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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 28, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 333-73107
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 52-2061057
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
17622 Armstrong Avenue
Irvine, California 92614
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 863-1171
Securities registered pursuant to Section 12(b)or 12(g) of the Act:
None
Securities registered pursuant to Section 15(d) of the Act:
Title of each class:
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12 1/2% Senior Subordinated Notes due 2009
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]*
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.*
*The Registrant is not subject to the reporting requirements of Item 405.
As of January 23, 2002, the Registrant had 6,546,240 shares of Common
Stock outstanding, and the aggregate market value of Registrant's Common Stock
held by nonaffiliates was $13,598,550 (based on the closing price of the Common
Stock on such date of $30.00 as reported on the OTC Bulletin Board quotation
system).
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INDEX
Page
Number
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PART I
ITEM 1. Business ............................................................................ 3
ITEM 2. Properties .......................................................................... 12
ITEM 3. Legal Proceedings ................................................................... 13
ITEM 4. Submission of Matters to a Vote of Security Holders ................................. 13
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters ........... 14
ITEM 6. Selected Financial Data ............................................................. 15
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk .......................... 21
ITEM 8. Financial Statements and Supplementary Data ......................................... 22
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22
PART III
ITEM 10. Directors and Executive Officers of St. John Knits International, Incorporated ...... 23
ITEM 11. Executive Compensation .............................................................. 25
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ...................... 28
ITEM 13. Certain Relationships and Related Transactions ...................................... 29
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K ................... 31
PART I
Item 1. BUSINESS
Overview
St. John Knits International, Incorporated ("SJKI" and together with its
subsidiaries, the "company", "we" or "us") is a leading designer, manufacturer
and marketer of fine women's clothing and accessories. The St. John name has
been associated with high quality women's knitwear for nearly 40 years. The
company's core knitwear product line consists of a collection of lifestyle
clothing for women's business, evening and casual needs. The company
manufactures its products primarily to order and distributes them on a highly
selective basis through a group of upscale retailers with whom it has long-term
relationships, as well as through company-owned stores.
The company's core knitwear products are considered unique and highly
desirable by customers due to their classic styling, durability, comfort, fit
and quality. These attributes, combined with selective distribution and targeted
advertising, have created a loyal base of customers consisting of professional
and higher-income women.
Products
St. John
The company's products are organized primarily into eight separate product
lines: Knitwear, Sport, Gray & Gray, Shoes, Jewelry, Accessories, Fragrance and
Home Furnishings.
Knitwear. The company organizes its St. John Knitwear into four groups:
Collection, Dressy, Basics and Couture. Due to the breadth of each product
group, the company competes in most segments of women's designer clothing. The
company's knitwear products are sold as a collection of lifestyle clothing for
women's business, evening and casual needs. Due to its all-purpose weight, St.
John Knitwear is a year-round product, not confined to a single season or
climate. The company manufactures all of its knitwear products and designs
knitwear collections to encourage consumers to coordinate outfits, resulting in
multiple product purchases within a collection.
Collection. The company is best known for its Collection line consisting of
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elegant ready-to-wear styles. This line of daytime knit fashions includes
sophisticated dresses and suits that focus on a classic tailored look. The
Collection line also includes jackets, pants, skirts, coats and sweaters.
All items in the line are sold as separates, including two-piece suit
styles.
Dressy. The Dressy line consists of dresses, suits and separates. The look
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of the Dressy line is one of understated elegance enhanced by innovative
touches, such as layers of transparent paillettes and sequins, embroidered
sleeves or embellished collars and cuffs.
Basics. The Basics line is comprised of products which are sold throughout
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the year and which generally do not vary by season. These products consist
of classic jackets, skirts and pants that are an integral part of women's
wardrobes, all in solid black. Simplicity of design allows these products
to be combined with any number of styles from any of the company's product
lines and worn for daytime or dressed up for evening. Retailers'
inventories of Basics products tend to be maintained throughout the year
and reordered as necessary.
Couture. The Couture line is the company's most exclusive group of day and
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evening apparel and is produced in limited quantities. The day group
includes dresses and two-piece suits which are designed with elegant
embroidery. The evening group consists of two-piece suits and long gowns.
Both groups are designed using colored paillettes and sequins.
Sport. St. John Sport is a line of active lifestyle clothing which includes
jackets, skirts, pants, tops and jeans and is targeted to the designer
sportswear customer as well as our core knitwear customers. The line is
manufactured in the company's production facilities and certain select outside
contractors located throughout the world. The line includes various knit styles
along with woven garments made from fabrics purchased primarily in Italy and
Asia.
Gray & Gray. The Gray & Gray line includes suits, coats, dresses, separates and
eveningwear. The line targets a slightly younger customer than the core Knitwear
line. A portion of the line is manufactured in the company's facilities,
including various knit styles. The balance of the line is manufactured by
outside contractors located in Italy using high quality European woven fabrics.
Commencing with the Fall 1999 line, Gray & Gray is carried exclusively in our
company-owned stores.
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Shoes. The St. John Shoe line consists of pumps, sling backs, loafers, boots and
sandals, manufactured in Italy using high quality Italian leather. Shoes are
designed to match the styles and colors of the Knitwear line.
Jewelry. The Jewelry line is comprised of fashion jewelry, including earrings,
necklaces, chokers, pins and bracelets. The Jewelry line is manufactured in the
company's production facilities.
Accessories. The Accessories line is comprised primarily of handbags and belts.
Handbags are produced primarily in Italy using the highest quality Italian
leather and fabrics.
Fragrance. The Fragrance line includes perfume, eau de parfum, perfumed body
mist, body cream, lotion, body powder and bath products. The Fragrance line
includes two scents, the signature fragrance, St. John, and White Camellia. Both
scents are marketed as accessories to the St. John apparel line through select
wholesale customers and company-owned retail stores.
Home Furnishings. The company manufactures various home furnishing items in its
manufacturing facilities. Many of the items are manufactured in the company's
jewelry manufacturing facilities. These items are sold through the company-owned
retail boutiques, St. John Home stores and select wholesale customers.
The following table details the approximate range of suggested retail
prices by product line. The suggested retail prices are indicative of individual
item prices.
Range of Suggested
Product Line Selected Products Retail Prices
------------ ----------------- -------------
Knitwear
Collection Dresses, Two-Piece Suits, Jackets, Pants, Skirts, Coats, $350-$1,500
Sweaters
Dressy Dresses, Theater Suits, Dressy Separates $650-$2,800
Basics Jackets, Skirts ,Pants $200-$ 825
Couture Dresses, Gowns, Two-Piece Suits $900-$3,500
Sport Jackets, Skirts, Pants, Tops, Jeans $ 95-$ 930
Gray & Gray Suits, Coats, Dresses, Separates, Eveningwear $200-$1,800
Shoes Pumps, Sling Backs, Loafers, Boots, Sandals $260-$ 550
Jewelry Earrings, Necklaces, Chokers, Pins, Bracelets $ 65-$ 350
Accessories Handbags, Belts $175-$ 745
Fragrance Perfume, Bath Products $ 25-$ 250
Home Furnishings Barware, Candle Holders, Napkin Rings $ 40-$ 375
Sales by Division
The following is a comparison of the net sales by division for the past
three fiscal years (in 000's):
Fiscal Years
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2001 2000 1999
---- ---- ----
Knitwear........................... $243,612 $221,667 $208,997
St. John Apparel Retail Stores..... 115,925 112,145 89,577
Sport.............................. 44,588 27,669 11,870
St. John Home Retail Stores........ 5,925 4,960 8,552
Jewelry............................ 5,130 5,884 6,132
Shoes.............................. 4,803 5,300 6,137
Accessories........................ 4,050 3,260 1,799
Gray &Gray......................... 1,334 1,809 2,578
Home Furnishings................... 1,070 -- --
Fragrance.......................... 667 1,331 1,581
Coat............................... -- -- (18) (1)
SJK................................ -- -- (646) (1)
St. John Company, Ltd.............. 7,390 7,241 5,996
St. John Asia, Ltd................. 962 1,080 308
Sales Elimination.................. (69,535) (55,887) (48,692)
-------- -------- --------
Total Net Sales.................... $365,921 $336,459 $294,171
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(1) The SJK and Coat product lines were discontinued at the end of fiscal 1998.
4
Licenses
The company has a license agreement to manufacture and sell coats under the
St. John name. The coat license agreement was completed in February 1999. The
St. John Coat Collection offers the usual classic styles, elegance and superior
quality the St. John customer has come to expect. The line was launched in
August 1999. Prior to the license agreement, the company's Coat Collection
consisted primarily of faux fur coats in various styles and colors which were
manufactured in the company's factories using fabric imported from Europe.
Manufacturing
The company has developed a vertically integrated manufacturing process
which it believes is unique and critical to its success. During fiscal 2001,
approximately 89% of the company's products were manufactured at the company's
own facilities, while the remaining 11% were manufactured by outside
contractors, primarily in Europe and Asia. The company twists and dyes its yarn,
as well as knits, constructs, presses and finishes its knitwear products, in its
seven facilities located in Southern California and one facility located in
Mexico. The company manufactures its knitwear using its highly automated
electronic knitting machines coupled with a skilled labor force. The company
also manufactures its own jewelry and hardware for its products. Products not
manufactured by the company include a portion of the Sport and Gray & Gray
product lines, the Shoe product line, handbags, scarves, belts and fragrance.
The company believes that its vertical integration differentiates it from
other apparel manufacturers and has been critical to its success because it
enables the company to manufacture products to order, maximize manufacturing
flexibility and maintain superior quality control. The company believes that the
ability to produce to order limits its exposure to both the inventory and market
risks associated with many apparel companies that source products
internationally. The company's in-house manufacturing capabilities also enable
it to quickly increase production of popular styles. The company's ability to
control every aspect of the manufacturing process allows it to consistently
produce garments to its high quality standards. Finally, the company believes
that its vertical integration has enabled it to consistently achieve margins
that are among the highest in the apparel industry.
The manufacturing process begins with the twisting together of wool and
rayon on the company's precision twisting machines in a unique process that
produces the company's signature yarn. The twisted yarn is transferred to the
company's dye house for dyeing based on garment orders received. The dyed yarn
is knitted on the company's computerized electronic knitting machines and then
cut, assembled and finished in the company's linking, seaming and hand finishing
facilities. The company's jewelry and hardware manufacturing plants produce the
buttons and buckles for garments, as well as bracelets, earrings, necklaces,
chokers and pins. The company also manufactures many of its woven products, as
well as blouses, jeans and certain scarves.
During fiscal 1998, the company completed a jewelry and garment hardware
manufacturing facility in Mexico. This facility gives the company additional
manufacturing capacity as well as the ability to lower the cost of certain
labor-intensive jewelry and hardware components through reduced labor costs. In
addition, workers at the Mexico facility produce certain items in the Sport
product line, cut and sew jeans and apply paillettes and sequins to some of the
company's apparel products.
Quality Control
The company has achieved its quality reputation by vertically integrating
manufacturing processes and maintaining control over its operations. The
expansion into dyeing, yarn twisting and jewelry and hardware manufacturing was
due primarily to the inability of outside suppliers to provide products meeting
the company's standards on a consistent and timely basis. The company's quality
control program is designed to enable all finished goods to meet the company's
standards, and includes inspection points throughout the manufacturing
processes. During the manufacturing processes, every garment is individually
inspected. In addition, the company uses outside contractors primarily for the
manufacturing of its shoes, handbags and certain woven products. The company has
instituted procedures to maintain the quality of products manufactured by
outside contractors.
Design
The company designs its garments to be consistent with its classic,
timeless style. To accomplish this goal, design teams reference the prior
season's designs and patterns to establish a basis for the current season's
lines. The design teams also work closely with the sales force to incorporate
current consumer preferences into the season's line. Dye lots are kept
consistent with prior years to enable consumers to augment their wardrobes over
several seasons. Once design parameters for a particular item are established,
the design teams work with the manufacturing group to plan construction details
and hardware attachments, such as buttons, to ensure efficient manufacturing.
The design management team has an average of 14 years of experience with the
company.
5
Distribution
The company's products are distributed primarily through a select group of
specialty retailers and the company's 26 boutiques, 10 outlet stores, three home
furnishing stores and one home furnishing outlet.
Retail Customers. The company selectively distributes its products through some
of the nation's leading upscale retailers, including Saks Fifth Avenue, Neiman
Marcus and Nordstrom, each of which accounted for more than 10% of the company's
net sales in fiscal 2001 (approximately 46% collectively) and have been
customers of the company for approximately 25, 20 and 15 years, respectively.
The company distributes its products to approximately 550 locations in the
United States and internationally. Since the mid-1980s, the company has worked
with these and certain other customers to create in-store boutiques, which are
designated areas devoted exclusively to the company's products. Other
significant customers of the company include Jacobson's, Macy's West and select
Marshall Field's and Dayton Hudson stores.
St. John Apparel Stores. In order to diversify its product distribution and
enhance name recognition, the company began opening its own retail boutiques in
1989 and currently operates 26 such boutiques. The boutiques showcase the
company's entire line of apparel products and have expanded the distribution and
enhanced the brand awareness of its products. The company also operates 10
outlet stores. Unlike many of its competitors, the company does not expressly
manufacture product for its outlets, instead utilizing the outlets to sell
seconds, design samples and slow-moving inventory from the company's full-price
boutiques.
