock, no par value: Authorized--2,000,000 shares, issued
and outstanding--none................................................. -- --
Common Stock, no par value: Authorized--40,000,000 shares, issued
and outstanding--16,580,498 and 16,468,734 shares, respectively....... 502,799 502,799
Additional paid-in capital.............................................. 17,648,397 15,687,393
Retained earnings....................................................... 70,283,890 53,037,048
------------ -----------
88,435,086 69,227,240
------------ -----------
$103,531,807 $85,972,720
============ ===========
</TABLE>
See accompanying notes.
2
<PAGE>
ST. JOHN KNITS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------- ---------------------------
July 28, July 30, July 28, July 30,
1996 1995 1996 1995
----------- ----------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales..................................... $46,524,557 $36,953,075 $141,811,752 $113,876,565
Cost of sales................................. 20,039,702 17,156,848 63,109,305 53,041,814
----------- ----------- ------------ ------------
Gross profit.................................. 26,484,855 19,796,227 78,702,447 60,834,751
Selling, general and administrative expenses.. 16,344,693 12,632,312 47,853,311 38,269,560
----------- ----------- ------------ ------------
Operating income.............................. 10,140,162 7,163,915 30,849,136 22,565,191
Other income.................................. 255,651 269,644 1,100,971 559,238
----------- ----------- ------------ ------------
Income before income taxes.................... 10,395,813 7,433,559 31,950,107 23,124,429
Income taxes.................................. 4,381,162 3,132,762 13,464,893 9,745,444
----------- ----------- ------------ ------------
Net income.................................... $ 6,014,651 $ 4,300,797 $ 18,485,214 $ 13,378,985
=========== =========== ============ ============
Net income per share.......................... $ 0.35 $ 0.26 $ 1.08 $ 0.81
=========== =========== ============ ============
Dividends per share........................... $ 0.025 $ 0.025 $ 0.075 $ 0.075
=========== =========== ============ ============
Weighted average shares outstanding........... 17,061,690 16,424,342 16,983,950 16,423,168
=========== =========== ============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
ST. JOHN KNITS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------------------
JULY 28, 1996 JULY 30, 1995
---------------- ----------------
<S> <C> <C>
(unaudited)
Cash flows from operating activities:
Net income............................................................. $ 18,485,214 $ 13,378,985
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 5,107,923 3,858,799
Deferred income tax benefit......................................... (320,000) (800,000)
Loss on sale of property and equipment.............................. 14,765 155,520
Partnership losses.................................................. 69,398 109,700
Decrease in accounts receivable..................................... 1,860,826 3,091,560
Increase in inventories............................................. (6,807,000) (5,377,050)
Increase in other current assets.................................... (469,793) (135,481)
(Increase) decrease in other assets................................. (176,761) 18,794
Decrease in accounts payable........................................ (199,445) (1,078,099)
Increase in accrued expenses........................................ 638,747 1,735,453
Decrease in income taxes payable.................................... (2,090,855) (312,565)
---------------- ---------------
Net cash provided by operating activities....................... 16,113,019 14,645,616
---------------- ---------------
Cash flows from investing activities:
Proceeds from sale of property and equipment........................ 60,294 39,867
Purchase of property and equipment.................................. (14,200,369) (11,541,158)
Net purchase of short-term investments.............................. (290,636) (160,132)
Net capital (contributions to) distributions from partnership....... (614,848) 30,000
---------------- ---------------
Net cash used in investing activities........................... (15,045,559) (11,631,423)
---------------- ---------------
Cash flows from financing activities:
Issuance of common stock............................................. 1,961,004 571,448
Dividends paid....................................................... (1,235,578) (820,743)
---------------- --------------
Net cash provided by (used in) financing activities............. 725,426 (249,295)
---------------- --------------
Net increase in cash and cash equivalents................................ 1,792,886 2,764,898
Beginning balance, cash and cash equivalents............................. 8,711,613 8,855,445
---------------- ---------------
Ending balance, cash and cash equivalents................................ $ 10,504,499 $ 11,620,343
================ ===============
Supplemental disclosures of cash flow information:
Cash received during the thirty-nine weeks for interest income...... $ 580,459 $ 427,903
================ ================
Cash paid during the thirty-nine weeks for:
Interest expense................................................ $ -- $ 273
================ ================
Income taxes........................................................ $ 14,875,994 $ 10,713,657
================ ================
</TABLE>
See accompanying notes.
