ST JOHN KNITS INC, SC 13E3, 1999-03-01

ST JOHN KNITS INC
SC 13E3, 1999-03-01
KNIT OUTERWEAR MILLS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Schedule 13E-3
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)

ST. JOHN KNITS, INC.
(Name of the Issuer)

ST. JOHN KNITS, INC.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SJKACQUISITION, INC.
PEARL ACQUISITION CORP.
ROBERT E. GRAY
MARIE GRAY
KELLY A. GRAY
(Name of Person(s) Filing Statement)

COMMON STOCK, WITHOUT PAR VALUE
(Title of Class of Securities)

790289 102
(CUSIP Number of Class of Securities)

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Robert E. Gray Roger G. Ruppert James P. Kelley
Chief Executive Officer Senior Vice President-Finance Managing Director
and Chairman of the Board and Chief Financial Officer Pearl Acquisition Corp.
St. John Knits, Inc. St. John Knits International, Incorporated 245 Park Avenue
17422 Derian Avenue 17422 Derian Avenue 41st Floor
Irvine, California 92614 Irvine, California 92614 New York, New York 10167
(949) 863-1171 (949) 863-1171 (212) 949-6500
</TABLE>

(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications on Behalf of
Person(s) Filing Statement)

------------------

Copies to:

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David A. Krinsky, Esq. Brian J. McCarthy, Esq. Philip T. Ruegger III, Esq.
O'Melveny & Myers LLP Skadden, Arps, Slate, Meagher & Flom, LLP Simpson Thacher & Bartlett
610 Newport Center Drive, 17th Floor 300 South Grand Avenue, Suite 3400 425 Lexington Avenue
Newport Beach, California 92660-6429 Los Angeles, California 90071 New York, New York 10017-3954
(949) 760-9600 (213) 687-5000 (212) 455-2000
</TABLE>
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This statement is filed in connection with (check the appropriate box):

a. [x] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act of
1933.
c. [ ] A tender offer.
d. [ ] None of the above.

Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [ x ]

Calculation of Filing Fee
- ----------------------------------------------------------------------------------
Transaction Valuation* Amount of Filing Fee
<S> <C>

$511,447,460 $102,289
- ----------------------------------------------------------------------------------
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[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.

*For purposes of calculation of the filing fee only. The "Transaction Valuation"
amount referred to above is the sum of (i) the product of 16,581,482, the number
of outstanding shares of common stock, without par value (the "Shares"), of St.
John Knits, Inc. as of February 22, 1999 and $30, the cash price per Share to be
paid in the Mergers (as defined herein), and (ii) cash consideration of
$14,003,000 to be paid for options being surrendered in connection with the
Mergers. In accordance with Rule 0-11 under the Securities Exchange Act of 1934,
the filing fee is determined by multiplying the amount calculated pursuant to
the preceding sentence by 1/50th of one percent.

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This Rule 13e-3 Transaction Statement (the "Statement") of St. John
Knits, Inc., a California corporation (the "Company"), St. John Knits
International, Incorporated, a Delaware corporation ("SJKI"), Pearl Acquisition
Corp., a Delaware corporation and, direct, wholly owned subsidiary of
Vestar/Gray Investors LLC ("Acquisition"), and SJKAcquisition, Inc., a
California corporation and, direct, wholly owned subsidiary of SJKI ("Merger
Sub"), Robert E. Gray, Marie Gray and Kelly A. Gray relates to an Agreement and
Plan of Merger, dated as of February 2, 1999 (the "Merger Agreement"), among the
Company, SJKI, Acquisition and Merger Sub, pursuant to which (a) Merger Sub will
merge with and into the Company (the "Reorganization Merger"), with the result
being that the Company will become a wholly owned subsidiary of SJKI and (b)
Acquisition will merge with and into SJKI (the "Acquisition Merger" and,
together with the Reorganization Merger, the "Mergers"), with SJKI as the
surviving corporation. As a result of the Mergers, SJKI will be 7% owned by
existing shareholders of the Company, other than the Grays, and 93% owned by
Vestar/Gray Investors LLC. Vestar/Gray Investors LLC is a Delaware corporation
and is wholly owned by Vestar Capital Partners III, L.P. Prior to the
Reorganization Merger, Robert E. Gray, Marie Gray and Kelly A. Gray (the
"Grays") will contribute their shares of the Company's common stock to
Vestar/Gray Investors LLC, and Vestar/Gray Investors LLC will become
approximately 16% owned by the Grays. The Merger Agreement and the Mergers have
already been approved by the Boards of Directors and the stockholders of all the
parties to the Merger Agreement, other than the stockholders of SJKI and the
shareholders of the Company. The Statement is intended to satisfy the reporting
requirements of Section 13(e) of the Securities Exchange Act of 1934, as amended
(the "Act"). A copy of the Merger Agreement filed by the Company as Appendix A
to the Company's Proxy Statement-Prospectus (the "Proxy Statement-Prospectus")
is filed as Exhibit (c)(1) to the Statement.

The cross-reference sheet below is being supplied pursuant to General
Instruction F to Schedule 13E-3 and shows the location in the Proxy Statement-
Prospectus of the information required to be included in response to the items
of this Statement. The information in the Proxy Statement-Prospectus, including
all appendices thereto, is hereby expressly incorporated herein by reference and
the responses to each item in this Statement are qualified in their entirety by
the information contained in the Proxy Statement-Prospectus.

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CROSS-REFERENCE SHEET

Item in
Schedule 13E-3 Where Located in Proxy Statement-Prospectus
- -------------- -------------------------------------------
<S> <C>
Item 1(a) "SUMMARY -- The Companies" and "INFORMATION ABOUT ST. JOHN AND
ST. JOHN KNITS INTERNATIONAL"

Item 1(b) "SUMMARY -- The Special Meeting" and "THE SPECIAL MEETING --
Record Date and Voting Rights"

Item 1(c) "SUMMARY -- Market Price and Dividend Information"

Item 1(d) "SUMMARY -- Market Price and Dividend Information," "RISK FACTORS --
We Do Not Expect to Pay Dividends" and "THE MERGERS -- Merger Financing"

Item 1(e) *

Item 1(f) "PURCHASES OF SHARES"

Item 2(a)-(d), (g) "SUMMARY -- The Companies," "INFORMATION ABOUT ST. JOHN AND
ST. JOHN KNITS INTERNATIONAL -- Management and Additional Information" and
"CERTAIN INFORMATION CONCERNING ACQUISITION, VESTAR AND THE GRAYS"

Item 2(e)-(f) *

Item 3(a)(1) *

Item 3(a)(2)-(b) "SUMMARY -- Reasons for the Mergers; Recommendations to Shareholders,"
"SPECIAL FACTORS -- Background of the Mergers" and "-- Reasons
for the Mergers; Recommendations to Shareholders"

Item 4(a) "SUMMARY -- The Mergers," "-- What You Will Receive," "SPECIAL
FACTORS -- Purpose and Structure for the Mergers," "THE MERGERS" and "THE MERGER
AGREEMENT"

Item 4(b) "SUMMARY -- The Voting Agreement," "-- Reasons for the Mergers; Recommendations
to Shareholders," "-- Interests of Certain Persons Involved in the Mergers That Are
Different from Yours," "-- The Stockholders Agreement," "-- The Limited Liability
Company Agreement," "SPECIAL FACTORS -- Background of the Mergers," "-- Reasons for
the Mergers; Recommendations to Shareholders," "--Interests of Certain Persons in the
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<S> <C>
Mergers; Conflicts of Interests," "-- Certain Effects of the Mergers; New York Stock Exchange Delisting;
Operations of St. John After the Mergers," "THE VOTING AGREEMENT," "THE STOCKHOLDERS AGREEMENT" and "THE
LIMITED LIABILITY COMPANY AGREEMENT"

Item 5(a)-(b) *

Item 5(c) "SUMMARY -- Reasons for the Mergers; Recommendations to Shareholders," "-- Interests of Certain Persons
Involved in the Mergers That Are Different from Yours," "SPECIAL FACTORS -- Reasons for the Mergers;
Recommendations to Shareholders," "-- Interests of Certain Persons in the Mergers; Conflicts of Interests"
and "THE MERGERS -- Board of Directors and Officers of St. John Knits International Following the Mergers"

Item 5(d) "SUMMARY -- Merger Financing," "--Market Price and Dividend Information," "--Selected Pro Forma Condensed
Consolidated Financial Data (Unaudited)," "RISK FACTORS -- We Do Not Expect to Pay Dividends," "SPECIAL
FACTORS --Certain Effects of the Mergers; New York Stock Exchange Delisting; Operations of St. John After
the Mergers," "THE MERGERS -- Merger Financing," "Pro Forma Condensed Consolidated Financial Statements
(Unaudited)" and "COMPARISON OF THE RIGHTS OF HOLDERS OF ST. JOHN COMMON STOCK AND ST. JOHN KNITS
INTERNATIONAL COMMON STOCK -- Dividends and Repurchases of Shares"

Item 5(e) "SPECIAL FACTORS -- Purpose and Structure for the Mergers"

Item 5(f)-(g) "SUMMARY -- New York Stock Exchange Delisting," "RISK FACTORS -- Our Common Stock Will Not Be Listed,
Which Will Result In A Loss of Liquidity" and "SPECIAL FACTORS -- Certain Effects of the Mergers;
New York Stock Exchange Delisting; Operations of St. John After the Mergers"

Item 6(a)-(c) "SUMMARY -- Merger Financing," "-- Selected Pro Forma Condensed Consolidated Financial Data (Unaudited),"
"THE MERGERS -- Merger Financing" and "--Pro Forma Condensed Consolidated Financial Statements (Unaudited)"

Item 6(d) *

Item 7(a)-(c) "SUMMARY -- Reasons for the Mergers; Recommendations to Shareholders," "-- Accounting Treatment," "SPECIAL
FACTORS --Background of the Mergers," "-- Purpose and Structure for the Mergers" and "--Reasons for the
Mergers; Recommendations to Shareholders"

Item 7(d) "SUMMARY -- Material Federal Income Tax Consequences," "-- New York Stock Exchange Delisting," "SPECIAL
FACTORS -- Certain Effects of the Mergers; New York Stock Exchange Delisting; Operations of St. John After
the Mergers" and "-- Material Federal Income Tax Consequences"

Item 8(a) "SUMMARY -- Reasons for the Mergers; Recommendations to Shareholders," "SPECIAL FACTORS -- Background of
the Mergers" and "-- Reasons for the Mergers; Recommendations to Shareholders"
</TABLE>

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<TABLE>

<S> <C>
Item 8(b) "SUMMARY -- Reasons for the Mergers; Recommendations to Shareholders,"
"-- Opinions of Financial Advisors," "SPECIAL FACTORS -- Reasons for
the Mergers; Recommendations to Shareholders" and "-- Fairness Opinions
of Financial Advisors"

Item 8(c) "SPECIAL FACTORS -- Purpose and Structure for the Mergers"

Item 8(d)-(e) "SUMMARY -- Reasons for the Mergers; Recommendations to Shareholders"
and "SPECIAL FACTORS -- Reasons for the Mergers; Recommendations to
Shareholders"

Item 8(f) *

Item 9(a)-(c) "SUMMARY -- Reasons for the Mergers; Recommendations to Shareholders,"
"-- Opinions of Financial Advisors," "SPECIAL FACTORS --
Background of the Mergers" and "-- Reasons for the Mergers;
Recommendations to Shareholders" and "-- Fairness Opinions of
Financial Advisors"

Item 10(a) "SUMMARY -- Percentage of Shares Held By Directors and Executive
Officers," "-- The Voting Agreement," "THE VOTING AGREEMENT," "THE SPECIAL
MEETING -- Record Date and Voting Rights" and "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT"

Item 10(b) *

Item 11 "SUMMARY -- The Voting Agreement," "-- The Stockholders Agreement,"
"-- The Limited Liability Company Agreement," "THE VOTING AGREEMENT," "THE
STOCKHOLDERS AGREEMENT" and "THE LIMITED LIABILITY COMPANY AGREEMENT"

Item 12(a)-(b) "SUMMARY -- Interests of Certain Persons Involved in the Mergers That
Are Different from Yours," "-- The Special Meeting," "SPECIAL
FACTORS -- Interests of Certain Persons in the Mergers; Conflicts of
Interests" and "THE SPECIAL MEETING -- Record Date and Voting Rights"

Item 13(a) "SUMMARY -- Dissenters' Rights" and "THE MERGERS -- Dissenters'
Rights of Appraisal"

Item 13(b)-(c) *

Item 14(a) Company's Annual Report on Form 10-K, as amended, for the fiscal year ended
November 1, 1998, and "SUMMARY -- Selected Historical Condensed Financial Data"
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Item 14(b) "SUMMARY -- Selected Pro Forma Condensed Consolidated Financial Data (Unaudited)" and
"THE MERGERS -- Pro Forma Condensed Consolidated Financial Statements
(Unaudited)"

Item 15(a)-(b) "THE MERGERS -- Merger Financing," "THE SPECIAL MEETING -- Proxies" and
"-- Solicitation of Proxies"

Item 16 *

Item 17(a)(1) Letter dated February 2, 1999, from The Chase Manhattan Bank
and Chase Securities Inc. to Vestar Capital Partners III, L.P.

Item 17(a)(2) Letter dated February 2, 1999, from Chase Securities Inc. to
Vestar Capital Partners III, L.P.

Item 17(b)(1)+ Fairness Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated (included as Appendix B to the Proxy Statement-Prospectus)

Item 17(b)(2)+ Fairness Opinion of Wasserstein Perella & Co., Inc. (included as Appendix C to the
Proxy Statement-Prospectus)

Item 17(c)(1)+ Agreement and Plan of Merger, dated as of February 2, 1999, by
and among the Company, SJKI, Acquisition and Merger Sub (included as Appendix A
to the Proxy Statement-Prospectus)

Item 17(c)(2)+ Voting Agreement, dated as of February 2, 1999, among Vestar
Capital Partners III, L.P., Vestar/Gray Investors LLC and the Grays (included as
Appendix E to the Proxy Statement-Prospectus)

Item 17(c)(3)<> Form of Amended and Restated Limited Liability Company
Agreement of Vestar/Gray Investors LLC

Item 17(c)(4)<> Form of Stockholders Agreement among SJKI, Vestar/Gray
Investors LLC, Vestar Capital Partners III, L.P., the Grays and other management
stockholders

Item 17(d) Proxy Statement-Prospectus filed by St. John Knits International, Incorporated on March 1,
1999 and incorporated herein by reference.

Item 17(e)+ Summary of Appraisal Rights (included as Appendix D to the Proxy Statement-Prospectus)

Item 17(f) *
</TABLE>
________________
* The Item is inapplicable or the answer thereto is in the
negative.

+ Incorporated herein by reference from the Proxy
Statement-Prospectus which forms a part of the
Registration Statement on Form S-4 of St. John Knits
International, Incorporated filed March 1, 1999.

<> To be filed in a subsequent amendment.

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RULE 13E-3 TRANSACTION STATEMENT

Item 1. Issuer and Class of Security Subject to the Transaction

(a) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- The Companies" and "INFORMATION ABOUT
ST. JOHN AND ST. JOHN KNITS INTERNATIONAL" is incorporated herein
by reference.

(b) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- The Special Meeting" and "THE SPECIAL
MEETING -- Record Date and Voting Rights" is incorporated herein
by reference.

(c) The information set forth in the Proxy Statement-Prospectus under
the caption "SUMMARY -- Market Price and Dividend Information" is
incorporated herein by reference.

(d) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- Market Price and Dividend Information,"
"RISK FACTORS -- We Do Not Expect to Pay Dividends" and "THE
MERGERS -- Merger Financing" is incorporated herein by reference.

(e) Not applicable.

(f) The information set forth in the Proxy Statement-Prospectus under
the caption "PURCHASES OF SHARES" is incorporated herein by
reference.

Item 2. Identity and Background

This Statement is filed jointly by the Company, the issuer of the
securities which are the subject of the Rule 13e-3 transaction,
SJKI, Merger Sub, Acquisition, Robert E. Gray, Marie Gray and
Kelly A. Gray. The Company and Merger Sub are each corporations
organized under the laws of the state of California. SJKI is a
corporation organized under the laws of the state of Delaware.
Acquisition is a corporation organized under the laws of the
state of Delaware. SJKI and Merger Sub are each affiliates of the
Company. The Grays are executive officers and directors of the
Company. The principal business of the Company is designing,
manufacturing and selling women's apparel. SJKI does not conduct
any business other than holding the capital stock of Merger Sub.
Merger Sub has been organized for the purpose of consummating the

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Reorganization Merger and has no other business activities.
Acquisition has been organized for the purpose of consummating
the Acquisition Merger and has no other business activities. The
address of the Company, SJKI, Merger Sub, Robert E. Gray, Marie
Gray and Kelly A. Gray is c/o St. John Knits, Inc., 17422 Derian
Avenue, Irvine, California 92614. The address of Acquisition is
c/o Vestar Capital Partners III, L.P., 1225 17th Street, Suite
1660, Denver, Colorado 80202.

(a)-(d), (g) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- The Companies," "INFORMATION ABOUT ST.
JOHN AND ST. JOHN KNITS INTERNATIONAL -- Management and
Additional Information" and "CERTAIN INFORMATION CONCERNING
ACQUISITION, VESTAR AND THE GRAYS" is incorporated herein by
reference.

(e)-(f) None of the Company, SJKI, Acquisition, Merger Sub, Robert E.
Gray, Marie Gray, Kelly A. Gray, any executive officer, director
or person controlling the Company, SJKI, Acquisition or Merger
Sub has during the last five years (i) been convicted in a
criminal proceeding (excluding traffic violations or similar
misdemeanors) or (ii) been a party to a civil proceeding of a
judicial or administrative body of competent jurisdiction and as
a result of such proceeding was or is subject to a judgment,
decree or final order enjoining future violations of, or
prohibiting activities subject to, federal or state securities
laws or finding any violation of such laws.

Item 3. Past Contacts, Transactions or Negotiations

(a)(1) Not applicable.

(a)(2)-(b) The information set forth in the Proxy Statement-Prospectus under
captions "SUMMARY -- Reasons for the Mergers; Recommendations to
Shareholders," "SPECIAL FACTORS -- Background of the Mergers" and
"--Reasons for the Mergers; Recommendations to Shareholders" is
incorporated herein by reference.

Item 4. Terms of the Transaction

(a) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- The Mergers," "--What You Will Receive,"
"SPECIAL FACTORS -- Purpose and Structure for the Mergers," "THE

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MERGERS" and "THE MERGER AGREEMENT" is incorporated herein by
reference.

(b) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- The Voting Agreement," "-- Reasons for
the Mergers; Recommendations to Shareholders," "-- Interests of
Certain Persons Involved in the Mergers That Are Different from
Yours," "-- The Stockholders Agreement," "-- The Limited
Liability Company Agreement," "SPECIAL FACTORS -- Background of
the Mergers," "-- Reasons for the Mergers; Recommendations to
Shareholders," "-- Interests of Certain Persons in the Mergers;
Conflicts of Interests," "-- Certain Effects of the Mergers; New
York Stock Exchange Delisting; Operations of St. John After the
Mergers," "THE VOTING AGREEMENT," "THE STOCKHOLDERS AGREEMENT"
and "THE LIMITED LIABILITY COMPANY AGREEMENT" is incorporated
herein by reference.

Item 5. Plans or Proposals of the Issuer or Affiliate

(a)-(b) Not applicable.

(c) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- Reasons for the Mergers; Recommendations
to Shareholders," "-- Interests of Certain Persons Involved in
the Mergers That Are Different from Yours," "SPECIAL FACTORS --
Reasons for the Mergers; Recommendations to Shareholders," "--
Interests of Certain Persons in the Mergers; Conflicts of
Interests" and "THE MERGERS -- Board of Directors and Officers of
St. John Knits International Following the Mergers" is
incorporated herein by reference.

(d) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- Merger Financing," -- Market Price and
Dividend Information," "-- Selected Pro Forma Condensed
Consolidated Financial Data (Unaudited)," "RISK FACTORS -- We Do
Not Expect to Pay Dividends," "SPECIAL FACTORS -- Certain Effects
of the Mergers; New York Stock Exchange Delisting; Operations of
St. John After the Mergers," "THE MERGERS -- Merger Financing,"
"-- Pro Forma Condensed Consolidated Financial Statements
(Unaudited)" and "COMPARISON OF THE RIGHTS OF HOLDERS OF ST. JOHN
COMMON STOCK AND ST. JOHN KNITS INTERNATIONAL COMMON STOCK --
Dividends and Repurchases of Shares" is incorporated herein by
reference.

(e) The information set forth in the Proxy Statement-Prospectus under
the caption "SPECIAL FACTORS -- Purpose and Structure of the
Mergers" is incorporated herein by reference.

(f)-(g) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- New York Stock Exchange Delisting,"
"RISK FACTORS -- Our Common Stock Will Not Be Listed, Which Will
Result In A Loss of Liquidity" and

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"SPECIAL FACTORS -- Certain Effects of the Mergers; New York
Stock Exchange Delisting; Operations of St. John after the
Mergers" is incorporated herein by reference.

Item 6. Source and Amounts of Funds or Other Consideration

(a)-(c) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- Merger Financing," "-- Selected Pro
Forma Condensed Consolidated Financial Data (Unaudited)," "THE
MERGERS -- Merger Financing" and "-- Pro Forma Condensed
Consolidated Financial Statements (Unaudited)" is incorporated
herein by reference.

(d) Not applicable.

Item 7. Purpose(s), Alternatives, Reasons and Effects

(a)-(c) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- Reasons for the Mergers; Recommendations
to Shareholders," "-- Accounting Treatment," "SPECIAL FACTORS --
Background of the Mergers," "-- Purpose and Structure for the
Mergers" and "-- Reasons for the Mergers; Recommendations to
Shareholders" is incorporated herein by reference.

(d) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- Material Federal Income Tax
Consequences," "-- New York Stock Exchange Delisting," "SPECIAL
FACTORS -- Certain Effects of the Mergers; New York Stock
Exchange Delisting; Operations of St. John After the Mergers" and
"-- Material Federal Income Tax Consequences" is incorporated
herein by reference.

Item 8. Fairness of the Transaction

(a) The information set forth in the Proxy Statement-Prospectus under
the caption "SUMMARY -- Reasons for the Mergers; Recommendations
to Shareholders," "SPECIAL FACTORS -- Background of the Mergers"
and "-- Reasons for the Mergers; Recommendations to Shareholders"
is incorporated herein by reference.

(b) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- Reasons for the Mergers; Recommendations
to Shareholders," "-- Opinions of Financial Advisors," "SPECIAL
FACTORS -- Reasons for the Mergers; Recommendations to
Shareholders" and "-- Fairness Opinions of Financial Advisors" is
incorporated herein by reference.

(c) The information set forth in the Proxy Statement-Prospectus under
the caption "SPECIAL FACTORS -- Purpose and Structure for the
Mergers" is incorporated herein by reference.

(d)-(e) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- Reasons for the Mergers; Recommendations
to Shareholders" and "SPECIAL FACTORS -- Reasons for the Mergers;

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Recommendations to Shareholders" is incorporated herein by
reference.

(f) Not applicable.

Item 9. Reports, Opinions, Appraisals and Certain Negotiations

(a)-(c) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- Reasons for the Mergers; Recommendations
to Shareholders," "-- Opinions of Financial Advisors," "SPECIAL
FACTORS -- Background of the Mergers" and "-- Reasons for the
Mergers; Recommendations to Shareholders" and "-- Fairness
Opinions of Financial Advisors" is incorporated herein by
reference.

Item 10. Interest in Securities of the Issuer

(a) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- Percentage of Shares Held By Directors
and Executive Officers," "-- The Voting Agreement," "THE VOTING
AGREEMENT," "THE SPECIAL MEETING -- Record Date and Voting
Rights" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" is incorporated herein by reference.

(b) None.

Item 11. Contracts, Arrangements or Understandings with Respect to the
Issuer's Securities

The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- The Voting Agreement," "-- The
Stockholders Agreement," "-- The Limited Liability Company
Agreement," "THE VOTING AGREEMENT," "THE STOCKHOLDERS AGREEMENT"
and "THE LIMITED LIABILITY COMPANY AGREEMENT" is incorporated
herein by reference.

Item 12. Present Intention and Recommendation of Certain Persons with
Regard to the Transaction

(a)-(b) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- Interests of Certain Persons Involved in
the Mergers That Are Different from Yours," "-- The Special
Meeting," "SPECIAL FACTORS -- Interests of Certain Persons in the
Mergers; Conflicts of Interests" and "THE SPECIAL MEETING --
Record Date and Voting Rights" is incorporated herein by
reference.

Item 13. Other Provisions of the Transaction

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(a) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- Dissenters' Rights" and "THE MERGERS --
Dissenters' Rights of Appraisal" is incorporated herein by
reference.

(b)-(c) Not applicable.

Item 14. Financial Information

(a) The information set forth in the Company's Annual Report on Form
10-K, as amended, for the fiscal year ended November 1, 1998 and
in the Proxy Statement-Prospectus under the caption "SUMMARY --
Selected Historical Condensed Financial Data" is incorporated
herein by reference.

(b) The information set forth in the Proxy Statement-Prospectus under
the captions "SUMMARY -- Selected Pro Forma Condensed
Consolidated Financial Data (Unaudited)" and "THE MERGERS -- Pro
Forma Condensed Consolidated Financial Statements (Unaudited)" is
incorporated herein by reference.

Item 15. Persons and Assets Employed, Retained or Utilized

(a)-(b) The information set forth in the Proxy Statement-Prospectus under
the captions "THE MERGERS -- Merger Financing," "THE SPECIAL
MEETING -- Proxies" and "-- Solicitation of Proxies" is
incorporated herein by reference.

Item 16. Additional Information

Not applicable.

Item 17. Material to Be Filed as Exhibits

(a)(1) Letter dated February 2, 1999, from The Chase Manhattan Bank and
Chase Securities Inc. to Vestar Capital Partners III, L.P.

(a)(2) Letter dated February 2, 1999, from Chase Securities Inc. to
Vestar Capital Partners III, L.P.

(b)(1) Fairness Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated (incorporated herein by reference to Appendix B to
the Proxy Statement-Prospectus).

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(b)(2) Fairness Opinion of Wasserstein Perella & Co., Inc. (incorporated
herein by reference to Appendix C to the Proxy Statement-
Prospectus).

(c)(1) Agreement and Plan of Merger, dated as of February 2, 1999, by
and among the Company, SJKI, Acquisition and Merger Sub
(incorporated herein by reference to Appendix A to the Proxy
Statement-Prospectus).

(c)(2) Voting Agreement, dated as of February 2, 1999, among Vestar
Capital Partners III, L.P., Vestar/Gray Investors LLC and the
Grays (incorporated herein by reference to Appendix E to the
Proxy Statement-Prospectus).

(c)(3) Form of Amended and Restated Limited Liability Company Agreement
of Vestar/Gray Investors LLC (to be filed in a subsequent
amendment).

(c)(4) Form of Stockholders Agreement among SJKI, Vestar/Gray Investors
LLC, Vestar Capital Partners III, L.P., the Grays and other
management stockholders (to be filed in a subsequent amendment).

(d) Proxy Statement-Prospectus (filed by St. John Knits
International, Incorporated on March 1, 1999 and incorporated
herein by reference).

(e) Summary of Appraisal Rights (incorporated by reference to
Appendix D to the Proxy Statement-Prospectus).

(f) Not applicable.

12
<PAGE>

SIGNATURES
----------

After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.

PEARL ACQUISITION CORP.

By: /s/ JAMES P. KELLEY
------------------------------------
Name: James P. Kelley
Title:

ST. JOHN KNITS, INC.

By: /s/ BOB GRAY
------------------------------------
Name: Bob Gray
Title:

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

By: /s/ BOB GRAY
------------------------------------
Name: Bob Gray
Title:

SJKACQUISITION, INC.

By: /s/ BOB GRAY
------------------------------------
Name: Bob Gray
Title:

BOB GRAY

By: /s/ BOB GRAY
------------------------------------
Title:

13
<PAGE>

MARIE GRAY

By: /s/ MARIE GRAY
____________________________________
Title:

KELLY A. GRAY

By: /s/ KELLY A. GRAY
____________________________________
Title:

February 26, 1999

14
<PAGE>

EXHIBIT INDEX

EXHIBIT
NUMBER EXHIBIT
- ------ -------

(a)(1) Letter dated February 2, 1999, from The Chase Manhattan Bank and
Chase Securities Inc. to Vestar Capital Partners III, L.P.

(a)(2) Letter dated February 2, 1999, from Chase Securities Inc. to
Vestar Capital Partners III, L.P.

(b)(1) Fairness Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated (incorporated herein by reference to Appendix B to
the Proxy Statement-Prospectus).

(b)(2) Fairness Opinion of Wasserstein Perella & Co., Inc. (incorporated
herein by reference to Appendix C to the Proxy Statement-
Prospectus).

(c)(3) Form of Amended and Restated Limited Liability Company Agreement
of Vestar/Gray Investors LLC (to be filed in a subsequent
amendment).

(c)(4) Form of Stockholders Agreement among SJKI, Vestar/Gray Investors
LLC, Vestar Capital Partners III, L.P., the Grays and other
management stockholders (to be filed in a subsequent
amendment).

(d) Proxy Statement-Prospectus (filed by St. John Knits
International, Incorporated on March 1, 1999 and incorporated
herein by reference).

(e) Summary of Appraisal Rights (incorporated by reference to
Appendix D to the Proxy Statement-Prospectus).

(f) Not applicable.

<PAGE>

EXHIBIT (a)(1)
to Schedule 13E-3

February 2, 1999

Vestar Capital Partners III, L.P.
245 Park Avenue, 41st Floor
New York, NY 10167-4098

Attention: Mr. Sander M. Levy

Vestar Capital Partners III, L.P.
17th Street Plaza
1225 17th Street, Suite 1660
Denver, CO 80202

Attention: Mr. James P. Kelley
Mr. Christopher J. Henderson

Project Knit
------------
Senior Secured Credit Facilities
--------------------------------
Commitment Letter
-----------------

Ladies and Gentlemen:

You have advised The Chase Manhattan Bank ("Chase") and Chase
-----
Securities Inc. ("CSI") that Vestar Capital Partners III, L.P. ("Vestar")
--- ------
proposes to acquire (the "Acquisition") St. John Knits, Inc., a California
-----------
corporation (the "Company"). You have further advised us that immediately prior
-------
to the Acquisition, a wholly owned subsidiary ("Merger Sub") of St. John Knits
----------
International, Incorporated, a wholly owned subsidiary of the Company (the

"Borrower"), will merge with and into the Company, with the Company being the
- ---------
surviving corporation (the
<PAGE>

"Reorganization"). In connection with the Reorganization, the existing
--------------
stockholders of the Company will exchange their shares of common stock of the
Company ("Company Common Stock") for shares of common stock of the Borrower
--------------------
("Borrower Common Stock"), resulting in the Company becoming a wholly owned
---------------------
subsidiary of the Borrower. You have further advised us that, in connection with
the Acquisition, (a) Vestar will form a limited liability company ("Holdco"),
------
which will form a subsidiary ("Newco") and (b) immediately prior to the
-----
Reorganization (i) Vestar and certain co-investors reasonably satisfactory to
Chase will contribute approximately $153,637,000 of cash equity to Holdco in
consideration for the issuance of an 84.1% limited liability company interest in
Holdco ("Holdco Interest"), (ii) certain members of management of the Company
---------------
(the "Gray Management") will contribute approximately 1,206,000 shares of
Company Common Stock to Holdco in consideration for approximately $7,110,000 and
the issuance of an aggregate 15.9% Holdco Interest (having an aggregate value of
approximately $29,069,000), (iii) Holdco will contribute approximately
$146,527,000 of cash equity to Newco in consideration for the issuance of 100%
of the common stock of Newco. You have further advised us that certain members
of management of the Company may be offered the opportunity to purchase Borrower
Common Stock from the Borrower representing not more than 5% of the outstanding
capital stock of the Borrower and that any such purchase would reduce the amount
of Vestar's contribution to Holdco and may be funded by loans from Vestar. You
have further advised us that in connection with the Acquisition, Newco, the
Borrower, the Company and Merger Sub will enter into an agreement and plan of
merger (the "Merger Agreement"), pursuant to which (a) the Borrower will obtain
----------------
the senior secured credit facilities (the "Facilities") described in the Summary
----------
of Principal Terms and Conditions attached hereto as Exhibit A (the "Term
----
Sheet") in an aggregate principal amount of $180,000,000, (b) the Borrower will
- -----
issue up to $160,000,000 principal amount of its senior subordinated notes (the
"Senior Subordinated Notes") in a public offering or in a Rule 144A offering or
-------------------------
other private placement, (c) Newco will merge with and into Borrower (the
"Merger"), (d) at the effective time of the Merger, the outstanding shares of
------
capital stock of the Borrower held by its stockholders (the "Sellers") (other
-------
than the shares held by Holdco, which will be cancelled) will be converted into
a combination of aggregate cash consideration equal to approximately
$447,581,000 and 456,000 shares of Borrower
<PAGE>

Common Stock , such that, following the Merger, certain of the Sellers will
continue to own approximately 7.0% of the outstanding capital stock of the
Borrower having an aggregate value of approximately $13,684,000, (e) at the
effective time of the Merger, outstanding in the money options to buy shares of
Borrower Common Stock will be cashed out for an aggregate amount of
approximately $14,003,000, (f) at the effective time of the Merger, the
outstanding shares of capital stock of Newco held by Holdco will be converted
into Borrower Common Stock representing approximately 93.0% of the outstanding
capital stock of the Borrower having an aggregate value of approximately
$182,706,000, and (g) the Borrower will pay transaction costs and expenses in
connection with the foregoing in an amount not to exceed $20,000,000 (the
foregoing transactions are collectively referred to herein as the
"Transactions"). In connection with the foregoing, you have requested that CSI
------------
agree to structure, arrange and syndicate the Facilities, and that Chase commit
to provide the Facilities and to serve as administrative agent therefor.

CSI is pleased to advise you that it is willing to act as exclusive
advisor, lead arranger and book manager for the Facilities. Furthermore, Chase
is pleased to advise you of its commitment to provide the entire amount of the
Facilities upon the terms and subject to the conditions set forth or referred to
in this Commitment Letter and in the Term Sheet.

It is agreed that Chase will act as the sole and exclusive
administrative agent, collateral agent and syndication agent, and that CSI will
act as the sole and exclusive advisor, lead arranger and book manager, for the
Facilities, and each will, in such capacities, perform the duties and exercise
the authority customarily performed and exercised by it in such roles. You
agree that no other agents, co-agents, managers or arrangers will be appointed,
no other titles will be awarded and no compensation (other than that expressly
contemplated by the Term Sheet and the Fee Letter referred to below) will be
paid in connection with the Facilities unless you and we shall so agree.

We intend to syndicate the Facilities to a group of financial
institutions (together with Chase, the "Lenders") identified by us in
-------
consultation with you. CSI intends to commence syndication efforts promptly
upon the execution of this Commitment Letter, and you agree actively
<PAGE>

to assist CSI in completing a syndication satisfactory to it. Such assistance
shall include (a) your using commercially reasonable efforts to ensure that the
syndication efforts benefit materially from your and, to the extent reasonably
possible, the Borrower's and the Company's existing lending relationships, (b)
direct contact between senior management and advisors of Vestar, the Borrower
and the Company and the proposed Lenders, (c) assistance in the preparation of a
Confidential Information Memorandum and other marketing materials to be used in
connection with the syndication and (d) the hosting, with CSI, of one or more
meetings of prospective Lenders. To the extent that syndication of any credit
facility in connection with other Vestar investments could reasonably be
expected to disrupt or otherwise interfere with the orderly syndication of the
Facilities, it is understood and agreed that you will, to the extent permitted
by applicable law, provide CSI with reasonable prior notice of the syndication
of such other credit facility and, upon the reasonable request of CSI, you will
endeavor in good faith to coordinate the syndication of such credit facility
with the syndication of the Facilities.

CSI will manage, in consultation with you, all aspects of the
syndication, including decisions as to the selection of institutions to be
approached and when they will be approached, when their commitments will be
accepted, which institutions will participate, the allocations of the
commitments among the Lenders and the amount and distribution of fees among the
Lenders. To assist CSI in its syndication efforts, you agree promptly to
prepare and provide (and to use your reasonable efforts to cause the Borrower
and the Company to provide) to CSI and Chase all information with respect to the
Borrower, the Company, the Transactions and the other transactions contemplated
hereby, including all financial information and projections (the "Projections"),
-----------
as we may reasonably request in connection with the arrangement and syndication
of the Facilities. You hereby represent and covenant that, to your knowledge,
(a) all information other than the Projections (the "Information") that has been
-----------
or will be prepared by or on behalf of you, the Borrower, the Company or any of
your or their officers, employees or other authorized representatives and made
available to Chase or CSI by you, the Borrower, the Company or any of your or
their officers, employees or other authorized representatives, when taken as a
whole, is or will be, when furnished, complete and correct in all material
respects and does not or will not, when
<PAGE>

furnished, contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements contained therein not
materially misleading in light of the circumstances under which such statements
are made and (b) the Projections that have been or will be made available to
Chase or CSI by you, the Borrower, the Company or any of your or their officers,
employees or other authorized representatives have been or will be prepared in
good faith based upon reasonable assumptions. You agree to supplement the
Information and Projections from time to time until the closing of the
Facilities so that the representation and covenant in the preceding sentence
remain correct. You understand that in arranging and syndicating the Facilities
we will be using and relying on the Information and Projections without
independent verification thereof.

As consideration for Chase's commitment hereunder and CSI's agreement
to perform the services described herein, you agree to pay or to cause the
Borrower to pay to Chase the nonrefundable fees set forth in the Term Sheet and
in the Fee Letter dated the date hereof and delivered herewith (the "Fee
---
Letter").
- ------

Chase and CSI shall be entitled, after consultation with you, to (i)
change the structure, terms, pricing or relative amounts of the Facilities (it
being understood that no such change shall result in any interest rate on the
Facilities set forth in the Term Sheet being increased by more than 0.50%) and
(ii) reduce the amount of the Facilities and increase the amount of the Senior
Subordinated Notes (provided that the aggregate amount of the Facilities and the
Senior Subordinated Notes is not reduced and that any such adjustment would not
materially adversely affect the marketing of the Senior Subordinated Notes), in
any such case if Chase and CSI reasonably determine that such changes are
necessary in order to ensure a successful syndication of the Facilities.
Chase's commitment hereunder is subject to the agreements in this paragraph.

Chase's commitment hereunder and CSI's agreement to perform the
services described herein are also subject to (a) our not having discovered or
otherwise becoming aware of any information not previously disclosed to us that
we believe to be materially adversely inconsistent with our understanding, based
on the information provided to us prior
<PAGE>

to the date hereof, of the business, assets, operations, prospects or condition
(financial or otherwise) of the Borrower, the Company and its subsidiaries, (b)
there not occurring any material adverse change in or affecting the business,
assets, operations, prospects or condition (financial or otherwise) of the
Borrower, the Company and its subsidiaries, taken as a whole, since November 1,
1998, (c) there not having occurred a material disruption of or material adverse
change in financial, banking or capital market conditions that, in our
reasonable judgment, could materially impair the syndication of the Facilities,
(d) our reasonable satisfaction that prior to and during the syndication of the
Facilities there shall be no competing offering, placement or arrangement of any
debt securities or bank financing by or on behalf of the Borrower, the Company
or any subsidiary thereof (other than the Senior Subordinated Notes), and (e)
the other conditions set forth or referred to in the Term Sheet.

In addition, Chase's commitment hereunder is subject to the
negotiation, execution and delivery of definitive documentation with respect to
the Facilities reasonably satisfactory to Chase and customary for transactions
of this type. The terms and conditions of Chase's commitment hereunder and of
the Facilities are not limited to those set forth herein and in the Term Sheet.
Those matters that are not covered by the provisions hereof and of the Term
Sheet are subject to the approval and agreement of Chase, CSI, you and the
Borrower.

You agree (a) to indemnify and hold harmless Chase, CSI, their
affiliates and their respective officers, directors, employees, advisors, and
agents (each, an "indemnified person") from and against any and all losses,
------------------
claims, damages and liabilities to which any such indemnified person may become
subject arising out of or in connection with this Commitment Letter, the
Facilities, the Transactions or any related transaction or any claim,
litigation, investigation or proceeding relating to any of the foregoing,
regardless of whether any indemnified person is a party thereto, and to
reimburse each indemnified person upon demand for any reasonable legal or other
expenses incurred in connection with investigating or defending any of the
foregoing, provided that the foregoing indemnity will not, as to any indemnified
--------
person, apply to losses, claims, damages, liabilities or related expenses to the
extent they arise from the willful misconduct or gross negligence of
<PAGE>

such indemnified person, and (b) to reimburse Chase, CSI and their affiliates
upon presentation of reasonable supporting documentation for all reasonable out-
of-pocket expenses (including due diligence expenses, syndication expenses,
consultants' fees and expenses, travel expenses, and reasonable fees, charges
and disbursements of counsel (which, in the case of the initial documentation
and closing of the Facilities, shall be limited to a single counsel to the Agent
in each applicable jurisdiction)) incurred in connection with the Facilities and
any related documentation (including, without limitation, this Commitment
Letter, the Term Sheet, the Fee Letter and the definitive financing
documentation) or the administration, amendment, modification or waiver thereof.
No indemnified person shall be liable for any damages arising from the use by
others of Information or other materials obtained through electronic,
telecommunications or other information transmission systems, except for damages
arising from such indemnified person's gross negligence or willful misconduct,
or for any special, indirect, consequential or punitive damages in connection
with its activities related to the Facilities.

You acknowledge that Chase and its affiliates may be providing debt
financing, equity capital or other services (including financial advisory
services) to other companies in respect of which you, the Borrower and the
Company may have conflicting interests regarding the transactions described
herein and otherwise. Neither Chase nor its affiliates will use confidential
information obtained from you, the Borrower and the Company by virtue of the
transactions contemplated by this Commitment Letter or its other relationships
with you in connection with the performance by Chase or its affiliates of
services for other companies, and neither Chase nor its affiliates will furnish
any such information to other companies. You also acknowledge that neither
Chase nor any of its affiliates has any obligation to use in connection with the
transactions contemplated by this Commitment Letter, or to furnish to you, the
Borrower or the Company, confidential information obtained by it from other
companies.

This Commitment Letter and Chase's commitment hereunder shall not be
assignable by you without the prior written consent of Chase and CSI (and any
purported assignment without such consent shall be null and void), is intended
to be solely for the benefit of the parties hereto and is not intended to confer
any benefits upon, or create
<PAGE>

any rights in favor of, any person other than the parties hereto. This
Commitment Letter may not be amended or waived except by an instrument in
writing signed by you, Chase and CSI. This Commitment Letter may be executed in
any number of counterparts, each of which shall be an original, and all of
which, when taken together, shall constitute one agreement. Delivery of an
executed signature page of this Commitment Letter by facsimile transmission
shall be effective as delivery of a manually executed counterpart hereof. This
Commitment Letter and the Fee Letter are the only agreements that have been
entered into among us with respect to the Facilities and set forth the entire
understanding of the parties with respect thereto. This Commitment Letter shall
be governed by, and construed in accordance with, the laws of the State of New
York.

This Commitment Letter is delivered to you on the understanding that
neither this Commitment Letter, the Term Sheet or the Fee Letter nor any of
their terms or substance shall be disclosed, directly or indirectly by you, to
any other person except (a) you may disclose this Commitment Letter, the Term
Sheet and the Fee Letter (i) to your officers who are directly involved in the
consideration of this matter or (ii) as may be compelled in a judicial or
administrative proceeding or as otherwise required by law (in which case you
agree to inform us promptly thereof), and (b) you may disclose this Commitment
Letter and the Term Sheet, and their terms and substance (but not the Fee Letter
or its terms and substance) (i) to the Company (including its Board of Directors
and any committee thereof), the Borrower (including its Board of Directors and
any committee thereof), Robert E. Gray, Marie Gray, Kelly A. Gray and their
respective attorneys and advisors on a confidential basis in connection with the
Transactions and (ii) in connection with any filing under the Securities Act of
1933 or the Securities Exchange Act of 1934.

The reimbursement, indemnification and confidentiality provisions
contained herein and in the Fee Letter shall remain in full force and effect
regardless of whether definitive financing documentation shall be executed and
delivered and notwithstanding the termination of this Commitment Letter or
Chase's commitment hereunder; provided that your obligations under this
--------
Commitment Letter shall automatically terminate (other than those under the
third, fourth, eleventh and thirteenth paragraphs hereof and the first and last
sentence of the fifth paragraph hereof) and
<PAGE>

be superseded by the provisions of the definitive documentation relating to the
Facilities upon the initial funding thereunder and the consummation of the
Acquisition, and you shall automatically be released from all liability in
connection therewith at such time.

If the foregoing correctly sets forth our agreement, please indicate
your acceptance of the terms hereof and of the Term Sheet and the Fee Letter by
returning to us executed counterparts hereof and of the Fee Letter, not later
than 5:00 p.m., New York City time, on February 3, 1999. Chase's commitment and
CSI's agreements contained herein will expire at such time in the event Chase
has not received such executed counterparts in accordance with the immediately
preceding sentence. In the event that the initial borrowing in respect of the
Facilities does not occur on or before June 15, 1999, then this Commitment
Letter and Chase's commitment and CSI's undertakings hereunder shall
automatically terminate unless Chase and CSI shall, in their discretion, agree
to an extension.

Chase and CSI are pleased to have been given the opportunity to assist
you in connection with this important financing.

Very truly yours,

THE CHASE MANHATTAN BANK,

by /s/ DEBORAH DAVEY
--------------------------
Name: Deborah Davey
Title: Vice President

CHASE SECURITIES INC.,

by /s/ JAMES A. FEELEY III
--------------------------
Name: James A. Feeley III
Title: Vice President
<PAGE>

Accepted and agreed to
as of the date first
written above by:

VESTAR CAPITAL PARTNERS III, L.P.,

by VESTAR ASSOCIATES III, L.P.,
its General Partner,

by VESTAR ASSOCIATES CORPORATION
III, its General Partner,

by /s/ SANDER LEVY
-----------------------------
Name: Sander Levy
Title:
<PAGE>

CONFIDENTIAL
February 2, 1999 EXHIBIT A

Project Knit
------------
Senior Secured Credit Facilities
--------------------------------
Summary of Principal Terms and Conditions
-----------------------------------------

Borrower: St. John Knits International, Incorporated, a Delaware
corporation (the "Borrower").
--------

Transactions: Vestar Capital Partners III, L.P. ("Vestar"), proposes to
------
acquire (the "Acquisition") St. John Knits, Inc., a
-----------
California corporation (the "Company"). Immediately prior
-------
to the Acquisition, a wholly owned subsidiary of the
Borrower ("Merger Sub"), will merge with and into the
----------
Company, with the Company being the surviving corporation
(the "Reorganization"). In connection with the
--------------
Reorganization, the existing stockholders of the Company
will exchange their shares of common stock of the Company
("Company Common Stock") for shares of common stock of
--------------------
the Borrower ("Borrower Common Stock"), resulting in the
---------------------
Company becoming a wholly owned subsidiary of the
Borrower. In connection with the Acquisition, (a) Vestar
will form a limited liability company ("Holdco"), which
------
will form a subsidiary ("Newco") and (b) immediately
-----
prior to the Reorganization (i) Vestar and certain co-
investors reasonably satisfactory to the Chase (as
defined below) will contribute approximately $153,637,000
of cash equity to Holdco in consideration for the
issuance of an 84.1% limited liability company interest
in Holdco ("Holdco Interest"), (ii) certain members of
---------------
management
<PAGE>

of the Company (the "Gray Management") will contribute
approximately 1,206,000 shares of Company Common Stock to
Holdco in consideration for approximately $7,110,000 and
the issuance of an aggregate 15.9% Holdco Interest
(having an aggregate value of approximately $29,069,000)
and (iii) Holdco will contribute (the "Contribution")
------------
approximately $146,527,000 of cash equity to Newco in
consideration for the issuance of 100% of the common
stock of Newco. You have further advised us that certain
members of management of the Company may be offered the
opportunity to purchase Borrower Common Stock from the
Borrower representing not more than 5% of the outstanding
capital stock of the Borrower and that any such purchase
would reduce the amount of Vestar's contribution to
Holdco and may be funded by loans from Vestar. Newco, the
Borrower, the Company and Merger Sub will enter into an
agreement and plan of merger (the "Merger Agreement"),
----------------
pursuant to which (a) the Borrower will obtain the senior
secured credit facilities described below under the
caption "Facilities" in an aggregate principal amount of
$180,000,000, (b) the Borrower will issue up to
$160,000,000 principal amount of senior subordinated
notes (the "Senior Subordinated Notes") in a public
-------------------------
offering or in a Rule 144A offering or other private
placement, (c) Newco will merge with and into Borrower
(the "Merger"), (d) at the effective time of the Merger,
------
the outstanding shares of capital
<PAGE>

stock of the Borrower held by its stockholders (the
"Sellers") (other than the shares held by Holdco, which
-------
will be cancelled) will be converted into a combination
of aggregate cash consideration equal to approximately
$447,581,000 and 456,000 shares of Borrower Common Stock,
such that, following the Merger, certain of the Sellers
will continue to own approximately 7.0% of the
outstanding capital stock of the Borrower having an
aggregate value of approximately $13,684,000, (e) at the
effective time of the Merger, outstanding in the money
options to buy shares of Borrower Common Stock will be
cashed out for an aggregate amount of approximately
$14,003,000, (f) at the effective time of the Merger, the
outstanding shares of capital stock of Newco held by
Holdco will be converted into Borrower Common Stock
representing approximately 93.0% of the outstanding
capital stock of the Borrower having an aggregate value
of approximately $182,706,000 and (g) the Borrower will
pay transaction costs and expenses in connection with the
foregoing in an amount not to exceed $20,000,000 (the
foregoing transactions are collectively referred to
herein as the "Transactions").
------------

Sources and Uses: The approximate sources and uses of funds necessary to
consummate the Transactions are set forth on Annex II
attached hereto.

Facilities: (A) Two Senior Secured Term Loan Facilities to be
provided to the Borrower in an aggregate
<PAGE>

principal amount of up to $155,000,000 (the "Term
----
Loan Facilities"), such aggregate principal amount
---------------
to be allocated between (a) a Tranche A Term Loan
Facility in an aggregate principal amount of
$75,000,000 (the "Tranche A Facility") and (b) a
------------------
Tranche B Term Loan Facility in an aggregate
principal amount of $80,000,000 (the "Tranche B
---------
Facility"); provided that Chase and CSI shall be
-------- --------
entitled to change such allocation of the Term Loans
between the Tranche A Facility and the Tranche B
Facility if Chase and CSI reasonably determine that
such changes are necessary to ensure a successful
syndication of the Facilities.

(B) Senior Secured Revolving Credit Facility (the
"Revolving Facility" and, together with the Term
------------------
Loan Facilities, the "Facilities") in an aggregate
----------
principal amount up to $25,000,000. Up to an amount
to be agreed of the Revolving Facility will be
available in the form of a swingline facility and up
to an amount to be agreed of the Revolving Facility
will be available in the form of letters of credit.

Agent: The Chase Manhattan Bank ("Chase") will act as
-----
administrative agent, collateral agent and syndication
agent (collectively, the "Agent") for a syndicate of
-----
financial
<PAGE>

institutions (the "Lenders"), and will perform the duties
customarily associated with such roles.

Advisor, Lead Chase Securities Inc. will act as advisor, lead arranger
Arranger and Book and book manager for the Facilities (the "Arranger"), and
Manager: --------
will perform the duties customarily associated with such
roles.

Purpose: (A) The proceeds of the Term Loan Facilities will be
used on the date of the initial funding under the
Facilities (the "Closing Date"), together with the
------------
proceeds of the Contribution and the Senior
Subordinated Notes, to consummate the Transactions.

(B) The proceeds of loans under the Revolving Facility
will be used for working capital requirements;
provided that such proceeds will not be used to
--------
consummate the Transactions.

Availability: (A) The full amount of the Term Loan Facilities must be
drawn in a single drawing on the Closing Date.
Amounts repaid under the Term Loan Facilities may
not be reborrowed.

(B) Loans under the Revolving Facility will be available
at any time on and after the date immediately
following the Closing Date and prior to the final
maturity of the Revolving Facility. Amounts repaid
under the Revolving Facility may be reborrowed.
<PAGE>

Final Maturity and (A) Tranche A Facility: The Tranche A Facility will
Amortization: ------------------
mature six years after the Closing Date, and will
amortize in equal quarterly installments in the
annual amounts indicated below:

<TABLE>
<CAPTION>
Year Annual Payment
---- --------------
<S> <C>
1 $ 3,000,000
2 5,000,000
3 7,000,000
4 11,000,000
5 22,000,000
6 27,000,000

</TABLE>

(B) Tranche B Facility: The Tranche B Facility will
------------------
mature eight years after the Closing Date, and will
amortize in equal quarterly installments in the
annual amounts indicated below:

<TABLE>
<CAPTION>
Year Annual Payment
---- --------------
<S> <C>
1 --
2 $ 1,000,000
3 1,000,000
4 1,000,000
5 1,000,000
6 11,000,000
7 30,000,000
8 35,000,000

</TABLE>

Letters of Credit: Letters of credit under the Revolving Facility will be
issued by Chase or one of its affiliates (in such
capacity, the "Issuing Bank"). Each letter of credit will
expire no later than the earlier of (a) the date one year
<PAGE>

after its date of issuance and (b) the fifth business day
prior to the final maturity of the Revolving Facility.

Drawings under any letter of credit shall be reimbursed
by the Borrower on the same business day that funds are
disbursed. To the extent the Borrower does not reimburse
the Issuing Bank on such business day, the Lenders under
the Revolving Facility will be irrevocably and
unconditionally obligated to reimburse the Issuing Bank
pro rata based upon their respective Revolving Facility
commitments.

Guarantees: All obligations of the Borrower under the Facilities will
be unconditionally guaranteed by each existing and each
subsequently acquired or organized domestic and, to the
extent no adverse tax consequences to the Borrower or
such subsidiary would result therefrom, foreign
subsidiary of the Borrower (including, without
limitation, the Company).

Security: The Facilities and the related guarantees as well as
hedging agreements entered into with counterparties that
are Lenders will be secured by a first priority pledge of
all the equity securities of the Company and by
substantially all the assets of the Borrower and each
existing and each subsequently acquired or organized
domestic, or subject to the following limitation, foreign
subsidiary of the Borrower (including, without
limitation, the Company) (collectively, the
"Collateral"), including but not
----------
<PAGE>

limited to (a) a first priority pledge of all the capital
stock of and other investments in each existing and each
subsequently acquired or organized subsidiary of the
Borrower (including, without limitation, the Company)
(which pledge, in the case of any foreign subsidiary,
shall be limited to 65% of the capital stock of such
foreign subsidiary to the extent the pledge of any
greater percentage would result in adverse tax
consequences to the Borrower or such subsidiary) and (b)
perfected first priority security interests in
substantially all tangible and intangible assets
(including trademarks, copyrights and all other
intellectual property) of the Borrower and each existing
and each subsequently acquired or organized domestic, or
subject to the foregoing limitation, foreign subsidiary
of the Borrower (including, without limitation, the
Company).

On the Closing Date, (a) all necessary documentation for
creating valid and prior security interests in real
property owned by the Borrower, the Company and its
subsidiaries reasonably selected by the Agent and certain
material real property leased by the Borrower, the
Company and its subsidiaries to be agreed upon shall be
executed and be in full force and effect and filed with
the applicable filing offices and the Borrower shall
provide to the Agent reasonably satisfactory title
insurance policies or title reports at the reasonable
discretion of the Agent, in each
<PAGE>

case at the Borrower's expense, and (b) the Agent shall
have received current certified surveys and Phase I
environmental reports with respect to all such real
property reasonably satisfactory to the Agent.

All the above-described pledges and security interests
shall be created on terms, and pursuant to documentation,
reasonably satisfactory to the Lenders, and, subject to
limited exceptions to be agreed upon, none of the
Collateral shall be subject to any other pledges or
security interests.

Interest Rates and As set forth on Annex I hereto.
fees:

Mandatory Loans under the Term Loan Facilities shall be prepaid
Prepayment: with (a) 100% of the net cash proceeds of all non-
ordinary course asset sales or other dispositions of
property by the Borrower and its subsidiaries (including
insurance and condemnation proceeds), subject to limited
exceptions to be agreed upon and with a provision to
allow reinvestment of asset sale proceeds subject to
limitations on amount and during a period to be agreed,
(b) 100% of the net cash proceeds of issuances of equity
and debt obligations of the Borrower and its
subsidiaries, subject to limited exceptions to be agreed
upon, and (c) 75% of annual Excess Cash Flow (to be
defined) which percentages will be subject to reduction
in increments to be agreed upon based on the achievement
by the Borrower of performance standards to be agreed
<PAGE>

upon. To the extent that the amount of any mandatory
prepayment exceeds the outstanding loans under the Term
Loan Facilities, the commitments under the Revolving
Facility will be reduced.

The above-described mandatory prepayments shall be
allocated between the Term Loan Facilities pro rata,
subject to the provisions set forth below under the
caption "Special Application Provisions". Within each
Term Loan Facility, mandatory prepayments shall be
applied pro rata to reduce the remaining amortization
payments under such Facility.

Special Application Holders of loans under the Tranche B Facility may, so
Provisions: long as loans are outstanding under the Tranche A
Facility, decline to accept any mandatory or optional
prepayment and, under such circumstances, all amounts
that would otherwise be used to prepay loans under the
Tranche B Facility shall be used to prepay loans under
the Tranche A Facility pro rata.

Voluntary Voluntary prepayments will be permitted in whole or in
Prepayment: part, at the option of the Borrower, in minimum principal
amounts to be agreed upon, without premium or penalty,
subject to reimbursement of the Lenders' redeployment
costs in the case of prepayment of Adjusted LIBOR
borrowings other than on the last day of the relevant
Interest Period. All voluntary prepayments of the Term
Loan Facilities will be allocated
<PAGE>

between the Term Loan Facilities pro rata, subject to the
provisions set forth above under the caption "Special
Allocation Provisions", and within each Term Loan
Facility will be applied pro rata to the remaining
amortization payments under such Term Loan Facility.

Representations and Usual for facilities and transactions of this type and
Warranties: others reasonably acceptable to the Borrower and the
Agent, with materiality qualifications to be agreed,
including but not limited to representations with respect
to: due organization and power; due authorization and
enforceability; governmental approvals; no conflicts;
financial condition; no material adverse change;
properties; litigation and environmental matters;
compliance with laws and agreements; inapplicability of
the Investment Company Act and Public Utility Holding
Company Act; taxes; ERISA matters; accuracy of
disclosure; subsidiaries; insurance; labor matters;
solvency; status of obligations; Year 2000 compliance;
and validity, priority and perfection of security
interests in the Collateral.

Conditions Usual for facilities and transactions of this type, those
Precedent to specified below and others to be agreed by the Borrower
Initial Borrowing: and the Agent, including but not limited to: delivery of
satisfactory legal opinions and certificates; accuracy of
representations and warranties (and, in the case of
representations and warranties that are not qualified as
to
<PAGE>

materiality, accuracy of such representations and
warranties in all material respects); absence of
defaults; payment of fees and expenses; first priority
perfected security interests in the Collateral; evidence
of reasonably satisfactory insurance; and absence of
defaults, prepayment events or creation of liens under
debt instruments (other than with respect to debt that
will be repaid upon consummation of the Transactions) or
other agreements as a result of the Transactions.

The Merger Agreement (including the attachments thereto)
and the Voting Agreement, in the respective forms in
which each such agreement is executed, shall be
substantially in the respective forms previously
delivered to the Agent, and all other agreements to be
entered into in connection with the Transactions
(including, without limitation, a shareholders agreement
among certain stockholders of the Borrower (including,
without limitation, certain members of management of the
Borrower and the Company)), in the form in which they are
executed, shall be reasonably satisfactory to the
Lenders; the Transactions shall have been consummated or
shall be consummated simultaneously with the closing of
the Facilities in accordance with Annex II hereto and in
accordance with applicable law and the Merger Agreement;
and the Merger Agreement shall not have been amended,
waived or otherwise modified in any material respect
without the approval of the Lenders.

<PAGE>

The terms and conditions of the Senior Subordinated Notes
and all documentation relating thereto shall be
reasonably satisfactory to the Lenders. The
Reorganization shall have been consummated on terms and
conditions reasonably satisfactory to the Lenders. The
Contribution shall be made and the Borrower shall have
received not less than $160,000,000 in gross proceeds
from the issuance of the Senior Subordinated Notes prior
to or simultaneously with the closing of the Facilities.
The Pro Forma Leverage Ratio of the Company for the
latest 12 months ending immediately prior to the Closing
Date shall be no greater than 5.25 to 1.0 (calculated in
a manner reasonably satisfactory to the Agent and in a
manner consistent with the financial models previously
furnished by the Company to the Agent).

The Lenders shall have received a pro forma consolidated
balance sheet of the Borrower as of the closing of the
Facilities, after giving effect to the Transactions and
the consummation of the other transactions contemplated
hereby, which shall not be materially inconsistent with
the forecasts previously provided to the Lenders.

The Lenders shall have received (a) audited consolidated
balance sheets and related statements of income and cash
flow for the Company for the year ended November 2, 1998,
and (b) reasonably satisfactory
<PAGE>

unaudited consolidated balance sheets and related
statements of income, stockholders' equity and cash flows
for the Company for each fiscal quarter, and monthly
balance sheets and statements of income for the Company
for each fiscal month, in each case ending after November
2, 1998, and prior to the closing of the Facilities for
which statements are available, which financial
statements shall not be materially inconsistent with the
forecasts previously provided to the Lenders.

After giving effect to the Transactions and the other
transactions contemplated hereby, the Borrower and its
subsidiaries shall have outstanding no indebtedness or
preferred equity securities other than (a) the loans
under the Facilities, (b) the Senior Subordinated Notes
and (c) other indebtedness to be agreed upon with terms
and conditions reasonably satisfactory to the Lenders.

The Lenders shall have received reasonably satisfactory
audits with respect to the amount and nature of any
environmental exposures to which the Borrower and its
subsidiaries may be subject, after giving effect to the
Transactions and the consummation of the other
transactions contemplated hereby, from Environ, and the
Lenders shall be reasonably satisfied with the plans of
the Borrower with respect thereto.

The Lenders shall have received a
<PAGE>

reasonably satisfactory audit prepared by Chase's asset-
based evaluating group with respect to the accounts
receivable and inventory and related systems of the
Borrower, the Company and its subsidiaries.

The Lenders shall have received a reasonably satisfactory
appraisal of the material trademarks owned by the
Borrower, the Company or its subsidiaries by appraisers
reasonably satisfactory to the Agent.

The Lenders shall have received a solvency letter, in
form and substance reasonably satisfactory to, and from a
recognized appraiser reasonably satisfactory to, the
Lenders as to the solvency of the Borrower and its
subsidiaries on a consolidated basis after giving effect
to the Transactions and the consummation of the other
transactions contemplated hereby.

All material governmental and third party consents and
approvals required in connection with the Transactions
and the other transactions contemplated hereby shall have
been obtained, all applicable appeal periods shall have
expired and there shall be no governmental or judicial
action, actual or threatened, that could reasonably be
expected to restrain, prevent or impose materially
burdensome conditions on the Transactions or the other
transactions contemplated hereby.

Affirmative Usual for facilities and transactions of this type
Covenants:
<PAGE>

(including materiality qualifications and other
exceptions to be agreed) and others to be reasonably
acceptable to the Borrower and the Agent, including but
not limited to covenants with respect to: delivery of
financial statements, other information and reports and
notices of default, litigation and other material events;
delivery of information regarding Collateral; maintenance
of corporate existence and rights and conduct of
business; payment of obligations; maintenance of
properties in good working order; maintenance of
insurance; notice and application of proceeds of casualty
or condemnation; maintenance of books and records;
inspection rights of Lenders; compliance with laws; use
of proceeds; additional subsidiaries; further assurances;
and maintenance of interest rate protection agreements on
terms and conditions reasonably satisfactory to the
Agent.

Negative Covenants: Usual for facilities and transactions of this
type (including materiality qualifications and
other exceptions to be agreed) and others to be
reasonably acceptable to the Borrower and the
Agent, including but not limited to covenants
with respect to limitations on: indebtedness
and certain equity securities; liens; fundamental
changes; investments, loans, advances, guarantees
and acquisitions; asset sales; sale-leaseback
transactions; hedging agreements; restricted
payments and certain payments on subordinated
indebtedness;
<PAGE>

transactions with affiliates; capital expenditures;
restrictive agreements; and amendments of material
documents.

Selected Financial The credit agreement relating to the Facilities (the
Covenants: "Credit Agreement") will contain the following
------ ---------
financial covenants of the Borrower (with definitions of
financial terms and compliance levels to be agreed upon)
(a) maximum ratio of Total Debt to EBITDA, (b) minimum
ratio of EBITDA to Interest Expense and (c) minimum Fixed
Charge Coverage ratio.

Events of Default: Usual for facilities and transactions of this type and
others to be reasonably acceptable to the Borrower and
the Agent, including but not limited to: nonpayment of
principal (no grace period); nonpayment of interest or
other amounts (three business days' grace); incorrectness
of representations and warranties; violation of covenants
(with grace periods to be agreed with respect to certain
affirmative covenants); failure to pay material
indebtedness; cross default to material indebtedness;
bankruptcy and similar events; material judgments; ERISA
events; actual or asserted invalidity of liens on
Collateral; and Change in Control (to be defined).

Cost and Yield
Protection: Usual for facilities and transactions of this type.

Voting: Amendments and waivers of the Credit Agreement and the
other definitive loan, guarantee and security
documentation will
<PAGE>

require the approval of Lenders holding more than 50% of
the aggregate amount of the loans and unused commitments
under the Facilities (the "Required Lenders"), except
-------- -------
that the consent of each Lender adversely affected
thereby shall be required with respect to certain
customary matters.

Assignments and The Lenders will be permitted to assign loans and
Participations: commitments to other Lenders (or their affiliates)
without restriction, or to other assignees with the
consent of the Borrower and the Agent, in each case not
to be unreasonably withheld. Each partial assignment
(except to other Lenders or their affiliates) must be in
a minimum aggregate principal amount of $5,000,000. The
Administrative Agent will receive a processing and
recordation fee of $3,500, payable by the assignor and/or
the assignee, with each assignment. Assignments will be
by novation.

The Lenders will be permitted to participate loans and
commitments without restriction. Voting rights of
participants shall be limited to customary matters.

Expenses and All reasonable out-of-pocket expenses (including but
Indemnification: not limited to expenses incurred in connection with due
diligence) of the Arranger and the Agent associated with
the syndication of the Facilities and with the
preparation, execution and delivery, administration,
waiver or modification and enforcement of the Credit
Agreement and the other
<PAGE>

documentation contemplated hereby and thereby (including
the reasonable fees, disbursements and other charges of
counsel) are to be paid by the Borrower. In addition, all
reasonable out-of-pocket expenses of the Lenders for
enforcement costs and documentary taxes associated with
the Facilities are to be paid by the Borrower.

The Borrower will indemnify the Arranger, the Agent, the
Lenders, their affiliates and their respective officers,
directors, employees, agents and advisors and hold them
harmless from and against all costs, expenses (including
reasonable fees, disbursements and other charges of
counsel) and liabilities incurred by or asserted against
any such indemnified person arising out of or relating to
the execution, delivery or performance of the definitive
documentation in respect of the Facilities, any loans
thereunder or use of the proceeds thereof, the
Transactions, any environmental exposures relating to the
Borrower or any of its subsidiaries or any claim,
litigation, investigation or proceeding relating to any
of the foregoing; provided that no such person will be
--------
indemnified for its gross negligence or willful
misconduct.

Counsel for the Cravath, Swaine & Moore.
Arranger and the
Agent:

Governing Law and State of New York.
Forum:
<PAGE>

ANNEX I

Interest Rates: The interest rates under the Facilities will be as
follows:

Revolving Facility and Tranche A Facility
-----------------------------------------

At the Borrower's option, (1) Adjusted LIBOR plus the
Applicable Margin or (2) ABR plus the Applicable Margin;
provided, that all swingline loans shall bear interest at
--------
ABR plus the Applicable Margin.

Tranche B Facility
------------------

At the Borrower's option, (1) Adjusted LIBOR plus the
Applicable Margin or (2) ABR plus the Applicable Margin.

All Facilities
--------------

The Borrower may elect interest periods of 1, 2, 3 or 6
months (or 9 or 12 months, subject to availability to all
participating Lenders) for Adjusted LIBOR borrowings.

Calculation of interest shall be on the basis of actual
days elapsed in a year of 360 days (or 365 or 366 days,
as the case may be, in the case of ABR loans based on the
Prime Rate) and interest shall be payable at the end of
each interest period and, in any event, at least every 3
months.

ABR is the Alternate Base Rate, which is the highest of
Chase's Prime Rate, the Federal Funds Effective Rate plus
1/2 of 1% and the Base CD Rate plus 1%.
<PAGE>

LIBOR is the London interbank offered rate with respect
to eurodollar deposits for 1, 2, 3 or 6 months or,
subject to availability to all participating Lenders, 9
or 12 months (as selected by the Borrower).

Adjusted LIBOR and the Base CD Rate will at all times
include statutory reserves (and, in the case of the Base
CD Rate, FDIC assessment rates).

The Applicable Margin is a percentage determined by
reference to the Borrower's ratio of Total Debt to EBITDA
(the "Leverage Ratio") as of the end of and for the most
-------- -----
recent period of four fiscal quarters for which financial
statements have been delivered, as set forth in the
pricing grid attached hereto as Annex III; provided that,
--------
prior to the date that is six months after the Closing
Date, loans under (a) the Revolving Facility and the
Tranche A Facility will bear interest at (1) Adjusted
Libor plus 3.00% or (2) ABR plus 2.00% and (b) the
Tranche B Facility will bear interest at (1) Adjusted
Libor plus 3.50% or (2) ABR plus 2.50%.

Default Rate: Overdue principal, interest and other amounts will
bear interest, in the case of principal, at the otherwise
applicable interest rate plus 2% per annum and in the
case of interest and other amounts, at the rate otherwise
applicable to ABR Loans plus 2% per annum.

Commitment Fees: A commitment fee on the undrawn
<PAGE>

portion of the commitment of each Lender (including
Chase) under the Revolving Facility will commence to
accrue on the Closing Date and will be payable quarterly
in arrears and upon the termination of such Lender's
commitment; provided that for purposes of calculating the
--------
commitment fee, outstanding swingline loans shall be
considered to be undrawn commitments under the Revolving
Facility. The commitment fee will accrue at a rate of
0.50% per annum, subject to reduction based on the
Leverage Ratio as of the end of and for the most recent
period of four fiscal quarters for which financial
statements have been delivered, as set forth in the
Pricing Grid.

