<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 2, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 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: (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
16,618,480 shares as of June 4, 1999.
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ST. JOHN KNITS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 2, November 1,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................... $ 28,839,156 $ 14,336,872
Investments......................................... 1,194,149 1,175,427
Accounts receivable, net............................ 34,695,688 35,562,189
Inventories......................................... 46,159,151 47,748,286
Deferred income tax benefit......................... 7,743,961 7,743,961
Other............................................... 2,605,733 2,377,352
------------ ------------
Total current assets............................. 121,237,838 108,944,087
------------ ------------
Property and equipment:
Machinery and equipment............................. 48,410,836 47,023,808
Leasehold improvements.............................. 33,620,602 30,691,098
Buildings........................................... 17,918,427 17,883,700
Furniture and fixtures.............................. 6,702,519 6,462,833
Land................................................ 5,786,857 5,786,857
Construction in progress............................ 2,168,124 666,481
------------ ------------
114,607,365 108,514,777
Less--Accumulated depreciation and amortization..... 43,860,566 38,627,543
------------ ------------
70,746,799 69,887,234
------------ ------------
Other assets........................................... 3,488,435 3,558,347
------------ ------------
$195,473,072 $182,389,668
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................... $ 4,251,458 $ 8,303,874
Accrued expenses.................................... 11,827,047 11,329,773
Income taxes payable................................ 3,739,693 120,657
------------ ------------
Total current liabilities........................ 19,818,198 19,754,304
------------ ------------
Long-term debt......................................... 284,638 407,599
------------ ------------
Minority interest...................................... 653,935 653,435
------------ ------------
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--16,584,815 and
16,579,484 shares, respectively................... 502,799 502,799
Unrealized loss on securities....................... (27,624) (27,504)
Cumulative translation adjustment................... 21,358 197,249
Additional paid-in capital.......................... 17,937,533 17,882,672
Retained earnings................................... 156,282,235 143,019,114
------------ ------------
174,716,301 161,574,330
------------ ------------
$195,473,072 $182,389,668
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
ST. JOHN KNITS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------- ----------------------------
May 2, May 3, May 2, May 3,
1999 1998 1999 1998
----------- ----------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales.................................... $78,237,040 $69,805,532 $151,625,553 $138,566,509
Cost of sales................................ 32,956,813 28,929,281 66,785,899 57,912,169
----------- ----------- ------------ ------------
Gross profit................................. 45,280,227 40,876,251 84,839,654 80,654,340
Selling, general and administrative expenses. 31,631,192 25,198,783 61,766,038 49,391,546
----------- ----------- ------------ ------------
Operating income............................. 13,649,035 15,677,468 23,073,616 31,262,794
Other income................................. 404,579 404,096 830,974 632,231
----------- ----------- ------------ ------------
Income before income taxes................... 14,053,614 16,081,564 23,904,590 31,895,025
Income taxes................................. 5,785,715 6,335,116 9,812,395 12,928,410
----------- ----------- ------------ ------------
Net income................................... 8,267,899 9,746,448 14,092,195 18,966,615
----------- ----------- ------------ ------------
Comprehensive income, net of tax:
Foreign currency translation adjustments.. (35,806) (32,645) (103,776) (70,225)
Unrealized loss on securities............. 919 -- (71) --
----------- ----------- ------------ ------------
Comprehensive income......................... $ 8,233,012 $ 9,713,803 $ 13,988,348 $ 18,896,390
=========== =========== ============ ============
Net income per common share:
Basic................................... $ 0.50 $ 0.58 $ 0.85 $ 1.14
=========== =========== ============ ============
Diluted................................. $ 0.49 $ 0.57 $ 0.83 $ 1.11
=========== =========== ============ ============
Dividends per share.......................... $ 0.025 $ 0.025 $ 0.05 $ 0.05
=========== =========== ============ ============
Shares used in the calculation of net income
per share:
Basic................................... 16,581,629 16,728,923 16,581,043 16,687,010
=========== =========== ============ ============
Diluted................................. 17,006,748 17,171,117 16,982,678 17,115,348
=========== =========== ============ ============
</TABLE>
See accompanying notes.
