<PAGE>
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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 May 3, 1998
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 Identification Number)
Incorporation or Organization)
17422 Derian Avenue, Irvine, California 92614
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (949) 863-1171
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The number of outstanding shares of registrant's Common Stock, no par value, was
16,742,884 shares as of June 10, 1998.
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ST. JOHN KNITS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 3, November 2,
1998 1997
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................. $ 17,703,044 $ 14,266,564
Investments........................................... 2,476,535 2,351,765
Accounts receivable, net.............................. 31,287,327 36,572,423
Inventories........................................... 39,193,670 30,736,980
Deferred income tax benefit........................... 5,793,961 5,793,961
Other................................................. 2,445,264 2,591,742
------------ ------------
Total current assets................................ 98,899,801 92,313,435
------------ ------------
Property and equipment:
Machinery and equipment.............................. 41,404,311 35,903,659
Leasehold improvements............................... 26,494,772 25,351,868
Buildings............................................ 14,953,265 11,572,917
Furniture and fixtures............................... 5,690,650 5,434,754
Land................................................. 5,226,857 3,536,606
Construction in progress............................. 4,004,445 4,225,573
------------ ------------
97,774,300 86,025,377
Less-Accumulated depreciation and amortization...... 33,358,280 28,222,633
------------ ------------
64,416,020 57,802,744
------------ ------------
Other assets............................................. 3,371,542 3,787,396
------------ ------------
$166,687,363 $153,903,575
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................... $ 6,165,957 $ 10,034,396
Accrued expenses.................................... 8,981,080 10,504,934
Income taxes payable................................ 481,077 2,081,242
------------ ------------
Total current liabilities........................ 15,628,114 22,620,572
------------ ------------
Minority interest........................................ 646,806 602,910
------------ ------------
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-16,738,384 and
16,634,548 shares, respectively.................... 502,799 502,799
Additional paid-in capital.......................... 20,647,575 18,929,541
Cumulative translation adjustment................... (137,376) (19,351)
Retained earnings................................... 129,399,445 111,267,104
------------ ------------
150,412,443 130,680,093
------------ ------------
$166,687,363 $153,903,575
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
ST. JOHN KNITS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------------- -----------------------------------
May 3, May 4, May 3, May 4,
1998 1997 1998 1997
----------- ----------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales..................................... $69,805,532 $59,562,531 $138,566,509 $115,737,826
Cost of sales................................. 28,929,281 23,691,678 57,912,169 48,111,388
----------- ----------- ------------ ------------
Gross profit.................................. 40,876,251 35,870,853 80,654,340 67,626,438
Selling, general and administrative expenses.. 25,198,783 21,034,471 49,391,546 40,444,987
----------- ----------- ------------ ------------
Operating income.............................. 15,677,468 14,836,382 31,262,794 27,181,451
Other income.................................. 404,096 248,299 632,231 454,711
----------- ----------- ------------ ------------
Income before income taxes.................... 16,081,564 15,084,681 31,895,025 27,636,162
Income taxes.................................. 6,335,116 6,211,119 12,928,410 11,379,189
----------- ----------- ------------ ------------
Net income.................................... $ 9,746,448 $ 8,873,562 $18,966,615 $16,256,973
=========== =========== =========== ===========
Net income per common share - basic........... $0.58 $0.53 $1.14 $0.98
=========== =========== =========== ===========
Net income per common share - diluted......... $0.57 $0.52 $1.11 $0.95
=========== =========== =========== ===========
Dividends per share........................... $0.025 $0.025 $0.05 $0.05
=========== =========== =========== ===========
Shares used in the calculation of net income
per share - basic........................... 16,728,923 16,606,552 16,687,010 16,602,995
=========== =========== =========== ===========
Shares used in the calculation of net income
per share - diluted.......................... 17,171,117 17,129,632 17,115,348 17,132,697
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
ST. JOHN KNITS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
------------------------------
May 3, 1998 May 4, 1997
------------ ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 18,966,615 $ 16,256,973
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........... 5,335,153 4,351,630
(Gain) loss on disposal of property and
equipment............................. 325,708 (10,034)
Partnership losses...................... 169,593 176,093
Minority interest in income of
consolidated subsidiaries.............. 43,896 --
Decrease in accounts receivable......... 5,285,096 469,422
Increase in inventories................. (8,456,690) (250,950)
(Increase) decrease in other current
assets................................. 146,478 (372,259)
Decrease in other assets................ 49,485 211,734
Increase (decrease) in accounts payable. (3,868,439) 238,513
Decrease in accrued expenses............ (1,107,990) (1,852,417)
Decrease in income taxes payable........ (1,600,165) (190,355)
------------ ------------
Net cash provided by operating
activities........................... 15,288,740 19,028,350
------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and
equipment.............................. 250 222,932
Purchase of property and equipment...... (12,123,612) (11,964,158)
Purchase of short term investments...... (124,770) (129,398)
Capital distributions from partnership.. 46,000 39,000
------------ ------------
Net cash used in investing activities. (12,202,132) (11,831,624)
------------ ------------
Cash flows from financing activities:
Issuance of common stock............... 1,718,034 285,608
Dividends paid......................... (1,250,137) (1,245,287)
------------ ------------
Net cash provided by (used in)
financing activities................. 467,897 (959,679)
------------ ------------
Effect of exchange rate changes............ (118,025) --
------------ ------------
Net increase in cash and cash equivalents.. 3,436,480 6,237,047
Beginning balance, cash and cash
equivalents............................... 14,266,564 6,186,057
------------ ------------
Ending balance, cash and cash equivalents.. $ 17,703,044 $ 12,423,104
============ ============
Supplemental disclosures of cash flow
information:
Cash received during the twenty-six
weeks for interest income............. $ 729,357 $ 408,795
============ ============
Cash paid during the twenty-six weeks
for:
Interest expense.................... $ 331 $ 9,375
============ ============
Income taxes........................ $ 13,759,408 $ 11,391,597
============ ============
</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 November 2, 1997 as filed with the Securities and Exchange
Commission on January 30, 1998.