4
<PAGE>
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of St.
John Knits, Inc. and its subsidiaries (collectively referred to herein as
"the Company") reflect all adjustments (which include only normal recurring
adjustments) considered necessary to present fairly the financial position,
results of operations and cash flows of the Company for the periods
presented. It is suggested that the accompanying unaudited consolidated
financial statements and footnotes thereto be read in conjunction with the
financial statements and footnotes included in the Company's Annual Report
on Form 10-K for the year ended October 29, 1995 as filed with the
Securities and Exchange Commission on January 26, 1996.
The results of operations for the periods presented are not
necessarily indicative of the operating results that may be expected for
the year ending November 3, 1996.
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 the Company owned retail
boutiques. 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 28, 1996
and July 30, 1995.
3. DIVIDENDS
The Company declared a quarterly dividend of $0.025 per share (as
adjusted for the stock split discussed below) on May 31, 1996 for all
shareholders of record on July 3, 1996. The dividend was paid on August 2,
1996. On September 3, 1996, the Company declared another quarterly cash
dividend of $0.025 per share to be paid on November 8, 1996 to shareholders
of record on October 3, 1996.
4. STOCK SPLIT
On March 12, 1996, the Company declared a 2-for-1 stock split for all
shareholders of record on April 8, 1996. Certificates evidencing the
additional shares were issued on May 6, 1996. All share and per share data
have been adjusted to reflect the stock split.
5. EARNINGS PER SHARE
Beginning in the second quarter of fiscal year 1996, the weighted
average shares have been increased to reflect stock options that are issued
and outstanding.
5
<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
--------------------
Thirteen Weeks Ended Thirty-Nine Weeks Ended
("Third Quarter") ("Nine Months")
-------------------- --------------------------
July 28, July 30, July 28, July 30,
1996 1995 1996 1995
----------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 43.1 46.4 44.5 46.6
----- ----- ----- -----
Gross profit.................................. 56.9 53.6 55.5 53.4
Selling, general and administrative expenses.. 35.1 34.2 33.7 33.6
----- ----- ----- -----
Operating income.............................. 21.8 19.4 21.8 19.8
Other income.................................. 0.5 0.7 0.8 0.5
----- ----- ----- -----
Income before income taxes.................... 22.3 20.1 22.6 20.3
Income taxes.................................. 9.4 8.5 9.5 8.6
----- ----- ----- -----
Net income.................................... 12.9% 11.6% 13.1% 11.7%
===== ===== ===== =====
</TABLE>
6
<PAGE>
THIRD QUARTER FISCAL 1996 COMPARED TO THIRD QUARTER FISCAL 1995
Net sales for the third quarter of fiscal 1996 increased by $9,571,000, or
25.9% over the third quarter of fiscal 1995. This increase was principally
attributable to (i) an increase in sales to existing domestic retail customers
of approximately $5,815,000, (ii) an increase in sales by Company owned retail
stores of approximately $2,891,000, mainly due to the addition of three retail
boutiques and two retail outlet stores since the beginning of the third quarter
of fiscal 1995 and (iii) an increase in sales to international retail customers
of $865,000. Net sales increased primarily as a result of increased unit sales
of various product lines.
Gross profit for the third quarter of fiscal 1996 increased by $6,689,000,
or 33.8% as compared with the third quarter of fiscal 1995, and increased as a
percentage of net sales to 56.9% from 53.6%. This increase in the gross profit
margin was due to (i) an increase in the number of garments being produced and
sold without a corresponding increase in the production costs, due in part to
the fixed nature of some costs, and (ii) an increase in the gross profit margin
recorded for the Retail Division.
Selling, general and administrative expenses for the third quarter of
fiscal 1996 increased by $3,712,000, or 29.4% over the third quarter of fiscal
1995, and increased as a percentage of net sales to 35.1% from 34.2%. This
increase in selling, general and administrative expenses as a percentage of net
sales was primarily attributable to costs incurred in connection with the
acquisition and construction of various new facilities.