Letter of Credit Fees: Each Lender participating in the Revolving Facility will
receive a participation fee on its pro rata portion of
the aggregate undrawn face amount of all outstanding
letters of credit, calculated on a 360-day basis and
payable in arrears at the end of each quarter and upon
termination of the Revolving Facility. Such fee will
accrue at a rate per annum equal to (a) in the case of
trade letters of credit, 1.25% per annum, or (b) in the
case of other letters of credit, the Applicable Margin at
the time applicable to Adjusted LIBOR borrowings under
the Revolving Facility.

A fronting fee equal to 0.25% per annum on the face
amount of each Letter of Credit shall be payable in
arrears at the end of each quarter and upon termination
of the Revolving Facility to the
<PAGE>

Issuing Bank for its own account. In addition, customary
administrative, issuance, amendment, payment and
negotiation charges shall be payable to the Issuing Bank
for its own account.
<PAGE>

ANNEX II

Sources and Uses of Funds
-------------------------
(all figures are approximate)

Sources of Funds Uses of Funds
- ---------------- -------------

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash on Balance Sheet $ 20,000,000
Options Proceeds 9,736,000
Revolving Facility 0 Acquisition $521,126,000
Tranche A Facility 75,000,000 Transaction Expenses 20,000,000
Tranche B Facility 80,000,000 ------------
Senior Subordinated
Notes 160,000,000
Management Equity
Rollover 29,069,000
Vestar Contribution 153,637,000
Public Equity Rollover 13,684,000
------------
Total Sources $541,126,000 Total Uses $541,126,000
</TABLE>
<PAGE>

ANNEX III

Pricing Grid
------------

Tranche A Facility, Revolving Facility and
------------------------------------------

Commitment Fee
--------------

<TABLE>
<CAPTION>
Leverage Ratio Adjusted Libor ABR Commitment Fee
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Greater than 5.0 to 1.0 3.00% 2.00% 0.500%
- -------------------------------------------------------------------------------
Greater than 4.5 to 1.0 and 2.75% 1.75% 0.500%
less than or equal to 5.0 to 1.0
- -------------------------------------------------------------------------------
Greater than 4.0 to 1.0 and 2.50% 1.50% 0.500%
less than or equal to 4.5 to 1.0
- -------------------------------------------------------------------------------
Greater than 3.75 to 1.0 and 2.25% 1.25% 0.500%
less than or equal to 4.0 to 1.0
- -------------------------------------------------------------------------------
Less than or equal to 3.75 to 1.0 2.00% 1.00% 0.375%
- -------------------------------------------------------------------------------
</TABLE>

Tranche B Facility
------------------

Leverage Ratio Adjusted Libor ABR
- ----------------------------------------------------------------
<S> <C> <C>
Greater than 4.25 to 1.0 3.50% 2.50%
- ----------------------------------------------------------------
Greater than 3.75 to 1.0 and 3.25% 2.25%
Less than or equal to 4.25 to 1.0
- ----------------------------------------------------------------
Less than or equal to 3.75 to 1.0 3.00% 2.00%
- ----------------------------------------------------------------
</TABLE>

<PAGE>

EXHIBIT (a)(2)
TO SCHEDULE 13E-3

CHASE SECURITIES INC.
270 Park Avenue

New York, New York 10017

February 2, 1999

Vestar Capital Partners III, L.P.
245 Park Avenue
41st Floor
New York, NY 10167-4098

Attention: Sander M. Levy

Vestar Capital Partners III, L.P.
17th Street Plaza
1225 17th Street, Suite 1660
Denver, CO 80202

Attention: James P. Kelley
Christopher Henderson

Gentlemen:

You have advised Chase Securities Inc. ("CSI") that Vestar Capital
---
Partners III, L.P. ("Vestar") proposes to acquire (the "Acquisition") St. John
------ -----------
Knits, Inc., a California corporation (the "Company"). You have further advised
-------
us that immediately prior to the Acquisition, a wholly owned subsidiary ("Merger
------
Sub") of St. John Knits International, Incorporated, a wholly owned subsidiary
- ---
of the Company ("SJKI"), will merge with and into the Company, with the Company
----
being the surviving corporation (the "Reorganization"). In connection with the
--------------
Reorganization, the existing stockholders of the Company will exchange their
shares of common stock of the Company ("Company Common Stock") for shares of
--------------------
common stock of SJKI ("SJKI Common Stock"), resulting in the Company becoming a
-----------------
wholly owned subsidiary of SJKI. You have further advised us that, in
connection with the Acquisition, (a) Vestar will form a limited liability
company ("Holdco"), which will form a subsidiary ("Newco") and (b) immediately
------ -----
prior to the Reorganization (i) Vestar and certain co-investors reasonably
satisfactory to CSI will contribute approximately $153,637,000 of cash equity to
Holdco in consideration for the issuance of an 84.1% limited liability company
interest in Holdco ("Holdco Interest"), (ii) certain members of management of
---------------
the Company (the "Gray Management") will contribute approximately 1,206,000
---------------
shares of Company Common Stock to Holdco in consideration for approximately
$7,110,000 and the issuance of an aggregate 15.9% Holdco Interest (having an
aggregate value of approxi-
<PAGE>

-2-

mately $29,069,000) and (iii) Holdco will contribute approximately $146,527,000
of cash equity to Newco in consideration for the issuance of 100% of the common
stock of Newco. You have further advised us that certain members of management
of the Company may be offered the opportunity to purchase SJKI Common Stock from
SJKI representing not more than 5% of the outstanding capital stock of SJKI and
that any such purchase would reduce the amount of Vestar's contribution to
Holdco and may be funded by loans from Vestar. You have further advised us that
in connection with the Acquisition, Newco, SJKI, the Company and Merger Sub will
enter into an agreement and plan of merger (the "Merger Agreement"), pursuant to
----------------
which (a) SJKI will obtain senior secured credit facilities (the "Facilities")
----------
consisting of a $155,000,000 term loan and a $25,000,000 revolving credit
facility, (b) SJKI will issue up to $160,000,000 principal amount of its senior
subordinated notes (the "Notes") in a public offering or in a Rule 144A offering
-----
or other private placement (which Notes will be guaranteed, on a senior
subordinated basis, by the Company and those subsidiaries of SJKI that guarantee
or otherwise provide credit support for the Facilities), (c) Newco will merge
with and into SJKI (the "Merger"), (d) at the effective time of the Merger, the
------
outstanding shares of capital stock of SJKI held by its stockholders (the
"Sellers") (other than the shares held by Holdco, which will be canceled) will
-------
be converted into a combination of aggregate cash consideration equal to
approximately $447,581,000 and 456,000 shares of SJKI Common Stock, such that,
following the Merger, certain of the Sellers will continue to own approximately
7.0% of the outstanding capital stock of SJKI having an aggregate value of
approximately $13,684,000, (e) at the effective time of the Merger, outstanding
in the money options to buy shares of SJKI Common Stock will be cashed out for
an aggregate amount of approximately $14,003,000, (f) at the effective time of
the Merger, the outstanding shares of capital stock of Newco held by Holdco will
be converted into SJKI Common Stock representing approximately 93.0% of the
outstanding capital stock of SJKI having an aggregate value of approximately
$182,706,000, and (g) SJKI will pay transaction costs and expenses in connection
with the foregoing in an amount not to exceed $20,000,000 (the foregoing
transactions are collectively referred to herein as the "Transactions"). You
------------
have asked us to assist you in raising a portion of the funds required to
consummate the Transactions through the sale or placement of up to $160,000,000
of Notes.

We are pleased to inform you that, based upon our understanding of the
Transactions as described by you, current market conditions, and subject to the
conditions set forth below, we are highly confident of our ability, as lead
manager, to sell or place the Notes in connection with the Transactions.

The structure, covenants and terms (including as to credit support) of
the Notes will be as determined by CSI in consultation with you, and subject to
your prior agreement, on terms
<PAGE>

-3-

mutually acceptable to both parties based on market conditions at the time of
the sale or placement and based on the structure and documentation of the
Transactions.

Our confidence in our ability to consummate the sale or placement of
the Notes is also subject to (i) (a) CSI and its representatives not having
discovered or otherwise becoming aware of any information not previously
disclosed to them that they believe to be materially adversely inconsistent with
their understanding, based on the information provided to them prior to the date
hereof, of the business, assets, operations, prospects or condition (financial
or otherwise) of SJKI, the Company and its subsidiaries, and (b) CSI and its
representatives having received reasonably satisfactory audits with respect to
the amount and nature of any environmental exposures to which the Company and
its subsidiaries may be subject; (ii) consummation of the Transactions, and
related financings, on terms and pursuant to documentation reasonably consistent
with the terms described to CSI and reasonably satisfactory to CSI; (iii) there
not occurring any material adverse change in or affecting the business, assets,
operations, prospects or condition (financial or otherwise) of SJKI, the Company
and its subsidiaries, taken as a whole, since November 1, 1998; (iv) the
availability of (a) reasonably satisfactory unaudited financial statements for
the Company for each fiscal quarter, and monthly balance sheets and statements
of income for the Company for each fiscal month, in each case ending after
November 1, 1998 and (b) pro forma financial statements of the Company and SJKI
after giving effect to the Transactions, which financial statements shall not be
materially inconsistent with the forecasts previously provided to CSI and shall
be in form and presentation as required by the Securities Act of 1933, as
amended, and the rules and regulations thereunder applicable to registration
statements filed thereunder; (v) there not having been any material disruption
or material adverse change in the market for new issues of high yield securities
or the financial or capital markets in general, in the reasonable judgment of
CSI; (vi) CSI having a reasonable time to market the Notes based on CSI's
experience in comparable transactions; (vii) the Pro Forma Leverage Ratio of
SJKI for the latest 12 months ending immediately prior to the Closing Date shall
be no greater than 5.25:1.00 (calculated in a manner reasonably satisfactory to
CSI and in a manner consistent with the financial models previously furnished to
CSI); (viii) there not existing any pending or threatened claim, suit or
proceeding by any governmental or regulatory authority (other than any pending
claim, suit or proceeding on the date hereof previously identified to CSI) which
CSI shall reasonably determine could have a materially adverse effect on the
business, assets, operations, prospects or condition (financial or otherwise) of
the Company and its subsidiaries, taken as a whole, after giving effect to the
Transactions and (ix) the
<PAGE>

-4-

receipt of all necessary governmental, regulatory and material third party
approvals or consents in connection with the Transactions.

This letter is not intended to be and should not be construed as a
commitment or undertaking with respect to the underwriting, sale or placement of
the Notes on a principal or agency basis.

This letter is delivered to you on the understanding that neither this
letter nor any of its terms or substance shall be disclosed, directly or
indirectly by you, to any other person except (i) you may disclose this letter
(a) to your officers who are directly involved in the consideration of this
matter, (b) as may be compelled in a judicial or administrative proceeding or as
otherwise required by law (in which case you agree to inform us promptly
thereof) or (c) in any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, as amended and (ii) you may disclose this letter, and its
terms and substance to the Company (including its Board of Directors and any
committee thereof), SJKI (including its Board of Directors and any committee
thereof), Robert E. Gray, Marie Gray, Kelly A. Gray and their respective
attorneys and advisors on a confidential basis in connection with the
Transactions.
<PAGE>

S-1

We are very pleased to be able to work with you on these Transactions
and look forward to its successful completion.

Very truly yours,

CHASE SECURITIES INC.

By: /s/ JOSEPH C. PURCELL
-------------------------------
Name: Joseph C. Purcell
Title: Vice President

<PAGE>

[ST. JOHN KNITS, INC. LOGO]

SPECIAL MEETING OF SHAREHOLDERS

MERGERS PROPOSED -- YOUR VOTE IS VERY IMPORTANT

St. John Knits, Inc. has signed a merger agreement providing for two
mergers. In the first merger, the "reorganization merger," St. John will become
a wholly owned subsidiary of St. John Knits International, Incorporated, a
Delaware corporation. St. John Knits International is currently a wholly owned
subsidiary of St. John. As a result of the reorganization merger, shareholders
of St. John will become stockholders of St. John Knits International.

In the second merger, the "acquisition merger," St. John Knits International
will be merged with Pearl Acquisition Corp., a Delaware corporation which is
wholly owned by Vestar/Gray Investors LLC. Vestar/Gray LLC is wholly owned by
Vestar Capital Partners III, L.P. As a result of the acquisition merger, St.
John Knits International will be 7% owned by existing shareholders of St. John,
other than Robert, Marie and Kelly Gray, and 93% owned by Vestar/Gray LLC,
which at that time will be approximately 16% beneficially owned by the Grays.
The Grays are executive officers and directors of St. John.

If both of the mergers are completed, each share of St. John common stock
owned before the mergers will be exchanged, at the holder's election and
subject to proration, for either $30 in cash or one share of stock of St. John
Knits International, with a total of 456,047 shares of common stock of St. John
Knits International to be issued in the mergers.

Before we can complete these transactions, St. John shareholders must
approve the reorganization merger and the Agreement and Plan of Merger. The
acquisition merger, which has already been approved by St. John, as the sole
stockholder of St. John Knits International, is conditioned on shareholder
approval of the reorganization merger. Consequently, your vote on the
reorganization merger will effectively be a vote on both mergers. The
affirmative vote of holders of a majority of outstanding shares of St. John's
common stock entitled to vote and the affirmative vote of holders of a majority
of outstanding shares of St. John's common stock voting at the special meeting,
excluding shares held by the Grays, are required to approve the reorganization
merger.

Your vote is very important. Whether or not you plan to attend the special
meeting, please take the time to vote by completing and mailing the enclosed
proxy card. If you sign, date and mail your proxy card without indicating how
you want to vote, we will vote your proxy in favor of the reorganization merger
and the Agreement and Plan of Merger. If you do not return your card, the
effect will be a vote against the reorganization merger and the Agreement and
Plan of Merger.

The date, time and place of the special meeting is:

, 1999
Local Time
17522 Armstrong Avenue
Irvine, California 92614

This Proxy Statement-Prospectus provides you with detailed information about
the proposed mergers. You can also get information about St. John from
documents that have been filed with the Securities and Exchange Commission. We
encourage you to read this entire document carefully.
<PAGE>

After careful consideration, a special committee of your Board of Directors
and your Board of Directors have determined that the mergers are advisable and
in the best interests of St. John and its shareholders. Your Board of Directors
has approved and adopted the Agreement and Plan of Merger, the reorganization
merger and the acquisition merger, and it recommends that you vote for approval
and adoption of the reorganization merger and the Agreement and Plan of Merger
at the special meeting.

Robert E. Gray
Chairman of the Board and Chief
Executive Officer

For a discussion of certain risk factors which you should consider in
evaluating the mergers, see "Risk Factors" beginning on page 15.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of this transaction or the securities
offered by this Proxy Statement-Prospectus, or passed upon the fairness or
merits of this transaction or the adequacy or accuracy of this Proxy
Statement-Prospectus. Any representation to the contrary is a criminal
offense.

This Proxy Statement-Prospectus is dated , 1999
and was first mailed to shareholders on , 1999.

We have not authorized anyone to give any information or make any
representation about the mergers, St. John or St. John Knits International that
differs from or adds to the information in this Proxy Statement-Prospectus or
in our documents that are publicly filed with the Securities and Exchange
Commission. Therefore, if anyone does give you different or additional
information, you should not rely on it.

If you are in a jurisdiction where it is unlawful to offer to exchange or
sell, or to ask for offers to exchange or buy, the securities offered by this
Proxy Statement-Prospectus or to ask for proxies, or if you are a person to
whom it is unlawful to direct such activities, then the offer presented by this
Proxy Statement-Prospectus does not extend to you.

The information contained in this Proxy Statement-Prospectus speaks only as
of its date unless the information specifically indicates that another date
applies.

A Warning About Forward-Looking Statements

St. John and St. John Knits International make forward-looking statements in
this document and in the St. John public documents to which we refer you. These
forward-looking statements are subject to risks and uncertainties, and there
can be no assurance that such statements will prove to be correct. Forward-
looking statements include some of the statements set forth under "SUMMARY--
Reasons for the Mergers; Recommendations to Shareholders," "--Selected Pro
Forma Condensed Consolidated Financial Data (Unaudited)," "RISK FACTORS--Our
Company Will Be Substantially Leveraged and Will Have Decreased Liquidity,"
"SPECIAL FACTORS--Reasons for the Mergers; Recommendations to Shareholders,"
"SPECIAL FACTORS--Fairness Opinions of Financial Advisors," "--Certain Effects
of the Mergers; New York Stock Exchange Delisting; Operations of St. John After
the Mergers," "CERTAIN FINANCIAL PROJECTIONS," "THE MERGERS--Merger Financing"
and "THE MERGERS--Pro Forma Condensed Consolidated Financial Statements
(Unaudited)." In addition, when we use any of the words "believes," "expects,"
"anticipates," "plans," "intends," "hopes," "will" or similar expressions, we
are making forward-looking statements. Many possible events or factors could
affect the future financial results and performance of St. John Knits
International after the mergers. This could cause results or performance to
differ materially from those expressed in our forward-looking statements. You
should consider these risks when you vote on the reorganization merger and the
Agreement and Plan of Merger. These possible events or factors include, in
addition to those discussed elsewhere in this document, those discussed in the
public documents to which we referred you.
<PAGE>

ST. JOHN KNITS, INC.

----------------

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on , 1999

----------------

St. John Knits, Inc. will hold a special meeting of shareholders at its
offices located at 17522 Armstrong Avenue, Irvine, California, at
local time on , 1999, for the following purposes:

. To consider and vote upon a proposal to approve and adopt the principal
terms of the Agreement and Plan of Merger, dated as of February 2, 1999,
by and among St. John Knits, Inc., St. John Knits International,
Incorporated, SJKAcquisition, Inc. and Pearl Acquisition Corp., to
approve the principal terms of the proposed reorganization merger between
St. John Knits, Inc. and SJKAcquisition, Inc., pursuant to which St. John
Knits, Inc. will become a wholly owned subsidiary of St. John Knits
International, Incorporated, a Delaware corporation, which is currently a
wholly owned subsidiary of St. John and to approve and adopt the form of
agreement of merger to be filed with the California Secretary of State to
effect the reorganization merger. The consummation of the reorganization
merger is a condition precedent to the acquisition merger and the other
transactions contemplated in the Agreement and Plan of Merger.

. To transact such other business as may properly come before the special
meeting or any adjournments or postponements of the special meeting.

A copy of the merger agreement is attached as Appendix A to the Proxy
Statement-Prospectus accompanying this notice.

Record holders of St. John common stock at the close of business on
, 1999 will receive notice of and will be entitled to vote at
the special meeting, including any adjournments or postponements of the special
meeting. The affirmative vote of (1) the holders of a majority of the
outstanding shares of St. John common stock entitled to vote on the Agreement
and Plan of Merger and the reorganization merger and (2) the holders of a
majority of the shares of St. John common stock present either in person or by
proxy at the special meeting, excluding any shares of St. John common stock
owned beneficially by Robert E. Gray, Marie Gray and Kelly A. Gray and Vestar
Capital Partners III, L.P. and any of its affiliates, is required for approval
and adoption of the principal terms of the Agreement and Plan of Merger and
approval of the principal terms of the reorganization merger.

Your vote is important and we urge you to complete, sign, date and return
your proxy card as promptly as possible, whether or not you expect to attend
the special meeting. If you are unable to attend in person and you return your
proxy card, your shares will be voted at the special meeting. A return envelope
is included for your convenience. If your shares are held in "street name" by
your broker or other nominee, only that holder can vote your shares. You should
follow the directions provided by your broker or nominee regarding how to
instruct them to vote your shares.

Marie Gray
Secretary

Irvine, California
, 1999

Please mark, sign, date and return your proxy promptly, whether or not
you plan to attend the special meeting.

Your Board of Directors recommends that you vote FOR approval of the
Agreement and Plan of Merger and the Reorganization Merger, which are
described in detail in the accompanying Proxy Statement-Prospectus.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGERS................................... 1
DIAGRAM OF THE STRUCTURE OF THE PROPOSED MERGERS.......................... 3
SUMMARY................................................................... 4
The Companies........................................................... 4
The Mergers............................................................. 4
What You Will Receive in the Mergers.................................... 5
Treatment of Outstanding Options........................................ 5
The Special Meeting..................................................... 5
Vote Required........................................................... 5
Percentage of Shares Held by Directors and Executive Officers........... 5
The Voting Agreement.................................................... 5
Reasons for the Mergers; Recommendations to Shareholders................ 5
Opinions of Financial Advisors.......................................... 6
The Stockholders Agreement.............................................. 6
The Limited Liability Company Agreement................................. 6
Interests of Certain Persons Involved in the Mergers That Are Different
from Yours............................................................. 6
Conditions to Completion of the Mergers................................. 7
Termination of the Merger Agreement..................................... 8
Termination Fees and Expenses........................................... 8
Material Federal Income Tax Consequences................................ 9
Accounting Treatment.................................................... 9
Dissenters' Rights...................................................... 9
Regulatory Approvals.................................................... 9
Comparison of Rights of St. John Common Stock and St. John Knits
International Common Stock............................................. 10
Description of Capital of St. John Knits International.................. 10
New York Stock Exchange Delisting....................................... 10
Merger Financing........................................................ 10
Rights Plan............................................................. 10
Market Price and Dividend Information................................... 11
Selected Historical Condensed Financial Data............................ 12
Selected Pro Forma Condensed Consolidated Financial Data (Unaudited).... 13
RISK FACTORS.............................................................. 15
We Will Be Controlled By Vestar After The Mergers....................... 15
Our Common Stock Will Not Be Listed, Which Will Result In A Loss Of
Liquidity.............................................................. 15
Our Company Will Be Substantially Leveraged and Will Have Decreased
Liquidity.............................................................. 15
Potential Dilution of St. John Knits International Stockholders May
Occur.................................................................. 16
We Do Not Expect to Pay Dividends....................................... 16
We Face Risks Associated with the Apparel Business...................... 16
Certain Proration Risks May Result...................................... 17
SPECIAL FACTORS........................................................... 18
Background of the Mergers............................................... 18
Purpose and Structure for the Mergers................................... 23
Reasons for the Mergers; Recommendations to Shareholders................ 24
Fairness Opinions of Financial Advisors................................. 28
Interests of Certain Persons in the Mergers; Conflicts of Interests..... 40
Certain Effects of the Mergers; New York Stock Exchange Delisting;
Operations of St. John After the Mergers............................... 43
Accounting Treatment.................................................... 43
</TABLE>

i
<PAGE>

TABLE OF CONTENTS
(continued)

<TABLE>
<CAPTION>
Page
<S> <C>
Material Federal Income Tax Consequences............................... 43
CERTAIN FINANCIAL PROJECTIONS............................................ 47
THE MERGERS.............................................................. 48
Merger Consideration................................................... 48
Conversion/Retention of Shares; Procedures for Exchange of
Certificates.......................................................... 49
Fractional Shares...................................................... 50
Governmental and Regulatory Approval................................... 51
Dissenters' Rights of Appraisal........................................ 51
Treatment of Options................................................... 53
Board of Directors and Officers of St. John Knits International
Following the Mergers................................................. 54
Other Information Regarding Directors and Executive Officers........... 54
Resale of St. John Knits International Common Stock After the Mergers.. 55
Merger Financing....................................................... 55
Rights Plan............................................................ 59
Pro Forma Condensed Consolidated Financial Statements (Unaudited)...... 61
THE MERGER AGREEMENT..................................................... 66
The Mergers............................................................ 66
Closing of the Mergers; Effective Time of the Mergers; Surviving
Corporations.......................................................... 66
Representations and Warranties......................................... 67
Certain Covenants...................................................... 68
No Solicitation........................................................ 69
Employee Benefits...................................................... 70
Access to Information.................................................. 70
Cooperation and Reasonable Best Efforts................................ 70
Indemnification and Insurance.......................................... 70
Conditions to the Consummation of the Mergers.......................... 70
Termination............................................................ 71
Amendment and Waiver................................................... 72
Termination Fees and Expenses.......................................... 73
THE VOTING AGREEMENT..................................................... 75
THE STOCKHOLDERS AGREEMENT............................................... 76
THE LIMITED LIABILITY COMPANY AGREEMENT.................................. 79
THE SPECIAL MEETING...................................................... 82
General................................................................ 82
Matters to be Considered............................................... 82
Proxies................................................................ 82
Solicitation of Proxies................................................ 83
Forms of Election...................................................... 83
Record Date and Voting Rights.......................................... 83
Recommendation of the St. John Board and the Special Committee of the
Board................................................................. 84
COMPARISON OF THE RIGHTS OF HOLDERS OF ST. JOHN COMMON STOCK AND ST. JOHN
KNITS INTERNATIONAL COMMON STOCK........................................ 85
Dividends and Repurchases of Shares.................................... 85
Special Meetings of Shareholders; Quorum; Shareholder Action by Written
Consent............................................................... 86
Certain Voting Rights.................................................. 86
Size and Classification of the Board of Directors...................... 87
Election of Directors.................................................. 88
Removal of Directors; Filling Vacancies on the Board of Directors...... 88
</TABLE>

ii
<PAGE>

TABLE OF CONTENTS
(continued)

<TABLE>
<CAPTION>
Page
<S> <C>
Amendment of Charter and Bylaws......................................... 89
Dissenters' Appraisal Rights............................................ 89
Certain Business Combinations and Reorganizations....................... 90
Limitation on Directors' Liability...................................... 91
Indemnification of Officers and Directors; Insurance.................... 92
Loans to Officers and Employees......................................... 93
Inspection of Shareholders' List........................................ 93
Interested Director Transactions........................................ 94
Voting By Ballot........................................................ 94
Shareholder Derivative Suits............................................ 94
Dissolution............................................................. 95
Rights Plan............................................................. 95
Doctrine of Independent Legal Significance.............................. 95
Application of The General Corporation Law of California To Delaware
Corporations........................................................... 96
CERTAIN PENDING LITIGATION................................................ 96
INFORMATION ABOUT ST. JOHN AND ST. JOHN KNITS INTERNATIONAL............... 97
General................................................................. 97
Management and Additional Information................................... 97
St. John Knits International............................................ 97
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 98
DESCRIPTION OF ST. JOHN KNITS INTERNATIONAL CAPITAL STOCK................. 99
PURCHASES OF SHARES....................................................... 99
CERTAIN INFORMATION CONCERNING ACQUISITION, VESTAR AND THE GRAYS.......... 100
WHERE YOU CAN FIND MORE INFORMATION....................................... 102
LEGAL OPINIONS............................................................ 103
INDEPENDENT PUBLIC ACCOUNTANTS............................................ 103
SHAREHOLDER PROPOSALS..................................................... 103
OTHER MATTERS............................................................. 103
APPENDIX A--Agreement and Plan of Merger.................................. A-1
APPENDIX B--Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................................. B-1
APPENDIX C--Opinion of Wasserstein Perella & Co., Inc. ................... C-1
APPENDIX D--Dissenters' Rights............................................ D-1
APPENDIX E--Voting Agreement.............................................. E-1
</TABLE>

iii
<PAGE>

QUESTIONS AND ANSWERS ABOUT THE MERGERS

Q: Why is St. John proposing the mergers?

A: We believe that, taken together, the mergers are in the best interests of
St. John shareholders in light of the value to be paid to the shareholders
in the mergers. As a private company, St. John will be able to shift its
focus from maximizing near term earnings to sustaining profitable long term
growth. Management believes that meeting the growth rate Wall Street has
come to expect of St. John is unsustainable without jeopardizing St. John's
profitability.

Q: What will St. John shareholders receive for each St. John share?

A: Each St. John shareholder will have the right to elect to receive in
exchange for each share of St. John common stock either $30 in cash or one
share of common stock of St. John Knits International.

Q: Is there any limit on the number of shares of St. John Knits International
that will be issued?

A: Yes. Exactly 456,047 shares of common stock of St. John Knits International
will be issued to St. John shareholders in the acquisition merger, which
will represent 7% of the total outstanding common stock of St. John Knits
International after the mergers.

Q: What will happen if too few people elect to receive St. John Knits
International shares?

A: If St. John shareholders elect to receive, in the aggregate, less than
456,047 shares, then the amount of shares equal to the difference between
456,047 and the number of shares elected to be received will be allocated
pro rata among shareholders based upon the number of non-electing shares.

Q: What will happen if too many people elect to receive St. John Knits
International shares?

A: If St. John shareholders elect to receive, in the aggregate, more than
456,047 shares, then the 456,047 shares will be allocated pro rata among
the St. John shareholders who have elected to receive shares based on the
number of shares each shareholder has elected to receive.

Q: If the shareholders of St. John do not approve the reorganization merger,
will St. John consummate the acquisition merger?

A: No. The consummation of the reorganization merger is a condition to the
consummation of the acquisition merger. Consequently, your vote on the
reorganization merger will effectively be a vote on both mergers. We will
not complete the reorganization merger unless all conditions to the
acquisition merger, other than the consummation of the reorganization
merger, are satisfied or, where permissible, waived.

Q: Will I have the right to vote on the acquisition merger?

A: No. St. John, as the sole stockholder of St. John Knits International, has
approved the acquisition merger. No further approval of the acquisition
merger is required and neither the shareholders of St. John nor the
stockholders of St. John Knits International after the reorganization
merger will have the right to vote on the acquisition merger.

Q: Will the shares of St. John Knits International be listed on the New York
Stock Exchange?

A: No. We do not expect that the shares of common stock of St. John Knits
International will be listed on any national securities exchange or any
inter-dealer quotation system.

1
<PAGE>

Q: What do I need to do now?

A: After carefully reading and considering the information contained in this
document, please fill out and sign your proxy card. Then mail your
completed, signed and dated proxy card in the enclosed return envelope as
soon as possible so that your shares can be voted at the St. John special
meeting. Include with your proxy card a completed form of election, where
you should indicate whether you elect to receive cash or shares of St. John
Knits International common stock.

Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?

A: Your broker will not be able to vote your shares without instructions from
you. You should follow the directions provided by your broker to vote your
shares.

Q: How do I change my vote or election to receive shares after I have mailed
my signed proxy card and form of election?

A: You may change your vote by sending a written notice stating that you would
like to revoke your proxy or by completing and submitting a new, later
dated proxy card to the Corporate Secretary of St. John. You also can
attend the St. John special meeting and vote in person. You may change your
election by sending a written notice stating that you would like to revoke
your election or by completing and submitting a new, later dated form of
election to the Corporate Secretary of St. John.

Q: Should I send in my stock certificates now?

A: No. After the mergers are completed, St. John shareholders will receive
written instructions for exchanging their St. John stock certificates for
cash and/or for St. John Knits International stock certificates.

Q: When do you expect the mergers to be completed?

A: We are working toward completing the mergers as quickly as possible after
the St. John special meeting. We hope to complete the mergers late in the
second calendar quarter of 1999.

Q: Who can help answer my questions?

A: If you have more questions about the mergers, you should contact:

St. John Knits, Inc.
17422 Derian Avenue
Irvine, California 92614
(949) 863-1171
Attention: Roger Ruppert, Chief Financial Officer

2
<PAGE>

[DIAGRAM OF THE STRUCTURE OF THE PROPOSED MERGERS]

3
<PAGE>

SUMMARY

This Summary, together with the "QUESTIONS AND ANSWERS" and the "DIAGRAM OF
THE STRUCTURE OF THE PROPOSED MERGERS" on the preceding pages, highlights
important selected information from this Proxy Statement-Prospectus and may not
contain all of the information that is important to you. To understand fully
the mergers and related transactions and for a more complete description of the
legal terms of the mergers and related transactions, you should read carefully
this entire document and the other documents to which we have referred you. For
more information about St. John, see "WHERE YOU CAN FIND MORE INFORMATION
(page 102)." We have included page references parenthetically to direct you to
more complete descriptions of the topics presented in this summary.

The Companies (See Page 97)

St. John Knits, Inc.
17422 Derian Avenue
Irvine, California 92614
(949) 863-1171

St. John is a leading designer, manufacturer and marketer of women's
clothing and accessories, principally under the St. John trade name. For over
thirty-five years, the St. John name has been associated with high quality and
a specific look in knitwear characterized by vibrant colors and classic,
timeless styling. The St. John "look," combined with limited production runs
and selective distribution, has created an exclusive image, engendering
consumer loyalty.

St. John Knits International, Incorporated
17422 Derian Avenue
Irvine, California 92614
(949) 863-1171

St. John Knits International is a Delaware corporation and a wholly owned
subsidiary of St. John. As a result of the reorganization merger, St. John will
become a wholly owned subsidiary of St. John Knits International and
shareholders of St. John will become stockholders of St. John Knits
International. St. John Knits International does not conduct any business other
than holding the capital stock of SJKAcquisition, Inc.

SJKAcquisition, Inc.
17422 Derian Avenue
Irvine, California 92614
(949) 863-1171

SJKAcquisition, Inc. is a California corporation and a wholly owned
subsidiary of St. John Knits International. SJKAcquisition was formed solely to
be a party to the reorganization merger.

Pearl Acquisition Corp.
245 Park Avenue
41st Floor
New York, New York 10167
(212) 949-6500

Pearl Acquisition Corp., which we will refer to in this document as
"Acquisition," is a Delaware corporation and is wholly owned by Vestar/Gray
LLC. Vestar/Gray LLC is wholly owned by Vestar, a private equity fund that
specializes in management buyouts. Prior to the mergers, the Grays will
contribute the shares they own beneficially, excluding shares subject to
options, to Vestar/Gray LLC and Vestar/Gray LLC will become approximately 16%
owned by the Grays. Robert E., Marie and Kelly A. Gray are executive officers
and directors of St. John. Acquisition was formed solely to be a party to the
acquisition merger.

The Mergers (See Page 48)

The merger agreement is attached as Appendix A to this Proxy Statement-
Prospectus. We encourage you to read the merger agreement as it is the legal
document that governs the mergers.

If the reorganization merger is approved by St. John shareholders and all
other conditions to the reorganization merger and the acquisition merger are
satisfied or, where permissible, waived, St. John will consummate the mergers
as follows:

1. The Reorganization Merger. St. John will merge with SJKAcquisition, with
-------------------------
St. John surviving the reorganization merger. As a result, St. John will
become a subsidiary of St. John Knits International and St. John
shareholders will become stockholders of St. John Knits International.

4
<PAGE>

2. The Acquisition Merger. Immediately after the reorganization merger, St.
----------------------
John Knits International will merge with Acquisition, with St. John
Knits International surviving the acquisition merger.

As a result of the mergers, St. John Knits International will be 7% owned by
existing shareholders of St. John, other than the Grays, and 93% owned by
Vestar/Gray LLC, which will be owned by Vestar and the Grays. St. John
anticipates completing the mergers as promptly as practicable after the St.
John special meeting.

What You Will Receive in the Mergers (See Page 48)

For each share of St. John common stock owned before the mergers, a St. John
shareholder who has not exercised his or her dissenters' rights in the
reorganization merger will be entitled to receive, at his or her election and
subject to proration, $30 in cash or one share of common stock of St. John
Knits International. St. John shareholders, other than the Grays, will receive
a total of 456,047 shares of common stock of St. John Knits International in
the acquisition merger.

Treatment of Outstanding Options (See Page 53)

When we complete the mergers, each holder of outstanding options to purchase
St. John common stock, whether or not such options are then exercisable, will
receive a cash payment for each of his or her options equal to the excess of
$30 over the exercise price per share of St. John common stock subject to his
or her options.

The Special Meeting (See Page 82)

At the special meeting, the holders of St. John common stock will be asked
to approve and adopt the principal terms of the merger agreement and to approve
the principal terms of the reorganization merger. You may vote at the special
meeting if you were the record owner of St. John common stock at the close of
business on , 1999. You will have one vote for each share of
St. John common stock you own.

Vote Required (See Page 83)

The vote of a majority of the outstanding shares of St. John common stock
entitled to vote on the reorganization merger and the merger agreement and a
majority of the outstanding shares of St. John common stock present and voting
at the special meeting, excluding any shares of stock owned beneficially by
Vestar or the Grays, is required to approve and adopt the principal terms of
the merger agreement and to approve the principal terms of the reorganization
merger.

Percentage of Shares Held by Directors and Executive Officers (See Page 84)

On the record date, directors and executive officers of St. John owned and
had the right to vote shares of St. John common stock (approximately %
of the shares of St. John common stock then outstanding). We expect that they
will vote all of their shares in favor of the reorganization merger.

The Voting Agreement (See Page 75)

The Grays have entered into a Voting Agreement with Vestar and Vestar/Gray
LLC in which they have agreed to vote the shares of St. John common stock owned
beneficially by them, excluding shares subject to options, in favor of the
mergers, the merger agreement and the transactions contemplated by the merger
agreement. As of the record date, the Grays owned and had the right to vote a
total of 1,205,983 shares of St. John common stock, representing approximately
7.3% of the total shares outstanding on the record date.

Reasons for the Mergers; Recommendations to Shareholders (See Page 24)

Your Board of Directors and the Special Committee of the Board believe the
proposed mergers are in the best interests of St. John shareholders in light of
the value to be paid to St. John shareholders in the mergers. In addition, the
Board and the Special Committee believe that as a private company, St. John
will be able to shift its focus from maximizing near term earnings to
sustaining profitable long term growth. Management believes that meeting the
growth rate Wall Street has come to expect of St. John is unsustainable without
jeopardizing St. John's profitability.

5
<PAGE>

Opinions of Financial Advisors (See Page 28)

In deciding to approve the mergers, your Board of Directors considered the
opinion delivered to it by Merrill Lynch, Pierce, Fenner & Smith Incorporated
that, as of the date of the opinion, and based upon and subject to the
assumptions, limitations and qualifications set forth in the opinion, the
consideration to be received by the holders of St. John common stock, other
than the Grays, pursuant to the mergers was fair from a financial point of view
to such holders. In deciding to recommend that the Board of Directors approve
the mergers, the Special Committee considered the opinions of its financial
advisors, Merrill Lynch and Wasserstein Perella & Co., Inc., that as of the
date of each opinion and based upon and subject to the assumptions, limitations
and qualifications set forth in each opinion, the consideration to be received
by the holders of St. John common stock, other than the Grays, pursuant to the
mergers, was fair from a financial point of view to such holders. We have
attached as Appendix B and Appendix C the written opinions of Merrill Lynch and
Wasserstein Perella, respectively, each dated February 2, 1999. You should read
those documents carefully to understand the assumptions made, matters
considered and limitations of the review undertaken by the financial advisors
in providing their opinions.

The Stockholders Agreement (See Page 76)

Upon completion of the mergers, St. John Knits International will enter into
a Stockholders Agreement with Vestar/Gray LLC, Vestar, the Grays and certain
other stockholders of St. John Knits International. The Stockholders Agreement
will require each party to vote all of its common stock of St. John Knits
International to elect five designees of Vestar/Gray LLC to the Board of
Directors of St. John Knits International. In addition, each party will be
required to approve actions adopted by the Board of Directors as long as
Vestar/Gray LLC continues to own a certain percentage of St. John Knits
International common stock. The Stockholders Agreement will give registration
rights to Vestar/Gray LLC and management and will restrict the transfer of
shares held by Vestar/Gray LLC and certain members of management.

The Limited Liability Company Agreement (See Page 79)

The Limited Liability Company Agreement, or "LLC Agreement," is the
organizational document of Vestar/Gray LLC. The LLC agreement will be amended
prior to consummating the mergers to provide Vestar and the Grays with certain
rights to designate members to the Board of Directors of St. John Knits
International. The LLC Agreement will contain restrictions on the transfer of
shares held by the Grays. The LLC Agreement will govern Vestar/Gray LLC's
exercise of the registration rights granted under the Stockholders Agreement.
The LLC Agreement will also provide that each of the Grays will not compete
with St. John or St. John Knits International as long as he or she is employed
by St. John or St. John Knits International and generally for five years
thereafter.

Interests of Certain Persons Involved in the Mergers That Are Different from
Yours (See Page 40)

In considering the recommendation of the St. John Board regarding the
mergers, you should be aware of the interests that certain executive officers
and directors of St. John have in the mergers that are different from your and
their interests as shareholders.

Prior to the mergers, the Grays will transfer 1,205,983 shares of St. John
common stock to Vestar/Gray LLC in exchange for $7,110,000 in cash and an
approximately 16% interest in Vestar/Gray LLC. Following the mergers, the Grays
will be granted new options to acquire shares of St. John Knits International
common stock representing 5% of the total shares of St. John Knits
International common stock following the mergers on a fully diluted basis.
These options will have an exercise price equal to the market value of such
stock on the date of grant, which St. John Knits International expects to equal
$30 per share. In addition, these options will become exercisable subject to
certain terms and conditions, including the passage of time and St. John's
achievement of certain performance criteria, will have up to a 15-year term and
may provide for the acceleration of exercisability upon certain events.

6
<PAGE>

Certain other members of senior management also will receive options to
acquire shares of St. John Knits International common stock that will have an
exercise price equal to the market value of such stock on the date of grant. In
addition, certain members of senior management, other than the Grays, will be
offered the opportunity to purchase shares of St. John Knits International
common stock which, together with the options referred to in the preceeding
sentence, will represent no more than 5% of the outstanding capital stock of
St. John Knits International on a fully diluted basis.

As noted above, the Stockholders Agreement will provide the Grays with
certain rights, including the following:

1. the Grays may designate two members of the Board of St. John Knits
International;

2. if the Grays no longer work for St. John Knits International, they may
sell shares of St. John Knits International common stock back to St.
John Knits International or cause Vestar/Gray LLC to sell shares on
their behalf;

3. the Grays will have the right, 12 months following an initial public
offering by St. John Knits International, to cause St. John Knits
International to register the sale of their shares of St. John Knits
International common stock with the Securities and Exchange Commission,
as well as other rights to participate in registrations of St. John
Knits International common stock; and

4. the Grays will have the right to participate with Vestar in certain
sales of St. John Knits International common stock by Vestar.

In addition to the foregoing, Robert E. Gray will receive the following
additional benefits. First, he will receive a lump sum payment in an amount
equal to approximately $1,800,000, which represents deferred compensation owed
to Mr. Gray under his employment agreement with St. John and which has been
reflected in the historical financial statements. Second, under certain
circumstances, in the event that St. John is obligated to reimburse Acquisition
for expenses under the merger agreement, Vestar may reimburse Robert E. Gray
for a proportionate share of his expenses. Third, Vestar has agreed that
following the consummation of the mergers, it will cause St. John Knits
International to reimburse Mr. Gray for his reasonable out-of-pocket expenses
in connection with the mergers. Finally, Mr. Gray, along with Kelly A. Gray,
will serve as directors of St. John Knits International after the mergers.

Conditions to Completion of the Mergers (See Page 70)

The completion of the mergers depends on the satisfaction of a number of
conditions, including without limitation, the following:

1. St. John shareholders must adopt and approve the principal terms of the
merger agreement and approve the principal terms of the reorganization
merger;

2. we must receive financing for the transactions contemplated by the
merger agreement;

3. we must receive all required consents and approvals, including
regulatory approvals, and any waiting periods required by law must have
expired;

4. there must be no governmental order blocking completion of the mergers,
no proceedings by a government body trying to block the mergers and no
significant litigation by any governmental body with respect to the
mergers;

5. St. John must not have suffered any event which has had, or is
reasonably likely to have, a "material adverse effect" on St. John (for
the definition of material adverse effect, see "THE MERGER AGREEMENT--
Conditions to the Consummation of the Mergers" on page 70); and

6. the representations and warranties made by St. John in the merger
agreement must be true and correct in all material respects at the
closing date, and St. John must have performed in all material respects
its obligations under the merger agreement.

7
<PAGE>

Unless prohibited by law, St. John or Acquisition could elect to waive a
condition that has not been satisfied and complete the mergers anyway. We
cannot be certain whether or when any of these conditions will be satisfied,
or, where permissible, waived, or that we will complete the mergers. In
addition, we will not complete the reorganization merger unless all conditions
to the acquisition merger are satisfied or, where permissible, waived.

Termination of the Merger Agreement (See Page 71)

Acquisition and St. John may agree at any time to terminate the merger
agreement before completing the mergers, even if the St. John shareholders have
already approved the reorganization merger.

Either party may also terminate the merger agreement if, among other
reasons:

1. the parties do not complete the mergers by July 15, 1999;

2. any government body has issued a final order enjoining or otherwise
prohibiting the mergers;

3. St. John shareholders do not approve the reorganization merger; or

4. the other party is in material breach of any of its representations,
warranties or covenants under the merger agreement and the breach is not
cured within 20 days.

In addition, Acquisition may terminate the merger agreement if, among other
reasons:

1. our Board has withdrawn or modified in a manner adverse to Acquisition
its recommendation of the mergers;

2. our Board has approved an acquisition proposal made by a third party; or

3. we have failed to recommend rejection of any tender or exchange offer
for shares of St. John common stock.

Finally, St. John may terminate the merger agreement prior to approval of
the reorganization merger by its shareholders if, among other reasons:

1. our Board has withdrawn or modified in a manner adverse to Acquisition
our recommendation of the mergers in compliance with the terms of the
merger agreement; or

2. our Board has approved a superior proposal in compliance with the terms
of the merger agreement.

Termination Fees and Expenses (See Page 73)

St. John has agreed to pay Acquisition a $14 million termination fee if
certain events occur, including the following:

1. Acquisition terminates the merger agreement because our Board has
withdrawn or modified in a manner adverse to Acquisition its
recommendation of the mergers or if our Board has approved or we have
consummated an acquisition proposal made by a third party or if we have
failed to recommend rejection of any tender or exchange offer for shares
of St. John common stock;

2. we terminate the merger agreement because, in compliance with the merger
agreement, our Board has withdrawn or modified in a manner adverse to
Acquisition its recommendation of the mergers or our Board has approved
a superior proposal in accordance with the terms of the merger
agreement; or

3. an acquisition proposal is made by a third party and

(a) either Acquisition or we terminate the merger agreement because St.
John shareholders have not approved the reorganization merger,

(b) either Acquisition or we terminate the Agreement because the mergers
have not been consummated by July 15, 1999, unless such consummation
has not occurred due to the failure to receive financing based on
certain market conditions, or

8
<PAGE>

(c) Acquisition terminates the merger agreement because we are in
material breach of any of our representations, warranties or
covenants contained in the merger agreement,

and, in any of these events, within twelve months after the date of such
termination, we enter into a definitive agreement or consummate either an
acquisition proposal made by a third party other than Acquisition prior
to the date of such termination or a superior proposal.

In addition, we have agreed to pay up to $1.5 million of the expenses
incurred by Acquisition in connection with the mergers if certain events occur,
including without limitation, the following:

1. either Acquisition or we terminate the merger agreement if the mergers
have not been consummated by July 15, 1999 because certain conditions to
the mergers have not been satisfied by such date; or

2. the circumstances described in paragraphs (1) or (2) above have
occurred.

If we have to pay both the termination fee and the expense amount, the
expense amount will be credited against the termination fee.

Acquisition has agreed to pay up to $1.5 million of the expenses incurred by
us in connection with the mergers if we terminate the merger agreement because
Acquisition is in material breach of any of its representations, warranties or
covenants contained in the merger agreement.

Material Federal Income Tax Consequences (See Page 43)

The mergers are intended to be tax-free to St. John shareholders to the
extent you have exchanged your shares of St. John common stock for St. John
Knits International common stock, and taxable to St. John shareholders to the
extent cash received exceeds your tax basis in St. John shares exchanged for
cash. However, it is possible that the mergers will be fully taxable to the
extent of the difference between the fair market value of your St. John stock
and your tax basis in your shares. In addition, the tax treatment of the cash
received by St. John shareholders depends upon how each shareholder holds the
St. John shares and upon whether such shares are deemed to have been sold to
Vestar/Gray LLC or instead to have been redeemed by St. John Knits
International or St. John. No opinions are being issued and no rulings from the
IRS are being sought concerning the tax treatment of the mergers.

Tax matters can be complicated and the tax consequences of the mergers to
you will depend on the facts of your own situation. You should consult your own
tax advisors to understand fully the tax consequences of the mergers to you.

Accounting Treatment (See Page 43)

The acquisition merger will be accounted for as a recapitalization under
generally accepted accounting principles. Accordingly, the historical basis of
St. John's assets and liabilities will not be impacted by the transaction.

Dissenters' Rights (See Page 51)

California law permits holders of St. John common stock to dissent from the
reorganization merger and to have the fair value of their stock appraised and
paid to them in cash. If you hold shares of St. John common stock and you
dissent from the reorganization merger and follow the required formalities, you
will receive neither the $30 cash price nor shares of stock of St. John Knits
International. Instead, your only right will be to receive the appraised value
of your shares of St. John in cash. Although shareholders of St. John will have
dissenters' rights with respect to the reorganization merger, they will not
have dissenters' rights with respect to the acquisition merger.

Regulatory Approvals (See Page 51)

The Hart-Scott-Rodino Antitrust Improvements Act of 1976 prohibits St. John
and Acquisition from completing the acquisition merger until they have
furnished certain information and materials to the Antitrust Division of the
Department of Justice and the Federal Trade Commission and the required waiting
period has expired.

9
<PAGE>

Comparison of Rights of St. John Common Stock and St. John Knits International
Common Stock (See Page 85)

The rights of St. John shareholders are governed by California law and by
St. John's restated articles of incorporation and restated bylaws, whereas the
rights of St. John Knits International's shareholders will be governed by
Delaware law and by St. John Knits International's restated certificate of
incorporation and restated bylaws. As a result of these different governing
laws and organizational documents, St. John shareholders will have different
rights as holders of St. John Knits International common stock than they
currently have as holders of St. John common stock.

Description of Capital of St. John Knits International (See Page 99)

St. John Knits International currently is authorized to issue up to 10,000
shares of common stock, par value $.01 per share. Dividends may be paid on the
St. John Knits International common stock out of funds legally available
therefor, when and if declared by St. John Knits International Board of
Directors. If the reorganization merger is approved by the requisite vote of
the shareholders of St. John and all other conditions to the mergers are
satisfied or waived, the certificate of incorporation of St. John Knits
International will be amended to, among other things, increase the number of
shares of common stock of St. John Knits International to 20,000,000 shares.

Holders of the St. John Knits International common stock are entitled to
share ratably therein and in assets available for distribution on liquidation,
dissolution or winding up, subject, if preferred stock of St. John Knits
International is then authorized and outstanding, to any preferential rights of
such preferred stock. Each share of the St. John International common stock
entitles the holder thereof to one vote at all meetings of share owners, and
such votes are non-cumulative. The St. John Knits International common stock is
not redeemable, has no subscription or conversion rights and do not entitle the
holders thereof to any pre-emptive rights.

New York Stock Exchange Delisting (See Page 43)

Once the mergers are completed, St. John will delist the St. John common
stock from the New York Stock Exchange. We do not expect to list the shares of
common stock of St. John Knits International on any national securities
exchange or any inter-dealer quotation system.

Merger Financing (See Page 55)

We expect St. John Knits International to incur approximately $315 million
in long-term debt to finance the acquisition merger. The rest of the necessary
financing will come from cash equity contributed by Vestar, rollover of the
Grays' investment in St. John and available cash of St. John.

Rights Plan (See Page 59)

The Special Committee of the St. John Board of Directors has exempted
Acquisition and its affiliates from triggering the rights of shareholders under
St. John's rights agreement in connection with the mergers. In addition, the
St. John Board of Directors intends to amend the rights agreement prior to the
reorganization merger to provide that the rights agreement will terminate at
the effective time of the reorganization merger. Because of these facts,
shareholders will have no right to acquire stock under the rights agreement
either by virtue of the mergers or following the mergers.

10
<PAGE>

Market Price and Dividend Information

Shares of St. John common stock are traded on the New York Stock Exchange
under the symbol "SJK." The table below sets forth, for the fiscal quarters
indicated, the high and low closing prices of shares of St. John common stock
as reported by the New York Stock Exchange.

<TABLE>
<CAPTION>
High Low Dividend
------ ------ --------
<S> <C> <C> <C>
1997
First Quarter......................................... $48.13 $41.13 $0.025
Second Quarter........................................ 45.50 37.50 0.025
Third Quarter......................................... 54.50 38.75 0.025
Fourth Quarter........................................ 49.19 38.50 0.025
1998
First Quarter......................................... $44.50 $36.38 $0.025
Second Quarter........................................ 48.31 38.63 0.025
Third Quarter......................................... 44.75 34.00 0.025
Fourth Quarter........................................ 33.88 13.00 0.025
1999
First Quarter......................................... $27.94 $17.56 $0.025
Second Quarter (through February 25).................. $27.88 $25.81 $ --
</TABLE>

On December 8, 1998, the last full trading day prior to the public
announcement of the proposed mergers, the reported closing price of St. John
common stock on the New York Stock Exchange was $21.9375 per share.

On , 1999, the most recent practicable date prior to the printing
of this Proxy Statement-Prospectus, the reported closing price of St. John
common stock on the New York Stock Exchange was $ per share.

St. John's ability to pay dividends depends upon limitations under
applicable law, certain covenants under its line of credit and other factors
your Board of Directors deems relevant, including results of operations,
financial condition and capital and surplus requirements. St. John does not
expect St. John Knits International to pay dividends on its common stock
following the mergers.

11
<PAGE>

Selected Historical Condensed Financial Data

The following table sets forth selected historical condensed consolidated
financial data of St. John. The selected historical condensed consolidated
financial data for the three fiscal years ended November 1, 1998, November 2,
1997 and November 3, 1996 are derived from the historical consolidated
financial statements of St. John and related notes thereto, which are
incorporated by reference in this document. The selected historical condensed
consolidated financial data for the two fiscal years ended October 29, 1995 and
October 30, 1994 are derived from the historical consolidated financial
statements of St. John, which are not incorporated by reference in this
document. See "WHERE YOU CAN FIND MORE INFORMATION" on page 102.

<TABLE>
<CAPTION>
For the years ended
-----------------------------------------------------------
October 30, October 29, November 3, November 2, November 1,
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(amounts in thousands except per share and ratio data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF INCOME:
Net sales.............. $127,953 $161,795 $202,951 $242,101 $281,961
Cost of sales.......... 59,179 74,252 88,871 99,545 120,883
-------- -------- -------- -------- --------
Gross profit........... 68,774 87,543 114,080 142,556 161,078
Selling, general and
administrative
expenses.............. 43,288 54,550 68,385 84,545 107,026
-------- -------- -------- -------- --------
Operating income....... 25,486 32,993 45,695 58,011 54,052
Other income........... 340 803 1,355 713 1,369
-------- -------- -------- -------- --------
Income before income
taxes................. 25,826 33,796 47,050 58,724 55,421
Income taxes........... 10,880 14,243 19,929 24,300 22,001
-------- -------- -------- -------- --------
Net income............. $ 14,946 $ 19,553 $ 27,121 $ 34,424 $ 33,420
-------- -------- -------- -------- --------
Net income per common
share--basic.......... $ 0.91 $ 1.19 $ 1.64 $ 2.07 $ 2.00
-------- -------- -------- -------- --------
Net income per common
share--diluted........ $ 0.90 $ 1.16 $ 1.59 $ 2.01 $ 1.94
-------- -------- -------- -------- --------
Dividends per share.... $ 0.075 $ 0.10 $ 0.10 $ 0.10 $ 0.10
-------- -------- -------- -------- --------
Shares used in the
calculation of net
income per share --
basic................ 16,396 16,433 16,519 16,615 16,694
-------- -------- -------- -------- --------
Shares used in the
calculation of net
income per share --
diluted.............. 16,651 16,869 17,016 17,134 17,235
-------- -------- -------- -------- --------
OTHER DATA:
EBITDA (a)............. $ 29,159 $ 38,306 52,737 66,927 66,124
EBITDA margin (b)...... 22.8% 23.7% 26.0% 27.6% 23.5%
Depreciation and
amortization.......... $ 3,673 $ 5,313 $ 7,042 $ 8,859 $ 11,371
Capital expenditures... $ 7,796 $ 17,571 $ 21,400 $ 22,751 $ 23,648
Ratio of earnings to
fixed charges (c)..... 17.5x 18.7x 21.8x 22.6x 16.6x
Net cash provided by
operating activities.. $ 12,637 $ 18,014 $ 16,841 $ 30,459 $ 24,982
Net cash used in
investing activities.. $ 14,292 $ 17,714 $ 20,114 $ 21,542 $ 22,377
Net cash provided by
(used in) financing
activities............ $ (998) $ (444) $ 748 $ (817) $ (2,724)
BALANCE SHEET DATA:
Working capital........ $ 31,442 $ 38,130 $ 49,628 $ 69,693 $ 89,190
Total assets........... 62,634 85,973 116,494 153,904 182,390
Total debt (d)......... -- -- -- -- 408
Stockholders' equity... 50,530 69,227 97,093 130,680 161,574
Book value per share... 3.08 4.20 5.85 7.86 9.75
</TABLE>
- -------
(a) "EBITDA" represents earnings before interest expense, interest income,
income taxes, depreciation and amortization expense, non-cash write-off of
assets and excludes minority interest and other non-royalty income. It is not
intended to represent cash flow from operations as defined by generally
accepted accounting principles and should not be used as an alternative to net
income as an indicator of St. John's operating performance or to cash flow as a
measure of liquidity. EBITDA is included in this Proxy Statement-Prospectus as
it is a basis upon which St. John assesses its financial performance, and
certain covenants in St. John's borrowing arrangements will be tied to similar
measures. EBITDA and EBITDA margin, as presented, present useful measures of
assessing St. John's ongoing operating activities without the impact of
financing activity and non-recurring charges. While EBITDA is frequently used
as a measure of operations and the ability to meet debt service requirements,
it is not necessarily comparable to other similar titled captions of other
companies due to potential inconsistencies in the method of calculation.

(b) EBITDA margin represents EBITDA divided by net sales.

(c) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes and extraordinary items,
plus fixed charges. Fixed charges consist of interest expense, including
amortization of debt issuance costs and a portion of operating lease rental
expense deemed to be representative of the interest factor.

(d) Total debt includes long-term debt and the current portion of long-term
debt.

12
<PAGE>

Selected Pro Forma Condensed Consolidated Financial Data

(Unaudited)

The following table sets forth selected pro forma condensed consolidated
financial data of St. John that has been derived by the application of pro
forma adjustments to St. John's historical consolidated financial statements
incorporated by reference herein. The pro forma condensed consolidated
statement of income for the period presented gives effect to the mergers and
related transactions as if such transactions were consummated as of November 3,
1997 for the fiscal year ended November 1, 1998. The pro forma condensed
consolidated balance sheet data gives effect to the mergers and related
transactions as if such transactions had occurred as of November 1, 1998. The
adjustments are described in the notes accompanying the pro forma financial
statements found on page 61. The selected pro forma condensed consolidated
financial data should not be considered indicative of actual results that would
have been achieved had the mergers and related transactions been consummated on
the date or for the periods indicated and do not purport to be indicative of
balance sheet data or results of operations as of any future date or for any
future period. This data should be read in conjunction with St. John's
historical financial statements and the notes thereto which are incorporated
herein by reference. See "WHERE YOU CAN FIND MORE INFORMATION" on page 102.

The pro forma adjustments were applied to the respective historical
consolidated financial statements to reflect the accounting for the mergers as
a recapitalization. Accordingly, the historical basis of St. John's assets and
liabilities has not been impacted by the transaction.

<TABLE>
<CAPTION>
Pro Forma
-----------
(amounts in thousands except per share and ratio data) November 1,
1998
-----------
<S> <C>
CONSOLIDATED STATEMENT OF INCOME:
Net sales...................................................... $ 281,961
Cost of sales.................................................. 120,883
---------
Gross profit................................................... 161,078
Selling, general and administrative expenses................... 107,526
---------
Operating income............................................... 53,552
Interest expense............................................... 32,816
Other income................................................... 252
---------
Income before income taxes..................................... 20,988
Income taxes................................................... 8,331
---------
Net income..................................................... $ 12,657
---------
Net income per common share-basic.............................. $ 1.93
---------
Net income per common share-diluted............................ $ 1.93
---------
Dividends per share............................................ $ --
---------
Shares used in the calculation of net income per share --
basic........................................................ 6,546
---------
Shares used in the calculation of net income per share --
diluted...................................................... 6,546
---------
OTHER DATA:
EBITDA (a)..................................................... $ 65,624
EBITDA margin (b).............................................. 23.3%
Depreciation and amortization.................................. $ 11,371
Capital expenditures........................................... $ 23,648
Ratio of earnings to fixed charges (c)......................... 1.58x
BALANCE SHEET DATA:
Working capital................................................ $ 69,065
Total assets................................................... 184,978
Total debt (d)................................................. 322,620
Stockholders' equity (deficit)................................. (158,050)
Book value per share........................................... (24.14)
</TABLE>

- --------
(a) "EBITDA" represents earnings before interest expense, interest income,
income taxes, depreciation and amortization expense, non-cash write-off of
assets and excludes minority interest and other non-royalty income. It is not
intended to represent cash flow from

13
<PAGE>

operations as defined by generally accepted accounting principles and should
not be used as an alternative to net income as an indicator of St. John's
operating performance or to cash flow as a measure of liquidity. EBITDA is
included in this Proxy Statement-Prospectus as it is a basis upon which St.
John assesses its financial performance, and certain covenants in St. John's
borrowing arrangements will be tied to similar measures. EBITDA and EBITDA
margin, as presented, present useful measures of assessing St. John's ongoing
operating activities without the impact of financing activity and non-recurring
charges. While EBITDA is frequently used as a measure of operations and the
ability to meet debt service requirements, it is not necessarily comparable to
other similar titled captions of other companies due to potential
inconsistencies in the method of calculation.

(b) EBITDA margin represents EBITDA divided by net sales.

(d) Total debt includes long-term debt and the current portion of long-term
debt.

14
<PAGE>

RISK FACTORS

You should carefully consider the following factors, together with the other
information contained in this Proxy Statement-Prospectus, before determining
whether to vote to approve the reorganization merger. The risks and
uncertainties described below are not the only ones facing St. John and St.
John Knits International. Additional risks and uncertainties not presently
known to us or that we do not currently believe are important may also harm our
business operations. If any of the following risks actually occur, our
business, financial condition or our results of operations could be seriously
harmed. If that happens, the value of St. John Knits International common stock
could decline, and you may lose all or part of your investment.

We Will Be Controlled By Vestar After The Mergers

Vestar/Gray LLC will own approximately 93% of the outstanding shares of St.
John Knits International after the acquisition merger. Following the mergers,
Vestar will own approximately 84% of Vestar/Gray LLC while the Grays will own
approximately 16% of Vestar/Gray LLC. As a result, Vestar's total ownership
interest of St. John Knits International will be approximately 78%. Vestar will
have significant voting power to control the direction and policies of St. John
Knits International, the election of all of the directors (although the Grays
will be contractually entitled to elect two of the five directors to serve on
the St. John Knits International Board following the mergers) and the outcome
of any matter requiring stockholder approval, including adopting amendments to
St. John Knits International's certificate of incorporation and approving
mergers or sales of all or substantially all of St. John Knits International's
assets. The directors elected by Vestar will have the authority to effect
decisions affecting the appointment of new management and the capital structure
of St. John Knits International, including the issuance of additional capital
stock, the implementation of stock repurchase programs and the declaration of
dividends. Stockholders other than Vestar, through Vestar/Gray LLC, will have
little or no influence on decisions regarding such matters.

In addition, the existence of a controlling stockholder of St. John Knits
International may have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from seeking to acquire, a
majority of the outstanding common stock. A third party would be required to
negotiate any such transaction with Vestar, through Vestar/Gray LLC, and
Vestar's interests may be different from the interests of other St. John Knits
International stockholders.

Our Common Stock Will Not Be Listed, Which Will Result In A Loss Of Liquidity

After the acquisition merger, neither St. John nor St. John Knits
International common stock will be listed on any securities exchange or any
inter-dealer quotation system. This fact, combined with the substantial
decrease in the number of shares of our common stock to be held by stockholders
other than Vestar/Gray LLC, is expected to result in a substantial decrease in
the liquidity of our common stock. In addition, quotes for shares of our common
stock will not be readily available because our common stock will trade only in
the over-the-counter market. As a result, we expect that the volume of shares
of St. John Knits International traded following the mergers will be
substantially smaller than the trading volume of shares of St. John before the
mergers.

Our Company Will Be Substantially Leveraged and Will Have Decreased Liquidity

In connection with the mergers, St. John Knits International will incur
approximately $315 million of long-term debt. The proceeds from these
borrowings will be used to fund payment of the cash consideration in the
acquisition merger and to pay the fees and expenses incurred in connection with
the mergers. The definitive terms of the merger financing have not been
finalized. However, based on a commitment letter from The Chase Manhattan Bank
(which is filed as an exhibit to the Rule 13e-3 Transaction Statement), we
expect that such terms will include significant operating and financial
restrictions, such as limits on our ability to incur indebtedness, create
liens, sell assets, engage in mergers or consolidations, make investments and
pay dividends. See "THE MERGERS--Merger Financing" on page 55.

15
<PAGE>

As of November 1, 1998, after giving pro forma effect to the mergers and the
merger financing and the application of the net proceeds from the financing,
St. John Knits International would have had $342.4 million of total liabilities
and $158.1 million of consolidated shareholders' deficit. This substantial
leverage may have important consequences for St. John Knits International,
including the following:

1. our ability to obtain additional financing for working capital, capital
expenditures or other purposes may be impaired or any such financing may
not be on terms favorable to us (although we do have a commitment for a
$25 million working capital facility);

2. during certain periods, a substantial portion of our cash flow available
from operations will be dedicated to the payment of principal and
interest expense, thereby reducing the funds that would otherwise be
available to us for operations and future business opportunities;

3. a substantial decrease in net operating income and cash flows or an
increase in expenses may make it difficult for us to meet our debt
service requirements or force us to modify our operations; and

4. our substantial leverage may make us more vulnerable to economic
downturns and competitive pressure.

In addition, substantial leverage will have a negative effect on our net
income. Pro forma net income for the 1998 fiscal year ended November 1, 1998
would have been $12.7 million as compared to $33.4 million for the same period
on a historical basis, and pro forma interest expense for fiscal 1998 would
have been increased to $32.8 million.

After the mergers are consummated, our principal source of liquidity is
expected to be cash flow from operations. It is anticipated that our principal
uses of liquidity will be to provide working capital, meet our debt service
requirements and finance our strategic plans.

Potential Dilution of St. John Knits International Stockholders May Occur

Following the mergers, St. John Knits International intends to grant members
of management options to purchase St. John Knits International common stock,
the exercise of which would dilute the holdings of St. John Knits International
stockholders. In particular, immediately following the acquisition merger,
Robert E. Gray, Marie Gray and Kelly A. Gray will be granted options to acquire
an aggregate of 5% of the total shares of St. John Knits International common
stock following the mergers. These options will become exercisable over a
three-year period, subject to St. John Knits International achieving certain
earnings targets. Certain other members of senior management also will receive
options to acquire shares of St. John Knits International common stock that
will have an exercise price equal to the market value of such stock on the date
of grant. In addition, certain members of senior management, other than the
Grays, will be offered the opportunity to purchase shares of St. John Knits
International common stock which, together with the options referred to in the
preceding sentence, will represent no more than 5% of the outstanding capital
stock of St. John Knits International on a fully diluted basis.

We Do Not Expect to Pay Dividends

We do not expect that St. John Knits International will pay dividends to
stockholders following the mergers. St. John Knits International will be
substantially leveraged. The agreements governing the terms of the indebtedness
will contain covenants limiting the amount of dividends that may be paid by us.
In addition, it is likely that we will use any retained earnings for working
capital and to finance our strategic plans, and not to pay dividends.

We Face Risks Associated with the Apparel Business

The apparel business is extremely competitive. The companies that compete
with us include manufacturers of all sizes, some of which have greater
financial resources than we do. In addition, companies in the apparel

16
<PAGE>

business may have different financial results during certain seasons or during
good or bad economic times. As a result of the substantial leverage of St. John
Knits International after the mergers, we may have less financial resources to
compete effectively and will not have the financial flexibility we currently
have in the event our financial results differ during certain seasons.

Certain Proration Risks May Result

The election of record holders of St. John common stock to receive shares of
St. John Knits International or $30 in cash per share is subject to the
proration procedures described in the merger agreement. If the mergers are
consummated, you will not necessarily receive the type of consideration
specified in your election. See "THE MERGERS--Merger Consideration" on page 48
for a description of the proration procedures.

17
<PAGE>

SPECIAL FACTORS

Background of the Mergers

The Board of Directors and management of St. John have from time to time
considered strategic alternatives for St. John. In the summer of 1998,
management began to question whether St. John could continue to sustain the
growth rate Wall Street had come to expect of St. John without jeopardizing St.
John's profitability. Accordingly, at that time, St. John entered into
discussions with Merrill Lynch regarding the retention of Merrill Lynch as its
financial advisor to explore strategic options for St. John, including the sale
of St. John. In July of 1998, Mr. Gray and outside directors of St. John met
with representatives of Merrill Lynch to discuss this engagement. On October 6,
1998, St. John retained Merrill Lynch. On November 4, 1998, after consulting
with Merrill Lynch, St. John's Board of Directors approved a shareholder rights
plan, or "poison pill," designed to provide the Board of Directors of St. John
with the ability to maximize shareholder value with respect to any offer made
to acquire St. John. St. John issued the rights as a dividend to shareholders
on November 18, 1998.

In July 1998, a former director of St. John, Mr. Rick Rozar, introduced Mr.
Gray to a potential financial buyer for St. John. After discussions with Mr.
Gray, in September 1998, the financial buyer indicated that it did not have any
interest in completing a transaction with St. John.

On November 12, 1998, Mr. Gray first met with Daniel S. O'Connell, Chief
Executive Officer of Vestar, James P. Kelley, Managing Director of Vestar and
Elizabeth M. Eveillard, Managing Director of PaineWebber Inc. The meeting was
the result of an initial contact with Mr. Gray made in late October 1998 by
PaineWebber Inc., on behalf of Vestar, indicating Vestar's potential interest
in a transaction such as the mergers. During the course of that initial
meeting, Messrs. O'Connell and Kelley provided a brief history of Vestar's
experience with private equity investments, including management buyouts. They
also discussed Vestar's experience with companies in the apparel sector.
Messrs. O'Connell and Kelley suggested a partnership between Vestar and
Mr. Gray, his wife, Marie Gray, Vice Chairwoman and Secretary of St. John, and
his daughter, Kelly A. Gray, President of St. John, to take St. John private in
a management-led buyout as a possible strategy for maximizing shareholder
value. Mr. Gray expressed preliminary interest in considering a transaction and
agreed to meet again with the representatives of Vestar in the second week of
November.

On November 13, 1998, Vestar signed a confidentiality agreement with St.
John. This confidentiality agreement contained a "standstill agreement" by
Vestar, in which Vestar generally agreed that it would not, for a period of
three years from November 13, 1998, seek to acquire any voting securities of
St. John or seek to influence or gain control of St. John without the approval
of the Board of Directors of St. John.