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 1, 1998.
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. 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 May 3, 1998 and May 4, 1997.
3. Dividends
The Company declared a quarterly dividend of $0.025 per share on March 2,
1998 for all shareholders of record on March 31, 1998. The dividend was paid on
April 30, 1998. On June 8, 1998, the Company declared another quarterly cash
dividend of $0.025 per share to be paid on July 30, 1998 to shareholders of
record on June 25, 1998.
4. Earnings Per Share
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128 "Earnings Per Share" during the first quarter of fiscal 1998. Under the
new requirement, primary earnings per share was replaced with basic earnings per
share. Basic earnings per share excludes the dilutive effect of common stock
equivalents, including stock options. Diluted earnings per share includes all
dilutive items. Dilution is calculated based upon the treasury stock method,
which assumes that all dilutive securities were exercised and that the proceeds
received were applied to repurchase outstanding shares at the average market
price during the period.
As a result of the adoption of SFAS No. 128, primary earnings per share for
the second quarter and first six months of fiscal 1997 were restated from $0.52
to $0.53 and from $0.95 to $0.98, respectively, to reflect the change to basic
earnings per share. The difference between basic and diluted earnings per
share, as shown on the consolidated statements of income, is due to the dilutive
effect of stock options outstanding at May 3, 1998 and May 4, 1997.
5. Inventories
A summary of the components of inventories is as follows:
May 3, November 2,
1998 1997
----------- -----------
Raw materials $13,763,216 $10,362,158
Work in process 7,931,273 6,451,053
Finished products 17,499,181 13,923,769
----------- -----------
$39,193,670 $30,736,980
=========== ===========
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 Percent of Net Sales
Thirteen Weeks Ended Twenty-Six Weeks Ended
("Second Quarter") ("Six Months")
---------------------- ----------------------
May 3, May 4, May 3, May 4,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales....................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................... 41.4 39.8 41.8 41.6
----- ----- ----- -----
Gross profit.................... 58.6 60.2 58.2 58.4
Selling, general and
administrative expenses........ 36.1 35.3 35.6 34.9
----- ----- ----- -----
Operating income................ 22.5 24.9 22.6 23.5
Other income.................... 0.6 0.4 0.5 0.4
----- ----- ----- -----
Income before income taxes...... 23.1 25.3 23.1 23.9
Income taxes.................... 9.1 10.4 9.3 9.8
----- ----- ----- -----
Net income...................... 14.0% 14.9% 13.8% 14.1%
===== ===== ===== =====
</TABLE>
6
<PAGE>
Second Quarter Fiscal 1998 Compared to Second Quarter Fiscal 1997
Net sales for the second quarter of fiscal 1998 increased by $10,243,000,
or 17.2 % over the second quarter of fiscal 1997. This increase was principally
attributable to (i) an increase in sales to existing domestic retail customers
of approximately $5,762,000, (ii) an increase in sales by Company owned retail
stores of approximately $2,484,000, due in part to the expansion of the New York
boutique, which was completed in October 1996, and the addition of two retail
outlet stores since the beginning of the second quarter of fiscal 1997, (iii)
sales of approximately $1,570,000 recorded by Amen Wardy Home Stores, LLC, a
majority owned subsidiary which commenced operations during the fourth quarter
of fiscal 1997 ("Amen Wardy Home Stores") and (iv) an increase in international
sales of $427,000, which includes the sales of St. John Company, Ltd., a
majority owned subsidiary which commenced operations in Japan during the fourth
quarter of fiscal 1997 ("St. John Company, Ltd."). Net sales increased primarily
as a result of increased unit sales of various product lines.