St. John Home Stores. During 1997, the company began opening home furnishing
stores and currently operates three such stores, located in Scottsdale, Arizona,
Costa Mesa, California and Palm Desert, California under the name St. John Home.
The Palm Desert location was opened during January 2001. In addition, the
company operates one St. John Home outlet store in Nevada. St. John Home stores
sell upscale home furnishings and gift items, some of which are manufactured by
the company.
International. The company sells its products to specialty retailers in Asia,
Europe, Canada and Mexico. In Asia, the company has established relationships
with a number of highly qualified retailers, including Lane Crawford in Hong
Kong and China and ShinSegae in South Korea, and is seeking to increase its
penetration in these accounts. In Japan, the company operates a wholly owned
subsidiary that distributes its products throughout Japan and operates a number
of small retail stores which are located within larger department stores and two
in-hotel boutiques. The company's European efforts involve expanding and
upgrading its relationships with high quality independent wholesale customers,
principally in the United Kingdom, Germany, Belgium, Switzerland and the
Netherlands. During fiscal 2001, international sales to wholesale customers and
sales through the company's subsidiary in Japan accounted for approximately 7.9%
of the company's net sales.
Financial Information About Segments
The company has two reportable business segments, wholesale and retail
sales. The company's wholesale sales business consists primarily of eight
divisions: Knitwear, Sport, Gray & Gray, Shoes, Jewelry, Accessories, Fragrance
and Home Furnishings. For fiscal 2001, retail sales were generated through the
company's 24 St. John boutiques, 10 St. John outlet stores, three St. John Home
stores and one St. John Home outlet store. Management evaluates segment
performance based primarily on revenue and earnings from operations. For segment
information regarding net sales, operating profits and assets, see note 14 to
the company's financial statements, included herein.
Marketing
The company markets its Collection, Dressy and Couture lines along with its
Sport line twice a year, during the Fall and Cruise/Spring seasons. These lines
are shown beginning in January for delivery between May and October and
beginning in July for delivery between November and April. The majority of
orders for each of these six-month delivery periods normally are received within
five weeks of showings, and the goods are then made to order. The Shoe line is
marketed four times per year. The company markets its Basics, Jewelry,
Accessories and Fragrance lines throughout the year.
The company shows its product lines to retail customer buyers in its New
York and Irvine showrooms. Members of the company's senior management team work
closely with major customers to develop sales plans and to determine the
appropriate mix of merchandise. These detailed sales plans are based on past
purchases, expected sales growth and profitability. The company also shows its
products in its Dusseldorf and Japan showrooms as well as in other foreign
countries at various times during the year using its outside sales
representatives.
The company's strategy is to sell its products to its retail accounts and
to facilitate the sale of its products through to the ultimate consumer. The
company employs a sales team, showroom personnel and customer service
representatives. The sales team
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is currently comprised of 30 U.S. and five international field representatives.
The sales team establishes and maintains in-store boutique presentations,
develops close working relationships with store management and trains key sales
people to be St. John specialists. The St. John specialists at certain key
retail accounts are eligible for the company's incentive rewards. In addition,
the company's customer service representatives monitor computerized information
on each store's sales and styles sold in an effort to track and increase sales.
In order to promote its upscale image, the company advertises in both
national and international fashion magazines, including Vanity Fair, Vogue, Elle
and Harper's. In fiscal 2001, the company spent approximately $15.0 million on
advertising. Management believes that this advertising approach enhances the
company's image. The company's advertising features Kelly Gray as its Signature
Model. The company also designs and produces seasonal exclusive St. John
catalogs, which are distributed at the discretion of individual retailers.
Distribution is usually limited to target repeat purchasers or those who meet
the company's consumer profile.
Raw Materials and Suppliers
The company's primary raw materials in the production of its knitwear are
wool and rayon. In fiscal 2001, the company purchased approximately $8.8 million
of wool and approximately $3.5 million of rayon. The company uses the highest
quality wool, primarily from Australia. Generally, a wool commitment is taken
with the company's primary U.S. spinner for a set quantity of wool based on the
company's forecasted wool requirements for at least one year. Multiple spinners
are available, both domestically and internationally, with comparable pricing
for spun Australian wool yarn. The company generally holds an inventory of
twisted yarn sufficient for approximately six weeks of production to protect it
from potential supply interruptions. Rayon is available in raw or dyed form from
various European and Japanese suppliers.
In addition to wool and rayon, the company purchases yarn and fabric from
various suppliers and has little difficulty in satisfying its requirements from
Europe and Asia. Certain raw materials used in the manufacture of paillettes are
purchased from a supplier in Europe. The company believes that there are limited
sources for these items.
Competition
Due to its history of strong sales and market leadership in designer
knitwear, the company believes that it faces limited direct competition for its
core product offerings. In addition, the company believes that the risk of
strong new competitors is further limited given its substantial investment in
knitwear production technology and its strong relationships with its retail
accounts. In a broader context, the company does compete with such successful
designers as Armani, Calvin Klein, Chanel, Donna Karan and Escada for
higher-income female customers.
Trademarks
The company owns and utilizes several trademarks, principal among which are
St. John(R), St. John by Marie Gray(R), St. John Sport by Marie Gray (R) and
Gray & Gray(TM). The company's principal marks are registered with the United
States Patent and Trademark Office and in several other major jurisdictions in
the world. The company regards its trademarks and other proprietary rights as
valuable assets and believes that they have significant value in the marketing
of its products. The company vigorously protects its trademarks against
infringement.
Regulation
The company is subject to a variety of federal, state and local laws and
regulations including those relating to zoning, land use, environmental
protection and workplace safety. The company is also subject to laws governing
its relationship with its employees, including minimum wage requirements,
overtime, working conditions and work permit requirements. Although the company
believes that it is and has been in material compliance with all of the various
regulations applicable to its business, the company cannot assure that
requirements will not change in the future or that it will not incur significant
costs to comply with such requirements.
7
Geographic Information
The table below presents information related to the geographic areas in
which the company operated during fiscal years 2001, 2000 and 1999:
Fiscal Years
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2001 2000 1999
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(in thousands)
Net sales:
United States ............. $337,050 $311,395 $269,701
Asia(1) ................... 17,445 15,284 13,344
Europe(1) ................. 6,750 6,298 6,909
Other ..................... 4,676 3,482 4,217
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$365,921 $336,459 $294,171
======== ======== ========
(1) Sales for these geographic areas include sales made into the area directly
from the United States and sales made in the area by subsidiaries or
branches of the company.
The Company
SJKI became the parent company of St. John Knits, Inc., a California
corporation ("St. John") and its subsidiaries as a result of mergers consummated
in July 1999. Prior to the mergers, SJKI was a wholly owned subsidiary of St.
John. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Agreement and Plan of Merger." SJKI was incorporated in
Delaware during fiscal 1999. Prior to such time, SJKI was incorporated in
Barbados as a "large FSC" under Section 922 of the Internal Revenue Code of
1986, as amended. St. John is a wholly owned subsidiary of SJKI and was
incorporated during 1962.
Employees
At October 28, 2001, the company had approximately 5,225 full-time
employees, including 26 in management positions, approximately 280 in design and
sample production, 2,935 in production, 255 in quality control, 460 in retail,
105 in sales and advertising and the balance in clerical and office positions.
In addition, the company had approximately 835 full-time employees working at
the company's manufacturing facility in Mexico and approximately 70 employees
working at the company's subsidiary in Japan, principally in retail and various
clerical and office positions. The company is not party to any labor agreements.
The company believes a significant number of its employees are highly skilled
and that turnover among these employees has been minimal. The company considers
its relationship with its employees to be good and has not experienced any
interruption of its operations due to labor disputes.
Risk Factors
Substantial Leverage and Debt Service. Our company is highly leveraged. As of
October 28, 2001, we had total debt of approximately $252.3 million, of which
approximately $152.0 million was senior debt, and a stockholders' deficit of
approximately $123.9 million, which resulted from the recapitalization of the
company in connection with the mergers consummated in July 1999. In addition, we
may borrow money under our revolving credit facility which is intended to be
used primarily for working capital. Subject to restrictions in our senior credit
facilities and the indenture governing our senior subordinated notes, we may
borrow more money for working capital, capital expenditures, acquisitions or
other purposes.
Our high level of debt could have important consequences, including the
following:
. our debt level makes us more vulnerable to economic downturns and
adverse developments in our business, may cause us to have difficulty
borrowing money in the future for working capital, capital expenditures,
acquisitions or other purposes and limits our ability to pursue other
business opportunities and implement our business strategies;
. we will need to use a large portion of the money we earn to pay
principal and interest on our senior credit facilities, our notes and on
other debt, which will reduce the amount of money available to us to
finance our operations and other business activities;
. some of our debt has a variable rate of interest, which exposes us
to the risk of increased interest rates; and
. we may have a much higher level of debt than our competitors, which
may put us at a competitive disadvantage and may reduce our flexibility in
responding to changing business and economic conditions, including
increased competition.
8
We expect to obtain the money to pay our expenses and to pay the principal
and interest on our notes, our senior credit facilities and other debt from our
operations and from loans under our revolving credit facility. Our ability to
meet our expenses thus depends on our future performance, which will be affected
by financial, business, economic and other factors. We will not be able to
control many of these factors, such as economic conditions in the markets where
we operate and pressure from competitors. We cannot be certain that the money we
earn will be sufficient to allow us to pay principal and interest on our debt
and meet our other obligations. If we do not have enough money, we may be
required to refinance all or part of our existing debt, sell assets or borrow
more money. We cannot guarantee that we will be able to refinance our debt, sell
assets or borrow more money on terms acceptable to us. In addition, the terms of
existing or future debt agreements, including our senior credit facilities and
the indenture governing our notes, may restrict us from adopting any of these
alternatives.
Covenant restrictions may limit our ability to operate our business. The
indenture governing our senior subordinated notes contains covenants that, among
other things:
. limit our ability to incur indebtedness and pay dividends on and redeem
capital stock; and
. create restrictions on:
. investments in unrestricted subsidiaries;
. limiting distributions from some of the company's subsidiaries;
. the use of proceeds from the sale of assets and subsidiary
stock;
. entering into transactions with affiliates and
. creating liens.
The indenture also restricts, subject to certain exceptions, our ability to
consolidate and merge with or to transfer all or substantially all our assets
to, another party.
Under our senior credit facilities, we must also comply with certain
specified financial ratios and tests that may restrict our ability to make
distributions or other payments to our investors and creditors and if we do not
comply with these or other covenants and restrictions contained in the senior
credit facilities we could default under the senior credit facilities. Such
debt, together with accrued interest, could then be declared immediately due and
payable. Our ability to comply with such provisions may be affected by events
beyond our control.
Although we believe that we have been in compliance and that we will be
able to maintain compliance with our current financial tests there can be no
assurance that we will be able to do so. The restrictions imposed by such
covenants may adversely affect our ability to take advantage of favorable
business opportunities. Failure to comply with the terms of such covenants could
result in acceleration of the indebtedness represented by our notes.
Competition and/or an economic downturn could have a material adverse
effect on our business. The apparel industry is highly competitive. We compete
primarily on the basis of price and quality. We believe that our success depends
in large part on our ability to anticipate, gauge and respond to changing
consumer demands in a timely manner. We cannot assure that we will always be
successful in this regard. If we misjudge these demands, our sales may suffer,
which could adversely affect our business, financial condition and results of
operations.
We compete with numerous domestic and foreign designers, brands and
manufacturers of apparel and accessories, some of which may be significantly
larger and more diversified and have greater financial and other resources than
we do. Increased competition from these and future competitors could reduce our
sales and adversely affecting our results. Because of our debt level, we may be
less able to respond effectively to such competition than others.
The industry in which we operate is cyclical. Purchases of apparel
generally tend to decline during recessions and also may decline at other times.
A recession in the general economy or uncertainties regarding future economic
prospects could affect consumer spending habits and have a material adverse
effect on our business, financial condition and results of operations.
The loss of one or more of our primary customers could have a material adverse
effect on our business. We, like many of our competitors, sell to retailers. In
recent years, the retail industry has experienced consolidation and other
ownership changes. In the future, retailers in the United States and in foreign
markets may have financial problems or consolidate, undergo restructurings or
reorganizations, or realign their affiliations, any of which could decrease the
number of stores that carry our products or increase the ownership concentration
within the retail industry. We cannot assure you as to the future effect of any
such changes.
9
During fiscal 2001 and 2000, net sales to our three largest retail
customers, Saks Fifth Avenue, Neiman Marcus and Nordstrom, totaled approximately
46% and 43% of net sales, respectively, and net sales to Saks Fifth Avenue, our
largest retail customer, accounted for approximately 16% of net sales in fiscal
2001 and 15% in fiscal 2000. Although we have long-established relationships
with many of our customers, we do not have any long-term sales agreements. The
loss of or significant decrease in business from any of our major customers
could have a material adverse effect on our business, financial condition and
results of operations.