On November 17 and 18, 1998, Messrs. O'Connell and Kelley, Sander M. Levy,
Managing Director of Vestar, Christopher Henderson, Vice President of Vestar,
Ms. Eveillard and David M. Reed, Jr., Managing Director of PaineWebber Inc.,
went to Irvine and met with the Grays, Roger G. Ruppert, Chief Financial
Officer of St. John, and other representatives of St. John for the purpose of
conducting a general diligence review of St. John. At that time, in a side
meeting, Mr. Gray told Messrs. O'Connell and Kelley that, in the event that an
agreement was reached, he and his family would like to sell shares of St. John
common stock and/or options valued at approximately $17 million in cash based
on the price per share to be offered in any transaction, and that any other
shares would be retained by him and his family and invested in the transaction
with Vestar.

On November 24, 1998, Mr. Gray held a meeting in Irvine with Messrs. Kelley
and Henderson and Ms. Eveillard. At that meeting, Vestar presented alternative
acquisition models that could be used in connection with an acquisition by
Vestar of St. John, including a part cash, part stock structure where
approximately 80% of the consideration would be $25.00 in cash and the rest
would be a combination of preferred and common stock, and a nearly all cash
merger transaction valued at $26.50 per share. Mr. Gray expressed his belief
that St. John shareholders, other than the Grays, would benefit more from, and
would look more favorably upon, a transaction with a larger cash component. As
a result, Vestar determined to focus on structuring a leveraged acquisition, to
be accounted for as a recapitalization, in which the consideration to St. John
shareholders would consist primarily of cash.

18
<PAGE>

On November 25, 1998, Mr. Kelley telephoned Mr. Gray and advised him that he
believed that Vestar would be able to structure a proposal for an acquisition
transaction with St. John whereby substantially all of the outstanding St. John
common stock would be acquired for cash with some shares to be retained by the
existing St. John shareholders in order to qualify for recapitalization
accounting.

Following these meetings, Vestar engaged Simpson Thacher & Bartlett as its
legal counsel and Deloitte & Touche as its independent accountants. These firms
were retained to assist Vestar in the due diligence process and in determining
the optimal transaction structure.

Between November 25 and December 7, 1998, Mr. Kelley and Mr. Gray continued
a dialogue regarding the possible terms and structure of the proposed
transaction.

On December 2, 1998, Messrs. Kelley and Levy met with Mr. Gray and
representatives of Merrill Lynch in New York to discuss the proposed
transaction and possible arrangements for financing the acquisition.

On December 7, 1998, The Chase Manhattan Bank and Chase Securities Inc.
informally agreed with Vestar to arrange for senior credit facilities and
subordinated debt financing to finance the proposed transaction.

On December 8, 1998, representatives of Vestar, The Chase Manhattan Bank,
Chase Securities Inc., Bear Stearns & Co. Inc., who was retained to assist
Vestar in raising subordinated debt financing, PaineWebber Inc. and Merrill
Lynch met with St. John's management in Irvine to conduct a due diligence
review of St. John.

Later that day, Mr. Gray and Vestar submitted to the Board of Directors of
St. John a proposal to purchase 98% of the outstanding St. John common stock.
The proposal, as modified on December 16, 1998 to correct a technical
inaccuracy, stated as follows:

"December 8, 1998

Board of Directors
St. John Knits, Inc.
17422 Derian Avenue
Irvine, California 92614

Ladies and Gentlemen:

Robert E. Gray, together with Vestar Capital Partners III, L.P. ("Vestar"
and, together with Robert Gray, the "Purchasers") are pleased to submit the
following proposal to purchase 98% of the outstanding common stock of St. John
Knits, Inc. (the "Company"). The Purchasers are prepared to move quickly toward
the execution of a definitive acquisition agreement and are confident that the
proposed transaction (the "Transaction") can be completed expeditiously.

1. Purchase Price. The Purchasers propose to acquire 98% of the outstanding
--------------
common stock of the Company at a price of $28 per share in cash, for an
aggregate purchase price of approximately $490 million. Approximately 5% of the
outstanding common stock will remain in the hands of the remaining current
public stockholders following the consummation of the Transaction.

2. Conditions. Consummation of the Transaction will be subject to: (a) the
----------
negotiation and execution of a definitive acquisition agreement (the
"Definitive Agreement") and related documents; (b) the receipt of any necessary
consents and approvals from third parties and the expiration or termination of
any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended; (c) the receipt by the Purchasers, on terms satisfactory to
them, of all financing necessary to complete the Transaction; (d) satisfactory
completion by Vestar and the Purchasers' financing sources prior to the
execution of the Definitive Agreement of confirmatory due diligence
investigations of the Company; and (e) the reincorporation of the Company as a
Delaware corporation. Given the amount of diligence Vestar has completed to
date and its knowledge of the Company's business, together with Robert Gray's
intimate familiarity with the company, we

19
<PAGE>

expect to complete our confirmatory due diligence and to be in a position to
execute a Definitive Agreement within the next two weeks.

3. Financing. Although consummation of the Transaction will be subject to
the receipt of financing, the Purchasers are confident that they can obtain
within the next two weeks definitive commitments with respect to the senior
debt financing and a "highly confident" letter with respect to any subordinated
debt financing necessary to consummate the Transaction. In that regard, the
Purchasers have retained Chase Manhattan Bank to lead in arranging the
necessary debt financing. Chase's expertise in financing transactions of this
nature buttresses the Purchasers' confidence that the necessary financing
arrangements will be completed expeditiously and on favorable terms. In
addition, Vestar Capital Partners III, L.P., Vestar's $800 million private
equity fund, is prepared to commit the necessary equity funds to complete the
transaction.

4. No Binding Commitment. Because the Board cannot accept our proposal
without a more thorough evaluation of the proposed Transaction, this letter
constitutes only a preliminary indication of our interest in consummating a
Transaction on the terms described above, and does not constitute a binding
commitment with respect to a Transaction. A binding commitment with respect to
a Transaction will result only from the execution of a Definitive Agreement,
and will be subject to the conditions set forth therein.

5. Process. We believe that the Transaction will provide superior value to
the Company's shareholders. We recognize of course that the Board will require
some time to evaluate the proposed Transaction before it can make its own
determination whether to endorse it. Given Robert Gray's and the Gray family's
involvement in the proposed Transaction, we appreciate that the Board may want
to establish a special committee to review the proposed Transaction, and that
such a committee may choose to engage counsel and investment bankers to assist
it in such review. While we appreciate and respect the Board's need to conduct
an appropriate process in evaluating our proposal, we must reserve the right to
terminate our proposal if a Definitive Agreement has not been executed by the
Company and the Purchasers by December 31, 1998.

Yours truly,

/s/ Robert Gray
_____________________________________
Robert Gray

VESTAR CAPITAL PARTNERS III, L.P.

By: Vestar Associates III, L.P.,
its General Partner

By: Vestar Associates Corporation
III,
its General Partner

/s/ James P. Kelley
By: _________________________________
Name: James P. Kelley
Title: Vice President"

After receiving the offer, St. John issued a press release after the close
of the market on December 8, 1998, stating that St. John had received the
offer. The full text of the press release is set forth below:

"St. John Knits Receives Definitive Offer For $28 Per Share From Group Led
by Founder And CEO Bob Gray

IRVINE, California--December 8, 1998--St. John Knits Inc. (NYSE: SJK), today
announced that its Board of Directors has formed an independent committee to
evaluate a definitive proposal it has received from company founder, Chairman,
and Chief Executive Officer Bob Gray and his family to buy the company's
outstanding shares not owned by the Gray family for $28 per share in cash. The
proposal represents a premium of approximately 28 percent over Tuesday's
closing stock price of 21 15/16 and has a total value of approximately $490
million.

20
<PAGE>

Gray has informed the company that he has received a commitment to provide
equity financing from Vestar Capital Partners, a private equity investment firm
with offices in New York and Denver. Gray and Vestar are working with Chase
Manhattan Bank to provide the balance of required financing for the
transaction.

In a letter proposing his offer to the Board of St. John Knits, Gray said,
"I believe our offer delivers substantial, certain value to shareholders as we
undertake a strategy to refocus on our core business lines. After carefully
considering the company's business performance this year and evaluating our
strategic options for the future, I have concluded that rather than pushing for
top-line growth at our historic growth rate of 25 percent per year through
further product and market diversification, it is in the company's best long-
term interest to slow the growth rate to about 10 percent per year and focus on
doing what we do best -- delivering the highest quality merchandise and service
to our loyal customers. I believe we can best accomplish this objective as a
private company.'

St. John Knits designs, manufactures, and markets women's clothing and
accessories. The company's products are sold under the St. John, Griffith &
Gray, SJK by St. John and Marie Gray trade names. St. John's retail division
operates 17 boutiques and nine outlet stores."

In response to this proposal, the Board of Directors determined that in
order to mitigate the potential conflict of interest inherent in the Vestar
proposal, it was in the best interests of St. John shareholders for the Board
to form a Special Committee comprised of independent directors to evaluate the
proposal. On Friday, December 11, 1998, St. John appointed a Special Committee
comprised of Messrs. Mark Goldston, Dan Reiner and Robert Davis, newly
appointed members of the Board who do not otherwise have a current affiliation
with St. John. Mr. Goldston, who serves as the chairman of the Special
Committee, is the chairman and chief executive officer of the Goldston Group, a
Los Angeles based strategic advisory firm specializing in repositioning
companies. Mr. Reiner was the founder, chairman and chief executive officer of
Optical Devices, Inc., a manufacturer of enhancement filters for computer
monitors. Mr. Davis was a former president and chief operating officer of St.
John who rejoined the Board after having served as a director from 1984 to
1996. The Special Committee was charged with the responsibility of evaluating
and negotiating the Vestar proposal as well as soliciting and evaluating other
expressions of interest in St. John. The appointment of the Special Committee
was announced publicly in a press release on December 11, 1998.

Following their appointment by the Board, the Special Committee considered
several law firms and several financial advisory firms based on the reputation
and experience of such firms in representing special committees in change of
control transactions. The Special Committee engaged Skadden, Arps, Slate,
Meagher & Flom LLP as its legal advisor. The Special Committee also reviewed
the prior engagement of Merrill Lynch by St. John and the terms of its
engagement. The Special Committee determined that it would be advisable to
engage a co-advisor to represent the Special Committee exclusively in addition
to the prior engagement of Merrill Lynch by St. John. Accordingly, the Special
Committee decided to engage Wasserstein Perella as the co-advisor to Merrill
Lynch. Both Merrill Lynch and Wasserstein Perella's fees were structured in a
manner designed to provide an incentive to the financial advisors to obtain a
price per share in excess of the price offered in the Vestar proposal.

In late December, the Special Committee and its advisors began their due
diligence of St. John. The members of the Special Committee visited St. John's
various facilities in California. The Special Committee also met with
management to discuss the business plan for St. John. The Special Committee
also considered St. John's performance during fiscal 1997 and fiscal 1998, St.
John's outlook for the first quarter of fiscal 1999 and the reasonable outlook
for such full fiscal year as well as management's concern regarding St. John's
ability to maintain its historical rates of growth and profit margins. The
financial advisors met with Vestar to discuss Vestar's projections and
valuation analysis of St. John. On December 31, 1998, the Special Committee
requested and received an extension of the Vestar proposal to January 15, 1999
in order to allow the Special Committee and its advisors additional time to
complete their diligence of St. John and to allow Merrill Lynch and Wasserstein
Perella to explore and evaluate any potential alternative transactions.

21
<PAGE>

At meetings of the Special Committee held on January 4 and 8, 1999, the
Special Committee authorized its financial advisors to contact selected
strategic and financial buyers to determine their interest in making a
competing offer and to provide information about St. John on a confidential
basis to prospective buyers.

On January 11, 1999, Vestar delivered drafts of the merger agreement, the
Voting Agreement and a stock option agreement to the Special Committee and its
advisors, including a summary of the proposed structure for the transaction.
Under the terms of the merger agreement, approximately 97% of St. John's common
stock would be converted in a series of merger transactions into the right to
receive $28 in cash per share. Subject to an election and proration process,
the remaining shares of St. John would represent approximately 7% of the
outstanding common stock in the recapitalized company. In addition, under the
terms of the stock option agreement, Vestar would have the option to purchase
up to 19.9% of the outstanding stock of St. John in the event that the merger
agreement was terminated because of a competing offer.

On January 14, 1999, the Special Committee met with its advisors to discuss
the details of the Vestar proposal. Vestar was invited to make a detailed
presentation to the Special Committee, discussing, among other things, its
valuation assumptions, financing, the risks of the transaction and the business
of St. John. Upon Vestar concluding its presentation, the Special Committee
questioned the Vestar representatives at length, particularly regarding
Vestar's arrangement with the Grays with respect to the Grays' ongoing
investment in St. John after the mergers. Vestar explained the rights and
obligations of the Gray family following the transaction with St. John. The
Special Committee's advisors also discussed among themselves the details of the
Vestar proposal, the merger agreement and the strategic alternatives for
St. John, including the result of preliminary contacts with prospective buyers.

On January 15, 1999, at the request of the Special Committee, the expiration
of the Vestar proposal was further extended to January 22, 1999. The expiration
of the Vestar proposal was subsequently extended twice through February 2, 1999
at the request of the Special Committee. From January 15 to January 20,
representatives of Merrill Lynch and Wasserstein Perella met with Vestar to
discuss the possibility of a higher offer price. Counsel for the Special
Committee also had several conversations with Vestar's counsel regarding the
provisions and terms in the merger agreement and the structure of the
transaction. The Special Committee received periodic updates from its advisors
regarding the progress of these discussions.

On January 21, 1999, the Special Committee met with its advisors.
Representatives of Merrill Lynch and Wasserstein Perella indicated that, as of
such date, they had contacted over ten potential buyers, none of which had
indicated a definitive interest in making a competing proposal, and only one
potential buyer had requested non-public information about St. John (which had
been delivered following such request). Concurrently, the Special Committee
authorized its advisors to continue negotiations with Vestar including
negotiations as to the price and other terms of the Vestar proposal.

On January 25, 1999, representatives of Vestar met with the Special
Committee's financial advisors to continue negotiations, which included
discussing alternative structures, including having the public retain
additional shares to create more liquidity and having Vestar and the Grays
acquire 100% of the outstanding shares of St. John.

On January 27 and January 28, 1999, the Special Committee's financial and
legal advisors met with Vestar to further negotiate the terms of the merger
agreement. On January 28, 1999, the advisors updated the Special Committee on
the status of their negotiations with Vestar. Representatives of Merrill Lynch
and Wasserstein Perella also indicated to the Special Committee that none of
the financial buyers or strategic buyers that had been contacted had expressed
any interest in making a competing offer.

On February 2, 1999, the Special Committee met at the Los Angeles offices of
Skadden, Arps. The Special Committee heard a presentation from its legal
counsel regarding the terms of the merger agreement and the Voting Agreement
and was informed that Vestar had agreed to increase the price per share to $30
for 97% of the outstanding shares of St. John, to lower the combined
termination fee and expense reimbursement to

22
<PAGE>

$14 million from the originally proposed $18 million, to reimburse St. John for
certain out of pocket expenses if the merger agreement were terminated in
certain circumstances, to eliminate the stock option agreement that had been
proposed and to provide that the reorganization merger would require the
approval of both the holders of a majority of the outstanding shares of St.
John common stock and the approval of the holders of a majority of shares of
St. John common stock voting at the Special Meeting, excluding shares owned by
the Grays. See "THE MERGER AGREEMENT" on page 66. Following presentations by
Merrill Lynch and Wasserstein Perella and the delivery to the Special Committee
by Merrill Lynch and Wasserstein Perella of oral fairness opinions regarding
the revised Vestar proposal (which were subsequently confirmed in writing), the
Special Committee determined to recommend for adoption and approval the Vestar
proposal as revised and the merger agreement to the Board of Directors. See "--
Fairness Opinions of Financial Advisors" on page 28.

Later that day, the full Board of Directors of St. John met with its counsel
and Merrill Lynch to review the Agreement and Plan of Merger. At this meeting,
the Special Committee unanimously recommended to the Board to adopt and approve
the Agreement and Plan of Merger and the transactions contemplated thereby and
to recommend to St. John shareholders to approve and adopt the principal terms
of the Agreement and Plan of Merger and the principal terms of the
reorganization merger. After a presentation by Merrill Lynch and the delivery
by Merrill Lynch of its oral fairness opinion to the Board of Directors (which
was subsequently confirmed in writing), a discussion of the terms of the
Agreement and Plan of Merger and the interests of the Grays and St. John's
officers in the transaction, the Board of Directors unanimously approved the
merger agreement, with the Gray family and the officers of St. John abstaining.

Purpose and Structure for the Mergers

The purpose of the mergers is for Vestar/Gray LLC to acquire a majority of
St. John Knits International common stock and thus control of St. John Knits
International, which will wholly own St. John after the reorganization merger.

1. The Reorganization Merger. St. John will merge with SJKAcquisition, with
-------------------------
St. John surviving the reorganization merger. As a result, St. John will
become a subsidiary of St. John Knits International, and St. John
shareholders will become stockholders of St. John Knits International.

2. The Acquisition Merger. St. John Knits International will merge with
----------------------
Acquisition, with St. John Knits International surviving the acquisition
merger.

Following the mergers, St. John Knits International will be 7% owned by
existing shareholders of St. John, other than the Grays, and 93% owned by
Acquisition. In addition, following the mergers, Vestar will own approximately
84% of Vestar/Gray LLC while the Grays will own approximately 16%. Robert E.,
Marie and Kelly A. Gray are directors and executive officers of St. John.

The Special Committee and the Board of Directors believe that the proposed
mergers are in the best interests of St. John shareholders in light of the
value to the shareholders represented by the mergers. The structure of the
mergers is known as a "leveraged recapitalization." St. John expects that St.
John Knits International will incur substantial indebtedness to pay the cash
consideration and the transaction costs and fees. St. John Knits International
will incur approximately $315 million in long-term debt, consisting of
approximately $155 million in senior secured credit facilities and
approximately $160 million in senior subordinated notes. In addition,
Acquisition will make an equity cash contribution of approximately
$146.5 million to St. John Knits International in connection with the
acquisition merger. St. John also expects St. John Knits International to enter
into a $25 million revolving credit facility to assist St. John Knits
International in meeting its working capital needs.

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<PAGE>

If the mergers are consummated, St. John shareholders who receive only cash
for their St. John common stock and do not retain any shares will no longer
have an equity interest in St. John and will therefore not share in the future
earnings and potential growth of St. John Knits International.

The reorganization merger, which is a condition to the acquisition merger,
requires the vote of the holders of a majority of the outstanding shares of St.
John common stock entitled to vote and the holders of a majority of the
outstanding shares of St. John common stock present in person or by proxy and
voting at the special meeting, other than the shares owned beneficially by the
Grays and Vestar.

Reasons for the Mergers; Recommendations to Shareholders

Reorganization Merger

The parties to the acquisition merger intend that the acquisition merger be
treated as a recapitalization for accounting purposes and that certain
shareholders of St. John receive differing treatment in the acquisition merger,
as described below. Based upon the advice of legal counsel and accountants, the
Board and the Special Committee have concluded that these plans can better be
implemented if Delaware law were to be applied to the acquisition merger for
the following reasons:

1. California statutory law does not permit differing treatment of holders
of the same class of shares in a merger transaction unless all holders
of that class of shares approve the differing treatment. It is unclear
whether, under California law, the sale by the Grays of their St. John
shares to Vestar/Gray LLC in exchange for cash and membership interests
in Vestar/Gray LLC would violate this statute.

2. California statutory law does not permit the payment of dividends or the
redemption or repurchase by a corporation of its shares if, among other
things, the total payout would exceed the corporation's retained
earnings. It is unclear under California law whether the acquisition of
St. John by merger of Acquisition into St. John in a recapitalization
transaction would violate this statute. Under certain circumstances, it
is possible that the directors of St. John approving such a transaction
could be personally liable for the total payments made.

St. John has concluded that if St. John were reorganized such that St. John
Knits International, a Delaware corporation and wholly owned subsidiary of St.
John, would become the parent holding company of St. John and would consummate
the acquisition merger, the desired results can be better implemented for the
following reasons:

1. Delaware merger statutes do not require that all stockholders of St.
John Knits International receive the same consideration in a merger.

2. Delaware's statutory restrictions on the payment of dividends and stock
redemptions or repurchases would not apply to the merger consideration
payments when the acquisition merger is effected pursuant to the
provisions of Delaware's merger statutes.

One of the conditions to the proposed transaction set forth in both the
December 8 proposal submitted to the St. John Board of Directors by Vestar and
Robert E. Gray and in the original draft of the merger agreement proposed by
Vestar's counsel was that St. John be reorganized so that the acquisition
transaction be governed by Delaware law. Accordingly, the Special Committee and
the Board of Directors concluded that it is in the best interests of St. John
and its shareholders to effect the reorganization merger as part of an
integrated plan to effect the acquisition merger.

Despite the belief of the Board and the Special Committee that the
reorganization merger is in the best interests of St. John and its
shareholders, it should be noted that Delaware law has been criticized by some
commentators on the grounds that it does not afford minority shareholders the
same substantive rights and protections as are available in a number of other
states. Before voting on the reorganization merger, St. John

24
<PAGE>

shareholders should carefully consider the significant differences between the
corporation laws of California and Delaware and the differences between the
charter and bylaws of St. John and St. John Knits International. For a
comparison of shareholders' rights under Delaware and California laws, see
"COMPARISON OF THE RIGHTS OF HOLDERS OF ST. JOHN COMMON STOCK AND ST. JOHN
KNITS INTERNATIONAL COMMON STOCK" on page 85.

As a result of the reorganization merger, St. John will become a wholly
owned subsidiary of St. John Knits International. The proposed reorganization
merger will not result in any change in the business, management, fiscal year,
location of the principal facilities, assets or liabilities of St. John.

Acquisition Merger

At its February 2, 1999 meeting, the Special Committee unanimously
determined that, taken together, the mergers are fair to, and in the best
interests of, St. John and its shareholders. In addition, at this meeting, the
Special Committee unanimously determined to recommend to the Board to approve
the merger agreement and the transactions contemplated thereby and to recommend
to St. John shareholders that they approve and adopt the principal terms of the
merger agreement and the principal terms of the reorganization merger. At its
February 2, 1999 meeting, the Board, after receiving the recommendations of the
Special Committee and following a presentation by Merrill Lynch, determined
that the mergers are fair to, and in the best interests of, St. John and its
shareholders and resolved to recommend to St. John shareholders that they
approve and adopt the principal terms of the merger agreement and approve the
principal terms of the reorganization merger. St. John's independent directors
unanimously approved the merger agreement and the transactions contemplated
thereby, with the following members of the Board abstaining from voting: Robert
E. Gray, Marie Gray, Kelly A. Gray and Roger G. Ruppert.

The Special Committee, and the full Board, in adopting the recommendations
of the Special Committee, considered a number of factors in recommending and
approving the mergers, including those listed below. In its consideration of
these factors, the Special Committee met several times and convened informally
by telephone on several other occasions between December 1998 and February
1999. The Special Committee's and the Board's respective recommendations are
the product of the business judgment of the respective members thereof,
exercised in light of their fiduciary duties to St. John shareholders:

1. The Special Committee considered the presentations made by each of
Merrill Lynch and Wasserstein Perella and their respective oral
opinions (which were subsequently confirmed in writing) that, as of the
date of such opinions, and based upon and subject to the assumptions,
limitations and qualifications reviewed with the Special Committee, the
consideration to be received by the holders of St. John common stock,
other than the Grays, pursuant to the mergers was fair from a financial
point of view to such holders. The St. John Board also considered the
presentation made, and the oral opinion to the same effect delivered,
by Merrill Lynch.

2. The Special Committee and the Board considered the recent trading
activity of shares of St. John common stock and the fact that the cash
consideration paid in the mergers would enable St. John shareholders to
realize an approximately 37% premium over the closing price for shares
of St. John common stock on the New York Stock Exchange the day the
original proposal was announced. The fact that the cash consideration
to be paid in the mergers represents a significant premium over such
value gave the Special Committee and the Board one indication that the
per share price in the mergers represents an attractive value for St.
John shareholders.

3. The Special Committee and the Board considered information with respect
to the financial condition, results of operations, business and
prospects of St. John, including the risks involved in achieving these
prospects, and current industry, economic and market conditions.

4. The Special Committee and the Board reviewed the possible alternatives
to the mergers, including continuing to operate St. John as a publicly-
owned entity. Both the Special Committee and the Board rejected
continued operation of St. John as a public company as an acceptable
alternative to the

25
<PAGE>

proposed mergers in light of the value to be paid to the shareholders in
the mergers. In this regard, the Special Committee and the Board
considered management's concern over St. John's ability to sustain its
historical growth rate and the effect that would have on shareholder
value.

5. The other alternative to the mergers considered by the Special
Committee and the Board has been the sale of St. John to a party
unaffiliated with the Grays or Vestar. St. John issued a press release
on December 8, 1998 announcing the receipt of the Vestar/Gray offer for
a cash acquisition of substantially all of the shares of St. John
common stock at a price of $28 per share. In addition, the Special
Committee directed Merrill Lynch and Wasserstein Perella to pursue
potential strategic and financial buyers, which they did by contacting
more than ten potential buyers of St. John during January 1999. No
proposal to effect such a sale was received despite the December 8th
public announcement and the efforts of Merrill Lynch and Wasserstein
Perella.

6. The Special Committee and the Board also considered the fact that the
terms of the merger agreement permit the Board to negotiate and
consummate third party proposals submitted after February 2, 1999 if
the Board believes in good faith that such proposal is a superior
acquisition proposal, if such negotiations are required in order for
the Board to act in a manner consistent with its fiduciary duties under
applicable law and if St. John pays Acquisition a termination fee of
$14 million.

7. The Special Committee and the Board considered the fact that it is a
condition to the consummation of the transactions contemplated by the
merger agreement that the holders of a majority of the outstanding
shares of St. John entitled to vote on the merger agreement and the
reorganization merger approve the merger agreement and the
reorganization merger and that the holders of a majority of outstanding
shares of St. John present in person or by proxy and voting at the
special meeting, other than shares held by the Grays, approve the
reorganization merger.

8. The Special Committee and the Board considered the nature of the
financing arrangements made by Vestar with The Chase Manhattan Bank and
Chase Securities Inc. with respect to the mergers, including the
receipt by Vestar of a commitment letter from The Chase Manhattan Bank
and a "highly confident" letter from Chase Securities Inc. as well as
the conditions to the obligations of such institutions to fund such
financing arrangements and to complete the mergers.

9. The Special Committee and the Board considered the experience and past
success of Vestar in structuring and closing transactions similar to
the mergers.

10. The Special Committee and the Board considered the fact that the
initial negotiations between St. John and Vestar led to an increase in
the cash price offered to be paid in the mergers for substantially all
of the outstanding St. John common stock from $26.50 per share to $28
per share, and the subsequent negotiations between the Special
Committee and Vestar led to a further increase in the cash price from
$28 per share to $30 per share.

11. The Special Committee also evaluated the mergers in light of the
following factors: price, availability of financing, ability to
consummate the proposed mergers, the proposed structure of the mergers
and their anticipated closing dates, the amount of equity being
invested by Vestar and the Grays and the fiduciary obligations of the
Special Committee and the Board. The Special Committee also considered
that the merger agreement permits the Special Committee and the Board
to withdraw its recommendation of the mergers to the extent required in
order to comply with the fiduciary duties of its members and applicable
law in the event a third party proposes a superior proposal. In such an
event, St. John may be obligated, subject to certain maximum amounts
and other limitations, to pay a $14 million termination fee to
Acquisition. In addition, the Special Committee considered the fact
that the Voting Agreement allows the Grays to vote in favor of a
superior acquisition proposal in the event the Board withdraws its
recommendation of the mergers in accordance with the merger agreement
as described above.

12. The Special Committee and the Board considered the fact that the terms
of the merger agreement and the price paid to the St. John shareholders
were determined through arms-length negotiations between

26
<PAGE>

Vestar and the Special Committee, which was comprised of entirely
non-management directors of St. John and was assisted by unaffiliated
investment banking advisors and an unaffiliated legal advisor. In light
of the formation of the Special Committee, which took an active role in
negotiating the merger agreement, it was not considered necessary to
appoint an unaffiliated representative to act solely on behalf of St.
John's public shareholders.

13. The Special Committee and the Board considered a comparison of the
financial terms of certain other transactions which have recently been
effected in the apparel industry, reviewing, among other things, the
premium paid compared to the pre-offer market price per share and the
multiple of aggregate consideration to earnings before interest, taxes,
depreciation and amortization, or "EBITDA," in such transactions.

14. The Special Committee and the Board considered that the merger
agreement contemplated the reimbursement to St. John of certain fees
and expenses in certain circumstances and subject to certain maximum
amounts in the event the mergers are not consummated through the fault
of Vestar.

The Special Committee and the full Board also considered other factors in
considering the mergers, including those listed below.

1. The Special Committee and the Board considered the fact that the
shareholders of St. John, other than the Grays, would own only
approximately 7% of the outstanding common stock of St. John Knits
International after the mergers, which would limit the shareholders'
opportunity as a group to participate in any future growth of St. John
Knits International following the consummation of the mergers. They
considered that if the projections set forth under "CERTAIN FINANCIAL
PROJECTIONS" on page 47 are realized, the common stock of St. John Knits
International after the mergers could significantly increase in value.
The Special Committee and the Board also considered St. John's recent
operating performance relative to these projections. In addition, the
Special Committee and the Board considered the possible conflicts of
interest based on the fact that the Grays will maintain a substantial
equity position in St. John Knits International and thereby participate
to a greater extent than other St. John shareholders in any future
growth of St. John Knits International. In addition, the Special
Committee and the Board considered the fact that there would be limited
liquidity for the shares of St. John Knits International after the
mergers as a result of not listing those shares on any exchange.

2. The Special Committee and the Board considered St. John's performance
during fiscal 1997 and fiscal 1998, St. John's outlook for the first
quarter of fiscal 1999 and the reasonable outlook for the full 1999
fiscal year as well as management's concern regarding St. John's ability
to maintain its historical rates of growth and profit margins.

3. The Special Committee and the Board considered the terms and conditions
of the Agreement and Plan of Merger, including the fact that
Acquisition's obligation to consummate the mergers is subject to the
receipt of financing and that the merger agreement contemplates the
payment or reimbursement to Acquisition of certain termination fees and
expenses in certain circumstances. In analyzing these conditions, the
Special Committee and the Board considered, among other things, the risk
of not consummating the mergers. In addition, in analyzing the fee and
expense provisions, the Special Committee and the Board considered that
their effect would be to increase the costs to a third party other than
Acquisition of acquiring St. John in the event the mergers did not occur
for certain reasons, which amount is not, in the view of the Special
Committee and the Board, likely to unduly deter other bidders in the
context of the proposed mergers.

In view of the wide variety of factors considered in connection with its
evaluation of the mergers, the Special Committee and the Board did not find it
practicable to, and did not, quantify or otherwise assign relative weight to
the individual factors considered in reaching its determinations. However, of
primary importance to the Special Committee and the Board was the opinion
delivered by Wasserstein Perella to the Special Committee and the opinion
delivered by Merrill Lynch to the Special Committee and the Board on

27
<PAGE>

February 2, 1999 that, in each case, as of such date, the consideration to be
received by the holders of St. John common stock, other than the Grays,
pursuant to the mergers was fair from a financial point of view to such
holders. Also of importance was the fact that the consideration represented a
premium over, among other things, the price of shares of St. John common stock
prior to the first public announcement of the mergers.

In addition, you should be aware of possible conflicts of interest based on
the fact that David A. Krinsky, a director of St. John, is a partner in the law
firm of O'Melveny & Myers, which has rendered legal services to St. John in the
past and in connection with the mergers, and that Richard A. Gadbois, III, a
director of St. John, is a Senior Vice President of Corporate Executive
Services at Merrill Lynch, which has rendered investment banking services to
St. John in the past and in connection with the mergers.

The rules of the Securities and Exchange Commission require each of the
Grays, St. John Knits International, Acquisition and SJKAcquisition to express
its belief as to the fairness of the mergers to the holders of St. John common
stock. While each of the Grays, St. John Knits International, Acquisition and
SJKAcquisition has undertaken no evaluation of the mergers from the standpoint
of fairness to the holders of St. John common stock, it has considered the
factors noted above which were taken into account by the Board and the Special
Committee. Although the Grays, St. John Knits International, Acquisition and
SJKAcquisition did not find it practicable to quantify or otherwise attach
relative weights to the specific factors considered by the Board or the Special
Committee, each of the Grays, St. John Knits International, Acquisition and
SJKAcquisition considered the delivery on February 2, 1999 by Merrill Lynch and
Wasserstein Perella to the Special Committee of opinions that, as of such date,
the consideration to be received by the holders of St. John common stock, other
than the Grays, pursuant to the mergers was fair from a financial point of view
to such holders and the fact that the cash price represented an approximately
37% premium over the price of shares of St. John common stock prior to the
first public announcement of the mergers to be particularly important to their
analysis. On the basis of the foregoing considerations, each of the Grays, St.
John Knits International, Acquisition and SJKAcquisition believes that the
mergers are fair to the holders of St. John common stock.

The Special Committee has recommended to the St. John Board, and the St.
John Board has approved, the merger agreement and the transactions contemplated
thereby. The St. John Board and the Special Committee believe that the merger
agreement and the transactions contemplated thereby are in the best interests
of St. John and St. John shareholders, and recommend that St. John shareholders
vote "FOR" adoption and approval of the principal terms of the merger agreement
and approval of the principal terms of the reorganization merger.

Fairness Opinions of Financial Advisors

Opinion of Merrill Lynch

On February 2, 1999, at a meeting of the Special Committee, Merrill Lynch
delivered an oral opinion that, as of such date and on the basis of and subject
to the matters reviewed with the Special Committee, the consideration to be
received by the holders of St. John common stock, other than the Grays,
pursuant to the mergers was fair from a financial point of view to such
holders. Immediately following the meeting of the Special Committee, at a
meeting of the St. John Board, Merrill Lynch orally delivered the same opinion
to the St. John Board. Merrill Lynch subsequently confirmed the opinion in
writing.

The full text of the Merrill Lynch opinion, which sets forth, among other
things, the assumptions made, procedures followed, matters considered and
limitations on the scope of the review undertaken by Merrill Lynch in rendering
its opinion, is attached to this Proxy Statement-Prospectus as Appendix B and
is incorporated by reference. A copy of the Merrill Lynch opinion is available
for inspection and copying by any holder of St. John common stock or any
representative of such person who has been so designated in writing, at the
principal executive offices of St. John during normal business hours. Holders
of St. John common stock are urged to, and should, read the Merrill Lynch
opinion carefully and in its entirety. The Merrill Lynch opinion was for the
use and benefit of the St. John Board and the Special Committee and addresses
only the

28
<PAGE>

fairness, from a financial point of view, to the holders of St. John common
stock, other than the Grays, of the consideration to be received pursuant to
the mergers. The Merrill Lynch opinion does not address the merits of the
underlying decision by St. John to engage in the mergers and does not
constitute a recommendation to any holder of St. John common stock as to how
any holder should vote on the mergers. The summary of the Merrill Lynch opinion
set forth in this Proxy Statement-Prospectus is qualified in its entirety by
reference to the full text of the Merrill Lynch opinion.

In arriving at the Merrill Lynch opinion, Merrill Lynch, among other things:

1. reviewed certain publicly available business and financial information
relating to St. John that Merrill Lynch deemed to be relevant;

2. reviewed information, including financial forecasts, relating to the
business, earnings, cash flow, assets, liabilities and prospects of St.
John furnished to Merrill Lynch by St. John and Vestar;

3. conducted discussions with members of senior management of St. John and
representatives of Vestar concerning the matters described in clauses
(1) and (2) above;

4. reviewed the market prices and valuation multiples for the shares of St.
John common stock and compared them with those of certain publicly
traded companies that Merrill Lynch deemed to be relevant;

5. reviewed the results of operations of St. John and compared them with
those of certain publicly traded companies that Merrill Lynch deemed to
be relevant;

6. compared the proposed financial terms of the mergers with the financial
terms of certain other transactions that Merrill Lynch deemed to be
relevant;

7. participated in certain discussions and negotiations among
representatives of St. John and Vestar and their financial and legal
advisors;

8. reviewed drafts dated February 2, 1999 of the merger agreement and the
Voting Agreement; and

9. reviewed such other financial studies and analyses and took into account
such other matters as Merrill Lynch deemed necessary, including Merrill
Lynch's assessment of general economic, market and monetary conditions.

In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to it,
discussed with or reviewed by or for it, or publicly available, and it did not
assume any responsibility for independently verifying such information or
undertake an independent evaluation or appraisal of any of the assets or
liabilities of St. John, nor was Merrill Lynch furnished with any such
evaluation or appraisal. In addition, Merrill Lynch did not assume any
obligation to conduct any physical inspection of the properties or facilities
of St. John. With respect to the financial forecast information furnished to or
discussed with Merrill Lynch by St. John and Vestar, Merrill Lynch assumed that
it had been reasonably prepared and reflected the best currently available
estimates and judgment of the management of St. John and representatives of
Vestar as to the expected future financial performance of St. John. Merrill
Lynch also assumed that none of the holders of St. John common stock would
elect to receive St. John Knits International common stock in the acquisition
merger and, accordingly, that all such holders would receive their pro rata
amount of St. John Knits International common stock and cash. In addition,
Merrill Lynch assumed that, in the course of obtaining the necessary regulatory
or other consents or approvals (contractual or otherwise) for the mergers, no
restrictions, including any divestiture requirements or amendments or
modifications, would be imposed that would have a material adverse effect on
the contemplated benefits of the mergers. Merrill Lynch assumed that the merger
agreement and the voting agreement would be substantially similar to the last
drafts reviewed by it. The Merrill Lynch opinion was necessarily based upon
market, economic and other conditions as they existed and could be evaluated
on, and on the information made available to Merrill Lynch as of, the date
thereof.

29
<PAGE>

In connection with the preparation of the Merrill Lynch opinion, Merrill
Lynch solicited third-party indications of interest for the acquisition of St.
John. Merrill Lynch was not asked to consider, and its opinion does not in any
manner address, the value of St. John Knits International common stock or the
prices at which St. John Knits International common stock will actually trade
following the mergers.

Richard A. Gadbois, III, Senior Vice President of Corporate Executive
Services at Merrill Lynch, currently serves as a director of St. John and St.
John Knits International. In addition, Merrill Lynch has in the past provided
financial advisory and financing services to Vestar and has received fees for
such services. In the ordinary course of Merrill Lynch's business, it may
actively trade shares of St. John common stock as well as debt securities of
Vestar and its affiliates, for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities.

The following is a summary of the financial analyses used by Merrill Lynch
in preparing the Merrill Lynch opinion and reviewed with the St. John Board and
the Special Committee.

Certain of the summaries of financial analyses include information presented
in tabular format. In order to fully understand the financial analyses
performed by Merrill Lynch, the tables must be read together with the text of
each summary. The tables alone do not constitute a complete description of such
financial analyses. Considering the data set forth in the tables without
considering the full narrative description of the financial analyses, including
the methodologies and assumptions underlying the analyses, could create a
misleading or incomplete view of the financial analyses performed by Merrill
Lynch.

Implied Premium Analysis. Merrill Lynch reviewed the historical trading
prices for St. John common stock and compared them with the merger
consideration of $30.00 per share. Such analysis indicated that the merger
consideration represented:

1. a premium of 37% over the market price of St. John common stock of
$21.94 per share at the close of business on December 8, 1998, which was
the last closing price prior to Vestar's initial proposal;

2. a premium of 53% over the one-month average market price of $19.59 per
share for the one month period beginning November 8, 1998 and ending
December 8, 1998;

3. a premium of 70% over the three-month average market price of $17.72 per
share for the three month period beginning September 8, 1998 and ending
December 8, 1998;

4. a premium of 18% over the six-month average market price of $25.50 per
share for the six month period beginning June 8, 1998 and ending
December 8, 1998;

5. a discount of 12% over the one-year average market price of $33.94 per
share for the one year period beginning December 8, 1997 and ending
December 8, 1998;

6. a discount of 37% over the 52-week high market price of $47.75 per share
for the 52 week period ending December 8, 1998; and

7. a premium of 126% over the 52-week low market price of $13.25 per share
for the 52 week period ending December 8, 1998.

Post-Announcement Trading Range Analysis. Merrill Lynch reviewed the high,
low and closing stock prices of St. John common stock on each trading day from
December 8, 1998 to February 1, 1999. This analysis indicated that the stock
prices over this time period was never equal to or greater than Vestar's
initial offer price of $28.00 per share.

Discounted Cash Flow Analysis. Merrill Lynch performed a discounted cash
flow analysis of the projected after-tax unlevered free cash flows of St. John.
After-tax unlevered free cash flow means operating cash flow after changes in
working capital, capital spending, taxes and other operating requirements. This
analysis was based on projections for fiscal years 1999 through 2003 prepared
by the management of St. John, the "Management Case" and by Vestar, the "Vestar
Case."

30
<PAGE>

Merrill Lynch calculated implied equity values per share of St. John common
stock by utilizing discount rates ranging from 12.5% to 13.5% and terminal
value multiples of estimated 2003 EBITDA ranging from 6.0x to 8.0x. Merrill
Lynch arrived at these discount rates based on its judgement of the weighted
average cost of capital of selected publicly traded apparel companies, and
arrived at these terminal multiples based on its review of the trading
characteristics of the common stock of selected publicly traded apparel
companies and of comparable acquisitions of selected apparel companies.

The following table presents the ranges of implied equity values per share
of St. John common stock implied by this analysis as compared with the merger
consideration of $30.00 per share and the pro rated cash component of the
merger consideration of $29.10 per share:

<TABLE>
<CAPTION>
Implied Equity Value
Per Share of St. John
Common Stock
----------------------
Low High
---------- -----------
<S> <C> <C>
Discounted Cash Flow Analysis
Management Case...................................... $26.64 $34.13
Vestar Case.......................................... $24.94 $31.89
Per Share Merger Consideration....................... $30.00
Per Share Pro Rated Cash Component of the Merger
Consideration....................................... $29.10
</TABLE>

Selected Publicly-Traded Comparable Companies Analysis. Merrill Lynch
compared certain financial data relating to St. John to corresponding financial
data for six publicly traded corporations: Jones Apparel Group, Inc., Polo
Ralph Lauren Corporation, Gucci Group N.V., Tommy Hilfiger Corporation, Liz
Clairborne, Inc. and Nautica Enterprises, Inc. (the "Merrill Lynch Selected
Companies"). The Merrill Lynch Selected Companies were chosen because they are
publicly traded companies with operations that for purposes of this analysis
may be considered reasonably similar to the operations of St. John.

For each of the Merrill Lynch Selected Companies and St. John, Merrill Lynch
calculated mutliples of the following financial metrics:

1. market price per share of common stock to estimated earnings (the "P/E
Multiple");

2. P/E Multiple to five-year estimated earnings per share ("EPS") growth
rate;

3. market capitalization to estimated fiscal year 1998 sales; and

4. market capitalzation to estimated fiscal year 1998 EBITDA.

For purposes of calculating the P/E Multiples of the Merrill Lynch Selected
Companies, Merrill Lynch utilized the closing price per share of their common
stock on January 29, 1999 (except for Gucci Group N.V. for which Merrill Lynch
utilized the closing price on January 5, 1999, the day prior to the acquisition
by LVMH Moet Hennessy Louis Vuitton of a 5% stake in Gucci Group N.V.) and
their calendar year estimated 1999 EPS, as reported by First Call Corporation
as of January 29, 1999. Five-year estimates EPS growth rates for the Merrill
Lynch Selected Companies were obtained from First Call Corporation as of
January 29, 1999. The multiples of market capitalization to estimated fiscal
year 1998 sales and to estimated fiscal year 1998 EBITDA, respectively, for the
Merrill Lynch Selected Companies were based on estimated fiscal year 1998 sales
and EBITDA obtained from selected publicly available Wall Street research
reports. The multiples for St. John were based on St. John's audited
consolidated financial statements as of November 1, 1998 and Management Case
projections.

31
<PAGE>

The following table sets forth information concerning the range of multiples
and the means of selected financial metrics for the Merrill Lynch Selected
Companies and the multiples of the same financial metrics for St. John at both
the December 8, 1998 closing price of $21.94 per share and the merger
consideration of $30.00 per share:

<TABLE>
<CAPTION>
Merrill Lynch St. John -- St. John --
Metric Selected Companies $21.94 per share $30.00 per share
------ ------------------ ---------------- ----------------
<S> <C> <C> <C>
1999 P/E................ Range: 9.3x to 17.7x 10.7x 14.6x
Mean: 14.7x*
1999 P/E to 5-year
Estimated EPS Growth
Rate................... Range: 0.58x to 1.28x 1.11x 1.52x
Mean: 0.93x*
Market Capitalization to
Estimated Fiscal Year Range: 0.94x to 2.85x 1.25x 1.75x
1998 Sales............. Mean: 1.57x*
Market Capitalization to
Estimated Fiscal Year Range: 4.8x to 12.1x 5.4x 7.5x
1998 EBITDA............ Mean: 8.7x*
</TABLE>
- --------
* Excludes Gucci Group N.V.

Merrill Lynch calculated implied equity values per share of St. John common
stock by applying P/E multiples ranging from 13.0x to 15.0x, and P/E to five-
year estimated EPS growth rates ranging from 0.70x to 1.10x, which were derived
from the foregoing analysis, to the St. John Management Case estimated fiscal
year 1999 EPS and five-year estimated EPS growth rate (based on five-year EBIT
growth rate estimate provided by the management of St. John).

<TABLE>
<CAPTION>
Implied Equity Value
Per Share of St. John
Common Stock
----------------------
Low High
---------- -----------
<S> <C> <C>
Selected Publicly-Traded Comparable Companies Trading
Analysis
Management Case Estimated 1999 EPS................... $26.65 $30.75
Management Case Estimated 1999 P/E to Five-Year
Estimated EPS Growth Rate........................... $13.78 $21.65
Per Share Merger Consideration....................... $30.00
Per Share Pro Rated Cash Component of the Merger
Consideration....................................... $29.10
</TABLE>

Selected Acquisitions Transaction Analysis. Merrill Lynch analyzed
information relating to the following selected transactions in the apparel
industry since January 1, 1996 (the "Merrill Lynch Selected Transactions"):

<TABLE>
<CAPTION>
Acquiror Acquired Company
-------- ----------------
<S> <C>
Citicorp Venture Capital,
Ltd. ....................... Gerber Childrenswear, Inc.
The Warnaco Group, Inc. ..... Lejaby-Euralis S.A.
Investcorp S.A. ............. The William Carter Company
The Jordan Co. .............. Winning Ways Inc.
The Warnaco Group, Inc. ..... Designer Holdings Ltd.
Vestar....................... Sun Apparel, Inc.
Gucci Group N.V. ............ Severin Montres
Tommy Hilfiger Corporation... Pepe Jeans USA, Inc., TJ Far East Limited and
Tomcan Investments Inc.
Vestar....................... Bidermann Industries USA Inc.
Tropical Sportswear Int'l
Corporation................. Farah Incorporated
Jones Apparel Group, Inc..... Sun Apparel, Inc.
</TABLE>

32
<PAGE>

Merrill Lynch calculated the multiples of transaction value for the Merrill
Lynch Selected Transactions to the sales and EBITDA, respectively, of the
acquired businesses for the latest twelve month periods preceding the
acquisition announcements and compared such multiples with corresponding
multiples for the mergers. For purposes of this analysis, transaction value was
calculated as the consideration offered for the common equity, including the
net cost of "in-the-money" options, plus liquidation value of preferred equity
and the value of debt and minority interests less cash and marketable
securities.

The analysis indicated that:

1. total transaction value for the Merrill Lynch Selected Transactions as a
multiple of the latest twelve month sales ranged from 0.40x to 3.00x,
with a mean of 0.77x (excluding the acquisition of Pepe Jeans USA, Inc.,
TJ Far East Limited and Tomcan Investments Inc. by Tommy Hilfiger
Corporation), compared to total transaction value for the mergers as a
multiple of fiscal year 1998 sales of 1.75x; and

2. total transaction value for the Merrill Lynch Selected Transactions as a
multiple of latest twelve month EBITDA ranged from 4.0x to 16.5x, with a
mean of 6.3x (excluding the acquisitions of Pepe Jeans USA, Inc., TJ Far
East Limited and Tomcan Investments Inc. by Tommy Hilfiger Corporation
and of Tropical Sportswear Int'l Corporation by Farah Incorporated),
compared to total transaction value for the mergers as a multiple of
fiscal year 1998 EBITDA of 7.5x.

Merrill Lynch calculated implied equity values per share of St. John common
stock by applying multiples, which were derived from the foregoing analysis, of
transaction value to the latest twelve months EBITDA ranging from 6.5x to 8.5x
to the St. John Management Case estimated latest twelve month EBITDA ended
January 31, 1999.

<TABLE>
<CAPTION>
Implied Equity Value
Per Share of St. John
Common Stock
----------------------
Low High
---------- -----------
<S> <C> <C>
Selected Acquisitions Transactions Analysis
Management Case estimated latest twelve-month EBITDA
ended January 31, 1999.............................. $ 24.37 $ 31.35
Per Share Merger Consideration....................... $30.00
Per Share Pro Rated Cash Component of the Merger
Consideration....................................... $29.10
</TABLE>

LBO Analysis. Using Management Case projections and Vestar Case projections,
Merrill Lynch performed a leveraged buyout analysis to determine, under current
market conditions, the maximum price per share that a leveraged buyout
purchaser, such as Vestar, could theoretically pay for St. John. In performing
this analysis, Merrill Lynch assumed that acquisition financing could be
obtained in the high yield and bank finance market in an amount not in excess
of 5.2x the latest twelve month EBITDA and that a minimum internal rate of
return from 20% to 30% on equity invested during a three to five year period
would be required.

The following table sets forth the ranges of prices per share of St. John
common stock that Merrill Lynch determined that such a prospective purchaser
could theoretically pay as compared with the merger consideration of $30.00 per
share and the pro rated cash component of the merger consideration of $29.10
per share:

<TABLE>
<CAPTION>
Implied Price
Per Share of St. John
Common Stock
----------------------
Low High
---------- -----------
<S> <C> <C>
Leveraged Buyout Analysis
Management Case...................................... $ 28.00 $ 31.00
Vestar Case.......................................... $ 27.00 $ 30.00
Per Share Merger Consideration....................... $30.00
Per Share Pro Rated Cash Component of the Merger
Consideration....................................... $29.10
</TABLE>

33
<PAGE>

The preparation of a fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, is not necessarily susceptible to partial analysis or summary
description. Selecting portions of the analyses or of the summary set forth
above, without considering the analyses as a whole, could create an incomplete
view of the processes underlying the Merrill Lynch opinion. In arriving at its
fairness determination, Merrill Lynch considered the results of all such
analyses and did not attribute any particular weight to any factor or analysis
considered by it; Merrill Lynch made its determination as to fairness on the
basis of its experience and professional judgment after considering the results
of all such analyses. No company or transaction used in the above analyses as a
comparison is directly comparable to St. John or the mergers. The analyses were
prepared solely for purposes of Merrill Lynch providing its opinion to the St.
John Board and the Special Committee and does not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may
be sold. Analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. Because such analyses are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of the parties or their respective advisors, none of St. John, Merrill
Lynch or any other person assumes responsibility if future results are
materially different from those forecast. As described above, the Merrill Lynch
opinion was among many factors taken into consideration by the St. John Board
and the Special Committee in making their respective determination to approve
the mergers.

Fee Arrangement. Merrill Lynch acted as financial advisor to the St. John
Committee in connection with the mergers. Pursuant to a letter agreement dated
December 28, 1998 among St. John, the Special Committee and Merrill Lynch,
Merrill Lynch will receive a fee from St. John for its services, a significant
portion of which is contingent on the consummation of the mergers. In addition,
St. John has agreed to reimburse Merrill Lynch for its reasonable out-of-pocket
expenses incurred in connection with rendering financial advisory services,
including fees and disbursements of its legal counsel. St. John has agreed to
indemnify Merrill Lynch and its directors, officers, agents, employees and
controlling persons, for certain costs, expenses, losses, claims, damages and
liabilities related to or arising out of its rendering of services under its
engagement as financial advisor.

Opinion of Wasserstein Perella

On February 2, 1999, at a meeting of the Special Committee, Wasserstein
Perella delivered an oral opinion to the Special Committee, which was
subsequently confirmed in writing that, as of such date and on the basis of and
subject to the matters reviewed with the Special Committee, the consideration
to be received by the holders of St. John common stock, other than the Grays,
pursuant to the mergers was fair from a financial point of view to such
holders.

The full text of the Wasserstein Perella opinion, which sets forth, among
other things, assumptions made, procedures followed, matters considered and
limitations on the scope of the review undertaken by Wasserstein Perella in
rendering its opinion, is attached to this Proxy Statement-Prospectus as
Appendix C and is incorporated by reference. A copy of the Wasserstein Perella
opinion is available for inspection and copying by any holder of St. John
common stock or any representative of such person who has been so designated in
writing, at the principal executive offices of St. John during normal business
hours. Holders of St. John common stock are urged to, and should, read the
Wasserstein Perella opinion carefully and in its entirety. The Wasserstein
Perella opinion was for the benefit and use of the Special Committee in its
consideration of the mergers. The Wasserstein Perella opinion addresses only
the fairness, from a financial point of view, to the holders of St. John common
stock, other than the Grays, of the consideration to be received pursuant to
the mergers, and Wasserstein Perella does not express any views on any other
terms of the mergers. The Wasserstein Perella opinion does not address St.
John's underlying business decision to engage in the mergers and does not
address the solvency of St. John or any other entity following consummation of
the mergers or at any time. The Wasserstein Perella opinion does not constitute
a recommendation to any holder of St. John common stock with respect to how
such holder should vote with respect to the mergers, and should not be relied
upon by any holder as such. The discussion of the Wasserstein Perella opinion
in this Proxy Statement-Prospectus is qualified in its entirety by reference to
the full text of the Wasserstein Perella opinion.

34
<PAGE>

In arriving at the Wasserstein Perella opinion, Wasserstein Perella reviewed
drafts of the merger agreement and Voting Agreement, and for purposes thereof,
assumed that the final forms of these documents would not differ in any
material respect from the drafts provided to it. Wasserstein Perella also
reviewed and analyzed certain publicly available business and financial
information relating to St. John for recent years and interim periods to the
date of the Wasserstein Perella opinion, as well as certain internal financial
and operating information, including financial forecasts, analyses, and
projections prepared by or on behalf of St. John and Vestar and provided to it
for purposes of its analysis, and Wasserstein Perella met with management of
St. John and representatives of Vestar to review and discuss such information
and, among other matters, St. John's business, operations, assets, financial
condition, and future prospects.

Wasserstein Perella reviewed and considered certain financial and stock
market data relating to St. John, and compared that data with similar data for
certain other companies, the securities of which are publicly traded, that it
believed may have been relevant or comparable in certain respects to St. John
or one or more of its businesses or assets, and Wasserstein Perella reviewed
and considered the financial terms of certain recent acquisitions and business
combination transactions in the apparel industry specifically, and in other
industries generally, that it believed to be reasonably comparable to the
mergers or otherwise relevant to its inquiry. Wasserstein Perella also
performed such other financial studies, analyses and investigations and
reviewed such other information as it considered appropriate for purposes of
the Wasserstein Perella opinion.

In Wasserstein Perella's review and analysis and in formulating its opinion,
Wasserstein Perella assumed and relied upon the accuracy and completeness of
all of the financial and other information provided to or discussed with it or
publicly available, and Wasserstein Perella did not assume any responsibility
for independent verification of any of such information. Wasserstein Perella
also assumed and relied upon the reasonableness and accuracy of the financial
projections, forecasts and analyses provided to it, and it assumed that such
projections, forecasts and analyses were reasonably prepared in good faith and
on bases reflecting the best currently available judgments and estimates of the
management of St. John and of Vestar. Wasserstein Perella expressed no opinion
with respect to such projections, forecasts and analyses or the assumptions
upon which they are based. In addition, Wasserstein Perella did not review any
of the books and records of St. John, or assume any responsibility for
conducting a physical inspection of the properties or facilities of St. John or
for making or obtaining an independent valuation or appraisal of the assets or
liabilities of St. John, and no such independent valuation or appraisal was
provided to it. Wasserstein Perella also assumed that none of the holders of
St. John common stock would elect to receive St. John Knits International
common stock in the acquisition merger and, accordingly, that all such holders
would receive their pro rata amount of St. John Knits International common
stock and cash and, further, that the transactions described in the merger
agreement would be consummated without waiver or modification of any of the
material terms or conditions contained therein by any party thereto.
Wasserstein Perella was not asked to consider and the Wasserstein Perella
opinion does not in any manner address the value of St. John Knits
International common stock or the prices at which St. John Knits International
common stock would actually trade following the mergers. The Wasserstein
Perella opinion is necessarily based on economic and market conditions and
other circumstances as they existed and could be evaluated by it as of the date
thereof.

In the ordinary course of Wasserstein Perella's business, Wasserstein
Perella may actively trade the debt and equity securities of St. John for its
own account and for the account of its customers and, accordingly, may at any
time hold a long or short position in such securities. Wasserstein Perella has
performed various investment banking services for Vestar and its affiliates
from time to time in the past and has received customary fees for rendering
such services.

35
<PAGE>

The following is a brief summary of the analyses performed and factors
considered by Wasserstein Perella in connection with rendering the Wasserstein
Perella opinion and reviewed with the Special Committee at the February 2, 1999
meeting.

Implied Premium Analysis. Wasserstein Perella reviewed the historical
trading prices for St. John common stock and compared them with the merger
consideration of $30.00 per share. Such analysis indicated that the merger
consideration represented:

1. a 37% premium over the single day closing price of $21.94 per share on
December 8, 1998;

2. a 53% premium over the one-month daily average closing price of $19.59
per share for the one month period ending December 8, 1998;

3. an 18% premium over the six-month daily average closing price of $25.39
per share for the six month period ending December 8, 1998;

4. a 12% discount to the one-year daily average closing price of $33.91 per
share for the one year period ending December 8, 1998;

5. a 37% discount to the 52-week high of $47.75 per share for the 52-week
period ending December 8, 1998; and

6. a 126% premium over the 52-week low of $13.25 per share for the 52-week
period ending December 8, 1998.

Discounted Cash Flow Analysis. Wasserstein Perella performed a discounted
cash flow analysis for St. John using actual results for 1998 and financial
projections for net sales, gross profit, EBITDA and earnings before interest
and taxes, or "EBIT," for fiscal years 1999 through 2003 provided by the
management of St. John. All cash flows were discounted at rates ranging from
12.5% to 13.5%. The terminal values were computed using a range of multiples of
6.0x to 8.0x for fiscal year 2003 EBITDA. Wasserstein Perella arrived at such
discount rates based on its judgment of the weighted average cost of capital of
selected publicly traded apparel companies, and arrived at such terminal values
based on its review of the trading characteristics of the common stock of
selected publicly traded apparel companies. This analysis indicated a range of
values for St. John common stock of $26.65 and $34.14 per share.

36
<PAGE>

Analysis of Selected Companies. Wasserstein Perella compared certain
financial data for St. John to corresponding data for a group of seven publicly
traded apparel companies comprised of Tommy Hilfiger Corporation, Jones Apparel
Group Inc., Polo Ralph Lauren Corporation, Liz Clairborne, Inc., Nautica
Enterprises, Inc., Hartmarx Corporation and Donna Karan International Inc. (the
"Wasserstein Selected Companies"). The Wasserstein Selected Companies were
chosen because they are publicly traded companies with operations that for
purposes of this analysis may be considered reasonably similar to the
operations of St. John. The following table sets forth information concerning
the range of multiples, the means and the medians of selected financial metrics
for the Wasserstein Selected Companies and the multiples of the same financial
metrics for St. John at both the December 8, 1998 closing price of $21.94 per
share and the merger consideration of $30.00 per share:

<TABLE>
<CAPTION>
St. John -- St. John --
Wasserstein $21.94 $30.00
Metric Selected Companies per share per share
------ --------------------- ----------- -----------
<S> <C> <C> <C>
Ratio of Adjusted Market Range: 0.2x to 2.6x 1.3x 1.7x
Value to Latest Twelve Mean: 1.3x
Months Sales Median: 1.0x

Ratio of Adjusted Market Range: 0.2x to 2.2x 1.2x 1.6x
Value to Next Fiscal Year Mean: 1.1x
("NFY") Sales Median: 0.9x

Ratio of Price to Latest Range: 10.3x to 22.3x 10.1x 16.8x
Twelve Months Earnings Mean: 16.4x
Median: 16.3x

Ratio of Price to NFY Range: 9.2x to 20.6x 9.8x 14.6x
Earnings Mean: 14.6x
Median: 15.4x

Ratio of Adjusted Market Range: 5.1x to 12.0x 4.9x 8.1x
Value to Latest Twelve Mean: 9.0x
Months EBITDA Median: 9.0x

Ratio of Adjusted Market Range: 4.0x to 9.9x 4.9x 6.9x
Value to NFY EBITDA Mean: 7.2x
Median: 6.8x

Ratio of Adjusted Market Range: 5.7x to 15.2x 5.8x 10.0x
Value to Latest Twelve Mean: 10.7x
Months EBIT Median: 10.7x

Ratio of Adjusted Market Range: 5.0x to 11.9x 5.6x 8.4x
Value to NFY EBIT Mean: 8.9x
Median: 8.1x
</TABLE>

For purposes of this analysis, Wasserstein Perella utilized closing prices
for each of the Wasserstein Selected Companies on January 29, 1999. St. John
multiples at $21.94 per share were based on results for the latest
twelve months ended in the third quarter of fiscal 1998 (August 2, 1998) while
multiples at $30.00 per share were based on estimates of the management of St.
John for the latest twelve months ending in the first quarter of fiscal year
1999.

Wasserstein Perella calculated implied equity values per share of St. John
common stock by:

1. applying multiples of 12.5x to 14.5x to St. John's estimated fiscal year
1999 EPS;

2. applying multiples of 6.0x to 8.0x to St. John's estimated fiscal year
1999 EBITDA; and

3. applying multiples of 7.0x to 9.0x to St. John's estimated first quarter
fiscal year 1999 latest twelve months EBITDA.

37
<PAGE>

The analysis implied the following equity values for St. John common stock:

<TABLE>
<CAPTION>
Implied Equity Value
Per Share of St. John
Common Stock
----------------------
Low High
---------- -----------
<S> <C> <C>
Analysis of Selected Companies
Estimated fiscal year 1999 EPS..................... $ 25.63 $ 29.73
Estimated fiscal year 1999 EBITDA.................. $ 26.39 $ 34.62
Estimated first quarter fiscal year 1999 latest
twelve months EBITDA.............................. $ 26.13 $ 33.11
</TABLE>

Analysis of Selected Comparable Transactions. Wasserstein Perella reviewed
the financial terms, to the extent publicly available, of the following fifteen
transactions in the apparel industry completed since January 1, 1996 (the
"Wasserstein Selected Transactions"):

<TABLE>
<CAPTION>
Acquiror Acquired Company
-------- ----------------
<S> <C>
Tommy Hilfiger Corporation Pepe Jean USA Inc., TJ Far East
Limited and Tomcan Investments Inc.
Holding di Partecipazioni Industrial
S.p.A Valentino
The Jordan Co. Winning Ways Inc.
Jones Apparel Group, Inc. Sun Apparel, Inc.
Investcorp S.A. Helly Hansen ASA
The Warnaco Group, Inc. Designer Holdings Ltd.
Gucci Group N.V. Severin Montres
Investcorp S.A. The William Carter Company
The Warnaco Group, Inc. Lejaby-Euralis S.A.
Haggar Corp. Jerrell Inc.
Vestar Sun Apparel, Inc.
Tropical Sportswear Int'l Corporation Farah Incorporated
Citicorp Venture Capital, Ltd Gerber Childrenswear, Inc.
Wuensche AG Joop! GmbH
Vestar Bidermann Industries USA Inc.
</TABLE>

Using publicly available information, Wasserstein Perella calculated
multiples of adjusted market value to sales and EBITDA, respectively, for each
of the Wasserstein Selected Transactions and compared them to corresponding
multiples for the mergers. Wasserstein Perella noted that:

1. the multiples of adjusted market value to sales for the Wasserstein
Selected Companies (excluding the acquisition of Bidermann Industries
USA Inc. by Vestar) ranged from 0.3x to 3.4x, with a median of 0.8x and
a mean of 1.1x compared to 1.7x adjusted market value to sales for St.
John based on estimated latest twelve months ending January 31, 1999;
and

2. the multiples of adjusted market value to EBITDA for the Wasserstein
Selected Companies (excluding the acquisitions of Bidermann Industries
USA Inc. by Vestar, Valentino by Holding di Partecipazioni Industriali
Sp.A., Severin Montres by Gucci Group N.V., Joop! GmbH by Wuensche AG
and Jerrell Inc. by Haggar Corporation) ranged from 4.0x to 17.4x, with
a median of 6.7x and a mean of 8.7x compared to 8.1x adjusted market
value to EBITDA for St. John based on estimated latest twelve months
ending January 31, 1999.

Wasserstein Perella calculated implied equity values per share of St. John
common stock by applying multiples of 6.0x to 9.0x to St. John's EBITDA
estimated for the for latest twelve months ending January 1999. The analysis
indicates a range of implied equity values for St. John common stock of $22.64
to $33.11.

No company used in the analysis of certain other publicly traded companies
nor any transaction used in the analysis of selected mergers and acquisitions
summarized above is identical to St. John or the mergers. In

38
<PAGE>

addition, Wasserstein Perella believes that both the analysis of certain other
publicly traded companies and the analysis of selected mergers and acquisitions
are not simply mathematical. Rather, such analyses must take into account
differences in the financial and operating characteristics of these companies
and other factors, such as general economic conditions, and markets in which
such companies compete and strategic and operating plans for such companies,
that could affect the public trading value and acquisition value of these
companies and therefore any such analyses must be made as of a specific date.

Leveraged Buyout Analysis. Wasserstein Perella calculated the projected
internal rates of return that could be realized on the equity invested in a
leveraged acquisition of St. John at a purchase price per share of St. John
common stock of $27.00 to $30.00 using projections provided by the management
of St. John. In performing this analysis, Wasserstein Perella assumed that
Vestar would cause St. John to borrow $155 million of bank debt at an average
interest rate of 8.0% and issue $160 million of high yield bonds at 11.0% and
that Vestar would contribute between $104.5 and $153.9 million of common
equity. Assuming 6.0x to 8.0x multiples of fiscal year 2003 EBITDA, this
analyses indicated a five-year internal rate of return ranging from 14.1% to
32.2%.

Leveraged Recapitalization Analysis. Wasserstein Perella estimated the
implied equity value of shares of St. John common stock assuming a repurchase
of 40% to 60% of St. John common stock at $30.00 per share. In performing this
analysis, Wasserstein Perella assumed that such repurchase would be funded with
between $36.6 and $138.2 million of bank debt at an average interest rate of
8.0% and $150 million of high yield debt at 11.0% and that the remaining
outstanding St. John common stock would trade in a range of 8.0x to 12.0x pro
forma 1999 P/E. This analysis resulted in a range of blended equity values of
shares repurchased and outstanding of $22.70 to $30.15 per share (pro rata).

Premiums Paid Analysis. Wasserstein Perella reviewed 167 change in control
transactions completed during the period from January 1998 to February 1999
with a transaction value of between $100 million and $1 billion. Using data
obtained from Securities Data Company, Wasserstein Perella calculated the
following premiums paid in such transactions:

% Stock Premium Before Announcement Date

<TABLE>
<CAPTION>
1 Day 1 Week 4 Weeks
----- ------ -------
<S> <C> <C> <C>
High 126.4% 172.6% 166.7%
Low (48.5%) (42.1%) (36.8%)
Mean 25.8% 31.9% 37.6%
Adjusted Mean* 24.1% 28.9% 34.7%
Median 20.0% 28.4% 33.2%
</TABLE>
--------
* Excludes highest and lowest 10% of premiums

Based on the foregoing analysis, Wasserstein Perella applied a premium range
of 20% to 30% to the $21.94 per share closing price for St. John common stock
on December 8, 1998. The analysis indicated a range of implied prices for St.
John common stock of $26.33 to $28.52.

While the foregoing summary describes the analyses and factors that
Wasserstein Perella deemed material in its presentation to the Special
Committee, it is not a comprehensive description of all analyses and factors
considered by Wasserstein Perella. The preparation of a fairness opinion is a
complex process involving various determinations as to the most appropriate and
relevant methods of financial analysis and the applications of these methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Wasserstein Perella believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all analyses
and factors, would create an incomplete view of the evaluation process
underlying the Wasserstein Perella opinion. The analyses performed by
Wasserstein Perella are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than those suggested
by such analyses. Accordingly, such analyses and estimates are inherently
subject to substantial uncertainty. Additionally, analyses relating to the
value of a business do not purport to be appraisals or to reflect the prices at
which the business actually may be sold.

39
<PAGE>

The terms of the mergers were determined through negotiations between St.
John and Vestar and were approved by the St. John Board and the St. John Knits
International Board. Although Wasserstein Perella provided advice to the
Special Committee during the course of these negotiations, the decision to
enter into the merger agreement was solely that of the St. John Board, the St.
John Knits International Board and the Special Committee. As described above,
the Wasserstein Perella opinion and the presentation of Wasserstein Perella to
the Special Committee were only one of a number of factors taken into
consideration by the Special Committee in making their recommendation to the
St. John Board and the St. John Knits International Board.

The Independent Committee of St. John retained Wasserstein Perella to act as
its advisor based upon Wasserstein Perella's qualifications, reputation,
experience and expertise. Wasserstein Perella is an internationally recognized
investment banking firm and, as a customary part of its investment banking
business, is engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwriting transactions,
private placements and valuations for corporate and other purposes.

Fee Arrangement. Wasserstein Perella acted as financial advisor to the
Special Committee in connection with the mergers. Pursuant to a letter
agreement dated December 24, 1998 and amended on February 2, 1999 among the
Special Committee, Wasserstein Perella and, as amended, the St. John Knits
International Special Committee, Wasserstein Perella will receive a fee from
St. John for its services, as well as a fee for rendering the Wasserstein
Perella opinion. In addition, St. John has agreed to reimburse Wasserstein
Perella for its reasonable out-of-pocket expenses incurred in connection with
rendering financial advisory services, including fees and disbursements of its
legal counsel. St. John has agreed to indemnify Wasserstein Perella and its
directors, officers, agents, employees and controlling persons, for certain
costs, expenses, losses, claims, damages and liabilities related to or arising
out of its rendering of services under its engagement as financial advisor.