Gross profit for the second quarter of fiscal 1998 increased by $5,005,000,
or 14.0% as compared with the second quarter of fiscal 1997, and decreased as a
percentage of net sales to 58.6% from 60.2%. This decrease in the gross profit
margin was primarily due to labor inefficiencies related to the training of new
employees and the time incurred to repair finished product which, upon final
inspection, did not meet the Company's quality control standards.
Selling, general and administrative expenses for the second quarter of
fiscal 1998 increased by $4,164,000, or 19.8% over the second quarter of fiscal
1997, and increased as a percentage of net sales to 36.1% from 35.3%. This
increase was primarily due to costs incurred related to the start-up of the new
home furnishing subsidiary, Amen Wardy Home Stores, and the closure of the
Company's retail boutique located in Aspen.
Operating income for the second quarter of fiscal 1998 increased by
$841,000, or 5.7% over the second quarter of fiscal 1997. Operating income as
percentage of net sales decreased to 22.5% from 24.9% during the same period.
This decrease in the operating income as a percentage of net sales was due to
the decrease in the gross profit margin and an increase in selling, general and
administrative expenses as a percentage of net sales.
First Six Months Fiscal 1998 Compared to First Six Months Fiscal 1997
Net sales for the first six months of fiscal 1998 increased by $22,829,000,
or 19.7% over the first six months of fiscal 1997. This increase was
principally attributable to (i) an increase in sales to existing domestic retail
customers of approximately $11,723,000, (ii) an increase in sales by Company
owned retail stores of approximately $5,312,000, due in part to the expansion of
the New York boutique, which was completed in October 1996, and the addition of
two retail outlet stores since the beginning of fiscal 1997, (iii) sales by
Amen Wardy Home Stores of approximately $2,916,000 and (iv) an increase in sales
to international retail customers of $2,878,000, which includes the sales of St.
John Company, Ltd. Net sales increased primarily as a result of increased unit
sales of various product lines.
Gross profit for the first six months of fiscal 1998 increased by
$13,028,000, or 19.3% as compared with the first six months of fiscal 1997, and
decreased as a percentage of net sales to 58.2% from 58.4%. This decrease in
the gross profit margin was primarily due to labor inefficiencies experienced
during the second quarter of fiscal 1998.
Selling, general and administrative expenses for the first six months of
fiscal 1998 increased by $8,947,000, or 22.1% over the first six months of
fiscal 1997, and increased as a percentage of net sales to 35.6% from 34.9%.
This increase was primarily due to costs incurred related to the start-up of the
Company's new home furnishing subsidiary, Amen Wardy Home Stores, and the
closure of the
7
<PAGE>
Company's retail boutique located in Aspen during the second quarter of fiscal
1998.
Operating income for the first six months of fiscal 1998 increased by
$4,081,000, or 15.0% over the first six months of fiscal 1997. Operating income
as percentage of net sales decreased to 22.6% from 23.5% during the same period.
This decrease in the operating income as a percentage of net sales was due to
the decrease in the gross profit margin and an increase in selling, general and
administrative expenses as a percentage of net sales.
Liquidity and Capital Resources
The Company's primary cash requirements are to fund the Company's working
capital needs, primarily inventory and accounts receivable, and for the purchase
of property and equipment. During the first six months of fiscal 1998, cash
provided by operating activities was $15,289,000. 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
the increase in inventories and the decreases in accounts payable, accrued
expenses and income taxes payable. Cash used in investing activities was
$12,202,000 during the first six months of fiscal 1998. The principal use of
cash in investing activities was for the purchase of 34 computerized knitting
machines, the purchase of property and construction of improvements for the
Company's jewelry and garment hardware manufacturing facility in Mexico and the
construction of leasehold improvements for a new boutique location in Las Vegas.
The Company anticipates purchasing property and equipment of approximately
$9,000,000 during the remainder of fiscal 1998. The estimated $9,000,000 will
be used principally for (i) the construction of leasehold improvements for two
new retail boutiques, (ii) the completion of construction and the purchase of
equipment for the Company's manufacturing facility in Mexico and (iii) upgrades
to the Company's computer systems.