The loss of one or more members of our senior management team could have a
material adverse effect on our business. Our success has been largely dependent
on the personal efforts and abilities of Bob Gray, Chairman and Chief Executive
Officer, Marie Gray, Chief Designer, and Kelly Gray, Co-President (collectively,
the "Grays"). The loss of the services of any of these executives could have a
material adverse effect on our business, financial condition and results of
operations.
We are controlled by Vestar Capital Partners III, L.P.("Vestar"). Vestar and the
Grays beneficially own approximately 78% and 15%, respectively, of the
outstanding common stock of SJKI. As a result, Vestar is able to effectively
control the outcome of certain matters requiring a stockholder vote, including
the election of four of the seven directors of SJKI (the Grays are contractually
entitled to appoint the remaining three directors). Such ownership of common
stock may have the effect of delaying, deferring or preventing a change of
control.
An increase in the price or a decrease in the availability of wool or rayon, our
primary raw materials, could have a material adverse effect on our business. Our
principal raw materials are wool and rayon. In fiscal 2001, we purchased
approximately $8.8 million of wool and approximately $3.5 million of rayon. The
price of wool and rayon may fluctuate significantly depending on world demand.
We cannot assure that such fluctuation in the price of wool or rayon will not
affect our business, financial condition and results of operations.
We purchase wool imported primarily from Australia. We also import other
raw materials, including rayon, from Europe and Japan. In addition, our shoes,
handbags and certain woven products are manufactured in Europe. Our imported
materials and products are subject to United States customs duties which
comprise a material portion of the cost of the merchandise. A substantial
increase in customs duties could have a material adverse effect on our business,
financial condition and results of operations. The United States and the
countries in which materials and products are produced or sold may, from time to
time, impose new quotas, duties, tariffs or other restrictions, or adversely
adjust prevailing quota, duty or tariff levels, any of which could have a
material adverse effect on the company.
Our international operations expose us to additional political, economic and
regulatory risks not faced by businesses that operate only in the United States.
We conduct international operations in Mexico, Europe, Asia and Canada. In
fiscal 2001, approximately 8% of our sales occurred outside the United States,
and approximately 11% of our products were manufactured by third-party
contractors, many of which were outside the United States. Any international
operations will be subject to risks similar to those affecting our U.S.
operations in addition to a number of other risks, including:
. lack of complete operating control;
. currency fluctuations;
. trade barriers;
. exchange controls;
. governmental expropriation;
. foreign taxation;
. difficulty in enforcing intellectual property rights;
. language and other cultural barriers; and
. political and economic instability.
In addition, various jurisdictions outside the United States have laws
limiting the right and ability of non-United States subsidiaries and affiliates
to pay dividends and remit earnings to affiliated companies unless specified
conditions exist. Our ability
10
to expand the manufacture and sale of our products internationally is also
limited by the necessity of obtaining regulatory approval in new countries.
Our financial performance on a U.S. dollar denominated basis can be
significantly affected by fluctuations in currency exchange rates. From time to
time we enter into agreements to seek to reduce our foreign currency exposure,
but we cannot assure that we will be successful in so doing.
Changes in, or the costs of complying with, various governmental regulations
could have a material adverse effect on our business. We are subject to a
variety of federal, state and local laws and regulations including those
relating to zoning, land use, environmental protection and workplace safety. We
are also subject to laws governing our relationship with our employees,
including minimum wage requirements, overtime, working conditions and work
permit requirements. Although we believe that we are and have been in material
compliance with all of the various regulations applicable to our business, we
cannot assure that requirements will not change in the future or that we will
not incur significant costs to comply with such requirements.
The loss or infringement of our trademarks and other proprietary rights could
have a material adverse effect on our business. We believe that our trademarks
and other proprietary rights are important to our success and competitive
position. Accordingly, we devote substantial resources to the establishment and
protection of our trademarks on a worldwide basis. We cannot assure that our
actions taken to establish and protect our trademarks and other proprietary
rights will be adequate to prevent imitation of our products by others or to
prevent others from seeking to block sales of our products as violative of their
trademarks and proprietary rights. Moreover, we cannot assure that others will
not assert rights in, or ownership of, trademarks and other proprietary rights
of ours or that we will be able to successfully resolve such conflicts. In
addition, the laws of certain foreign countries may not protect proprietary
rights to the same extent as do the laws of the United States. The loss of such
trademarks and other proprietary rights, or the loss of the exclusive use of our
trademarks and other proprietary rights, could have a material adverse effect on
our business, financial condition and results of operations.
Backlog
At October 28, 2001, the company had unfilled customer orders for the
Cruise/Spring season of approximately $142 million compared with approximately
$160 million as of October 29, 2000. Orders for the Cruise/Spring season are
generally shipped during November through April. The company's experience has
been that the cancellations, rejections or returns of orders do not materially
reduce the amount of sales realized from its backlog.
11
Item 2. PROPERTIES
The principal executive offices of the company are located at 17622
Armstrong Avenue, Irvine, California 92614.
Company-owned Properties
The general location, use and approximate size of the company-owned
properties are set forth below. All of such properties are used in the company's
wholesale business segment.
Approximate
Area in
Location Use Square Feet
-------- --- -----------
Irvine, California ................. Design Facility, Sewing, Warehousing, Shipping 110,500
Tijuana, Mexico .................... Jewelry and Hardware Manufacturing, Sewing, Knitting 63,100
Irvine, California ................. Knitting 32,100
Van Nuys, California ............... Assembling, Sewing 27,900
San Ysidro, California ............. Assembling 27,300
Irvine, California ................. Corporate Headquarters, Showroom, Administrative 25,100
Offices
Irvine, California ................. Knitting 20,500
Leased Properties
The general location, use, approximate size and lease expiration date
of the company's principal leased properties are set forth below. All of such
properties are used in the company's retail business segment except as noted.
Approximate Lease
Area in Expiration
Location Use Square Feet Date
-------- --- ----------- ----------
Irvine, California(1) (2) .......... Knitting, Sewing, Finishing, Shipping, 175,000 7/10
Administrative Offices
Irvine, California(3) .............. Warehousing, Administrative Offices 90,100 4/05
Irvine, California(2) .............. Twisting, Dyeing, Warehousing 88,100 5/06
Alhambra, California(2) ............ Assembling, Sewing 41,000 8/06
Santa Ana, California(2) ........... Jewelry and Hardware Manufacturing 25,000 5/04
Costa Mesa, California(4) .......... Retail Boutique 15,400 1/14
New York, New York(2) .............. Showroom 12,300 6/11
New York, New York(5) .............. Retail Boutique 7,500 6/11
Beverly Hills, California .......... Retail Boutique 7,000 3/06
New York, New York(5) .............. Retail Boutique 6,200 6/11
Chicago, Illinois .................. Retail Boutique 6,000 9/04
Las Vegas, Nevada .................. Retail Boutique 5,600 1/09
Munich, Germany .................... Retail Boutique 4,400 10/02
- ---------------------
(1) The company leases this property from a general partnership in which St.
John holds a 50 % interest.
(2) This property is used in the company's wholesale business segment.
(3) This property is used in both the company's retail and wholesale business
segment.
(4) This lease includes both the St. John and St. John Home boutiques which
were opened during fiscal 1999.
(5) The square footage of the retail boutique located on 5th Avenue in New York
City is covered by these two leases.
As of October 28, 2001, annual base rents for the company's leased
properties listed in the table above ranged from approximately $165,000 to
$1,318,000. In general, the terms of these leases provide for rent escalations
dependent upon either increases in the lessor's operating expenses or
fluctuations in the consumer price index in the relevant geographical area.
The company believes that there are facilities available for lease in the
event that either the productive capacities of the company's manufacturing
facilities need to be expanded or a current lease of a manufacturing facility
expires. The company also leases space for 26 additional retail boutiques
(including nine that will open in fiscal 2002 or later, two of which will
replace existing boutiques), one additional showroom, one additional
administrative and warehouse facility, 10 outlet stores, two home furnishing
stores and one home furnishing outlet store (aggregating approximately 311,000
square feet).
12
Item 3. LEGAL PROCEEDINGS
Litigation Regarding the Mergers
On June 9, 2000, the company reached an agreement to settle a class action
shareholders' lawsuit arising from the mergers of the company that closed on
July 7, 1999. The terms of the settlement agreement, which received final court
approval on August 1, 2000, called for payment of $13.75 million to the
company's former public shareholders and their attorneys. Nearly all of this
payment was funded by the company's insurance carriers. Additionally, in the
event of a future sale, merger or public offering of the company, the company
has agreed to provide these former shareholders with an opportunity to receive a
specified percentage of proceeds from such an event under certain limited
circumstances. On September 1, 2000, one of the plaintiffs in this lawsuit filed
a notice of appeal from the judgment approving the settlement and the court
order regarding application for attorney's fees. On October 12, 2001, an order
was entered dismissing the appeal as it relates to the settlement, thereby
leaving the only issue on appeal the court order regarding application for
attorney's fees. As such, the matter as it relates to the company has been
finalized.
The company is not a party to any other litigation which is individually or
in the aggregate material to its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
SJKI's common stock is quoted on the OTC Bulletin Board quotation system
under the symbol "SJKI". The following table sets forth, for each of the full
quarterly periods indicated, the quarterly high and low bid quotations for
SJKI's common stock as reported by the OTC Bulletin Board. The prices in the
table represent prices between dealers and do not include adjustments for retail
mark-ups, markdowns or commissions and may not represent actual transactions.
Fiscal 2001 Fiscal 2000
----------- -----------
Quarter High Low High Low
- ------- ---- --- ---- ---
Fourth $26.00 $21.00 $28.00 $20.88
Third 38.00 22.00 25.00 18.00
Second 56.00 40.00 18.00 16.25
First 50.00 28.00 16.00 14.50
As of January 22, 2002, there were approximately 17 holders of record of
SJKI's common stock.
SJKI has never declared dividends on its common stock and does not intend
to pay dividends on its common stock in the future. SJKI's ability to pay
dividends depends upon the receipt of dividends from St. John, which is a wholly
owned subsidiary of SJKI. In addition, SJKI's ability to pay dividends on its
common stock is restricted by the terms of its senior credit facilities and the
indenture governing its senior subordinated notes as well as limitations under
applicable law and other factors the board of directors deems relevant. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
14
Item 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the
consolidated financial statements of the company. This information should be
read in conjunction with the company's audited consolidated financial statements
and notes thereto and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Fiscal Year Ended
---------------------------------------------------------------
October 28, October 29, October 31, November 1, November 2,
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(in thousands, except per share amounts)
Income Statement Data:
Net sales(1) ....................................... $365,921 $336,459 $294,171 $277,900 $240,479
Cost of sales ...................................... 159,484 141,097 130,131 120,883 99,545
-------- -------- -------- -------- --------
Gross profit ....................................... 206,437 195,362 164,040 157,017 140,934
Selling, general and administrative expenses(1) .... 137,325 123,251 114,884 102,965 82,923
Transaction fees and expenses ...................... -- -- 15,123 -- --
-------- -------- -------- -------- --------
Operating income ................................... 69,112 72,111 34,033 54,052 58,011
Interest expense ................................... 28,344 31,787 10,224 -- 42
Other income ....................................... 4,036 1,000 1,197 1,369 755
-------- -------- -------- -------- --------
Income before income taxes ......................... 44,804 41,324 25,006 55,421 58,724
Income taxes ....................................... 18,925 17,511 10,317 22,001 24,300
-------- -------- -------- -------- --------
Net income ......................................... $ 25,879 $ 23,813 $ 14,689 $ 33,420 $ 34,424
======== ======== ======== ======== ========
Net income per common share-diluted ................ $ 3.17 $ 3.00 $ 0.98 $ 1.94 $ 2.01
======== ======== ======== ======== ========
Dividends per share ................................ $ -- $ -- $ 0.075 $ 0.10 $ 0.10
======== ======== ======== ======== ========
Weighted average shares outstanding-diluted ........ 6,623 6,546 13,669 17,235 17,134
======== ======== ======== ======== ========
As of
---------------------------------------------------------------
October 28, October 29, October 31, November 1, November 2,
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(in thousands)
Balance Sheet Data:
Working capital ................................... $ 71,025 $ 69,821 $ 89,140 $ 89,190 $ 69,693
Total assets(1) ................................... 222,223 218,499 206,810 182,390 153,904
Long-term debt(2) ................................. 243,291 261,847 287,321 408 --
Mandatorily redeemable preferred stock ............ 25,000 25,000 25,000 -- --
Redeemable common stock ........................... 27,132 29,069 29,069 -- --
Stockholders' equity (deficit) (2) ................ (123,924) (146,670) (166,000) 161,574 130,680
- -----------------
(1) Certain reclasses have been made to the prior year balances to conform with
the current year presentation.
(2) The company increased its long-term debt and issued the redeemable
preferred stock in connection with the mergers consummated in July 1999.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Agreement and Plan of Merger." In addition, the
deficit in stockholders' equity was incurred in connection with the
mergers.
15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis should be read in conjunction with the
company's consolidated financial statements and the notes related thereto.