3
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ST. JOHN KNITS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
-----------------------------
May 2, 1999 May 3, 1998
------------- -------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $14,092,195 $ 18,966,615
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................ 6,687,151 5,335,153
Loss on disposal of property and equipment............... 355,664 325,708
Partnership losses....................................... 136,836 169,593
Minority interest in income of consolidated subsidiaries. 500 43,896
Decrease in accounts receivable.......................... 866,501 5,285,096
(Increase) decrease in inventories....................... 1,589,135 (8,456,690)
(Increase) decrease in other current assets.............. (228,381) 146,478
(Increase) decrease in other assets...................... (272,472) 49,485
Decrease in accounts payable............................. (4,052,416) (3,868,439)
Increase (decrease) in accrued expenses.................. 497,274 (1,107,990)
Increase (decrease) in income taxes payable.............. 3,619,036 (1,600,165)
----------- ------------
Net cash provided by operating activities............ 23,291,023 15,288,740
----------- ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment............. 120,000 250
Purchase of property and equipment....................... (7,869,832) (12,123,612)
Purchase of short-term investments....................... (18,722) (124,770)
Capital distributions from partnership................... 53,000 46,000
----------- ------------
Net cash used in investing activities................ (7,715,554) (12,202,132)
----------- ------------
Cash flows from financing activities:
Issuance of common stock................................. 54,861 1,718,034
Dividends paid........................................... (829,074) (1,250,137)
Principal payments on long-term debt..................... (122,961) --
----------- ------------
Net cash provided by (used in) financing activities.. (897,174) 467,897
----------- ------------
Effect of exchange rate changes.............................. (175,891) (118,025)
----------- ------------
Unrealized loss on securities................................ (120) --
----------- ------------
Net increase in cash and cash equivalents.................... 14,502,284 3,436,480
Beginning balance, cash and cash equivalents................. 14,336,872 14,266,564
----------- ------------
Ending balance, cash and cash equivalents.................... $28,839,156 $ 17,703,044
=========== ============
Supplemental disclosures of cash flow information:
Cash received during the twenty-six weeks for
interest income........................................ $ 595,020 $ 729,357
=========== ============
Cash paid during the twenty six weeks for:
Interest expense..................................... $ 5,754 $ 331
=========== ============
Income taxes......................................... $ 7,575,555 $ 13,759,408
=========== ============
</TABLE>
See accompanying notes.
4
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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 1, 1998 as filed with the Securities and Exchange
Commission on January 29, 1999.
The results of operations for the periods presented are not necessarily
indicative of the operating results that may be expected for the year ending
October 31, 1999.
2. Summary of Accounting Policies
a. Company Operations
The Company is a leading designer, manufacturer and marketer of women's
clothing and accessories. The Company's products are distributed primarily
through specialty retailers and Company owned retail boutiques and outlets. All
intercompany and interdivisional transactions and accounts have been eliminated.
b. Definition of Fiscal Year
The Company utilizes a 52-53 week fiscal year whereby the fiscal year ends
on the Sunday nearest to October 31. The quarters also end on the Sunday nearest
the end of the quarter, which accordingly were May 2, 1999 and May 3, 1998.
3. Dividends
The Company declared a quarterly dividend of $0.025 per share on March 12,
1999 for all shareholders of record on April 8, 1999. The dividend was paid on
May 6, 1999. On June 8, 1999, the Company declared another quarterly cash
dividend of $0.025 per outstanding share to be paid on July 22, 1999 to
shareholders of record on June 24, 1999.
4. Earnings Per Share
The Company accounts for earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". Under SFAS
No. 128, basic earnings per share includes the weighted average number of common
shares outstanding during the period and excludes the dilutive effect of common
stock equivalents, including stock options. Diluted earnings per share includes
all dilutive items. Dilution is calculated based upon the treasury stock method,
which assumes that all dilutive securities were exercised and that the proceeds
received were applied to repurchase outstanding shares at the average market
price during the period.
5
<PAGE>
5. Comprehensive Income
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income" during
the first quarter of fiscal 1999. This statement requires that all items that
meet the definition of components of comprehensive income be reported in a
financial statement for the period in which they are recognized. Components of
comprehensive income include revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income
but excluded from net income.