Operating income for the third quarter of fiscal 1996 increased by
$2,976,000, or 41.5% over the third quarter of fiscal 1995. Operating income as
a percentage of net sales increased to 21.8% from 19.4% during the same period.
This increase in the operating income as a percentage of net sales was due to
the increase in the gross profit margin which was partially offset by the
increase in selling, general and administrative expenses as a percentage of net
sales.
FIRST NINE MONTHS FISCAL 1996 COMPARED TO FIRST NINE MONTHS FISCAL 1995
Net sales for the first nine months of fiscal 1996 increased by
$27,935,000, or 24.5% over the first nine months of fiscal 1995. This increase
was principally attributable to (i) an increase in sales to existing domestic
retail customers of approximately $15,361,000, (ii) an increase in sales by
Company owned retail stores of approximately $9,225,000, mainly due to the
addition of three retail boutiques and two retail outlet stores since the
beginning of fiscal 1995 and (iii) an increase in sales to international retail
customers of $3,349,000. Net sales increased primarily as a result of increased
unit sales of various product lines.
Gross profit for the first nine months of fiscal 1996 increased by
$17,868,000, or 29.4% as compared with the first nine months of fiscal 1995, and
increased as a percentage of net sales to 55.5% from 53.4%. This increase in the
gross profit margin was due to (i) an increase in the number of garments being
produced and sold without a corresponding increase in the production costs, due
in part to the fixed nature of some costs, and (ii) an increase in the gross
profit margin recorded for the Retail Division.
Selling, general and administrative expenses for the first nine months of
fiscal 1996 increased by $9,584,000, or 25.0% over the first nine months of
fiscal 1995, and increased as a percentage of net sales to 33.7% from 33.6%.
This increase in selling, general and administrative expenses as a percentage of
net sales was primarily attributable to the higher selling, general and
administrative expenses as a percentage of net sales reported by the Retail
Division.
7
<PAGE>
Operating income for the first nine months of fiscal 1996 increased by
$8,284,000, or 36.7% over the first nine months of fiscal 1995. Operating income
as a percentage of net sales increased to 21.8% from 19.8% 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 which was partially offset by the
increase in selling, general and administrative expenses as a percentage of net
sales.
Other income for the first nine months of fiscal 1996 increased by $542,000
as compared with the first nine months of fiscal 1995, and increased as a
percentage of net sales to 0.8% from 0.5%. This increase was primarily due to
the receipt of a workers' compensation insurance dividend of $316,000 which
related to the policy period ended December 31, 1994. In addition, the Company
reported higher interest income due to the increase in its invested cash
balances.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are to fund its working capital
needs, primarily inventory and accounts receivable, and for the purchase of
property and equipment. During the first nine months of fiscal 1996, cash
provided by operating activities was $16,113,000. Cash provided by operating
activities was primarily generated by net income, depreciation and amortization,
a decrease in accounts receivable and an increase in accrued expenses, while
cash used in operating activities was primarily used to fund the increase in
inventories and the decrease in taxes payable. Cash used in investing activities
was $15,046,000 during the first nine months of fiscal 1996. The principal use
of cash in investing activities was for the purchase of 32 computerized knitting
machines, the purchase of 3.8 acres of land which included a 35,000 sq. ft.
building to be used for production and storage, the purchase of 1.8 acres of
land which included a 37,000 sq. ft. building to be used for design and
manufacturing, the construction of leasehold improvements to increase the size
of the retail boutique located in New York City and the construction of
leasehold improvements for the Beverly Hills boutique.
The Company anticipates purchasing property and equipment of approximately
$6,500,000 during the remainder of fiscal 1996. The estimated $6,500,000 will be
used principally for the construction of a new design center on the recently
purchased 1.8 acres, the purchase of land and a building to replace a current
manufacturing facility in Los Angeles, the completion of the expansion of an
existing retail boutique located in New York City and the construction of a
20,000 sq. ft. manufacturing facility on the recently purchased 3.8 acres.