Agreement and Plan of Merger
On July 7, 1999, (i) SJKAcquisition, Inc., a California corporation and
direct wholly owned subsidiary of SJKI, merged with and into St. John, with St.
John surviving the merger (the "reorganization merger") and (ii) Pearl
Acquisition Corp. ("Pearl"), a Delaware corporation and direct wholly owned
subsidiary of Vestar/Gray Investors LLC, a Delaware limited liability company,
merged with and into SJKI, with SJKI surviving the merger (the "acquisition
merger" and together with the reorganization merger, the "mergers"), as
contemplated by the Agreement and Plan of Merger, dated as of February 2, 1999,
among SJKI, St. John, SJKAcquisition and Pearl. As a result of the mergers, St.
John became a wholly owned subsidiary of SJKI. Immediately after the mergers,
SJKI was approximately 7% owned by former shareholders of St. John, other than
Robert E. Gray, Marie Gray and Kelly A. Gray, and approximately 93% owned by
Vestar/Gray Investors LLC. Vestar/Gray Investors LLC is approximately 84% owned
by an affiliate of Vestar Capital Partners III, L.P. and 16% owned by the Grays.
As a result of the mergers, except for fractional shares and shares owned
by St. John, Pearl, Vestar/Gray Investors LLC and the Grays, and subject to
proration, each issued and outstanding share of St. John prior to the
reorganization merger was converted into the right to receive either $30 in cash
or, for each former issued and outstanding share of common stock of St. John
with respect to which an election had been made and not withdrawn in accordance
with the merger agreement, one fully paid and non-assessable share of SJKI's
common stock, with a total of 455,969 shares (after elimination of fractional
shares) of SJKI issued to former shareholders of St. John, other than the Grays.
The aggregate cash consideration paid to company shareholders in connection
with the mergers was approximately $448.7 million. The company financed the
mergers with proceeds from senior secured credit facilities of $190.0 million,
an equity contribution by Vestar/Gray Investors LLC of $146.5 million, a
subordinated debt offering of $100.0 million and the issuance of preferred stock
of $25.0 million. The transaction was recorded as a recapitalization. Expenses
related to the new debt financing of approximately $15.2 million were recorded
as deferred financing costs and are being amortized over the life of the related
debt. Expenses related to the purchase of the company's outstanding stock of
approximately $9.3 million were reflected as a reduction in retained earnings at
October 31, 1999. Expenses totaling approximately $15.0 million were incurred
during the third quarter of fiscal 1999 related to the mergers. These expenses
were primarily related to payments made to settle the company's outstanding
stock options in connection with the mergers.
Results of Operations
The following table is derived from the company's Consolidated Statements
of Income and sets forth, for the periods indicated, the results of operations
as a percentage of net sales:
Percentage of Net Sales
Fiscal Year Ended
--------------------------------------------------
October 28, October 29, October 31,
2001 2000 1999
----------- ----------- -----------
Net sales ............................................ 100.0% 100.0% 100.0%
Cost of sales ........................................ 43.6 41.9 44.2
----- ----- -----
Gross profit ......................................... 56.4 58.1 55.8
Selling, general and administrative expenses ......... 37.5 36.6 39.1
Transaction fees and expenses ........................ -- -- 5.0
----- ----- -----
Operating income ..................................... 18.9 21.5 11.7
Interest expense ..................................... 7.8 9.5 3.5
Other income ......................................... 1.1 0.3 0.4
----- ----- -----
Income before income taxes ........................... 12.2 12.3 8.6
Income taxes ......................................... 5.2 5.2 3.5
----- ----- -----
Net income ........................................... 7.0% 7.1% 5.1%
===== ===== =====
16
Fiscal 2001 Compared to Fiscal 2000
Net sales for fiscal 2001 increased by $29.5 million, or 8.8% over fiscal
2000. This increase was principally attributable to (i) an increase in sales to
existing domestic wholesale customers of approximately $28.9 million, including
an increase of $13.7 million in sales of the Sport product line to these
customers, (ii) an increase in sales by company-owned retail stores of
approximately $3.8 million, primarily due to an increase in sales for the
boutiques located in Palm Desert, California and Las Vegas, and the addition of
six retail boutiques and one outlet store since the beginning of fiscal 2000 and
(iii) an increase in sales to existing foreign wholesale customers of
approximately $3.8 million. These increases were partially offset by increased
markdowns related to the company's wholesale sales of approximately $8.6
million. Net sales increased primarily as a result of increased unit sales of
various product lines. As a result of the general declining economic conditions
and its effect on the retail market, the company's net sales for the third and
fourth quarters of fiscal 2001 decreased approximately 2.5% and 4.4%,
respectively, compared to the same periods of fiscal 2000. This trend is
expected to continue during the first six months of fiscal 2002.
Gross profit for fiscal 2001 increased by $11.1 million, or 5.7% as
compared with fiscal 2000, and decreased as a percentage of net sales to 56.4%
from 58.1%. This decrease in the gross profit margin was primarily due to (i)
increased markdowns related to the company's wholesale sales and (ii) a decrease
in the gross profit margin for the retail boutiques due to an increase in the
point of sale markdowns.
Selling, general and administrative expenses for fiscal 2001 increased by
$14.1 million, or 11.4% over fiscal 2000, and increased as a percentage of net
sales to 37.5% from 36.6%. This increase in selling, general and administrative
expenses as a percentage of net sales was primarily due to an increase in the
operating expenses as a percent of sales for the retail boutiques due to the
addition of six boutiques since the beginning of fiscal 2000. New boutiques
historically have reported higher selling, general and administrative expenses
as a percentage of net sales. In addition, during fiscal 2001 the company
incurred non-recurring costs related to severance benefits totaling
approximately $3.0 million and an expense of $1.5 million to increase the
reserve for uncollectable accounts receivable, related to the receivable for one
of the company's significant customers. The effect of these increases was
partially offset by non-recurring costs incurred during fiscal 2000 related to
the litigation involving the mergers totaling approximately $1.5 million and
costs incurred to repair the corporate airplane of $1.0 million.
Operating income for fiscal 2001 decreased by $3.0 million, or 4.2% over
fiscal 2000. Operating income as percentage of net sales decreased to 18.9% from
21.5% during the same period. This decrease in the operating income as a
percentage of net sales was primarily due to a decrease in the gross profit
margin and an increase in selling, general and administrative expenses as a
percentage of net sales.
Interest expense for fiscal 2001 decreased by $3.4 million over fiscal
2000. This decrease was primarily due a reduction in interest rates and a
reduction in the debt balance since the end of fiscal 2000.
Other income for fiscal 2001 increased by $3.0 million over fiscal 2000.
This increase was primarily due to a gain realized on the sale of equipment held
by a 50% owned partnership.
Fiscal 2000 Compared to Fiscal 1999
Net sales for fiscal 2000 increased by $42.3 million, or 14.4% over fiscal
1999. This increase was principally attributable to (i) an increase in sales by
company-owned retail stores of approximately $22.6 million, due in part to
increased sales at a number of the wholesale boutiques, including significant
increases at the boutiques located in New York City and Palm Desert, California,
and the addition of five retail boutiques and one outlet store since the
beginning of fiscal 1999 and (ii) an increase in sales to existing domestic
wholesale customers of approximately $20.7 million, including an increase of
$15.8 million in sales of the Sport product line to these customers. These
increases in net sales were partially offset by a decrease in net sales for St.
John Home of $3.6 million, due to the closure of three stores and the transfer
of one store to a former joint venture partner during the second quarter of
fiscal 1999. Net sales increased primarily as a result of increased unit sales
of various product lines.
Gross profit for fiscal 2000 increased by $31.3 million, or 19.1% as
compared with fiscal 1999, and increased as a percentage of net sales to 58.1%
from 55.8%. This increase in the gross profit margin was primarily due to (i) an
increase in the gross profit margin for the Knit and Sport divisions, due to an
increase in the number of garments being manufactured and sold without a
corresponding increase in the production costs and an improvement in
manufacturing efficiency and (ii) an increase in the gross margin for the retail
boutiques due to a decrease in point of sale markdowns.
17
Selling, general and administrative expenses for fiscal 2000 increased by
$8.4 million, or 7.3% over fiscal 1999, and decreased as a percentage of net
sales to 36.6% from 39.1%. This decrease was primarily due to the reduction in
selling, general and administrative expenses related to the closure of three
home stores and the transfer of one home store to a former joint venture partner
during the second quarter of fiscal 1999 and non-recurring expenses totaling
approximately $1.7 million related thereto. This decrease was offset by
non-recurring costs incurred during fiscal 2000 related to the litigation
involving the mergers totaling approximately $1.5 million and costs incurred to
repair the corporate airplane of $1.0 million.
Transaction fees and expenses for fiscal 1999 represent costs directly
associated with the completion of the mergers which are described above,
including $13.8 million of costs related to payments made to settle the
company's outstanding stock options. There were no corresponding fees and
expenses in fiscal 2000.
Operating income for fiscal 2000 increased by $38.1 million, or 111.9% over
fiscal 1999. Operating income as percentage of net sales increased to 21.5% from
11.7% during the same period. This increase in the operating income as a
percentage of net sales was primarily due to transaction fees and expenses which
were recorded during the third quarter of fiscal 1999, and an increase in the
gross profit margin and a decrease in selling, general and administrative
expenses as a percentage of net sales during fiscal 2000.
Interest expense for fiscal 2000 increased by $21.6 million over fiscal
1999. This increase was due to the borrowings under the senior credit facility
and senior subordinated notes incurred during the third quarter of fiscal 1999
in connection with the completion of the mergers in July 1999.
Liquidity and Capital Resources
SJKI is effectively a holding company and, accordingly, must rely on
distributions, loans and other intercompany cash flows from its affiliates and
subsidiaries to generate the funds necessary to satisfy the repayment of its
outstanding loans. Except as may be required under applicable law, there are no
significant restrictions on the transfer of funds or assets from the company's
wholly owned subsidiaries, which have guaranteed obligations of SJKI, to SJKI.
The company's primary cash requirements are to fund payments required to
service its debt, to fund its working capital needs, primarily inventory and
accounts receivable, and for the purchase of property and equipment. During
fiscal 2001, cash provided by operating activities was $32.3 million. Cash
provided by operating activities was primarily generated by net income, a
decrease in accounts receivable and an increase in accrued expenses while cash
used in operating activities was primarily used to fund a decrease in accounts
payable, accrued interest expense and income taxes payable and an increase in
inventories. Cash used in investing activities was $15.8 million during fiscal
2001. The principal use of cash in investing activities was for upgrades to the
company's computer systems, the construction of leasehold improvements for a new
showroom location in New York, the purchase of 5 acres of land in Mexico to be
used for the future expansion of our manufacturing facilities and the
construction of leasehold improvements for three new retail boutiques located in
Troy, Michigan and Houston and Plano, Texas. Cash used in financing activities
was $15.3 million during fiscal 2001. Cash used in financing activities included
the prepayment of bank debt totaling $10.0 million.
The company anticipates purchasing property and equipment of approximately
$18 million during fiscal 2002. The estimated $18 million will be used
principally for (i) upgrades to the company's computer systems, (ii) the
construction of leasehold improvements for five new retail boutiques located in
San Francisco and San Jose, California, Orlando and Tampa, Florida and Short
Hills, New Jersey and (iii) the construction of leasehold improvements for
relocated boutiques in Atlanta, Georgia and Denver, Colorado.
During fiscal 2002, the company will be required to make a mandatory
prepayment under the terms of the credit agreement based on the calculation of
the company's excess cash flow, as that term is defined in the credit agreement.
The payment will be made during the second quarter of fiscal 2002 in the amount
of $6.8 million.
As of October 28, 2001, the company had approximately $71.0 million in
working capital and $26.2 million in cash and marketable securities. The
company's principal source of liquidity is internally generated funds. As part
of the senior credit facilities, the company has a $25.0 million revolving
credit facility which expires on July 31, 2005. The revolving credit facility is
secured and borrowings thereunder bear interest at the company's choice of the
bank's borrowing rate (5.5% at October 28, 2001) plus 1.0% or a Eurodollar rate
plus 2.0%. The availability of funds under the revolving credit facility is
subject to the company's continued compliance with certain covenants, including
a covenant that sets the maximum amount the company can spend annually on the
acquisition of fixed or capital assets, and certain financial covenants,
including a maximum leverage ratio, a minimum fixed charge coverage ratio and a
minimum interest expense coverage ratio. See "Credit Facilities" below. As of
18
October 28, 2001, no amounts were outstanding under the revolving credit
facility. The company invests its excess cash in a money market fund.
Total debt outstanding decreased $15.1 million to $252.3 million at October
28, 2001, as compared to the amount outstanding at October 29, 2000. This
decrease is primarily due to prepayments totaling $10.0 million. The company's
outstanding debt is comprised primarily of senior secured credit facilities of
$152.0 million and $98.9 million of senior subordinated notes.