As of May 3, 1998, the Company had approximately $83,272,000 in working
capital and $20,180,000 in cash and marketable securities. The Company's
principal source of liquidity is internally generated funds. The Company also
has a $25,000,000 bank line of credit ("Line of Credit") which expires on March
1, 2000. The Line of Credit is unsecured and borrowings thereunder bear
interest at the Company's choice of the bank's reference rate (8.25% at May 3,
1998) minus 0.25% or an offshore rate plus 1.5%. The availability of funds
under the Line of Credit 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 minimum quick ratio, a minimum tangible net
worth and a maximum ratio of total liabilities to tangible net worth. The
Company may not declare or pay any dividends if the Company fails to perform its
obligations under, or fails to meet the conditions of, the Line of Credit or if
payment of the dividend creates a default under the Line of Credit. As of May
3, 1998, 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 and tax exempt municipal bonds.
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.
The Company declared a quarterly cash dividend of $0.025 per share on March
2, 1998 which was paid on April 30, 1998 to shareholders of record on March 31,
1998. On June 8, 1998, the Company declared another quarterly cash dividend of
$0.025 per outstanding share to be paid on July 30, 1998 to shareholders of
record on June 25, 1998. Future dividends by the Company remain
8
<PAGE>
subject to limitations under applicable law, certain covenants under the Line of
Credit and other factors the Board of Directors deems relevant, including
results of operations, financial condition and capital requirements.
Year 2000
The Company is continuing to assess the impact of the Year 2000 issues on
its computer systems. Company personnel are currently making the required
modifications to certain of the Company's computer systems for Year 2000
compliance. In addition, the Company plans to begin implementing the replacement
of some of its existing systems during fiscal years 1998 and 1999, primarily to
improve productivity, but such replacement systems will also address Year 2000
issues. The Company plans to complete the replacement of such systems during
fiscal 1999. The estimated costs of the new systems are included in the capital
budget for fiscal years 1998 and 1999. Management currently believes that the
impact of Year 2000 issues will not have a material effect on the Company's
financial condition or results of operations. However, the Company will
continue to assess the impact of Year 2000 issues on its computer systems to
evaluate the appropriate courses of corrective action needed. If the Company
determines additional corrective measures are required, the cost of such
measures could have a material effect on its financial condition or results of
operations.
9
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of matters to a Vote of Security-Holders
The Company held its Annual Meeting on March 25, 1998. At the Annual
Meeting, shareholders re-elected Robert E. Gray, Marie St. John Gray, Kelly A.
Gray, Roger G. Ruppert, Richard A. Gadbois, III and David A. Krinsky as
directors of the Company. The shareholders also approved the amendment to the
Company's 1993 Stock Option Plan to increase the number of authorized shares
thereunder and to provide an individual limit on the number of shares subject to
options granted in any one calendar year. Voting at the meeting was as follows:
<TABLE>
<CAPTION>
MATTER FOR AGAINST WITHHELD
- ----------------------------------------------- ---------- --------- --------
<S> <C> <C> <C>
Election of Robert E. Gray 15,426,594 -- 133,862
Election of Marie St. John Gray 15,426,244 -- 134,212
Election of Kelly A. Gray 15,427,864 -- 132,592
Election of Roger G. Ruppert 15,425,270 -- 135,186
Election of David A. Krinsky 15,426,425 -- 134,031
Election of Richard A. Gadbois, III 15,464,655 -- 95,801
Approval of Amendment to 1993 Stock Option Plan 9,126,584 6,157,562 276,310
</TABLE>
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.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
June 10, 1998 ST. JOHN KNITS, INC.
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)
11
<PAGE>
EXHIBIT INDEX
Exhibit Sequentially
Number Description of Exhibit Numbered Page
------- ---------------------- -------------
10.1 Aircraft Lease dated April 1, 1998 by and between the
Company and Ocean Air Charters, Inc. as Trustee of the
SJA 1&2, Ltd. Trust (Lease for Company airplane)
10.2 Amendment No.II to the St. John Knits, Inc. 1993 Stock
Option Plan
10.3 Amendment No. 5 to the Business Loan Agreement between
the Company and Bank of America National Trust and
Savings Association
27.1 Financial Data Schedule
12
<PAGE>
EXHIBIT 10.1
AIRCRAFT LEASE
--------------
THIS LEASE is made as of April 1, 1998, between Ocean Air Charters, Inc., as
Trustee of the SJA 1&2, Ltd. Trust (the "Lessor"), and St. John Knits, Inc.,
(the "Lessee").
1. LEASE. Lessor leases to the Lessee the following described aircraft:
One Dassault-Brequet Falcon 50 Aircraft, Serial No. 080 and
Garrett Engines Serial No. P76381, P76376 & P76212
("Aircraft")
2. TERM. The term of this lease shall be one year, commencing on April
1, 1998, and ending on March 31, 1999.