6. Deferred Compensation
In accordance with the employment agreement between the Company and Bob
Gray, the Company's Chairman and CEO, a portion of the annual salary payable to
Bob Gray is being deferred. The deferred portion of the compensation is being
paid into an irrevocable "rabbi" trust. The deferred compensation is recorded as
an expense at the time it is paid. At May 2, 1999, the balance in the trust and
the corresponding liability were approximately $2 million and are not reflected
in the Consolidated Balance Sheets.
7. Inventories
A summary of the components of inventories is as follows:
<TABLE>
<CAPTION>
May 2, November 1,
1999 1998
------------ -------------
<S> <C> <C>
Raw materials............................. $12,994,257 $14,529,822
Work in process........................... 9,571,768 8,896,248
Finished products......................... 23,593,126 24,322,216
----------- -----------
$46,159,151 $47,748,286
=========== ===========
</TABLE>
6
<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 2, May 3, May 2, May 3,
1999 1998 1999 1998
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 42.1 41.4 44.0 41.8
----- ----- ----- -----
Gross profit...................................... 57.9 58.6 56.0 58.2
Selling, general and administrative expenses...... 40.4 36.1 40.7 35.6
----- ----- ----- -----
Operating income.................................. 17.5 22.5 15.3 22.6
Other income...................................... 0.5 0.6 0.5 0.5
----- ----- ----- -----
Income before income taxes........................ 18.0 23.1 15.8 23.1
Income taxes...................................... 7.4 9.1 6.5 9.3
----- ----- ----- -----
Net income........................................ 10.6% 14.0% 9.3% 13.8%
===== ===== ===== =====
</TABLE>
7
<PAGE>
Second Quarter Fiscal 1999 Compared to Second Quarter Fiscal 1998
Net sales for the second quarter of fiscal 1999 increased by $8,432,000, or
12.1% over the second quarter of fiscal 1998. This increase was principally
attributable to (i) an increase in sales by Company owned retail stores of
approximately $4,189,000, due in part to the expansion of the Las Vegas
boutique, which was completed in May 1998, and the addition of one retail
boutique in Scottsdale, Arizona and one outlet store since the beginning of the
second quarter of fiscal 1998, (ii) an increase in sales of approximately
$1,440,000 recorded by Amen Wardy Home Stores, LLC, which commenced operations
during the fourth quarter of fiscal 1997 ("Amen") and (iii) an increase in
international sales of $1,393,000, 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"). Net sales increased
primarily as a result of increased unit sales of various product lines.
Gross profit for the second quarter of fiscal 1999 increased by $4,404,000,
or 10.8%, as compared with the second quarter of fiscal 1998, and decreased as a
percentage of net sales to 57.9% from 58.6%. This decrease in the gross profit
margin was primarily due to a decrease in the gross margin for the Knitwear
line, due to increased production costs, which were not offset by a
corresponding increase in the selling price. In addition, the gross profit
margin was reduced by lower gross profit margins recorded by Amen, due to
markdowns reported at the stores which were being closed.
Selling, general and administrative expenses for the second quarter of
fiscal 1999 increased by $6,432,000, or 25.5% over the second quarter of fiscal
1998, and increased as a percentage of net sales to 40.4% from 36.1%. This
increase was primarily due to expenses incurred by the Company to advertise and
market its product lines and non-recurring expenses incurred in connection with
resolving the Amen litigation (see Part II, Item 1 below) and the closure of
three Amen stores located in Dallas, Palm Beach and Boston.
Operating income for the second quarter of fiscal 1999 decreased by
$2,028,000, or 12.9% over the second quarter of fiscal 1998. Operating income
as percentage of net sales decreased to 17.5% from 22.5% 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.
First 26 Weeks Fiscal 1999 Compared to First 26 Weeks Fiscal 1998
Net sales for the first 26 weeks of fiscal 1999 increased by $13,059,000, or
9.4% over the first 26 weeks of fiscal 1998. This increase was principally
attributable to (i) an increase in sales by Company owned retail stores of
approximately $7,875,000, due in part to the expansion of the Las Vegas
boutique, which was completed in May 1998, and the addition of one retail
boutique in Scottsdale, Arizona and one outlet store since the beginning of
fiscal 1998, (ii) an increase in sales of approximately $3,552,000 recorded by
Amen and (iii) an increase in international sales of $1,834,000, which includes
the sales of St. John Company. These increases were offset by a net decrease of
$202,000 in sales to existing domestic retail customers, primarily due to the
discontinuance of the SJK line. Net sales increased primarily as a result of
increased unit sales of various product lines.