The company's primary ongoing cash requirements will be for debt service
and capital expenditures. The company's debt service requirements consist
primarily of principal and interest payments on bank borrowings and interest on
the senior subordinated notes. The company believes it will be able to finance
its debt service and capital expenditure requirements for the foreseeable future
with internally generated funds and availability under the revolving credit
facility. However, the company's ability to fund its capital investment
requirements, interest and principal payment obligations and working capital
requirements and to comply with all of the financial covenants under its debt
agreements depends on its future operating performance and cash flow, which in
turn are subject to prevailing economic conditions and to financial, business
and other factors, some of which are beyond the company's control. See "Risk
Factors-Substantial Leverage and Debt Service."
The Company may repurchase from time to time a portion of the Company's
12.5% Senior Subordinated Notes, subject to market conditions and other factors.
No assurance can be given as to whether or when or at what prices such
repurchases will occur. In addition, the company may be required to repurchase a
portion of the common stock beneficially owned by the Grays. Any such
repurchases would be limited by the restrictions of the agreements under the
credit facilities and senior subordinated notes.
SJKI did not make any payment of dividends during fiscal 2001 and
fiscal 2000 and does not anticipate the payment of any cash dividends on its
common stock in the future.
The company's EBITDA (EBITDA generally represents the net income of the
company excluding the effects of interest expense, income taxes, depreciation
and a majority of the items included in other income) as defined in its credit
agreement for its senior secured credit facilities was $84.5 million and $86.9
million for fiscal 2001 and 2000, respectively. EBITDA is not a defined term
under GAAP and is not an alternative to operating income or cash flow from
operations as determined under GAAP. The company believes that EBITDA provides
additional information for determining its ability to meet future debt service
requirements; however, EBITDA does not reflect cash available to fund cash
requirements and should not be construed as an indication of the company's
operating performance or as a measure of liquidity.
Credit Facilities
In order to finance a portion of the cash consideration paid pursuant to
the mergers, the company entered into a credit agreement with a group of
financial institutions, which provides for an aggregate principal amount of
loans totaling $215 million. The credit agreement consists of three facilities:
(i) tranche A facility totaling $75 million which matures July 31, 2005, (ii)
tranche B facility totaling $115 million which matures July 31, 2007 and (iii)
the revolving credit facility totaling $25 million which matures July 31, 2005.
Borrowings under the tranche A facility and the revolving credit facility
bear interest at a floating rate, which is based upon the leverage ratio of the
company, but cannot exceed the banks' borrowing rate plus 2.0% or LIBOR plus
3.0%. Borrowings under the tranche B facility bear interest at a floating rate,
which is also based upon the leverage ratio of the company, but cannot exceed
the banks' borrowing rate plus 2.5% or LIBOR plus 3.5%. In addition, the company
is required to pay a commitment fee on the unused portion of the revolving
credit facility of 0.5% per year.
Borrowings under the tranche A facility began to mature quarterly on
October 31, 1999, while borrowings under the tranche B facility began to mature
quarterly on October 31, 2000. The credit agreement permits the company to
prepay loans and to permanently reduce revolving credit commitments, in whole or
in part, at any time. In addition, the company is required to make mandatory
prepayments of tranche A and B facilities, subject to certain exceptions, in
amounts equal to (i) 50% of excess cash flow (as defined in the credit
agreement); and (ii) 100% of the net cash proceeds of certain dispositions of
assets or issuances of debt or equity of the company or any of its subsidiaries
(in each case, subject to certain exceptions and subject to a reduction to zero
based upon the company's financial performance).
The obligations of the company under the credit agreement are guaranteed by
each domestic subsidiary of the company, including St. John, and to the extent
no adverse tax consequences would result from such guarantees, each foreign
subsidiary of the company. The credit agreement and the related guarantees are
secured by (i) a pledge of 100% of the capital stock of each domestic subsidiary
of the company, including St. John, and 65% of each foreign subsidiary of the
company and (ii) a security
19
interest in, and mortgage on, substantially all the assets of the company and
each domestic subsidiary of the company, including St. John, and to the extent
no adverse tax consequences would result therefrom, each foreign subsidiary of
the company.
The credit agreement requires the company to comply with specified
financial ratios, including a minimum interest coverage ratio, a maximum
leverage ratio and a minimum fixed charge coverage ratio. The credit agreement
also contains additional covenants that, among other things, restrict the
ability of the company to dispose of assets, incur additional indebtedness, pay
dividends, create liens on assets, make investments, loans or advances and
engage in mergers or consolidations. The credit agreement prohibits the company
from declaring or paying any dividends or making any payments with respect to
the company's senior subordinated notes if it fails to perform its obligations
under, or fails to meet the conditions of, the credit agreement or if payment
creates a default under the credit agreement.|~3emspace~|The credit agreement
contains customary events of default.
Senior Subordinated Notes
In addition to the credit facilities described above, the company sold $100
million of senior subordinated notes (the "notes") to help finance the mergers.
The notes are unsecured and mature on July 1, 2009. The notes bear interest at a
rate of 12.5% per year and were issued at 98.616% of the actual face value.
Interest on the notes is payable semiannually to the holders of record. The
notes are subject to redemption by the company on or after July 1, 2004. In
addition, on or before July 1, 2002, the company may redeem up to 35% of the
outstanding notes with the net cash proceeds of certain equity offerings. The
indenture governing the notes limits, among other things, the payment of
dividends, the incurrence of additional indebtedness and other restricted
payments. The indenture contains customary events of default.
Redeemable Common Stock
In connection with the mergers, SJKI has entered into a stockholders'
agreement with Vestar/Gray Investors, Vestar and the Grays, which states, among
other things, that prior to a public offering of SJKI common stock, if Bob Gray
ceases to serve as Chairman or Chief Executive Officer of St. John or SJKI or if
the employment with SJKI of Marie Gray or Kelly Gray ceases for any reason, then
he or she will have the right to require SJKI to purchase the shares of SJKI
common stock beneficially owned by them, up to a maximum of $5 million of such
common stock for all the Grays during any 12-month period. If any of the Grays
are terminated without "cause" or resigns for "good reason," as these terms are
defined in their employment agreements with the company, then he or she will
have the right to require SJKI to purchase the shares of SJKI common stock
beneficially owned by them, up to a maximum of 25% of the total shares held by
such terminated or resigning Gray employee during any 12-month period. This
agreement may be limited by the terms of the agreements related to the credit
facilities and the notes.
Mandatorily Redeemable Preferred Stock
In order to finance a portion of the cash consideration paid in the
mergers, SJKI issued 250,000 shares of 15.25% Mandatorily Redeemable preferred
stock due 2010 (the "preferred stock") to Vestar/SJK Investors LLC. The
liquidation preference of the preferred stock is $100 per share. The preferred
stock ranks junior in right of payment to all liabilities and obligations
(whether or not for borrowed money) of SJKI (other than common stock of SJKI and
any preferred stock of SJKI which by its terms is on parity with or junior to
the preferred stock). Holders of the preferred stock will be entitled to
receive, when, and if declared by the Board of Directors of SJKI, out of funds
legally available therefor, dividends on the preferred stock, at an annual rate
equal to 15.25%, provided that if dividends are not paid on a dividend payment
date, dividends will continue to accrue on unpaid dividends. Dividends on the
preferred stock may only be paid in cash if permitted under the terms of the
company's senior secured credit facilities, indenture and other contractual
arrangements. Dividends accrue from the date of issuance and are payable
semi-annually in arrears on January 1 and July 1 of each year, commencing on
January 1, 2000. If permitted under the terms of the company's senior secured
credit facilities, the indenture and other contractual arrangements, the
preferred stock may be redeemed at any time, in whole or in part, at the option
of SJKI at specified redemption prices. On July 1, 2010, SJKI is required to
redeem (subject to contractual and other restrictions with respect thereto and
to the legal availability of funds therefor) all outstanding shares of preferred
stock at a price equal to the liquidation value thereof plus all accumulated
dividends to the date of redemption. SJKI may, at its option, exchange all, but
not less than all, of the shares of the then outstanding preferred stock for
debentures of SJKI in a principal amount equal to the liquidation value of the
preferred stock plus accumulated dividends. The exchange debentures will bear
interest at 15.25% per year, have a final stated maturity of July 1, 2010, have
optional redemption provisions comparable to the preferred stock and will have
customary covenants and events of default. SJKI may not cause the exchange of
the preferred stock for debentures unless permitted under the terms of the
company's senior secured credit facilities, the indenture and other contractual
arrangements.
20
New Accounting Pronouncements
See Note 2(p) "New Accounting Pronouncements" included under the caption
Notes to Consolidated Financial Statements included elsewhere in this document.
Forward Looking Statements
This Annual Report on Form 10-K contains certain statements which describe
the company's beliefs concerning future business conditions and the outlook for
the company based on currently available information. Wherever possible the
company has identified these "forward looking" statements (as defined in Section
21E of the Securities Exchange Act of 1934) by words such as "anticipates,"
"believes," "estimates," "expects" and other similar expressions. The forward
looking statements and associated risks set forth herein may include or relate
to: (i) the company's expectation that sales will decrease during the first six
months of fiscal 2002 as compared to fiscal 2001, (ii) the company's anticipated
purchases of property and equipment during fiscal 2002, (iii) the company's
belief that it will be able to fund its working capital and capital expenditure
requirements with internally generated funds and borrowings under the revolving
credit facility and (iv) the company's anticipation that it will not pay cash
dividends on its common stock in the future.
These forward looking statements are subject to risks, uncertainties and
other factors which could cause the company's actual results, performance or
achievements to differ materially from those expressed in, or implied by, these
statements. See "Business-Risk Factors." In addition to the factors that may be
described in this report, the following factors could cause actual results to
differ from those expressed in any forward looking statements made by the
company: (i) the financial strength of the retail industry and the level of
consumer spending for apparel and accessories, (ii) the company's ability to
develop, market and sell its products, (iii) increased competition from other
manufacturers and retailers of women's clothing and accessories, (iv) general
economic conditions and (v) the inability of the company to meet the financial
covenants under its credit facilities and indenture.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The company has exposure to fluctuations in foreign currency exchange rates
for the revenues derived from sales to its foreign customers denominated in
foreign currency. In order to reduce the effects of such fluctuations, under
established risk management practices, the company enters into forward
contracts. These contractual arrangements are entered with a major financial
institution. The company does not hold derivative financial instruments for
trading.
The primary business objective of this hedging program is to secure the
anticipated profit on sales denominated in foreign currencies. Forward contracts
are usually entered into at the time the company prices its products. The
company's primary exposure to foreign exchange fluctuation is on the Euro. At
October 28, 2001, the company had contracts maturing through April 30, 2002 to
sell 1.3 million Euros at a rate of .89 U.S. dollars to the Euro. At October 29,
2000, the company did not have any outstanding forward contracts.
The company purchases its shoes and leather goods, as well as various other
raw materials, from companies located in Italy. The purchase of these items is
completed in Italian lira. In order to reduce the effect of the fluctuation in
the exchange rate between the lira and the U.S. dollar, the company may enter
into foreign exchange contracts. At October 28, 2001, the company had contracts
maturing through May 31, 2002 to purchase 5.0 billion Italian lira at a rate of
2,286 lira to the U.S. dollar. Combined with the Euro contracts, the total fair
value at October 28, 2001 was $106,999, which was recorded as a component of
stockholders' equity and comprehensive income.
The company is also exposed to market risks related to fluctuations in
interest rates on its variable rate debt which consists of bank borrowings
related to the mergers. The company also holds fixed rate subordinated notes.
The company has entered into an interest rate collar agreement with a major
financial institution to limit its exposure on $35 million of the variable rate
debt. The agreement became effective on October 4, 1999 and will expire on July
7, 2002. The agreement sets a cap rate for LIBOR contracts at 8.5%. The
agreement also sets a minimum floor rate of 5.37%. During fiscal 2001, LIBOR
decreased below the floor rate and the company began making payments under the
agreement. Since LIBOR rates are currently less than the floor rate,
$35 million of the company's variable rate debt has effectively been converted
to fixed rate debt. The fair Value of the intrest rate collar agreement was
$(825,000) at October 28, 2001.
For fixed rate debt, changes in interest rates generally affect the fair
market value, but not earnings or cash flows. Conversely, for variable rate
debt, changes in interest rates generally do not influence fair market value,
but do affect future earnings and cash flows. The company has managed its
exposure to changes in interest rates by issuing part of its debt with a fixed
interest rate. Assuming that the balance of variable rate debt remains
constant and inclusive of the impact of the interest rate collar, a one
percentage point increase in LIBOR from the first day of the year would result
in an increase in interest expense of approximately $1.2 millon.
21
The table below details the principal amounts due and the average nominal
interest rates for the debt in each category based on the expected maturity
dates and applicable amortization schedules. The carrying value of the variable
rate debt approximates fair value as the interest rate is adjusted to market
periodically. The subordinated debt is publicly traded and the fair value is
based upon the quoted market value at October 28, 2001.
Fiscal Years
--------------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(Amounts in thousands)
Fixed rate subordinated notes $ -- $ -- $ -- $ -- $ -- $100,000 $100,000 $ 93,000
Average interest rate 12.5% 12.5%
Variable rate debt $8,982 $12,013 $21,863 $23,495 $34,252 $ 51,378 $ 151,983 $151,983
Average interest rate(1) 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3%
Variable rate notes payable $ 24 $ 24 $ 24 $ 24 $ 1,277 $ -- $ 1,373 $ 1,373
Average interest rate(1) 5.3% 5.3% 5.3% 5.3% 5.3% -- 5.3%
(1) The average interest rate is based upon the actual rates in place as of
October 28, 2001, and is held constant for the duration of the debt.