3. RENTAL. The Aircraft rental shall be at the rate of $73,500 per month,
plus any applicable state tax, payable to the Lessor on or before the first day
of each monthly period of the lease. All rental payments shall be paid at the
place where designated by the Lessor.
4. LESSEE COVENANTS AND AGREEMENTS.
(a) Conforming Use. Lessee covenants and agrees to use the Aircraft only
--------------
for the purposes and in the manner set forth in any application for insurance
executed in connection with the leased Aircraft, to abide by and conform to, and
cause others to abide by and to, all present and future federal, state,
municipal, and other laws, ordinances, orders, rules, and regulations,
controlling or in any way affecting the operation, use, or occupancy of the
Aircraft or the use of any airport premises by the Aircraft.
(b) No Lien or Assignment. Lessee agrees to keep safely, and use
---------------------
carefully, the Aircraft, and not to sell, or attempt to sell, or assign or
dispose of the Aircraft, or of any interest therein, or of any part thereof, or
equipment necessary thereto, or suffer or permit any charge, lien, or
encumbrance of any nature upon the Aircraft, or any part thereof, or lend or
rent the same, or remove or permit the Aircraft to be removed from its
designated home airport for periods in excess of 30 days, and not to remove
permanently the Aircraft from its designated home airport without the Lessor's
prior written consent.
(c) Sublease. Upon approval of the Lessor, the Lessee may sublease the
--------
Aircraft, provided, however, the Aircraft is maintained in conformance with all
applicable rules and regulations pertaining to the use to which the Aircraft
shall be subjected.
(d) Taxes. Lessee shall pay all taxes, assessments, and charges imposed by
-----
any national, state, municipal, or other public or airport authority on the
Aircraft or on its use during the term of this lease and until redelivery of the
Aircraft to the Lessor, and to save the Lessor free and harmless therefrom, and
reimburse the Lessor on a pro rata basis for any such taxes or charges payable
subsequent to the term of this lease.
(e) Maintenance. Lessee shall maintain and keep the Aircraft and all its
-----------
components in good order and repair, in accordance with the requirements of the
manufacturer and the Federal Aviation Agency or any other governmental authority
having jurisdiction, and within a reasonable time replace in or on the Aircraft
any and all parts, equipment, appliances, instruments, or accessories which may
be worn out, lost, destroyed, confiscated, or otherwise rendered unsatisfactory
or unavailable for use in or on the Aircraft. Such replacement shall be (1) in
good operating condition and have a value, utility, and quality at least equal
to that which the property
<PAGE>
replaced originally had, and (2) at the time affixed to the Aircraft and made
subject to this lease, owned by the Lessee free and clear of all liens and
encumbrances, it being understood that the Lessee shall have the same protection
as the Lessor under the standard warranty clause of the manufacturer of the
Aircraft, the terms and provisions of said warranty being incorporated herein;
perform all major overhaul on the Aircraft, whenever deemed necessary and as may
be required by the manufacturer and/or the Federal Aviation Agency or any other
governmental authority during the term of this lease, and all engine overhaul
and inspection and maintenance service.
(f) Indemnification. Lessee shall be responsible and liable to the Lessor
---------------
for, and indemnify the Lessor against, any and all damage to the Aircraft which
occurs in any manner from any cause or causes during the term of this lease or
until redelivery of the Aircraft to the Lessor, and to indemnify and hold Lessor
harmless from and against all claims, cost, expenses, damages, and liabilities,
including personal injury, death, or property damage claims arising or in any
manner occasioned by the operation or use of the Aircraft, during the term of
this lease or until redelivery of the Aircraft to the Lessor.
(g) Insurance. Lessee shall, at its own expense, keep the Aircraft covered
---------
by insurance in accordance with the following:
(1) Risk of Loss or Damage: With respect to the Aircraft and its
equipment, the insurance policy obtained in connection herewith shall be in
the joint names of Lessor and Lessee and shall insure the Aircraft and its
equipment against all risk of loss or damage or not less than the full
market value thereof, and the premiums therefor shall be paid by Lessee
unless otherwise provided herein. With respect to all other equipment,
Lessee shall keep the equipment insured against all risk of loss or damage
from every cause whatever for not less than the full replacement value
thereof, except that in the case of oil or gas equipment, the insurance, at
the election of Lessor, need not include fire and extended coverage on
equipment situated beneath the ground. Any such insurance shall be in form
and amount with companies approved by Lessor and shall, at the election of
Lessor, either be in the joint names of Lessor and Lessee or be for the
beneficial interest of Lessor, and Lessee shall pay the premiums therefor
and at the request of Lessor deliver said policies or duplicates thereof to
Lessor. The proceeds of any such insurance at the option of Lessor, shall
be applied (i) toward the replacement, restoration, or repair of the
Aircraft and its equipment or (ii) toward payment of the obligations of
Lessee hereunder.