In addition, the Company has entered into an agreement to purchase certain
assets and technologies from one of its suppliers. The assets and technologies
are used in the design and production of certain types of trim currently used on
garments produced by the Company. The purchase price is approximately
$2,600,000, with $1,850,000 due at the closing and the remainder to be paid
within 12 months after the closing. It is anticipated that this transaction will
be closed during the fourth quarter of fiscal 1996.
As of July 28, 1996, the Company had approximately $47,598,000 in working
capital and $17,195,000 in cash and marketable securities. The Company's
principal source of liquidity is internally generated funds. The Company also
has a $15,000,000 bank line of credit ("Line of Credit") which expires on March
1, 1998. The Line of Credit is unsecured and borrowings thereunder bear interest
at the Company's choice of the bank's reference rate or an offshore rate plus
1.5%. As of July 28, 1996, no amounts were outstanding under the Line of
Credit. The Company invests its excess funds primarily in a money market fund,
investment grade commercial paper, adjustable rate tax deferred municipal
obligations collateralized by letters of credit issued by financial institutions
and tax exempt municipal bonds.
8
<PAGE>
The Company believes it will be able to finance its working capital and
capital expenditure requirements on both a short-term and long-term basis with
internally generated funds. However, the Company has entered into an agreement
with its principal lender dated as of April 26, 1996 to finance up to $8 million
related to the acquisition of certain property and the construction of
improvements thereon. The agreement provides for borrowing of up to $8 million
on a revolving basis through September 1, 1997. At that time, any unpaid balance
will be converted to a 10 year fully amortized term loan expiring on September
1, 2007. The Loan is unsecured and borrowings thereunder bear interest at the
Company's choice of the bank's reference rate or an offshore rate plus 1.5%
during the revolving period and at the bank's reference rate plus 0.25% or an
offshore rate plus 1.625% during the term loan.
The Company declared a quarterly cash dividend of $.025 per share (as
adjusted to reflect the stock split) on May 31, 1996 which was paid on August 2,
1996 to shareholders of record on July 3, 1996. On September 3, 1996, the
Company declared another quarterly cash dividend of $.025 per share to be paid
on November 8, 1996 to shareholders of record on October 3, 1996. Future
dividends by the Company remain subject to limitations under applicable law and
other factors the Board of Directors deems relevant, including results of
operations, financial condition and capital requirements.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
See "Exhibit Index."
(b) Reports on Form 8-K.
None.
9
<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 3, 1996 ST. JOHN KNITS, INC.
By: /s/Robert E. Gray
---------------------------------
Robert E. 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)
10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBIT NUMBERED PAGE
------ ---------------------- -------------
<S> <C> <C>
10.1 Employment Agreement dated July 22, 1996 between the
Company and David Frankel.
10.2 Employment Agreement dated July 8, 1996 between the
Company and Cindy Sumner.
10.3 Consulting Agreement dated as of April 24, 1996 between the
Company and Robert C. Davis.
27.1 Financial Data Schedule.
</TABLE>
11
<PAGE>
EXHIBIT 10.1
[LETTERHEAD OF ST. JOHN KNITS, INC.]
July 22, 1996
Mr. David Frankel
3002 Third Street, Apt. 207
Santa Monica, CA 90405
Dear David:
On behalf of St. John Knits, Inc. ("St. John" or the "Company"), I am pleased to
confirm our offer of employment as Executive Vice President of St. John Knits.
The terms and conditions of your employment are as follows:
(1) As Executive Vice President of St. John, you will be responsible for sales,
marketing, and expansion of St. John. These responsibilities may be changed
from time to time as appropriate. Initially, you will report to Kelly Gray,
President and Bob Gray, Chairman.
(2) Your starting base salary will be $20,833.34 per month or $250,000.00 on an
annualized basis, less applicable withholdings and deductions, paid on the
Company's regular payroll dates. Your salary will be reviewed from time to time
and may be adjusted (up or down) at the Company's discretion in light of the
Company's performance, your performance, market conditions and other conditions
deemed relevant by the Company. You are also eligible for a monthly expense
amount, performance or discretionary bonus, and stock options of up to 50,000
shares by the Company. Any such stock options will be covered and subject to a
separate agreement. See attached Amendment of Understanding-Stock Options. The
Company will pay you a moving allowance of $12,500.00.