The company does not believe that the future market rate risks related to
the above securities will have a material impact on the company or the results
of its operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements and supplementary data filed with this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
22
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF ST. JOHN KNITS INTERNATIONAL
The following sets forth certain information concerning the directors and
executive officers of SJKI:
Name Position with St. John Knits International Age
- ---- ------------------------------------------ ---
Bob Gray Chairman of the Board and Chief Executive Officer 76
Kelly Gray Director and Co-President 35
Marie Gray Chief Designer and Secretary 65
Bruce Fetter Co-President and Chief Operating Officer 47
Roger Ruppert Senior Vice President-Finance and Chief Financial 58
Officer
James Kelley Director and Assistant Secretary 47
Daniel O'Connell Director 47
Sander Levy Director 40
Christopher Henderson Director 34
Biographical Information
Bob Gray, a co-founder of St. John, has served as Chairman of the Board of
the company since its inception in 1962. He has also served as Chief Executive
Officer of the company from its inception until February 2001 and was
re-appointed Chief Executive Officer in October 2001. 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 Gray.
Kelly Gray, a director of the company since October 1994, became President
of the company in April 1996. She served as Creative Director of the company
from June 1991 and Executive Vice President-Creative Director from December 1995
until April 1996. Ms. Gray also heads the company's retail boutique division and
has design responsibilities for the St. John product line and the Gray & Gray
line. In addition, she has been the company's Signature Model since 1982. Prior
to becoming Creative Director, Ms. Gray headed the company's advertising
department from 1988 to June 1991. Prior to heading the advertising department
of the company, Ms. Gray held various other administrative positions with the
company. Ms. Gray is the daughter of Bob Gray and Marie Gray.
Marie Gray, a co-founder of St. John, has served as Chief Designer of the
company since its inception in 1962 and as Secretary of the company since March
1993. Prior to forming St. John, Ms. Gray was a fashion model, served as hostess
of the Queen For a Day television show and was a fit model for some of the
leading designers in the Los Angeles area. Ms. Gray is the wife of Bob Gray and
the mother of Kelly Gray.
Bruce Fetter was appointed Co-President and Chief Operating Officer of the
company in October 2001. He served as Executive Vice President and Chief
Operating Officer of the company from June 1999 until October 2001. He served as
Senior Vice President and Chief Operating Officer of the company from November
1997. He joined the company in January 1997 as Vice President-Distribution and
in April was appointed Senior Vice President-Operations. From August 1994 to
December 1996 he held the position of Vice President-Logistics for Bob's Stores,
a division of the Melville Corporation. He graduated with a B.S. degree from the
University of Southern California in 1976, majoring in business.
Roger Ruppert has served as Senior Vice President-Finance and Chief
Financial Officer of the company since October 1986. Prior to joining the
company, Mr. Ruppert was Vice President-Finance and Chief Financial Officer of
Cardis Corporation, a publicly traded auto parts distributor, from October 1985
to October 1986. He graduated with a B.S. degree in engineering from the U.S.
Naval Academy and also received an M.B.A. from the University of California, Los
Angeles. Mr. Ruppert is a certified public accountant.
James Kelley, a director of the company since July 1999, is a Managing
Director of Vestar Capital and was a founding partner of Vestar Capital at its
inception in 1988. Mr. Kelley is a director of Consolidated Container Holdings,
LLC, Michael Foods, Inc. and Westinghouse Air Brake Technologies Corporation.
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.
23
Daniel O'Connell, a director of the company since July 1999, is the Chief
Executive Officer and founder of Vestar Capital. Mr. O'Connell is a director of
Aearo Corporation, Cluett American Corp., Insight Communications Company, Inc.,
Michael Foods, Inc., Remington Products Company L.L.C., Siegelgale Holdings,
Inc. and Sunrise Medical Inc. Mr. O'Connell received a B.A. degree from Brown
University and an M.B.A. degree from Yale University.
Sander Levy, a director of the company since July 1999, is a Managing
Director of Vestar Capital and was a founding partner of Vestar Capital at its
inception in 1988. Mr. Levy is a director of Cluett American Corp. and Gleason
Corporation. 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.
Christopher Henderson, a director of the company since June 2001, is a
Managing Director of Vestar Capital and has been a member of the firm since
1993. Mr. Henderson is director of Michael Foods, Inc. Mr. Henderson received a
B.A. degree from the University of Colorado and an M.B.A. degree from Columbia
University.
Director Compensation
Directors of SJKI do not receive compensation, except as officers or
employees of the company.
24
Item 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation earned by the Chief
Executive Officers of the company and the other four most highly compensated
executive officers (collectively, the "Named Executive Officers") for services
in all capacities to SJKI and its subsidiaries for the fiscal years indicated:
Long Term
Annual Compensation(1) Compensation
---------------------- Awards
------
Shares of Common
Stock underlying All Other
Year Salary(2) Bonus Options Compensation
---- --------- ----- ------- ------------
Bob Gray 2001 $ 532,408 $ -- -- $ --
Chairman and Chief Executive Officer 2000 1,584,419 -- -- --
1999 1,615,663 -- 109,104 6,880,000(3)
Hugh Mullins(4) 2001 707,067 500,000 75,000 1,710,045(5)
Chief Executive Officer
Marie Gray 2001 565,734 -- -- --
Chief Designer and Secretary 2000 525,710 -- -- --
1999 551,311 -- 109,104 1,720,000(3)
Kelly Gray 2001 916,524(6) -- -- --
Co-President 2000 879,458(6) -- -- --
1999 677,406(6) -- 145,472 1,290,000(3)
Bruce Fetter 2001 425,649 -- 8,333 --
Co-President and Chief Operating 2000 379,331 -- -- --
Officer 1999 327,007 -- 16,667 402,500(3)
Roger Ruppert 2001 324,421 -- -- --
Chief Financial Officer 2000 313,942 -- -- --
1999 278,426 -- 8,333 545,000(3)
- -----------------
(1) The company has concluded that the aggregate amount of perquisites and
other personal benefits, securities or property paid to each of the Named
Executive Officers for each of the fiscal years 2001, 2000 and 1999 did not
exceed the lesser of 10% of such officer's total annual salary and bonus
for such year or $50,000. Therefore, any such amounts are not included in
the table.
(2) The amounts shown in this column include amounts and awards accrued during
each of fiscal years 2001, 2000 and 1999 that were earned but not paid in
such fiscal year.
(3) This amount was paid to settle outstanding stock options in connection with
the mergers. Each outstanding option was cancelled and replaced with the
right to receive a cash payment equal to the excess of $30 over the
exercise price per share of the stock subject to such option.
(4) Hugh Mullins became Chief Executive Officer of the company in February 2001
and subsequently terminated his employment in October 2001.
(5) This amount includes relocation expenses paid by the company of $20,000,
principal and accrued interest on a loan which was forgiven of $520,000 and
severance paid to Mr. Mullins of $1,170,000.
(6) This amount includes modeling fees of $400,000 which were paid to Ms. Gray
during each of fiscal years 2001 and 2000 and $250,000 which was paid
during fiscal year 1999.
25
Employment Agreements
The company has employment agreements with Marie Gray, Kelly Gray and Bruce
Fetter. The employment agreements with Marie and Kelly Gray expire on December
31, 2004. The agreement with Bruce Fetter expires on December 31, 2002. The
agreements provide for the payment of a base salary at the rate of $750,000 for
Marie Gray and $650,000 for Kelly Gray and Bruce Fetter. In addition, under
Kelly Gray's employment agreement, the company will compensate Ms. Gray $400,000
each year for her position as the Signature Model of the company.
In the event of termination of employment by the company with "cause", or
by the executive without "good reason", the employment agreements provide that
such executive will only receive salary and health benefits through the date of
termination. In the event of termination of employment by the company without
cause, or by the executive with good reason, Marie Gray and Kelly Gray would
receive continued salary payments for one year and health benefits for the
longer of the remainder of the term of the agreement or six months. Bruce Fetter
would receive continued salary payments and health benefits for the longer of
the remainder of the term of the agreement or one year. Each employment
agreement provides that the company shall pay severance benefits in the form of
salary and health benefits continuation for a period equal to one month for each
year of service, up to a maximum of 18 months, if the executive's employment is
terminated by reason of a disability. In cases where the employee's employment
is terminated by reason of the employee's death, the company generally will
provide certain health insurance benefits to the employee's immediate family for
a period of six months.
Under Marie and Kelly Grays' employment agreements, each would also receive
a lump sum payment of $1,000,000 if they terminated their employment agreement
for good reason due to the fact that (i) a successor company's employment
agreements did not assume their employment agreements or (ii) a change of
control occurred. Under Bruce Fetter's employment agreement, in the event of a
change of control wherein he is terminated by the company without cause or he
terminates his employment for good reason within one year after such change in
control, he would receive salary and health benefits continuation for a period
of one year. If Bruce Fetter's agreement expires without being renewed for
another year, he will receive continued salary payments and health benefits for
six months.
Option Grants in Last Fiscal Year
The following table sets forth information with respect to the Named
Executive Officers concerning the number of stock options granted during the
fiscal year ended October 28, 2001:
Potential Realizable
Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation for
Underlying Granted to Option Term
Options Employees in Exercise Expiration -----------
Name Granted(1) Fiscal Year Price Date 5% 10%
---- ---------- ----------- ----- ---- -- ---
Bob Gray............. -- -- $-- -- $ -- $ --
Hugh Mullins(2)...... 75,000 72.0% 30.00 02/01/11 1,170,750 3,196,500
Marie Gray........... -- -- -- -- -- --
Kelly Gray........... -- -- -- -- -- --
Bruce Fetter......... 8,333 8.0% 30.00 11/15/10 130,078 355,152
Roger Ruppert........ -- -- -- -- -- --
(1) The options were granted under the 1999 St. John International,
Incorporated Stock Option Plan for a term of ten years, subject to earlier
termination in certain events related to termination of employment. The
options become exercisable 20% per year, beginning one year from the date
of grant. To the extent not already exercisable, the options generally
become exercisable upon a change in control transaction. All options were
granted at fair market value.
(2) Hugh Mullins terminated his employment with the company during fiscal 2001.
All options held by Mr. Mullins were terminated at the time of his
departure.
26
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information with respect to the Named
Executive Officers concerning the exercise of options during the fiscal year
ended October 28, 2001 and unexercised options held by each such officer as of
October 28, 2001:
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares Fiscal Year-End Fiscal Year-End(1)
Acquired on Value --------------------------------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- --------- ----------- ------------- ------------ -------------
Bob Gray........ -- -- 36,368 72,736 -- --
Hugh Mullins.... -- -- -- -- -- --
Marie Gray...... -- -- 36,368 72,736 -- --
Kelly Gray...... -- -- 48,490 96,982 -- --
Bruce Fetter.... -- -- 6,666 18,334 -- --
Roger Ruppert... -- -- 3,332 5,001 -- --
(1) All stock options currently held by the Named Executive Officers have an
exercise price of $30. The fair market value of the stock at October 28,
2001 does not exceed the exercise price and therefore there is no current
value to the unexercised options.
Compensation Committee Interlocks and Insider Participation
The company does not have a compensation committee. Issues regarding
executive's compensation are addressed by the full board of directors. Bob and
Kelly Gray participated in deliberations regarding executive compensation during
fiscal 2001.
27
Item 12. SECURY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of January 23, 2002 regarding
the beneficial ownership of SJKI's common stock by: (i) each person who is known
by SJKI to be the beneficial owner of more than 5% of the common stock; (ii)
each of the directors of SJKI; (iii) each Named Executive Officer; and (iv) all
current directors and executive officers of SJKI as a group.
Approximate
Number of Shares
Beneficially
Name Owned Percentage Owned
- ---- ----- ----------------
Vestar/Gray Investors LLC(1) ............................................. 6,090,205 93.03%
1225 17th Street, Suite 1660
Denver, Colorado 80202
Bob Gray(2) .............................................................. 684,148 10.24%
Hugh Mullins ............................................................. -- --
Marie Gray(2) ............................................................ 684,148 10.24%
Kelly Gray(3) ............................................................ 406,061 6.28%
Bruce Fetter(4) .......................................................... 10,082 *
Roger Ruppert(5) ......................................................... 4,332 *
Daniel O'Connell(6) ...................................................... 5,121,222 78.23%
James Kelley(6) .......................................................... 5,121,222 78.23%
Sander Levy(6) ........................................................... 5,121,222 78.23%
Christopher Henderson(6) ................................................. 5,121,222 78.23%
All current directors and executive officers as a group (nine persons) (7) 6,225,845 93.21%
- ----------
* less than 1%
(1) Vestar Capital Partners III, L.P., 245 Park Avenue, New York, New York
10167, beneficially owns 5,121,222 shares, or approximately 78%, of SJKI's
common stock through its controlling interest in Vestar/SJK Investors LLC,
which owns approximately 84% of Vestar/Gray Investors.