(2) With respect to the Aircraft and its equipment, public liability
and property damage insurance shall be carried in the joint names of Lessor
and Lessee against any and all damages and liabilities arising out of,
connected with, or resulting from the possession, use, and operation of
such equipment, shall be in form and amount with companies approved by
Lessor and the premiums therefor shall be paid by Lessee unless otherwise
provided herein. With respect to all equipment other than the Aircraft,
Lessee at the election of Lessor shall carry public liability and property
damage insurance against any and all damages and liabilities arising out
of, connected with, or resulting from the possession, use, and operation
of such equipment. Any such insurance shall be in form and amount with
companies approved by Lessor and shall be in the joint names of Lessor and
Lessee, and Lessee shall pay the premiums therefor and at the request of
Lessor deliver said policies or duplicates thereof to Lessor.
With respect to all policies of insurance hereinabove required to be obtained by
Lessee that are not issued in the joint names of Lessor and Lessee, such
policies, at Lessor's election, shall effectively provide that the insurer in
such policies shall give Lessor 30 days' written notice
<PAGE>
before the policy in question shall be altered or canceled. If within ten days
following notice by Lessor to Lessee, the Lessor has not received the insurance
policies herein required to be obtained by Lessee or has not received evidence
of the payment by Lessee of the premiums due on any of the policies of insurance
required herein, the Lessor may procure such insurance or pay such premiums and
any sums so expended by Lessor shall thereafter be reimbursed by Lessee to
Lessor and shall become additional rent under this lease and shall be payable in
its entirety on the next rental payment date or within 60 days, whichever event
is sooner.
The Lessee hereby appoints Lessor as the Lessee's attorney-in-fact to make proof
of loss, and claim for, receive payment of, and execute or endorse all
documents, checks, or drafts for hull damage or return premium under the
insurance policies.
(h) Licensed pilotage. Lessee shall permit the Aircraft to be operated only
-----------------
by a currently certificated pilot having at least the minimum total pilot hours
required by the applicable insurance and regulations.
(i) Right of inspection. Lessee shall permit the Lessor, or Lessor's duly
-------------------
authorized agent or representative, to inspect the Aircraft at any reasonable
time, either on the land or aloft, and to furnish any information in respect to
the Aircraft and its use that the Lessor may reasonable request.
(j) Delivery upon termination. Lessee shall return, upon demand, at the
-------------------------
expiration of the lease term, the Aircraft to the Lessor, at such place as may
be designated by the Lessor, in the same operating order, repair, condition, and
appearance as when received, excepting only for reasonable wear and tear, and
damage by any cause covered by collectible insurance.
(k) Further assurances. Lessee shall execute and deliver to the Lessor all
------------------
additional or supplemental instruments or documents as the Lessor may request in
connection with the Aircraft or this lease.
5. ASSIGNMENT OF WARRANTY. The Lessor hereby assigns to the Lessee, for
and during the lease term, any warranty of the manufacturer, express or implied,
issued on or relating to the Aircraft, and hereby authorizes the Lessee to
obtain the customary service furnished by the manufacturer in connection with
any warranty, at Lessee's expenses. The Lessee acknowledges and agrees that the
Aircraft is of a size, design, capacity, and a manufacturer selected by the
Lessee and suitable for its purposes.
6. NO IMPLIED REPRESENTATIONS OR WARRANTIES. The parties acknowledge that
the Lessor is not a manufacturer or engaged in the sale or distribution of the
Aircraft. Lessor makes no representations, promises, statements, or warranties,
expressed or implied, with respect to the merchantability, suitability, or
fitness for purpose of the Aircraft or otherwise. Lessor shall not be liable to
the Lessee for any loss, claim, demand, liability, cost, damage, or expense of
any kind, caused, or alleged to be caused, directly, or indirectly, by the
Aircraft, or by any inadequacy thereof for any purpose, or by any defect
therein; or in the use of maintenance thereof, or any repairs, servicing, or
adjustments thereto, or any delay in providing, or failure to provide the same,
or any interruption or loss of service or use thereof, or any loss of business,
or any damage whatsoever and howsoever caused.
7. RISK OF LOSS. All risks of loss or damage of the Aircraft leased, from
whatever cause, are hereby assumed by the Lessee during the entire lease term of
the Aircraft, and if the Aircraft is damaged, and is capable of being repaired,
the Lessee shall have the option of either repairing same or replacing same, at
the Lessee's cost.
<PAGE>
8. IRREVOCABILITY. This lease is irrevocable for its full term and until
the aggregate rentals have been paid by the Lessee. Rent shall not abate during
the lease term because the Lessee's right to possession of the Aircraft has
terminated, or for any other reason whatsoever.