(3) In addition to your base compensation and specified perquisites, you will
also be eligible for 2 weeks vacation for the first year, holidays, health plan
and other employee benefits, all under the terms of the then-existing Company
policies, commensurate with other employees at the same level as you.
(4) In accordance with our policies and state and federal law, this offer of
employment is contingent upon your successful completion of all requirements to
establish the legal right to work in the United States.
<PAGE>
-2-
(5) Your employment is for an unspecified term and is to continue only at the
mutual will of both you and the Company. This means that either you or the
Company may terminate the employment relationship at will at any time, for any
reason, with or without cause or notice. This at-will aspect of your employment,
which includes the right of the Company to demote, transfer or otherwise
discipline with or without cause or notice, may not be modified, amended or
rescinded except by an individual written agreement to the contrary signed by
both you and the Chairman of the Company.
(6) You will be reviewed within the first three (3) months and should the
Company elect to terminate your employment without cause at or before that time,
the Company will continue to pay your base salary (but not any other
compensation or benefits) on its regular payroll dates for a period of one
hundred eighty (180) days. If you are terminated any time in the first year, you
will receive six (6) months severance pay.
(7) You will be required to observe St. John's personnel and business policies
and procedures as they are in effect from time to time. In the event of any
conflict, the terms of this letter will control.
(8) St. John owns certain trade secrets and other confidential and/or
proprietary information. Except as required in the performance of your duties,
you will not at any time during or after your employment use, disclose or
disseminate any such information relating to the Company, or its products,
methods or procedures. This includes the list of names of suppliers and garment
contractors who have relationships with St. John, and other particularized
information concerning the products, finances, processes, material preferences,
fabrics, designs, material sources, pricing information, production schedules,
marketing strategies, merchandising strategies, and order forms. You shall
deliver to the Company any and all copies of confidential information, or other
Company property, upon the termination of the employment relationship, or at any
other time upon the Company's request.
(9) To the fullest extent allowed by law, any controversy, claim or dispute
between you and the Company (and/or any of its directors, officers, employees or
agents) relating to or arising out of your employment or the cessation of your
employment will be submitted to final and binding arbitration in Orange County,
California, for determination in accordance with the National Rules for the
Resolution of Employment Disputes of the American
<PAGE>
-3-
Arbitration Association as the exculsive remedy for such controversy, claim or
dispute. Possible disputes covered by the above include (but are not limited to)
wage, contract, discrimination, and other employment-related claims under laws
known as Title VII of the Civil Rights Act, the California Fair Employment and
Housing Act, Americans With Disabilities Act, Age Discrimination in Employment
Act, and any other statutes or laws relating to an employee's relationship with
his employer. However, claims for workers' compensation benefits and
unemployment insurance are not covered by this arbitration agreement, and such
claims may be presented by you to the appropriate court or state agency as
provided by California law. Judgment on the award issued by the arbitrator may
be entered in any court having jurisdiction thereof.
(10) This letter and the terms and conditions of employment contained herein
supersede and replace any prior understandings or discussions between you and
the Company regarding your employment. This letter sets forth the complete
agreement between you and the Company regarding your employment, and may only be
amended by a writing signed by you and the Chairman.
(11) We look forward to your starting work at the Company Headquarters in
Irvine on August 5, 1996.
Please sign, date and return the enclosed copy of this letter to me for our
files to acknowledge your agreement with the above.
Sincerely,
ST. JOHN
/s/ BOB GRAY
- ------------
Bob Gray
Chairman
I ACCEPT ST JOHN'S OFFER OF EMPLOYMENT UPON THE TERMS AND CONDITIONS SET FORTH
ABOVE.
Dated: 7/29 , 1996. /s/ DAVID FRANKEL
-------- ---------------------
David Frankel
<PAGE>
-4-
AMENDMENT OF UNDERSTANDING - STOCK OPTIONS
<TABLE>
<C> <S>
TOTAL OPTIONS 50,000 SHARES
OPTIONS TO BE ISSUED 6 MONTHS AFTER DATE OF EMPLOYMENT
SHARE PRICE THE PRICE AT THE DATE OF ISSUANCE
VESTING PERIOD 1/3 EACH YEAR FOR 3 YEARS COMMENCING
2/1/97.