(2) Includes 556,772 shares which are beneficially owned (through Vestar/Gray
Investors) by the Gray Family Trust, of which Bob and Marie Gray serve as
co-trustees and are the sole beneficiaries. In addition, includes 54,640
shares which are beneficially owned (through Vestar/Gray Investors) by the
Kelly Ann Gray Trust, of which Bob and Marie Gray serve as co-trustees and
of which Kelly Gray is the sole beneficiary. Includes 72,736 shares
issuable upon exercise of options exercisable at or within 60 days of
January 23, 2002. Bob and Marie Gray each held 36,368 of such option
shares. The address is 17622 Armstrong Avenue, Irvine, California, 92614.
(3) Includes 357,571 shares which are beneficially owned through Vestar/Gray
Investors. Includes 48,490 shares issuable upon exercise of options
exercisable at or within 60 days of January 23, 2002. The address is 17622
Armstrong Avenue, Irvine, California, 92614.
(4) Includes 8,332 shares issuable upon exercise of options exercisable at or
within 60 days of January 23, 2002.
(5) Includes 3,332 shares issuable upon exercise of options exercisable at or
within 60 days of January 23, 2002.
(6) Includes shares beneficially owned by Vestar. Each of Mr. O'Connell, Mr.
Kelley, Mr. Levy and Mr. Henderson disclaims the existence of a group and
disclaims beneficial ownership of the common stock not held by him.
(7) Includes 132,890 shares issuable upon exercise of options exercisable at or
within 60 days of January 23, 2002.
28
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The company leases a manufacturing facility in Irvine, California from GM
Properties, a partnership in which the Gray Family Trust, of which Bob and Marie
Gray serve as co-trustees and are the sole beneficiaries, has a 50% general
partnership interest. The lease is for a five-year term expiring on May 31,
2006, with the company having the option to extend the lease for another
five-year term at a lease amount to be agreed upon. The current base monthly
lease payment under this lease is approximately $66,000, with annual increases
of 4%. During fiscal years 2001, 2000 and 1999, the company paid GM Properties
approximately $783,000, $756,000 and $729,000, respectively, under this lease.
The company leases its Alhambra, California manufacturing facility from
Alhambra Partners, a limited partnership in which the Gray Family Trust has a
65% general partnership interest. The lease is for a five-year term expiring on
August 31, 2006, with the company having the option to extend the lease for a
five-year term at a lease amount to be agreed upon. The current base monthly
lease payment under this lease is approximately $26,000, with annual increases
of 4%. During fiscal 2001, 2000 and 1999, the company paid Alhambra Partners
approximately $308,000, $295,000 and $285,000, respectively, under this lease.
The company subleases a warehouse facility from Michael Gray, the son of
Bob Gray. The building is owned by a partnership comprised of the Gray family.
The sublease is for a five-year term expiring on May 31, 2006. The current base
monthly lease payment under the sublease is approximately $9,000. During fiscal
2001, the company paid Michael Gray approximately $44,000 under this sublease.
The company entered into a lease agreement effective July 27, 2001 with
Steele & Second Avenue, LLC, a Delaware limited liability company in which the
Gray Family Trust has a 60% ownership percentage. The leased property will be
used for a new retail boutique location in Denver, Colorado. The boutique
currently located in Denver will be relocated to this site during fiscal 2002.
The lease term is 10 years and the minimum monthly lease amount is $15,000.
The company periodically rents certain personal property from Ocean Air
Charters, Inc. ("Ocean"), in which Bob Gray and Marie Gray are the sole
shareholders. During fiscal years 2001, 2000 and 1999, the company paid
approximately $9,000, $3,000 and $8,000, respectively, with respect to such
property. In addition, St. John and Ocean each hold a 50% ownership interest in
a partnership ("Partnership") which owns an airplane. As of October 28, 2001,
each partner had a net capital investment in the Partnership of approximately
$6,008,000. During fiscal years 2001, 2000 and 1999, the Partnership leased the
airplane to the company and received lease payments totaling approximately
$1,123,000, $953,000 and $1,038,000, respectively. As of October 18, 2001, St.
John and the Partnership entered into a lease agreement for the airplane
expiring October 31, 2002, at a lease rate of $100,000 per month.
Each of the arrangements between the company and entities controlled by the
Gray family is, in the opinion of management, on terms no less favorable to the
company than those that were available from persons not affiliated with the
company.
Certain Agreements Relating to the Mergers
Vestar Capital, SJKI and St. John have entered into a management agreement.
Under the agreement, Vestar Capital provides management services, including
advisory and consulting services, in relation to the selection, supervision and
retention of independent auditors, outside legal counsel, investment bankers or
other financial advisors or consultants. For these services, SJKI and St. John
pay Vestar Capital an annual fee of $500,000 and reimburses Vestar Capital for
all out-of-pocket expenses. The management agreement will terminate if Vestar
Capital and its partners and their respective affiliates, through Vestar/Gray
Investors or otherwise, hold, in the aggregate, less than 50% of the SJKI stock
beneficially owned by Vestar immediately following the closing of the mergers
and cease to control a majority of SJKI's board of directors.
SJKI is approximately 93% owned by Vestar/Gray Investors. Vestar
beneficially owns approximately 84%, and the Grays beneficially own
approximately 16%, of Vestar/Gray Investors. The Vestar/Gray Investors limited
liability company agreement provides, among other things, that Vestar may
appoint four of SJKI's seven directors and the Grays may appoint the remaining
three directors. The right of Vestar and the Grays to appoint directors will be
subject to reduction to the extent the amount of SJKI stock allocated to either
is reduced.
SJKI has entered into a stockholders' agreement with Vestar/Gray Investors,
Vestar and the Grays, which states, among other things, that (i) prior to a
public offering of SJKI common stock, if Bob Gray ceases to serve as Chairman or
Chief Executive Officer of St. John or SJKI or if the employment with SJKI of
Marie Gray or Kelly Gray ceases for any reason, then he or she will have the
right to require SJKI, or, under some circumstances, St. John, to purchase the
shares of SJKI common stock beneficially owned by such employee, up to a maximum
of $5.0 million worth of such common stock for all Gray employees during any 12-
29
month period; and (ii) prior to a public offering of SJKI common stock, if any
of the Grays is terminated without "cause" or resigns for "good reason," as
these terms are defined in their current respective employment agreements with
the company, then he or she will have the right to require SJKI, or, under some
circumstances, St. John, to purchase shares of SJKI common stock beneficially
owned by such employee, up to a maximum of 25% of the common stock beneficially
owned by all such terminated or resigning Gray employees during any 12-month
period.
The stockholders' agreement also provides that each of the Grays, so long
as he or she is employed by the company 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, marketing, sale or distribution of women's
clothing or accessories anywhere in the world in which the company is doing
business, other than through his or her employment with the company. The
agreement also provides that if Kelly Gray is terminated without "cause" or
resigns for "good reason," as defined under her current employment agreement,
the term of the non-compete period will be reduced to three years, and, subject
to restrictions, she will be permitted to engage in certain otherwise
competitive activities.
All outstanding shares of preferred stock of SJKI are currently held by
Vestar/SJK Investors LLC, Kelly Gray and The Gray Family Trust. The holders of
the preferred stock will be entitled to up to five demand registration rights at
the expense of SJKI.
30
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements--See "Index to Consolidated
Financial Statements"
2. Consolidated Financial Statement Schedule--See "Index to
Consolidated Financial Statements"
3. Exhibits--See "Exhibit Index"
(b) Reports on Form 8-K
None
31
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................................... 33
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at October 28, 2001 and October 29, 2000... 34
Consolidated Statements of Income for the years ended October 28,
2001, October 29, 2000 and October 31, 1999....................... 35
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended October 28, 2001, October 29, 2000 and October 31,
1999.............................................................. 36
Consolidated Statements of Cash Flows for the years ended October 28,
2001, October 29, 2000 and October 31, 1999....................... 37
Notes to Consolidated Financial Statements............................. 39
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Account.......................... 62
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To St. John Knits International, Incorporated:
We have audited the accompanying consolidated balance sheets of ST. JOHN KNITS
INTERNATIONAL, INCORPORATED (a Delaware corporation) and subsidiaries as of
October 28, 2001 and October 29, 2000, and the related consolidated statements
of income, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended October 28, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of St. John Knits International,
Incorporated and subsidiaries as of October 28, 2001 and October 29, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended October 28, 2001 in conformity with accounting principles
generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to consolidated
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
December 21, 2001
33
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED BALANCE SHEETS
October 28, October 29,
A S S E T S 2001 2000
----------- ------------ ------------
Current assets:
Cash and cash equivalents ................................................... $ 26,210,874 $ 25,130,928
Investments ................................................................. 10,045 17,373
Accounts receivable, net .................................................... 25,512,903 29,174,930
Inventories ................................................................. 52,497,697 49,166,611
Deferred income tax benefit ................................................. 13,815,985 12,196,359
Other ....................................................................... 3,702,444 3,386,916
------------ ------------
Total current assets .................................................... 121,749,948 119,073,117
------------ ------------
Property and equipment:
Machinery and equipment ..................................................... 68,272,493 61,197,026
Leasehold improvements ...................................................... 42,339,225 36,863,431
Buildings ................................................................... 23,699,445 23,513,166
Furniture and fixtures ...................................................... 9,757,411 8,286,382
Land ........................................................................ 8,798,320 7,449,577
Construction in progress .................................................... 2,215,527 5,678,064
------------ ------------
155,082,421 142,987,646
Less--Accumulated depreciation and amortization ............................. 72,713,841 59,958,231
------------ ------------
82,368,580 83,029,415
------------ ------------
Deferred financing costs ......................................................... 10,107,345 12,261,364
Other assets ..................................................................... 7,997,366 4,135,066
------------ ------------
$222,223,239 $218,498,962
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable ........................................................................ $ 8,961,470 $ 13,351,361
Accrued expenses ........................................................................ 15,669,641 12,080,881
Dividends payable ....................................................................... 10,302,516 5,429,572
Current portion of long-term debt ....................................................... 9,005,724 5,577,398
Accrued interest expense ................................................................ 4,864,191 8,254,994
Income taxes payable .................................................................... 1,921,035 4,558,120
------------- -------------
Total current liabilities ........................................................... 50,724,577 49,252,326
Long-term debt, net of current portion ....................................................... 243,290,691 261,846,745
------------- -------------
Total liabilities ................................................................... 294,015,268 311,099,071
------------- -------------
Mandatorily redeemable preferred stock, $100 stated value: Authorized--2,000,000
shares, issued and outstanding--250,000 shares ....................................... 25,000,000 25,000,000
------------- -------------
Redeemable common stock - par value $0.01, issued and outstanding--968,983
shares ............................................................................... 27,131,524 29,069,490
------------- -------------
Stockholders' equity (deficit):
Common stock, par value $0.01 per share : Authorized--10,000,000 shares, issued and
outstanding--5,577,257 and 5,577,191 shares, respectively ............................ 55,772 55,772
Unrealized loss on securities ........................................................... (40,826) (36,665)
Unrealized gain on hedging transactions ................................................. 106,999 --
Cumulative translation adjustment ....................................................... (150,371) 152,776
Additional paid-in capital .............................................................. 120,021,341 118,081,394
Accumulated deficit ..................................................................... (243,916,468) (264,922,876)
------------- -------------
Total stockholders' deficit .......................................................... (123,923,553) (146,669,599)
------------- -------------
$ 222,223,239 $ 218,498,962
============= =============
See accompanying notes.
34
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
For the years ended
-------------------------------------------------------
October 28, October 29, October 31,
2001 2000 1999
--------------- --------------- ---------------
Net sales .............................................................. $ 365,920,697 $ 336,458,871 $ 294,171,410
Cost of sales .......................................................... 159,484,269 141,096,934 130,130,588
------------- ------------- -------------
Gross profit ........................................................... 206,436,428 195,361,937 164,040,822
Selling, general and administrative expenses ........................... 137,325,012 123,251,422 114,884,303
Transaction fees and expenses .......................................... -- -- 15,122,809
------------- ------------- -------------
Operating income ....................................................... 69,111,416 72,110,515 34,033,710
Interest expense ....................................................... 28,344,453 31,786,855 10,224,486
Other income ........................................................... 4,037,768 1,000,246 1,196,654
------------- ------------- -------------
Income before income taxes ............................................. 44,804,731 41,323,906 25,005,878
Income taxes ........................................................... 18,925,381 17,510,814 10,316,811
------------- ------------- -------------
Net income ............................................................. 25,879,350 23,813,092 14,689,067
------------- ------------- -------------
Comprehensive income, net of tax:
Foreign currency translation adjustments ............................ (175,099) (146,395) 123,649
Unrealized gain on hedging transactions ............................. 61,803 -- --
Unrealized loss on securities ....................................... (2,403) (4,843) (447)
------------- ------------- -------------
Comprehensive income ................................................... $ 25,763,651 $ 23,661,854 $ 14,812,269
============= ============= =============
Net income per common share:
Basic ............................................................... $ 3.21 $ 3.00 $ 1.01
============= ============= =============
Diluted ............................................................. $ 3.17 $ 3.00 $ 0.98
============= ============= =============
Dividends per share .................................................... $ -- $ -- $ 0.075
============= ============= =============
Shares used in the calculation of net income per common share:
Basic ............................................................... 6,546,193 6,546,174 13,389,747
============= ============= =============
Diluted ............................................................. 6,622,625 6,546,174 13,668,638
============= ============= =============
See accompanying notes.