Interests of Certain Persons in the Mergers; Conflicts of Interests

Certain directors and executive officers of the Company may have interests
which present them with potential conflicts of interest in connection with the
mergers. The Special Committee and the Board of Directors were aware of the
conflicts described below and considered them in addition to the other matters
described under "--Reasons for the Mergers; Recommendations to Shareholders."

Ownership of Vestar/Gray LLC

Concurrently with the execution of the merger agreement, the Grays entered
into a Voting Agreement with Vestar and Vestar/Gray LLC. Under the Voting
Agreement, prior to the reorganization merger, the Grays will transfer any
shares of St. John common stock owned beneficially by them, excluding shares
subject to options, to Vestar/Gray LLC in exchange for cash and interests in
Vestar/Gray LLC as follows:

<TABLE>
<CAPTION>
Membership Interest in
Name Shares Transferred Cash Received Vestar/Gray LLC
---- ------------------ ------------- ----------------------
<S> <C> <C> <C>
The Gray Family Trust 603,439 $1,400,010 9.14%
Kelly A. Gray 547,904 5,709,990 5.87%
The Kelly Ann Gray Trust 54,640 -- 0.90%
--------- ---------- -----
1,205,983 $7,110,000 15.91%
</TABLE>

The Gray Family Trust is a revocable living trust of which Robert E. and
Marie Gray serve as co-trustees and are the co-beneficiaries. The Kelly Ann
Gray Trust is a trust of which Robert E. and Marie Gray serve as co-trustees
and of which Kelly A. Gray is the sole beneficiary.

The remaining 84.09% interest in Vestar/Gray LLC will be held by Vestar,
which will also act as managing member of Vestar/Gray LLC.

40
<PAGE>

Stockholders Agreement

The Grays will also be parties to the Stockholders Agreement. This agreement
will provide the Grays with certain rights, including the following:

1. the Grays may designate two members of the Board of Directors of St.
John Knits International;

4. the Grays will have the right to participate with Vestar in certain
sales of St. John Knits International common stock by Vestar.

For additional information regarding the Grays rights under this agreement,
see "THE STOCKHOLDERS AGREEMENT" on page 76.

Indemnification and Insurance

Following the mergers, St. John's articles of incorporation and bylaws will
contain provisions identical to those existing prior to the mergers with
respect to elimination of personal liability and indemnification. These
provisions will not be amended, repealed or otherwise modified for a period of
six years in any manner that would adversely affect the rights of directors,
officers, agents or employees of St. John or St. John Knits International at
the time of the mergers.

In addition, St. John has agreed to maintain for six years directors' and
officers' liability insurance policies on terms and conditions which are at
least as favorable as those in effect on February 2, 1999, covering events
occurring prior to the mergers. In no event will St. John be required to spend
in any year more than $162,000. If St. John would be required to spend more
than $162,000 for any year, St. John must buy a policy with the best coverage
available, in the reasonable discretion of the Board of St. John, for a cost
not exceeding such amount. St. John may instead decide to buy one or more
"tail" policies for all or any portion of the six-year period.

Options and Common Stock

In accordance with a term sheet agreed to by Vestar and the Grays,
immediately following the mergers, the Grays will be granted new options to
acquire shares of St. John Knits International common stock representing 5% of
the total shares of St. John Knits International common stock following the
mergers on a fully diluted basis. These options will have an exercise price
equal to the market value of such stock on the date of grant, which St. John
Knits International expects to equal $30 per share. In addition, these options
will become exercisable subject to certain terms and conditions, including the
passage of time and St. John's achievement of certain performance criteria,
will have up to a 15-year term and may provide for the acceleration of
exercisability upon certain events.

Certain other members of senior management also will receive options to
acquire shares of St. John Knits International common stock that will have an
exercise price equal to the market value of such stock on the date of grant. In
addition, certain members of senior management, other than the Grays, will be
offered the opportunity to purchase shares of St. John Knits International
common stock which, together with the options referred to in the preceding
sentence, will represent no more than 5% of the outstanding capital stock of
St. John Knits International on a fully diluted basis.

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<PAGE>

Options to purchase 13,334 shares of St. John common stock issued to each of
David A. Krinsky and Richard A. Gadbois III, directors of St. John, will
accelerate as a result of the mergers, and each of these directors will receive
a cash payment equal to $160,008 for these accelerated options upon
consummation of the mergers. In addition, options to purchase 3,334 shares of
St. John common stock issued to Roger G. Ruppert, a director and executive
officer of St. John, will accelerate as a result of the mergers, and Mr.
Ruppert will receive a cash payment equal to $38,341 for these accelerated
options.

Other Interests

For their services as members of the Special Committee, Messrs. Davis and
Reiner each will receive $50,000 from St. John and Mr. Goldston, as Chairman of
the Special Committee, will receive $75,000 from St. John. No further
compensation was paid or is payable on a per meeting basis or otherwise for
service on the Special Committee. These payments are not dependent upon the
successful consummation of the mergers.

Robert E. Gray and Kelly A. Gray will serve as directors of St. John Knits
International after the mergers. See "THE MERGERS--Board of Directors and
Officers of St. John Knits International Following the Mergers" on page 54.

The Grays are parties to employment agreements with St. John, which
agreements generally will not be affected by the merger agreement or the
transactions contemplated thereby. Notwithstanding the foregoing, however,
Robert E. Gray will receive a lump sum payment in an amount equal to
approximately $1,800,000, which represents deferred compensation owed to Mr.
Gray under his employment agreement with St. John and which has been reflected
in the historical financial statements. This deferred compensation payment is
in respect of the total amount of Mr. Gray's compensation otherwise deferred
into a grantor trust. Under the terms of his employment agreement, the deferred
compensation would not otherwise be distributed to Mr. Gray until the earlier
of (1) the termination of his employment and (2) June 1, 2000, on an
installment basis, subject to the $1 million compensation limit under Section
162(m) of the Internal Revenue Code of 1986, as amended. In connection with the
payment of the deferred compensation, Mr. Gray's employment agreement will be
amended to provide that after the mergers, no portion of Mr. Gray's annual
compensation that Mr. Gray may receive from St. John or St. John Knits
International will be deferred and all provisions of his employment agreement
regarding compensation deferrals will be of no further force and effect. You
can find more information concerning his and other executive officers'
employment agreements in St. John's Annual Report on Form 10-K, as amended, for
the fiscal year ended November 1, 1998, which is incorporated in this document
by reference. See "WHERE YOU CAN FIND MORE INFORMATION" on page 102.

In connection with the consummation of the mergers, certain zero-cost collar
arrangements to which the Grays are parties will be settled and the Grays are
expected to receive cash payments from Merrill Lynch equal to the difference
between the put price of each of the collar arrangements and the market price
of the common stock of St. John on the date the collars are settled, discounted
to reflect the early settlement of such arrangements. For a description of
these arrangements, see "PURCHASE OF SHARES" at page 99.

Acquisition has agreed that St. John may amend or enter into a new lease for
its airplane, provided that the new lease rate will not exceed $100,000 each
month or be for a term in excess of two years. The airplane lease, which
expires on March 31, 1999, currently provides for a monthly lease rate of
$73,500. Robert and Marie Gray are sole shareholders in the company which owns
a 50% interest in the partnership that rents this plane to St. John.

Payment of Certain Expenses

Under certain circumstances, in the event that expenses are payable by St.
John to Acquisition as described in "THE MERGER AGREEMENT -- Termination Fees
and Expenses" on page 73, Vestar may reimburse Robert E. Gray for his
proportionate share of such expenses. In addition, Vestar has agreed that
following the consummation of the mergers, it will cause St. John Knits
International to reimburse Robert E. Gray for his reasonable out-of-pocket
expenses incurred in connection with the mergers.

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<PAGE>

Certain Effects of the Mergers; New York Stock Exchange Delisting; Operations
of St. John After the Mergers

As a result of the mergers, St. John shareholders who receive only cash for
their St. John common stock and do not retain any shares will no longer have an
equity interest in St. John Knits International and will therefore not share in
any of the future earnings and potential growth of St. John Knits
International.

Upon consummation of the mergers, St. John common stock will be delisted
from the New York Stock Exchange and deregistered under the Securities Exchange
Act of 1934. In addition, St. John does not expect to list the St. John Knits
International common stock or to have it registered under the 1934 Act. The
deregistration of St. John common stock under the Securities Exchange Act of
1934 and the failure to reregister St. John Knits International will make
certain of the provisions of the Securities Exchange Act of 1934, such as the
short-swing profit recovery provisions of Section 16(b) and the requirement of
furnishing a proxy or information statement in connection with shareholder
meetings, no longer applicable. Those St. John shareholders who retain shares
of St. John common stock after the mergers will have a limited opportunity to
share in any future earnings and potential growth of St. John Knits
International. Although an investment in St. John Knits International following
the consummation of the mergers involves substantial risk resulting from the
limited liquidity of such investment and the high debt-to-equity ratio, if the
projections made by St. John Knits International are realized, such investment
could be worth considerably more. Except as otherwise described in this Proxy
Statement-Prospectus, St. John currently expects that St. John Knits
International will initially be operated after the mergers in a manner similar
to that of St. John's current operations. See "CERTAIN FINANCIAL PROJECTIONS"
on page 47.

Accounting Treatment

Material Federal Income Tax Consequences

The following discussion summarizes the material United States federal
income tax consequences of the reorganization merger and the acquisition merger
to St. John Knits International and the shareholders of St. John. The
discussion deals only with shareholders that hold shares of St. John's common
stock as capital assets (generally, property held for investment). The
discussion does not address all aspects of federal income taxation that may be
relevant to particular shareholders in light of their personal circumstances or
to certain types of shareholders subject to special treatment under the federal
income tax laws (including certain financial institutions, broker dealers,
insurance companies, tax-exempt organizations, foreign persons and persons
acquiring shares of St. John's common stock pursuant to the exercise of
employee stock options or otherwise as compensation). In addition, the
discussion does not address any state, local or foreign tax consequences of any
aspect of the mergers. The discussion is based upon the Internal Revenue Code
of 1986, as amended, the "Code," applicable Treasury regulations promulgated
thereunder, judicial decisions and current administrative pronouncements, all
as in effect as of the date hereof and which are subject to change at any time,
potentially with retroactive effect. No ruling from the Internal Revenue
Service will be applied for with respect to the federal income tax consequences
discussed herein and, accordingly, there can be no assurance that the Internal
Revenue Service will agree with the conclusions stated herein.

Although this discussion sets forth all material U.S. federal income tax
considerations generally applicable to shareholders of St. John as a
consequence of their receipt of cash and/or St. John Knits International common
stock pursuant to the mergers, the discussion does not address every U.S.
federal income tax concern that may be applicable to a particular holder of St.
John common stock in light of such holder's particular circumstances. All
shareholders are urged to consult their own tax advisors as to the particular
tax consequences to them of the mergers.

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<PAGE>

Characterization of the Mergers for U.S. Federal Income Tax Purposes

The merger agreement contemplates a series of transactions, which, taken as
a whole, are intended to be treated as (1) an exchange of St. John common stock
for cash and stock of St John Knits International qualifying under Section 351
of the Code, and (2) a sale of a portion of the St. John Knits International
stock to Vestar/Gray LLC. St John believes that the reorganization merger and
the acquisition merger will be treated for federal income tax purposes as two
interdependent and simultaneous components of a single overall Section 351
transaction and St. John intends to report the transactions consistently with
such treatment. However, due to the factual determinations required, no opinion
is rendered as to whether the mergers will so qualify under Section 351.

Tax Consequences to the St. John Shareholders

If the mergers constitute an exchange qualifying under Section 351 of the
Code, the material federal income tax consequences to the St. John shareholders
will include the following:

1. Except as provided below, no gain or loss will be recognized by the St.
John shareholders on their receipt of St. John Knits International
stock, if any, in exchange for their respective shares of St. John
common stock. The amount of St. John stock exchanged for St. John Knits
International stock should equal the number of St. John shares
surrendered, multiplied by the percentage that the stock portion of the
merger consideration received by the shareholder bears to the total
merger consideration received, rounded down to the nearest whole number
of shares.

2. Subject to the discussion in paragraph 5, below, the tax basis of the
shares of St. John Knits International, if any, received by each
shareholder in such exchange will be the same as such shareholder's tax
basis in the stock of St. John exchanged therefor, and the holding
period of the St. John Knits International stock in the hands of each
shareholder will include the holding period of such shareholder's St.
John stock.

3. For those St. John shareholders who receive cash in connection with
their transfers of St. John stock, the federal income tax treatment of
the cash paid would depend upon whether such stock is deemed to have
been sold to Vestar/Gray LLC or to St. John Knits International, or to
St. John. There is no authority directly addressing the method of
allocation the proceeds received by a St. John shareholder between the
portion treated as received from the Vestar/Gray LLC and the portion
treated as received from St. John Knits International, or St. John. St.
John intends to take the position that (a) the percentage of St. John
Knits International shares disposed of by a shareholders for cash that
will be treated as if sold to Vestar/Gray LLC will be equal to (i) the
cash consideration provided by Vestar/Gray LLC in the acquisition merger
divided by (ii) the aggregate amount of cash paid to the St. John
shareholders in exchange for their shares pursuant to the acquisition
merger, and that (b) the remainder of the shares of St. John Knits
International disposed of by a shareholder in exchange for cash in the
mergers will be treated by St. John as sold to St. John Knits
International. However, the IRS could determine such percentage under a
different approach or could treat all of the cash paid to the
shareholders as having been paid by St. John Knits International, or St.
John, and, in such event, the shareholders' tax consequence would be as
described in paragraph 5, below.

4. Shareholders who receive cash will recognize gain or loss on the portion
of such cash received over the shareholder's adjusted tax basis of each
share deemed sold to Vestar/Gray LLC by such shareholder. Such gain or
loss will be long-term capital gain or loss if the shares of St. John
were held for more than one year, and if recognized by individual
shareholders will be subject to a maximum federal income tax rate of
20%. There are limitations on the deductibility of capital losses.

5. For those St. John shareholders who receive cash, to the extent such a
shareholder's stock is deemed to have been sold to St. John Knits
International, or to St. John, assuming that the deemed redemption
satisfies the requirements of Section 302(b) of the Code, the
shareholder will recognized either capital

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<PAGE>

gain or loss equal to the difference between the amount realized on the
deemed redemption (i.e., the cash proceeds properly allocated to such
shares) and the shareholder's adjusted tax basis in such shares. Under
Section 302(b), cash received will be treated as a payment in exchange
for shares if the payment completely terminates the shareholders'
indirect interest in St. John, if there is a "substantially
disproportionate" reduction in the equity ownership of the shareholder
in St. John, or if the payment is deemed to be "not essentially
equivalent to a dividend." For purposes of certain of these tests,
shareholders must take into account not only shares they actually own
but also shares they are deemed to own under the constructive ownership
rules of Section 318. For those shareholders who do not meet the
requirements of Section 302 with respect of Section 302 with respect to
stock deemed to have been sold to St. John Knits International, or to
St. John, the amount received will be treated as a distribution taxable
as ordinary income to the extent of St. John's and St. John Knits
International's earnings and profits. Because the complex rules under
Section 302 and Section 318 apply on a shareholder-by-shareholders
basis, shareholders should consult with their individual tax advisors to
determine whether a deemed sale of their shares would be impacted by the
limitations of Section 302 on capital gain treatment. Alternatively, for
shareholders that receive St. John Knits International stock as well as
cash, it is possible that the cash received from St. John Knits
International could be treated as "boot" received in the Section 351
transaction, rather than in a redemption of such shares under Section
302. In such a case, the shareholders will recognize capital gain, but
not loss, to the extent of the total merger consideration received over
their basis in all of their St. John shares (including shares exchanged
for shares of St. John Knits International), but not in excess of the
cash received, and a shareholder's tax basis in the St. John Knits
International shares received will be equal to the tax basis of the St.
John shares exchanged, decreased by the cash received, and increased by
any gain recognized. Any such capital gain will be treated as described
above.

6. St. John shareholders who exercise dissenters' rights under applicable
state law will recognize gain or loss equal to the difference between
the proceeds received and the shareholders' stock bases, with such
capital gain or loss treated as described above.

If the mergers are treated as fully taxable transactions, the material
federal income tax consequences will include the following:

7. A St. John shareholder that receives cash or St. John Knits
International stock or both in the mergers in a fully taxable
transaction will recognize capital gain or loss (with such capital gain
or loss as described above) in an amount equal to the difference between
the fair market value of the St. John stock surrendered and the
shareholder's tax basis in the St. John stock, provided that, to the
extent such stock is deemed to have been sold to St. John Knits
International, or to St. John, the shareholder will be treated as having
received the cash as a payment in exchange for such shareholder's stock
under Section 302 of the Code, as summarized above. For shareholders
that do not meet the requirements of Section 302 of the Code, with
respect to stock that is treated as having been sold to St. John Knits
International, the amount received will be treated as a distribution
taxable as ordinary income to the extent of St. John's and St. John
Knits International's earnings and profits.

8. St. John shareholders who receive St. John Knits International stock in
the mergers will take an initial tax basis in the St. John Knits
International stock equal to the fair market value of the St. John Knits
International stock at the time of the mergers. The holding period for
such St. John Knits International stock will commence on the day after
the mergers.

Tax Consequences to St. John Knits International

St. John Knits International will not recognize any gain or loss upon the
receipt of the St. John stock in exchange for the issuance of its own stock.

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<PAGE>

Information Reporting Requirements and Backup Withholding Tax

A shareholder that has exchanged stock in an transaction under Section 351
is required to report certain information relating to the exchange with such
shareholder's income tax return for the taxable year in which the transaction
takes place. That information generally consists of a statement attached to the
return, stating that such shareholder has engaged in a Section 351 transaction,
and identifying the shares exchanged. Shareholders are urged to consult their
tax advisors as to the information to be provided.

Under certain circumstances, U.S. persons (as defined under Section 7701 of
the Code) may be subject to backup withholding at a rate of 31% on payments
made with respect to, or cash proceeds of a sale or exchange of a capital
asset. Backup withholding will apply only if the holder (1) fails to furnish
his or her taxpayer identification number, or TIN (which, for an individual,
would be his or her Social Security Number), (2) furnishes an incorrect TIN,
(3) is notified by the Internal Revenue Service that he or she has failed
properly to report payments of interest and dividends or is otherwise subject
to backup withholding or (4) under certain circumstances, fails to certify,
under penalties of perjury, that he or she has furnished a correct TIN and (a)
that he or she has not been notified by the Internal Revenue Service that he or
she is subject to backup withholding for failure to report interest and
dividend payments or (b) that he or she has been notified by the Internal
Revenue Service that he or she is no longer subject to backup withholding.
Backup withholding will not apply with respect to payments made to certain
exempt recipients, such as corporations and tax-exempt organizations.

U.S. persons should consult their own tax advisors regarding their
qualifications for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
U.S. person will be allowed as a credit against the U.S. person's United States
federal income tax liability and may entitle the U.S. person to a refund,
provided that the required information is furnished to the Service.

Additional issues may arise pertaining to information reporting and backup
withholding for St. John shareholders who are not U.S. persons. Non-U.S.
persons should consult their tax advisors with regard to U.S. information
reporting and backup withholding.

Shareholders Should Seek Their Own Tax Advice

The preceding is a brief summary of the tax considerations potentially
affecting St. John shareholders and St. John Knits International. This
discussion is based on the current state of the law, which is subject to
legislative, administrative or judicial actions, which may apply retroactively.
Moreover, the discussion does not address considerations that may adversely
affect the treatment of certain shareholders (including certain financial
institutions, broker dealers, insurance companies, tax-exempt organizations,
foreign persons and persons acquiring shares of St. John's common stock
pursuant to the exercise of employee stock options or otherwise as
compensation). In these circumstances, and particularly because the ultimate
tax impact may vary depending upon the personal circumstances of each investor,
ALL SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE TAX
ASPECTS OF THE MERGERS.

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<PAGE>

CERTAIN FINANCIAL PROJECTIONS

St. John provided Vestar, in connection with its evaluation of the mergers,
and Merrill Lynch and Wasserstein Perella, in connection with their analyses
described above under "SPECIAL FACTORS--Fairness Opinion of Financial Advisors"
on page 28 with certain non-public financial projections for St. John prepared
by its management. The material portions are set forth below:

<TABLE>
<CAPTION>
Projected Fiscal Year
----------------------------------
1999 2000 2001 2002 2003
------ ------ ------ ------ ------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Net Sales.................................. $314.2 $339.4 $366.5 $395.9 $427.5
Gross Profit............................... 177.8 193.4 210.8 227.6 245.8
Selling General and Administrative
Expense................................... 119.5 127.3 137.5 148.4 160.3
Income from Operations..................... 58.3 66.1 73.3 79.2 85.5
EBITDA..................................... 71.6 80.4 88.3 94.7 101.5
</TABLE>

St. John does not usually publicly disclose projections of future revenues,
earnings or other financial information. We are not including these projections
in this Proxy Statement-Prospectus to influence your vote with respect to the
mergers. Our projections were based upon a variety of assumptions, including
our ability to achieve strategic goals, objectives and targets over the
applicable periods. These assumptions involve judgments with respect to, among
other things, future economic, competitive and regulatory conditions, financial
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control or,
after the mergers, St. John Knits International's control. St. John's
projections were not prepared with a view to public disclosure, use in this
Proxy Statement-Prospectus or compliance with published guidelines of the
Securities and Exchange Commission, nor were they prepared in accordance with
the guidelines established by the American Institute of Certified Public
Accountants for preparation and presentation of financial projections. Arthur
Andersen LLP, St. John's accountants, has not examined or compiled these
projections and does not assume any responsibility for them. None of St. John,
the Board, Vestar or any of Vestar's advisors, agents or representatives
assumes any responsibility for the accuracy of these projections, although we
have no reason to doubt the reasonableness of the underlying assumptions. In
the past, we have made projections which we did not achieve. Shareholders are
cautioned not to rely on the projections. See "RISK FACTORS" on page 15.

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<PAGE>

THE MERGERS

The following summary of the material terms and provisions of the merger
agreement is qualified in its entirety by reference to the merger agreement,
which is incorporated herein by reference and, with the exception of certain
schedules and exhibits, is attached as Appendix A to this document.

Merger Consideration

Reorganization Merger Consideration

As a result of the reorganization merger, each issued and outstanding share
of St. John common stock prior to the reorganization merger will be converted
into one share of common stock of St. John Knits International.

Acquisition Merger Consideration

Subject to the provisions described in this Proxy Statement-Prospectus with
respect to fractional shares, dissenting shares and shares owned by St. John,
Acquisition, Vestar/Gray LLC and the Grays and subject to proration, each
issued and outstanding share of St. John Knits International common stock will
be converted into the right to receive either $30 in cash or, for each issued
and outstanding share of St. John Knits International common stock with respect
to which an election has been made and not withdrawn in accordance with the
merger agreement, one fully paid and non-assessable share of St. John Knits
International common stock.

St. John shareholders, other than Vestar, Vestar/Gray LLC and the Grays,
will receive a total of 456,047 shares of common stock of St. John Knits
International in the acquisition merger, which will represent approximately 7%
of the total outstanding common stock of St. John Knits International after the
mergers. If St. John shareholders elect to receive, in the aggregate, less than
456,047 shares, then the amount of shares equal to the difference between
456,047 and the number of shares elected to be received will be allocated pro
rata among shareholders based on the number of non-electing shares. If St. John
shareholders elect to receive, in the aggregate, more than 456,047 shares, then
the 456,047 shares will be allocated pro rata among the St. John shareholders
who have elected to receive shares based on the number of shares each
shareholder has elected to receive.

The following examples illustrate the potential effects of the prorations
described above.

. Example A. Holder A owns 100 shares and does not elect to retain any
shares.

If other stockholders elect to retain 456,047 or more shares in the
aggregate, then Holder A will receive $3,000 in cash, or $30 for each of his or
her 100 shares.

If other stockholders elect to retain fewer than 456,047 shares in the
aggregate, then Holder A will not receive all cash for his or her 100 shares
and will be required to retain some shares. Each stockholder will be required
to retain a small number of shares in order to increase the number of retained
shares to 456,047. However, even in the case where no stockholder elects to
retain shares, Holder A will still be assured of receiving at least $2,910 in
cash (97 shares at $30 per share) and will receive three shares of St. John
Knits International common stock.

. Example B. Holder B owns 100 shares and elects to receive 100 St. John
Knits International shares.

If the stockholders, including Holder B, elect to receive more than 456,047
shares in the aggregate, the number of shares retained by stockholders must be
reduced to 456,047 and Holder B will not be able to receive all of his or her
shares and will be required to receive some cash. For example, if stockholders
elected to receive 506,719 shares in the aggregate, then each holder electing
to receive shares, including Holder B, would be able to receive only 90% of the
shares he or she elected to receive in order to reduce the number of issued

48
<PAGE>

shares to 456,047. Therefore, Holder B would be able to receive only 90 shares
(or 90% of his 100 shares) and would receive $300 in cash (10 shares at $30 per
share). If all stockholders elect to receive shares, Holder B would be able to
receive only three shares (or 3% of his 100 shares) and would receive $2,910 in
cash.

If the stockholders, including Holder B, elect to retain fewer than 456,047
shares in the aggregate, then Holder B will be able to retain all 100 of his or
her shares.

. Example C. Holder C owns 100 shares and elects to retain 50 shares and
convert 50 shares into cash.

In the unlikely event that stockholders, including Holder C, elect to
receive exactly 456,047 shares in the aggregate, then Holder C will be able to
receive 50 shares and will receive $1,500 in cash (50 shares at $30 per share).

If the stockholders, including Holder C, elect to receive more than 456,047
shares in the aggregate, then Holder C will not be able to receive all 50
shares. For example, if stockholders elected to receive 506,719 shares in the
aggregate, then each holder, including Holder C, would be able to receive only
90% of the shares he or she elected to receive in order to reduce the number of
retained shares to 456,047. Therefore, Holder C would be able to receive only
45 shares (or 90% of his 50 shares) and would receive $1,650 in cash (55 shares
at $30 per share). If the stockholders, including Holder C, elected to retain
more than 456,047 shares in the aggregate, Holder C would receive fewer shares
than in the example above, but would receive a proportionately greater amount
of cash.

If the stockholders, including Holder C, elect to receive fewer than 456,047
shares in the aggregate, then Holder C would be required to receive more than
50 shares. For example, if stockholders elected to receive 145,625 shares, then
all stockholders must collectively receive an additional 310,422 shares in
order to reach the 456,047 share threshold. In this example, Holder C would be
required to receive an additional share (for a total of 51 shares) and would
receive $1,470 in cash (49 shares at $30 per share). The additional share is
calculated by multiplying the 50 shares Holder C wants to convert to cash by a
fraction, the numerator of which is 310,422 and the denominator of which is the
total number of outstanding shares less the electing shares. If the
stockholders elected to receive fewer than 145,625 shares than in the example
above, Holder C would receive more shares than in the example above, but would
receive commensurately less cash.

Fractional shares of St. John Knits International common stock will not be
issued in the mergers. Holders otherwise entitled to a fractional share of St.
John Knits International common stock following the acquisition merger will be
paid cash instead of such fractional share. For more information regarding the
treatment of fractional shares, see "THE MERGERS--Fractional Shares" below.

Conversion/Retention of Shares; Procedures for Exchange of Certificates

Reorganization Merger

Your shares of common stock of St. John Knits International will be
represented and evidenced by the same stock certificates that previously
represented shares of St. John common stock.

Acquisition Merger

The conversion of shares of St. John Knits International common stock into
the right to receive cash or the right to receive shares of St. John Knits
International following the acquisition merger will occur at the effective time
of the acquisition merger.

As soon as practicable after the effective time of the acquisition merger,
Harris Trust Company of California, St. John's exchange agent, will send a
letter of transmittal to each holder of St. John Knits International common
stock. The letter of transmittal will contain instructions with respect to the
surrender of

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<PAGE>

certificates representing shares of St. John Knits International common stock
in exchange for cash, certificates representing shares of St. John Knits
International common stock or the amount of cash in lieu of any fractional
interest in a share of St. John Knits International common stock, if
applicable.

You should not forward stock certificates to the exchange agent until you
have received the letter of transmittal.

As soon as practicable after the effective time of the acquisition merger
and once you surrender your outstanding certificates representing shares of St.
John Knits International common stock to the exchange agent and the exchange
agent accepts those certificates, you will be entitled to receive the cash
merger consideration, certificates representing the number of full shares of
St. John Knits International common stock and cash in lieu of fractional shares
into which the shares represented by such St. John share certificates have been
converted pursuant to the merger agreement. The exchange agent will accept such
certificates upon compliance with such reasonable terms and conditions as the
exchange agent may impose to effect an orderly exchange in accordance with
normal exchange practices. After the effective time of the reorganization
merger, there will be no further transfer on the records of St. John or its
transfer agent of certificates representing shares of stock which have
converted pursuant to the reorganization merger. After the effective time of
the acquisition merger, there will be no further transfer on the records of St.
John Knits International or its transfer agent of certificates representing
shares of stock which have been converted pursuant to the acquisition merger.
If such certificates are presented to St. John or St. John Knits International
for transfer, they will be cancelled against delivery of cash, and if
appropriate, certificates for shares of St. John Knits International common
stock. Until surrendered as contemplated by the merger agreement, each
certificate for shares of St. John Knits International common stock will be
deemed at any time after the effective time of the acquisition merger to
represent only the right to receive upon such surrender the acquisition
consideration contemplated by the merger agreement. No interest will be paid or
will accrue on any cash payable as consideration in the acquisition merger or
in lieu of any fractional shares of retained St. John Knits International
common stock.

No dividends or other distributions with respect to retained St. John Knits
International common stock with a record date after the effective time of the
acquisition merger will be paid to the holder of any unsurrendered certificate
for shares of St. John Knits International common stock with respect to the
shares of retained St. John Knits International common stock represented
thereby and no cash payment in lieu of fractional shares will be paid to any
such holder pursuant to the merger agreement until the surrender of such
certificate in accordance with the merger agreement. Subject to the effect of
applicable laws, following surrender of any such certificate, there will be
paid to the holder of the certificate representing whole shares of retained St.
John Knits International common stock issued in connection with such
certificates, without interest, (1) at the time of such surrender or as
promptly as practicable after the sale of certain shares representing
fractional interests, the amount of any cash payable in lieu of a fractional
share of retained St. John Knits International common stock to which such
holder is entitled pursuant to the merger agreement and the proportionate
amount of dividends or other distributions, if any, with a record date after
the effective time of the acquisition merger paid with respect to whole shares
of retained St. John Knits International common stock, and (2) at the
appropriate payment date, the proportionate amount of dividends or other
distributions, if any, with a record date after the effective time of the
acquisition merger but prior to such surrender and a payment date subsequent to
such surrender payable with respect to such whole shares of retained St. John
Knits International common stock.

Fractional Shares

St. John Knits International will not issue certificates or scrip
representing fractional shares of retained St. John Knits International common
stock in connection with the acquisition merger. Any fractional interests will
not entitle the owner of such interests to vote or to have any other rights of
a stockholder of St. John Knits International after the acquisition merger.
Each St. John Knits International stockholder who would otherwise be entitled
to receive a fraction of a share of retained St. John Knits International
common stock will receive, in lieu of such fractional share, a cash payment,
without interest, in lieu of such fractional share in an amount

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equal to the product of such fraction multiplied by the average of the last
reported sales price, regular way, per share of St. John common stock on the
New York Stock Exchange Composite Transactions Tape for the ten business days
prior to and including the last business day prior to the day on which the
effective time of the acquisition merger occurs.

Governmental and Regulatory Approval

Under the Hart-Scott-Rodino Improvements Act of 1996, or "HSR Act," and the
rules promulgated thereunder by the Federal Trade Commission, or "FTC," the
mergers may not be completed until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division of the
Department of Justice and specified waiting period requirements have been
satisfied. St. John and Acquisition filed notification and report forms under
the HSR Act with the FTC and the Antitrust Division on , 1999. At any
time before or after consummation of the mergers, the Antitrust Division, the
FTC or state attorneys' general could take such action under the antitrust laws
as they deem necessary or desirable in the public interest, including seeking
to enjoin the consummation of the mergers. Private parties may also seek to
take legal action under the antitrust laws under certain circumstances.

Based on the information available to them, St. John and Acquisition believe
that the mergers can be effected in compliance with federal and state antitrust
laws. However, there can be no assurance that a challenge to the consummation
of the mergers on antitrust grounds will not be made or that, if such challenge
were made, St. John and Acquisition would prevail or would not be required to
accept certain conditions, including the divestitures of certain assets, in
order to consummate the mergers.

Dissenters' Rights of Appraisal

The rights of shareholders of St. John to dissent from approval of the
reorganization merger and demand payment for their shares are governed by
Chapter 13 of the California General Corporation Law, or "CGCL," the full text
of which is reprinted as Appendix D to this Proxy Statement-Prospectus. The
summary of these rights set forth below is not intended to be complete and is
qualified in its entirety by reference to Appendix D.

Although shareholders of St. John will have dissenters' rights with respect
to the reorganization merger, they will have no dissenters' rights with respect
to the acquisition merger.

Under the CGCL, shareholders of St. John will not have any dissenters'
rights with respect to the reorganization merger unless demands for payment are
duly filed with respect to five percent (5%) or more of the outstanding shares
of St. John common stock. If the holders of five percent (5%) or more of the
outstanding shares of St. John common stock duly file demands for payment and
fully comply with Chapter 13 of the CGCL, they will have the right to be paid
in cash the fair market value of their shares in accordance with Chapter 13 of
the CGCL.

Under the CGCL, "fair market value" is determined as of the day before the
first announcement of the terms of the proposed transaction, excluding any
appreciation or depreciation as a consequence of the transaction, but adjusted
for any stock split, reverse stock split, or share dividend which becomes
effective thereafter. If the parties are unable to agree on a fair market
value, the dissenting shareholder may request the Superior Court for Orange
County to determine the fair market value of the shares. The court's decision
would be subject to appellate review.

The terms of the proposed transaction were initially publicly announced
after the close of the market on December 8, 1998. On December 8, 1998, the
last trading day prior to the public announcement of the proposed transaction,
the high and low sales prices for St. John common stock were $21.9375 and
$20.75, respectively.

Dissenters' rights cannot be validly exercised by persons other than
shareholders of record regardless of the beneficial ownership of the shares.
Persons who are beneficial owners of shares held of record by another

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<PAGE>

person, such as a broker, a bank or a nominee, should instruct the record
holder to follow the procedures outlined below if such beneficial owners wish
to dissent from the approval of the reorganization merger.

As described more fully below, in order to perfect their dissenters' rights,
shareholders of record must: (1) make written demand for the purchase of their
dissenting shares to St. John or its transfer agent on or before the date of
the special meeting, (2) vote their dissenting shares against approval of the
reorganization merger, and (3) within 30 days after the mailing to shareholders
by St. John of notice of approval of the reorganization merger, submit the
certificates representing their dissenting shares to St. John or its transfer
agent, for notation on such certificates that they represent dissenting shares.
Failure to follow any of these procedures may result in the loss of statutory
dissenters' rights.

Demand for Purchase

Dissenting shareholders of St. John must submit to St. John at its principal
office, 17422 Derian Avenue, Irvine, California 92614, or to its transfer
agent, Harris Trust Company of California, a written demand that St. John
purchase for cash those shares with respect to which they wish to act as
dissenting shareholders.

The demand must state the number and class of shares held of record which
the shareholder demands to be purchased and the amount claimed to be the "fair
market value" of those shares on December 8, 1998. That statement of fair
market value will constitute an offer by the dissenting shareholder to sell
such shares at that price. Such demand will not be effective unless it is
received by not later than the date of the special meeting.

Dissenting shareholders may not withdraw their demand for payment without
the consent of the St. John Board. The rights of dissenting shareholders to
demand payment terminate (1) if the reorganization merger is abandoned
(although dissenting shareholders are entitled upon demand to reimbursement of
expenses incurred in a good faith assertion of their dissenters' rights), (2)
if the shares are transferred prior to submission for endorsement as dissenting
shares, or (3) if St. John and the dissenting shareholders do not agree upon
the status of the shares as dissenting shares or upon the purchase price, and
neither files a complaint or intervenes in a pending action within six months
after the date on which notice of approval of the reorganization merger was
mailed to the shareholders.

No shareholder who has a right to demand payment of cash for such
shareholder's shares will have any right to attack the validity of the
reorganization merger or have the reorganization merger set aside or rescinded,
except in an action to test whether St. John has received the number of shares
required to approve the reorganization merger.

Vote Against Approval of the Reorganization Merger

Dissenting shareholders must vote their dissenting shares against approval
of the reorganization merger. Record shareholders may vote part of the shares
that they are entitled to vote in favor of the reorganization merger or abstain
from voting a part of such shares without jeopardizing their dissenters' rights
to other shares; however, if record shareholders vote part of the shares they
are entitled to vote in favor of the reorganization merger and fail to specify
the number of shares they are so voting, it is conclusively presumed under
California law that their approving vote is with respect to all shares that
they are entitled to vote. Voting against the reorganization merger will not of
itself, absent compliance with the provisions of Chapter 13 of the CGCL
summarized herein, satisfy the requirement of the CGCL for exercise and
perfection of dissenters' rights.

Notice of Approval

If shareholders have a right to require St. John to purchase their shares
for cash under the dissenters' rights provisions of the CGCL, St. John will
mail to each such shareholder a notice of approval of the reorganization merger
within ten days after the date of shareholder approval, stating the price
determined by it to represent the

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<PAGE>

"fair market value" of the dissenting shares. The statement of price will
constitute an offer to purchase any dissenting shares at that price.

Submission of Stock Certificates

Within 30 days after the mailing of the notice of approval of the
reorganization merger, dissenting shareholders must submit to St. John or its
transfer agent, at the address set forth above, certificates representing the
dissenting shares to be purchased, to be stamped or endorsed with a statement
that the shares are dissenting shares or are to be exchanged for certificates
of appropriate denomination so stamped or endorsed. The notice of approval of
the reorganization merger will specify the date by which the submission of
certificates for endorsement must be made and a submission made after that date
will not be effective for any purpose.

Purchase of Dissenting Shares

If a dissenting shareholder and St. John agree that the shares are
dissenting shares and agree upon the price of the shares, St. John will, upon
surrender of the certificates, make payment of that amount, plus interest on
such amount at the legal rate on judgments from the date of such agreement,
within 30 days after the agreement on price. Any agreement between dissenting
shareholders and St. John fixing the "fair market value" of any dissenting
shares must be filed with the Corporate Secretary of St. John.

If St. John denies that the shares are dissenting shares, or St. John and a
dissenting shareholder fail to agree upon the "fair market value" of the
shares, the dissenting shareholder may, within six months after the date on
which notice of approval of the reorganization merger was mailed to the
shareholder, but not thereafter, file a complaint, or intervene in a pending
action, if any, in the Superior Court for Orange County, State of California,
requesting that the Superior Court determine whether the shares are dissenting
shares and the "fair market value" of such dissenting shares. The Superior
Court may determine, or appoint one or more impartial appraisers to determine,
the "fair market value" per share of the dissenting shares. The costs of the
action, including reasonable compensation to the appraisers to be fixed by the
court, will be assessed or apportioned as the Superior Court considers
equitable, but if the "fair market value" is determined to exceed the price
offered to the shareholder by St. John, then St. John will be required to pay
such costs, including, in the discretion of the Superior Court, attorneys'
fees, fees of expert witnesses and interest at the legal rate on judgments, if
such "fair market value" is determined to exceed 125% of the price offered by
St. John. A dissenting shareholder must bring this action within six months
after the date on which notice of approval of the reorganization merger was
mailed to the shareholder whether or not the corporation responds within such
time to the shareholder's written demand that St. John purchase for cash shares
voted against the approval of the reorganization merger.

Treatment of Options

At the effective time of the reorganization merger, St. John Knits
International will assume all of St. John's obligations with respect to any
then-outstanding options to acquire shares of St. John common stock under the
St. John Knits, Inc. 1993 Stock Option Plan, as amended. Each holder of an
outstanding option to acquire shares of common stock of St. John immediately
prior to the reorganization merger will have the right to acquire, on the same
terms and conditions that were applicable under the corresponding St. John
option, the number of shares of St. John Knits International common stock
identical to the number of shares of St. John common stock that were subject to
such corresponding option at the same price applicable to the respective shares
of St. John common stock that were subject to such corresponding option.

At the effective time of the acquisition merger, each outstanding option to
acquire shares of St. John Knits International common stock will be cancelled
and replaced with the right to receive a cash payment equal to the excess of
$30 over the exercise price per share of St. John Knits International common
stock previously subject to such option.

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Board of Directors and Officers of St. John Knits International Following the
Mergers

The merger agreement requires all directors of St. John and St. John Knits
International, other than Robert E. and Kelly A. Gray, to resign effective as
of the effective time of the acquisition merger. It is expected that Daniel S.
O'Connell, James P. Kelley and Sander M. Levy will become directors of St. John
and St. John Knits International at the effective time of the acquisition
merger. After the effective time of the acquisition merger, the Boards of
Directors of St. John and St. John Knits International will be subject to
change from time to time. The total number of members of the Board of Directors
will be reduced from the current nine to five.

The officers of St. John are presently the officers of St. John Knits
International. It is expected that the officers of St. John Knits International
at the effective time of the acquisition merger will be officers of
St. John Knits International following the mergers until such time as may be
determined by the Board of Directors following the mergers.

We have provided information regarding the directors of St. John Knits
International and St. John after the mergers:

Robert E. Gray, 73, a co-founder of St. John, has served as Chairman of the
Board and Chief Executive Officer of St. John since its inception in 1962.
Prior to forming St. John, Mr. Gray held various sales and production positions
with Cannady Creations, a small sportswear company, from 1952 to 1962, his last
position being General Manager. He graduated from the University of Southern
California with a B.A. degree in political science and psychology. Mr. Gray is
the husband of Marie Gray and the father of Kelly A. Gray.

Kelly A. Gray, 32, a director of St. John since October 1994, became
President of St. John in April 1996. She served as Creative Director of St.
John from June 1991 and Executive Vice President--Creative Director from
December 1995 until April 1996. Ms. Gray also heads St. John's retail boutique
division and has design responsibilities for the St. John product line and the
St. John's Griffith & Gray line. In addition, she has also been the St. John's
signature model since 1982. Prior to becoming Creative Director, Ms. Gray
headed St. John's advertising department from 1988 to June 1991. Prior to
heading the advertising department of St. John, Ms. Gray held various other
administrative positions with St. John. Ms. Gray is the daughter of Robert E.
Gray and Marie Gray.

Daniel S. O'Connell, 45, is the Chief Executive Officer and founder of
Vestar. Mr. O'Connell is a director of Advanced Organics, Inc., Aearo
Corporation, Cluett American Corp., Insight Communications Company, L.P.,
Remington Products Company L.L.C., Russell-Stanley Holdings, Inc. and Siegel &
Gale Holdings, Inc., all companies in which Vestar or its affiliates have a
significant equity interest. Mr. O'Connell received an A.B. degree from Brown
University and an M.B.A. degree from Yale University.

Sander M. Levy, 37, is a Managing Director of Vestar and was a founding
partner of Vestar at its inception in 1988. Mr. Levy is a director of Cluett
American Corp. Mr. Levy received a B.S. degree from The Wharton School of the
University of Pennsylvania and an M.B.A. degree from Columbia University.

James P. Kelley, 44, is a Managing Director of Vestar and was a founding
partner of Vestar at its inception in 1988. Mr. Kelley is a director of
Celestial Seasonings, Inc., Reid Plastics, Inc. and Westinghouse Air Brake
Company. Mr. Kelley received a B.S. degree from the University of Northern
Colorado, a J.D. degree from the University of Notre Dame and an M.B.A. degree
from Yale University.

Other Information Regarding Directors and Executive Officers

Information concerning directors and officers of St. John and executive
compensation is contained in St. John's Annual Report on Form 10-K, as amended,
for the fiscal year ended November 1, 1998 and is incorporated herein by
reference. See "WHERE YOU CAN FIND MORE INFORMATION" on page 102.

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Resale of St. John Knits International Common Stock After the Mergers

The St. John Knits International common stock to be received and not
converted into cash in the mergers will be freely transferable, except that
shares received by any stockholder who may be deemed an "affiliate" of
St. John Knits International under applicable securities laws will not be
transferable except in compliance with such laws and in compliance with any
agreements entered into by such affiliates restricting their resale. Federal
securities laws generally deem directors, certain executive officers and
beneficial owners of 10% or more of a class of capital stock of a company
"affiliates" of such company. This Proxy Statement-Prospectus does not cover
sales of St. John Knits International common stock retained by any person who
may be deemed an affiliate of St. John Knits International.

Merger Financing

General

St. John Knits International will incur approximately $315 million of long-
term debt to help finance the mergers. Vestar will contribute approximately
$153.6 million to Vestar/Gray LLC, of which approximately $7.1 million will be
used to acquire shares from the Grays and approximately $146.5 million will be
used to make a cash equity contribution to Acquisition to help finance the
acquisition merger. The rest of the necessary financing is expected to come
from the rollover of the Grays' investment in St. John and available cash of
St. John. These amounts will be used to fund payment of the cash consideration
in the acquisition merger, including in respect of outstanding, in-the-money
options, and pay the fees and expenses incurred in connection with the mergers.

We currently contemplate that the mergers will be funded by approximately
$155 million in senior secured credit facilities provided to St. John Knits
International by a group of banks led by The Chase Manhattan Bank and
approximately $160 million in senior subordinated notes arranged by Chase
Securities Inc.

Term Loan Facilities and Revolving Facility

The Chase Manhattan Bank has delivered a commitment letter, dated February
2, 1999, providing for the establishment of senior secured credit facilities to
be provided to St. John Knits International by a syndicate of financial
institutions in accordance with the terms of a credit agreement to be entered
into prior to the consummation of the mergers. The commitment letter is filed
as an exhibit to the Rule 13e-3 Transaction Statement and is available for
inspection and copying by any holder of St. John common stock any or
representative of such person who has been so designated in writing, at the
principal executive offices of St. John. The Chase Manhattan Bank will act as
administrative agent, collateral agent and syndication agent in connection with
the credit facilities, and Chase Securities Inc. will act as advisor, lead
arranger and book manager.

The terms of the commitment letter provide for the following facilities:

1. two senior secured term loan facilities in an aggregate principal amount
of $155 million to be allocated between Tranche A, with an aggregate
amount of $75 million, and Tranche B, with an aggregate amount of
$80 million, which facilities will be used to finance the mergers and
are collectively referred to as "term loan facilities" in this Proxy
Statement-Prospectus, and

2. a senior secured revolving credit facility in an aggregate principal
amount of up to $25 million (a portion of which will be available in the
form of a swingline facility and in the form of letters of credit),
which will be used for working capital requirements.

Other material terms of the commitment letter are set forth in detail below.

Maturities; Amortization

Tranche A and the revolving facility will mature six years after the closing
date, and Tranche B will mature eight years after the closing date. Each
tranche will amortize in quarterly installments. The revolving facility will be
payable in full at maturity.

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Interest

The commitment letter provides that the interest rates under the term loan
facilities and the revolving facility will be as follows:

1. Tranche A and the revolving facility will, in general, bear interest at
a rate per annum equal to, at the option of St. John Knits
International, either

a. Adjusted LIBOR (the London interbank offered rate for eurodollar
deposits as adjusted for statutory reserve requirements) plus the
Applicable Margin (as defined below), or

b. the Alternate Base Rate, which is the highest of (a) The Chase
Manhattan Bank's Prime Rate, (b) the Federal Funds Effective Rate
plus of 1% and (c) the Base CD Rate plus 1%, plus the Applicable
Margin, which is a percentage determined by reference to St. John
Knits International's ratio of Total Debt to EBITDA (each term to be
defined) as of the end of and for the most recent period of four
quarters for which financial statements have been delivered (all
swingline loans will bear interest at the Alternate Base Rate plus
the Applicable Margin) and

2. Tranche B will, in general, bear interest at a rate per annum equal to,
at the option of St. John Knits International, either

a. Adjusted LIBOR plus the Applicable Margin, or

b. the Alternate Base Rate plus the Applicable Margin.

Prior to the date that is six months after the closing date, loans under (i)
Tranche A and the revolving facility will bear interest at (A) Adjusted LIBOR
plus 3.00% or (B) the Alternate Base Rate plus 2.00% and (ii) Tranche B will
bear interest at (A) Adjusted LIBOR plus 3.50% or (B) the Alternate Base Rate
plus 2.50%.

Overdue principal will bear interest at the otherwise applicable interest
rate plus 2% per annum, and overdue interest and other amounts will bear
interest at the rate otherwise applicable to loans bearing interest at the
Alternate Base Rate plus 2% per annum.

Fees

The commitment letter provides that a commitment fee on the undrawn portion
of the commitment of each lender (including The Chase Manhattan Bank) under the
revolving facility will begin to accrue on the closing date and will be payable
quarterly in arrears and upon the termination of such lender's commitment. For
purposes of calculating the commitment fee, outstanding swingline loans will be
considered to be undrawn commitments under the revolving facility. The
commitment fee will accrue at a rate of 0.50% per annum, subject to reduction
based on St. John Knits International's ratio of Total Debt to EBITDA as of the
end of and for the most recent period of four fiscal quarters for which
financial statements have been delivered.

Mandatory Prepayment

The commitment letter provides that St. John Knits International will be
required to prepay the loans under the term loan facilities with:

1. 100% of the net cash proceeds of all non-ordinary course asset sales or
other dispositions of property by St. John Knits International and its
subsidiaries (including insurance and condemnation proceeds), subject to
limited exceptions to be agreed upon and with a provision to allow
reinvestment of asset sale proceeds subject to limitations on amount and
during a period to be agreed upon;

2. 100% of the net cash proceeds of issuances of equity and debt
obligations of St. John Knits International and its subsidiaries,
subject to limited exceptions to be agreed upon; and

3. 75% of annual Excess Cash Flow (to be defined) which percentages will be
subject to reduction in increments to be agreed upon based on the
achievement by St. John Knits International of performance standards to
be agreed upon.

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To the extent that the amount of any mandatory prepayment exceeds the
outstanding loans under the term loan facilities, the commitments under the
revolving facility will be reduced.

Voluntary Prepayment

The commitment letter provides that St. John Knits International may, at its
option, prepay the loans under the term loan facilities, in minimum principal
amounts to be agreed upon, without premium or penalty, subject to reimbursement
of the lenders' redeployment costs in the case of prepayment of Adjusted LIBOR
borrowings other than on the last day of the relevant interest period.

Guarantees

The commitment letter provides that all obligations of St. John Knits
International under the term loan facilities and the revolving facility will be
unconditionally guaranteed by each existing and each subsequently acquired or
organized domestic and, to the extent no adverse tax consequences to St. John
Knits International or such subsidiary would result from such guarantees, each
foreign subsidiary of St. John Knits International.

Security

Under the commitment letter, the facilities and the related guarantees, as
well as hedging agreements entered into with counterparties that are lenders,
will be secured by a first priority security pledge of all the equity
securities of St. John and by substantially all the assets of St. John Knits
International and each existing and each subsequently acquired or organized
domestic or foreign subsidiary, subject to certain limitations described below,
of St. John Knits International, including but not limited to

1. a first priority pledge of all the capital stock of and other
investments in each existing and each subsequently acquired or organized
subsidiary of St. John Knits International (which pledge, in the case of
any foreign subsidiary, will be limited to 65% of the capital stock of
such foreign subsidiary to the extent the pledge of any greater
percentage would result in adverse tax consequences to St. John Knits
International or such subsidiary), and

2. perfected first priority security interests in substantially all
tangible and intangible assets (including trademarks, copyrights and all
other intellectual property) of St. John Knits International and each
existing and each subsequently acquired or organized domestic, or
subject to the limitation described in the immediately preceding
paragraph, foreign subsidiary of St. John Knits International.

Covenants

The commitment letter provides that the term loan facilities and the
revolving facility will contain a number of affirmative covenants and negative
covenants. The negative covenants relate, among other things, to limitations
on:

1. indebtedness and certain equity securities;

2. liens;

3. fundamental changes;

4. investments, loans, advances, guarantees and acquisitions;

5. asset sales;

6. sale-leaseback transactions;

7. hedging agreements;

8. restricted payments and certain payments on subordinated indebtedness;

9. transactions with affiliates;

10. capital expenditures;

11. restrictive agreements; and

12. amendments of material documents.

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In addition, the credit agreement will contain the following financial
covenants, with definitions of financial terms and compliance levels to be
agreed upon:

1. maximum ratio of Total Debt to EBITDA;

2. minimum ratio of EBITDA to Interest Expense; and

3. minimum Fixed Charge Coverage ratio.

Events of Default

The commitment letter provides that events of default under the term loan
facilities and the revolving facility will include, among other things:

1. nonpayment of principal, with no grace period;

2. nonpayment of interest or other amounts, with three business days' grace
period;

3. inaccuracy of representations and warranties;

4. default in the performance of covenants, with grace periods to be agreed
with respect to certain affirmative covenants;

5. failure to pay material indebtedness;

6. cross-default to material indebtedness;

7. bankruptcy and similar events;

8. material judgments;

9. failure to satisfy certain material requirements of the Employee
Retirement Income Security Act of 1974, as amended;

10. actual or asserted invalidity of liens on any collateral; and

11. the occurrence of a change in control (to be defined).

The commitment letter provides that, in the event they reasonably deem it
necessary to ensure a successful syndication of the credit facilities, The
Chase Manhattan Bank and Chase Securities Inc. will be entitled, after
consultation with Vestar, to (A) change the structure, terms, pricing or
relative amounts of the credit facilities (provided that no such change will
result in any interest rate on the credit facilities set forth in the
commitment letter being increased by more than 0.50%) and (B) reduce the amount
of the credit facilities and increase the amount of the senior subordinated
notes being arranged by Chase Securities Inc. (provided that the aggregate
amount of the credit facilities and the senior subordinated notes is not
reduced and that any such adjustment would not materially adversely affect the
marketing of the senior subordinated notes).

Senior Subordinated Notes Financing

Vestar has received from Chase Securities Inc. a letter dated February 2,
1999, indicating that, based upon market conditions existing at the time of
delivery of the letter and subject to certain terms and conditions, Chase
Securities Inc. was highly confident of its ability to sell or place senior
subordinated notes of St. John Knits International in an aggregate principal
amount of $160 million. The "highly confident" letter is filed as an exhibit to
the Rule 13e-3 Transaction Statement and is available for inspection and
copying by any holder of St. John common stock or any representative of such
person who has been so designated in writing, at the principal executive
offices of St. John.

The senior subordinated notes will be general unsecured obligations of St.
John Knits International, junior to all existing and future senior indebtedness
of St. John Knits International and pari passu in right of payment to all other
existing and future senior subordinated indebtedness of St. John Knits
International. Certain subsidiaries of St. John Knits International will
guarantee payment on the notes on an unsecured senior subordinated basis. The
interest rate, interest payment dates, maturity and other material terms for
the senior subordinated notes will be determined prior to the consummation of
the mergers.

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Estimated Fees and Costs

The estimated fees and costs of St. John in connection with the mergers, the
financing and the related transactions, are as follows:

<TABLE>
<S> <C>
Financial advisory fees......................................... $ 8,769,000
Placement agent fees and expenses............................... 4,800,000
Bank commitment fees............................................ 5,100,000
Legal and accounting fees....................................... 3,000,000
Printing and mailing fees....................................... 100,000
Solicitation expenses........................................... 10,000
SEC filing fees................................................. 103,000
Other regulatory filing fees.................................... 45,000
Miscellaneous................................................... 500,000
-----------
Total........................................................... $22,427,000
===========
</TABLE>

Arrangements to Repay Borrowings

After the mergers are consummated, we plan to rely principally on cash flow
from operations to meets our debt service requirements.

Rights Plan

On November 4, 1998, the Board of Directors of St. John declared a dividend
distribution of one right for each outstanding share of St. John common stock
to shareholders of record at the close of business on November 18, 1998. Each
right entitles the registered holder to purchase from St. John one one-
hundredth of a share of Series A Junior Participating Preferred Stock, at a
price of $85 per one one-hundredth of a share, subject to adjustment. The
description and terms of the rights are set forth in the rights agreement dated
as of November 9, 1998, as amended, between St. John and Harris Trust Company
of California, as rights agent.

The rights are evidenced by the St. John common stock certificates. The
rights will separate from the St. John common stock and a distribution date
will occur upon the earliest of (1) ten days following a public announcement
that a person or group of affiliated or associated persons has acquired
beneficial ownership of 15% or more of the outstanding shares of St. John
common stock (under the rights agreement, they have become "acquiring persons")
or (2) ten business days (or such later date as may be determined by action of
a majority of the Board of Directors) following the commencement of or
announcement of an intention to make, a tender offer or exchange offer that
would result in a person or group beneficially owning 15% or more of the
outstanding shares of St. John common stock. The rights agreement provides that
the Board of Directors of St. John may exempt certain persons in connection
with certain transactions from becoming acquiring persons and triggering the
exercisability of the rights.

The rights are not exercisable until the distribution date and will expire
at the close of business on November 18, 2008, unless extended or earlier
redeemed by St. John as described below.

In the event that St. John is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets, or earning
power is sold, proper provision shall be made so that each holder of a right
shall thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the purchase price. In the
event that any person or group of affiliated or associated persons becomes an
acquiring person, proper provision shall be made so that each holder of a
right, other than rights beneficially owned by the acquiring person (which will
thereafter be void), will thereafter have the right to receive upon exercise
that number of common shares of St. John having a market value of two times the
exercise price of the right.

At any time after any person or group becomes an acquiring person and prior
to the acquisition by such person or group of 50% or more of the outstanding
common shares of St. John, the Board of Directors may

59
<PAGE>

exchange the rights (other than rights owned by such person or group which will
have become void), in whole or in part, at an exchange ratio of one common
share, or one one-hundredth of a preferred share (or of a share of a class or
series of the Company's preferred stock having equivalent rights, preferences
and privileges), per right (subject to adjustment).

Because the Special Committee has exempted Acquisition and its affiliates
from triggering St. John's rights agreement in connection with the mergers and
because St. John intends to amend the rights agreement to provide that it will
terminate at the effective time of the reorganization merger, shareholders of
St. John will not have the right to acquire stock under the rights agreement by
reason of the mergers or following the mergers.

The purchase price payable, and the number of shares of preferred stock or
other securities or property issuable, upon exercise of the rights are subject
to adjustment from time to time to prevent dilution. With certain exceptions,
no adjustment of the purchase price will be required until cumulative
adjustments require an adjustment of at least 1% of the purchase price.

Preferred shares purchasable upon exercise of the rights will not be
redeemable. Each preferred share will be entitled to an aggregate dividend of
100 times the dividend declared per common share, but at least a preferential
quarterly dividend payment of $1 per share. In the event of liquidation, the
holders of the preferred shares will be entitled to an aggregate payment of 100
times the payment made per common share, but at least a preferential
liquidation payment of $100 per share. Each preferred share will have 100
votes, voting together with the common shares. Finally, in the event of any
merger, consolidation or other transaction in which common shares are
exchanged, each preferred share will be entitled to receive 100 times the
amount received per common share. These rights are protected by customary
antidilution provisions.

Because of the nature of the preferred shares' dividend, liquidation and
voting rights, the value of the one one-hundredth interest in a preferred share
purchasable upon exercise of each right should approximate the value of one
share of St. John common stock.

Until the right is exercised, the holder thereof, as such, will have no
rights as a shareholder of St. John, including the right to vote or to receive
dividends.

At any time prior to the first date of public announcement of an acquisition
by a person or group of affiliated or associated persons of beneficial
ownership of 15% or more of the outstanding common shares, the Board of
Directors of St. John may redeem the rights in whole, but not in part, at a
price of $.01 per right. The redemption of the rights may be made effective at
such time on such basis with such conditions as the Board of Directors in its
sole discretion may establish. Immediately upon any redemption of the rights,
the right to exercise the rights will terminate and the only right of the
holders of rights will be to receive the redemption price.

The Board of Directors may supplement or amend the rights agreement in order
to cure any ambiguity, to correct or supplement any provision which may be
defective or inconsistent with any other provisions, or to make any other
provisions with respect to the rights which St. John may deem necessary or
desirable; provided, however, that from and after such time as any person
becomes an acquiring person, the rights agreement cannot be amended in any
manner which would adversely affect the interests of the holders of rights.

The Board of Directors of St. John delegated its authority under the rights
agreement to the Special Committee of the Board of Directors. The Special
Committee has exempted Acquisition and its affiliates in connection with the
mergers from triggering the rights agreement. In addition, we intend to amend
the rights agreement to provide that it will terminate at the effective time of
the reorganization merger. Because of these facts, shareholders will not have
any right to acquire stock under the rights agreement either by virtue of the
mergers or following the mergers.

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<PAGE>

Pro Forma Condensed Consolidated Financial Statements (Unaudited)

The following pages set forth the unaudited pro forma condensed consolidated
financial statements of St. John Knits International, which have been derived
by the application of pro forma adjustments to St. John's historical
consolidated financial statements incorporated by reference in this Proxy
Statement-Prospectus. The pro forma condensed consolidated balance sheet gives
effect to the mergers and related transactions as if such transactions had
occurred as of November 1, 1998. The pro forma condensed consolidated statement
of income for the period presented gives effect to the mergers and related
transactions as if such transactions were consummated as of November 3, 1997
for the fiscal year ended November 1, 1998. The adjustments are described in
the accompanying notes. You should not consider the pro forma condensed
consolidated financial statements indicative of actual results that would have
been achieved had the mergers and related transactions been consummated on the
date or for the periods indicated and do not purport to indicate balance sheet
data or results of operations as of any future date or for any future period.
You should read this data in conjunction with St. John's historical financial
statements and the notes to such statements incorporated in this Proxy
Statement-Prospectus by reference. See "WHERE YOU CAN FIND MORE INFORMATION" on
page 102.

We applied the pro forma adjustments to the respective historical
consolidated financial statements to reflect the accounting for the mergers as
a recapitalization. Accordingly, the historical basis of St. John's assets and
liabilities has not been impacted by the transaction.

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<PAGE>

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF NOVEMBER 1, 1998
(UNAUDITED)

<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS: (amounts in thousands)

Current assets:
Cash and short-term cash investments..... $ 15,512 $ (15,512)(a) $ --
Accounts receivable, net................. 35,562 35,562
Inventories.............................. 47,748 47,748
Deferred income tax benefit.............. 7,744 7,744
Prepaid income taxes..................... -- 5,600 (b) 5,600
Other.................................... 2,378 2,378
-------- --------- ---------
Total current assets................... 108,944 (9,912) 99,032
Property and equipment, net.............. 69,888 69,888
Deferred debt issuance costs............. -- 12,500 (c) 12,500
Other.................................... 3,558 3,558
-------- --------- ---------
$182,390 $ 2,588 $ 184,978
======== ========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):

Current liabilities:
Accounts payable......................... $ 8,304 $ -- $ 8,304
Accrued expenses......................... 11,330 11,330
Revolving credit facility................ -- 7,212 (a) 7,212
Current portion of term loan facilities.. -- 3,000 (a) 3,000
Income taxes payable..................... 121 121
-------- --------- ---------
Total current liabilities.............. 19,755 10,212 29,967
Long-term debt........................... 408 408
Term loan facilities, net of current
portion................................. -- 152,000 (a) 152,000
160,000
Senior subordinated notes................ -- (a) 160,000
-------- --------- ---------
Total liabilities...................... 20,163 322,212 342,375
Minority interest........................ 653 653
Total shareholders' equity (deficit)..... 161,574 (319,624)(d) (158,050)
-------- --------- ---------
$182,390 $ 2,588 $ 184,978
======== ========= =========
</TABLE>

See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet

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<PAGE>

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(amounts in thousands)

The unaudited pro forma financial data has been derived by the application
of pro forma adjustments to St. John's historical financial statement as of the
date noted. The mergers have been accounted for as a recapitalization which
will have no impact on the historical basis of St. John's assets and
liabilities.

(a) This adjustment represents the net effect of the mergers on the cash
balance as follows:

<TABLE>
<S> <C>
SOURCES OF CASH:
Capital contribution -- Vestar/Gray LLC........................ $146,527
Senior subordinated notes...................................... 160,000
Term loan facilities proceeds.................................. 155,000
Revolving credit facilities.................................... 7,212
--------
Total sources................................................ 468,739
--------

USES OF CASH:
Payment of cash merger consideration........................... 447,524
Estimated transaction fees and costs........................... 22,427
Settlement of stock options outstanding........................ 14,300
--------
Total uses................................................... 484,251
--------
Net use...................................................... $(15,512)
========
</TABLE>

(b) This adjustment represents the estimated tax benefit received by St. John
on the settlement of stock options in connection with the transaction.

(c) This adjustment represents the portion of the estimated transaction fees
and costs attributable to the Term Loan Facilities, Senior Subordinated
Notes and Revolving Credit Facility which will be amortized over the life
of the related debt. Such estimated deferred debt issuance costs include
estimated fees and costs payable to banks, underwriters, outside
professionals and related advisors.

(d) This adjustment represents the net change in equity resulting from the
mergers as follows:

<TABLE>
<S> <C>
Convert to cash 14,917,454 shares of common stock............... $(447,524)
Issuance of 4,884,222 shares of common stock to Vestar/Gray
LLC............................................................ 146,527
Settlement of stock options -- net of tax benefit............... (8,700)
Estimated transaction fees and costs............................ (9,927)
---------
$(319,624)
=========
</TABLE>

63
<PAGE>

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED NOVEMBER 1, 1998
(UNAUDITED)

<TABLE>
<CAPTION>
Pro Forma Pro
Historical Adjustments Forma
---------- ----------- --------
(amounts in thousands, except
per share and ratio data)
<S> <C> <C> <C>
Net sales............................... $281,961 $ -- $281,961
Cost of sales........................... 120,883 120,883
-------- --------
Gross profit............................ 161,078 161,078
Selling, general and administrative
expenses............................... 107,026 500 (a)(e) 107,526
-------- -------- --------
Operating income........................ 54,052 (500) 53,552
Interest expense........................ -- 32,816 (b) 32,816
Other income............................ 1,369 (1,117)(c) 252
-------- -------- --------
Income before income taxes.............. 55,421 (34,433) 20,988
Income taxes............................ 22,001 (13,670)(d) 8,331
-------- -------- --------
Net income.............................. $ 33,420 $(20,763) $ 12,657
======== ======== ========
Net income per common share from
continuing operations -- basic......... $ 2.00 $ 1.93
======== ========
Net income per common share from
continuing operations -- diluted....... $ 1.94 $ 1.93
======== ========
Dividends per share..................... $ 0.10 --
======== ========
Shares outstanding -- basic............. 16,694 6,546
======== ========
Shares outstanding -- diluted........... 17,235 6,546
======== ========
Ratio of earnings to fixed charges...... 16.60x 1.58x
======== ========
</TABLE>

See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income

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<PAGE>

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

The pro forma financial data has been derived by the application of pro
forma adjustments to St. John's historical financial statement of income for
the period noted. The mergers have been accounted for as a recapitalization,
which will have no impact on the historical basis of St. John's assets and
liabilities.

(a) This adjustment represents an annual advisory fee paid to Vestar.

(b) The pro forma adjustment to interest expense for the period presented
reflects the following items (in thousands):

<TABLE>
<S> <C>
Interest expense on the Senior Subordinated Notes............... $16,800
Interest expense on the Term Loan Facilities.................... 13,602
Interest expense on the Revolving Credit Facility............... 771
Amortization of deferred debt issuance costs.................... 1,563
Commitment fee of the unused portion of Revolving Credit
Facility....................................................... 80
-------
Total........................................................... $32,816
=======
</TABLE>

The interest expense above is based upon a weighted average interest rate of
9.66%.

An increase or decrease in the interest rate of 0.125% would change the pro
forma interest expense by $400,000. This would change the pro forma net income
by $241,000 and the pro forma net income per share by $0.04.

(c) This adjustment eliminates interest income on cash and short-term
investments which is not expected to be received after the mergers have
been completed.

(d) This adjustment represents the tax effect of the pro forma adjustments
using an effective tax rate of 39.7%.

(e) Upon completion of the transaction, all stock options outstanding will be
cancelled and converted to the right to receive a cash payment equal to
the excess of $30 over the exercise price per share. This payment of
approximately $14.3 million will be reflected as an expense to St. John in
the period the mergers are effected and has not been included in the pro
forma adjustment.

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<PAGE>

THE MERGER AGREEMENT

The merger agreement contemplates the acquisition by Vestar and the Grays of
control of St. John Knits International and St. John. This section of the
document describes material provisions of the merger agreement. Because the
description of the merger agreement in this document is a summary, it does not
contain all the information that may be important to you. You should read
carefully the entire copy of the merger agreement attached as Appendix A to
this document before you decide how to vote.

The Mergers

The merger agreement requires that St. John shareholders approve the
reorganization merger by both the vote of a majority of the outstanding shares
of St. John common stock entitled to vote on the reorganization merger and the
vote of a majority of the outstanding shares present at the St. John special
meeting, excluding those shares of St. John common stock owned beneficially by
the Grays. Following receipt of this approval and the satisfaction or waiver of
the other conditions to the mergers, St. John will consummate the
reorganization merger and the acquisition merger.

In the reorganization merger, St. John will merge into SJKAcquisition, a
wholly owned subsidiary of St. John Knits International, with St. John
surviving the reorganization merger. St. John Knits International is a Delaware
corporation and a wholly owned subsidiary of St. John. As a result of the
reorganization merger, St. John will become a subsidiary of St. John Knits
International and St. John shareholders will become stockholders of St. John
Knits International. In the acquisition merger, St. John Knits International
will merge into Acquisition, with St. John Knits International surviving the
acquisition merger. Acquisition is wholly owned by Vestar/Gray LLC, which,
following the mergers, will be approximately 84% owned by Vestar and
approximately 16% owned by the Grays. Robert E., Marie and Kelly A. Gray are
directors and executive officers of St. John.

As a result of the mergers, St. John Knits International will be 7% owned by
existing shareholders of St. John, other than the Grays, and 93% owned by
Vestar/Gray LLC. St. John anticipates that the mergers will occur as promptly
as practicable after the St. John special meeting.

You may find more information regarding the merger consideration in the
following sections of this Proxy Statement-Prospectus: "THE MERGERS--Merger
Consideration" on page 48, "--Conversion/Retention of Shares; Procedures for
Exchange of Certificates" on page 49 and "--Fractional Shares" on page 50.

You may find information regarding the treatment in the mergers of
outstanding St. John stock options under "THE MERGERS--Treatment of Options" on
page 53.

Closing of the Mergers; Effective Time of the Mergers; Surviving Corporations

Closing of the Mergers

Unless the parties agree otherwise, the closing of the mergers will take
place as soon as practicable after the date on which all closing conditions
have been satisfied or waived. The closing of the mergers is expected to take
place shortly after the approval of the St. John shareholders at the special
meeting, which is expected to occur late in the second calendar quarter of
1999.