9. LESSOR'S ASSUMPTION OF LESSEE'S OBLIGATIONS. If Lessee shall fail to
use, preserve, and maintain the Aircraft, discharge all taxes, liens, or
charges, pay all costs and expenses, or procure and maintain insurance, in the
manner above provided, the Lessor, at its option, may do so, and all such
advances by the Lessor shall be added to the unpaid balance of the rentals due
under this lease and shall be repayable by the Lessee to Lessor on demand,
together with interest thereon at the rate of 10 percent per annum, until the
unpaid balance shall have been repaid in full. The Lessor may enter upon any
premises where the Aircraft is located, for the purpose of inspection, and may
remove the Aircraft forthwith, without notice to Lessee, if, in the opinion of
the Lessor, the Aircraft is being improperly used or maintained.
10. REPOSSESSION UPON DEFAULT. If the Lessee shall fail to pay any rental
or any other amounts payable pursuant to this lease, when the same is due and
payable, or if the Lessee shall breach any other provision of this lease, or if
the Lessee becomes insolvent, or files a voluntary, or has filed against him an
involuntary, proceeding in bankruptcy for either discharge of indebtedness or
other protection from creditors or if a receiver is appointed for the Lessee's
property or an arrangement is made with or committee is formed for the Lessee's
creditors, then the Lessor, at its option, and in addition to and without
prejudice to any other remedies, may take possession of and remove, the
Aircraft, and all equipment, instruments, accessories, and repairs thereon,
which shall be considered a component part of the Aircraft, and in removing the
Aircraft, the Lessor may, if permitted by law, use any of the Lessee's licenses
in respect to the Aircraft, and/or the Lessor may terminate this lease. The
retaking of such possession, however, shall not constitute a termination of this
lease unless the Lessor, so notifies Lessee in writing. The Lessor, at its
option, may (a) lease the repossessed Aircraft, or any part thereof to any third
party upon such terms and conditions as Lessor may determine, or (b) sell the
Aircraft, or any part thereof, at public or private sale. The total proceeds,
less the Lessor's expenses incurred in connection therewith, including
attorneys' fees, of such sale or sales, shall be applied to the total unpaid
rental. Any deficiency thereafter shall be paid by the Lessee.
11. TIME OF ESSENCE. Time is of the essence of this lease.
12. NO PASSAGE OF TITLE. This agreement is a lease, and the Lessee does not
acquire hereby any right, title, or interest whatsoever, legal or equitable, in
the Aircraft or to the proceeds of the sale of the Aircraft except its interests
as the Lessee under this lease.
13. MISCELLANEOUS
(a) The Lessor warrants that, if Lessee performs its obligations under this
lease, the Lessee shall peaceable and quietly hold, possess and use the Aircraft
during the entire lease term, free of any interference or hindrance.
(b) The relationship between the Lessor and Lessee is only that of Lessor
and Lessee. The Lessee shall never at any time during the term of this lease for
any purpose whatsoever be or become the agent of the Lessor, and the Lessor
shall not be responsible for the acts or omissions of the Lessee or its agents.
(c) The Lessor's rights and remedies with respect to any of the terms and
conditions of this lease shall be cumulative and not exclusive, and shall be in
addition to all other rights and
<PAGE>
remedies available to Lessor.
(d) The Lessor's failure to strictly enforce any provisions of this lease
shall not be construed as a waiver thereof or as excusing the Lessee from future
performance.
14. SEVERABILITY. The invalidity of any portion of this lease shall not
affect the remaining valid portions thereof.
15. ENTIRE AGREEMENT. This lease constitutes the entire agreement between
the parties hereto, and any change or modification to this lease must be in
writing and signed by the parties hereto.
16. NOTICES. All notices or other documents under this lease shall be in
writing and delivered personally or mailed by certified mail, postage prepaid,
addressed to the parties at their last known addresses.
17. NON-WAIVER. No delay or failure by either party to exercise any right
under this lease, and no partial or single exercise of that right, shall
constitute a waiver of that or any other right, unless otherwise expressly
provided herein.
18. HEADINGS. Headings in this lease are for convenience only and shall not
be used to interpret or construe its provisions.
19. GOVERNING LAW. This lease shall be construed in accordance with and
governed by the laws of the State of California.
20. COUNTERPARTS. This lease may be executed in two or more counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
21. BINDING EFFECT. The provisions of this lease shall be binding upon and
inure to the benefit of both parties and their respective legal representatives,
successors, and assigns.
IN WITNESS WHEREOF the Lessee and Lessor have duly executed this lease on
LESSOR: LESSEE:
The SJA 1&2, Ltd. Trust St. John Knits, Inc.