Gross profit for the first 26 weeks of fiscal 1999 increased by $4,185,000,
or 5.2% as compared with the first 26 weeks of fiscal 1998, and decreased as a
percentage of net sales to 56.0% from 58.2%. This decrease in the gross profit
margin was primarily due to a decrease in the gross margin for the Knitwear
line, due to increased production costs, which were not offset by a
corresponding increase in the selling price. This increase in the production
costs was due in part to the reevaluation
8
<PAGE>
of the Company's quality control program and the related procedures which were
implemented during the second half of fiscal 1998. In addition, the gross profit
margin was reduced by lower gross profit margins recorded by Amen, due to
markdowns reported at the stores which were being closed.
Selling, general and administrative expenses for the first 26 weeks of
fiscal 1999 increased by $12,374,000, or 25.1% over the first 26 weeks of fiscal
1998, and increased as a percentage of net sales to 40.7% from 35.6%. This
increase was primarily due to (i) an increase in selling expenses due to
increased costs of promoting its products to its major customers, (ii) non-
recurring expenses incurred in connection with resolving the Amen litigation and
the closure of three Amen stores and (iii) an increase in sales, marketing,
design and administrative personnel expenses.
Operating income for the first 26 weeks of fiscal 1999 decreased by
$8,189,000, or 26.2% over the first 26 weeks of fiscal 1998. Operating income
as percentage of net sales decreased to 15.3% from 22.6% 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 26 weeks of fiscal 1999, cash
provided by operating activities was $23,291,000. Cash provided by operating
activities was primarily generated by net income, an increase in income taxes
payable and a decrease in inventories, while cash used in operating activities
was primarily used to fund the decrease in accounts payable. Cash used in
investing activities was $7,716,000 during the first 26 weeks of fiscal 1999.
The principal use of cash in investing activities was for the (i) construction
of leasehold improvements for a new boutique location at South Coast Plaza in
Costa Mesa, California, (ii) costs incurred in connection with the upgrade of
the Company's computer systems and (iii) the completion of leasehold
improvements for a new home furnishing boutique at South Coast Plaza.
The Company anticipates purchasing property and equipment of approximately
$11,000,000 during the remainder of fiscal 1999. The estimated $11,000,000 will
be used principally for (i) continued upgrades to the Company's computer
systems, (ii) the purchase of computerized knitting machines and (iii) the
construction of leasehold improvements to expand the Boston boutique, move the
Hawaii boutique to a new location and open one additional new boutique.
As of May 2, 1999, the Company had approximately $101,420,000 in working
capital and $30,033,000 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 minus 0.25% (7.75%
at May 2, 1999) 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
2, 1999, 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.
9
<PAGE>
The Company believes it will be able to finance its working capital and
capital expenditure requirements for the foreseeable future with internally
generated funds. However, if the transactions contemplated by the Agreement and
Plan of Merger described below are consummated, the Company believes it will
also use its revolving credit facility to help finance such requirements.
The Company declared a quarterly cash dividend of $0.025 per share on March
12, 1999 which was paid on May 6, 1999 to shareholders of record on April 8,
1999. On June 8, 1999, the Company declared another quarterly cash dividend of
$0.025 per outstanding share to be paid on July 22, 1999 to shareholders of
record on June 24, 1999. 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. If the transactions contemplated by the Agreement and Plan of
Merger are consummated, the Company anticipates that it will not pay any further
dividends on its common stock.
Stock Repurchase Plan
The Board of Directors authorized a stock repurchase plan on August 26,
1998. This repurchase program allows the purchase of up to one million shares of
the Company's common stock. During the first 26 weeks of fiscal 1999, the
Company did not make any purchases of its common stock.