Effective Time of the Mergers

The reorganization merger will become effective upon the filing of an
agreement of merger with the Secretary of State of the State of California or
such later date as is specified in the agreement of merger. The filing of the
agreement of merger will occur as soon as practicable after the special
meeting. We have attached as Appendix the form of agreement of merger to be
filed with the California Secretary of State after the closing of the mergers.
This agreement of merger contains the principal terms of the reorganization
merger found in the

66
<PAGE>

merger agreement to be approved and adopted by St. John shareholders at the
special meeting. The acquisition merger will become effective upon the filing
of a certificate of merger with the Secretary of State of the State of Delaware
or such later date as is specified in the certificate of merger. The filing of
the certificate of merger will occur as soon as practicable after the effective
time of the reorganization merger.

Surviving Corporations

St. John will be the surviving corporation of the reorganization merger. St.
John Knits International will be the surviving corporation of the acquisition
merger. After the mergers, the certificate of incorporation and bylaws of St.
John Knits International as in effect immediately prior to the reorganization
merger will continue to be the certificate of incorporation and bylaws of St.
John Knits International, until thereafter further lawfully amended. The
initial directors and senior executive officers of St. John Knits International
following the mergers will be as described in "THE MERGERS--Board of Directors
and Officers of St. John Knits International Following the Mergers" on page 54.

Representations and Warranties

The merger agreement contains customary representations and warranties of
St. John and St. John Knits International relating to, with respect to St.
John, St. John Knits International and their respective subsidiaries, among
other things:

1. organization, standing and similar corporate matters;

2. capital structure;

3. the authorization, execution, delivery, performance and enforceability
of the merger agreement;

4. the accuracy of information contained in documents filed by St. John
with the Securities and Exchange Commission and the absence of
undisclosed liabilities;

5. the accuracy of information supplied by St. John in connection with this
Proxy Statement-Prospectus;

6. the absence of certain changes or events since the date of the most
recent audited financial statements filed with the Securities and
Exchange Commission;

7. the absence of pending or threatened material litigation and compliance
with applicable laws;

8. benefit plans and other related employment matters;

9. filing of tax returns and payment of taxes;

10. real property and other real-estate related matters;

11. environmental matters;

12. the absence of defaults under material contracts;

13. brokers' fees and expenses;

14. the receipt of opinions of St. John's financial advisors;

15. intellectual property matters;

16. the Board of Directors' exemption of Vestar, its affiliates,
Vestar/Gray LLC and Acquisition under the Rights Plan;

17. the inapplicability of state anti-takeover laws; and

18. the recommendation of the Board of Directors and approval of the
Special Committee with respect to the merger agreement, the mergers and
related transactions.

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<PAGE>

The merger agreement also contains customary representations and warranties
of Acquisition relating to, among other things:

1. organization, standing and similar corporate matters;

2. the authorization, execution, delivery, performance and enforceability
of the merger agreement;

3. brokers' fees and expenses;

4. the accuracy of information supplied by Acquisition in connection with
this Proxy Statement-Prospectus; and

5. financing commitments obtained from third parties in connection with the
mergers.

All the representations and warranties are subject to various qualifications
and limitations.

CERTAIN COVENANTS

St. John has agreed that, prior to the mergers, it will conduct its business
only in the ordinary course and in compliance with applicable laws, and will
use its reasonable best efforts to preserve substantially intact its business
organization, to keep available the services of its present officers, employees
and consultants and to preserve its present relationships with customers,
suppliers and other persons with which it has significant business relations.

Accordingly, St. John agreed that, subject to certain exceptions described
generally below, it will not, prior to the effective time of the acquisition
merger, without the prior written consent of Acquisition:

1. amend its articles of incorporation or bylaws;

2. issue its securities or dispose of assets outside the ordinary course;

3. pay dividends beyond current levels;

4. change its share capital, including, among other things, by effecting a
stock split, combination or reclassification, or repurchase or redeem
capital stock;

5. repay any debt or guarantee the debt of others, or make any loan to or
investment in any other person, or enter into or amend any material
contract, outside the ordinary course;

6. increase the compensation of directors and officers, or other employees
other than in the ordinary course, or provide any new or change any
existing benefit plans;

7. make changes in its accounting methods other than as required by
generally accepted accounting principles, or make any material tax
election;

8. adopt a plan of liquidation or dissolution, merger or other
reorganization;

9. acquire the stock or assets of other companies or other businesses;

10. pay any material liabilities or obligations other than in the ordinary
course, or forfeit any rights of value;

11. settle or compromise any litigation;

12. close any of its facilities;

13. change its Board of Directors;

14. amend or waive any provision of its rights agreement or redeem the
rights or make them inapplicable to any other transaction;

15. amend or enter into any intellectual property license, or dispose of
any intellectual property or subject it to any lien or other
encumbrance; or

16. take, or offer or propose to take, or agree to take in writing or
otherwise, any of the above actions.

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<PAGE>

These restrictions are subject to certain exceptions, including, without
limitation, certain provisions which permit St. John to open and close retail
boutiques, make certain capital expenditures, settle certain outstanding
lawsuits and take other actions without Acquisition's prior written consent,
provided generally that St. John gives Acquisition at least two full business
days' notice of such actions and Acquisition does not object to such actions.

No Solicitation

The merger agreement provides that neither St. John nor any of its
subsidiaries, directly or indirectly, may solicit, initiate, encourage,
including by way of furnishing information, or take any action knowingly to
facilitate the submission of any inquiries, proposals or offers from any person
relating to any "transaction proposal" described below, agree to or endorse a
transaction proposal, enter into or participate in any discussions or
negotiations regarding any transaction proposal, furnish to any other person
any information with respect to its business, properties or assets in
connection with a transaction proposal or otherwise cooperate in any way with,
or knowingly assist or participate in, facilitate or encourage, any effort or
attempt by any other person to do or seek any transaction proposal. The merger
agreement defines a transaction proposal to mean:

1. any acquisition or purchase of 10% or more of the consolidated assets or
any class of equity securities of St. John or St. John Knits
International or any of their respective subsidiaries;

2. any tender offer, including a self tender offer, or exchange offer that
if consummated would result in any person beneficially owning 10% or
more of any class of equity securities of St. John or St. John Knits
International or any of their subsidiaries;

3. any merger, consolidation, business combination, sale of substantially
all the assets, recapitalization, liquidation, dissolution or similar
transaction involving St. John or any of its subsidiaries whose assets,
individually or in the aggregate, constitute 10% or more of the
consolidated assets of St. John or St. John Knits International; or

4. any other transaction the consummation of which would or would
reasonably be expected to impede, interfere with, prevent or materially
delay the mergers or which would or would reasonably be expected to
materially dilute the benefits to Acquisition of the transactions
contemplated by the merger agreement.

The merger agreement provides that these restrictions will not prohibit St.
John, prior to the approval by its shareholders of the reorganization merger,
from:

1. complying with Rule 14e-2 and Rule 14d-9 under the Securities Exchange
Act of 1934, as amended, with regard to a bona fide tender offer or
exchange offer, which rules require a target company to respond publicly
to a tender offer; or

2. participating in negotiations or discussions with, or furnishing
information to, any person concerning a transaction proposal not
solicited after February 2, 1999 which the Board of Directors receives
in writing after February 2, 1999 if all of the following conditions are
met:

(a) prior to participating in any such discussions or negotiations, or
furnishing any information, St. John must receive from the person
making the transaction proposal, and provide a copy to Acquisition
of, an executed confidentiality agreement on terms at least as
favorable to St. John as the confidentiality agreement entered into
with Vestar;

(b) the Board of Directors of St. John must have concluded in good
faith, after consulting its outside financial and legal advisors,
that such transaction proposal is a "superior proposal," and that it
must participate in such negotiations or discussions or furnish such
information in order to comply with its fiduciary duties to the
shareholders; and

(c) the Board of Directors must promptly notify Acquisition of such
negotiations or discussions or that it has provided any
information.

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<PAGE>

In addition, St. John agreed that if its Board of Directors receives a
transaction proposal, then St. John will, to the extent not prohibited in good
faith by the terms of such transaction proposal, promptly inform Acquisition of
the terms and conditions of such proposal and the identity of the person making
it. St. John also agreed to cease all existing activities, discussions or
negotiations with any parties conducted prior to February 2, 1999 with respect
to any transaction proposal other than the mergers and to use its reasonable
best efforts to cause anyone who has confidential information about St. John
that was furnished by or on behalf of St. John to return or destroy such
information. Finally, St. John agreed not to release any third party from, or
waive any provisions of, any confidentiality or standstill agreement to which
St. John is a party.

For purposes of this covenant, the term "superior proposal" means any of the
transaction proposals described in clause (1), (2) or (3) of the definition of
transaction proposal described above, with all of the percentages raised to
51%, with respect to which St. John's Board of Directors has concluded in good
faith, after consulting with its outside legal counsel and financial advisors,
is reasonably capable of being completed, and would, if consummated, result in
a transaction more favorable to St. John shareholders from a financial point of
view than the transactions contemplated by the merger agreement, including the
mergers.

Employee Benefits

Under the merger agreement, St. John Knits International will assume all
obligations of St. John, including any accrued benefits under existing employee
benefit arrangements. In addition, for at least 12 months following the
mergers, St. John Knits International will cause St. John and its subsidiaries
to provide to their employees benefits that are no less favorable, in the
aggregate, than those provided to employees as of February 2, 1999, other than
under plans relating to St. John common stock. So long as St. John Knits
International complies with this covenant, it or its subsidiaries may amend or
terminate their respective benefit plans and may terminate employees at any
time, provided that the companies continue to satisfy the conditions in the
preceding sentence.

Access to Information

Subject to existing confidentiality obligations, St. John has agreed to
afford Acquisition and its representatives and the potential financing sources
for the mergers reasonable access during normal business hours to its officers,
employees, agents, properties, offices, centers and other facilities and to all
of its books, contracts and records. In addition, St. John has agreed to
furnish Acquisition and such financing sources with all financial, operating
and other data and information as any of them may from time to time reasonably
request.

Cooperation and Reasonable Best Efforts

Pursuant to the merger agreement and subject to certain conditions and
limitations, the parties have agreed to cooperate with each other and to use
their reasonable best efforts to take certain specified actions, including
cooperation in the arrangement of financing, so that the transactions
contemplated by the merger agreement may be consummated.

Indemnification and Insurance

You may find information regarding the indemnification of our directors,
other employees and agents, and the maintenance of our directors' and officers'
liability insurance, under "SPECIAL FACTORS--Interests of Certain Persons in
the Mergers; Conflicts of Interests," on page 40.

Conditions to the Consummation of the Mergers

The respective obligations of St. John, St. John Knits International and
Acquisition to effect the mergers are subject to various conditions which
include, in addition to certain other customary closing conditions, the
following:

1. the St. John shareholders must approve the reorganization merger;

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<PAGE>

2. the waiting period under the Hart-Scott-Rodino Act must have terminated
or expired;

3. there may be no law, order, injunction or other legal restraint or
prohibitions enjoining or preventing the consummation of either or both
mergers or the transfer by the Grays of their shares of St. John common
stock to Vestar/Gray LLC;

4. there may be no stop order suspending the effectiveness of the
registration statement of which this Proxy Statement-Prospectus is a
part, and any material state securities laws applicable to the
registration and qualification of St. John Knits International common
stock following the mergers must have been complied with;

5. St. John Knits International must have completed its migration from
Barbados to Delaware; and

6. with respect to the parties' obligations to effect the acquisition
merger, the reorganization merger must have become effective in
accordance with the California General Corporations Law.

As of the date of this Proxy Statement-Prospectus, the conditions described
in clauses have been satisfied.

Acquisition's obligations to effect the acquisition merger are also subject,
in addition to certain other customary conditions, to the following additional
conditions.

1. Acquisition must have received evidence that all consents and approvals
of governmental bodies and other specified third parties have been
obtained, without, in the case of these third parties, the payment or
imposition of any material costs or obligations or the exercise of any
preemptive rights;

2. there must be no pending or threatened proceeding by any governmental
body (a) seeking to restrain or prohibit the consummation of either
merger or any transactions contemplated by the merger agreement or the
Voting Agreement or seeking to obtain material damages from Acquisition
or any of its affiliates, (b) seeking to limit St. John's ownership or
operations of any material portion of its or its subsidiaries' business
or assets or (c) seeking to limit the ability of Acquisition, or any
designee of Acquisition pursuant to the Voting Agreement, or any
stockholder of Acquisition or shareholder of St. John to acquire or
hold, or exercise full rights of ownership of, any shares of St. John
common stock, including the right to vote such St. John common stock on
all matters properly presented to St. John shareholders;

3. Acquisition must have received an agreement from each affiliate of St.
John with respect to certain securities laws matters;

4. St. John must have received the proceeds of financing on the terms and
conditions identified in the commitment letters that are filed as
exhibits to the Rule 13e-3 Transaction Statement or upon equivalent
terms and conditions; and

5. since February 2, 1999, no event has occurred that has had, or is
reasonably likely to have, a material adverse effect on the business,
operations, assets, liabilities, financial condition or results of
operations of St. John or its subsidiaries.

The obligations of St. John Knits International to effect the acquisition
are also subject to customary closing conditions.

Termination

The merger agreement provides that at any time prior to the effective time
of the acquisition merger, the merger agreement may be terminated:

1. by mutual written consent of Acquisition and St. John;

2. by either Acquisition or St. John if:

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(a) any court or other governmental body issues a non-appealable final
order, decree or ruling or takes any other final action restraining,
enjoining or otherwise prohibiting the consummation of either merger,
or any of the transactions contemplated by the merger agreement or
the Voting Agreement;

(b) the mergers have not been completed on or prior to July 15, 1999, so
long as the party seeking to terminate did not prevent consummation
by failing to fulfill any of its obligations under the merger
agreement;

(d) the other party breaches any of its representations, warranties,
covenants or agreements in the merger agreement which, in the case of
a breach by St. John, is reasonably likely to have a material adverse
effect on St. John or is reasonably likely to affect St. John's
ability to consummate either or both mergers, or in the case of a
breach by Acquisition, is reasonably likely to affect Acquisition's
ability to consummate the acquisition merger, and in each case, with
respect to any such breach that is reasonably capable of being
remedied, such breach is not remedied within 20 days; and

3. by Acquisition, if St. John or its Board of Directors has: (a)
withdrawn, modified or amended in any respect adverse to Acquisition its
approval or recommendation of the merger agreement or any of the
transactions contemplated in the merger agreement; (b) failed as
promptly as reasonably practicable after the Registration Statement
associated with this Proxy Statement-Prospectus is declared effective to
mail this Proxy Statement-Prospectus to its shareholders; (c) approved,
recommended or entered into an agreement with respect to any transaction
proposal from a person other than Acquisition or any of its affiliates;
(d) resolved to do any of the foregoing; or (e) failed to recommend the
rejection of any exchange or tender offer commenced for 10% or more of
the outstanding shares of St. John common stock;

4. by St. John, prior to the approval by its shareholders of the
reorganization merger: (a) St. John, in compliance with the merger
agreement, withdraws, modifies or amends in a manner adverse to
Acquisition its recommendation of the mergers (or publicly announces its
intention to do so); or (b) St. John or its Board of Directors approves
a superior proposal, but only if (1) St. John is in compliance with the
no-solicitation covenant described under "MERGER AGREEMENT--No
Solicitation" on page 69; (2) its Board of Directors has concluded in
good faith after consultation with its outside legal counsel and
financial advisors that such proposal is a superior proposal; (3) its
Board of Directors has concluded in good faith, after consulting with
its outside legal counsel, that it must approve such superior proposal
in order to comply with its fiduciary duties to St. John shareholders;
(4) St. John pays a termination fee of $14 million to Acquisition; and
(5) St. John has given Acquisition at least 48 hours prior notice of
termination.

AMENDMENT AND WAIVER

The parties may amend the merger agreement by action taken by or on behalf
of their Boards of Directors at any time prior to the effective time of the
reorganization merger. After St. John shareholders approve the reorganization
merger, the parties may not amend the merger agreement in any way bylaw which
would require further shareholder approval without such shareholder approval.
At any time prior to the effective time of the reorganization merger any party
may, to the extent legally allowed:

1. extend the time for the performance of any of the obligations or other
acts of the other parties;

2. waive any inaccuracies in the representations and warranties contained
in the merger agreement or in any document delivered pursuant to the
merger agreement; and

3. waive compliance with any of the agreements or conditions in the merger
agreement.

Any extension or waiver described above will be valid if set forth in
writing and signed by the parties to be bound.

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Termination Fees and Expenses

The merger agreement provides that St. John will pay up to $1.5 million of
the reasonable out-of-pocket expenses Acquisition incurred in connection with
the mergers if the merger agreement is terminated under the following
circumstances:

1. either party terminates the merger agreement because the mergers have
not been completed on or before July 15, 1999 because:

(a) the migration of the jurisdiction of incorporation of St. John Knits
International from Barbados to Delaware has not been completed;

(b) all relevant conditions to the reorganization merger have been
satisfied or waived and St. John fails to consummate the
reorganization merger;

(c) St. John is in material breach of its representations, warranties,
covenants or agreements under the merger agreement;

(d) the required consents and approvals to the mergers have not been
obtained;

(e) the required St. John affiliate letters have not been executed and
delivered to St. John;

(f) the financing for the transactions contemplated by the merger
agreement has not been received, except if such failure to receive
financing is based on certain market conditions;

(g) an event has occurred that has had or is reasonably likely to have
a material adverse effect on St. John; or

(h) either St. John or St. John Knits International has failed to
perform its obligations under the merger agreement.

2. Acquisition terminates the merger agreement because St. John or its
Board of Directors has:

(a) withdrawn, modified or amended in any respect adverse to Acquisition
its approval or recommendation of the merger agreement or any of the
transactions contemplated in it;

(b) failed as promptly as reasonably practicable after the Registration
Statement associated with this Proxy Statement-Prospectus is
declared effective to mail this Proxy Statement-Prospectus to its
shareholders;

(c) approved, recommended or entered into an agreement with respect to,
or consummated, any transaction proposal from a person other than
Acquisition or any of its affiliates;

(d) resolved to do any of the foregoing; or

(e) failed to recommend rejection of any exchange or tender offer
commenced for 10% or more of the shares of St. John common stock;

3. St. John terminates the merger agreement because:

(a) in compliance with the merger agreement, the Board of Directors of
St. John withdraws, modifies or amends in a manner adverse to
Acquisition its recommendation of the mergers, or publicly announces
its intention to do so; or

(b) St. John or its Board of Directors approves a superior proposal,
but only if

. St. John is in compliance with the no-solicitation covenant
described in "THE MERGER AGREEMENT--No Solicitation" on page 69;

. the Board of Directors of St. John has concluded in good faith
after consultation with its outside legal counsel and financial
advisors that such proposal is a superior proposal;

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. the Board of Directors has concluded in good faith, after
consultation with its outside legal counsel, that approving such
superior proposal is required in order to comply with its fiduciary
duties to the shareholders of St. John;

. St. John pays a termination fee of $14 million to Acquisition; and

. St. John has given Acquisition at least 48 hours prior notice of
termination; or

4. Acquisition terminates the merger agreement because St. John is in
material breach of any of its representations, warranties, covenants or
agreements and St. John does not remedy the breach within 20 days.

The merger agreement also provides that if Acquisition terminates the merger
agreement pursuant to clause (2) above or if St. John terminates the merger
agreement pursuant to clause (3) above, St. John will pay to Acquisition a
termination fee of $14 million, less any amount previously paid to Acquisition
in respect of expenses.

In addition, St. John will pay Acquisition a termination fee of $14 million,
with one-third of such fee payable upon execution of a transaction agreement
and the remainder upon consummation of the related transaction, less any amount
previously paid to Acquisition in respect of expenses, if all of the following
conditions are met:

1. a transaction proposal is commenced or otherwise formally communicated
to St. John, St. John Knits International or the Special Committee of
the St. John Board at any time on or after February 2, 1999 but prior to
any termination of the merger agreement, and either:

(a) Acquisition or St. John terminates the merger agreement because the
mergers have not been consummated on or before July 15, 1999, unless
the termination occurs because of the failure to receive financing
based on certain market conditions;

(b) Acquisition or St. John terminates the merger agreement because St.
John shareholders fail to approve the reorganization merger; or

(c) Acquisition terminates the merger agreement because St. John is in
material breach of any of its representations, warranties,
covenants or agreements; and

2. within 12 months of the date of such termination, St. John or St. John
Knits International enters into a definitive agreement with respect to,
or consummates, the transaction proposal commenced or communicated on or
after February 2, 1999 referred to in clause (1) above or a superior
proposal, whether or not the superior proposal was commenced or
communicated to St. John or St. John Knits International prior to such
termination.

To the extent that Acquisition is entitled to the payment of expenses under
circumstances where the termination fee is also payable, the expense payment
amount will be credited against the termination fee payable.

The merger agreement provides that Acquisition will pay up to $1.5 million
of the reasonable out-of-pocket expenses St. John incurred in connection with
the mergers upon the termination of the merger agreement for the following
reasons:

1. the mergers have not been consummated on or before July 15, 1999 because
Acquisition is in material breach of its representations, warranties,
covenants or agreements; or

2. Acquisition is in breach of any of its representations, warranties,
covenants or agreements and this breach is reasonably likely to
materially adversely effect Acquisition's ability to consummate the
acquisition merger and Acquisition has not remedied the breach within 20
days.

The parties have agreed that the payment of these expenses, together with
any termination fee which may be paid under the merger agreement, will serve as
full liquidated damages in respect of any breach by the other party. In
addition, except as otherwise specifically provided in the merger agreement,
each party has agreed to bear its own expenses in connection with the merger
agreement and the transactions contemplated thereby, except that all of the
expenses of Acquisition will be paid by St. John Knits International after the
effective time of the acquisition merger.

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THE VOTING AGREEMENT

As a condition to the willingness of Acquisition to enter into the merger
agreement, the Grays entered into a Voting Agreement with Vestar and
Vestar/Gray LLC dated as of February 2, 1999. Because the description of the
Voting Agreement contained in this document is a summary, it does not contain
all the information that may be important to you. You should read carefully the
entire copy of the Voting Agreement attached as Appendix E to this document.

Subject to certain exceptions and conditions, the Grays have agreed to vote,
and have given Vestar/Gray LLC their irrevocable proxy to vote, all the shares
of St. John common stock issued and outstanding and beneficially owned by them,
excluding shares subject to options, as of the date of the Voting Agreement, as
well as any shares with respect to which any of them becomes the owner after
the date of the Voting Agreement and prior to the record date for the special
meeting:

1. in favor of the mergers, the merger agreement and the transactions
contemplated by the merger agreement;

2. against certain other actions or agreements that would result in a
material breach by St. John or St. John Knits International of the
merger agreement or would impede or reasonably be expected to discourage
the mergers;

3. against any extraordinary corporate transaction involving St. John or
St. John Knits International, other than the mergers;

4. against any amendment to the charter documents of St. John or St. John
Knits International which would in any manner impede or prevent the
mergers;

5. against any change in the management or the Board of Directors of St.
John or St. John Knits International; and

6. against any material change in either company's corporate structure or
business.

In the event St. John's Board of Directors withdraws, amends or modifies its
recommendation of the mergers in compliance with the merger agreement, the
Voting Agreement permits the Grays to vote their shares in favor of a superior
proposal.

Subject to the terms and conditions of the Voting Agreement, the Grays have
agreed (a) to refrain from soliciting or responding to certain inquiries or
proposals regarding St. John, (b) to refrain from selling, pledging,
encumbering, assigning or otherwise disposing of, including by gift, any of
their shares or from agreeing to do the same, (c) to waive any rights of
appraisal available in the reorganization merger and (d) to take or refrain
from taking certain other actions. If the merger agreement is terminated in
accordance with its terms, the covenants and agreements contained in the Voting
Agreement with respect to the Gray's shares will terminate at the same time.

The Voting Agreement provides that prior to the reorganization merger the
Grays will transfer any shares of St. John common stock held by them to
Vestar/Gray LLC in exchange for cash and an interest in Vestar/Gray LLC. Please
refer to "SPECIAL FACTORS--Interests of Certain Persons in the Merger;
Conflicts of Interests" on page 40 for a breakdown of the shares to be
transferred and the cash payment and ownership interest to be received by each
of the Grays.

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THE STOCKHOLDERS AGREEMENT

Upon consummation of the acquisition merger, St. John Knits International
will enter into a Stockholders' Agreement with Vestar/Gray LLC, Vestar, the
Grays and certain members of management who become stockholders of St. John
Knits International. Because the description of the Stockholders' Agreement
contained in this document is a summary, it does not contain all the
information that may be important to you. You should read carefully the entire
copy of the Stockholders' Agreement attached as Appendix to this document.

Voting Agreements

Each stockholder that is a party to the Stockholders' Agreement will be
required to vote all shares of St. John Knits International common stock held
by it to elect a Board of Directors of St. John Knits International and St.
John consisting solely of five designees of Vestar/Gray LLC, or a lesser number
as required by the LLC Agreement.

So long as Vestar/Gray LLC (or Vestar and the Grays together) beneficially
owns not less than 25% of the outstanding common stock of St. John Knits
International, all stockholders party to the Stockholders' Agreement will be
required to vote all common stock of St. John Knits International held by them
to ratify, approve and adopt any and all actions adopted or approved by the
Board of Directors of St. John Knits International.

In the event the Stockholders' Agreement is in effect at the time of any
dissolution of Vestar/Gray LLC:

1. Vestar will be entitled to designate directors to the Board of Directors
of St. John Knits International on the following terms: Vestar may
appoint three directors as long as Vestar owns at least half of the
common stock of St. John Knits International allocated to Vestar as of
the date of the acquisition merger. Vestar may appoint two directors as
long as Vestar owns less than half of the common stock of St. John Knits
International allocated to Vestar as of the date of the acquisition
merger but not less than one third of the common stock of St. John Knits
International allocated to Vestar as of such date. Finally, Vestar may
appoint one director as long as Vestar owns less than one-third of the
common stock of St. John Knits International allocated to Vestar as of
the date of the acquisition merger, but not less than one-tenth of the
common stock of St. John Knits International allocated to Vestar as of
such date; provided that so long as the Grays have the right to appoint
at least one director, as long as more shares are allocated to Vestar
than the Grays, Vestar shall retain the right to appoint at least one
director.

2. the Grays will be entitled to designate directors to the Board of
Directors of St. John Knits International on the following terms: the
Grays may appoint two directors as long as the Grays own not less than
half of the common stock of St. John Knits International allocated to
the Grays as of the date of the acquisition merger. The Grays may
appoint one director as long as they own less than half of the common
stock of St. John Knits International allocated to the Grays as of the
date of the acquisition merger, but not less than one-fifth of the
common stock of St. John Knits International that will be allocated to
the Grays as of such date.

Registration Rights

The Stockholders' Agreement will permit Vestar/Gray LLC to require that St.
John Knits International registers under the Securities Act of 1933, as
amended, the sale of some or all of the shares of St. John Knits International
common stock that it holds. Vestar/Gray LLC will be limited to six such demand
registrations which it may exercise at any time after the acquisition merger.
In the event of the dissolution of Vestar/Gray LLC, if St. John Knits
International terminates any of the Grays without "cause" or if any of the
Grays resigns for "good reason," as such terms are defined in their current
respective employment contracts with St. John, then such member of the Gray
family, along with all other Grays terminated without "cause" or who resign for
"good reason," will have the right, beginning six months following the
consummation of the initial public offering of St. John Knits International
common stock, to four additional requests for registration, which may be used
not more often than once in any 12-month period. In addition, the member or
members of

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the Gray family who so resigns or is terminated will have first priority,
alone, to register 25% of the common stock of St. John Knits International held
by it or them in the registration. If St. John Knits International is not able
to register shares within 90 days (or 135 days under some circumstances) St.
John Knits International will purchase the Grays' shares on the terms and
conditions found in the LLC Agreement. In addition, if St. John Knits
International proposes to file a registration statement under the Securities
Act with respect to any offering of its common stock, other than certain
registrations relating to certain common stock issued in business combinations
or pursuant to employee benefit plans, then St. John Knits International will
provide all parties to the Stockholders' Agreement an opportunity to register
their shares of St. John Knits International common stock, subject to certain
priority provisions, on the same terms and conditions. In connection with any
demand registration as set forth above, St. John Knits International will be
responsible for all expenses incurred in connection with such registration,
except for underwriting expenses, which will be paid by the stockholders
requesting registration. In addition, St. John Knits International will
indemnify the stockholders requesting registration and the underwriters and
each of their employees and affiliates against certain liabilities, including
liabilities under the Securities Act.

Transfers of St. John Knits International Common Stock

The Stockholders' Agreement will provide that the stockholders who are also
members of St. John management, including, if the LLC Agreement has been
terminated, the Grays, cannot transfer their shares of St. John Knits
International common stock prior to the earlier of the fifth anniversary of the
acquisition merger or a public offering of the common stock of St. John Knits
International.

We expect that the Stockholders' Agreement will provide that:

1. the management stockholders, and, if the LLC Agreement has terminated,
the Grays will have the right to participate pro rata in certain sales
of St. John Knits International common stock by Vestar/Gray LLC, and, if
the LLC Agreement is terminated, by Vestar;

2. Vestar will have the right to require the management stockholders, and,
if the LLC Agreement is terminated, the Grays, to participate in certain
sales of St. John Knits International common stock by Vestar/Gray LLC,
and, if the LLC Agreement is terminated, by Vestar;

3. St. John Knits International will have a right of first refusal on
certain sales of St. John Knits International common stock by the
management holders, and, if the LLC Agreement is terminated, by the
Grays;

4. management holders and, if the LLC Agreement is terminated, Vestar and
the Grays may, after a public offering of St. John Knits International
common stock subject to certain limitations, request the transfer of all
or any portion of their St. John Knits International common stock in
accordance with Rule 144 under the Securities Act;

5. management holders and, if the LLC Agreement is terminated upon the
earlier to occur of a public offering of St. John Knits International
common stock or the fifth anniversary of the acquisition merger and
subject to certain restrictions, the Grays may effect a transfer of all
or a portion of their St. John Knits International common stock pursuant
to any available exemption from the registration requirement under the
Securities Act;

6. if the LLC Agreement is terminated, Vestar may, at any time, effect a
transfer of all or a portion of its St. John Knits International common
stock pursuant to any available exemption from the registration
requirement under the Securities Act;

7. if the LLC Agreement is terminated, prior to a public offering of St.
John Knits International common stock, if Robert E. Gray ceases to serve
as Chairman or Chief Executive Officer of St. John or St. John Knits
International or if the employment of Marie Gray or Kelly A. Gray ceases
for any reason then he or she will have the right to require St. John
Knits International, or, under certain circumstances, St. John, to
purchase such employee's St. John Knits International common stock up to
a maximum of $5 million worth of such common stock during any 12-month
period; and

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8. if the LLC Agreement is terminated, prior to a public offering of St.
John Knits International common stock, if any of the Grays is
terminated without "cause" or resigns for "good reason," as such terms
are defined in their current respective employment contracts with St.
John, then he or she will have the right to require St. John Knits
International, or, under certain circumstances, St. John, to purchase
from him or her his or her shares of St. John Knits International
initially allocated to all such terminated Gray employees under the LLC
Agreement up to a maximum of 25% of such shares during any 12-month
period.

Termination

The Stockholders' Agreement will terminate when Vestar/Gray LLC, the Grays
and Vestar and their respective affiliates do not own in the aggregate at least
10% of the outstanding common stock of St. John Knits International on a fully
diluted basis.

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THE LIMITED LIABILITY COMPANY AGREEMENT

The description of the LLC Agreement contained in this document is a summary
and may not contain all the information that may be important to you. You
should read carefully the entire copy of the LLC Agreement attached as Appendix
to this document.

Upon consummation of the acquisition merger, St. John Knits International
will be 93% owned by Vestar/Gray LLC. Following the mergers, Vestar/Gray LLC
will be owned approximately 84% by Vestar and approximately 16% by the Grays.
Vestar and the Grays will be the sole members of Vestar/Gray LLC following the
mergers.

Voting of Shares

The LLC Agreement will provide that Vestar/Gray LLC will vote the shares of
St. John Knits International it holds as directed in writing by the members of
Vestar/Gray LLC in proportion to their percentage interests in Vestar/Gray LLC.

Under the LLC Agreement, Vestar may designate directors to the Board of
Directors of St. John Knits International on the following terms: Vestar may
appoint three directors as long as Vestar owns at least half of the common
stock of St. John Knits International allocated to Vestar as of the date of the
acquisition merger. Vestar may appoint two directors as long as Vestar owns
less than half of the common stock of St. John Knits International that will be
allocated to Vestar as of the date of the acquisition merger but not less than
one-third of the common stock of St. John Knits International allocated to
Vestar as of such date. Finally, Vestar may appoint one director as long as
Vestar owns less than one-third of the common stock of St. John Knits
International allocated to Vestar as of the date of the acquisition merger, but
not less than one-tenth of the common stock of St. John Knits International
allocated to Vestar as of such date; provided that so long as the Grays have
the right to appoint at least one director, as long as more shares are
allocated to Vestar than the Grays, Vestar shall retain the right to appoint at
least one director.

The LLC Agreement will also provides that the Grays may designate directors
to the Board of Directors of St. John Knits International on the following
terms: the Grays may appoint two directors as long as the Grays own not less
than half of the common stock of St. John Knits International allocated to the
Grays as of the date of the acquisition merger. The Grays may appoint one
director as long as they own less than half of the common stock of St. John
Knits International allocated to the Grays as of the date of the acquisition
merger, but not less than one-fifth of the common stock of St. John Knits
International that will be allocated to the Grays as of such date.

Registration Rights

The Stockholders' Agreement will grant Vestar/Gray LLC registration rights
with respect to the common stock of St. John Knits International. See "THE
STOCKHOLDERS' AGREEMENT" on page 76. The LLC Agreement will govern the exercise
of these registration rights. At any time when Vestar/Gray LLC is permitted
under the Stockholders' Agreement, Vestar may request Vestar/Gray LLC to
exercise a right to register its allocable share of the St. John Knits
International common stock held by Vestar/Gray LLC. Vestar is limited to four
requests for registration. Only Vestar may cause an initial public offering of
St. John Knits International common stock to occur. No earlier than 12 months
following the consummation of the initial public offering of the common stock
of St. John Knits International and subject to requirements as to the minimum
number of shares to be registered, any time when Vestar/Gray LLC is permitted
under the Stockholders' Agreement, the Grays may request Vestar/Gray LLC to
exercise a right to register the St. John Knits International common stock held
by Vestar/Gray LLC. The Grays are limited to two requests for registration. In
addition, if St. John Knits International terminates any of the Grays without
"cause" or if any of the Grays resigns for "good reason," as such terms are
defined in their current respective employment contracts with St. John, then
such member of the Gray family, along with all other Grays terminated without
"cause" or who resign for "good reason," will have the right, beginning six
months following the consummation of the initial public offering of St. John
Knits International common stock, to four additional requests for registration,
which may be used not more often than once in any 12-month period. In addition,
the

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member or members of the Gray family who so resigns or is terminated will have
first priority, alone, to register 25% of the common stock of St. John Knits
International held by it or them in the registration. If St. John Knits
International is not able to register shares within 90 days (or 135 days under
some circumstances), St. John Knits International will purchase the Grays'
shares on the terms and conditions found in the LLC Agreement. In addition,
under the LLC Agreement, whenever Vestar/Gray LLC receives notice that St. John
Knits International proposes to register any of its common stock under the
Securities Act, it is required to give prompt notice to each of its members and
each member will have the opportunity, subject to certain priority provisions,
to include in such a registration shares of common stock of St. John Knits
International held by Vestar/Gray LLC which are allocated to such member.

Transfers of St. John Knits International Common Stock

The LLC Agreement will provide that:

1. the Grays will have the right to participate pro rata in certain sales
by Vestar/Gray LLC of St. John Knits International common stock
allocated to Vestar;

2. Vestar will have the right to require the Grays to participate in
certain sales by Vestar/Gray LLC of St. John International common stock
allocated to Vestar;

3. St. John Knits International will have a right of first refusal on
certain sales by Vestar/Gray LLC of St. John Knits International common
stock allocated to the Grays;

4. after a public offering of St. John Knits International common stock,
Vestar and the Grays may, subject to certain limitations, request the
transfer in accordance with Rule 144 under the Securities Act of all or
any portion of the St. John Knits International common stock allocated
to Vestar or the Grays;

5. upon the earlier to occur of a public offering of St. John Knits
International common stock or the fifth anniversary of the acquisition
merger and subject to certain restrictions, the Grays may request that
Vestar/Gray LLC effect a transfer pursuant to any available exemption
from the registration requirement under the Securities Act of all or a
portion of the St. John Knits International common stock allocated to
the Grays;

6. Vestar may, at any time, request that Vestar/Gray LLC effect a transfer
pursuant to any available exemption from the registration requirement
under the Securities Act of all or a portion of the St. John Knits
International common stock allocated to Vestar;

7. prior to a public offering of St. John Knits International common stock,
if Robert E. Gray ceases to serve as Chairman or Chief Executive Officer
of St. John or St. John Knits International or if the employment of
Marie Gray or Kelly A. Gray ceases for any reason, then he or she will
have the right, subject to certain limitations, to require St. John
Knits International, or, in some cases, St. John, to purchase from
Vestar/Gray LLC up to $5 million during any 12-month period of St. John
Knits International common stock allocated to such member of the Gray
family; and

8. prior to a public offering of St. John Knits International common stock,
if any of the Grays is terminated without "cause" or resigns for "good
reason," as such terms are defined in their current respective
employment contracts with St. John, then he or she will have the right,
subject to certain restrictions, to require St. John Knits International
or, in some cases, St. John, to purchase from Vestar/Gray LLC not more
than 25% during any 12-month period of the shares of St. John Knits
International allocated to all such terminated members of the Gray
family.

Non-Compete

The LLC Agreement will provide that each of the Grays, so long as he or she
is employed by St. John, St. John Knits International or one of their
respective subsidiaries and for a period of five years after he or she ceases
to be so employed, will not, directly or indirectly, engage in the design,
manufacturing, production,

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marketing, sale or distribution of women's clothing or accessories anywhere in
the world in which St. John Knits International and its subsidiaries are doing
business, other than through his or her employment with St. John, St. John
Knits International or one of their subsidiaries. The LLC Agreement also will
provide that if Kelly Gray is terminated without "cause" or resigns for "good
reason," as defined under her current employment contract, the term of the non-
compete period will be reduced to three years, and, subject to certain
restrictions, she will be permitted to engage in certain otherwise competitive
activities.

Each of the Grays will agree that he or she will not, without the prior
written consent of St. John Knits International, directly or indirectly, use or
grant a third party the right to use, the names "Marie Gray," "St. John" or
"St. John by Marie Gray" or any combination or variation of these names, in any
competing business or in any other manner that would be reasonably likely to
dilute or endanger the validity or value of any trademarks or trade names of
St. John Knits International, St. John or any of their respective subsidiaries.

Termination

Vestar/Gray LLC will dissolve upon the first to occur of any of the
following events:

1. December 31, 2009;

2. the bankruptcy, dissolution, resignation or expulsion of Vestar as
managing member;

3. the sale of all of the assets of Vestar/Gray LLC;

4. the unanimous agreement of Vestar and the Grays to dissolve Vestar/Gray
LLC;

5. on or after the earlier of the consummation of a public offering of St.
John Knits International and the fifth anniversary of the date of the
acquisition merger, upon the request of Vestar or the Grays; or

6. less than 10% of the number of shares of common stock of St. John Knits
International allocated to Vestar as of the date of the acquisition
merger are allocated to Vestar. In the event the Stockholders' Agreement
is in effect at the time of any dissolution of Vestar/Gray LLC, all
rights of Vestar and the Grays described above will be incorporated into
the Stockholders' Agreement.

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THE SPECIAL MEETING

General

This Proxy Statement-Prospectus is accompanied by the Notice of Special
Meeting, a form of election and a form of proxy that is solicited by the St.
John Board of Directors for use at the special meeting of St. John shareholders
to be held on , 1999, at , local time, at 17522 Armstrong
Avenue, Irvine, California and at any adjournments or postponements thereof.

Matters to be Considered

At the special meeting, St. John shareholders will be asked to consider and
vote upon a proposal to approve and adopt the principal terms of the merger
agreement, to approve the principal terms of the reorganization merger and to
approve and adopt the form of agreement of merger to be filed with the
California Secretary of State to effect the reorganization merger.

The consummation of the reorganization merger is a condition to the
acquisition merger. The Board of Directors of St. John Knits International has
approved the acquisition merger. In addition, St. John, as sole stockholder of
St. John Knits International, has approved the acquisition merger. No further
approval of the acquisition merger is required and neither the shareholders of
St. John nor the stockholders of St. John Knits International after the
reorganization merger will have the right to vote on the acquisition merger.
Consequently, your vote on the reorganization merger will effectively be a vote
on both mergers.

We anticipate that the mergers will occur as promptly as practicable after
the St. John special meeting. You may also be asked to vote upon a proposal to
adjourn or postpone the St. John special meeting, which adjournment or
postponement could be used for the purpose, among others, of allowing
additional time for the soliciting of additional votes to approve and adopt the
principal terms of the merger agreement and to approve the principal terms of
the reorganization merger.

Proxies

If you are a St. John shareholder, you may use the accompanying proxy if you
are unable to attend the special meeting in person or wish to have your shares
voted by proxy even if you do attend the special meeting. You may revoke any
proxy given by you pursuant to this solicitation by delivering to Marie Gray,
the Corporate Secretary of St. John, prior to or at the special meeting, a
written notice revoking the proxy or a duly executed proxy relating to the same
shares bearing a later date or by attending the special meeting and electing to
vote in person. However, your attendance at the special meeting will not in and
of itself constitute a revocation of a proxy you must vote in person at the
meeting. You should address any written notice of revocation and other
communications with respect to the revocation of St. John proxies to the
Corporate Secretary of St. John at 17422 Derian Avenue, Irvine, California
92614. In all cases, the latest dated proxy revokes an earlier dated proxy,
regardless of which method is used to give or revoke a proxy, or if different
methods are used to give and revoke a proxy. For such notice of revocation or
later proxy to be valid, however, it must actually be received by St. John
prior to the vote of the St. John shareholders at the special meeting. If your
broker has been instructed to vote your shares, you must follow directions
received from your broker in order to change your vote.

All shares represented by valid proxies received pursuant to this
solicitation and not revoked before they are exercised will be voted in the
manner specified therein. If you do not specify how your proxy is to be voted,
it will be voted in favor of approval and adoption of the principal terms of
the merger agreement and approval of the principal terms of the reorganization
merger. The St. John Board is unaware of any other matters that may be
presented for action at the special meeting. If other matters do properly come
before the special meeting, however, it is intended that shares represented by
proxies in the accompanying form will be voted or not voted by the persons
named in the proxies, in their discretion.

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Solicitation of Proxies

The cost of soliciting the proxies from the St. John shareholders will be
borne by St. John. In addition to the solicitation of proxies by mail, St. John
will request banks, brokers and other record holders to send proxies and proxy
material to the beneficial owners of shares of St. John and secure their voting
instructions, if necessary. St. John will reimburse such record holders for
their reasonable out-of-pocket expenses in doing so. will assist
in the solicitation of proxies by St. John for an estimated fee of , plus
reasonable out-of-pocket expenses.

Forms of Election

St. John has mailed a form for making a non-cash election with this Proxy
Statement-Prospectus to shareholders of record of St. John common stock. For a
form of election to be effective, you must properly complete the form of
election, and the form of election must be received by Harris Trust Company of
California, St. John's exchange agent, at one of the addresses listed on the
form of election and not withdrawn, by Eastern Standard Time, on
. The exchange agent will determine whether non-cash elections have
been properly made or revoked, and such determinations will be binding.

Record Date and Voting Rights

Record Date. The St. John Board has fixed , 1999 as the record
date for the determination of the St. John shareholders entitled to receive
notice of and to vote at the special meeting. Accordingly, only St. John
shareholders of record at the close of business on such date will be entitled
to notice of and to vote at the special meeting. At the close of business on
the record date, there were shares of St. John common stock
entitled to vote at the special meeting held by holders of record.

Quorum Requirement. The presence, in person or by proxy, of shares of St.
John common stock representing a majority of the total voting power of the St.
John Knits common stock entitled to vote on the record date is necessary to
constitute a quorum at the special meeting.

Voting Rights. Each share of St. John common stock outstanding on the record
date entitles its holder to one vote as to (1) the proposal to approve and
adopt the principal terms of the merger agreement and to approve the principal
terms of the reorganization merger and (2) any other proposal that may properly
come before the special meeting.

Vote Required. Under the California General Corporation Law, or the "CGCL,"
the adoption and approval of the principal terms of the merger agreement and
the approval of the principal terms of the reorganization merger require the
affirmative vote of the holders of a majority of the outstanding shares of
St. John common stock entitled to vote on the reorganization merger and on the
merger agreement. In addition, under the merger agreement, the approval of the
reorganization merger requires the affirmative vote of the holders of a
majority of outstanding shares of St. John common stock present in person or by
proxy at the special meeting, excluding the shares of St. John stock owned
beneficially by Vestar and the Grays.

Agreement of Merger. We have attached as Appendix the form of agreement of
merger to be filed with the California Secretary of State after the closing of
the mergers to consummate the reorganization merger. This form of agreement of
merger contains the principal terms of the reorganization merger found in the
Agreement and Plan of Merger to be approved and adopted by St. John
shareholders at the special meeting.

Abstentions and Broker Non-Votes. St. John intends to count shares of St.
John common stock present in person at the special meeting but not voting, and
shares of St. John common stock for which it has received proxies but with
respect to which holders of such shares have abstained, as present at the St.
John special meeting for purposes of determining the presence or absence of a
quorum for the transaction of business. Brokers who hold shares of St. John
common stock in "street" name for customers who are the beneficial

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owners of such shares are prohibited from giving a proxy to vote shares held
for such customers with respect to the matters to be considered and voted at
the special meeting without specific instructions from such customers. Shares
of St. John common stock represented by proxies returned by a broker holding
such shares in nominee or "street" name will be counted for purposes of
determining whether a quorum exists, even if such shares are broker non-votes.

Because approval of the merger agreement and the reorganization merger
requires the affirmative vote of a majority of outstanding shares of St. John
common stock, abstentions and broker non-votes will have the same effect as
negative votes. Accordingly, the St. John Board urges St. John shareholders to
complete, date and sign the accompanying proxy and return it promptly in the
enclosed, postage-paid envelope.

As of the record date, approximately shares of St. John common
stock, or approximately % of the shares entitled to vote at the special
meeting, were owned by directors and executive officers of St. John. It is
currently expected that each such director and executive officer will vote the
shares of the St. John common stock beneficially owned by him or her for
approval of the merger agreement and the reorganization merger. Furthermore,
each of the Grays has agreed in the Voting Agreement to vote its shares of St.
John common stock, which in the aggregate represent 7.3% of the shares
outstanding as of the close of business on the record date, in favor of the
reorganization merger and the merger agreement.

Recommendation of the St. John Board and the Special Committee of the Board

The Special Committee has recommended to the St. John Board, and the St.
John Board has approved, the merger agreement and the transactions contemplated
thereby. The St. John Board and the Special Committee of the Board believe that
the merger agreement and the transactions contemplated thereby are in the best
interests of St. John and the St. John shareholders, and recommend that the
St. John shareholders vote "FOR" adoption and approval of the principal terms
of the merger agreement and approval of the principal terms of the
reorganization merger. See "SPECIAL FACTORS--Reasons for the Mergers;
Recommendations to Shareholders" on page 24.

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COMPARISON OF THE RIGHTS OF HOLDERS OF ST. JOHN COMMON STOCK AND
ST. JOHN KNITS INTERNATIONAL COMMON STOCK

As a consequence of the consummation of the proposed reorganization merger,
the shareholders of St. John, a California corporation, will become
shareholders of St. John Knits International, a Delaware corporation. Delaware
corporations are governed by the Delaware General Corporation Law, or the DGCL.
California corporations are governed by the California General Corporation Law,
or the CGCL. Thus, the rights of former St. John shareholders will be governed
by the DGCL rather than the CGCL.

Differences between the CGCL and the DGCL and between the charters and
bylaws of St. John and St. John Knits International will result in several
changes in the rights of shareholders of St. John if the mergers are effected.
Certain differences between the rights of holders of shares of St. John Knits
International common stock and shares of St. John common stock are summarized
below. The following summary does not purport to be a complete statement of the
rights of holders of St. John common stock under the CGCL, the restated
articles of incorporation of St. John, as amended, and the restated bylaws of
St. John, as compared with the rights of holders of St. John Knits
International common stock under the DGCL, the restated certificate of
incorporation of St. John Knits International and the bylaws of St. John Knits
International, or a complete description of the specific provisions referred to
herein. The identification of specific differences is not meant to indicate
that other equally or more significant differences do not exist. In addition,
the summary is qualified in its entirety by reference to the CGCL, the DGCL and
the governing corporate instruments of St. John Knits International and St.
John, to which shareholders are referred. Copies of the St. John Knits
International certificate of incorporation and St. John Knits International
bylaws are available for inspection at the offices of St. John Knits
International and copies will be sent to the holders of St. John common stock
upon request. Pursuant to Sections 1500 and 213 of the CGCL, copies of the St.
John articles of incorporation and the St. John bylaws are available for
inspection at the principal executive offices of St. John.

Dividends and Repurchases of Shares

St. John

California law dispenses with the concepts of par value of shares as well as
statutory definitions of capital, surplus and the like. Generally, a California
corporation may pay dividends or repurchase shares out of retained earnings.
Dividends or repurchases of shares may also be made if, immediately after
giving effect thereto, the sum of (1) the assets (excluding goodwill and
certain other assets) of the corporation is at least equal to 1.25 times its
liabilities (excluding certain deferred credits) and (2) the current assets of
such corporation is at least equal to its current liabilities or, if the
average of the earnings of the corporation before taxes and interest expense
for the two preceding fiscal years were less than the average of the interest
expense of such corporation for such fiscal years, at least equal to 1.25 times
its current liabilities. Under the CGCL, there are exceptions to the foregoing
rules for repurchases of shares in connection with certain rescission actions
or pursuant to certain employee stock plans.

The St. John restated articles generally provide that certain repurchases of
St. John common stock from certain affiliates and 5% shareholders requires the
vote of a majority of the outstanding shares, excluding shares owned by such
interested shareholders.

St. John Knits International

The concepts of par value, capital and surplus are retained under Delaware
law. Under the DGCL, a corporation may declare and pay dividends out of surplus
or, if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or for the preceding fiscal year as long as the amount
of capital of the corporation following the declaration and payment of the
dividend is not less than the aggregate amount of the capital represented by
the issued and outstanding stock of all classes having a preference upon

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the distribution of assets. In addition, the DGCL generally provides that a
corporation may redeem or repurchase its shares only if such redemption or
repurchase would not impair the capital of the corporation.

Special Meetings of Shareholders; Quorum; Shareholder Action by Written Consent

St. John

Under the CGCL, a special meeting of shareholders may be called by the board
of directors, the chairman of the board, the president or the holders of shares
entitled to cast not less than 10% of the votes at the meeting or such
additional persons as may be provided in the charter or bylaws. The St. John
restated articles and restated bylaws do not provide for any such additional
persons.

A quorum for a meeting of shareholders of St. John is generally a majority
of the outstanding shares of St. John entitled to vote at such a meeting. An
action by shareholders of St. John requires a majority of votes cast at a
meeting of shareholders. The CGCL provides that these quorum requirements may
be increased or decreased by amendment of the charter, except that in no event
shall a quorum consist of less than one-third of the shares entitled to vote.

Under the CGCL, unless otherwise provided in the articles of incorporation,
any action which may be taken at a meeting of shareholders may also be taken by
the written consent of the holders of at least the same proportion of
outstanding shares as would be necessary to take such action at a meeting at
which all shares entitled to vote were present and voted, except that the
election of directors by written consent requires the unanimous consent of all
shares entitled to vote. The St. John restated articles and restated bylaws
contain provisions that prohibit actions by written consent of its shareholders
so long as St. John is a listed corporation within the meaning of Section 301.5
of the CGCL.

St. John Knits International

Under the DGCL, a special meeting of stockholders may be called by the board
of directors or by any other person authorized to do so in the certificate of
incorporation or the bylaws. The bylaws of St. John Knits International grant
the President for any purpose and the President or Secretary, if directed by
the board of directors as requested in writing by the holders of not less than
100% of the capital stock of St. John Knits International, the right to call a
special meeting.

The DGCL provides that, unless limited by the certificate of incorporation,
any action that could be taken by stockholders at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so taken,
is signed by the holders of record of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. The St. John Knits International restated certificate of
incorporation does not limit the right of the stockholders to take action by
written consent.

Certain Voting Rights

St. John

California law generally requires approval of any reorganization, which
includes a merger, certain exchange reorganizations and certain sale-of-asset
reorganizations, or sale of all or substantially all of the assets of a
corporation, by the affirmative vote of the holders of a majority, unless the
charter requires a higher percentage, of the outstanding shares of each class
of capital stock of the corporation entitled to vote thereon. The St. John
restated articles do not require a higher percentage of the holders of shares
of St. John common stock to approve any such reorganization.

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In general, under the CGCL, no approval of a reorganization is required by
the holders of the outstanding shares in the case of any corporation if such
corporation, or its shareholders immediately before such reorganization, or
both, own, immediately after such reorganization, equity securities, other than
warrants or rights, of the surviving or acquiring corporation, or the parent of
either of the constituent corporations, possessing more than five-sixths of the
voting power of such surviving or acquiring corporation or such parent.

Under the CGCL, a parent corporation may, without shareholder approval,
merge a subsidiary into itself if the parent corporation owns at least 90% of
the outstanding shares of each class of stock of such subsidiary.

St. John Knits International

Delaware law provides that, unless otherwise specified in a corporation's
certificate of incorporation, a sale or other disposition of all or
substantially all of the corporation's assets, a merger or consolidation of the
corporation with another corporation or a dissolution of the corporation
requires the affirmative vote of the board of directors, except in certain
limited circumstances, plus with certain exceptions, the affirmative vote of a
majority of the outstanding stock entitled to vote thereon.

Under the DGCL, unless a corporation's certificate of incorporation
expressly provides otherwise, there is no requirement that the holders of the
outstanding shares approve a reorganization if certain conditions are met,
including: (1) the corporation and its subsidiary are the only constituent
corporations to the merger; (2) the corporation's stockholders receive in the
merger the same number of shares of stock in the new company as they owned
prior to the reorganization, and this stock must have, among other things, the
same voting powers as the stock of the corporation before the reorganization;
(3) the parent company after the reorganization must be a Delaware company with
the same certificate of incorporation and bylaws that the corporation had prior
to the reorganization, subject to limited exceptions; (4) after the
reorganization, the corporation or its successors becomes a subsidiary of the
parent; (5) the directors of the corporation immediately prior to the
reorganization become the directors of the parent following the reorganization;
and (6) the certificate of incorporation of the subsidiary is amended to
provide that any action involving the subsidiary that would have required the
vote of its stockholders prior to the merger will require, following the
merger, the approval of the stockholders of the parent.

The St. John Knits International restated certificate of incorporation does
not contain vote requirements for extraordinary corporate transactions in
addition to or different from the approvals mandated by law.

Size and Classification of the Board of Directors

St. John

Under the CGCL, although changes in the number of directors must in general
be approved by a majority of the outstanding shares, the board of directors may
fix the exact number of directors within a stated range set forth in the
articles of incorporation or bylaws, if that stated range has been approved by
the shareholders.

Under the CGCL, a listed corporation may, by amendment to its charter or
bylaws, divide its board of directors into as many as three classes, and
directors can be elected to serve staggered terms. The St. John Articles of
Incorporation and Bylaws contain no such provision and, accordingly, all
directors are elected annually for a term of one year or until a successor is
elected. A "listed corporation" is defined under the CGCL as a corporation with
(1) securities listed on the New York Stock Exchange or the American Stock
Exchange or (2) securities designated as a National Market System security or
the Nasdaq National Market if the corporation has at least 800 holders of
equity securities.

St. John Knits International

Under the DGCL, directors, unless their terms are staggered, are elected at
each annual stockholders meeting. The certificate of incorporation may
authorize the election of certain directors by one or more classes or series of
shares, and the certificate of incorporation, an initial bylaw or a bylaw
adopted by a vote of the

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stockholders may provide for staggered terms for the directors. The certificate
of incorporation or the bylaws also may allow the stockholders or the board of
directors to fix or change the number of directors, but a corporation must have
at least one director. The St. John Knits International restated certificate of
incorporation and bylaws contain no such provision and accordingly, all
directors will be elected annually for a term of one year or until their
successors are elected.

Election of Directors

St. John

Under the CGCL, unless the corporate charter provides otherwise, any
shareholder of a listed corporation is entitled to cumulate his votes for the
election of directors provided that at least one shareholder has given notice
at the meeting prior to the voting of such shareholder's intention to cumulate
his votes and the corporation's charter does not specifically eliminate
cumulative voting. The St. John restated articles provide for the elimination
of cumulative voting so long as the corporation is a listed corporation.

St. John Knits International

Under the DGCL, stockholders do not have cumulative voting rights unless the
certificate of incorporation so provides. The St. John Knits International
restated certificate does not contain such a provision.

Removal of Directors; Filling Vacancies on the Board of Directors

St. John

Under the CGCL, the holders of at least 10% of the number of outstanding
shares of any class of stock may initiate a court action to remove any director
for cause. In addition, any or all of the directors of a California corporation
may be removed without cause by the affirmative vote of a majority of the
outstanding shares entitled to vote. However, no director may be removed,
unless the entire board is removed, when the votes cast against removal would
be sufficient to elect the director if voted cumulatively at an election at
which the same total number of votes were cast and the entire number of the
directors authorized at the time of the director's most recent election were
then being elected. In the case of a corporation whose board is classified, a
director may not be removed if the votes cast against removal would be
sufficient to elect the director if voted cumulatively at an election at which
the same number of votes were cast.

Under the CGCL, unless otherwise provided in the charter or bylaws and
except for a vacancy created by the removal of a director, vacancies on the
board of directors may be filled by approval of the board. The St. John
restated articles of Incorporation and restated bylaws contain no provisions to
the contrary. In addition, any vacancy not filled by the directors and any
vacancies on the board resulting from the removal of directors may be filled by
approval of the shareholders.

St. John Knits International

Under the DGCL, a director of a corporation that does not have a classified
board of directors or cumulative voting may be removed, with or without cause,
with the approval of a majority of the outstanding shares entitled to vote. The
St. John Knits International restated certificate of incorporation does not
provide for cumulative voting or for a classified board of directors.
Consequently, any director may be removed from office at any time with or
without cause upon the affirmative vote of the holders of a majority of the
then outstanding voting stock.

Under the DGCL, vacancies and newly created directorships may be filled by a
majority of the directors then in office, even though less than a quorum,
unless otherwise provided in the certificate of incorporation or bylaws. The
St. John Knits International bylaws provide that any vacancy or newly created
directorship resulting from any increase in the number of directors may be
filled by a majority of the directors then in office, even though less than a
quorum.

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Amendment of Charter and Bylaws

St. John

Under the CGCL, amendments to the charter of a corporation generally require
approval by vote of the directors and the holders of a majority of outstanding
shares entitled to vote thereon and, where their rights are affected, by the
holders of a majority of the outstanding shares of a class, whether or not such
class is entitled to vote thereon by the provision of the charter.

Under the CGCL, bylaws may be adopted, amended or repealed either by the
vote of a majority of the outstanding shares or by the approval of the board of
directors except (1) if the number of directors is set forth in the charter, in
which case such number may only be changed by an amendment to the charter, or
(2) if the charter requires a larger percentage of shareholder or director vote
to approve a given action. The St. John restated articles also gives St. John's
directors the power to adopt, amend or repeal the St. John restated bylaws. In
addition, the St. John restated articles give St. John shareholders the right
to adopt, amend or repeal the St. John restated bylaws, but only with the
affirmative vote of the holders of not less than 66-2/3% of the outstanding
shares of St. John common stock entitled to vote on such matters.

St. John Knits International

Under the DGCL, unless a higher vote is required in the certificate of
incorporation, an amendment to the certificate of incorporation of a
corporation may be approved by a majority of the outstanding shares and a
majority of the outstanding shares of each class entitled to vote upon the
proposed amendment.

Delaware law provides that a corporation's bylaws may be amended by that
corporation's stockholders, or, if so provided in the corporation's certificate
of incorporation, by the corporation's directors. The St. John Knits
International restated certificate of incorporation gives its directors the
power to alter, amend, or repeal the bylaws.

Dissenters' Appraisal Rights

St. John

The provisions of the CGCL relating to dissenters' rights of appraisal are
described in "THE MERGERS--Dissenters' Rights of Appraisal" on page 51.

St. John Knits International

Under Delaware law, in certain circumstances, a stockholder of a Delaware
corporation is entitled to demand appraisal and obtain payment of the
judicially determined fair value of his or her shares in the event of any plan
of merger or consolidation to which the corporation, the shares of which he or
she holds, is a party, provided such stockholder continuously holds such shares
through the effective date of the merger, otherwise complies with the
requirements of Delaware law for the perfection of appraisal rights and does
not vote in favor of the merger. However, this right to demand appraisal does
not apply to stockholders if: (1) they are stockholders of a surviving
corporation and if a vote of the stockholders of such corporation is not
necessary to authorize the merger or consolidation; or (2) the shares held by
the stockholders are of a class or series listed on a national securities
exchange, designated as a national market system security on an interdealer
quotation system by the NASD or are held of record by more than 2,000
stockholders on the date set to determine the stockholders entitled to vote on
the merger or consolidation. Notwithstanding the above, appraisal rights are
available for the shares of any class or series of stock of a Delaware
corporation if the holders thereof are required by the terms of an agreement of
merger or consolidation to accept for their stock anything except: (1) shares
of stock of the corporation surviving or resulting from the merger or
consolidation; (2) shares of stock of any other corporation which at the
effective date of the merger or consolidation will be listed on the New York
Stock Exchange or the American Stock Exchange, designated as a national market
system security on an

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interdealer quotation system by the NASD or held of record by more than 2,000
shareholders; (3) cash in lieu of fractional shares of the corporations
described in (1) and (2); or (4) any combination of the shares of stock and
cash in lieu of fractional shares described above.

A Delaware corporation may provide in its certificate of incorporation that
appraisal rights will be available for the shares of any class or series of its
stock as the result of an amendment to its certificate of incorporation, any
merger or consolidation to which the corporation is a party or a sale of all or
substantially all of the assets of the corporation. The St. John Knits
International restated certificate of incorporation does not contain any
provision regarding appraisal rights.

Although shareholders of St. John have dissenters' appraisal rights in the
reorganization merger, stockholders of St. John Knits International after the
reorganization merger will not have dissenters' appraisal rights in the
acquisition merger.

Certain Business Combinations and Reorganizations

St. John

The CGCL generally requires that, unless all shareholders of a class or
series consent, each share of such class or series of any party to a merger
must be treated equally with respect to any distribution of cash, property,
rights or securities. The CGCL also provides generally that if a corporation
that is party to a merger, or its parent, owns more than 50% but less than 90%
of the voting power of the other corporation that is party to such merger, the
nonredeemable shares of common stock of the controlled corporation may be
converted only into nonredeemable shares of the surviving corporation or a
parent party unless all of the shareholders of the class consent.

The CGCL also provides generally that if a tender offer or a written
proposal for certain business combinations is made to some or all of a
corporation's shareholders by an "interested party," an affirmative written
opinion as to the fairness of the consideration to such shareholders must be
delivered. An "interested party" is generally a control person of the target
corporation, an entity directly or indirectly controlled by an officer or
director of such corporation or an entity in which a material financial
interest is held by any director or executive officer of such corporation.

St. John Knits International

Under Section 203 of the DGCL, certain "business combinations" with
"interested stockholders" of Delaware corporations are subject to a three-year
moratorium unless specified conditions are met.

Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the
time that such person becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person who or group which owns 15%
or more of the corporation's outstanding voting stock, including any rights to
acquire stock purchase to an option, warrant, agreement, arrangement or
understanding, or upon the exercise of conversion or exchange rights, and stock
with respect to which the person has voting rights only, or is an affiliate or
associate of the corporation and was the owner of 15% or more of such voting
stock at any time within the previous three years.

For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder, except proportionately
with the corporation's other stockholders, of assets of the corporation or a
subsidiary equal 10% or more of the aggregate market value of the corporation's
consolidated assets or its outstanding stock; the issuance or transfer by the
corporation or a subsidiary of stock of the corporation or such subsidiary to
the interested stockholder, except for transfers in an conversion or exchange
or a pro rata distribution or certain other transactions, none of which
increase the interested stockholder's proportionate ownership of any class or

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<PAGE>

series of the corporation's or such subsidiary's stock; or any receipt by the
interested stockholder (except proportionately as a stockholder), directly or
indirectly, of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation or a subsidiary.

The three-year moratorium imposed on business combinations by Section 203
does not apply if: (1) prior to the time at which such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested stockholder; (2) the interested stockholder owns at least 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an interested stockholder, excluding from the 85% calculation shares
owned by directors who are also officers of the target corporation and shares
held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer; or (3) on or after
the time such person becomes an interested stockholder, the board approves the
business combination and it is also approved at a stockholder meeting by 66-
2/3% of the voting stock not owned by the interested stockholder.

Section 203 applies only to Delaware corporations which have a class of
voting stock that is listed on a national securities exchange, are quoted on an
interdealer quotation system such as Nasdaq, or are held of record by more than
2,000 stockholders. However, a Delaware corporation may elect not to be
governed by Section 203 by a provision in its original certificate of
incorporation or an amendment thereto or to the bylaws, which amendment must be
approved by a majority of the shares entitled to vote and, in the case of a
bylaw amendment, may not be further amended by the board of directors. St. John
Knits International does not intend to elect not to be governed by Section 203.

Limitation on Directors' Liability

St. John

The CGCL provides that a corporation's charter may contain a provision
eliminating or limiting the personal liability of a director for monetary
damages in an action brought by or in the right of the corporation for breach
of a director's duties to the corporation and its shareholders. However, no
such provision may eliminate or limit the liability of directors

1. for acts or omissions that involve intentional misconduct or a knowing
and culpable violation of law,

2. for acts or omissions that a director believes to be contrary to the
best interests of the corporation or its shareholders or that involve
the absence of good faith on the part of the director,

3. for any transaction from which a director derived an improper personal
benefit,

4. for acts or omissions that show a reckless disregard for the director's
duty to the corporation or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary
course of performing a director's duties, of a risk of serious injury to
the corporation or its shareholders,

5. for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation or its shareholders,

6. for any improper transaction between a director and a corporation in
which the director has a material financial interest,

7. for any unlawful distribution to the shareholders of a corporation or
any unlawful loan of money and property to, or guarantee of the
obligations of, any director or officer of the corporation,

8. for any act or omission occurring prior to September 27, 1987 when
Section 204 of the CGCL became effective or

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9. for the liability of an officer for any act or omission as an officer,
notwithstanding that the officer is also a director or that his or her
actions, if negligent or improper, have been ratified by the directors.

The St. John restated articles provides that the liability of St. John
directors for monetary damages will be eliminated to the fullest extent
permissible under the CGCL.

St. John Knits International

Delaware law permits a corporation to adopt a provision in its certificate
of incorporation eliminating or limiting the personal liability of a director,
but not an officer, to the corporation or its shareholders for monetary damages
for breach of fiduciary duty as a director, except that such provision shall
not limit the liability of a director for (1) any breach of the director's duty
of loyalty to the corporation or its shareholders, (2) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (3) liability under Section 174 of the DGCL for unlawful payment of
dividends or stock purchases or redemptions, or (4) any transaction from which
the director derived an improper personal benefit. The St. John Knits
International restated certificate of incorporation provides that no director
of St. John Knits International shall be personally liable to it or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such an exemption from liability or limitation thereof is
not permitted under the DGCL.

Indemnification of Officers and Directors; Insurance

St. John

Under California law, a corporation has the power to indemnify, with certain
exceptions, any agent who is a party to any action, other than an action by or
in the right of the corporation to procure a judgment in its favor, against
expenses, judgments, fines and settlements if that person acted in good faith
and in a manner that person reasonably believed to be in the best interests of
the corporation and, in the case of a criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. In addition, a corporation
has the power to indemnify, with certain exceptions, any agent who is a party
to any action by or in the right of the corporation, against expenses actually
and reasonably incurred by that person in connection with the defense or
settlement of the action if that person acted in good faith and in a manner
that person believed to be in the best interests of the corporation and its
shareholders. An agent of a corporation for purposes of the CGCL includes
directors, officers and employees of such corporation.

The indemnification authorized by the CGCL is not exclusive and a
corporation may grant its directors certain additional rights to
indemnification. The St. John restated bylaws permit St. John to indemnify each
of its agents in excess of the indemnification otherwise permitted by the CGCL
with respect to actions for breach of duty to St. John, subject to certain
limitations imposed by the CGCL.

St. John Knits International

Under Delaware law, a corporation may indemnify any person made a party or
threatened to be made a party to any type of proceeding, other than action by
or in the right of the corporation, because he is or was an officer, director,
employee or agent of the corporation or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
entity, against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such proceeding: (1) if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation; or (2) in the case of a
criminal proceeding, he had no reasonable cause to believe that his conduct was
unlawful. A corporation may indemnify any person made a party or threatened to
be made a party to any threatened, pending or completed action or suit brought
by or in the right of the corporation because he was an officer, director,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation or other entity, against expenses actually and reasonably incurred
in connection with such action or suit if he acted in good faith and in a
manner he

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<PAGE>

reasonably believed to be in or not opposed to the best interests of the
corporation, except that there may be no such indemnification if the person is
found liable to the corporation unless, in such a case, the court determine the
person is entitled thereto. A corporation must indemnify a director, officer,
employee or agent who successfully defends himself in a proceeding to which he
was a party because he was a director, officer, employee or agent of the
corporation against expenses actually and reasonably incurred by him. Expenses
incurred by an officer or director, or other employees or agents as deemed
appropriate by the board of directors, in defending a civil or criminal
proceeding may be paid by the corporation in advance of the final disposition
of such proceeding upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount if it shall ultimately be determined
that he is not entitled to be indemnified by the corporation. The Delaware law
indemnification and expense advancement provisions are not exclusive of any
other rights which may be granted by the St. John Knits International bylaws, a
vote of shareholders or disinterested directors, agreement or otherwise.

Under the DGCL, termination of any proceeding by conviction or upon a plea
of nolo contendere or its equivalent shall not, of itself, create a presumption
that such person is prohibited from being indemnified.