</TABLE>
SHOULD EMPLOYMENT BE TERMINATED BY EITHER PARTY IN THE FIRST SIX (6) MONTHS, THE
STOCK OPTIONS ARE AUTOMATICALLY NULL AND VOID.
/s/ BOB GRAY /s/ DAVID FRANKEL
- -------------------------------- --------------------------------
BOB GRAY DAVID FRANKEL
<PAGE>
EXHIBIT 10.2
[LETTERHEAD OF ST. JOHN KNITS, INC.]
July 8, 1996
Mrs. Cindy Sumner
176 Essay
Newport Coast, CA 92657
Dear Cindy:
On behalf of St. John Knits, Inc. ("St. John" or the "Company"), I am pleased to
confirm our offer of employment as Senior Vice President of Operations. The
terms and conditions of your employment are as follows:
(1) As Senior Vice President of Operations, you will generally be responsible
for operations at our headquarters. These responsibilities may be changed from
time to time as appropriate. Initially, you will report to Bob Gray, Chairman.
(2) Your starting base salary will be $14,583.34 per month or $175,000.00 on an
annualized basis, less applicable withholdings and deductions, paid on the
Company's regular payroll dates. Your salary will be reviewed from time to time
and may be adjusted (up or down) at the Company's discretion in light of the
Company's performance, your performance, market conditions and other conditions
deemed relevant by the Company. You are also eligible for a monthly expense
amount, performance or discretionary bonus, and stock options at discretion of
Company.
(3) In addition to your base compensation and specified perquisites, you will
also be eligible for 2 weeks vacation for the first year, holidays, sick pay,
and other employee benefits, all under the terms of the then-existing Company
policies, commensurate with other employees at the same level as you. Should you
not be covered by your husband's health insurance policy, you will be eligible
for coverage under the St. John policies. A clothing allowance of $2,000.00
immediately, $5,000.00 for Fall '96 and $5,000.00 per year subsequently.
(4) In accordance with our policies and state and federal law, this offer of
employment is contingent upon your successful completion of all requirements to
establish the legal right to work in the United States.
<PAGE>
-2-
(5) Your employment is for an unspecified term and is to continue only at the
mutual will of both you and the Company. This means that either you or the
Company may terminate the employment relationship at will at any time, for any
reason, with or without cause or notice. This at-will aspect of your employment,
which includes the right of the Company to demote, transfer or otherwise
discipline with or without cause or notice, may not be modified, amended or
rescinded except by an individual written agreement to the contrary signed by
both you and the Chairman of the Company.
(6) Nevertheless, if St. John elects to terminate your employment without cause
during the first twelve (12) months of service, the Company will continue to pay
your base salary (but not any other compensation or benefits) on its regular
payroll dates for a period of 120 days.
(7) You will be required to observe St. John's personnel and business policies
and procedures as they are in effect from time to time. In the event of any
conflict, the terms of this letter will control.
(8) St. John owns certain trade secrets and other confidential and/or
proprietary information. Except as required in the performance of your duties,
you will not at any time during or after your employment use, disclose or
disseminate any such information relating to the Company, or its products,
methods or procedures. This includes the list of names of suppliers and garment
contractors who have relationships with St. John, and other particularized
information concerning the products, finances, processes, material preferences,
fabrics, designs, material sources, pricing information, production schedules,
marketing strategies, merchandising strategies, and order forms. You shall
deliver to the Company any and all copies of confidential information, or other
Company property, upon the termination of the employment relationship, or at any
other time upon the Company's request.