Agreement and Plan of Merger
On February 2, 1999, the Company signed a definitive merger agreement
between the Company and a group consisting of an affiliate of Vestar Capital
Partners ("Vestar") and the Company's founder, Chairman and Chief Executive
Officer Bob Gray and his family. Under the terms of the agreement, approximately
97% of the Company's outstanding common stock will be converted in a series of
merger transactions into the right to receive $30 per share in cash. Pursuant to
an election and pro-ration process, the remaining shares of the Company will be
retained by existing public shareholders, other than the Grays, and will
represent approximately 7% of the common stock of the reorganized company
following the transaction. Vestar, through its affiliates, has agreed to provide
approximately $154,000,000 of equity financing. In addition, The Chase Manhattan
Bank and Chase Securities Inc. have agreed to arrange an additional $315,000,000
of long-term debt to help finance the transaction and a $25,000,000 revolving
credit facility. The completion of the transaction depends on the satisfaction
of customary conditions, including the receipt of financing, Company shareholder
approval and regulatory approvals. Although the Company cannot be certain
whether or when any of the conditions to the transaction will be satisfied or
that the Company will complete the transaction, the Company anticipates
completing the transaction early in the third calendar quarter of 1999.
Year 2000
The Company uses various types of technology in the operations of its
business. Some of this technology incorporates date identification functions;
however, many of these date identification functions were developed to use only
two digits to identify a year. These date identification functions, if not
corrected, could cause their relating technology to fail or create erroneous
results by or at the year 2000.
The Company is continuing to monitor the impact of Year 2000 issues on its
information and non-information technology systems. As part of this process,
the Company retained the services of an independent contractor with experience
in analyzing and addressing Year 2000 issues. In addition, the Company
developed a five-phased plan with respect to the Year 2000 readiness of its
internal
10
<PAGE>
technology systems. This plan involves (i) creating awareness inside the Company
of Year 2000 issues, (ii) analyzing the Company's Year 2000 state of readiness,
(iii) correcting systems or acquiring new ones as needed, (iv) testing the
corrected or new systems and (v) incorporating the corrected or new systems into
the Company's business. The Company has substantially completed all five phases
of the plan.
The Company has also developed a plan to address the impact that Year 2000
issues of its vendors and customers may have on the Company's operations. The
Company is finalizing its evaluation of the materiality of its vendor and
customer relationships and has initiated communications with certain of its
significant vendors and customers to identify and minimize disruptions to the
Company's operations and to assist in resolving Year 2000 issues. The Company
has substantially completed its evaluation; however there can be no assurances
that the Year 2000 compliance efforts will be successful or that the systems and
products of other companies on which the Company relies will not have an adverse
effect on the Company's business, operations or financial condition. In the
event that satisfactory completion of the Company's Year 2000 evaluation of its
vendors and customers is not assured by the end of fiscal 1999, the Company
intends to determine appropriate contingency plans.
As of May 2, 1999, the Company had incurred approximately $432,000 in costs
related to the Year 2000 issue. The Company believes that additional costs
related to the Year 2000 issue will not be material to the Company's business,
operations or financial condition. However, estimates of Year 2000 related
costs are based on numerous assumptions and there is no certainty that estimates
will be achieved, and actual costs could be materially greater than anticipated.
The Company anticipates that it will fund its additional Year 2000 costs from
current working capital.
Forward Looking Statements
This Quarterly Report on Form 10-Q contains certain statements which
describe the Company's beliefs concerning future business conditions and the
outlook for the Company based on currently available information. Wherever
possible the Company has identified these "forward looking" statements (as
defined in Section 21E of the Securities Exchange Act of 1934) by words such as
"anticipates," "believes," "estimates," "expects" and other similar expressions.
The forward looking statements and associated risks set forth herein may include
or relate to: (i) the Company's anticipated purchases of property and equipment
during the remainder of fiscal 1999, (ii) the Company's belief that it will be
able to fund its working capital and capital expenditure requirements with
internally generated funds and, if the transactions contemplated by the
Agreement and Plan of Merger are consummated, the Company's belief that it will
also use its revolving credit facility to help finance such requirements, (iii)
the Company's anticipated completion of its Year 2000 readiness plans, (iv) the
costs and source of funds to address the Company's Year 2000 issues and (v) the
Company's anticipated completion of the proposed merger transaction.
These forward looking statements are subject to risks, uncertainties and
other factors which could cause the Company's actual results, performance or
achievements to differ materially from those expressed in, or implied by, these
statements. These risks, uncertainties and other factors include, but are not
limited to, the following: (i) the financial strength of the retail industry and
the level of consumer spending for apparel and accessories, (ii) the Company's
ability to develop, market and sell its products, (iii) increased competition
from other manufacturers and retailers of women's clothing and accessories, (iv)
general economic conditions, (v) any unanticipated problems or delays in the
completion by the Company to become Year 2000 ready or the failure of the
Company's vendors or customers to do so and (vi) the satisfaction of the
conditions to the completion of the proposed merger transaction.