The St. John Knits International bylaws provide for the indemnification to
the fullest extent permitted by law of any person made, or threatened to be
made, a party to an action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or his testator
or intestate is or was a director, officer or employee of St. John Knits
International or serves or served any other enterprise at the request of St.
John Knits International.

Loans to Officers and Employees

St. John

Under California law, the directors of a California corporation are not
authorized to approve loans or guaranties to or on behalf of officers, whether
or not such officers are directors, unless (1) the outstanding shares of the
Corporation are held by 100 or more shareholders, (2) the corporation has a
bylaw approved by the outstanding shares authorizing the board alone to approve
such loans or guaranties and (3) if the board determines, without counting the
vote of any interested director or directors, that such loans or guaranties may
reasonably be expected to benefit the corporation. St. John Knits does not have
a bylaw authorizing the board of directors to approve such loans or guaranties.

St. John Knits International

Under Delaware law, a corporation, its officers or other employees may make
loans to, guarantee the obligations of or otherwise assist its officers or
other employees and those of its subsidiaries, including directors who are also
officers or employees, when such action, in the judgment of the directors, may
reasonably be expected to benefit the corporation, even without approval of the
stockholders.

Inspection of Shareholders' List

St. John

The CGCL allows any shareholder to inspect a corporation's shareholders'
list for a purpose reasonably related to such person's interest as a
shareholder. In addition, the CGCL provides an absolute right to inspect and
copy the corporation's shareholders' list to persons holding an aggregate of 5%
or more of a corporation's voting shares, or shareholders holding an aggregate
of 1% or more of such shares who have filed a Schedule 14A with the Securities
and Exchange Commission relating to the election of directors.

St. John Knits International

The DGCL allows any stockholder to inspect a corporation's stockholders'
list for a purpose reasonably related to such person's interest as a
stockholder. The DGCL does not provide for any absolute right of inspection,
and no such right is granted under the restated certificate of incorporation or
bylaws of St. John Knits International.

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Interested Director Transactions

St. John

Under the CGCL certain contracts or transactions in which one or more of a
corporation's directors has an interest are not void or voidable solely because
of such interest provided that certain conditions, such as obtaining the
required approval and fulfilling the requirements of good faith and full
disclosure, are met. Under the CGCL, (1) either the shareholders or the board
of directors must approve any such contract or transaction after full
disclosure of the material facts, and in the case of board approval the
contract or transaction must also be "just and reasonable" to the corporation,
or (2) the contract or transaction must have been just and reasonable or fair,
as applicable, to the corporation at the time it was approved. In the latter
case, the CGCL explicitly places the burden of proof on the interested
director. Under the CGCL, if shareholder approval is sought, the interested
director is not entitled to vote his shares at a shareholder meeting with
respect to any action regarding such contact or transaction. If board approval
is sought, the contract or transaction must be approved by a majority vote of a
quorum of the directors, without counting the vote of any interested directors,
except that interested directors may be counted for purposes of establishing a
quorum. Therefore, there are certain transactions that the board of directors
of St. John might not be able to approve because of the number of interested
directors, or the exclusion of interested director shares, St. John is not
aware of any plans to propose any transaction involving directors of St. John
which could not be so approved under the CGCL.

St. John Knits International

The DGCL is similar to the CGCL, except under the DGCL, board approval of
contracts in which directors have an interest require that the contract or
transaction must also be "fair" to the corporation. In addition, under the
DGCL, if board approval is sought, the contract or transaction must be approved
by a majority of the disinterested directors (even though less than a majority
of a quorum). Therefore, certain transactions could be approved by a majority
of the disinterested directors of St. John Knits International, although less
than a majority of a quorum, or by a majority of all voting shares, which might
not include a majority of the disinterested shares. St. John Knits
International is not aware of any plans to propose any transaction involving
directors of St. John Knits International which could be so approved under the
DGCL.

Voting By Ballot

St. John

The CGCL provides that the election of directors need not be by ballot
unless a shareholder demands election by ballot at the shareholders' meeting or
unless the bylaws require voting by ballot. St. John's bylaws provide that the
election of directors at a shareholders' meeting may be by voice vote or
ballot, unless prior to such vote a shareholder demands voting by ballot, in
which case such vote must be by ballot.

St. John Knits International

Under the DGCL, the right to vote by written ballot may be restricted if so
provided in the certificate of incorporation. The restated certificate of
incorporation of St. John Knits International does not so provide for such a
restriction.

Shareholder Derivative Suits

St. John

The CGCL provides that a shareholder bringing a derivative action on behalf
of a corporation need not have been a shareholder at the time of the
transaction in question, provided that certain tests are met. The CGCL also
provides that the corporation or the defendant in a derivative suit may make a
motion to the court for an order requiring the plaintiff shareholder to furnish
a security bond.

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St. John Knits International

Under the DGCL, a stockholder may only bring a derivative action on behalf
of the corporation if the stockholder was a stockholder of the corporation at
the time of the transaction in question or his or her stock thereafter devolved
upon him or her by operation of law. The DGCL does not have a bonding
requirement similar to that in California.

Dissolution

St. John

Under California law, shareholders holding 50% or more of the total voting
power may authorize a corporation's dissolution, with or without the approval
of the corporation's board of directors, and this right may not be modified by
the articles of incorporation.

St. John Knits International

Under Delaware law, unless the board of directors approves the proposal to
dissolve, the dissolution must be approved by stockholders holding 100% of the
total voting power of the corporation. Only if the dissolution of a Delaware
corporation is initiated by the board of directors may it be approved by a
simple majority of the corporation's stockholders. In the event of such a
board-initiated dissolution, the DGCL allows a Delaware corporation to include
in its certificate of incorporation a supermajority voting requirement in
connection with dissolutions. St. John Knits International restated certificate
of incorporation contains no such supermajority voting requirement, however,
and a majority of shares voting at a meeting at which a quorum is present would
be sufficient to approve a dissolution of St. John Knits International which
had previously been approved by its board of directors.

Rights Plan

St. John

The CGCL does not prohibit corporations from issuing stock purchase rights.
St. John has adopted a shareholder rights agreement. However, St. John expects
to terminate such agreement prior to the consummation of the mergers.

St. John Knits International

The DGCL does not prohibit corporations from issuing stock purchase rights.
St. John Knits International has not adopted a shareholder rights agreement.

Doctrine of Independent Legal Significance

The Delaware courts apply the traditional Delaware doctrine that a
corporation may choose among several possible ways to reach a result, and if it
chooses one way it need not observe statutory or common law requirements
applicable to the way not chosen. This is known as the doctrine of "independent
legal significance." The doctrine stands for the proposition that actions taken
pursuant to the authority of various sections of the law constitute acts of
independent legal significance and their validity is not dependent on other
sections of an act. The separate sections of the corporation law are considered
to be of equal dignity, and a corporation is allowed to resort to one section
without having to meet the requirements of a different section. The doctrine of
independent legal significance may not apply in California.

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Application Of The General Corporation Law Of California To Delaware
Corporations

Under Section 2115 of the CGCL, certain foreign corporations
(i.e. corporations not organized under California law) are placed in a special
category if they have characteristics of ownership and operation which indicate
that they have significant contacts with California. So long as a Delaware or
other foreign corporation is in this special category, and it does not qualify
for one of the statutory exemptions, it is subject to a number of key
provisions of the CGCL applicable to corporations incorporated in California.
Among the more important provisions are those relating to the election and
removal of directors, cumulative voting, prohibition of classified boards of
directors, standards of liability and indemnification of directors,
distributions, dividends and repurchases of shares, shareholder meetings,
approval of certain corporation transactions, dissenters' and appraisal rights
and inspection of corporate records.

One of the requirements in determining whether Section 2115 is applicable is
that more than one-half of the corporation's securities must be held of record
by persons having addresses in California. Section 2115 will not apply to St.
John Knits International, following the reorganization merger, nor will it
apply following the acquisition merger.

CERTAIN PENDING LITIGATION

St. John is party to six lawsuits that allege claims against certain of St.
John's directors for breach of fiduciary duty alleged to have arisen from the
transactions contemplated by the merger agreement. 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.

St. John believes that the allegations contained in the complaints are
without merit and intends to contest the actions vigorously, on behalf of
itself and its directors, if the plaintiffs elect to proceed with their
actions.

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INFORMATION ABOUT ST. JOHN
AND ST. JOHN KNITS INTERNATIONAL

General

St. John's products are organized primarily into the following separate
product lines:

. Knitwear -- The breadth of St. John's knitwear collection, which includes
elegant and dressy styles, basic lines of seasonless products and limited
production designs, enables St. John to compete in most segments of
women's designer clothing.

. Accessories -- The accessories line is comprised of fine fashion jewelry,
silk scarves, suede belts and handbags.

. Sport -- St. John Sport consists of a line of activewear which includes
jackets, skirts, pants, tops and jeans.

. Griffith & Gray -- This line includes suits, coats, dresses, separates
and eveningwear.

. Shoes -- Consists of pumps, sling backs, loafers and boots.

. Fragrance -- Includes, perfume, eau de parfum, perfumed body mist, body
cream, lotion, body power and bath products.

. Coats, Eyewear and Timepieces -- We have entered into license agreements
for the manufacture and sale of coats, eyewear and timepieces under the
"St. John" name.

In order to diversify product distribution and enhance name recognition, St.
John began operating retail boutiques in 1989 and currently operate seventeen
such boutiques. St. John also operates six home furnishing boutiques under the
name of Amen Wardy Home Stores. The Amen Wardy Home boutiques sell upscale home
furnishing and gift items. Amen Wardy Home plans to close one of its boutiques.
St. John also operates nine outlet stores.

Management and Additional Information

Certain information relating to executive compensation, various benefits
plans (including St. John's stock option plan), certain relationships and
related transactions and other related matters as to St. John is set forth in
the St. John Annual Report on Form 10-K, as amended, for the year ended
November 1, 1998, a copy of which is incorporated herein by reference.

St. John Knits International

St. John Knits International is a wholly owned subsidiary of St. John. St.
John Knits International was originally incorporated under the laws of Barbados
on August 5, 1997 and operated as a "FSC" under Section 922 of the Internal
Revenue Code of 1986, as amended. On February 1, 1999, St. John Knits
International filed a certificate of domestication and a certificate of
incorporation with the Secretary of State of the State of Delaware to
domesticate St. John Knits International as a Delaware corporation. On
, 1999, St. John Knits International filed a Notice of Discontinuance in
Barbados so that it would no longer be subject to Barbados law.

Upon consummation of the reorganization merger, St. John Knits International
will become the parent holding company of St. John. The assets, liabilities and
businesses of St. John will not be affected by the reorganization merger.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of February 19, 1999 regarding
the beneficial ownership of St. John's common stock by each person who is known
by St. John to beneficially own more than 5% of the outstanding shares of St.
John's common stock, each director of St. John, certain executive officers of
St. John, and all directors and executive officers as a group.
<TABLE>
<CAPTION>
Approximate
Number of
Shares
Beneficially Percentage
Name Owned Owned
---- ------------ ----------
<S> <C> <C>
Vestar Capital Partners III, L.P.(/1/)............. 1,205,983 7.3%
Robert E. Gray(/2/)................................ 1,078,079 6.3%
Marie Gray(/3/).................................... 738,079 4.4%
Kelly A. Gray(/4/)................................. 607,904 3.7%
Robert C. Davis(/5/)............................... 264,000 1.7%
David C. Frankel(/6/).............................. 33,332 *
Roger G. Ruppert(/7/).............................. 27,666 *
Richard A. Gadbois, III(/8/)....................... 21,666 *
David A. Krinsky(/8/).............................. 20,666 *
Bruce Fetter(/9/).................................. 9,957 *
Mark L. Goldston................................... 0 *
Daniel T. Reiner................................... 0 *
All current directors and executive officers as a
group (eleven persons)(/10/)...................... 2,147,436 12.5%
</TABLE>
- --------
* Less than 1%.

(1) Vestar, certain of its affiliates and the Grays filed a fourth amendment
to their Schedule 13D on February 10, 1999 with respect to shares of St.
John common stock. Vestar and its affiliates may be deemed to have
acquired beneficial ownership of this stock by virtue of the Voting
Agreement described in this Proxy Statement-Prospectus.

(2) Includes 603,439 shares which are owned by the Gray Family Trust, of which
Robert and Marie Gray serve as co-trustees and are the sole beneficiaries.
In addition, includes 54,640 shares which are owned by the Kelly Ann Gray
Trust, of which Robert and Marie Gray serve as co-trustees and of which
Kelly A Gray is the sole beneficiary, and also includes 420,000 shares
issuable upon exercise of options exercisable at or within 60 days of
February 19, 1999. 70,700 of the shares which are owned by the Gray Family
Trust are subject to "zero-cost collar" arrangements described in
"PURCHASES OF SHARES" on page 99.

(3) Includes 603,439 shares which are owned by the Gray Family Trust, of which
Robert and Marie Gray serve as co-trustees and are the sole beneficiaries.
In addition, includes 54,640 shares which are owned by the Kelly Ann Gray
Trust, of which Robert and Marie Gray serve as co-trustees and of which
Kelly A Gray is the sole beneficiary. Includes 80,000 shares issuable upon
exercise of options exercisable within 60 days of February 19, 1999.
70,700 of the shares which are owned by the Gray Family Trust are subject
to "zero-cost collar" arrangements described in "PURCHASES OF SHARES" on
page 99.

(4) Includes 60,000 shares issuable upon exercise of options exercisable at or
within 60 days of February 19, 1999. 80,700 of these shares are subject to
"zero-cost collar" arrangements described in "PURCHASES OF SHARES" on page
99.

(5) Includes 244,700 shares held by the Robert C. and Alison Davis Charitable
Remainder Trust. Also includes 19,230 shares held by the Robert and Alison
Davis Family Foundation. Mr. Davis serves as co-trustee for both the trust
and foundation.

(6) Includes 33,332 shares issuable upon exercise of options exercisable at or
within 60 days of February 19, 1999. Mr. Frankel resigned as an executive
officer of St. John effective as of February 10, 1999.

(7) Includes 26,666 shares issuable upon exercise of options exercisable at or
within 60 days of February 19, 1999.

(8) Includes 16,666 shares issuable upon exercise of options exercisable at or
within 60 days of February 19, 1999.

(9) Includes 8,332 shares issuable upon exercise of options exercisable at or
within 60 days of February 19, 1999.

(10) Includes 565,328 shares issuable upon exercise of options exercisable at
or within 60 days of February 19, 1999.

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DESCRIPTION OF ST. JOHN KNITS INTERNATIONAL CAPITAL STOCK

Set forth below is a description of the common shares of St. John Knits
International. The following statements are summaries of, and are subject to
the detailed provisions of, the St. John Knits International certificate of
incorporation and bylaws, and to the relevant provisions of the DGCL.

Holders of St. John Knits International common stock are entitled to share
ratably in the assets available for distribution on liquidation, dissolution or
winding up, subject, if preferred stock of St. John Knits International is then
authorized and outstanding, to any preferential rights of such preferred stock.
Each share of the St. John Knits International common stock entitles the holder
thereof to one vote at all meetings of stockholders, and such votes are
noncumulative. The St. John Knits International common stock is not redeemable,
has no subscription or conversion rights and does not entitle the holders
thereof to any pre-emptive rights.

If the reorganization merger is approved by the requisite vote of the
shareholders of St. John and all of the conditions to the mergers are satisfied
or waived, immediately prior to the effective time of the reorganization
merger, we will restate the certificate of incorporation of St. John Knits
International. The restated certificate of incorporation of St. John Knits
International will read in its entirety in the form set forth as Appendix ,
until thereafter amended as provided therein and under the DGCL. Under the
restated certificate of incorporation, St. John Knits International will be
authorized to issue 20,000,000 shares of common stock as compared to the 10,000
shares of common stock it was authorized to issue prior to the reorganization
merger.

In addition, the bylaws of St. John Knits International as in effect at the
effective time will be the bylaws of St. John Knits International following the
mergers until thereafter changed or amended as provided therein or by
applicable law. The bylaws of St. John Knits International read in their
entirety as set forth in Appendix .

PURCHASES OF SHARES

The following table indicates, with respect to any purchases of St. John
common stock made by St. John or any affiliate of St. John since November 3,
1996, the range of prices paid for such stock, the amount of shares purchased
and the average purchase price for such shares for each quarterly period since
November 3, 1996:

<TABLE>
<CAPTION>
Amount of Range of Average
Purchaser Quarterly Period Shares Purchased Prices Purchase Price
--------- ---------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
St. John Q4 FY98 164,400 $15.50-$19.88 $17.51
Bruce Fetter,
Chief Operating
Officer Q4 FY98 1,625 $19.13-$19.31 $19.22
All St. John
and
Affiliate
Purchases Q4 FY98 166,025 $15.50-$19.88 $17.53
</TABLE>

Robert E. Gray and Marie Gray, for the benefit of the Gray Trust, and Kelly
A. Gray are each parties to "zero-cost collar" arrangements with respect to
certain shares of common stock of St. John beneficially owned by each of them.
On April 8, 1998, the Gray Trust entered into a letter agreement with Merrill
Lynch pursuant to which the Gray Trust (1) bought from Merrill Lynch a
European-style put relating to 20,700 shares of St. John common stock at a
price of $43.13 per share, subject to adjustment and (2) sold to Merrill Lynch
a European-style call relating to 20,700 shares of St. John common stock at a
price of $60.86 per share, subject

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<PAGE>

to adjustment. The Gray Trust paid $3.70 per share for the put and Merrill
Lynch paid $3.70 per share for the call. The put and the call are not
exercisable until, and are scheduled to expire on or about April 10, 2000, and
if one of the two is in the money at the close of trading on that date, that
option shall be deemed to be automatically exercised. The Gray Trust has the
right to determine whether settlement of the put or call, as applicable, will
be in cash or in shares of common stock. In connection with the foregoing
transaction, the Gray Trust granted Merrill Lynch a first priority lien, charge
and security interest in the shares of common stock held by Merrill Lynch as
security for its obligations under the zero-cost collar. Also on April 8, 1998,
Kelly A. Gray entered into a letter agreement with Merrill Lynch pursuant to
which Kelly A. Gray (1) bought from Merrill Lynch a put and (2) sold to Merrill
Lynch a call, in each case relating to 20,700 shares of St. John common stock
on terms identical to the April 8, 1998 Collar, including with respect to the
security interest.

On July 5, 1996, each of the Gray Trust and Kelly A. Gray entered into a
letter agreement with Merrill Lynch providing for a "zero-cost collar" on the
same terms as the April 8, 1998 Collar with the following differences: (1) the
Gray Trust letter agreement relates to 50,000 shares of Common Stock and the
Kelly A. Gray letter agreement relates 60,000 shares of Common Stock, (2) in
each case, the put price is $46.16 and the call price is $59.08, subject to
adjustment, (3) in each case, the put and call are scheduled to expire on or
about July 6, 1999, and (4) in each case, the price per share for each of the
put and the call is $4.67.

In connection with the consummation of the mergers, these zero-cost collar
arrangements will be settled and the Gray Trust and Kelly A. Gray are expected
to receive cash payments from Merrill Lynch equal to the difference between the
put price of each of the collar arrangements and the market price of the common
stock of St. John on the date the collars are settled, discounted to reflect
the early settlement of such arrangements.

CERTAIN INFORMATION CONCERNING ACQUISITION, VESTAR AND THE GRAYS

Vestar and Acquisition. Acquisition is a newly formed Delaware corporation
and is wholly owned by Vestar/Gray LLC. Vestar/Gray LLC is wholly owned by
Vestar. Acquisition was formed solely to be a party to the acquisition merger.
Vestar refers to Vestar Capital Partners III, L.P., Vestar Associates III, L.P.
and Vestar Associates Corporation III. Vestar is principally engaged in the
business of investing in securities. The principal business and office address
of Vestar is 245 Park Avenue, 41st Floor, New York, New York 10167.

Vestar Capital Partners III, L.P. Vestar Capital Partners III, L.P., a
leading investment firm based in New York with an office in Denver, manages
more than $1.2 billion in equity capital and specializes in management buyouts
and growth capital investments. Vestar Capital Partners III, L.P. invests, as
partners with management teams, in high-quality, middle-market companies. It
has been a leading or majority shareholder in such well-known companies as
Celestial Seasonings, Inc., Prestone Products Corporation, Westinghouse Air
Brake Company, Remington Products Company, Sun Apparel Inc., Aearo Corporation,
Insight Communications Company and Cluett American Group. Since its founding in
1988, Vestar Capital Partners III, L.P. has completed approximately 30
transactions with a total value of approximately $5 billion.

Vestar Associates III, L.P. Vestar Associates III, L.P. is the sole general
partner of Vestar Capital Partners III, L.P.

Vestar Associates Corporation III. Vestar Associates Corporation III is the
sole general partner of Vestar Associates III, L.P. The executive officers of
Vestar Associates Corporation III are as follows: Daniel S. O'Connell is the
President and Chief Executive Officer; Prakash A. Melwani is the Vice President
and Secretary; Norman W. Alpert, James P. Kelley, Sander M. Levy, Arthur J.
Nagle and Robert L. Rosner are Vice Presidents; Nicholas A. Dovidio is the
Chief Financial Officer; and Brian Schwartz is the Controller. Mr. O'Connell is
the sole member of the Board of Directors of Vestar Associates Corporation III.
The principal business address for Messrs. O'Connell, Alpert, Levy, Melwani,
Nagle, Rosner, Dovidio and Schwartz is 245 Park Avenue, 41st Floor, New York,
New York 10167. The principal business address for Mr. Kelley is 1225 17th
Street, Suite 1660, Denver, Colorado 80202.

100
<PAGE>

Messrs. O'Connell, Alpert, Kelley, Levy, Nagle, Rosner, Dovidio and Schwartz
are citizens of the United States of America. Mr. Melwani is a British National
Overseas Citizen. The present principal occupation or employment of each of
Messrs. O'Connell, Alpert, Kelley, Levy, Melwani, Nagle, Rosner, Dovidio and
Schwartz is serving his position with Vestar Associates Corporation III.

Vestar/Gray LLC. Vestar/Gray LLC is a Delaware limited liability company of
which Vestar is the sole member. Vestar/Gray LLC was formed to effect the
acquisition merger as described earlier and has not engaged in any activities
other than those incident to its formation and to such proposed transaction.
The address and principal business office of Vestar/Gray LLC is 1225 17th
Street, Suite 1660, Denver, Colorado 80202.

The Grays. The principal business and office address of the Grays is care of
St. John, 17422 Derian Avenue, Irvine, California. Robert E. Gray is Chairman
and Chief Executive Officer of St. John, Marie Gray is Vice Chairman, Chief
Designer and Secretary of St. John, and Kelly A. Gray is President of St. John.
Each of the Grays is a U.S. citizen.

At closing, St. John Knits International will pay an advisory fee in an
amount equal to $4,000,000 to Vestar. In addition, at closing, Vestar will
enter into an advisory agreement with St. John pursuant to which Vestar will be
paid an annual advisory fee of $500,000.

101
<PAGE>

WHERE YOU CAN FIND MORE INFORMATION

St. John files annual, quarterly and special reports, proxy statements and
other information with the Commission. You may read and copy any reports,
statements or other information that the companies file with the Commission at
the Commission's public reference rooms in Washington, D.C., New York, New
York, and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for
further information on the public reference rooms. These Commission filings are
also available to the public from commercial document retrieval services at the
Internet world wide web site maintained by the Commission at
"http://www.sec.gov." Reports, proxy statements and other information filed by
St. John should also be available for inspection at the offices of the New York
Stock Exchange, 120 Broad Street, New York, New York 10005.

St. John Knits International filed a Registration Statement on Form S-4 to
register with the Commission its shares of common stock to be issued to St.
John shareholders in the reorganization merger and the common stock to be
retained by its stockholders in the acquisition merger. This Proxy Statement-
Prospectus is a part of the Registration Statement and constitutes a prospectus
of St. John Knits International. As allowed by Commission rules, this Proxy
Statement-Prospectus does not contain all of the information you can find in
St. John Knits International's Registration Statement or in the exhibits to
that Registration Statement.

You should rely only on the information contained or incorporated by
reference in this Proxy Statement-Prospectus. St. John has not authorized
anyone to provide you with information that is different from what is contained
in this Proxy Statement-Prospectus. This Proxy Statement-Prospectus is dated
, 1999. You should not assume that the information contained in
this Proxy Statement-Prospectus is accurate as of any date other than that date
or such other date as this Proxy Statement-Prospectus indicates. The mailing of
this Proxy Statement-Prospectus to St. John shareholders does not create any
implication to the contrary.

St. John Incorporated Documents

As allowed by the Commission rules, this Proxy Statement-Prospectus does not
contain all the information set forth in St. John's Annual Report on Form 10-K,
as amended for the year ended November 1, 1998. The Commission allows St. John
to "incorporate by reference" information into this Proxy Statement-Prospectus,
which means that St. John can disclose important information to you by
referring you to another document filed separately with the Commission. The
information incorporated by reference is considered part of this Proxy
Statement-Prospectus, except for any information superseded by information
contained directly in this Proxy Statement-Prospectus or in later filed
documents incorporated by reference in this Proxy Statement-Prospectus.

This Proxy Statement-Prospectus incorporates by reference the documents set
forth below that St. John has previously filed with the Commission. These
documents contain important information about St. John and its finances and
should be reviewed carefully and fully. Some of these filings have been amended
by later filings, which are also listed.

<TABLE>
<CAPTION>
St. John Commission Filings
(File No. 001-11752) Period/As of Date
------------------------------------------------------------------------------
<S> <C>
Annual Report on Form 10-K, as amended......... Year ended 11/1/98
Quarterly Report on Form 10-Q ................. Quarter ended
Current Reports on Form 8-K.................... 11/12/98; 12/14/98; 12/15/98;
1/19/99; 1/19/99; 1/19/99;
1/26/99; 2/4/99; 2/8/99 and
2/12/99
</TABLE>

All documents filed by St. John under Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, subsequent to the date hereof
and prior to the date of the special meeting will be deemed to be incorporated
herein by reference and to be a part hereof from the date of such filing. Any
statement

102
<PAGE>

contained herein or in a document incorporated or deemed to be incorporated
herein by reference will be deemed to be modified or superseded for purposes
hereof to the extent that a statement contained herein or in any other
subsequently filed document which also is, or is deemed to be, incorporated
herein by reference modifies or supersedes such statement. Any such statement
so modified or superseded will not be deemed to constitute a part hereof,
except as so modified or superseded.

Any documents filed by St. John with the Commission and incorporated by
reference (excluding exhibits, unless specifically incorporated in this Proxy
Statement-Prospectus) are available without charge upon written request to
Roger G. Ruppert, Senior Vice President-Finance and Chief Financial Officer,
St. John Knits, Inc., 17422 Derian Avenue, Irvine, California 92614. Telephone
requests may be directed to Roger G. Ruppert at (949) 863-1171.

If you would like to receive documents from St. John, please request them by
, 1999, in order to receive them before the special meeting.

LEGAL OPINIONS

The legality of the shares of St. John Knits International common stock to
be issued or retained in connection with the mergers will be passed upon by
O'Melveny & Myers LLP, Newport Beach, California, counsel to St. John Knits
International. Certain federal income tax consequences of the mergers will be
passed upon by O'Melveny & Myers LLP, Washington, D.C. A partner of such firm,
who is a director of St. John, owns 4,000 shares of common stock of St. John
and options to purchase 30,000 shares of common stock of St. John.

INDEPENDENT PUBLIC ACCOUNTANTS

The consolidated financial statements of St. John at November 1, 1998 and
November 2, 1997, and for each of the three years in the period ended November
1, 1998, included in St. John's Annual Report on Form 10-K, as amended, for the
year ended November 1, 1998 incorporated by reference in this Proxy
Statement-Prospectus, have been audited by Arthur Andersen LLP, independent
auditors, as stated therein. Representatives of Arthur Andersen LLP are
expected to be present at the special meeting. Such representatives will be
available to respond to appropriate questions.

SHAREHOLDER PROPOSALS

St. John will hold its 1999 annual meeting of St. John shareholders only if
the mergers are not consummated. In the event that such a meeting is held, any
proposals of St. John shareholders intended to be presented at the 1999 annual
meeting of St. John shareholders must be received by the Corporate Secretary of
St. John no later than in order to be considered for
inclusion in the St. John 1999 annual meeting proxy materials.

OTHER MATTERS

As of the date of this Proxy Statement-Prospectus, the St. John Board knows
of no matters that will be presented for consideration at the special meeting
other than as described in this Proxy Statement-Prospectus. If any other
matters shall properly come before either the special meeting or any
adjournments or postponements thereof to be voted upon, the enclosed proxies
will be deemed to confer discretionary authority on the individuals named as
proxies therein to vote the shares represented by such proxies as to any such
matters. The persons named as proxies intend to vote or not to vote in
accordance with the recommendation of the Board of Directors and, if
appropriate, the Special Committee of St. John.

103
<PAGE>

APPENDIX A

EXECUTION COPY
--------------

__________________________________________________________

AGREEMENT AND PLAN OF MERGER

Between

ST. JOHN KNITS, INC.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SJKACQUISITION, INC.

and

PEARL ACQUISITION CORP.

Dated as of February 2, 1999

__________________________________________________________
<PAGE>

TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>

Page
----

<S> <C>
ARTICLE 1.
THE REORGANIZATION MERGER.............................................. 2
SECTION 1.1 The Reorganization Merger; Filing and Effective Time
of the Reorganization Merger....................... 2
SECTION 1.2 Closing.............................................. 3
SECTION 1.3 Effects of the Reorganization Merger................. 3
SECTION 1.4 Articles of Incorporation; By-Laws................... 3
SECTION 1.5 Directors and Officers............................... 3
SECTION 1.6 Employee Benefit Plans............................... 4

ARTICLE 2.EFFECT OF THE REORGANIZATION MERGER ON THE
CAPITAL STOCK OF THE COMPANY AND MERGER SUB...................... 4
SECTION 2.1 Effect on Capital Stock.............................. 4
SECTION 2.2 Company Dissenting Shares............................ 4
SECTION 2.3 Notification of Transfer Agent....................... 5
SECTION 2.4 Stock Certificates................................... 5

ARTICLE 3.THE ACQUISITION MERGER
SECTION 3.1 The Acquisition Merger; Filing and Effective
Time of the Acquisition Merger..................... 6
SECTION 3.2 Closing.............................................. 6
SECTION 3.3 Effects of the Acquisition Merger.................... 6
SECTION 3.4 Certificate of Incorporation; By Laws................ 6
SECTION 3.5 Directors and Officers............................... 7

ARTICLE 4.EFFECT OF THE ACQUISITION MERGER ON THE CAPITAL
STOCK OF PARENT AND ACQUISITION.................................... 7
SECTION 4.1 Effect on Capital Stock.............................. 7
SECTION 4.2 [Not Used]........................................... 8
SECTION 4.3 Parent Common Stock Elections........................ 8
SECTION 4.4 Proration............................................ 9
SECTION 4.5 Treatment of Options and Other Employee Equity Rights 10
SECTION 4.6 Surrender of Shares; Transfer Books.................. 11
</TABLE>

-i-
<PAGE>

page
----
<S> <C>
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................................. 13
SECTION 5.1 Organization and Qualification; Subsidiaries................ 13
SECTION 5.2 Articles of Incorporation and By-Laws....................... 14
SECTION 5.3 Capitalization.............................................. 14
SECTION 5.4 Authority Relative to This Agreement........................ 15
SECTION 5.5 No Conflict; Required Filings and Consents.................. 16
SECTION 5.6 Compliance.................................................. 17
SECTION 5.7 SEC Filings; Financial Statements; Undisclosed Liabilities.. 17
SECTION 5.8 Absence of Certain Changes or Events........................ 18
SECTION 5.9 Absence of Litigation....................................... 18
SECTION 5.10 Properties.................................................. 18
SECTION 5.11 Employee Benefit Plans...................................... 19
SECTION 5.12 Tax Matters................................................. 21
SECTION 5.13 Environmental Laws.......................................... 22
SECTION 5.14 Material Contract Defaults; Non-Compete..................... 23
SECTION 5.15 Intellectual Property....................................... 23
SECTION 5.16 Transactions with Affiliates................................ 24
SECTION 5.17 Brokers..................................................... 25
SECTION 5.18 Opinion of Financial Advisor................................ 25
SECTION 5.19 Board Recommendation; Approval of Independent Committee..... 25
SECTION 5.20 Vote Required; State Takeover Statutes...................... 26
SECTION 5.21 Proxy Statement............................................. 26
SECTION 5.22 Rights Plan................................................. 27

ARTICLE 6.
REPRESENTATIONS AND WARRANTIES OF ACQUISITION............................. 28
SECTION 6.1 Corporate Organization...................................... 28
SECTION 6.2 Authority Relative to This Agreement........................ 28
SECTION 6.3 No Conflict; Required Filings and Consents.................. 28
SECTION 6.4 Proxy Statement; Schedule 13E-3............................. 29
SECTION 6.5 Brokers..................................................... 29
SECTION 6.6 Commitment Letters.......................................... 29
SECTION 6.7 Newly Formed Entity......................................... 29
SECTION 6.8 Capitalization.............................................. 30

ARTICLE 7.
CONDUCT OF BUSINESS PENDING THE MERGERS........................................ 30
SECTION 7.1 Conduct of Business of the Company Pending the Mergers...... 30
SECTION 7.2 WARN........................................................ 32
</TABLE>

-ii-
<PAGE>

Page
----
<S> <C>
ARTICLE 8.
ADDITIONAL AGREEMENTS....................................................... 33
SECTION 8.1 Shareholders Meeting.......................................... 33
SECTION 8.2 Proxy Statement; Form S-4; Schedule 13E-3..................... 33
SECTION 8.3 Access to Information; Confidentiality........................ 34
SECTION 8.4 No Solicitation............................................... 35
SECTION 8.5 Employee Benefits Matters..................................... 36
SECTION 8.6 Directors' and Officers' Indemnification and Insurance........ 36
SECTION 8.7 Notification of Certain Matters............................... 37
SECTION 8.8 Further Action; Reasonable Best Efforts....................... 37
SECTION 8.9 Public Announcements.......................................... 39
SECTION 8.10 Disposition of Litigation..................................... 40
SECTION 8.11 Affiliates.................................................... 40
SECTION 8.12 Resignation of Directors...................................... 40
SECTION 8.13 Stop Transfer Order........................................... 40
SECTION 8.14 Certain Covenants of Parent and the Company................... 40

ARTICLE 9.
CONDITIONS TO THE MERGERS................................................... 41
SECTION 9.1 Conditions to Obligation of Each Party to Effect the Mergers.. 41
SECTION 9.2 Additional Condition to the Acquisition Merger................ 42
SECTION 9.3 Conditions to Obligation of Acquisition to Consummate
the Acquisition Merger...................................... 42
SECTION 9.4 Conditions to Obligation of Parent to Consummate
the Acquisition Merger...................................... 43

ARTICLE 10.
TERMINATION, AMENDMENT AND WAIVER........................................... 44
SECTION 10.1 Termination................................................. 44
SECTION 10.2 Effect of Termination....................................... 45
SECTION 10.3 Termination Fees and Expenses............................... 45
SECTION 10.4 Amendment................................................... 47
SECTION 10.5 Waiver...................................................... 47

ARTICLE 11.
GENERAL PROVISIONS.......................................................... 48
SECTION 11.1 Non-Survival of Representations, Warranties and Agreements.. 48
SECTION 11.2 Notices..................................................... 48
SECTION 11.3 Certain Definitions and Interpretations..................... 49
SECTION 11.4 Severability................................................ 50
SECTION 11.5 Entire Agreement; Assignment................................ 51
SECTION 11.6 Parties in Interest......................................... 51
</TABLE>

-iii-
<PAGE>

<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 11.7 Governing Law............................................... 51
SECTION 11.8 Headings.................................................... 51
SECTION 11.9 Counterparts................................................ 51
SECTION 11.10 Enforcement; Jurisdiction................................... 51
</TABLE>

Exhibit A - Form of Affiliate Letter

-iv-
<PAGE>

AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER, dated as of February 2, 1999 (the
"Agreement"), among St. John Knits, Inc., a California corporation (the
- ----------
ACompany"), St. John Knits International, Incorporated, a Delaware and Barbados
-------
corporation ("Parent"), Pearl Acquisition Corp., a Delaware corporation
------
("Acquisition"), and SJKAcquisition, Inc., a California corporation which is a
- -------------
direct, wholly owned subsidiary of Parent ("Merger Sub").
----------

WHEREAS, the respective Boards of Directors of Parent, Merger Sub and
the Company have determined that it is advisable and in the best interests of
each of Parent, Merger Sub and the Company and their respective shareholders
that Merger Sub be merged with and into the Company (the "Reorganization
--------------
Merger"), with the Company as the surviving corporation (the "Company Surviving
- ------ -----------------
Corporation"), in accordance with the terms and conditions set forth in this
- -----------
Agreement, and such Boards of Directors have approved and authorized the
principal terms of this Agreement and the Reorganization Merger, pursuant to
which each share of common stock, no par value, of the Company (the "Company
-------
Common Stock") issued and outstanding immediately prior to the Effective Time of
- ------------
the Reorganization Merger (as defined in Section 1.1), together with the
associated purchase rights (the "Company Rights") under the Rights Agreement (as
--------------
defined in Section 5.22 hereof), will be converted into one share of Parent
Common Stock, other than (a) Company Dissenting Shares (as defined in Section
2.2) and (b) shares of Company Common Stock owned, directly or indirectly, by
the Company or any subsidiary of the Company;

WHEREAS, the respective Boards of Directors of Parent and Acquisition
have determined that it is advisable and fair to and in the best interests of
their respective shareholders that Acquisition be merged with and into Parent
(the "Acquisition Merger" and, together with the Reorganization Merger, the
------------------
"Mergers"), with Parent as the surviving corporation (the "Parent Surviving
- -------- ----------------
Corporation"), in accordance with the terms and conditions set forth in this
- -----------
Agreement, and such Boards of Directors have approved and authorized this
Agreement and the Acquisition Merger, pursuant to which each share of common
stock, par value $.01 per share, of Parent (the "Parent Common Stock") issued
-------------------
and outstanding immediately prior to the Effective Time of the Acquisition
Merger (as defined in Section 3.1(b)), will, at the election of the holder
thereof and subject to the terms hereof, be converted into either (i) the right
to receive one share of Parent Common Stock or (ii) the right to receive $30 per
share in cash, other than shares of Parent Common Stock owned, directly or
indirectly, by Parent or any subsidiary (as defined in Section 11.3) of the
Parent or by Acquisition or any subsidiary of Acquisition or Acquisition's
parent (which shall be canceled);

WHEREAS, in accordance with the California General Corporation Law
(the "California GCL") the vote of a majority of the outstanding shares of the
--------------
Company Common Stock entitled to vote thereon is required to approve the
principal terms of this Agreement and the Reorganization Merger;
<PAGE>

WHEREAS, the vote of a majority of the outstanding shares of the
Parent Common Stock entitled to vote thereon is required to adopt this Agreement
in respect of the Acquisition Merger;

WHEREAS, Acquisition is a newly formed corporation organized at the
direction of Vestar Capital Partners III, L.P. ("Vestar") and Vestar/Gray
------
Investors LLC, a limited liability company formed at the direction of Vestar
("Vestar/Gray"), which prior to the consummation of the Acquisition Merger will
- -------------
own all the outstanding capital stock of Acquisition;

WHEREAS, as a condition to Acquisition's willingness to enter into
this Agreement and consummate the transactions contemplated hereby, the Board of
Directors of each of the Company and Parent has approved, and the Management
Shareholders (each as defined in the Voting Agreement (as defined below)) have
entered into, the Voting Agreement, dated as of the date hereof, among Vestar
Capital Partners III, L.P., Vestar/Gray and the Management Shareholders (the
"Voting Agreement") pursuant to which, among other things, the Management
- -----------------
Shareholders have agreed (a) to vote the shares of Company Common Stock
beneficially owned by them (including shares of Company Common Stock issued upon
the exercise of Company Options) in accordance with the Voting Agreement and (b)
prior to the consummation of the Reorganization Merger, to contribute all of
their issued and outstanding shares of Company Common Stock to Vestar/Gray in
exchange for a combination of $30 per share in respect of 237,000 shares of
Company Common Stock and an approximately 15.9% interest in Vestar/Gray in
respect of 968,983 shares of Company Common Stock;

WHEREAS, each of Merger Sub, Acquisition, the Company and Parent
desire to make certain representations, warranties, covenants and agreements in
connection with the Mergers and also to prescribe various conditions to the
Mergers;

WHEREAS, it is intended that the Acquisition Merger be recorded as a
recapitalization for financial reporting purposes; and

WHEREAS, it is intended that the Reorganization Merger and the
Acquisition Merger be treated, collectively, as a transfer to a controlled
corporation within the meaning of Section 351 of the Internal Revenue Code of
1986, as amended (the "Code").

NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:

ARTICLE 1.

THE REORGANIZATION MERGER

SECTION 1.1 The Reorganization Merger; Filing and Effective Time of
-------------------------------------------------------
the Reorganization Merger. Upon the terms and subject to the conditions of this
- -------------------------
Agreement and in accordance with the California GCL, at the Effective Time of
the Reorganization Merger (as defined below), Merger Sub shall be merged with
and into the Company. As a result of the
<PAGE>

Reorganization Merger, the separate corporate existence of Merger Sub shall
cease and the Company shall be the surviving corporation in the Reorganization
Merger. The parties hereto shall cause the Reorganization Merger to be
consummated as soon as practicable after the Reorganization Closing (as defined
in Section 1.2) by filing an agreement of merger with the Secretary of State of
the State of California, in such form as required by and executed in accordance
with the relevant provisions of the California GCL (the date and time of the
filing of the agreement of merger with the Secretary of State of the State of
California (or such later time as is agreed to by the parties hereto and set
forth therein) being the "Effective Time of the Reorganization Merger").
--------------------------------------------

SECTION 1.2 Closing. Unless this Agreement shall have been
-------
terminated and the transactions herein contemplated shall have been abandoned
pursuant to Section 10.1 and subject to the satisfaction or waiver of the
conditions set forth in Article 9, the closing of the Reorganization Merger (the
"Reorganization Closing") shall take place as soon as practicable after
----------------------
satisfaction or waiver of the conditions set forth in Article 9 on the day on
which the Effective Time of the Reorganization Merger is to occur (the
"Reorganization Closing Date"), at the offices of Simpson Thacher & Bartlett,
- ----------------------------
425 Lexington Avenue, New York, New York 10017, unless another date or place is
agreed to in writing by the parties hereto.

SECTION 1.3 Effects of the Reorganization Merger. The Reorganization
------------------------------------
Merger shall have the effects set forth in the applicable provisions of the
California GCL.

SECTION 1.4 Articles of Incorporation; By-Laws. (a) At the Effective
----------------------------------
Time of the Reorganization Merger, the articles of incorporation of the Company
as in effect immediately prior to the Effective Time of the Reorganization
Merger shall be the articles of incorporation of the Company Surviving
Corporation until thereafter further amended as provided therein and under the
California GCL.

(b) At the Effective Time of the Reorganization Merger, the bylaws of
the Company as in effect immediately prior to the Effective Time of the
Reorganization Merger (the "Company Bylaws") shall be the bylaws of the Company
--------------
Surviving Corporation following the Reorganization Merger and thereafter may be
amended or repealed in accordance with their terms or the articles of
incorporation of the Company following the Reorganization Merger and under the
California GCL.

SECTION 1.5 Directors and Officers. (a) The directors of the Company
----------------------
(the "Company Board") immediately prior to the Effective Time of the
-------------
Reorganization Merger shall be the initial directors of the Company Surviving
Corporation upon and after the Effective Time of the Reorganization Merger,
until such members' respective successors are duly elected or appointed and
qualified.

(b) Each person serving as an officer of the Company immediately
prior to the Effective Time of the Reorganization Merger shall be and continue
as an officer of the Company Surviving Corporation, holding the same office or
offices, upon and after the Effective Time of the Reorganization Merger, until
such person's successor is chosen and qualified.
<PAGE>

SECTION 1.6 Employee Benefit Plans. Subject to Section 4.5 hereof,
----------------------
as of the Effective Time of the Reorganization Merger, Parent hereby assumes all
obligations of the Company under any and all employee benefit plans in effect as
of said date or with respect to which employee rights or accrued benefits are
outstanding as of said date.

ARTICLE 2.

EFFECT OF THE REORGANIZATION MERGER ON THE CAPITAL STOCK OF THE
COMPANY AND MERGER SUB

SECTION 2.1 Effect on Capital Stock. As of the Effective Time of the
-----------------------
Reorganization Merger, by virtue of the Reorganization Merger and without any
action on the part of the Company, Merger Sub, Parent or any holder of any
shares of Company Common Stock or any shares of capital stock of Merger Sub:

(a) Cancellation of Company Common Stock. Each share of Company
------------------------------------
Common Stock that is owned by the Company, Merger Sub or Parent shall
automatically be canceled and retired and shall cease to exist, and no
cash, Parent Common Stock or other consideration shall be delivered or
deliverable in exchange therefor.

(b) Conversion of Merger Sub Common Stock. Each outstanding share of
-------------------------------------
Merger Sub Common Stock shall be converted into one validly issued, fully
paid and nonassessable share of common stock, no par value ("Company
-------
Surviving Corporation Common Stock"), of the Surviving Corporation, to be
----------------------------------
issued and deemed to have been issued by the Surviving Corporation
automatically and immediately upon and as of the Effective Time of the
Reorganization Merger; and such outstanding share of Merger Sub Common
Stock shall be canceled and cease to exist.

(c) Conversion of Company Common Stock. Except as otherwise provided
----------------------------------
herein, each issued and outstanding share of Company Common Stock (other
than any such shares to be canceled pursuant to Section 2.1(a) and any
Company Dissenting Shares), including any Company Rights associated
therewith, shall be converted into one fully paid and nonassessable share
of Parent Common Stock to be issued and deemed to have been issued by
Parent automatically and immediately upon and as of the Effective Time of
the Reorganization Merger (the "Reorganization Merger Consideration").
-----------------------------------

SECTION 2.2 Company Dissenting Shares. (a) Notwithstanding anything
-------------------------
in this Agreement to the contrary, shares of Company Common Stock which were
outstanding on the date for the determination of shareholders entitled to vote
on the Reorganization Merger and which were not voted in favor of or were voted
against the Reorganization Merger and the holders of which have demanded that
the Company purchase such shares at their fair market value in accordance with
Section 1301 of the California GCL and have submitted such shares for
endorsement in accordance with Section 1302 of the California GCL and have not
otherwise failed to perfect or shall not have effectively withdrawn or lost
their rights to purchase for cash under the California GCL (the "Company
-------
Dissenting Shares") shall not be converted into the
- -----------------
<PAGE>

Reorganization Merger Consideration, but, instead, the holders thereof shall be
entitled to have their shares purchased by the Company for cash at the fair
market value of such Company Dissenting Shares as agreed upon or determined in
accordance with the provisions of Section 1300 et seq. of the California GCL;
provided, however, that if any such holder shall have failed to perfect or shall
- -------- -------
have effectively withdrawn or lost his, her or its right to appraisal and
payment under the California GCL, such holder's shares of Company Common Stock
shall thereupon be deemed to have been converted, at the Effective Time of the
Reorganization Merger, into the Reorganization Merger Consideration set forth in
Section 2.1 of this Agreement, without any interest thereon.

(b) The Company shall give Acquisition (i) prompt notice of any
demands pursuant to Section 1300 et seq. of the California GCL received by the
Company, withdrawals of such demands and any other instruments served pursuant
to the California GCL and received by the Company and (ii) the opportunity to
direct all negotiations and proceedings with respect to demands under Section
1300 et seq. of the California GCL. The Company shall not, except with the
prior written consent of Acquisition, make any payment with respect to any such
demands for appraisal or offer to settle or settle any such demands.

SECTION 2.3 Notification of Transfer Agent. Prior to the
------------------------------
Reorganization Closing Date, the Company shall notify its transfer agent of the
conversion of shares of Company Common Stock and of shares of Merger Sub Common
Stock and the cancellation of shares of Company Common Stock pursuant to Section
2.1(a) hereof.

SECTION 2.4 Stock Certificates. Upon and as of the Effective Time of
------------------
the Reorganization Merger, by virtue of the Reorganization Merger and without
any action on the part of any of the Company or Merger Sub or Parent, the
holders of the respective shares, or any other person:

(a) The shares of Parent Common Stock into which the outstanding
shares of Company Common Stock shall have been converted pursuant to
Section 2.1(c) hereof shall be represented and evidenced by the same stock
certificates that previously represented and evidenced such outstanding
shares of Company Common Stock and the holders of the outstanding shares of
Company Common Stock so converted shall, at the Effective Time of the
Reorganization Merger, become holders of record of the shares of Parent
Common Stock issued in consideration therefor upon such conversion without
any further action on the part of such holders; and

(b) Parent, as the holder of the certificate that immediately prior
to the Effective Time of the Reorganization Merger evidenced the
outstanding shares of Merger Sub Common Stock (such certificate, the
"Merger Sub Common Stock Certificate") may, at such holder's option,
------------------------------------
surrender the same to the Company Surviving Corporation for cancellation,
and such holder shall be entitled to receive from the Company Surviving
Corporation in exchange therefor a certificate representing and evidencing
the shares of Company Surviving Corporation Common Stock into which such
holder's outstanding shares of Merger Sub Common Stock shall have been
converted and, until surrendered, the Merger Sub Common Stock Certificate
shall represent and evidence the shares of Company Surviving Corporation
Common Stock into which the outstanding shares of
<PAGE>

Merger Sub Common Stock theretofore represented and evidenced thereby shall
have been converted.

ARTICLE 3.

THE ACQUISITION MERGER

SECTION 3.1 The Acquisition Merger; Filing and Effective Time of the
--------------------------------------------------------
Acquisition Merger. (a) Upon the terms and subject to the conditions of this
- ------------------
Agreement and in accordance with the Delaware General Corporation Law (the
"DGCL"), at the Effective Time of the Acquisition Merger (as defined in Section
----
3.1(b)), Acquisition shall be merged with and into Parent. As a result of the
Acquisition Merger, the separate corporate existence of Acquisition shall cease
and Parent shall be the surviving corporation following the effectiveness of the
Acquisition Merger.

(b) The parties hereto shall cause the Acquisition Merger to be
consummated by filing a certificate of merger with the Secretary of State of the
State of Delaware, in such form as required by and executed in accordance with
the relevant provisions of the DGCL (the date and time of the filing of the
certificate of merger with the Secretary of State of the State of Delaware (or
such later time as is agreed to by the parties hereto and set forth therein)
being the "Effective Time of the Acquisition Merger").
----------------------------------------

SECTION 3.2 Closing. The closing of the Acquisition Merger (the
-------
"Acquisition Closing" and, together with the Reorganization Closing, the
- --------------------
"Closings") will take place as soon as practicable after satisfaction or waiver
- ---------
of the conditions set forth in Article 9 (the "Acquisition Closing Date" and,
-------------------------
together with the Reorganization Merger Closing Date, the "Closing Dates"; it
-------------
being understood that the parties shall use their best efforts to cause the
Closing Dates to be on the same date), at the offices of Simpson Thacher &
Bartlett, 425 Lexington Avenue, New York, New York 10017, unless another date or
place is agreed to in writing by the parties hereto.

SECTION 3.3 Effects of the Acquisition Merger. The Acquisition
---------------------------------
Merger shall have the effects set forth in the applicable provisions of the
DGCL.

SECTION 3.4 Certificate of Incorporation; By Laws. (a) At the
-------------------------------------
Effective Time of the Acquisition Merger, the certificate of incorporation of
Parent as in effect immediately prior to the Effective Time of the Acquisition
Merger shall be the certificate of incorporation of the Parent Surviving
Corporation until thereafter further amended as provided therein and under the
DGCL.

(b) At the Effective Time of the Acquisition Merger, the by-laws of
Parent as in effect immediately prior to the Effective Time of the Acquisition
Merger shall be the by-laws of the Parent Surviving Corporation following the
Acquisition Merger and thereafter may be amended or repealed in accordance with
their terms or the certificate of incorporation of Parent following the
Acquisition Merger and as provided under the DGCL.
<PAGE>

SECTION 3.5 Directors and Officers. Subject to Section 8.12, the
----------------------
directors of Acquisition immediately prior to the Effective Time of the
Acquisition Merger, together with those directors of Parent not resigning in
accordance with Section 8.12, shall be the initial directors of Parent following
the Acquisition Merger, each to hold office in accordance with the certificate
of incorporation and by-laws of Parent following the Acquisition Merger, and the
officers of Parent immediately prior to the Effective Time of the Acquisition
Merger shall be the initial officers of Parent following the Acquisition Merger,
in each case until their respective successors are duly elected or appointed (as
the case may be) and qualified.

ARTICLE 4.

EFFECT OF THE ACQUISITION MERGER ON THE CAPITAL STOCK OF PARENT
AND ACQUISITION

SECTION 4.1 Effect on Capital Stock. As of the Effective Time of the
-----------------------
Acquisition Merger, by virtue of the Acquisition Merger and without any action
on the part of Parent, Acquisition or any holder of any shares of Parent Common
Stock or any shares of capital stock of Acquisition:

(a) Conversion of Common Stock of Acquisition. Each share of common
-----------------------------------------
stock of Acquisition issued and outstanding immediately prior to the
Effective Time of the Acquisition Merger shall be converted into one newly
issued, fully paid and non-assessable share of Parent Common Stock.

(b) Cancellation of Certain Parent Common Stock. Each share of
-------------------------------------------
Parent Common Stock outstanding immediately prior to the Effective Time of
the Acquisition Merger that is owned by the Company, Acquisition or
Vestar/Gray shall automatically be cancelled and retired and shall cease to
exist, and no cash, Parent Common Stock or other consideration shall be
delivered or deliverable in exchange therefor.

(c) Conversion of Parent Common Stock. Except as otherwise provided
---------------------------------
herein and subject to Section 4.4, each issued and outstanding share of
Parent Common Stock (other than any such shares to be cancelled pursuant to
Section 4.1(b)) shall be converted into the following (the "Acquisition
-----------
Merger Consideration"):
--------------------

(i) for each share of Parent Common Stock with respect to
which an election to receive Parent Common Stock has been effectively
made and not revoked or lost, pursuant to Sections 4.3(c), (d) and (e)
("Electing Shares"), the right to receive one fully paid and
---------------
nonassessable share of Parent Common Stock (a "Non-Cash Election
-----------------
Share"); and
-----
(ii) for each share of Parent Common Stock (other than
Electing Shares), the right to receive in cash from Parent following
the Acquisition Merger an amount equal to $30 (the "Cash Election
-------------
Price").
-----
<PAGE>

(d) Cancellation and Retirement of Parent Common Stock. All shares
--------------------------------------------------
of Parent Common Stock issued and outstanding immediately prior to the
Effective Time of the Acquisition Merger shall no longer be outstanding and
shall automatically be cancelled and retired and shall cease to exist, and
each holder of a certificate representing any such shares of Parent Common
Stock shall, to the extent such certificate represents such shares, cease
to have any rights with respect thereto, except the right to receive the
Acquisition Merger Consideration (and cash in lieu of fractional shares of
Parent Common Stock to be issued or paid in consideration therefor) upon
surrender of such certificate in accordance with Section 4.6.

SECTION 4.2 [Not Used].
----------

SECTION 4.3 Parent Common Stock Elections. (a) Each person who, on
-----------------------------
or prior to the Election Date referred to in (c) below, is a record holder of
shares of Company Common Stock and who does not demand appraisal rights in
accordance with the California GCL will be entitled, with respect to all or any
portion of his shares, to make an unconditional election (a "Non-Cash Election")
-----------------
on or prior to such Election Date to receive Non-Cash Election Shares, on the
basis hereinafter set forth.

(b) Prior to the mailing of the Proxy Statement (as defined in Section
5.23), Acquisition shall appoint a bank or trust company to act as exchange
agent (the "Exchange Agent") for the payment of the Acquisition Merger
--------------
Consideration.

(c) Parent shall, subject to any required clearance by the
Securities and Exchange Commission (the "SEC"), prepare and mail a form of
election, which form shall be subject to the reasonable approval of Acquisition
(the "Form of Election"), with the Proxy Statement to the record holders of
----------------
Company Common Stock as of the record date for the Shareholders Meeting (as
defined in Section 8.1), which Form of Election shall be used by each record
holder of shares of Company Common Stock who wishes to elect (with respect to
such holder's shares of Parent Common Stock following the Reorganization Merger)
to receive Non-Cash Election Shares upon conversion of any or all of such
holder's shares of Parent Common Stock in the Acquisition Merger, subject to the
provisions of Section 4.4 hereof. Parent will use its best efforts to make the
Form of Election and the Proxy Statement available to all persons who become
holders of Company Common Stock during the period between such record date and
the Election Date referred to below. Any such holder's election to receive Non-
Cash Election Shares shall have been properly made only if the Exchange Agent
shall have received at its designated office, by 5:00 p.m., New York City time
on the business day (the "Election Date") preceding the date of the Shareholders
-------------
Meeting, a Form of Election properly completed and signed.

(d) Any Form of Election may be revoked by the shareholder submitting
it to the Exchange Agent only by written notice received by the Exchange Agent
prior to 5:00 p.m, New York City time, on the Election Date. In addition, all
Forms of Election shall automatically be revoked if the Exchange Agent is
notified in writing by Acquisition and Parent that the Acquisition Merger has
been abandoned.
<PAGE>

(e) The determination of the Exchange Agent shall be binding whether
or not elections to receive Non-Cash Election Shares have been properly made or
revoked pursuant to this Section 4.3 and when elections and revocations were
received by it. If the Exchange Agent determines that any election to receive
Non-Cash Election Shares was not properly made with respect to shares of Parent
Common Stock, such shares shall be treated by the Exchange Agent as shares which
were not Electing Shares at the Effective Time of the Acquisition Merger, and
such shares shall be converted in the Acquisition Merger into the right to
receive cash pursuant to Section 4.1(c)(ii). The Exchange Agent shall also make
all computations as to the allocation and the proration contemplated by Section
4.4, and any such computation shall be conclusive and binding on the holders of
shares of Company Common Stock and Parent Common Stock. The Exchange Agent may,
with the mutual agreement of Acquisition and Parent, make such rules as are
consistent with this Section 4.3 for the implementation of the elections
provided for herein as shall be necessary or desirable fully to effect such
elections.

SECTION 4.4 Proration.
---------

(a) Notwithstanding anything in this Agreement to the contrary, the
aggregate number of shares of Parent Common Stock to be converted into the right
to receive Parent Common Stock at the Effective Time of the Acquisition Merger
(the "Non-Cash Election Number") shall be equal to approximately 456,047
------------------------
(excluding for this purpose any shares of Parent Common Stock to be canceled
pursuant to Section 4.1(b)).

(b) If the number of Electing Shares exceeds the Non-Cash Election
Number, then each Electing Share shall be converted into the right to receive
Non-Cash Election Shares or receive cash in accordance with the terms of Section
4.1(c) in the following manner:

(i) A proration factor (the "Non-Cash Proration Factor") shall
-------------------------
be determined by dividing the Non-Cash Election Number by the total number
of Electing Shares.

(ii) The number of Electing Shares covered by each Non-Cash
Election to be converted into the right to receive Non-Cash Election Shares
shall be determined by multiplying the Non-Cash Proration Factor by the
total number of Electing Shares covered by such Non-Cash Election rounded
down to the nearest whole number.

(iii) All Electing Shares, other than those shares converted
into the right to receive Non-Cash Election Shares in accordance with
Section 4.4(b)(ii), shall be converted into the right to receive cash (on a
consistent basis among shareholders who made the election referred to in
Section 4.1(c)(i), pro rata in accordance with the number of shares as to
which they made such election) as if such shares were not Electing Shares
in accordance with the terms of Section 4.1(c)(ii).

(i) all Electing Shares shall be converted into the right to
receive Parent Common Stock in accordance with the terms of Section
4.1(c)(i);
<PAGE>

(ii) shares of Parent Common Stock other than Electing Shares
shall be converted into the right to receive Non-Cash Election Shares in
accordance with the terms of 4.1(c) in the following manner:

(A) a proration factor (the "Cash Proration Factor") shall be
---------------------
determined by dividing (x) the difference between the Non-Cash
Election Number and the number of Electing Shares, by (y) the total
number of shares of Parent Common Stock other than Electing Shares;
and

(B) the number of shares of Parent Common Stock in addition to
Electing Shares to be converted into the right to receive Non-Cash
Election Shares shall be determined by multiplying the Cash Proration
Factor by the total number of shares other than Electing Shares
rounded down to the nearest whole number; and

(iii) subject to Section 4.2, shares of Parent Common Stock
subject to clause (ii) of this paragraph (c) shall be converted into the
right to receive Non-Cash Election Shares in accordance with Section
4.1(c)(i) (on a consistent basis among shareholders who held shares of
Parent Common Stock as to which they did not make the election referred to
in Section 4.1(c)(i), pro rata in accordance with the number of shares as
to which they did not make such election).

SECTION 4.5 Treatment of Options and Other Employee Equity Rights.
-----------------------------------------------------
(a) Upon and as of the Effective Time of the Reorganization Merger and in
connection with the Reorganization Merger, to the fullest extent permitted by
applicable law, Parent shall assume all of the Company's obligations with
respect to any then-outstanding option to acquire shares of Company Common Stock
issued under the St. John Knits, Inc. 1993 Stock Option Plan that theretofore
shall not have expired or been duly exercised by the holders thereof (each, if
any, a "Company Option") and the due exercise of rights under any such Company
--------------
Option shall entitle the holder thereof to acquire, upon the same terms and
conditions that were applicable under the corresponding Company Option, a number
of shares of Parent Common Stock identical to the class and number of shares of
Company Common Stock that were subject to such corresponding Company Option (a
"Parent Option"). Parent and the Company agree to take all corporate and other
- --------------
action as shall be necessary to effectuate the foregoing, and the Company shall
use its best efforts to obtain, if required, prior to the Reorganization Closing
Date, such consent of each holder of a Company Option as shall be necessary to
effectuate the foregoing. Parent shall take all corporate and other action
necessary to reserve and make available for issuance upon the due exercise of
rights under the Parent Options a sufficient number of shares of Parent Common
Stock, and as soon as practicable following the Effective Time of the
Reorganization Merger, shall provide to the record holders of the Parent Options
appropriate notice of such holders' rights thereunder.

(b) Immediately following the Effective Time of the Acquisition
Merger, each holder of a Parent Option, whether or not then exercisable, will
receive in settlement of such Parent Option a cash payment equal to the product
of (i) the total number of shares of Parent Common Stock previously subject to
such Parent Option and (ii) the excess, if any, of the Cash Election Price over
the exercise price per share of Parent Common Stock previously subject to such
Parent Option.
<PAGE>

SECTION 4.6 Surrender of Shares; Transfer Books. (a) Exchange
----------------------------------- --------
Agent. At or prior to the Effective Time of the Acquisition Merger, Parent
- -----
shall deposit with the Exchange Agent, for the benefit of the holders of shares
of Parent Common Stock, the Acquisition Merger Consideration for exchange in
accordance with this Article 2. The cash portion of the Acquisition Merger
Consideration shall be invested by the Exchange Agent as directed by Parent.
Any net profit resulting from, or interest or income produced by, such
investments will be payable to Parent.

(b) Exchange Procedures for Shares of Parent Common Stock. As soon
-----------------------------------------------------
as practicable after the Effective Time of the Acquisition Merger, each holder
of an outstanding certificate or certificates which prior thereto represented
shares of Parent Common Stock shall, upon surrender to the Exchange Agent of
such certificate or certificates and acceptance thereof by the Exchange Agent,
be entitled to a certificate or certificates representing the number of full
shares of Parent Common Stock, if any, to be received by the holder thereof
pursuant to this Agreement and the amount of cash, if any, which the holder of
such shares has the right to receive pursuant to this Agreement and the cash, if
any, payable in lieu of any fractional shares. The Exchange Agent shall accept
such certificates upon compliance with such reasonable terms and conditions as
the Exchange Agent may impose to effect an orderly exchange thereof in
accordance with normal exchange practices. After the Effective Time of the
Acquisition Merger, there shall be no further transfer on the records of Parent
or its transfer agent of certificates representing shares of Parent Common Stock
which have been converted pursuant to this Agreement into the right to receive
the Acquisition Merger Consideration, and if such certificates are presented to
Parent for transfer, they shall be canceled against delivery of cash and, if
appropriate, certificates for Non-Cash Election Shares. If any certificate for
such Non-Cash Election Shares is to be issued in, or if cash is to be remitted
to, a name other than that in which the certificate for Parent Common Stock
surrendered for exchange is registered, it shall be a condition of such exchange
that the certificate so surrendered shall be properly endorsed, with signature
guaranteed, or otherwise in proper form for transfer and that the person
requesting such exchange shall pay to Parent or its transfer agent any transfer
or other taxes required by reason of the issuance of certificates for such Non-
Cash Election Shares in a name other than that of the registered holder of the
certificate surrendered, or establish to the satisfaction of Parent or its
transfer agent that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 4.6(b), each certificate for shares
of Parent Common Stock which have been converted into the right to receive the
Acquisition Merger Consideration shall be deemed at any time after the Effective
Time of the Acquisition Merger to represent only the right to receive upon such
surrender the Acquisition Merger Consideration as contemplated by Section 4.1.
No interest will be paid or will accrue on any cash payable as Acquisition
Merger Consideration or in lieu of any fractional shares of Non-Cash Election
Shares.

(c) Distributions with Respect to Unexchanged Shares. No dividends
------------------------------------------------
or other distributions with respect to Non-Cash Election Shares with a record
date after the Effective Time of the Acquisition Merger shall be paid to the
holder of any unsurrendered certificate for shares of Parent Common Stock with
respect to the Non-Cash Election Shares to be received in respect thereof and no
cash payment in lieu of fractional shares shall be paid to any such holder
pursuant to Section 4.6(e) until the surrender of such certificate in accordance
with this Article 4. Subject to the effect of applicable laws, following
surrender of any such certificate, there shall be
<PAGE>

paid to the holder of the certificate representing whole Non-Cash Election
Shares issued in connection therewith, without interest, (i) at the time of such
surrender the amount of any cash payable in lieu of a fractional share of Non-
Cash Election Shares to which such holder is entitled pursuant to Section 4.6(e)
and the proportionate amount of dividends or other distributions with a record
date after the Effective Time of the Acquisition Merger theretofore paid with
respect to such whole Non-Cash Election Shares, and (ii) at the appropriate
payment date, the proportionate amount of dividends or other distributions with
a record date after the Effective Time of the Acquisition Merger but prior to
such surrender and a payment date subsequent to such surrender payable with
respect to such whole Non-Cash Election Shares.

(d) No Further Ownership Rights in Parent Common Stock Exchanged For
----------------------------------------------------------------
Cash. All Acquisition Merger Consideration paid upon the surrender for exchange
- ----
of certificates representing shares of Parent Common Stock in accordance with
the terms of this Article 4 (including any cash paid pursuant to Section 4.6(e))
shall be deemed to have been issued and paid in full satisfaction of all rights
pertaining to the shares of Parent Common Stock exchanged therefor theretofore
represented by such certificates.

(e) No Fractional Shares. (i) No certificates or scrip representing
--------------------
fractional shares of Non-Cash Election Shares shall be issued in connection with
the Acquisition Merger, and such fractional share interests will not entitle the
owner thereof to vote or to any rights of a shareholder of Parent after the
Acquisition Merger; and

(ii) Notwithstanding any other provision of this Agreement, no
certificates or scrip representing fractional shares of Parent Common Stock
shall be issued upon the surrender for exchange of certificates and such
fractional shares shall not entitle the owner thereof to vote or to any other
rights of a holder of Parent Common Stock. Each record holder of shares of
Parent Common Stock exchanged pursuant to the Acquisition Merger who would
otherwise have been entitled to receive a fraction of a Non-Cash Election Share
(after taking into account all shares of Parent Common Stock delivered by such
holder) shall receive, in lieu thereof, a cash payment (without interest) in
lieu of such fractional share in an amount equal to the product of such fraction
multiplied by the average of the last reported sales price, regular way, per
share of Company Common Stock on the New York Stock Exchange ("NYSE") Composite
----
Transactions Tape for the ten business days prior to and including the last
business day prior to the day on which the Effective Time of the Acquisition
Merger occurs.

(f) Termination of Exchange Fund. Any portion of the Acquisition
----------------------------
Merger Consideration deposited with the Exchange Agent pursuant to this Section
4.6 (the "Exchange Fund") which remains undistributed to the holders of the
-------------
certificates formerly representing shares of Parent Common Stock for six months
after the Effective Time of the Acquisition Merger shall be delivered to Parent,
upon demand, and any holders of shares of Parent Common Stock prior to the
Acquisition Merger who have not theretofore complied with this Article 4 shall
thereafter look only to Parent and only as general creditors thereof for payment
of their claim for cash, if any, Non-Cash Election Shares, if any, any cash in
lieu of fractional shares of Non-Cash Election Shares, and any dividends or
distributions with respect to Non-Cash Election Shares, as applicable, to which
such holders may be entitled.
<PAGE>

(g) No Liability. None of Acquisition, Parent, the Company nor the
------------
Exchange Agent shall be liable to any person in respect of any shares of Non-
Cash Election Shares (or dividends or distributions with respect thereto) or
cash from the Exchange Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any certificates
representing shares of Parent Common Stock immediately prior to the Effective
Time of the Acquisition Merger shall not have been surrendered prior to one year
after the Effective Time of the Acquisition Merger (or immediately prior to such
earlier date on which any cash, if any, any cash in lieu of fractional shares of
Non-Cash Election Shares, any dividends or distributions with respect to Non-
Cash Election Shares in respect of such certificate would otherwise escheat to
or become the property of any Governmental Entity (as defined in Section
5.5(b)), any such cash, dividends or distributions in respect of such
certificate shall, to the extent permitted by applicable law, become the
property of Parent, free and clear of all claims or interest of any person
previously entitled thereto.

ARTICLE 5.

REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND PARENT

The Company and Parent hereby jointly and severally represent and
warrant to Acquisition that, except as specifically set forth in the SEC Reports
(as defined below) filed prior to the date hereof, or the Disclosure Schedule
delivered by the Company to Acquisition at or prior to the execution of this
Agreement (the "Disclosure Schedule") (provided that the listing of an item in
-------------------
one section of the Disclosure Schedule shall be deemed to be a listing in each
section of the Disclosure Schedule to which such item relates only to the extent
that it is reasonably apparent from a reading of such disclosure that it also
qualifies or applies to such other section):

SECTION 5.1 Organization and Qualification; Subsidiaries. (a) Each
--------------------------------------------
of the Company and its subsidiaries, including Parent, is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
formation and has the requisite power and authority and any necessary
governmental approvals to own, lease and operate its properties and to carry on
its business as it is now being conducted, except where the failure to be in
good standing or to have such power, authority and governmental approval would
not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect (as defined below). Each of the Company and its subsidiaries is
duly qualified or licensed to do business, and is in good standing, in each
jurisdiction where the character of the properties owned, leased or operated by
it or the nature of its activities makes such qualification or licensing
necessary, except for such failures to be so duly qualified or licensed and in
good standing which would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect. When used in connection with the
Company or any of its subsidiaries, the term "Material Adverse Effect" means any
-----------------------
change or effect that, either individually or in the aggregate with all other
changes or effects, is materially adverse to the business, operations, assets,
liabilities (including contingent liabilities), financial condition or results
of operations of the Company and its subsidiaries taken as a whole. Prior to
the Closing Dates, Parent will take such action as is
<PAGE>

necessary so that as of the day prior to the Closing Dates Parent will be a
Delaware corporation only and not a Barbados corporation.