(9) To the fullest extent allowed by law, any controversy, claim or dispute
between you and the Company (and/or any of its directors, officers, employees or
agents) relating to or arising out of your employment or the cessation of your
employment will be submitted to final and binding arbitration in Orange County,
California, for determination in accordance with the Employment Dispute
Resolution Rules of the American Arbitration Association as the exclusive remedy
for such controversy, claim or dispute. Possible disputes covered by the above
include (but are not limited
<PAGE>
-3-
to) wage, contract, discrimination, and other employment-related claims under
laws known as Title VII of the Civil Rights Act, the California Fair Employment
and Housing Act, Americans With Disabilities Act, Age Discrimination in
Employment Act, and any other statutes or laws relating to an employee's
relationship with her employer. However, claims for workers' compensation
benefits and unemployment insurance are not covered by this arbitration
agreement, and such claims may be presented by you to the appropriate court or
state agency as provided by California law. Judgment on the award issued by the
arbitrator may be entered in any court having jurisdiction thereof.
(10) This letter and the terms and conditions of employment contained herein
supersede and replace any prior understandings or discussions between you and
the Company regarding your employment. This letter sets forth the complete
agreement between you and the Company regarding your employment, and may only be
amended by a writing signed by you and the Chairman.
(11) We look forward to your starting work at the Company Headquarters in
Irvine no later than August 15, 1996, and sooner if you so desire.
Please sign, date and return the enclosed copy of this letter to me for our
files to acknowledge your agreement with the above.
Sincerely,
ST. JOHN
BOB GRAY
- ---------------------
Bob Gray
Chairman
I ACCEPT ST. JOHN'S OFFER OF EMPLOYMENT UPON THE TERMS AND CONDITIONS SET FORTH
ABOVE.
Dated: July 8, 1996. /s/ CINDY SUMNER
------ --------------------
Cindy Sumner
<PAGE>
EXHIBIT 10.3
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is entered into as of
April 24, 1996, by and between St. John Knits, Inc., a California corporation
(the "Company"), and Robert C. Davis (the "Consultant").
BACKGROUND
The Consultant is voluntarily resigning on the date hereof as
President, Chief Operating Officer, Assistant Secretary and director of the
Company to pursue personal interests. The Company desires to maintain access to
the Consultant and his opinion, advice and knowledge concerning the business of
the Company. The Consultant and the Company desire to enter into this Agreement
to assure the Company of the services of the Consultant from May 20, 1996
through November 19, 1996 (the "Term").
AGREEMENT
In consideration of the mutual covenants, terms and conditions set
forth herein, the parties agree as follows:
1. Duties of Consultant. The Consultant agrees to advise and
--------------------
consult with the Company as reasonably requested by the Company from time to
time during the Term. The Consultant agrees to perform such services
conscientiously and to the best of his ability.
2. Compensation.
------------
(a) In consideration of Consultant's duties under Section 1, the
Company shall pay Consultant in the aggregate $100,000, payable in six
substantially equal amounts at the end of each month during the Term;
the first payment payable on June 30, 1996 and the last payment payable
on November 30, 1996. The Company also shall reimburse Consultant for
all reasonable out-of-pocket expenses paid by the Consultant during the
Term in the performance of his services hereunder, upon Consultant's
presentation of expense statements or vouchers or such other supporting
information as the Company customarily requires in accordance with its
outside services billing practices.
(b) Notwithstanding the provisions of Section 2(a) above, if
during the Term the Consultant is employed by another corporation,
partnership or other entity, the Consultant shall no longer receive any
payments under this
<PAGE>
Agreement other than a prorated amount for any portion of a period prior
to the date the Consultant was so employed.
3. INDEPENDENT CONTRACTOR. The Consultant acknowledges that he
----------------------
is being engaged on an independent contractor basis hereunder, and that the
Consultant will not be eligible for benefits generally available to the
employees of the Company. No compensation to be paid to the Consultant for his
consulting services under this Agreement will be subject to any withholding or
deductions required by local, state or federal law with respect to employees.
4. NO REPRESENTATION OF THE COMPANY. The Consultant agrees that
--------------------------------
he will not (i) enter into any agreements, arrangements or undertakings binding
or on behalf of the Company or for the benefit of the Company or (ii) make
representations that he has authority to act for or represent that he is engaged
by the Company in any capacity other than as a consultant during the Term,
except as authorized by an executive officer of the Company in writing.