11
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has exposure to fluctuations in foreign currency exchange rates
for the revenues derived from sales to its foreign customers denominated in
foreign currency. In order to reduce the effects of such fluctuations, under
established procedures and controls, the Company enters into forward contracts.
These contractual arrangements are entered with a major financial institution.
The Company does not hold derivative financial instruments for trading.
The primary business objective of this hedging program is to secure the
anticipated profit on sales denominated in foreign currencies. Forward
contracts are entered into at the time the Company prices its products. The
Company's primary exposure to foreign exchange fluctuation is on the deutsche
mark. At May 2, 1999, the Company had contracts maturing through November 30,
1999 to sell 5.8 million deutsche marks at rates ranging from 1.66 to 1.76
deutsche marks to the U.S. dollar.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to certain legal proceedings, which are described in
the Company's Annual Report on Form 10-K and Form 10-K/A for the fiscal year
ended November 1, 1998 filed with the Securities and Exchange Commission on
January 29, 1999 and February 26, 1999, respectively. During the second quarter
of fiscal 1999, the following developments occurred with respect to certain of
these legal proceedings:
Amen Wardy Home Stores
On October 5, 1998, Amen Wardy, Jr. filed a complaint against the Company,
Amen Wardy Home Stores, LLC ("AWHS"), Robert E. Gray, Marie St. John Gray, Kelly
A. Gray, Black and Co. Inc. and Jennifer Black in the Superior Court of the
County of Orange (Wardy Jr. v. St. John Knits, Inc., et al.) (the "Wardy, Jr.
Action"). On November 17, 1998, AWH Direct, Inc. filed a derivative complaint
against AWHS, the Company, Robert E. Gray, Marie St. John Gray, Kelly A. Gray,
David A. Krinsky and David C. Frankel in the Superior Court of California,
County of Orange (AWH Direct, LLC v. Amen Wardy Home Stores, LLC, et al.) (the
"AWH Direct Action"). These actions are more fully described in the Company's
Annual Report on Form 10-K and Form 10-K/A for the fiscal year ended November 1,
1998 filed with the Securities and Exchange Commission on January 29, 1999 and
February 26, 1999, respectively.
The Wardy Jr. Action and the AWH Direct Action were settled pursuant to a
Memorandum of Understanding between the parties dated April 1, 1999 and a
subsequent Settlement Agreement and Mutual General Release dated April 30, 1999.
As part of the settlement, the Company paid certain legal fees of the plaintiffs
and transferred the AWHS boutique in Las Vegas to an affiliate of Amen Wardy,
Jr. In addition, as part of the settlement, AWHS became a wholly owned
subsidiary of the Company and the name of the entity was changed to "St. John
Home, LLC". Pursuant to the settlement, the Wardy Jr. Action was dismissed with
prejudice on May 11, 1999 and the AWH Direct Action was dismissed with prejudice
on May 5, 1999.
Proposed Buy-Out Litigation
The Company is party to six lawsuits that allege claims against the
Company's directors for breach of fiduciary duty alleged to have arisen from the
transactions contemplated by the Agreement and Plan of Merger, described above.
All of these lawsuits were filed in the Superior Court of the State of
California for the County of Orange. The principal relief sought in the six
actions is certification of the putative class, an injunction against the
mergers or, to the extent the mergers are concluded, a rescission of the mergers
and damages and attorneys' fees in an unspecified amount. These six lawsuits
were consolidated into one lawsuit on February 24, 1999. These actions are more
fully described in the Company's Annual Report on Form 10-K and Form 10-K/A for
the fiscal year ended November 1, 1998 filed with the Securities and Exchange
Commission on January 29, 1999 and February 26, 1999, respectively.
On April 15, 1999, the plaintiffs in the lawsuit filed a motion for
preliminary injunction seeking to prevent the mergers from proceeding. The
preliminary injunction motion was heard by the California state court on April
28, 1999. On April 30, 1999, the court denied the plaintiffs' preliminary
injunction
13
<PAGE>
motion. In denying the plaintiffs' request, the court ruled that the plaintiffs
had not shown a "reasonable probability" that they could succeed in proving at
trial that the $30 per share offer in the mergers is unfair. Similarly, the
court ruled that the plaintiffs were unlikely to show that the special committee
of the Company's Board of Directors lacked true independence or failed to "shop"
the Company adequately to other buyers.