(b) Merger Sub was formed on January 28, 1999 solely for the purpose
of engaging in the transactions contemplated hereby and, in all material
respects, has engaged in no other business activities and has conducted its
operations only as contemplated hereby.

SECTION 5.2 Articles of Incorporation and By-Laws. Included in
-------------------------------------
Section 5.2 of the Disclosure Schedule are a complete and correct copy of the
Company's amended and restated articles of incorporation and restated by-laws as
in effect on the date hereof and the certificate of incorporation and by-laws of
Parent. Such articles of incorporation and by-laws are in full force and effect
and no other organizational documents are applicable to or binding upon the
Company. Neither the Company nor Parent is in violation of any of the
provisions of its respective articles (or certificate) of incorporation or by-
laws.

SECTION 5.3 Capitalization. (a) The authorized capital stock of the
--------------
Company consists of 40,000,000 shares of Company Common Stock and 2,000,000
shares of Preferred Stock, no par value (the "Preferred Stock"). As of January
---------------
31, 1999, (i) 16,581,482 shares of Company Common Stock were issued and
outstanding, all of which were validly issued, fully paid and nonassessable and
were issued free of preemptive (or similar) rights, and (ii) an aggregate of
914,652 shares of Company Common Stock were reserved for issuance and issuable
upon or otherwise deliverable in connection with the exercise of outstanding
Company Options having an exercise price of less than $30. As of the date
hereof, no shares of Preferred Stock are issued and outstanding. Since January
31, 1999, the Company has not issued or reserved for issuance (i) any shares of
capital stock or other voting securities of the Company or any of its
subsidiaries, except as a result of the exercise of Company Options outstanding
at January 31, 1999 or (ii) any Company Options except as described in this
Section 5.3.

(b) Parent was incorporated under the Company's Act of Barbados
pursuant to which it is authorized to issue an unlimited number of shares
designated as common shares. On February 1, 1999, pursuant to a Certificate of
Domestication in accordance with Section 388 of the Delaware General Corporation
Law and a Certificate of Incorporation, Parent was incorporated under the laws
of the State of Delaware, pursuant to which it is authorized to issue 10,000
shares of Parent Common Stock, of which, as of the date hereof, 1,000 shares are
issued and outstanding (the "Outstanding Parent Common Shares") and owned of
--------------------------------
record by the Company. The number of authorized and outstanding shares of Parent
Common Stock immediately prior to the Effective Time of the Reorganization
Merger shall be equal to the number of shares of Company Common Stock issued and
outstanding as of the date hereof plus the number of shares issuable upon the
exercise of options or other securities described in this Section 5.3.

(c) Other than Company Options outstanding as of the date hereof and
the Company Rights, neither the Company nor Parent has issued or reserved for
issuance (i) any options or other rights to acquire from the Company or Parent
or any of their respective subsidiaries, and no obligation of the Company or
Parent or any of their respective subsidiaries to issue, any capital stock,
voting securities or securities convertible into or exchangeable for capital
<PAGE>

stock or voting securities of the Company or Parent or any of their respective
subsidiaries and (ii) no equity equivalents, interests in the ownership or
earnings of the Company or Parent or any of its subsidiaries or other similar
rights (collectively, with the Company Options, and including securities of
Parent, "Company Securities"). All shares of Company Common Stock subject to
------------------
issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable and free of preemptive (or similar)
rights. There are no outstanding obligations of the Company or Parent or any of
their respective subsidiaries to repurchase, redeem or otherwise acquire any
Company Securities or to provide funds to or make any investment (in the form of
a loan, capital contribution or otherwise) in any such subsidiary or any other
entity. Except for the Company Options and the Company Rights, there are no
other options, calls, warrants or other rights, agreements, arrangements or
commitments of any character relating to the issued or unissued capital stock of
the Company or Parent or any of their respective subsidiaries to which the
Company or Parent or any of their respective subsidiaries is a party. Section
5.3 of the Disclosure Schedule sets forth a true and complete list of the
subsidiaries of the Company which evidences, among other things, the amount of
capital stock or other equity interests owned by the Company, directly or
indirectly, in such subsidiaries or associated entities. Each of the
outstanding shares of capital stock of each of the Company's subsidiaries is
duly authorized, validly issued, fully paid and nonassessable and all such
shares are owned by the Company or another wholly owned subsidiary of the
Company and are owned free and clear of all security interests, liens, claims,
pledges, agreements, limitations in voting rights, charges or other encumbrances
of any nature whatsoever, except as set forth on Section 5.3 of the Disclosure
Schedule. No entity in which the Company owns, directly or indirectly, less
than a 50% equity interest is, individually or when taken together with all such
other entities, material to the business of the Company and its subsidiaries
taken as a whole. As of the date hereof, the outstanding indebtedness for
borrowed money of the Company and its subsidiaries is set forth in Section 5.3
of the Disclosure Schedule. The outstanding indebtedness under the Company's
line of credit with Bank of America National Trust and Savings Association may
be prepaid in full without penalty in accordance with the terms of such line of
credit.

(d) The authorized capital stock of Merger Sub consists of 1,000
shares of common stock, no par value ("Merger Sub Common Stock"), of which, as
-----------------------
of the date hereof, 1,000 shares are issued and outstanding (the "Outstanding
-----------
Merger Sub Common Shares") and owned of record by Parent.
- ------------------------

SECTION 5.4 Authority Relative to This Agreement. Each of the
------------------------------------
Company and Parent has all necessary corporate power and authority to execute
and deliver this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby (other than, with respect to (i)
the Reorganization Merger, the approval of this Agreement by the Requisite
Shareholder Approval (as defined in Section 5.20), as required by the California
GCL, and the filing of appropriate merger documents with the Secretary of State
of the State of California as required by the California GCL and (ii) the
Acquisition Merger, the adoption of this Agreement by the Company, as sole
stockholder of Parent, as required by the DGCL, and the filing of appropriate
merger documents with the Secretary of State of the State of Delaware as
required by the DGCL). The execution, delivery and performance this Agreement
by the Company and Parent and the consummation by the Company and Parent of the
transactions
<PAGE>

contemplated by this Agreement have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of the
Company or Parent are necessary to authorize this Agreement or to consummate the
transactions so contemplated (other than, with respect to (i) the Reorganization
Merger, the Requisite Shareholder Approval, as required by the California GCL,
and the filing of appropriate merger documents with the Secretary of State of
the State of California as required by the California GCL and (ii) the
Acquisition Merger, the adoption of this Agreement by the Company, as sole
stockholder of Parent, as required by the DGCL, and the filing of appropriate
merger documents with the Secretary of State of the State of Delaware as
required by the DGCL). This Agreement has been duly and validly executed and
delivered by the Company and Parent and constitutes a legal, valid and binding
obligation of the Company and Parent enforceable against the Company and Parent
in accordance with its terms, except as such enforceability may be limited by
(a) bankruptcy, reorganization, moratorium or other laws now or hereafter in
effect, relating to or limiting creditor's rights generally, and (b) general
principles of equity (whether considered in an action in equity or at law) which
provide, among other things, that the remedies of specific performance and
injunction and other forms of equitable relief are subject to equitable defenses
and to the discretion of the court. Parent will, promptly following the
execution of this Agreement, approve this Agreement and the Reorganization
Merger in its capacity as the sole shareholder of Merger Sub. As a result of the
foregoing actions, the only approval required to authorize the Reorganization
Merger on the part of Parent, the Company and Merger Sub is the Requisite
Shareholder Approval in connection with the Reorganization Merger and the
adoption of this Agreement by the Company, as sole stockholder of Parent, in
connection with the Acquisition Merger.

SECTION 5.5 No Conflict; Required Filings and Consents. (a) The
------------------------------------------
execution and delivery of this Agreement by the Company and Parent and the
consummation of the transactions contemplated hereby would not result in or
give rise to any: (i) conflict with or violate the articles of incorporation or
by-laws of the Company or the equivalent organizational documents of any of its
subsidiaries; (ii) conflict with or violation of any law, rule, regulation,
order, judgment or decree applicable to the Company or any of its subsidiaries
or by which its or any of their respective properties are bound or affected; or
(iii) breach or violation of or default (or an event which with notice or lapse
of time or both could become a default) or loss of a material benefit under, or
right of termination, amendment, acceleration or cancellation of, or alteration
of rights under or require the consent or approval of any person under, or
creation of a lien or encumbrance on any of the properties or assets of the
Company or any of its subsidiaries pursuant to, or preemptive or similar rights
under, any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit (including any Environmental Permit), franchise, joint venture agreement,
limited liability agreement, partnership agreement or other instrument to which
the Company or any of its subsidiaries is a party or by which the Company or any
of its subsidiaries or its or any of their respective properties are bound or
affected, except, in the case of clauses (ii) and (iii) to the extent that any
of the foregoing would not reasonably be expected to result in a Material
Adverse Effect.

(b) The execution, delivery and performance of this Agreement by the
Company, Parent and Merger Sub and the consummation of the Mergers by the
Company and Parent do not and will not require any consent, approval,
authorization or permit of, action by, filing with or notification to, any
Federal, state or local government or any court, administrative agency or
<PAGE>

commission or other governmental authority, official or agency, domestic or
foreign (a "Governmental Entity"), except for (i) the applicable requirements of
-------------------
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
------------
rules and regulations promulgated thereunder, (ii) the Securities Act of 1933,
as amended (the "Securities Act"), and the rules and regulations promulgated
--------------
thereunder, (iii) the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), state securities, takeover and Blue Sky laws and (iv)
-------
the filing and recordation of appropriate merger or other documents as required
by the California GCL or the DGCL.

SECTION 5.6 Compliance. Neither the Company nor any of its
----------
subsidiaries is in conflict with, or in default or violation of, (i) any law,
rule, regulation, order, judgment or decree applicable to the Company or any of
its subsidiaries or by which its or any of their respective properties are bound
or affected or (ii) any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or its or any of their respective properties are bound or
affected, except for any such conflicts, defaults or violations which would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.

SECTION 5.7 SEC Filings; Financial Statements; Undisclosed
----------------------------------------------
Liabilities. (a) The Company has filed all forms, reports, statements,
- -----------
schedules, registration statements and other documents required to be filed with
the Securities and Exchange Commission (the "SEC") since November 1, 1996 (the
---
"SEC Reports"), each of which has complied in all material respects with the
- ------------
applicable requirements of the Securities Act, and the rules and regulations
promulgated thereunder, or the Exchange Act and the rules and regulations
promulgated thereunder, each as in effect on the date so filed or as amended.
No subsidiary of the Company is required to file any form, report, statement,
schedule, registration statement or other document with the SEC. No SEC Report,
when filed (or, if amended or superseded by a filing prior to the date of this
Agreement or of the Closing Dates, then on the date of such filing) contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except to the extent revised or superseded by a subsequent filing
with the SEC (a copy of which has been provided to Acquisition prior to the date
hereof), none of the SEC Reports filed prior to the date hereof contains any
untrue statement of a material fact or omits to state a material fact required
to be stated or incorporated by reference therein or necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.

(b) Each of the audited and unaudited consolidated financial
statements of the Company (including any related notes thereto) included in the
SEC Reports filed prior to the date hereof and the audited financial
consolidated financial statements of the Company (including any related notes
thereto) to be included in the Company's Annual Report on Form 10-K for the
fiscal year ended November 1, 1998, have been prepared in accordance with
generally accepted accounting principles (except in the case of unaudited
statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis
during the relevant periods (except as may be indicated in the notes thereto),
and present fairly the consolidated financial position and consolidated results
<PAGE>

of operations and changes in cash flows of the Company and its subsidiaries as
of the respective dates or for the respective periods reflected therein, except,
in the case of the unaudited interim financial statements, for the absence of
footnotes and to normal and recurring year-end adjustments that are not
material.

(c) Except as set forth in the SEC Reports filed prior to the date of
this Agreement and except to the extent set forth on the consolidated balance
sheet of the Company and its subsidiaries at November 1, 1998, or in the notes
thereto, neither the Company nor any of its subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
which would be required to be reflected on a balance sheet or in the notes
thereto prepared in accordance with generally accepted accounting principles
consistently applied, except for liabilities or obligations incurred in the
ordinary course of business since November 1, 1998, none of which would,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.

SECTION 5.8 Absence of Certain Changes or Events. Since November 1,
------------------------------------
1998, the Company and its subsidiaries have conducted their businesses only in
the ordinary course and, since such date, there has not been (i) any condition,
event or occurrence which, individually or in the aggregate, would be reasonably
likely to have a Material Adverse Effect or (ii) any action which, if it had
been taken after the date hereof, would have required the consent of Acquisition
under Section 7.1 hereof.

SECTION 5.9 Absence of Litigation. As of the date of this Agreement,
---------------------
there are no suits, claims, actions, proceedings or investigations pending or,
to the knowledge of the Company, threatened against the Company or any of its
subsidiaries, or against or involving any properties or rights of the Company or
any of its subsidiaries, before any Governmental Entity (collectively,
"Litigation"), which (i) if adversely determined, would, individually or in the
- -----------
aggregate in the case of related claims, result in liability to the Company in
excess of $500,000 or (ii) seek to delay or prevent the consummation of the
transactions contemplated hereby. All matters disclosed in Section 5.9 of the
Disclosure Schedule (other than the claims, suits, actions, proceedings or
investigations relating to the transactions contemplated by this Agreement (and
other claims substantially similar thereto)), and any other Litigation involving
the Company, taken together, would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. Neither the Company
nor any of its subsidiaries nor any of their respective properties is or are
subject to any order, writ, judgment, injunction, decree, determination or award
having, or which, insofar as can be reasonably foreseen in the future, would
reasonably be expected to have a Material Adverse Effect or would prevent or
delay the consummation of the transactions contemplated hereby. As of the date
of this Agreement, no officer or director of the Company is a defendant in any
litigation commenced by shareholders of the Company with respect to the
performance of his or her duties as an officer and/or director of the Company
under any federal or state law (including litigation under federal and state
securities laws). There exist no indemnification agreements with any of the
directors and officers of the Company.

SECTION 5.10 Properties. (a) The Company or its subsidiaries has
----------
good, valid and, in the case of the Owned Properties (as defined below),
marketable fee title, to all of the (i)
<PAGE>

real property and interests in real property indicated as being owned by the
Company and its subsidiaries in the financial statements included in the SEC
Reports, except for properties sold or otherwise disposed of in the ordinary
course of business (the "Owned Properties"), and (ii) leasehold estates in all
----------------
leased real properties indicated as being leased by the Company and its
subsidiaries in the financial statements included in the SEC Reports, except
leasehold interests terminated in the ordinary course of business (the "Leased
------
Properties"; the Owned Properties and Leased Properties being sometimes referred
- ----------
to herein as the "Real Properties"), in each case free and clear of all
---------------
mortgages, liens, security interests, easements, covenants, rights-of-way and
other similar restrictions and encumbrances ("Encumbrances"), except where the
------------
failure to have such marketable fee title would not interfere in any material
respect with the conduct of business of the Company as currently conducted.

(b) No consent or approval is required to be obtained under any
agreement by which the Company or any of its subsidiaries has obtained a
leasehold interest in any Leased Property (each such agreement a "Lease") by or
-----
with respect to the Company or any subsidiary of the Company, and no right of
termination shall arise under any Lease nor does any landlord have the right to
increase the rent payable under any Lease, in each case in connection with the
execution and delivery of this Agreement by the Company or the consummation by
the Company of the transactions contemplated hereby, except to the extent that
any of the foregoing, individually or in the aggregate, would not have a
Material Adverse Effect.

(c) Neither the Company nor any of its subsidiaries is obligated
under or bound by any option, right of first refusal, purchase contract, or
other contractual right to sell or dispose of any Owned Property or any portions
thereof or interests therein which property, portions and interests,
individually or in the aggregate, are material to the Company.

(d) Neither the Company nor any of its subsidiaries (or any of the
affiliates of any of the foregoing) has an ownership, financial or other
interest in the landlord under any of the Company Leases, which exceeds a 50%
ownership, financial or other interest in such landlord.

SECTION 5.11 Employee Benefit Plans. (a) Section 5.11(a) of the
----------------------
Disclosure Schedule contains a true and complete list of each "employee benefit
plan" (within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), including, without limitation,
multiemployer plans within the meaning of Section 3(37) of ERISA), stock
purchase, stock option, severance, employment, change-in-control, fringe
benefit, collective bargaining, bonus, incentive, deferred compensation and all
other employee benefit plans, agreements, programs, policies or other
arrangements, whether or not subject to ERISA (including any funding mechanism
therefor now in effect or required in the future as a result of the transaction
contemplated by this Agreement or otherwise), whether oral or written, under
which any employee or former employee of the Company or its subsidiaries has any
present or future right to benefits or under which the Company or its
subsidiaries has any present or future liability. All such plans, agreements,
programs, policies and arrangements shall be collectively referred to as the
"Company Plans".
- --------------

(b) No Company Plan (i) is a multiemployer plan within the meaning of
Section 4001(a)(3) of ERISA (and neither the Company nor any of its subsidiaries
has, at any time,
<PAGE>

contributed to nor had an obligation to contribute to any such multiemployer
plan) or (ii) is an "employee pension plan" within the meaning of Section 3(2)
of ERISA that is subject to Title IV of ERISA.

(c) With respect to each Company Plan, the Company has delivered to
Acquisition a current, accurate and complete copy (or, to the extent no such
copy exists, an accurate description) thereof and, to the extent applicable:
(i) any related trust agreement or other funding instrument; (ii) the most
recent determination letter, if applicable; (iii) the most recent summary plan
description and other written communications (or a description of any oral
communications) by the Company or its subsidiaries to their employees concerning
the extent of the benefits provided under a Company Plan; and (iv) for the three
most recent years (A) the Form 5500 and attached schedules, (B) audited
financial statements, (C) actuarial valuation reports and (D) attorney's
response to an auditor's request for information.

(d) (i) Each Company Plan has been established and administered in all
material respects in accordance with its terms, and in compliance in all
material respects with the applicable provisions of ERISA, the Internal Revenue
Code of 1986, as amended (the "Code") and other applicable laws, rules and
----
regulations; (ii) each Company Plan which is intended to be qualified within the
meaning of Section 401(a) of the Code is so qualified, to the knowledge of the
Company, and has received a favorable determination letter as to its
qualification, and nothing has occurred, whether by action or failure to act,
that would reasonably be expected to cause the loss of such qualification; (iii)
no event has occurred and no condition exists that would subject the Company or
its Subsidiaries, either directly or by reason of their affiliation with any
member of their "Controlled Group" (defined as any organization which is a
----------------
member of a controlled group of organizations within the meaning of Sections
414(b), (c), (m) or (o) of the Code), to any material tax, fine, lien, penalty
or other liability imposed by ERISA, the Code or other applicable laws, rules
and regulations; (iv) for each Company Plan with respect to which a Form 5500
has been filed, no material change has occurred with respect to the matters
covered by the most recent Form since the date thereof; (v) no non-exempt
"prohibited transaction" (as such term is defined in Section 406 of ERISA and
Section 4975 of the Code) has occurred with respect to any Company Plan; (vi) no
Company Plan provides retiree welfare benefits and neither the Company nor its
subsidiaries have any obligations to provide any retiree welfare benefits
(except to the extent retirees are entitled to benefits pursuant to Section 6.01
et seq. of ERISA); and (vii) all awards, grants or bonuses made pursuant to any
- -- ---
Company Plan have been, or will be, fully deductible to the Company or its
subsidiaries notwithstanding the provisions of Section 162(m) of the Code and
the regulations promulgated thereunder.

(e) With respect to any Company Plan, (i) no actions, suits or claims
(other than routine claims for benefits in the ordinary course) are pending or,
to the knowledge of the Company, threatened and (ii) to the knowledge of the
Company, no facts or circumstances exist that would give rise to any such
actions, suits or claims.

(f) The consummation of the Mergers and other transactions
contemplated by this Agreement will not (i) entitle any Company employee or
director to severance pay, (ii) result in the payment to any present or former
employee of the Company or its subsidiaries of any money or other property or
accelerate the time of payment or vesting, or increase the amount payable or
<PAGE>

provide any other rights or benefits to any present or former employee of the
Company or its subsidiaries, whether or not such payment would constitute a
parachute payment within the meaning of Section 280G of the Code.

SECTION 5.12 Tax Matters. Except to the extent the failure of any
-----------
representation made in this Section 5.12 to be true and correct which, when
taken in the aggregate with all other such failures (regarding the
representations made in this Section 5.12 only), would not have a Material
Adverse Effect:

(a) All Tax Returns required to be filed by or with respect to the
Company and its subsidiaries have been timely filed or requests for
extensions to file such Tax Returns have been timely filed and the Company
and its subsidiaries are within such period of extension. The Company and
its subsidiaries have (i) timely paid all Taxes shown to be due on such Tax
Returns or that have been assessed in writing by any taxing authority,
except for Taxes contested in good faith and (ii) provided adequate
reserves (in addition to reserves for deferred Taxes, which reflect
differences between the book and tax bases in assets and liabilities) for
Taxes (whether or not shown to be due on any Tax Return) on the financial
statements in accordance with generally accepted accounting principles.

(b) There are no liens for unpaid Taxes against the property of the
Company or any of its subsidiaries, except with respect to Taxes not yet
due or payable.

(c) The statute of limitations with respect to the U.S. Federal,
California and all other state income tax returns of the Company and its
subsidiaries for all periods through 1992 has expired.

(d) No audit or other proceeding by any taxing authority has formally
commenced, and no written notification has been given to the Company or any
of its subsidiaries that such an audit or other proceeding is pending or
threatened with respect to any Taxes of the Company or any subsidiary of
the Company, in each case that could reasonably be expected to result in an
assessment for Taxes. No assessment of Tax has been proposed in writing
against the Company or any of its subsidiaries or any of their assets,
except for assessments contested by the Company or any of its subsidiaries
in good faith.

(e) Neither the Company nor any of the subsidiaries is a party to,
bound by or has any obligation under any Tax sharing or similar contract or
arrangement.

(f) None of the Company or any of its subsidiaries (i) has been a
member of an affiliated group (within the meaning of the Code) filing a
consolidated federal Tax Return (other than a group the common parent of
which was the Company) or (ii) has any liability for any Tax of any person
under Reg. Section 1.1502-6 of the Treasury Regulations promulgated under
the Code (or any similar provision of state, local or foreign law), as a
transferee or successor, by contract or otherwise.
<PAGE>

(g) As used herein, "Taxes" shall mean all taxes of any kind,
-----
including, without limitation, those on or measured by or referred to as
income, gross receipts, sales, use, ad valorem, franchise, profits,
license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, value added, property or windfall profits taxes,
customs, duties or similar fees, assessments or charges of any kind
whatsoever, together with any interest and any penalties, additions to tax
or additional amounts imposed by any governmental entity. As used herein,
"Tax Return" shall mean any return, declaration, report, claim for refund
----------
or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.

SECTION 5.13 Environmental Laws. Except to the extent that any
------------------
inaccuracy, individually or in the aggregate with any other inaccuracy under any
of the following representations, would not reasonably be expected to have a
Material Adverse Effect, (a) each of the Company and each of its subsidiaries
complies and has complied with all Environmental Laws applicable to the
properties, assets or businesses of the Company and its subsidiaries, and
possesses and complies with and has possessed and complied with all
Environmental Permits required under such laws; (b) none of the Company and its
subsidiaries has received any Environmental Claim, and none of the Company and
its subsidiaries is aware after reasonable inquiry of any threatened
Environmental Claim or of any Environmental Claim pending or threatened against
any entity for which the Company or any of its subsidiaries may be responsible;
(c) none of the Company and its subsidiaries has assumed, contractually or by
operation of law, any liabilities or obligations under any Environmental Laws;
(d) there are no past or present events, conditions, circumstances, practices,
plans or legal requirements that would reasonably be expected to result in
liability to the Company or any of its subsidiaries under Environmental Laws,
prevent, or reasonably be expected to increase the burden on the Company or any
subsidiary of, complying with Environmental Laws or of obtaining, renewing, or
complying with all Environmental Permits required under such laws; (e) there are
and have been no Hazardous Materials or other conditions at or from any property
owned, operated or otherwise used by the Company or any subsidiary now or in the
past that would reasonably be expected to give rise to liability of the Company
or any subsidiary under any Environmental Law; and (f) the Company has provided
to Acquisition all Environmental Reports in the possession or control of the
Company or any of its subsidiaries. For purposes of this Agreement, the
following terms shall have the following meanings:

"Environmental Claim" means any written or oral notice, claim, demand,
-------------------
action, suit, complaint, proceeding or other communication by any person
alleging liability or potential liability arising out of, relating to,
based on or resulting from (i) the presence, discharge, emission, release
or threatened release of any Hazardous Materials at any location, whether
or not owned, leased or operated by the Company or any of its subsidiaries
or (ii) circumstances forming the basis of any violation or alleged
violation of any Environmental Law or Environmental Permit or (iii)
otherwise relating to obligations or liabilities under any Environmental
Laws.

"Environmental Laws" means all applicable statutes, rules,
------------------
regulations, ordinances, orders, decrees and common law, in each case of
any Governmental Entity, as they exist at the date hereof, relating in any
manner to contamination, pollution or

<PAGE>

protection of human health or the environment, including without limitation
the Comprehensive Environmental Response, Compensation and Liability Act,
the Solid Waste Disposal Act, the Resource Conservation and Recovery Act,
the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act,
the Occupational Safety and Health Act, the Emergency Planning and
Community-Right-to-Know Act, the Safe Drinking Water Act, all as amended,
and similar state laws.

"Environmental Permits" means all permits, licenses, registrations and
---------------------
other governmental authorizations required for the Company and the
operations of the Company's and its subsidiaries' facilities and otherwise
to conduct its business under Environmental Laws.

"Environmental Report" means any report, study, assessment, audit, or
--------------------
other similar document that addresses any issue of noncompliance with, or
liability under, any Environmental Law that may affect the Company or any
of its subsidiaries.

"Hazardous Materials" means any gasoline or petroleum (including crude
-------------------
oil or any fraction thereof) or petroleum products, polychlorinated
biphenyls, urea-formaldehyde insulation, asbestos, pollutants,
contaminants, radioactivity, and any other substances of any kind, whether
or not any such substance is defined as hazardous or toxic under any
Environmental Law, that is regulated pursuant to or could give rise to
liability under any Environmental Law.

SECTION 5.14 Material Contract Defaults; Non-Compete. (a) Neither
---------------------------------------
the Company nor any of its subsidiaries is, or has received any notice or has
any knowledge that any other party is, in default or unable to perform in any
respect under any material contracts, agreements, commitments, arrangements,
leases, licenses, policies or other instruments to which it or any of its
subsidiaries is a party or by which it or any such subsidiary is bound
("Material Contracts"), except for those defaults which would not reasonably be
- --------------------
expected, either individually or in the aggregate, to have a Material Adverse
Effect, and there has not occurred any event that with the lapse of time or the
giving of notice or both would constitute such a default, except for those
defaults which would not reasonably be expected, either individually or in the
aggregate, to have a Material Adverse Effect. The Company is not a party to any
Material Contract that is required to be disclosed as an exhibit to the SEC
Documents in accordance with the rules and regulations of the SEC that has not
been so disclosed

(b) Neither the Company nor any of its subsidiaries is a party to any
agreement that expressly limits the ability of the Company or any of its
subsidiaries to compete in or conduct any line of business or compete with any
person in any geographic area or during any period of time.

SECTION 5.15 Intellectual Property. (a) Section 5.15(a) of the
---------------------
Disclosure Schedule sets forth (i) all material Intellectual Property necessary
to operate the business of the Company as currently conducted ("Company IP")
----------
which is owned by the Company or its subsidiaries and which has been registered
or filed with any Governmental Entity which regulates the filing of applications
for any Intellectual Property, (ii) all unregistered trademarks that are
<PAGE>

necessary to operate the business as currently conducted and (iii) all licenses,
consents and other agreements concerning Company IP ("IP Licenses") that are
-----------
necessary to operate the business as currently conducted. The Company and/or
its subsidiaries (i) owns or has the right to use all the Intellectual Property
necessary for the Company and its subsidiaries to conduct their business
substantially as is currently conducted and consistent with past practice, and
(ii) with respect to any registered trademarks owned or used by the Company or
its subsidiaries in the United States, the corresponding Company IP in all other
countries in which the Company and/or any of its subsidiaries currently conducts
business except, in the case of this clause (ii), to the extent that the failure
to own or have the right to use such Intellectual Property would not reasonably
be expected, individually or in the aggregate, to have a Material Adverse
Effect.

(b) Except to the extent that such would not individually or in the
aggregate interfere in any material respect with the conduct of the business of
the Company as currently conducted: (i) all of the issued registrations for the
Company IP are valid, enforceable and unexpired, are free of liens and other
encumbrances, have not been abandoned, to the knowledge of the Company, do not
infringe the Intellectual Property of any third party and, to the knowledge of
the Company, are not being infringed by any third party; (ii) no judgment,
decree, injunction, rule or order has been rendered or, to the knowledge of the
Company, is threatened by any Governmental Entity that seeks to limit or impair
the validity of (or the Company or any subsidiary's right to own or use) any
Company IP; (iii) no action, suit or proceeding is pending, or to the knowledge
of the Company, threatened that seeks to limit, cancel or question the validity
of (or the Company or any subsidiary's right to own or use) any Company IP; (iv)
the Company has taken and takes all reasonable steps to protect and maintain the
Company IP; (v) to the knowledge of the Company, no party to an IP License is,
or is alleged to be, in material breach or default thereunder; and (vi) the
transactions contemplated by this Agreement shall not in any material respect
impair or limit the rights of the Company or any of its subsidiaries under any
IP License, or cause any material additional payments to be due thereunder.

For the purposes of this Section 5.15, "Intellectual Property" shall
---------------------
mean all U.S., state and foreign intellectual property, including all (a)
inventions, processes, designs, techniques, technology, and related improvements
and know-how, whether or not patented or patentable; (b) registered copyrights
and works of authorship in any media, including computer software, databases and
related items, graphics, artwork, photography, advertising and promotional
materials, designs, copyrightable elements of pictorial, graphic or sculptural
works, utilitarian objects or items of clothing, Internet site content, and all
other authors' rights, including "moral rights"; (c) trademarks, service marks,
trade names, brand names, corporate names, registered domain names, logos, trade
dress and all elements thereof, the goodwill of any business symbolized thereby,
and all common-law rights relating thereto (collectively, the "Trademarks"); and
----------
(d) trade secrets and other confidential information.

SECTION 5.16 Transactions with Affiliates. From November 1, 1996
----------------------------
through the date of this Agreement, except as set forth in the SEC Documents,
there has been no transaction, agreement, arrangement or understanding, or any
related series thereof, between the Company or its subsidiaries or contractors,
on the one hand, and the Company's affiliates (other than wholly-owned
(excluding directors' and nominee shares) subsidiaries of the Company), on the
other hand, in which the amount or value involved exceeded $60,000. As used in
the
<PAGE>

definition of "affiliate", the term Acontrol" means possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of a person, whether through the ownership of voting securities, by
contract or otherwise.

SECTION 5.17 Brokers. No broker, finder or investment banker (other
-------
than Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
-------------
Wasserstein Perella & Co., Inc. ("Wasserstein Perella" and, collectively with
-------------------
Merrill Lynch, the "Financial Advisors")) is entitled to any brokerage, finder's
------------------
or other fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by and on behalf of the Company or
the Independent Committee. The Company and Parent have heretofore furnished to
Acquisition a complete and correct copy of all agreements between the Company
and/or Parent and each of the Financial Advisors pursuant to which such firm
would be entitled to any payment relating to the transactions contemplated
hereby. The aggregate fees payable under such agreements will not exceed $4.3
million, plus reimbursement for out-of-pocket expenses.

SECTION 5.18 Opinion of Financial Advisors. (a) The Company and the
-----------------------------
Independent Committee of the Board of Directors of the Company specially formed
for the purpose of reviewing the transactions contemplated by this Agreement
(the "Independent Committee") have received the opinion of Merrill Lynch dated
---------------------
the date of this Agreement, to the effect that the consideration to be received
in the Acquisition Merger by the Company's (and, following the Reorganization
Merger, Parent's) shareholders is fair to such shareholders from a financial
point of view, a true and complete copy of which opinion has been delivered to
Acquisition. The Company has been authorized by Merrill Lynch to permit the
inclusion of such fairness opinion and any other reports, opinions or appraisals
(within the meaning of Item 9 of Schedule 13E-3 under the Exchange Act) of
Merrill Lynch related to the transactions contemplated by this Agreement in the
Form S-4, the Proxy Statement, and the Schedule 13E-3.

(b) The Independent Committee has received the opinion of Wasserstein
Perella & Co. Inc. dated the date of this Agreement, to the effect that the
consideration to be received in the Acquisition Merger by the Company's (and,
following the Reorganization Merger, Parent's) shareholders is fair to such
shareholders from a financial point of view, a true and complete copy of which
opinion has been delivered to Acquisition. The Company has been authorized by
Wasserstein Perella to permit the inclusion of such fairness opinion and any
other reports, opinions or appraisals (within the meaning of Item 9 of Schedule
13E-3 under the Exchange Act) of Wasserstein Perella related to the transactions
contemplated by this Agreement in the Form S-4, the Proxy Statement, and the
Schedule 13E-3.

SECTION 5.19 Board Recommendation; Approval of Independent Committee.
-------------------------------------------------------
(a) The Board of Directors of the Company, at a meeting duly called and held on
February 2, 1999, has by unanimous vote of those directors present (who
constituted 100% of the directors then in office), other than those directors
who would be considered "interested directors" under Section 310 of the
California GCL, (i) determined that this Agreement, the Voting Agreement and the
transactions contemplated hereby and thereby, taken together, are advisable and
are fair to and in the best interests of the shareholders of the Company, and
(ii) resolved to recommend
<PAGE>

that the holders of the shares of Company Common Stock approve the principal
terms of this Agreement and approve the transactions contemplated hereby,
including the Mergers.

(b) The Board of Directors of Parent, at a meeting duly called and
held on February 2, 1999, has by unanimous vote of those directors present (who
constituted 100% of the directors then in office), other than those directors
who would be considered "interested directors" under Section 310 of the
California GCL, (i) determined that this Agreement, the Voting Agreement and the
transactions contemplated hereby and thereby, including the Acquisition Merger,
taken together, are advisable and are fair to and in the best interests of the
shareholders of Parent, and (ii) resolved to recommend that the holders of the
shares of Parent Common Stock adopt this Agreement.

(c) The Independent Committee has, by unanimous vote, recommended
that the Board of Directors of the Company approve this Agreement, the Voting
Agreement and the transactions contemplated hereby and thereby on February 2,
1999.

SECTION 5.20 Vote Required; State Takeover Statutes. (a) The
--------------------------------------
affirmative vote of (i) the holders of a majority of the outstanding shares of
Company Common Stock entitled to vote thereon and (ii) the holders of a majority
of the Company Common Stock present in person or by proxy and voting at the
Shareholders Meeting, excluding for such purposes shares of the persons
indicated on the Schedule 13D filed with the SEC on December 17, 1998, as
amended, with respect to shares of Company Common Stock ((i) and (ii) together,
the "Requisite Shareholder Approval") is the only vote of the holders of any
------------------------------
class or series of the Company's capital stock necessary to approve the
principal terms of this Agreement and approve the Reorganization Merger and the
other transactions contemplated hereby. No vote of the stockholders of the
Company or any of its subsidiaries is required to approve the Voting Agreement.

(b) The affirmative vote of the Company, as the sole stockholder of
Parent, is the only vote of the holders of any class or series of Parent's
capital stock necessary to adopt this Agreement.

(c) No provision of the articles of incorporation, by-laws or other
governing instruments of the Company or any of its subsidiaries (including
Parent) or any applicable law would, directly or indirectly, restrict or impair
the ability of Vestar/Gray (i) to vote, or otherwise to exercise the rights of a
shareholder with respect to, shares of the Company and its subsidiaries
(including Parent) that may be beneficially owned by Vestar/Gray or (ii) to
consummate the Mergers.

SECTION 5.21 Proxy Statement. None of the information supplied by
---------------
the Company or Parent for inclusion in (i) the registration statement on Form S-
4 to be filed with the SEC by Parent in connection with the issuance of the
Common Stock of Parent following the Mergers (such Form S-4, as amended or
supplemented, is herein referred to as the "Form S-4") will, at the time the
--------
Form S-4 is filed with the SEC, and at any time it is amended or supplemented or
at the time it becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or
<PAGE>

necessary to make the statements therein not misleading, (ii) the proxy
statement to be sent to the shareholders of the Company in connection with the
Shareholders Meeting (as defined in Section 8.1) (such proxy statement, as
amended or supplemented, is herein referred to as the "Proxy Statement")
---------------
will, at the date it is first mailed to the Company's shareholders or at the
time of the Shareholders Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading or (iii) the Statement
on Schedule 13E-3 (such statement, as amended or supplemented, is herein
referred to as the "Schedule 13E-3") to be filed with the SEC by the Company
--------------
concurrently with the filing of the Proxy Statement will, at the time it is
first filed with the SEC, and at any time it is amended or supplemented and at
the time of the Shareholders Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. The Form S-4 will, as of its
effective date, and the prospectus contained therein will, as of its date,
comply as to form in all material respects with the requirements of the
Securities Act and the rules and regulations promulgated thereunder. The Proxy
Statement and the Schedule 13E-3 will comply as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations
promulgated thereunder, except that no representation is made by the Company or
Parent with respect to statements made or incorporated by reference therein
based on information supplied in writing by Acquisition specifically for
inclusion in the Proxy Statement.

SECTION 5.22 Rights Plan. The Board of Directors of the Company has
-----------
adopted a resolution designating Vestar Capital Partners III, L.P. and its
affiliates, Vestar/Gray and Acquisition as "Exempt Persons" under the Rights
Agreement between the Company and Harris Trust Company of California dated as of
November 9, 1998 (the "Rights Agreement") (without redeeming the Company
----------------
Rights), the net effect of which is that (a) neither the execution or delivery
of this Agreement or the Voting Agreement, nor the consummation of the
transactions contemplated by such Agreements (including the transactions
contemplated by the Voting Agreement and the consummation of the Mergers) will
(i) cause any Company Rights to become exercisable or to separate from the
shares of Company Common Stock to which they are attached, (ii) cause
Vestar/Gray or Acquisition or any of their affiliates to be an Acquiring Person
(as defined in the Rights Agreement) in connection with the transactions
contemplated hereby or (iii) trigger any other provisions of the Rights
Agreement, including giving rise to a Distribution Date (as defined in the
Rights Agreement) in connection with the transactions contemplated hereby and
such resolution shall remain in full force and effect at all times from and
after the date hereof.
<PAGE>

ARTICLE 6.

REPRESENTATIONS AND WARRANTIES
OF ACQUISITION

Acquisition hereby represents and warrants to the Company that:

SECTION 6.1 Corporate Organization. Acquisition is a corporation
----------------------
duly organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated and has the requisite corporate power
and authority and any necessary governmental approval to own, operate or lease
its properties and to carry on its business as it is now being conducted, except
where the failure to be so organized, existing and in good standing or to have
such power, authority and governmental approvals would not, individually or in
the aggregate, reasonably be expected to prevent the consummation of the
Mergers.

SECTION 6.2 Authority Relative to This Agreement. Acquisition has
------------------------------------
all necessary corporate power and authority to enter into this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by Acquisition and the consummation by Acquisition of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of Acquisition other than filing and recordation of appropriate
merger documents as required by the DGCL. This Agreement has been duly executed
and delivered by Acquisition and, assuming due authorization, execution and
delivery by the Company and Parent, constitutes a legal, valid and binding
obligation of Acquisition enforceable against it in accordance with its terms.
Vestar/Gray will, in its capacity as sole stockholder of Acquisition, promptly
following the execution of this Agreement adopt this Agreement in accordance
with the DGCL.

SECTION 6.3 No Conflict; Required Filings and Consents. (a) The
------------------------------------------
execution, delivery and performance of this Agreement by Acquisition does not
and will not: (i) conflict with or violate the certificate of incorporation or
by-laws of Acquisition; (ii) assuming that all consents, approvals and
authorizations contemplated by clauses (i), (ii) and (iii) of subsection (b)
below have been obtained and all filings described in such clauses have been
made, conflict with or violate any law, rule, regulation, order, judgment or
decree applicable to Acquisition or by which it or its properties are bound or
affected; or (iii) result in any breach or violation of or constitute a default
(or an event which with notice or lapse of time or both would become a default)
or result in the loss of a material benefit under, or give rise to any pre-
emptive or any right of termination, amendment, acceleration or cancellation of,
or result in the creation of a lien or encumbrance on any of the property or
assets of Acquisition pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Acquisition is a party or by which Acquisition or any of its
properties are bound or affected, except, in the case of clause (iii), for any
such conflicts, violations, breaches, defaults or other occurrences which would
not, individually or in the aggregate, reasonably be expected to prevent the
consummation of the Mergers.

(b) The execution, delivery and performance of this Agreement by
Acquisition does not and will not require any consent, approval, authorization
or permit of, action by, filing
<PAGE>

with or notification to, any Governmental Entity, except (i) for the applicable
requirements, if any, of the Exchange Act and the rules and regulations
promulgated thereunder, the Securities Act and the rules and regulations
promulgated thereunder, the HSR Act, state securities, takeover and Blue Sky
laws and (ii) the filing and recordation of appropriate merger or other
documents as required by the DGCL.

SECTION 6.4 Proxy Statement; Schedule 13E-3. None of the information
-------------------------------
supplied in writing by Acquisition specifically for inclusion in (i) the Form S-
4 will, at the time the Form S-4 is filed with the SEC, and at any time it is
amended or supplemented or at the time it becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) the Proxy Statement will, at the date it is first
mailed to the Company's shareholders or at the time of the Shareholders Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not misleading
or (iii) the Schedule 13E-3 will, at the time it is first filed with the SEC,
and at any time it is amended or supplemented and at the time of the
Shareholders Meeting, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. Notwithstanding the foregoing, Acquisition makes no
representation or warranty with respect to any information supplied by the
Company or any of its representatives which is contained in or incorporated by
reference in any of the foregoing documents.

SECTION 6.5 Brokers. No broker, finder or investment banker (other
-------
than as set forth in Schedule 6.5) is entitled to any brokerage, finder's or
other fee or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by and on behalf of Acquisition.

SECTION 6.6 Commitment Letters. Acquisition has delivered to each of
------------------
the Company and Parent executed letters (a) committing Vestar to cause to be
contributed to Acquisition in connection with the Acquisition Merger cash equity
in an amount equal to $146,526,664, (b) committing The Chase Manhattan Bank to
provide senior debt financing to Parent in the amount of $180,000,000,
consisting of a $155,000,000 term loan and a $25,000,000 revolving credit
facility, in connection with the Acquisition Merger, and (c) stating that Chase
Securities Inc. is highly confident that it can provide subordinated debt
financing to Parent in connection with the Acquisition Merger in an amount equal
to $160,000,000 (collectively, the "Commitment Letters"). As of the date of
------------------
this Agreement, the Commitment Letters provided to the Company and Parent are in
full force and have not been amended in any material respect.

SECTION 6.7 Newly Formed Entity. Acquisition was formed on January
------------------- -------
29, 1999 solely for the purpose of engaging in the transactions contemplated by
- --
this Agreement and, in all material respects, has not engaged in any other
business activities or conducted any operations other than in connection with
the transactions contemplated hereby.
<PAGE>

SECTION 6.8 Capitalization. The authorized capital stock of
--------------
Acquisition consists of 1,000 shares of common stock, par value $.01 per share,
of which, as of the date hereof, 1,000 shares are issued and outstanding and
owned of record by Vestar/Gray. Immediately prior to the Effective Time of the
Acquisition Merger, the authorized capital stock of Acquisition shall be
increased to 7,100,000 and the number of issued and outstanding shares of common
stock immediately prior to the Effective Time of the Acquisition Merger shall be
increased to 6,546,252.

ARTICLE 7.

CONDUCT OF BUSINESS PENDING THE MERGERS

SECTION 7.1 Conduct of Business of the Company Pending the Mergers.
------------------------------------------------------
The Company covenants and agrees that, during the period from the date hereof to
the Effective Time of the Acquisition Merger, unless Acquisition gives its prior
written consent, the businesses of the Company and its subsidiaries shall be
conducted only in, and the Company and its subsidiaries shall not take any
action except in, the ordinary course of business and in compliance with
applicable laws; and the Company and its subsidiaries shall each use its
reasonable best efforts to preserve substantially intact the business
organization of the Company and its subsidiaries, to keep available the services
of the present officers, employees and consultants of the Company and its
subsidiaries and to preserve the present relationships of the Company and its
subsidiaries with customers, suppliers and other persons with which the Company
or any of its subsidiaries has significant business relations. Except as
expressly contemplated by this Agreement or as set forth in the Disclosure
Schedule, by way of amplification and not limitation, neither the Company nor
any of its subsidiaries shall, between the date of this Agreement and the
Effective Time of the Acquisition Merger, directly or indirectly do or commit to
do any of the following without the prior written consent of Acquisition:

(a) amend or otherwise change the articles of incorporation or by-
laws or equivalent organizational documents of the Company or any of its
subsidiaries;

(b) issue, deliver, sell, lease, sell and leaseback, pledge, dispose
of or encumber, or authorize or commit to the issuance, delivery, sale,
lease, sale/leaseback, pledge, disposition or encumbrance of, (i) any
shares of capital stock of any class, or any options, warrants, convertible
securities or other rights of any kind to acquire any shares of capital
stock, or any other ownership interest (including but not limited to stock
appreciation rights or phantom stock), of the Company or any of its
subsidiaries (except for the issuance and delivery of shares of Company
Common Stock issuable in accordance with the terms of Stock Options
outstanding as of January 1, 1999) or (ii) any material assets of the
Company or any of its subsidiaries, other than assets sold, leased,
pledged, disposed of or encumbered in the ordinary course of business
consistent with past practice;

(c) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any of its capital stock, except for the
<PAGE>

Company's regular quarterly dividend in an amount not in excess of $.025
per share per quarter;

(d) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of the capital stock of the
Company or any of its subsidiaries;

(e) (i) repurchase, repay or incur any indebtedness for borrowed
money or issue any debt securities or assume, guarantee or endorse, or
otherwise as an accommodation become responsible for, the obligations of
any person, or make any loans, advances or capital contributions to, or
investments in, any other person; (ii) enter into any material contract or
agreement or any Leases; or (iii) enter into or amend any material
contract, lease, agreement, commitment or arrangement with respect to any
of the matters set forth in this Section 7.1(e), other than in the ordinary
course of business consistent with past practice;

(f) except to the extent required under existing employee and
director benefit plans, agreements or arrangements as in effect on the date
of this Agreement, (i) increase the compensation or fringe benefits of any
of its directors, officers or employees, except for increases in salary or
wages of employees of the Company or its subsidiaries, who are not
directors or officers of the Company, in the ordinary course of business
and consistent with the Company's past practice, (ii) grant any severance
or termination pay not currently required to be paid under existing
severance plans to, or enter into any employment, consulting or severance
agreement or arrangement with, any present or former director, officer or
other employee of the Company or any of its subsidiaries or (iii)
establish, adopt, enter into or amend or terminate any collective
bargaining, bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, deferred compensation, employment,
termination, severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any present or former directors, officers or
employees or the Company or any of its subsidiaries;

(g) except as may be required as a result of a change in law or in
generally accepted accounting principles, change any of the accounting
practices or principles used by it;

(h) make any material tax election, make or change any material
method of accounting with respect to any Tax, file any amended Tax Return
with respect to any material Tax or settle or compromise any material
federal, state, local or foreign tax liability;

(i) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of the Company or any of its subsidiaries (other than the
Mergers);

(j) acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the stock or assets of, or by any
other manner, any business or any
<PAGE>

corporation, partnership, joint venture, association or other business
organization or division thereof;

(k) pay, discharge or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), except for the payment, discharge or satisfaction of
liabilities or obligations in the ordinary course of business consistent
with past practice, or waive, release, grant, or transfer any rights of
value;

(l) settle or compromise any litigation (whether or not commenced
prior to the date of this Agreement), other than settlements not in excess
of amounts specifically reserved for in respect of the subject litigation
in the most recent consolidated financial statements of the Company
included in the SEC Documents (provided such settlement documents do not
involve any material non-monetary obligations on the part of the Company);

(m) close, shut down or otherwise eliminate any of its facilities;

(n) change the composition, fill any vacancies or increase the size
of the Company's Board of Directors;

(o) amend, modify or waive any provision of the Rights Agreement, or
take any action to redeem the Rights or render the Rights inapplicable to
any transaction other than the Mergers and the transactions contemplated by
the Voting Agreement other than in accordance with Section 8.14(b);

(p) amend or modify in any material respect or terminate any existing
IP License, execute any new IP License, sell, license or otherwise dispose
of, in whole or in part, any Company IP, and/or subject any Company IP to
any lien or other encumbrance; or

(q) take or agree to take in writing or otherwise, any of the actions
described in Sections 7.1(a) through 7.1(p).

SECTION 7.2 WARN. Neither the Company nor any of its subsidiaries
----
shall effectuate a "plant closing" or Amass layoff", as those terms are defined
in the Worker Adjustment and Retraining Notification Act of 1988 ("WARN"),
----
affecting in whole or in part any site of employment, facility, operating unit
or employee of the Company or any subsidiary, without notifying Acquisition or
its affiliates in advance and without complying with the notice requirements and
other provisions of WARN.
<PAGE>

ARTICLE 8.

ADDITIONAL AGREEMENTS

SECTION 8.1 Shareholders Meeting. (a) The Company, acting through
--------------------
its Board of Directors, will, as reasonably promptly as practicable following
the date of this Agreement and in consultation with Acquisition, (i) duly call,
give notice of, convene and hold a meeting of its shareholders for the purpose
of considering and approving the principal terms of this Agreement and the
Reorganization Merger and the other transactions contemplated hereby (the
"Shareholders Meeting") and (ii) (A) except to the extent modified in accordance
- ---------------------
with this Section 8.01, include in the Proxy Statement the unanimous
recommendation of the Board of Directors that the shareholders of the Company
vote in favor of the approval of the principal terms of this Agreement and the
Reorganization Merger and the transactions contemplated hereby and the written
opinions of the Financial Advisors that the consideration to be received by the
shareholders of the Company and the Parent pursuant to the Mergers is fair to
such shareholders from a financial point of view and (B) use its reasonable best
efforts to obtain the necessary approval of the principal terms of this
Agreement and Reorganization Merger and the other transactions contemplated
hereby by its shareholders. The Board of Directors of the Company shall not
withdraw, amend or modify in a manner adverse to Acquisition its recommendation
referred to in clause (ii) (A) of the preceding sentence (or announce publicly
its intention to do so). Notwithstanding the foregoing, prior to the receipt of
the Requisite Shareholder Approval, the Board of Directors shall be permitted to
withdraw, amend or modify its recommendation (or publicly announce its intention
to do so) of this Agreement and the Reorganization Merger and the other
transactions contemplated by this Agreement in a manner adverse to Acquisition
if: (1) the Company has complied with Section 8.4, (2) a Superior Proposal (as
defined in Section 8.4) shall have been proposed by any person other than
Acquisition and such proposal is pending at the time of such action; (3) the
Board of Directors shall have concluded in good faith, after consultation with
its outside legal counsel, that the Board of Directors is required to withdraw,
amend or modify its recommendation in order to comply with its fiduciary duties
to the shareholders of the Company under applicable law; and (4) the Company
shall have notified Acquisition of such Superior Proposal at least 48 hours in
advance of such action; and

(b) Parent, acting through its Board of Directors, will, as promptly
as practicable following the date of this Agreement and in consultation with
Acquisition, duly call, give notice of, convene and hold a meeting of its
stockholders for the purpose of adopting this Merger Agreement. The Company,
acting in its capacity as sole stockholder of Parent (i) agrees to vote at such
meeting all the shares of Parent Common Stock held by the Company in favor of
the adoption of this Agreement and (ii) hereby irrevocably waives any rights of
appraisal with respect to the Acquisition Merger or right to dissent from the
Acquisition Merger that the Company may have.

SECTION 8.2 Proxy Statement; Form S-4; Schedule 13E-3. As soon as
-----------------------------------------
reasonably practicable following the date of this Agreement, Parent and the
Company shall prepare the Proxy Statement and the Schedule 13E-3, and Parent
shall prepare and file with the SEC the Form S-4, in which the Proxy Statement
will be included, and the Schedule 13E-3.The
<PAGE>

Company and Parent shall use their reasonable best efforts to have the Form
S-4 declared effective under the Securities Act as promptly as practicable after
such filing. The Company and Parent will use their reasonable best efforts to
cause the Proxy Statement to be mailed to the Company's shareholders as promptly
as practicable after the Form S-4 is declared effective under the Securities
Act. The Company and Parent shall also take any action reasonably required to be
taken under any applicable state securities laws in connection with the
registration and qualification in connection with the Mergers of common stock of
Parent following the Mergers. The information provided by Parent and the Company
for use in the Form S-4, the Proxy Statement and the Schedule 13E-3, and to be
supplied by Acquisition in writing specifically for use in the Form S-4, the
Proxy Statement and the Schedule 13E-3, shall, at the time the Form S-4 becomes
effective and on the date of the Shareholders Meeting referred to above, be true
and correct in all material respects and shall not omit to state any material
fact required to be stated therein or necessary in order to make such
information not misleading, and the Parent, the Company and Acquisition each
agree to correct any information provided by it for use in the Form S-4, the
Proxy Statement and the Schedule 13E-3, which shall have become false or
misleading. Acquisition, Parent and the Company will cooperate with each other
in the preparation of the Proxy Statement; without limiting the generality of
the foregoing, Parent and the Company will promptly notify Acquisition of the
receipt of any comments from the SEC, of any request by the SEC for any
amendment to the Proxy Statement or for additional information and of the
effectiveness of the Form S-4. The Company will permit Acquisition to review and
comment upon all filings with the SEC, including the Proxy Statement and the
Schedule 13E-3 and any amendment thereto, and all mailings to the Company's
shareholders in connection with the Mergers, including the Proxy Statement,
shall be subject to the prior review, comment and approval of Acquisition, which
may not be unreasonably withheld. Acquisition will furnish to Parent and the
Company the information relating to it required by the Exchange Act and the
rules and regulations promulgated thereunder to be set forth in the Proxy
Statement and the Schedule 13E-3. Each of Parent and the Company agrees to use
its reasonable best efforts, after consultation with the other parties hereto,
to respond promptly to any comments made by the SEC with respect to the Proxy
Statement and any preliminary version thereof filed by it and the Schedule 13E-3
and to cause the Proxy Statement to be mailed to the Company's shareholders at
the earliest practicable time.

SECTION 8.3 Access to Information; Confidentiality. From the date
--------------------------------------
hereof to the Effective Time of the Acquisition Merger, the Company shall, and
shall cause its subsidiaries, officers, directors, employees, auditors, counsel,
financial advisors and other agents to, afford Acquisition and its
representatives and the potential financing sources for the transactions
contemplated by this Agreement reasonable access during normal business hours to
its officers, employees, agents, properties, offices, centers and other
facilities and to all books, contracts and records, and shall furnish
Acquisition and such financing sources with all financial, operating and other
data and information as Acquisition, through its representatives or such
financing sources may from time to time reasonably request. Except as required
by law, each of the Company and Acquisition will hold and cause their respective
officers, directors, agents and employees to hold any nonpublic information in
confidence to the extent required by, and in accordance with, the provisions of
the letter dated November 13, 1998 between Vestar and the Company (the
"Confidentiality Agreement").
- --------------------------
<PAGE>

SECTION 8.4 No Solicitation. Neither the Company nor any of its
---------------
subsidiaries (including Parent) shall (whether directly or indirectly through
advisors, agents or other intermediaries), nor shall the Company or any of its
subsidiaries (including Parent) authorize or permit any of its or their
officers, directors, agents, representatives, advisors or subsidiaries to, (a)
solicit, initiate, encourage (including by way of furnishing information) or
take any action knowingly to facilitate the submission of any inquiries,
proposals or offers (whether or not in writing) from any person (other than
Acquisition, Vestar or Vestar/Gray) relating to, other than the transactions
contemplated by this Agreement and the Voting Agreement, (i) any acquisition or
purchase of 10% or more of the consolidated assets of the Company (or, following
the Reorganization Merger, Parent) and its subsidiaries or of 10% or more of any
class of equity securities of the Company (or, following the Reorganization
Merger, Parent) or any of its subsidiaries, (ii) any tender offer (including a
self tender offer) or exchange offer that if consummated would result in any
person beneficially owning 10% or more of any class of equity securities of the
Company (or, following the Reorganization Merger, Parent) or any of its
subsidiaries, (iii) any merger, consolidation, business combination, sale of
substantially all assets, recapitalization, liquidation, dissolution or similar
transaction involving the Company or any of its subsidiaries whose assets,
individually or in the aggregate, constitute 10% or more of the consolidated
assets of the Company (or, following the Reorganization Merger, Parent) , or
(iv) any other transaction the consummation of which would or would reasonably
be expected to impede, interfere with, prevent or materially delay the Mergers
or which would or would reasonably be expected to materially dilute the benefits
to Acquisition of the transactions contemplated by this Agreement (collectively,
"Transaction Proposals"), or agree to or endorse any Transaction Proposal, or
---------------------
(b) enter into or participate in any discussions or negotiations regarding any
of the foregoing, or furnish to any other person any information with respect to
its business, properties or assets in connection with the foregoing, or
otherwise cooperate in any way with, or knowingly assist or participate in,
facilitate or encourage, any effort or attempt by any other person (other than
Acquisition, Vestar or Vestar/Gray) to do or seek any of the foregoing;
provided, however, that the foregoing shall not prohibit the Company, prior to
- -------- -------
the receipt of the Requisite Shareholder Approval, (A) from complying with Rule
14e-2 and Rule 14d-9 under the Exchange Act with regard to a bona fide tender
offer or exchange offer or (B) from participating in negotiations or discussions
with or furnishing information to any person in connection with a Transaction
Proposal not solicited after the date hereof which is submitted in writing by
such person to the Board of Directors of the Company after the date of this
Agreement; provided, however, that prior to participating in any such
-------- -------
discussions or negotiations or furnishing any information, the Company receives
from such person an executed confidentiality agreement on terms not less
favorable to the Company than the Confidentiality Agreement, a copy of which
shall be provided for informational purposes only to Acquisition; and provided,
--------
further, that the Board of Directors of the Company shall have concluded in good
- -------
faith, after consultation with its outside financial advisors, that such
Transaction Proposal is reasonably likely to constitute a Superior Proposal (as
defined below) and, after consultation with its outside legal counsel, that
participating in such negotiations or discussions or furnishing such information
is required in order to comply with its fiduciary duties to the shareholders of
the Company under applicable law; and provided, further, that the Board of
-------- -------
Directors of the Company shall not take any of the foregoing actions unless it
provides Acquisition with prompt (but in no event later than 24 hours after the
occurrence or commencement of such action) notice thereof. If the Board of
Directors of the Company receives a Transaction Proposal, then the Company
shall, to the extent not
<PAGE>

prohibited in good faith by the terms of such Transaction Proposal, promptly
inform Acquisition of the terms and conditions of such proposal and the identity
of the person making it. The Company will immediately cease and cause its
advisors, agents and other intermediaries to cease any and all existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing, and shall use its reasonable best efforts
to cause any such parties in possession of confidential information about the
Company that was furnished by or on behalf of the Company to return or destroy
all such information in the possession of any such party or in the possession of
any agent or advisor of any such party. The Company agrees not to release any
third party from, or waive any provisions of, any confidentiality or standstill
agreement to which the Company is a party. "Superior Proposal" means any of the
------------------
transactions described in clause (i), (ii) or (iii) of the definition of
Transaction Proposal (with all of the percentages included in the definition of
such term raised to 51% for purposes of this definition) with respect to which
the Board of Directors of the Company shall have concluded in good faith, after
consultation with its outside legal counsel and financial advisors, is
reasonably capable of being completed, taking into account all legal, financial,
regulatory and other aspects of the Transaction Proposal and the person making
the proposal, and would, if consummated, result in a transaction more favorable
to the Company's (or, following the Reorganization Merger, Parent's)
shareholders from a financial point of view than the transactions contemplated
by this Agreement, including the Mergers.

SECTION 8.5 Employee Benefits Matters. For a period of at least 12
-------------------------
months following the Effective Time of the Acquisition Merger, Parent shall, or
shall cause the Company to, provide employee benefits under plans, programs and
arrangements which, in the aggregate, will provide benefits to the employees of
Parent, the Company and its subsidiaries which are no less favorable, in the
aggregate, than those provided pursuant to the Company Plans (other than those
related to Company Common Stock) in effect and disclosed to Acquisition on the
date hereof; provided, however, that nothing herein shall prevent the amendment
-------- -------
or termination of any such Company Plan (provided that following any such
amendment or termination, the Company continues to satisfy the requirements of
the first clause of this Section 8.5) or any employee, require that Parent, the
Company (or any of its subsidiaries) provide or permit investment in the
securities of Parent or interfere with Parent's or the Company's right or
obligation to make such changes to any Company Plans as are necessary to conform
with applicable law.

SECTION 8.6 Directors' and Officers' Indemnification and Insurance.
------------------------------------------------------
(a) The articles of incorporation and by-laws of the Company following the
Mergers shall contain provisions identical with respect to elimination of
personal liability and indemnification to those set forth in Article V of the
articles of incorporation of the Company and Article V of the by-laws of the
Company, respectively, which provisions shall not be amended, repealed or
otherwise modified for a period of six years from the Effective Time of the
Acquisition Merger in any manner that would adversely affect the rights
thereunder of individuals who at the Effective Time of the Reorganization Merger
or the Effective Time of the Acquisition Merger were directors, officers, agents
or employees of the Company or Parent.

(b) The Company shall maintain in effect for six years from the
Effective Time of the Acquisition Merger policies of directors' and officers'
liability insurance containing terms
<PAGE>

and conditions which are not less advantageous than those policies maintained by
the Company at the date hereof, with respect to matters occurring prior to the
Effective Time of the Acquisition Merger, to the extent available, and having
the maximum available coverage under the current policies of directors' and
officers' liability insurance; provided that (i) the Company following the
Acquisition Merger shall not be required to spend an amount in any year in
excess of 150% of the annual aggregate premiums currently paid by the Company
for such insurance; and provided, further, that if the annual premiums of such
insurance coverage exceed such amount, the Company shall be obligated to obtain
a policy with the best coverage available, in the reasonable judgment of the
Board of Directors of Parent following the Acquisition Merger, for a cost not
exceeding such amount, and (ii) such policies may in the sole discretion of the
Company be one or more "tail" policies for all or any portion of the full six
year period. The annual premium paid for such insurance in respect of the year
ended December 31, 1998 was $108,000.

SECTION 8.7 Notification of Certain Matters. The Company shall give
-------------------------------
prompt notice to Acquisition, and Acquisition shall give prompt notice to the
Company, of (i) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would be likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate; (ii) any failure of
Parent, the Company or Acquisition, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; (iii) any notice or other communication from any third party
alleging that the consent of such third party is or may be required in
connection with the transactions contemplated by this Agreement; and (iv) any
material adverse change in the properties, operations, assets, liabilities,
condition (financial or otherwise) or results of operations of the Company and
its subsidiaries, taken as a whole, or the occurrence of an event known to the
Company which would be reasonably likely to result in any such change; provided,
--------
however, that the delivery of any notice pursuant to this Section 8.7 shall not
- -------
limit or otherwise affect the remedies available hereunder to the party
receiving such notice.

SECTION 8.8 Further Action; Reasonable Best Efforts. (a) Upon the
---------------------------------------
terms and subject to the conditions hereof, each of the parties hereto shall use
its reasonable best efforts to take, or cause to be taken, all action, and to do
or cause to be done, and to assist and cooperate with the parties in doing, all
things necessary, proper or advisable to consummate and make effective, in the
most expeditious manner practicable, the transactions contemplated by this
Agreement and the Voting Agreement, including but not limited to (i) cooperation
in the preparation and filing of the Form S-4, the Proxy Statement, the Schedule
13E-3, any required filings under the HSR Act and any amendments to any thereof,
(ii) determining whether any filings are required to be made or consents,
approvals, waivers, licenses, permits or authorizations are required to be
obtained (or, which if not obtained, would result in an event of default,
termination or acceleration of any agreement or any put right under any
agreement) under any applicable law or regulation or from any Governmental
Entities or third parties, including parties to leases, loan agreements or other
debt instruments, in connection with the transactions contemplated by this
Agreement, including the Mergers, and the Voting Agreement, and (iii) promptly
making any such filings, furnishing information required in connection therewith
and timely seeking to obtain any such consents, approvals, permits or
authorizations.
<PAGE>

(b) Each of the parties agrees to cooperate with each other in
taking, or causing to be taken, all actions necessary to delist the shares of
Company Common Stock from the NYSE, provided that such delisting shall not be
effective until after the Effective Time of the Acquisition Merger. The parties
also acknowledge that it is Acquisition's intent that the shares of Parent
Common Stock following the Acquisition Merger will not be quoted on the NYSE or
any other national securities exchange or quoted in any inter-dealer quotation
system.

(c) The Company agrees to provide, and will cause its subsidiaries
and its and their respective officers, employees and advisers to provide, all
cooperation reasonably necessary in connection with the arrangement of any
financing to be consummated contemporaneously with or at or after the Closings
in respect of the transactions contemplated by this Agreement, including
participation in meetings, due diligence sessions, road shows, the preparation
of offering memoranda, private placement memoranda, prospectuses and similar
documents, the execution and delivery of any commitment letters, underwriting or
placement agreements, pledge and security documents, other definitive financing
documents, or other requested certificates or documents, including a certificate
of the chief financial officer of the Company or Parent with respect to solvency
matters, comfort letters of accountants and legal opinions as may be reasonably
requested by Acquisition and taking such other actions as are reasonably
required to be taken by the Company in the Commitment Letters. The parties
acknowledge that the payment of any fees by the Company in connection with any
Commitment Letters, other than pursuant to Section 10.3, shall be subject to the
occurrence of the Closings. In addition, in conjunction with the obtaining of
any such financing, the Company agrees, at the reasonable request of
Acquisition, to call for prepayment or redemption, or to prepay, redeem and/or
renegotiate, as the case may be, any then existing indebtedness of the Company;
provided that no such prepayment or redemption shall themselves actually be made
until contemporaneously with or after the Effective Time of the Reorganization
Merger.

(d) The Company shall cooperate with any reasonable requests of
Acquisition or the SEC related to the recording of the Mergers as a
recapitalization for financial reporting purposes, including, without
limitation, to assist Acquisition and its affiliates with any presentation to
the SEC with regard to such recording and to include appropriate disclosure with
regard to such recording in all filings with the SEC and all mailings to
shareholders made in connection with the Mergers. In furtherance of the
foregoing, the Company and/or Parent shall provide to Acquisition for the prior
review of Acquisition's advisors any description of the transactions
contemplated by this Agreement which is meant to be disseminated.

(e) (i) Acquisition hereby agrees to use its reasonable best efforts,
subject to normal conditions, to assist Parent and the Company in arranging the
financing described in the Commitment Letters in respect of the transactions
contemplated by this Agreement (as described in Section 9.3(f) hereof),
including using its reasonable best efforts (A) to assist Parent and the Company
in the negotiation of definitive agreements with respect thereto and (B) to
satisfy all conditions applicable to Acquisition in such definitive agreements.
Acquisition and its affiliates shall not take any action which is intended to
impair, hinder or delay the receipt of the proceeds of the financing described
in the Commitment Letters on the terms set forth therein; provided that the
foregoing shall not preclude Acquisition from providing the parties providing
such financing with all relevant information relating to the Company and its
business in connection
<PAGE>

with their due diligence investigation. Acquisition will keep the Company
informed of the status of its efforts to assist Parent and the Company in
arranging such financing, including making reports with respect to significant
developments. In the event any portion of such financing becomes unavailable in
the manner or from the sources originally contemplated, Acquisition will use its
reasonable best efforts to assist Parent and the Company in arranging
replacement financing. Each of Acquisition and the Company shall notify the
other within 24 hours of its learning that any such financing will not be
available on terms satisfactory to Acquisition or the Company.

(ii) Subject to Parent having received the proceeds of the financing
described in the Commitment Letters referred to in Section 6.6(b) and (c) on
terms reasonably satisfactory to Acquisition, Acquisition at the Closings will
be capitalized with a cash equity contribution in an amount of up to
$146,526,664. It is understood that certain members of management of the
Company may be afforded the opportunity to purchase Parent Common Stock
representing not more than 5% of the outstanding capital stock of Parent.
Acquisition will be under no obligation pursuant to the preceding sentence
unless and until Parent receives the proceeds of the financing described in the
Commitment Letters referred to in Section 6.6(b) and (c) on terms reasonably
satisfactory to Acquisition. In addition, Acquisition will be under no
obligation under any circumstances to be capitalized with cash equity of more
than $146,526,664.

(f) In case at any time after the Effective Time of the
Reorganization Merger any further action is necessary or desirable to carry out
the purposes of this Agreement, the parties to this Agreement shall use their
reasonable best efforts to cause their proper officers and directors to take all
such necessary action.

(g) The Company and Parent shall make, subject to the condition that
the transactions contemplated herein actually occur, any undertakings required
in order to comply with the antitrust requirements or laws of any governmental
entity, including the HSR Act, in connection with the transactions contemplated
by this Agreement; provided that no such undertaking shall be agreed to or made
--------
unless reasonably acceptable to Acquisition.

(h) The Company shall use its commercially reasonable best efforts to
obtain all consents, approvals, agreements, extensions or other waivers of
rights necessary to ensure that all Leases and other Material Contracts remain
in full force and effect for the benefit of the Company on substantially the
same terms and conditions as in effect on the date hereof (without any material
increase in amounts payable by the Company thereunder) immediately following the
Effective Time of the Reorganization Merger, and Acquisition shall cooperate
with the Company in obtaining such consents, approvals, agreements, extensions
or other waivers of rights.