By: Ocean Air Charters, Trustee By: /s/ ROGER G. RUPPERT
--------------------------------
Roger G. Ruppert, Senior Vice
President/CFO
By: /s/ BOB GRAY
----------------------------
Bob Gray, President
<PAGE>
EXHIBIT 10.2
AMENDMENT NO. 11
TO THE
ST. JOHN KNITS, INC.
1993 STOCK OPTION PLAN
WHEREAS, St. John Knits, Inc. (the "Corporation") maintains the St.
John Knits, Inc. 1993 Stock Option Plan, as amended (the "Plan");
WHEREAS, the Board of Directors, after discussion and deliberation,
has determined that it is advisable and in the best interests of the Corporation
and its stockholders to increase the number of shares of the Corporation's
Common Stock (the "Common Stock") which may be issued or delivered pursuant to
the Plan and options granted thereunder by an additional 750,000 shares of
Common Stock (the "Additional Shares"), and to provide that the maximum number
of shares of Common Stock in the aggregate that may be subject to all options
granted under the Plan to any one individual in any calendar year is 150,000
shares; and
WHEREAS, the Board of Directors has the authority to amend the Plan,
subject, however, to the requisite approval of the Corporation's stockholders in
certain circumstances as set forth in the Plan;
RESOLVED, that the Plan be, and it hereby is, amended as set forth
below, such amendments to take effect immediately, subject, however, to the
approval of the Corporation's stockholders:
1. The first Sentence of Section 5 of the Plan is amended to read as
follows:
"The maximum aggregate number of Shares which may be
obtained and sold under this Plan is 2,350,000 Shares of
authorized but unissued Common Stock of the Company."
2. Section 5 of the Plan is amended by adding the following sentence
at the end thereof:
"The maximum number of Shares in the aggregate that may be
subject to all Options granted under this Plan to any one
individual in any calendar year is 150,000 shares."
RESOLVED FURTHER, that the amendments to the Plan approved herein be
presented to the stockholders of the Corporation at the 1998 annual meeting of
stockholders.
<PAGE>
IN WITNESS WHEREOF, this Amendment to the Plan is executed as of this
thirteenth day of February, 1998, by the undersigned duly authorized officer of
the Corporation.
ST. JOHN KNITS, INC.
By: /s/ ROGER G. RUPPERT
--------------------------------
Name: Roger G. Ruppert
Title: Sr. V.P. Finance/CFO
2
<PAGE>
EXHIBIT 10.3
================================================================================
[LOGO OF BANK OF AMERICA] AMENDMENT TO DOCUMENTS
- --------------------------------------------------------------------------------
AMENDMENT NO. 5 TO BUSINESS LOAN AGREEMENT
This Amendment No. 5 (the "Amendment") dated as of May 28, 1998, is between
-------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") and ST. JOHN
KNITS, INC. (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of December 15, 1995, as previously amended (the
"Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
---------
1. DEFINITIONS. Capitalized terms used but not defined in this Amendment
-----------
shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
----------
2.1 In Paragraph 1.3 of the Agreement, the interest rate "REFERENCE
RATE MINUS 0.25 PERCENTAGE POINT" is substituted for the interest rate
"REFERENCE RATE."
3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the
-------------------
terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of
this Amendment.
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION ST. JOHN KNITS, INC.
X /s/ ARTHUR P. CARTER X /s/ ROGER G. RUPPERT
--------------------------------- ----------------------------
BY: Arthur P. Carter BY: Roger G. Ruppert
TITLE: Vice President TITLE: Senior Vice President-Finance
and Chief Financial Officer
- -------------------------------------------------------------------------------
AmendL (10/92) 020440-40119
-1-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ST. JOHN
KNITS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-01-1998
<PERIOD-START> NOV-03-1997
<PERIOD-END> MAY-03-1998
<CASH> 17,703
<SECURITIES> 2,477
<RECEIVABLES> 31,287
<ALLOWANCES> 0
<INVENTORY> 39,194
<CURRENT-ASSETS> 98,900
<PP&E> 97,774
<DEPRECIATION> 33,358
<TOTAL-ASSETS> 166,687
<CURRENT-LIABILITIES> 15,628
<BONDS> 0
0
0
<COMMON> 503
<OTHER-SE> 149,909
<TOTAL-LIABILITY-AND-EQUITY> 166,687
<SALES> 138,567
<TOTAL-REVENUES> 138,567
<CGS> 57,912
<TOTAL-COSTS> 57,912
<OTHER-EXPENSES> 49,392
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 31,895
<INCOME-TAX> 12,928
<INCOME-CONTINUING> 18,967
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,967
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.11
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