While declining to grant the preliminary injunction, the court imposed a
constructive trust which prevents Robert E. Gray, Marie Gray and Kelly A. Gray
from receiving in the mergers any amount for their Company shares in excess of
$30 per share until a full trial on the merits is held. Prior to the
determination of the final, definitive terms of the stock options to be granted
to the Grays after the mergers, the plaintiffs had argued that these options
represent additional consideration for the Grays' Company shares. It is the
Company's belief that these employee stock options represent compensation for
the Grays' services as officers of the reorganized company after the mergers and
are not additional consideration for their Company shares.
The court also imposed a constructive trust preventing Messrs. Gadbois and
Krinsky, directors of the Company, from exercising options that were repriced by
the board in September 1998 until a full trial on the merits is held. It is the
Company's belief that the September 1998 option repricing was not improper. The
repricing was consistent with the repricing of options held by key employees of
the Company, excluding the Grays, and occurred on September 15, 1998, which was
nearly two months in advance of Vestar's first meeting with the Grays.
In imposing the constructive trusts, the court indicated that the plaintiffs
had shown a "reasonable probability" that they could succeed at trial in proving
that the Company directors breached their fiduciary duties with respect to the
repricing of the director options and the alleged preferential treatment of the
Grays to the extent that the Grays receive a higher price for their shares than
the public shareholders in the mergers. The Company intends to continue to
contest vigorously the plaintiffs' allegations in this lawsuit, including any
request by the plaintiffs for the imposition of a constructive trust after a
full trial on the merits is held.
The Company is unable to estimate the outcome of these matters or any
potential liabilities it may incur. The Company expects to incur legal and other
defense costs as a result of such proceedings in an amount which it cannot
currently estimate. These proceedings could involve a substantial diversion of
the time of some of the members of management, and an adverse determination in,
or settlement of, such litigation could involve payment of significant amounts,
which could have an adverse impact on the Company's business, financial
condition, results of operations and cash flows.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
1. On February 4, 1999, the Company filed a Form 8-K with the Securities
and Exchange Commission reporting that, on January 31, 1999, the
Company received an extension of the expiration date of the purchase
offer from Bob Gray and Vestar Capital Partners from February 1, 1999
to February 2, 1999.
14
<PAGE>
2. On February 8, 1999, the Company filed a Form 8-K with the Securities
and Exchange Commission reporting that, on February 2, 1999, the
Company entered into a definitive agreement with Vestar Capital
Partners and the Gray family to purchase 97% of the Company's
outstanding common stock.
3. On February 12, 1999, the Company filed a Form 8-K with the
Securities and Exchange Commission reporting that the Company had
appointed Peter Buonocore as CEO of Amen Wardy Home Stores.
15
<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 4, 1999 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)
16
<PAGE>
EXHIBIT INDEX
Exhibit Sequentially
Number Description of Exhibit Numbered Page
- - - - - - - - - - - - - - - - - - ------- ---------------------- -------------
27.1 Financial Data Schedule
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-01-1998
<PERIOD-START> NOV-02-1998
<PERIOD-END> MAY-02-1999
<CASH> 28,839
<SECURITIES> 1,194
<RECEIVABLES> 34,696
<ALLOWANCES> 0
<INVENTORY> 46,159
<CURRENT-ASSETS> 121,238
<PP&E> 114,607
<DEPRECIATION> 43,861
<TOTAL-ASSETS> 195,473
<CURRENT-LIABILITIES> 19,818
<BONDS> 0
0
0
<COMMON> 503
<OTHER-SE> 174,213
<TOTAL-LIABILITY-AND-EQUITY> 195,473
<SALES> 151,626
<TOTAL-REVENUES> 151,626
<CGS> 66,786
<TOTAL-COSTS> 66,786
<OTHER-EXPENSES> 61,766
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,905
<INCOME-TAX> 9,812
<INCOME-CONTINUING> 14,092
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,092
<EPS-BASIC> 0.85
<EPS-DILUTED> 0.83
</TABLE>