SECTION 8.9 Public Announcements. Neither Parent, the Company nor
--------------------
Acquisition will issue any press release or public statement with respect to the
transactions contemplated by this Agreement and the Voting Agreement, including
the Mergers, without the other party's prior consent, except as may be required
by applicable law, court process or by obligations pursuant to any listing
agreement with the NYSE. In addition to the foregoing, Acquisition and the
Company will consult with each other before issuing, and provide each other the
opportunity to review and comment upon, any such press release or other public
statements
<PAGE>

with respect to such transactions. The parties (including the Independent
Committee) agree that the initial press release or releases to be issued with
respect to the transactions contemplated by this Agreement shall be mutually
agreed upon prior to the issuance thereof.

SECTION 8.10 Disposition of Litigation. The Company will not
-------------------------
voluntarily cooperate with any third party which has sought or may hereafter
seek to restrain or prohibit or otherwise oppose the Mergers and will cooperate
with Acquisition to resist any such effort to restrain or prohibit or otherwise
oppose the Mergers. The Company and Acquisition shall participate jointly in
the defense of any shareholder litigation against the Company or Acquisition, as
applicable, and their respective directors relating to the transactions
contemplated by this Agreement.

SECTION 8.11 Affiliates. Prior to the Closing Dates, the Company
----------
shall deliver to Acquisition a letter identifying all persons who are, at the
time this Agreement is submitted for approval to the shareholders of the
Company, "affiliates" of the Company for purposes of Rule 145 under the
Securities Act. The Company shall use its reasonable best efforts to cause each
such person to deliver to Acquisition on or prior to the Closing Dates a written
agreement substantially in the form attached as Exhibit A hereto.

SECTION 8.12 Resignation of Directors. Prior to the Effective Time
------------------------
of the Acquisition Merger, the Company shall deliver to Acquisition evidence
satisfactory to Acquisition of the resignation of the directors of the Company
and Parent set forth in Section 8.12 of the Disclosure Schedule, effective at
the Effective Time of the Acquisition Merger.

SECTION 8.13 Stop Transfer Order. The Company acknowledges and
-------------------
agrees to be bound by and to comply with the provisions of the Voting Agreement
as if a party thereto with respect to transfers of record ownership of shares of
Company Common Stock, and agrees to notify the Company's transfer agent that
there is a stop transfer order with respect to all of the Subject Shares (as
defined in the Voting Agreement) and that the Voting Agreement places limits on
the voting of the Subject Shares and to do all other things as are necessary to
effect the provisions of the Voting Agreement.

SECTION 8.14 Certain Covenants of Parent and the Company. (a)
-------------------------------------------
Parent covenants and agrees that on or before the Effective Time of the
Reorganization Merger:

(i) Qualification as Foreign Corporation. It will qualify to do
------------------------------------
business as a foreign corporation in the State of California, and in
connection therewith will irrevocably appoint an agent for service of
process as required under the provisions of Section 2105 of the California
GCL.

(ii) Franchise Tax Filings. It will file any and all documents with
---------------------
the California Franchise Tax Board necessary to the assumption by Parent of
all the franchise tax liabilities of the Company.
<PAGE>

(iii) Migration of Parent. It will take all actions necessary to
-------------------
liquidate its existence as a Barbados corporation as promptly as
practicable following the date of this Agreement and continue its existence
as a Delaware corporation.

(b) Effective not later than the Effective Time of the Reorganization
Merger, the Board of Directors of the Company shall adopt and approve an
amendment to the Rights Agreement causing the Company Rights to expire as
of the Effective Time of the Reorganization Merger.

ARTICLE 9.

CONDITIONS TO THE MERGERS

SECTION 9.1 Conditions to Obligation of Each Party to Effect the
----------------------------------------------------
Mergers. The respective obligations of each party to effect the Mergers shall
- -------
be subject to the satisfaction at or prior to the Effective Time of the
Reorganization Merger of the following conditions:

(a) Requisite Shareholder Approval. The principal terms of this
------------------------------
Agreement and the Reorganization Merger shall have been approved by the
Requisite Shareholder Approval.

(b) HSR Act. The waiting period (and any extension thereof)
-------
applicable to the Mergers under the HSR Act shall have been terminated or
shall have expired.

(c) No Injunctions or Restraints. No temporary restraining order,
----------------------------
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other Governmental Entity of competent
jurisdiction or other legal restraint or prohibition preventing the
consummation of either or both of the Mergers or the transactions
contemplated by the Voting Agreement shall be in effect; provided, however,
-------- -------
that the parties hereto shall use their reasonable best efforts to have any
such injunction, order, restraint or prohibition vacated.

(d) Form S-4. The Form S-4 shall have become effective under the
--------
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order, and any material Blue Sky and other state
securities laws applicable to the registration and qualification of Parent
Common Stock following the Mergers shall have been complied with.

(e) Statutes. No statute, rule or regulation shall have been enacted
--------
by any Governmental Entity that would make the consummation of either
Merger illegal.

(f) Migration of Parent. The migration of the jurisdiction of
-------------------
incorporation of Parent from Barbados to Delaware pursuant to Section 356
of the Company Laws of Barbados shall have been consummated.
<PAGE>

SECTION 9.2 Additional Condition to the Acquisition Merger. The
----------------------------------------------
obligations of Acquisition and Parent to effect the Acquisition Merger are
subject to the Reorganization Merger having become effective in accordance with
the California GCL.

SECTION 9.3 Conditions to Obligation of Acquisition to Consummate the
---------------------------------------------------------
Acquisition Merger. The obligations of Acquisition to effect the Acquisition
- ------------------
Merger are further subject to the satisfaction at or prior to the Effective Time
of the Acquisition Merger of the following conditions:

(a) Representations and Warranties. The representations and
------------------------------
warranties of the Company and Parent set forth in this Agreement to the
extent qualified as to materiality shall be true and correct and any such
representations and warranties to the extent not so qualified shall be true
and correct in all material respects, in each case as of the date of this
Agreement and as of the Closing Dates as though made on and as of the
Closing Dates (other than representations and warranties which address
matters only as of a certain date, which shall be true and correct, or true
and correct in all material respects, as the case may be, as of such date).
Acquisition shall have received a certificate signed on behalf of Parent
and the Company by the chief executive officer and the chief financial
officer of Parent and the Company to the effect set forth in this paragraph
and paragraph (b) below.

(b) Performance of Obligations of the Company. Parent and the
-----------------------------------------
Company shall have performed the obligations required to be performed by
them under this Agreement at or prior to the Closing Dates (except for such
failures to perform as have not had or would not reasonably be expected,
either individually or in the aggregate, to have a Material Adverse Effect
or materially adversely affect the ability of the Company and Parent to
consummate the transactions herein contemplated or perform its obligations
hereunder).

(c) Consents, etc. Acquisition shall have received evidence, in form
--------------
and substance reasonably satisfactory to it, that all licenses, permits,
consents, approvals, authorizations, qualifications and orders of
Governmental Entities and other third parties listed on Section 9.3 of the
Disclosure Schedule have been obtained without, in the case of third
parties, the payment or imposition of any material costs or obligations or
the exercise of preemptive rights.

(d No Material Litigation. There shall not be pending or threatened
----------------------
by any Governmental Entity any suit, action or proceeding (i) challenging
or seeking to restrain or prohibit the consummation of either of the
Mergers or any of the other transactions contemplated by this Agreement or
the Voting Agreement or seeking to obtain from Acquisition or any of its
affiliates any damages that are material to any such party, (ii) seeking to
prohibit or limit the ownership or operation by the Company or any of its
subsidiaries of any material portion of the business or assets of the
Company or any of its subsidiaries or (iii) seeking to impose limitations
on the ability of Acquisition (or any designee of Acquisition pursuant to
the Voting Agreement) or any shareholder of Acquisition or the Company to
acquire or hold, or exercise full rights of ownership of,
<PAGE>

any shares of Company Common Stock, including, without limitation, the
right to vote the Company Common Stock on all matters properly presented to
the shareholders of the Company.

(e) Affiliate Letters. Acquisition shall have received the
-----------------
agreements referred to in Section 8.11.

(f) Financing. Parent shall have received the proceeds of financing
---------
on the terms and conditions specifically identified in the Commitment
Letters described in Section 6.6(b) and (c) or upon terms and conditions
which are, in the reasonable judgment of Acquisition, substantially
equivalent thereto, and to the extent that any terms and conditions are not
specifically identified in the Commitment Letters, on terms and conditions
reasonably satisfactory to Acquisition.

(g) Certain Transactions. The Management Shareholders and
--------------------
Vestar/Gray shall have consummated the transactions contemplated by Section
4 of the Voting Agreement and entered into the agreement contemplated by
Section 4 of the Voting Agreement.

(h) No Material Adverse Effect. Since the date of this Agreement, no
--------------------------
event shall have occurred that has had, or that would be reasonably likely
to have, a Material Adverse Effect.

SECTION 9.4 Conditions to Obligation of Parent to Consummate the
----------------------------------------------------
Acquisition Merger. The obligations of Parent to effect the Acquisition Merger
- ------------------
are further subject to the satisfaction at or prior to the Effective Time of the
Acquisition Merger of the following conditions:

(a) Representations and Warranties. The representations and
------------------------------
warranties of Acquisition set forth in this Agreement to the extent
qualified as to materiality shall be true and correct and any such
representations and warranties to the extent not so qualified shall be true
and correct in all material respects, in each case as of the date of this
Agreement and as of the Closing Dates as though made on and as of the
Closing Dates (other than representations and warranties which address
matters only as of a certain date, which shall be true and correct, or true
and correct in all material respects, as the case may be, as of such date).
Parent shall have received a certificate signed on behalf of Acquisition by
an authorized officer of Acquisition to the effect set forth in this
paragraph and in paragraph (b) below.

(b) Performance of Obligations of Acquisition. Acquisition shall
-----------------------------------------
have performed the obligations required to be performed by it under this
Agreement at or prior to the Closing Dates (except for such failures to
perform as have not had or would not reasonably be expected, either
individually or in the aggregate, to materially adversely affect the
ability of Acquisition to consummate the transactions herein contemplated
or perform its obligations hereunder).
<PAGE>

ARTICLE 10.

TERMINATION, AMENDMENT AND WAIVER

SECTION 10.1 Termination. This Agreement may be terminated and the
-----------
Acquisition Merger contemplated hereby may be abandoned at any time prior to the
Effective Time of the Reorganization Merger and, except as set forth below,
notwithstanding approval hereof by the shareholders of the Company, Acquisition
and Parent, provided that such termination shall have been approved by the Board
--------
of Directors of such party or a duly authorized committee thereof:

(a) By mutual written consent of Acquisition and the Company;

(b) By Acquisition or the Company if any court of competent
jurisdiction, arbitrator or other Governmental Entity located or having
jurisdiction within the United States or any country or economic region in
which either the Company or Acquisition, directly or indirectly, has
material assets or operations, shall have issued a final order, decree or
ruling or taken any other final action restraining, enjoining or otherwise
prohibiting the consummation of either of the Mergers or any of the
transactions contemplated by this Agreement or the Voting Agreement, or
otherwise altering the terms of any of the foregoing in any significant
respect, and such order, decree, ruling or other action is or shall have
become final and nonappealable;

(c) By Acquisition or the Company if the Mergers shall not have been
consummated on or before July 15, 1999, provided that the right to
--------
terminate this Agreement under this Section 10.1(c) shall not be available
to the party whose action or failure to act has been the cause of or
resulted in the failure of the Mergers to occur on or before such date and
such action or failure to act constitutes a breach of this Agreement;

(d) By Acquisition or the Company if the Requisite Shareholder
Approval shall not have been obtained at a duly held meeting of
shareholders or at any adjournment thereof;

(e) By Acquisition, if the Company or its Board of Directors shall
have (i) withdrawn, modified or amended in any respect adverse to
Acquisition its approval or recommendation of this Agreement or any of the
transactions contemplated herein, (ii) failed as promptly as reasonably
practicable after the Form S-4 is declared effective to mail the Proxy
Statement to its shareholders or failed to include in such statement such
recommendation, (iii) approved, recommended or entered into an agreement
with respect to, or consummated, any Transaction Proposal from a person
other than Acquisition or any of its affiliates, (iv) resolved to do any of
the foregoing or (v) in response to the commencement of any tender offer or
exchange offer for 10% or more of the outstanding shares of Company Common
Stock, not recommended rejection of such tender offer or exchange offer;
<PAGE>

(f) By the Company, prior to the receipt of the Requisite Shareholder
Approval, if, (i) pursuant to and in compliance with Section 8.1 hereof,
the Board of Directors of the Company withdraws, modifies or amends in a
manner adverse to Acquisition its recommendation referred to in Section
5.21 (or publicly announces its intention to do so) or (ii) the Company or
its Board of Directors approves a Superior Proposal; provided, however,
-------- -------
that (A) the Company shall have complied with Section 8.4, (B) the Board of
Directors of the Company shall have concluded in good faith, after
consultation with its outside legal counsel and financial advisors, that
such proposal is a Superior Proposal and (C) the Board of Directors shall
have concluded in good faith, after consultation with its outside legal
counsel, that approving and entering into an agreement in connection with,
and consummating, such Superior Proposal is required in order to comply
with its fiduciary duties to the shareholders of the Company under
applicable law; provided, that this Agreement may not be terminated
--------
pursuant to this Section 10.1(f) unless (A) concurrently with such
termination, the Company pays to Acquisition the Termination Fee and (B)
the Company shall have provided Acquisition with at least 48 hours advance
notice of such termination; or

(g) (i) by the Company, if Acquisition breaches any of its
representations, warranties, covenants or agreements contained in this
Agreement which is reasonably likely to materially adversely affect
Acquisition's ability to consummate the Acquisition Merger and, with
respect to any such breach that is reasonably capable of being remedied,
the breach is not remedied within 20 days after the Company has furnished
Acquisition with written notice of such breach or (ii) by Acquisition, if
the Company breaches any of its representations, warranties, covenants or
agreements contained in this Agreement which is reasonably likely to have a
Material Adverse Effect or which is reasonably likely to materially
adversely affect the Company's ability to consummate either or both of the
Mergers and, with respect to any such breach that is reasonably capable of
being remedied, the breach is not remedied within 20 days after Acquisition
has furnished the Company with written notice of such breach.

SECTION 10.2 Effect of Termination. In the event of the termination
---------------------
of this Agreement pursuant to Section 10.1, this Agreement shall forthwith
become void and there shall be no liability on the part of any party hereto
except as set forth in Section 10.3 and Section 11.1; provided, however, that
-------- -------
nothing herein shall relieve any party from liability for any wilful breach
hereof.

SECTION 10.3 Termination Fees and Expenses. (a) The Company shall
-----------------------------
(provided that Acquisition is not then in material breach of its obligations
under this Agreement) upon the termination of this Agreement in accordance with
Section 10.1(c) (in the event that the Closings shall not have occurred, in
whole or in part, by reason of the failure of the conditions set forth in
Section 9.1(f), 9.2 (to the extent that all relevant conditions have been
satisfied or waived and the Company fails to cause the Reorganization Merger to
be consummated) or Section 9.3(a), (b), (c) (other than consents from Robert E.
Gray, Marie Gray and Kelly Gray or any entity controlled by any of them), (e)
(other than letters from Robert E. Gray, Marie Gray and Kelly Gray), (f) (unless
such financing is not received due to (i) the occurrence of a material
disruption of or material adverse change in financial, banking or capital market
conditions, (ii) a competing
<PAGE>

offering, placement or arrangement of debt securities or bank financing by or on
behalf of the Borrower, the Company or any subsidiary thereof that was
undertaken by, on behalf of (with Vestar's consent), or at the direction of
Vestar or its affiliates, or (iii) a material disruption or material adverse
change in the market for new issues of high yield securities or the financial or
capital markets in general) or (h)), 10.1(e), 10.1(f) or 10.1(g)(ii), promptly,
but in no event later than two business days following written notice thereof,
together with reasonable supporting documentation, reimburse Acquisition, in an
aggregate amount of up to $1.5 million, for all reasonable out-of-pocket
expenses and fees (including fees payable to all banks, investment banking firms
and other financial institutions, and their respective agents and counsel, and
all fees of counsel, accountants, financial printers, advisors, experts and
consultants to Acquisition and its affiliates), whether incurred prior to,
concurrently with or after the execution of this Agreement, in connection with
the Mergers and the consummation of all transactions contemplated by this
Agreement, the Voting Agreement and the financing thereof (collectively, the
"Expenses"). Such payment, together with any Termination Fee which may be paid,
--------
shall serve as full liquidated damages in respect of such breach, and
Acquisition hereby waives all claims against the Company and Parent and their
respective subsidiaries in respect of the breach or breaches occasioning the
payment pursuant to this Section 10.3(a). It is understood that in the event
that Acquisition is paid a Termination Fee pursuant to Section 10.3(c) or (d),
to the extent not previously paid, no amounts shall be payable as Expenses.

(b) Acquisition shall (provided that neither Parent nor the Company
is then in material breach of its obligations under this Agreement) following
the termination of this Agreement in accordance with Section 10.1(c) (in the
event that the Closings shall not have occurred by reason of the failure of the
conditions set forth in Sections 9.4(a) or 9.4(b)) or 10.1(g)(i), promptly, but
in no event later than two business days following written notice thereof,
together with reasonable supporting documentation, reimburse Parent and Company,
in an aggregate amount of up to $1.5 million for all reasonable out-of-pocket
expenses and fees (including payable to all banks, investment banking firms and
other financial institutions, and their respective agents and counsel, and all
fees of counsel, accountants, financial printers, advisors, experts and
consultants to Parent, the Company and their respective affiliates), whether
incurred prior to, concurrently with or after the execution of this Agreement,
in connection with the Mergers and the consummation of all transactions
contemplated by this Agreement, the financing hereof and consents related
hereto. Such payment shall serve as full liquidated damages in respect of such
breach and Parent and the Company hereby waive, on behalf of themselves and
their subsidiaries, all claims against Acquisition and its affiliates in respect
of the breach or breaches occasioning the payment pursuant to this Section
10.3(b) less any amount previously paid to Acquisition in respect of Expenses.

(c) In the event that this Agreement is terminated by Acquisition
pursuant to Section 10.1(e) or by the Company pursuant to Section 10.1(f), the
Company shall pay to Acquisition by wire transfer of immediately available funds
to an account designated by Acquisition on the next business day following such
termination (or, in the case of a termination pursuant to Section 10.1(f), prior
to the effectiveness of such termination) an amount equal to $14 million (the
"Termination Fee") less any amount previously paid to Acquisition in respect of
- ----------------
Expenses.
<PAGE>

(d) If all of the following events have occurred:

(i) a Transaction Proposal is commenced, publicly disclosed, publicly
proposed or otherwise formally communicated to the Company, Parent or the
Independent Committee at any time on or after the date of this Agreement
but prior to any termination of this Agreement and either (A) Acquisition
or the Company terminates this Agreement pursuant to Section 10.1(c)
(unless such termination shall have occurred, in whole or in part, due to
the failure of the condition set forth in Section 9.3(f) due to (i) the
occurrence of a material disruption of or material adverse change in
financial, banking or capital market conditions, (ii) a competing offering,
placement or arrangement of debt securities or bank financing by or on
behalf of the Borrower, the Company or any subsidiary thereof that was
undertaken by, on behalf of (with Vestar's consent), or at the direction of
Vestar or its affiliates, or (iii) a material disruption or material
adverse change in the market for new issues of high yield securities or the
financial or capital markets in general) or (B) Acquisition or the Company
terminates this Agreement pursuant to Section 10.1(d) or (C) Acquisition
terminates this Agreement pursuant to Section 10.1(g)(ii); and

(ii) thereafter, within 12 months of the date of such termination,
the Company or Parent enters into a definitive agreement with respect to,
or consummates, the Transaction Proposal referred to in clause (i) above or
a Superior Proposal (whether or not such Superior Proposal was commenced,
publicly disclosed, publicly proposed or otherwise communicated to the
Company or Parent prior to such termination);

then, the Company shall pay to Acquisition, concurrently with the earlier of the
execution of such definitive agreement or the consummation of such Transaction
Proposal, an amount equal to the Termination Fee (less any amount previously
paid to Acquisition in respect of Expenses), it being agreed that one third of
such Termination Fee shall be payable upon the execution of such definitive
agreement and the remaining two thirds of such Termination Fee (or, if no
definitive agreement shall have been signed, all of such Termination Fee less
any amount previously paid to Acquisition in respect of Expenses) shall be
payable upon the consummation of such Transaction Proposal or Superior Proposal.

(e) Except as otherwise specifically provided herein, each party
shall bear its own expenses in connection with this Agreement and the
transactions contemplated hereby; provided that all expenses of Acquisition
--------
shall be paid by the Company at or following the Effective Time of the Merger.

SECTION 10.4 Amendment. This Agreement may be amended by the parties
---------
hereto by action taken by or on behalf of their respective Boards of Directors
at any time prior to the Effective Time of the Reorganization Merger; provided,
--------
however, that, after approval of the Mergers and adoption of this Agreement by
- -------
the shareholders of the Company, Acquisition and Parent, as applicable, no
amendment may be made which by law requires the further approval of such
shareholders without such further approval.

SECTION 10.5 Waiver. At any time prior to the Effective Time of the
------
Reorganization Merger, any party hereto may by action taken by or on behalf of
its respective
<PAGE>

Board of Directors (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (c) subject to applicable law, waive
compliance with any of the agreements or conditions contained herein. Any such
extension or waiver shall be valid if set forth in an instrument in writing
signed by the party or parties to be bound thereby.

ARTICLE 11.

GENERAL PROVISIONS

SECTION 11.1 Non-Survival of Representations, Warranties and
-----------------------------------------------
Agreements. The representations, warranties and agreements in this Agreement
- ----------
and in any instrument delivered pursuant hereto shall terminate at the Effective
Time of the Acquisition Merger or upon the termination of this Agreement
pursuant to Section 10.1, as the case may be, except that the agreements set
forth in Section 8.6 shall survive the Effective Time of the Acquisition Merger
and those set forth in Sections 8.3, 10.3 and this Section 11.1 shall survive
termination of this Agreement.

SECTION 11.2 Notices. All notices, requests, claims, demands and
-------
other communications hereunder shall be in writing and shall be given (and shall
be deemed to have been duly given upon receipt) by delivery in person, by
telecopy with confirmation or by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties at the following addresses
(or at such other address for a party as shall be specified by like notice):

if to Acquisition:

c/o Vestar Capital Partners III, L.P.
1225 17th Street, Suite 1660
Denver, Colorado 80202
Attention: James P. Kelley
Facsimile: (303) 292-6639

with a copy to:

Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Attention: Robert L. Friedman, Esq.
Facsimile: (212) 455-2502
<PAGE>

Hewitt & McGuire, LLP
19900 MacArthur Boulevard, Suite 1050
Irvine, California 92612
Attention: Paul A. Rowe, Esq.
Facsimile: (949) 798-0511

if to the Company or Parent:

St. John Knits, Inc.
17422 Derian Avenue
Irvine, California 92614
Attention: Robert E. Gray
Facsimile: (949) 223-3272

with a copy to:

O'Melveny & Myers LLP
610 Newport Center Drive
Newport Beach, California 92660-6429
Attention: Karen K. Dreyfus
Facsimile: (949) 823-6994

and

Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Los Angeles, California 90071
Attention: Brian J. McCarthy, Esq.
Facsimile: (213) 687-5600

SECTION 11.3 Certain Definitions and Interpretations. For purposes
---------------------------------------
of this Agreement, the term:

(a) "affiliate" of a person means a person that directly or
---------
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, the first mentioned person;

(b) "beneficial owner" with respect to any shares of Company Common
----------------
Stock means a person who shall be deemed to be the beneficial owner of such
shares (i) which such person or any of its affiliates or associates (as
such term is defined in Rule 12b-2 of the Exchange Act) beneficially owns,
directly or indirectly, (ii) which such person or any of its affiliates or
associates has, directly or indirectly, (A) the right to acquire (whether
such right is exercisable immediately or subject only to the passage of
time), pursuant to any agreement, arrangement or understanding or upon the
exercise of consideration rights, exchange rights, warrants or options, or
otherwise, or (B) the right to vote pursuant to any agreement, arrangement
or understanding or (iii) which are beneficially owned,
<PAGE>

directly or indirectly, by any other persons with whom such person or any
of its affiliates or person with whom such person or any of its affiliates
or associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares of Company
Common Stock;

(c) "control" (including the terms "controlled by" and "under common
------- ------------- ------------
control with") means the possession, directly or indirectly or as trustee
------------
or executor, of the power to direct or cause the direction of the
management policies of a person, whether through the ownership of stock, as
trustee or executor, by contract or credit arrangement or otherwise;

(d) "generally accepted accounting principles" shall mean the
----------------------------------------
generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute
of Certified Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession in the United States;

(e) "person" means an individual, corporation, partnership, limited
------
liability company, association, trust, unincorporated organization, other
entity or group (as defined in Section 13(d)(3) of the Exchange Act); and

(f) "subsidiary" or "subsidiaries" of the Company, or any other
---------- ------------
person means any corporation, partnership, joint venture or other legal
entity of which the Company, or such other person, as the case may be
(either alone or through or together with any other subsidiary), owns,
directly or indirectly, 50% or more of the stock or other equity interests
the holder of which is generally entitled to vote for the election of the
board of directors or other governing body of such corporation or other
legal entity (and, for the avoidance of doubt, it is understood that such
term shall include and shall refer to Parent, Amen Wardy Home Stores, LLC
and St. John/Varian Development Corporation).

When a reference is made in this Agreement to Articles, Sections or Exhibits,
such reference shall be to a Section or Exhibit of this Agreement, respectively,
unless otherwise indicated. The table of contents and headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation". Unless the context otherwise
requires, the use of the singular shall include the plural, the use of the
masculine shall include the feminine, and vice versa. As used in this
Agreement, the antecedent of any personal pronoun shall be deemed to be only the
next preceding proper noun or nouns, as appropriate for such pronoun. As used
in this Agreement, any reference to any law, rule or regulation shall be deemed
to include a reference to any amendments, revisions or successor provisions to
such law, rule or regulation.

SECTION 11.4 Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so
<PAGE>

long as the economic or legal substance of the transactions contemplated hereby
is not affected in any manner adverse to any party. Upon such determination that
any term or other provision is invalid, illegal or incapable of being enforced,
the parties hereto shall negotiate in good faith to modify this Agreement so as
to effect the original intent of the parties as closely as possible in an
acceptable manner to the end that the transactions contemplated hereby are
fulfilled to the fullest extent possible.

SECTION 11.5 Entire Agreement; Assignment. This Agreement
----------------------------
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all prior agreements and undertakings, both written
and oral, among the parties, or any of them, with respect to the subject matter
hereof other than the Confidentiality Agreement. This Agreement shall not be
assigned by operation of law or otherwise, except that Acquisition may assign
all or any of its rights and obligations hereunder to any direct or indirect
wholly owned subsidiary or subsidiaries of Acquisition or Vestar/Gray, provided
--------
that no such assignment shall relieve the assigning party of its obligations
hereunder if such assignee does not perform such obligations.

SECTION 11.6 Parties in Interest. This Agreement shall be binding
-------------------
upon and inure solely to the benefit of each party hereto and, with respect to
the provisions of Section 8.6 and 10.3, shall inure to the benefit of the
persons or entities benefitting from the provisions thereof who are intended to
be third-party beneficiaries thereof. Except as provided in the preceding
sentence, nothing in this Agreement, express or implied, is intended to or shall
confer upon any other person any rights, benefits or remedies of any nature
whatsoever under or by reason of this Agreement.

SECTION 11.7 Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of Delaware, except for
Articles 1 and 2, which shall be governed by the laws of the State of
California.

SECTION 11.8 Headings. The descriptive headings contained in this
--------
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.

SECTION 11.9 Counterparts. This Agreement may be executed in one or
------------
more counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.

SECTION 11.10 Enforcement; Jurisdiction. The parties agree that
-------------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions of this Agreement in any Federal
court located in the States of California or Delaware or any California or
Delaware state court, this being in addition to any other remedy to which they
are entitled at law or in equity. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in connection
with, this Agreement or the transactions contemplated by this Agreement may be
<PAGE>

brought against any of the parties in any Federal court located in the States of
California or Delaware or any California or Delaware state court, and each of
the parties hereto hereby consents to the jurisdiction of such courts (and of
the appropriate appellate courts therefrom) in any such suit, action or
proceeding may be served on any objection to venue laid therein. Process in any
such suit, action or proceeding may be served on any party anywhere in the
world, whether within or without the States of California or Delaware. Without
limiting the generality of the foregoing, each party hereto agrees that service
of process upon such party at the address referred to in Section 11.2, together
with written notice of such service to such party, shall be deemed effective
service of process upon such party.
<PAGE>

IN WITNESS WHEREOF, the Company, Acquisition, Merger Sub and Parent
have caused this Agreement to be executed as of the date first written above by
their respective officers thereunto duly authorized.

ST. JOHN KNITS, INC.

By: /s/ BOB GRAY
--------------------------------
Title:

PEARL ACQUISITION CORP.

By: /s/ JAMES P. KELLEY
--------------------------------
Title:

SJKACQUISITION, INC.

By: /s/ BOB GRAY
--------------------------------
Title:

ST. JOHN KNITS INTERNATIONAL,
INCORPORATED

By: /s/ ROGER RUPPERT
--------------------------------
Title:
<PAGE>

Exhibit A

Form of Affiliate Letter
------------------------

Gentlemen:

The undersigned, a holder of shares of common stock, no par value
("Company Common Stock"), of St. John Knits International, Incorporated, a
- ----------------------
Delaware corporation (the "Company"), is entitled to receive in connection with
-------
the merger (the "Merger") of the Company with Pearl Acquisition Corp., a
------
Delaware corporation, securities (the "Securities") of the Company. The
----------
undersigned acknowledges that the undersigned may be deemed an "affiliate" of
the Company within the meaning of Rule 145 ("Rule 145") promulgated under the
--------
Securities Act of 1933 (the "Act"), although nothing contained herein should be
---
construed as an admission of such fact.

If in fact the undersigned were an affiliate under the Act, the
undersigned's ability to sell, assign or transfer the Securities retained by the
undersigned pursuant to the Merger may be restricted unless such transaction is
registered under the Act or an exemption from such registration is available.
The undersigned understands that such exemptions are limited and the undersigned
has obtained advice of counsel as to the nature and conditions of such
exemptions, including information with respect to the applicability to the sale
of such securities of Rules 144 and 145(d) promulgated under the Act.

The undersigned hereby represents to and covenants with the Company
that the undersigned will not sell, assign or transfer any of the Securities
retained by the undersigned pursuant to the Merger except (i) pursuant to an
effective registration statement under the Act, (ii) in conformity with the
volume and other limitations of Rule 145 or (iii) in a transaction which, in the
opinion of independent counsel reasonably satisfactory to the Company or as
described in a "no-action" or interpretive letter from the Staff of the
Securities and Exchange Commission (the "SEC"), is not required to be registered
---
under the Act.

In the event of a sale or other disposition by the undersigned of
Securities pursuant to Rule 145, the undersigned will supply the Company with
evidence of compliance with such Rule, in the form of a letter in the form of
Annex I hereto. The undersigned understands that the Company may instruct its
transfer agent to withhold the transfer of any Securities disposed of by the
undersigned, but that upon receipt of such evidence of compliance the transfer
agent shall effectuate the transfer of the Securities sold as indicated in the
letter.

The undersigned acknowledges and agrees that appropriate legends will
be placed on certificates representing Securities retained by the undersigned in
the Merger or held by a transferee thereof, which legends will be removed by
delivery of substitute certificates upon receipt of an opinion in form and
substance reasonably satisfactory to the Company from
<PAGE>

independent counsel reasonably satisfactory to the Company to the effect that
such legends are no longer required for purposes of the Act.

The undersigned acknowledges that (i) the undersigned has carefully
read this letter and understands the requirements hereof and the limitations
imposed upon the distribution, sale, transfer or other disposition of Securities
and (ii) the receipt by Acquisition of this letter is an inducement and a
condition to Acquisition's obligations to consummate the Merger.

Very truly yours,

Dated:
<PAGE>

ANNEX I
TO Exhibit A

[Name] [Date]

On __________________ the undersigned sold the securities
("Securities") of St. John Knits International, Incorporated (the "Company")
---------- -------
described below in the space provided for that purpose (the "Securities"). The
----------
Securities were retained by the undersigned in connection with the merger of
Pearl Acquisition Corp. with and into the Company.

Based upon the most recent report or statement filed by the Company
with the Securities and Exchange Commission, the Securities sold by the
undersigned were within the prescribed limitations set forth in paragraph (e) of
Rule 144 promulgated under the Securities Act of 1933, as amended (the "Act").
---

The undersigned hereby represents that the Securities were sold in
"brokers' transactions" within the meaning of Section 4(4) of the Act or in
transactions directly with a "market maker" as that term is defined in Section
3(a)(38) of the Securities Exchange Act of 1934, as amended. The undersigned
further represents that the undersigned has not solicited or arranged for the
solicitation of orders to buy the Securities, and that the undersigned has not
made any payment in connection with the offer or sale of the Securities to any
person other than to the broker who executed the order in respect of such sale.

Very truly yours,

[Space to be provided for description of securities]
<PAGE>

APPENDIX B

February 2, 1999

The Board of Directors and
The Independent Committee of the Board of Directors
St. John Knits, Inc.
17422 Derian Avenue
Irvine, CA 92714

The Board of Directors and
The Independent Committee of the Board of Directors
St. John Knits International, Incorporated
17422 Derian Avenue
Irvine, CA 92714

Ladies and Gentlemen:

St. John Knits, Inc. (the "Company"), St. John Knits International,
Incorporated ("Parent"), SJK Acquisition, Inc., a wholly owned subsidiary of
Parent ("Merger Sub"), and Pearl Acquisition Corp ("Acquisition"), a wholly
owned subsidiary of Vestar/Pearl Investors LLC ("Vestar/Pearl") (which in turn
is a wholly owned subsidiary of Vestar Capital Partners III, L.P. ("Vestar")),
propose to enter into an agreement and plan of merger (the "Merger Agreement")
pursuant to which Merger Sub will merge with and into the Company (the
"Reorganization Merger"), with the Company as the surviving corporation, and
each share of common stock, no par value, of the Company (the "Company Common
Stock") outstanding immediately prior to the Reorganization Merger (other than
Company Dissenting Shares (as defined in the Merger Agreement) and Company
Common Stock owned, directly or indirectly, by the Company or any subsidiary of
the Company) will be converted into one share of common stock, par value $.01
per share, of Parent (the "Parent Common Stock").

Immediately following the Reorganization Merger, Acquisition will be merged
with and into Parent (the "Acquisition Merger" and, together with the
Reorganization Merger, the "Mergers"), with Parent as the surviving corporation
(the "Surviving Parent Corporation"), and each share of Parent Common Stock
outstanding immediately prior to the Acquisition Merger (other than Parent
Common Stock owned, directly or indirectly, by Parent or any subsidiary of
Parent or by Acquisition, any subsidiary of Acquisition, Vestar/Pearl or Vestar
(which will be cancelled)) will be converted into the right to receive $30.00
in cash or, at the election of the holder thereof, the right to receive one
share of common stock, par value $.01 per share, of the Surviving Parent
Corporation (the "Surviving Parent Common Stock"), with such elections being
pro rated as necessary so that approximately 457,000 shares of Surviving Parent
Common Stock will be exchanged for Parent Common Stock pursuant to the
Acquisition Merger.

In connection with the Mergers, Vestar, Vestar/Pearl and the Shareholders
(identified in Schedule A to the Voting Agreement (as hereinafter defined))
propose to enter into a voting agreement (the "Voting Agreement") pursuant to
which the Shareholders will, following the Reorganization Merger but prior to
the Acquisition Merger, contribute all of their Parent Common Stock to
Vestar/Pearl in exchange for cash and equity in Vestar/Pearl.

You have asked us whether, in our opinion, the consideration to be received
by the holders of shares of Company Common Stock, other than the Shareholders,
pursuant to the Mergers is fair from a financial point of view to such holders.

In arriving at the opinion set forth below, we have, among other things:

(1) Reviewed certain publicly available business and financial information
relating to the Company that we deemed to be relevant;

B-1
<PAGE>

(2) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets, liabilities and prospects
of the Company furnished to us by the Company and Vestar;

(3) Conducted discussions with members of senior management of the Company
and representatives of Vestar concerning the matters described in
clauses 1 and 2 above;

(4) Reviewed the market prices and valuation multiples for the shares of
Company Common Stock and compared them with those of certain publicly
traded companies that we deemed to be relevant;

(5) Reviewed the results of operations of the Company and compared them
with those of certain publicly traded companies that we deemed to be
relevant;

(6) Compared the proposed financial terms of the Mergers with the financial
terms of certain other transactions that we deemed to be relevant;

(7) Participated in certain discussions and negotiations among
representatives of the Company and Vestar and their financial and legal
advisors;

(8) Reviewed drafts dated February 2, 1999 of the Merger Agreement and the
Voting Agreement; and

(9) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.

In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or been furnished with any such evaluation or
appraisal. In addition, we have not assumed any obligation to conduct any
physical inspection of the properties or facilities of the Company. With
respect to the financial forecast information furnished to or discussed with us
by the Company and Vestar, we have assumed that they have been reasonably
prepared and reflect the best currently available estimates and judgment of the
management of the Company and representatives of Vestar as to the expected
future financial performance of the Company. We have also assumed that none of
the holders of Parent Common Stock will elect to receive Surviving Parent
Common Stock in the Acquisition Merger, and, accordingly, that all such holders
will receive their pro rata amount of Surviving Parent Common Stock and cash.
In addition, we have assumed that, in the course of obtaining the necessary
regulatory or other consents or approvals (contractual or otherwise) for the
Mergers, no restrictions, including any divestiture requirements or amendments
or modifications, will be imposed that will have a material adverse effect on
the contemplated benefits of the Mergers. We have assumed that the Merger
Agreement and the Voting Agreement will be substantially similar to the last
drafts reviewed by us. Our opinion is necessarily based upon market, economic
and other conditions as they exist and can be evaluated on, and on the
information made available to us as of, the date hereof.

In connection with the preparation of this opinion, we solicited third-party
indications of interest for the acquisition of the Company. We have not been
asked to consider, and our opinion does not in any manner address, the value of
the Surviving Parent Common Stock or the prices at which the Surviving Parent
Common Stock will actually trade following the Mergers.

We are acting as financial advisor to the Independent Committee of the Board
of Directors of the Company in connection with the Mergers and will receive a
fee from the Company for our services, a significant portion of which is
contingent upon the consummation of the Mergers. In addition, the Company has
agreed to indemnify us for certain liabilities arising out of our engagement.

Richard A. Gadbois, III, Senior Vice President of Corporate Executive
Services at Merrill Lynch, currently serves as a Director of the Company and
Parent. In addition, we have, in the past, provided financial advisory and
financing services to Vestar and have been retained to provide additional
financial services to Vestar in the future and have received, or will receive,
fees for such services. In the ordinary course of our business, we may

B-2
<PAGE>

actively trade shares of Company Common Stock as well as debt securities of
Vestar and its affiliates, for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.

This opinion is for the use and benefit of the Board of Directors of the
Company and the Independent Committee thereof and the Board of Directors of
Parent and the Independent Committee thereof. Our opinion does not address the
merits of the underlying decision by the Company or Parent to engage in the
Mergers and does not constitute a recommendation to any shareholder as to how
such shareholder should vote on the Mergers.

On the basis of and subject to the foregoing, we are of the opinion that, as
of the date hereof, the consideration to be received by the holders of the
Company Common Stock, other than the Shareholders, pursuant to the Mergers is
fair from a financial point of view to such holders.

Very truly yours,

/s/ Merrill Lynch, Pierce, Fenner & Smith
Incorporated

MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED

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<PAGE>

APPENDIX C

February 2, 1999

Independent Committee of the Board of Directors
St. John Knits, Inc.
17422 Derian Avenue
Irvine, California 92614

Independent Committee of the Board of Directors
St. John Knits International, Incorporated
17422 Derian Avenue
Irvine, California 92614

Ladies and Gentlemen:

You have asked us to advise you with respect to the fairness, from a
financial point of view, to the holders of the common stock, no par value
("Company Common Stock"), of St. John Knits, Inc. (the "Company"), other than
the shareholders (the "Shareholders") identified in Schedule A to the Voting
Agreement (as hereinafter defined), of the consideration to be received by such
holders pursuant to the terms of the proposed agreement and plan of merger (the
"Merger Agreement"), among the Company, St. John Knits International,
Incorporated ("Parent"), SJK Acquisition, Inc. ("Merger Sub"), a wholly owned
subsidiary of Parent, and Pearl Acquisition Corp. ("Acquisition"), a wholly
owned subsidiary of Vestar/Pearl Investors LLC ("Vestar/Pearl") (which in turn
is a wholly owned subsidiary of Vestar Capital Partners III, L.P. ("Vestar")).
The Merger Agreement provides for, among other things, the merger of Merger Sub
with and into the Company (the "Reorganization Merger") pursuant to which each
share of Company Common Stock outstanding immediately prior to the
Reorganization Merger, other than (i) Company Dissenting Shares (as defined in
the Merger Agreement) and (ii) Company Common Stock owned, directly or
indirectly, by the Company or any subsidiary of the Company, will be converted
into one share of common stock, par value $0.01 per share ("Parent Common
Stock"), of Parent. The Merger Agreement further provides, immediately
following the Reorganization Merger, for the merger of Acquisition with and
into Parent (the "Acquisition Merger" and, together with the Reorganization
Merger, the "Mergers") with Parent as the surviving corporation (the "Surviving
Parent Corporation") pursuant to which each share of Parent Common Stock
outstanding immediately prior to the Acquisition Merger, other than Parent
Common Stock owned, directly or indirectly, by Parent or any subsidiary of
Parent or by Acquisition, any subsidiary of Acquisition, Vestar/Pearl or
Vestar, will be converted into the right to receive $30.00 in cash, or at the
election of the holder thereof, the right to receive one share of common stock,
par value $.01 per share, of the Surviving Parent Corporation (the "Surviving
Parent Common Stock"), with such elections being pro rated as necessary so that
approximately 457,000 shares of Surviving Parent Common Stock will be exchanged
for Parent Common Stock pursuant to the Acquisition Merger. The terms and
conditions of the Mergers are set forth in more detail in the Merger Agreement.

In connection with the Mergers, Vestar, Vestar/Pearl and the Shareholders
propose to enter into a voting agreement (the "Voting Agreement") pursuant to
which the Shareholders will, following the Reorganization Merger but prior to
the Acquisition Merger, contribute all of their Company Common Stock to
Vestar/Pearl in exchange for cash and equity in Vestar/Pearl.

In connection with rendering our opinion, we have reviewed drafts of the
Merger Agreement and the Voting Agreement, and for purposes hereof, we have
assumed that the final forms of these documents will not differ in any material
respect from the drafts provided to us. We have also reviewed and analyzed
certain publicly available business and financial information relating to the
Company for recent years and interim periods to date, as well as certain
internal financial and operating information, including financial forecasts,
analyses and projections prepared by or on behalf of the Company and Vestar and
provided to us for purposes

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<PAGE>

In re: St. John Knits, Inc.
February 2, 1999
Page 2

of our analysis, and we have met with the management of the Company and
representatives of Vestar to review and discuss such information and, among
other matters, the Company's business, operations, assets, financial condition
and future prospects.

We have reviewed and considered certain financial and stock market data
relating to the Company, and we have compared that data with similar data for
certain other companies, the securities of which are publicly traded, that we
believe may be relevant or comparable in certain respects to the Company or one
or more of its businesses or assets, and we have reviewed and considered the
financial terms of certain recent acquisitions and business combination
transactions in the apparel industry specifically, and in other industries
generally, that we believe to be reasonably comparable to the Mergers or
otherwise relevant to our inquiry. We have also performed such other financial
studies, analyses and investigations and reviewed such other information as we
considered appropriate for purposes of this opinion.

In our review and analysis and in formulating our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to or discussed with us or publicly available, and we have
not assumed any responsibility for independent verification of any of such
information. We have also assumed and relied upon the reasonableness and
accuracy of the financial projections, forecasts and analyses provided to us,
and we have assumed that such projections, forecasts and analyses were
reasonably prepared in good faith and on bases reflecting the best currently
available judgments and estimates of the management of the Company and of
Vestar. We express no opinion with respect to such projections, forecasts and
analyses or the assumptions upon which they are based. In addition, we have not
reviewed any of the books and records of the Company, or assumed any
responsibility for conducting a physical inspection of the properties or
facilities of the Company, or for making or obtaining an independent valuation
or appraisal of the assets or liabilities of the Company, and no such
independent valuation or appraisal was provided to us. We also have assumed
that none of the holders of Parent Common Stock will elect to receive Surviving
Parent Common Stock in the Acquisition Merger and, accordingly, that all such
holders will receive their pro rata amount of Surviving Parent Common Stock and
cash and, further, that the transactions described in the Merger Agreement will
be consummated without waiver or modification of any of the material terms or
conditions contained therein by any party thereto. We have not been asked to
consider and our opinion does not in any manner address the value of the
Surviving Parent Common Stock or the prices at which the Surviving Parent
Common Stock will actually trade following the Mergers. Our opinion is
necessarily based on economic and market conditions and other circumstances as
they exist and can be evaluated by us as of the date hereof.

In the ordinary course of our business, we may actively trade the debt and
equity securities of the Company for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.

We are acting as financial advisor to the Independent Committee of the Board
of Directors of the Company in connection with the Mergers and will receive a
fee for our services, as well as a fee for rendering this opinion. We have
performed various investment banking services for Vestar and its affiliates
from time to time in the past and have received customary fees for rendering
such services.

Our opinion addresses only the fairness, from a financial point of view, to
the holders of Company Common Stock, other than the Shareholders, of the
consideration to be received by such holders pursuant to the Mergers, and we do
not express any views on any other terms of the Mergers. Specifically, our
opinion does not address the Company's underlying business decision to effect
the Mergers. In addition, our opinion does not address the solvency of the
Company or any other entity following consummation of the Mergers or at
any time.

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<PAGE>

In re: St. John Knits, Inc.
February 2, 1999
Page 3

It is understood that this letter is for the benefit and use of the
Independent Committee of the Board of Directors of the Company and the
Independent Committee of the Board of Directors of Parent in its consideration
of the Mergers, and except for inclusion in its entirety in any proxy statement
required to be circulated to shareholders of the Company relating to the
Mergers may not be quoted, referred to or reproduced at any time or in any
manner without our prior written consent. This opinion does not constitute a
recommendation to any holder of Company Common Stock with respect to how such
holder should vote with respect to the Mergers, and should not be relied upon
by any holder as such.

Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that as of the date hereof,
the consideration to be received by the holders of Company Common Stock, other
than the Shareholders, pursuant to the Mergers is fair to such holders from a
financial point of view.

Very truly yours,

/s/ Wasserstein Perella & Co., Inc.

WASSERSTEIN PERELLA & CO., INC.

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<PAGE>

APPENDIX D

CHAPTER 13. DISSENTERS' RIGHTS

(S)1300. Reorganization or short-form merger; dissenting shares; corporate
purchase at fair market value; definitions

(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.

(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:

(1) Which were not immediately prior to the reorganization or short-
form merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or (B)
listed on the list of OTC margin stocks issued by the Board of Governors of
the Federal Reserve System, and the notice of meeting of shareholders to act
upon the reorganization summarizes this section and Sections 1301, 1302, 1303
and 1304; provided, however, that this provision does not apply to any shares
with respect to which there exists any restriction on transfer imposed by the
corporation or by any law or regulation; and provided, further, that this
provision does not apply to any class of shares described in subparagraph (A)
or (B) if demands for payment are filed with respect to 5 percent or more of
the outstanding shares of that class.

(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that sub-
paragraph (A) rather than subparagraph (B) of this paragraph applies in any
case where the approval required by Section 1201 is sought by written
consent rather than at a meeting.

(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance with Section
1301.

(4) Which the dissenting shareholder has submitted for endorsement,
in accordance with Section 1302.

(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.

(S)1301. Notice to holders of dissenting shares in reorganizations; demand for
purchase; time; contents

(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval,

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<PAGE>

accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a
statement of the price determined by the corporation to represent the fair
market value of the dissenting shares, and a brief description of the procedure
to be followed if the shareholder desires to exercise the shareholder's right
under such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as defined in
subdivision (b) of Section 1300, unless they lose their status as dissenting
shares under Section 1309.

(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.

(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.

(S)1302. Submission of share certificates for endorsement; uncertificated
securities

Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.

(S)1303. Payment of agreed price with interest; agreement fixing fair market
value; filing; time of payment

(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.

(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.

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<PAGE>

(S)1304. Action to determine whether shares are dissenting shares or fair
market value; limitation; joinder; consolidation; determination of
issues; appointment of appraisers

(a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.

(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.

(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.

(S)1305. Report of appraisers; confirmation; determination by court; judgment;
payment; appeal; costs

(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.

(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.

(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which
any dissenting shareholder who is a party, or who has intervened, is entitled
to require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.

(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.

(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of
Section 1301).

(S)1306. Prevention of immediate payment; status as creditors; interest

To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with

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interest at the legal rate on judgments until the date of payment, but
subordinate to all other creditors in any liquidation proceeding, such debt to
be payable when permissible under the provisions of Chapter 5.

(S)1307. Dividends on dissenting shares

Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.

(S)1308. Rights of dissenting shareholders pending valuation; withdrawal of
demand for payment

Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.

(S)1309. Termination of dissenting share and shareholder status

Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:

(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.

(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.

(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.

(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of dissenting shares.

(S)1310. Suspension of right to compensation or valuation proceedings;
litigation of shareholder's approval

If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.

(S)1311. Exempt shares

This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.

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<PAGE>

(S)1312. Right of dissenting shareholder to attack, set aside or rescind merger
or reorganization; restraining order or injunction; conditions

(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attach the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions, or if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.

(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the reorganization or short-form set aside or rescinded shall
not restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.

(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.

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APPENDIX E

VOTING AGREEMENT

This AGREEMENT dated as of February 2, 1999, among Vestar Capital
Partners III, L.P., a Delaware limited partnership ("Vestar"), Vestar/Gray
Investors LLC, a Delaware limited liability company ("Vestar/Gray"), and the
parties listed on Schedule A hereto (each, a "Shareholder" and, collectively,
the "Shareholders").

WHEREAS, St. John Knits, Inc. (the "Company"), St. John Knits
International, Incorporated, a Delaware and Barbados corporation ("Parent"),
SJKAcquisition, Inc., a California corporation ("Merger Sub"), and Pearl
Acquisition Corp., a Delaware corporation ("Acquisition") propose to enter into
an Agreement and Plan of Merger dated as of the date hereof (the "Merger
Agreement"; capitalized terms used but not defined herein shall have the
meanings set forth in the Merger Agreement) providing for (i) a merger (the
"Reorganization Merger") of Merger Sub with and into the Company and (ii) as
promptly as practicable following the consummation of the Reorganization Merger,
a merger (the "Acquisition Merger" and, together with the Reorganization Merger,
the "Mergers") of Acquisition with and into Parent, both upon the terms and
subject to the conditions set forth in the Merger Agreement.

WHEREAS, each Shareholder owns the number of shares of Common Stock,
no par value, of the Company ("Company Common Stock") set forth opposite such
Shareholder's name on Schedule A hereto (such shares of Company Common Stock,
together with any other shares of Company Common Stock or shares of the Common
Stock, par value $.01 per share, of Parent (the "Parent Common Stock") of which
such Shareholder acquires beneficial ownership after the date hereof and during
the term of this Agreement (including, but not limited to, shares of Parent
Common Stock into which shares of Company Common Stock are converted pursuant
the Reorganization Merger) whether upon the exercise of options, warrants or
rights, the conversion or exchange of convertible or exchangeable securities, or
by means of purchase, dividend, distribution or otherwise, being collectively
referred to herein as the "Subject Shares"); and

WHEREAS, as a condition to its willingness to cause Acquisition to
enter into the Merger Agreement, Vestar/Gray has requested that the Shareholders
enter into this Agreement.

NOW, THEREFORE, to induce Vestar/Gray to cause Acquisition to enter
into, and in consideration of its entering into, the Merger Agreement, and in
consideration of the premises and the representations, warranties and agreements
contained herein, the parties agree as follows:

1. Representations and Warranties of the Shareholders.
--------------------------------------------------

(a) Representations and Warranties of the Shareholders. Each
--------------------------------------------------
Shareholder hereby represents and warrants to Vestar and Vestar/Gray as to
itself as of the date hereof as follows:

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(i) Organization. The Shareholders that are entities are duly
------------
organized, validly existing and in good standing under the laws of the
state of their incorporation, formation or organization.

(ii) Authority; No Conflicts. Each Shareholder has the legal
-----------------------
capacity (in the case of Shareholders that are natural persons), and all
requisite power and authority to enter into this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated
hereby. This Agreement has been duly authorized, executed and delivered by
each Shareholder and constitutes a valid and binding obligation of each
Shareholder enforceable in accordance with its terms. Except for filings
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), the applicable requirements of the Securities
Act and the Exchange Act, and the applicable requirements of state
securities, blue sky or takeover or other corporate laws, (A) except as
set forth on Schedule A, no filing with, and no permit, authorization,
consent or approval of, any Governmental Entity or any other person is
necessary for the execution of this Agreement by the Shareholders and the
consummation by the Shareholders of the transactions contemplated hereby
and (B) except as set forth on Schedule A, none of the execution and
delivery of this Agreement by the Shareholders, the consummation of the
transactions contemplated hereby and compliance with the terms hereof by
the Shareholders will conflict with, or result in any violation of, or
default (with or without notice or lapse of time or both) under any
provision of, the certificate of incorporation, by-laws or analogous
documents of each Shareholder (other than Shareholders that are natural
persons) or any other agreement to which such Shareholder is a party,
including any voting agreement, stockholders agreement, voting trust,
trust agreement, pledge agreement, loan or credit agreement, note, bond,
mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise or license or violate any judgment, order, notice,
decree, statute, law, ordinance, rule or regulation applicable to the
Shareholders or to each of the Shareholders' property or assets.

(iii) The Subject Shares. Except as set forth on Schedule A, each
------------------
Shareholder is the record and beneficial owner of, and has good and
marketable title to, the number of Subject Shares set forth opposite such
Shareholder's name on Schedule A hereto, free and clear of any
encumbrances, agreements, adverse claims, liens or other arrangements with
respect to the ownership of or the right to vote or dispose of the Subject
Shares. None of the Shareholders beneficially or of record owns any shares
of capital stock of the Company or securities convertible or exchangeable
for shares of capital stock of the Company, other than as set forth
opposite such Shareholder's name on Schedule A hereto. Each Shareholder
has the sole right and power to vote and dispose of the Subject Shares.
None of such Subject Shares is subject to any voting trust or other
agreement, arrangement or restriction with respect to the voting or
transfer of any of the Subject Shares, except as contemplated by this
Agreement or as set forth on Schedule A.

2. Representations and Warranties of Vestar and Vestar/Gray. Vestar
--------------------------------------------------------
and Vestar/Gray hereby represent and warrant to the Shareholders that Vestar and
Vestar/Gray are duly organized, validly existing and in good standing under the
laws of the state of their formation. Vestar and Vestar/Gray have all requisite

E-2
<PAGE>

power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly authorized,
executed and delivered by Vestar and Vestar/Gray and constitutes a valid and
binding obligation of Vestar and Vestar/Gray enforceable in accordance with its
terms. Except for filings required under the HSR Act, the applicable
requirements of the Securities Act and the Exchange Act, and the applicable
requirements of state securities, blue sky or takeover laws, (i) no filing with,
and no permit, authorization, consent or approval of, any Governmental Entity or
any other person is necessary for the execution of this Agreement by Vestar and
Vestar/Gray and the consummation by Vestar and Vestar/Gray of the transactions
contemplated hereby and (ii) none of the execution and delivery of this
Agreement by Vestar and Vestar/Gray, the consummation of the transactions
contemplated hereby nor the compliance with the terms hereof by Vestar and
Vestar/Gray will conflict with, or result in any violation of, or default (with
or without notice or lapse of time or both) under any provision of, the
certificate of incorporation, by-laws, limited liability company agreement,
certificate of formation or analogous documents of Vestar or Vestar/Gray or any
other agreement to which either of them is a party, including any voting
agreement, stockholders agreement, voting trust, trust agreement, pledge
agreement, loan or credit agreement, note, bond, mortgage, indenture, lease or
other agreement, instrument, permit, concession, franchise or license, or
violate any judgment, order, notice, decree, statute, law, ordinance, rule or
regulation applicable to Vestar or Vestar/Gray or to Vestar's or Vestar/Gray's
property or assets.

3. Covenants of the Shareholders. Until the termination of this
-----------------------------
Agreement in accordance with Section 8 hereof, each Shareholder agrees as
follows:

(a) Voting of Subject Shares. At any meeting of stockholders of the
------------------------
Company or Parent or at any adjournment thereof or in any other
circumstances upon which any Shareholder's vote, consent or other approval
is sought, each such Shareholder shall vote all of the Subject Shares then
beneficially owned by such Shareholder (i) in favor of the Mergers and the
adoption and the approval of the principal terms of the Merger Agreement
and each of the other transactions contemplated by the Merger Agreement,
(ii) against any action or agreement that would result in a breach in any
material respect of any covenant, representation or warranty or any other
obligation or agreement of the Company or Parent under the Merger
Agreement and (iii) against any action or agreement that would impede,
interfere with, delay or postpone or that would reasonably be expected to
discourage the Mergers, including, but not limited to: (A) any
extraordinary corporate transactions (other than the Mergers), such as a
merger, consolidation or other business combination involving the Company
or Parent and their subsidiaries, a sale or transfer of a material amount
of assets of the Company or Parent and their subsidiaries or a
reorganization, recapitalization or liquidation of the Company or Parent
and their subsidiaries; (B) any amendment of the Company's or Parent's
articles or certificate of incorporation or by-laws or other proposal or
transaction involving the Company or Parent or any of their subsidiaries,
which amendment or other proposal or transaction would in any manner impede,
prevent or nullify the Mergers, the Merger Agreement or any of the other
transactions contemplated by the Merger Agreement or change in any manner the
voting rights of any class of the

E-3
<PAGE>

Company's or Parent's capital stock; (C) any change in the management or board
of directors of the Company or Parent; (D) any material change in the present
capitalization or dividend policy of the Company or Parent; or (E) any other
material change in the Company's or Parent's corporate structure or business;
provided, however, that in the event the Board of Directors of the Company
shall have withdrawn, amended or modified its recommendation in accordance
with Section 8.1 of the Merger Agreement, the Shareholders shall be permitted
to vote the Subject Shares owned by them in favor of any action described in
clause (iii)(A) above which is a Superior Proposal. Each Shareholder shall not
hereafter, unless and until this Agreement terminates pursuant to Section 8
hereof, purport to grant (other than through the irrevocable proxy granted in
Section 3(b)) any proxy or power of attorney with respect to any of the
Subject Shares, deposit any of the Subject Shares into a voting trust or enter
into any agreement (other than this Agreement), arrangement or understanding
with any person, directly or indirectly, to vote, grant any proxy or give
instructions with respect to the voting of any of the Subject Shares. Each
Shareholder further agrees not to commit or agree to take any action
inconsistent with the foregoing.

(b) Proxies. Each Shareholder hereby grants to Vestar/Gray a proxy
-------
to vote all of the Subject Shares then beneficially owned by such
Shareholder as indicated in Section 3(a) above. Each Shareholder agrees
that this proxy shall be irrevocable and coupled with an interest, agrees
to take such further action or execute such other instruments as may be
necessary to effectuate the intent of this proxy and hereby revokes any
proxy previously granted by such Shareholder with respect to any of the
Subject Shares.

(c) Transfer Restrictions. Each Shareholder agrees not to (i) sell,
---------------------
transfer, pledge, encumber, assign or otherwise dispose of (including by
gift) (collectively, "Transfer"), or enter into any contract, option or
other arrangement or understanding (including any profit sharing
arrangement) with respect to the Transfer of, any of the Subject Shares to
any person other than pursuant to the terms of the Merger Agreement, (ii)
enter into any voting arrangement or understanding, whether by proxy,
voting agreement or otherwise, with respect to any of the Subject Shares
or (iii) take any action that would make any of its representations or
warranties contained herein untrue or incorrect or have the effect of
preventing or impeding such Shareholder from performing any of its
obligations under this Agreement.

(d) Appraisal Rights. Each Shareholder hereby irrevocably waives any
----------------
rights of appraisal with respect to the Mergers or rights to dissent from
the Mergers that such Shareholder may have.

(e) No Solicitation. Each of the Shareholders agrees that it shall
---------------
not, directly or indirectly, nor shall it authorize, instruct or, if asked
or notified, permit (to the extent feasible) any of its trustees,
advisors, agents, representatives or other intermediaries to, (i)
solicit, initiate, encourage or take any action to facilitate any
submission of inquiries, proposals or offers from any person relating to
(A) any acquisition or purchase of any or all of the Subject Shares or (B)

E-4
<PAGE>

any Transaction Proposal or agree to or endorse any Transaction Proposal,
other than the transactions contemplated by the Merger Agreement, or (ii)
enter into or participate in any discussions or negotiations regarding any
of the foregoing or furnish to any other person any information with
respect to the Company's or Parent's business, properties or assets or any
of the foregoing, or otherwise cooperate in any way with, or assist or
participate in, facilitate or encourage, any effort or attempt by any
other person to do or seek any of the foregoing (other than in their
capacities as officers and directors of the Company in the event that the
Board of Directors of the Company has concluded in accordance with Section
8.4 of the Merger Agreement that similar actions on the part of the
Company are required in order for the Board of Directors to comply with
its fiduciary duties under applicable law). Notwithstanding anything in
this Agreement to the contrary, from and after the date hereof, each
Shareholder shall promptly advise Vestar/Gray orally and in writing of the
receipt by any of them (or any of the other entities or persons referred
to above) of any Transaction Proposal (it being understood that to the
extent received in their respective capacities as officer or director of
the Company, their obligation to so advise Vestar/Gray shall be governed
by the Merger Agreement) or any inquiry which is likely to lead to any
Transaction Proposal, the material terms and conditions of such
Transaction Proposal or inquiry, and the identity of the person making any
such Transaction Proposal or inquiry. Each Shareholder will keep
Vestar/Gray fully informed of the status and details of any such
Transaction Proposal or inquiry (it being understood that to the extent
such transaction proposal was received in their respective capacities as
officer or director of the Company, their obligation to so advise
Vestar/Gray shall be governed by the Merger Agreement).

(f) Affiliate Letter. Each Shareholder shall deliver to Vestar/Gray
----------------
on or prior to the Closing Date a written agreement substantially in the
form attached as Exhibit C to the Merger Agreement.

(g) Consents. Each Shareholder agrees that to the extent that it is,
--------
or that it controls, any party to any Lease or other agreement between the
Company or one of its subsidiaries and a third party set forth on Section
9.3 of the Disclosure Schedule, it will deliver, or cause to be delivered
any necessary approval or consent required in connection with the
consummation of the transactions contemplated by the Merger Agreement
without requiring the payment of or imposing any costs or obligations on
the Company or exercising any preemptive rights.

4. Contribution; LLC Agreement. (a) Each Shareholder hereby agrees
---------------------------
that, prior to the Effective Time of the Reorganization Merger, it shall
contribute all of the Subject Shares then beneficially owned by such Shareholder
to Vestar/Gray, in exchange for (i) payment by Vestar/Gray of cash in
immediately available funds in the amount set forth opposite such Shareholder's
name on Schedule B hereto and (ii) the membership interest in Vestar/Gray set
forth opposite such Shareholder's name on Schedule B hereto.

(b) In connection with the undertakings contained in Section 4(a)
hereof, Vestar and each Shareholder hereby agree that concurrently with the
consummation of the transactions contemplated by Section 4(a) hereof, they will
enter into the Limited Liability Company Agreement of Vestar/Gray in
substantially the form attached hereto as Exhibit A.

E-5
<PAGE>

5. Further Assurances. Each of the Shareholders, Vestar and
------------------
Vestar/Gray agrees that it will, from time to time, execute and deliver, or
cause to be executed and delivered, such additional or further consents,
documents and other instruments as any of the Shareholders, Vestar or
Vestar/Gray may reasonably request for the purpose of effectively carrying out
the transactions contemplated by this Agreement.

6. Stop Transfer Order. Each Shareholder hereby authorizes counsel
-------------------
for the Company to notify the Company's transfer agent that there is a stop
transfer order with respect to all of the Subject Shares and that this Agreement
places limits on the voting of the Subject Shares.

7. Assignment. Neither this Agreement nor any of the rights,
----------
interests or obligations hereunder may be assigned by any of the parties hereto
without the prior written consent of the other parties hereto, except that
Vestar and Vestar/Gray may assign, in their sole discretion, any or all of their
rights, interests and obligations hereunder to any direct or indirect wholly
owned subsidiary of Vestar or Vestar/Gray, respectively. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit of
and be enforceable by the parties hereto and their respective successors and
permitted assigns.

8. Termination. This Agreement shall terminate, and no party hereto
-----------
shall have any rights or obligations hereunder, upon the first to occur of (a)
the Effective Time of the Acquisition Merger and (b) the termination of the
Merger Agreement in accordance with its terms.

9. General Provisions.
------------------

(a) Amendments. This Agreement may not be amended except by an
----------
instrument in writing signed by each of the parties hereto.

(b) Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be in writing and shall be given (and shall
be deemed to have been duly given upon receipt) by delivery in person, by
telecopy or by registered or certified mail (postage prepaid, return
receipt requested) to the respective parties at the following addresses
(or at such other address for a party as shall be specified by like
notice):

if to Vestar or Vestar/Gray:

c/o Vestar Capital Partners III, L.P.
1225 17th Street, Suite 1660
Denver, Colorado 80202
Attention: James P. Kelley
Facsimile: (303) 292-6639

with a copy to:

Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Attention: Robert L. Friedman, Esq.

E-6
<PAGE>

Facsimile: (212) 455-2502

if to any of the Shareholders:

c/o Robert E. Gray
St. John Knits, Inc.
17422 Derian Avenue
Irvine, California 92614
Facsimile: (949) 223-3272

with a copy to:

Hewitt & McGuire, LLP
19900 MacArthur Boulevard, Suite 1050
Irvine, California 92612
Attention: Paul A. Rowe, Esq.
Facsimile: (949) 798-0511

(c) Interpretation. When a reference is made in this Agreement to
--------------
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Wherever the words "include", "includes"
or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation".

(d) Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more of the counterparts have been
signed by each of the parties and delivered to the other party, it being
understood that each party need not sign the same counterpart.

(e) Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of California
regardless of the laws that might otherwise govern under applicable
principles of conflicts of law.

10. Enforcement. The parties agree that irreparable damage would
-----------
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that, in addition to any other remedy to which it may be
entitled, at law or in equity, the parties shall be entitled to the remedy of
specific performance of the covenants and agreements contained herein and
injunctive and other equitable relief.

11. No Termination or Closure of Trusts. Unless, in connection
-----------------------------------
therewith, the subject Shares held by any trust which are presently subject to
the terms of this Agreement are transferred upon termination to one or more
Shareholders and remain subject in all respects to the terms of this Agreement,
the Shareholders who are trustees shall not take any action to terminate, close
or liquidate any such trust and shall take all steps necessary to maintain the
existence thereof at least until the first to occur of (i) the Effective Time of
the Acquisition Merger and (ii) the termination of the Merger Agreement in
accordance with its terms.

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<PAGE>

12. Parties in Interest. This Agreement shall be binding upon and
-------------------
inure solely to the benefit of each party hereto and, with respect to the
provisions of Section 4 also shall inure to the benefit of Parent and the
Company. Except as provided in the preceding sentence, nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any rights, benefits or remedies or any nature whatsoever under or by
reason of this Agreement.

IN WITNESS WHEREOF, each of Vestar, Vestar/Gray and the Shareholders
have caused this Agreement to be signed by its signatory thereunto duly
authorized, as of the date first written above.

VESTAR CAPITAL PARTNERS III, L.P.

By: Vestar Associates III, L.P.,
its General Partner

By: Vestar Associates Corporation III,
its General Partner

By: /s/ James P. Kelley
-----------------------
Name:

VESTAR/GRAY INVESTORS LLC

By: VESTAR CAPITAL PARTNERS III, L.P.
Its: Managing Member

By: VESTAR ASSOCIATES III, L.P
Its: General Partner

By: VESTAR ASSOCIATES CORPORATION III
Its: General Partner

By: /s/ James P. Kelley
-----------------------
Name:
Title:

/s/ Robert E. Gray
-----------------------
ROBERT E. GRAY

/s/ Marie Gray
-----------------------
MARIE GRAY

/s/ Kelly A. Gray
-----------------------
KELLY A. GRAY

GRAY FAMILY TRUST

By: /s/ Robert E. Gray
-----------------------
Name: Robert E. Gray

By: /s/ Marie Gray
-----------------------
Name: Marie Gray

KELLY ANN GRAY TRUST

By: /s/ Robert E. Gray
-----------------------
Name: Robert E. Gray

By: /s/ Marie Gray
-----------------------
Name: Marie Gray

E-8
<PAGE>

SCHEDULE A

Shareholder Shares
- ----------- ------

Robert E. Gray 0

Marie Gray 0

Kelly A. Gray 547,904

Gray Family Trust 603,439*

Kelly Ann Gray Trust 54,640

Totals 1,205,983

* 59,425 of these shares are held in Street Name by Merrill Lynch

Each of the Shareholders is a Reporting Person under the Schedule
13D dated December 8, 1998 which was initially filed with the Securities and
Exchange Commission on or about December 17, 1998, (as amended, the "Schedule
13D"). Each Shareholder's right to vote or dispose of the Subject Shares is as
set forth in the Schedule 13D.

Certain of the Shareholders are parties to zero-cost collar
arrangements with respect to certain of the Subject Shares, all as set forth in
the Schedule 13D. In connection with those zero cost collar arrangements, the
Gray Family Trust and Kelly Gray have each granted Merrill Lynch a first
priority lien, charge and security interest in 70,700 and 80,700 shares,
respectively, as security for their respective obligations under the zero-cost
collar. The Gray Family Trust and Kelly Gray intend to have those shares
released from such pledge arrangements prior to the Effective Time of the
Acquisition Merger.

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<PAGE>

SCHEDULE B

<TABLE>
<CAPTION>
Membership Interest in
Vestar/Gray Cash Payment
---------------------- ------------
<S> <C> <C>
Vestar 84.09% n/a

Robert E. Gray 0% n/a

Marie Gray 0% n/a

Kelly A. Gray 5.87% $5,709,990

Gray Family Trust 9.14% $1,400,010

Kelly Ann Gray Trust .90% n/a
--------- ------------
Total 100% $7,110,000

</TABLE>

E-10