5. CONFIDENTIALITY. The Consultant acknowledges that he will
---------------
have access to, and that there will be disclosed to him, information of a
confidential and/or trade secret nature that has great value to and that
constitutes a substantial basis and foundation upon which the business of the
Company is predicated ("Confidential Information"). During the Term and
thereafter, the Consultant shall keep all Confidential Information in confidence
and shall not disclose any Confidential Information to any other person, except
(i) to the Company's personnel on a "need-to-know" basis and other persons
designated in writing by an executive officer of the Company, (ii) to the extent
such disclosure may be required by law, (iii) if such information hereafter
becomes lawfully obtainable from other sources, or (iv) to the extent such duty
as to confidentiality is waived in writing by an executive officer of the
Company. Without the express written consent of an executive officer of the
Company, the Consultant shall not use or permit to be used any Confidential
Information for the gain or benefit of any party outside of the Company or for
the Consultant's personal gain or benefit outside the scope of the Consultant's
engagement by the Company. The Consultant agrees to deliver promptly to the
Company on termination of this Agreement, or at any other time that the Company
may so request, all memoranda, notes, records, reports, and other documents (and
all copies thereof) relating to Confidential Information and/or the business of
the Company that he obtained while employed by or otherwise serving or acting on
behalf of the Company or any of its subsidiaries.
6. INDEMNIFICATION OF THE CONSULTANT. The Company shall
---------------------------------
indemnify and hold harmless the Consultant from and against any and all claims,
expenses and liabilities (including, without limitation, attorneys' fees and
costs of investigation and defense) he may incur by reason of the Consultant
providing services to or for the Company by virtue of this Agreement so long as
Consultant
2
<PAGE>
acted in good faith and in a manner Consultant reasonably believed to be in the
best interests of the Company.
7. MISCELLANEOUS. Except for that Mutual Release Agreement
-------------
between the Company and Consultant dated of even date herewith and Article III
and Article V (other than Sections 5.6 and 5.8 thereof) of the Consultant's
Employment Agreement with the Company, dated as of January 1, 1996 (the
"Employment Agreement"), this Agreement supersedes all prior agreements between
the parties concerning employment or consulting arrangements with the Company
(including, without limitation, any other Consulting Agreement dated April 24,
1996 with a one-year term) which are hereby terminated in their entirety (except
for Article III and Article V (other than Sections 5.6 and 5.8 thereof) of the
Employment Agreement which shall survive), and constitutes the entire agreement
between the parties with respect thereto. This Agreement may be modified only
with a written instrument duly executed by each of the parties. No waiver by
any party of any breach of this Agreement will be deemed to be a waiver of any
preceding or succeeding breach. The Consultant acknowledges and agrees that the
Company's remedy at law for any breach of the Consultant's obliga tions
hereunder would be inadequate, and agrees and consents that temporary and
permanent injunctive relief may be granted in any proceeding which may be
brought to enforce any provision of this Agreement.
EXECUTED as of the date first mentioned above, at Orange County,
California.
ST. JOHN KNITS, INC.,
a California corporation
By: /s/ ROBERT E. GRAY
---------------------------------
Name: Robert E. Gray
Title: Chief Executive Officer
ROBERT C. DAVIS
/s/ ROBERT C. DAVIS
-------------------------------------
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ST. JOHN
KNITS, INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-03-1996
<PERIOD-START> OCT-30-1995
<PERIOD-END> JUL-28-1996
<CASH> 10,504
<SECURITIES> 6,690
<RECEIVABLES> 19,263
<ALLOWANCES> 0
<INVENTORY> 21,716
<CURRENT-ASSETS> 62,666
<PP&E> 60,573
<DEPRECIATION> 21,947
<TOTAL-ASSETS> 103,532
<CURRENT-LIABILITIES> 15,067
<BONDS> 0
0
0
<COMMON> 503
<OTHER-SE> 87,932
<TOTAL-LIABILITY-AND-EQUITY> 103,532
<SALES> 141,812
<TOTAL-REVENUES> 141,812
<CGS> 63,109
<TOTAL-COSTS> 63,109
<OTHER-EXPENSES> 47,853
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 31,950
<INCOME-TAX> 13,465
<INCOME-CONTINUING> 18,485
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,485
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
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