35
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
-------------------
Number Additional Cumulative Unrealized Unrealized Retained
of Paid-In Translation Loss on Gain on Earnings
Shares Amount Capital Adjustment Securities Hedging (Deficit) Total
------ ------ ------- ---------- ---------- ------- --------- -----
Balance November 1, 1998 16,579,484 $502,799 $17,882,672 $197,249 $(27,504) $ -- $143,019,114 $161,574,330
Dividends declared
($.075 per share) ...... -- -- -- -- -- -- (1,244,545) (1,244,545)
Dividends accrued for
preferred stock ........ -- -- -- -- -- -- (1,228,472) (1,228,472)
Shares issued upon
exercise of options
including tax benefit .. 39,329 -- 796,510 -- -- -- -- 796,510
Unrealized loss on
securities ............. -- -- -- -- (757) -- -- (757)
Foreign currency
translation
adjustment ............. -- -- -- 209,574 -- -- -- 209,574
Recapitalization
transaction ............ (10,072,639) (437,337) 128,407,850 -- -- -- (439,750,574) (311,780,061)
Redeemable common stock . (968,983) (9,690) (29,059,800) -- -- -- -- (29,069,490)
Reimbursement of
short-swing profit ..... -- -- 54,162 -- -- -- -- 54,162
Net income .............. -- -- -- -- -- -- 14,689,067 14,689,067
----------- --------- ----------- --------- -------- ----- ------------ -------------
Balance October 31, 1999 ..... 5,577,191 55,772 118,081,394 406,823 (28,261) -- (284,515,410) (165,999,682)
Dividends accrued for
preferred stock ........ -- -- -- -- -- -- (4,201,100) (4,201,100)
Unrealized loss on
securities ............. -- -- -- -- (8,404) -- -- (8,404)
Foreign currency
translation
adjustment ............. -- -- -- (254,047) -- -- -- (254,047)
Recapitalization
transaction............. -- -- -- -- -- -- (19,458) (19,458)
Net income .............. -- -- -- -- -- -- 23,813,092 23,813,092
Balance October 29, 2000 ..... 5,577,191 55,772 118,081,394 152,776 (36,665) -- (264,922,876) (146,669,599)
Dividends accrued for
preferred stock ........ -- -- -- -- -- -- (4,872,942) (4,872,942)
Shares issued upon
exercise of options
including tax benefit .. 66 -- 1,981 -- -- -- -- 1,981
Unrealized loss on
securities.............. -- -- -- -- (4,161) -- -- (4,161)
Foreign currency
translation adjustment . -- -- -- (303,147) -- -- -- (303,147)
Unrealized gain on
hedge transactions ..... -- -- -- -- -- 106,999 -- 106,999
Redeemable common stock . -- -- 1,937,966 -- -- -- -- 1,937,966
Net income .............. -- -- -- -- -- -- 25,879,350 25,879,350
----------- --------- ------------ --------- -------- -------- ------------- -------------
Balance October 28, 2001 ..... 5,577,257 $ 55,772 $120,021,341 $(150,371) $(40,826) $106,999 $(243,916,468)$(123,923,553)
=========== ========= ============ ========= ======== ======== ============= =============
See accompanying notes.
36
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
-------------------------------------------------
October 28, October 29, October 31,
2001 2000 1999
------------- ------------ ------------
Cash flows from operating activities:
Net income ................................................................ $25,879,350 $23,813,092 $14,689,067
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ......................................... 14,778,350 13,362,734 13,611,668
Amortization of discount on 12.5% notes due 2009 ...................... 139,671 139,937 44,596
Amortization of deferred loan costs ................................... 2,154,019 2,456,985 611,990
Net (increase) decrease in deferred income tax benefit ................ (1,619,626) (4,518,087) 65,689
Loss on disposal of property and equipment ............................ 111,713 644,104 1,315,830
Partnership losses .................................................... 295,067 306,621 231,213
Gain on sale of partnership asset ..................................... (2,482,123) -- --
Write-off of trademark in Japan ....................................... -- -- 620,077
Minority interest in income of consolidated subsidiaries .............. -- 30,254 39,956
Book value in excess of purchase price of minority interest in
Japan subsidiary .................................................... -- (495,188) --
Decrease in accounts receivable ....................................... 3,662,027 2,343,425 1,999,616
(Increase) decrease in inventories .................................... (3,331,086) (5,644,877) 4,226,552
Increase in other current assets ...................................... (315,528) (752,789) (256,775)
(Increase) decrease in other assets ................................... (136,830) 10,848 (472,032)
Increase (decrease) in accounts payable ............................... (4,389,891) 6,546,282 (1,498,795)
Increase in accrued expenses ......................................... 3,588,760 2,849,290 174,015
Increase (decrease) in accrued interest expense ....................... (3,390,803) 593,560 7,661,434
Increase (decrease) in income taxes payable ........................... (2,637,085) 3,367,232 1,070,231
------------- ----------- -----------
Net cash provided by operating activities ......................... 32,305,985 45,053,423 44,134,332
------------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment .............................. 6,500 19,017 183,860
Proceeds from sale of partnership asset ................................... 1,225,431 -- --
Purchase of property and equipment ........................................ (13,987,578) (27,233,695) (14,530,943)
Purchase of minority interest in Japan subsidiary ......................... -- (228,457) --
Purchase of foreign trademark ............................................. -- (70,000) --
Sale of short-term investments ............................................ 7,328 8,039 1,150,015
Capital contributions to partnership ...................................... (3,089,493) (2,013,072) --
Capital distributions from partnership .................................... 77,500 167,528 127,341
------------- ----------- -----------
Net cash used in investing activities ............................. (15,760,312) (29,350,640) (13,069,727)
------------- ----------- -----------
Cash flows from financing activities:
Proceeds from credit agreement ............................................ -- -- 190,000,000
Proceeds from issuance of subordinated notes .............................. -- -- 98,616,000
Addition to long-term debt ............................................... -- -- 1,427,000
Principal payments of long-term debt ...................................... (15,267,399) (22,601,167) (837,800)
Recapitalization transaction .............................................. -- (19,458) (311,780,061)
Issuance of common stock .................................................. 1,981 -- 796,510
Issuance of preferred stock ............................................. -- -- 25,000,000
Financing fees and expenses ............................................. -- (132,594) (15,197,745)
Cash dividends paid ....................................................... -- -- (1,244,545)
Short-swing profit reimbursement .......................................... -- -- 54,162
------------- ----------- -----------
Net cash used in financing activities ............................. (15,265,418) (22,753,219) (13,166,479)
------------- ----------- -----------
37
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the years ended
--------------------------------------------
October 28, October 29, October 31,
2001 2000 1999
------------ ------------ ------------
Effect of exchange rate changes ............................ (303,147) (254,047) 209,574
------------ ------------ ------------
Unrealized loss on securities .............................. (4,161) -- --
------------ ------------ ------------
Unrealized gain on hedging transactions .................... 106,999 (8,404) (757)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ....... 1,079,946 (7,312,887) 18,106,943
Beginning balance, cash and cash equivalents ............... 25,130,928 32,443,815 14,336,872
------------ ------------ ------------
Ending balance, cash and cash equivalents .................. $ 26,210,874 $25,130,928 $32,443,815
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash received during the year for interest income ...... $ 892,047 $ 1,348,567 $ 1,239,507
=========== =========== ===========
Cash paid during the year for:
Interest expense .................................. $28,501,570 $28,559,439 $ 1,882,331
=========== =========== ===========
Income taxes ...................................... $23,179,781 $18,676,457 $10,554,471
=========== =========== ===========
Supplemental disclosure of noncash financing activity:
Dividends accrued on mandatorily redeemable
preferred stock ...................................... $ 4,872,944 $ 4,201,100 $ 1,228,472
=========== =========== ===========
See accompanying notes.
38
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 28, 2001, October 29, 2000 and October 31, 1999
1. Company Background and Basis of Presentation
The consolidated financial statements include the accounts of St. John
Knits International, Incorporated ("SJKI"), a Delaware corporation, and its
subsidiaries, including St. John Knits, Inc. ("St. John"). SJKI and its
subsidiaries are collectively referred to herein as "the Company." All
interdivisional and intercompany transactions and accounts have been eliminated
in consolidation. The Company is a leading designer, manufacturer and marketer
of women's clothing and accessories. The Company's products are distributed
primarily through specialty retailers and the Company's own retail boutiques and
outlets.
On February 2, 1999, St. John entered into a merger agreement to be
acquired by a group consisting of Vestar Capital Partners III, L.P. ("Vestar")
and Bob Gray, Marie Gray and Kelly Gray at an offer price of $30 per share.
Pursuant to the agreement, on July 7, 1999, the Company consummated two mergers.
As a result of the mergers, St. John became a wholly owned subsidiary of SJKI.
After consummation of the mergers, Vestar and the Grays beneficially own
approximately 70 percent and 15 percent, respectively, of the outstanding common
stock of SJKI. The mergers were accounted for as a recapitalization. The
operating results for all periods prior to the mergers consist entirely of the
historical results of St. John and its subsidiaries.
During fiscal 1997, the Company formed St. John Company, Ltd. in Japan to
operate as a 51 percent owned subsidiary to distribute the Company's products in
Japan. During fiscal 1998, the Company increased its ownership percentage to 68
percent. During fiscal 2000, the Company increased its ownership to 100 percent.
During fiscal 1997, the Company also formed Amen Wardy Home Stores, LLC, a 51
percent owned limited liability company. During fiscal 1999, the Company changed
the name of this subsidiary to St. John Home Stores, LLC and now owns 100
percent of this entity. St. John Home operates three home furnishing stores and
one outlet store. The operations of both entities are included in the
accompanying consolidated financial statements.
2. Summary of Accounting Policies
a. Definition of Fiscal Year
The Company utilizes a 52-53 week fiscal year whereby the fiscal year ends
on the Sunday nearest to October 31. Accordingly, fiscal years 2001, 2000 and
1999 ended on October 28, October 29 and October 31, respectively. Fiscal years
2001, 2000 and 1999 were comprised of 52 weeks.
b. Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
c. Revenue Recognition
Revenue on sales to specialty retailers is recognized when the goods are
shipped. The Company establishes liabilities for estimated returns, allowances
and wholesale markdowns at the time of shipment. The Company also provides for
estimated discounts when recording sales. Retail sales are recognized at the
point of sale. The Company establishes liabilities for estimated returns at the
retail stores. Accounts receivable are shown net of allowances for discounts and
uncollectible amounts of $2,511,000 and $3,091,000 in fiscal year 2001 and
$2,255,000 and $1,468,000 in fiscal year 2000, respectively.
The Company adopted the Securities and Exchange Commission Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements" in the
first quarter of fiscal 2001. SAB No. 101 summarizes certain of the SEC's views
in applying generally accepted accounting principles to revenue recognition in
financial statements.
39
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 28, 2001, October 29, 2000 and October 31, 1999
d. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market.
Inventories are comprised of the following:
2001 2000
---- ----
Raw materials.............. $13,011,735 $10,170,195
Work-in-process............ 8,184,806 12,175,945
Finished products.......... 31,301,156 26,820,471
----------- -----------
$52,497,697 $49,166,611
=========== ===========
e. Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method to provide for the retirement of
property and equipment at the end of their estimated useful lives, which range
from three to thirty-nine years.
f. Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents
include all liquid debt instruments purchased with a maturity of three months or
less.
g. Foreign Exchange Transactions and Contracts
The Company enters into foreign exchange contracts as a hedge against
exchange rate risk on the collection of certain accounts receivable denominated
in a foreign currency. The Company enters into contracts to sell foreign
currencies in the future only to protect the U.S. dollar value of certain
anticipated foreign currency transactions. The forward contracts are carried on
the balance sheet at their fair value with changes in their fair value initially
included as a separate component of stockholders' equity until the anticipated
transaction occurs. Such gains and losses then offset the related gains and
losses reported on the underlying transaction (Note 4).
h. Income Taxes
The Company utilizes the liability method of accounting for income taxes
required by Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes."
i. Earnings per Share
Basic earnings per share are computed by dividing income allocated to
common stockholders by the weighted average number of common shares outstanding,
excluding the dilutive effect of common stock equivalents, including stock
options. Preferred stock dividends are deducted from net income to arrive at
income allocated to common stockholders. Diluted earnings per share includes all
dilutive items and is calculated based upon the treasury stock method, which
assumes that all dilutive securities were exercised and that the proceeds
received were applied to repurchase outstanding shares at the average market
price during the period.
40
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 28, 2001, October 29, 2000 and October 31, 1999
The following is a reconciliation of the Company's net income and weighted
average shares outstanding for the purpose of calculating basic and diluted
earnings per common share for all periods presented:
Fiscal Year Ended
-------------------------------------------------------
October 28, October 29, October 31,
2001 2000 1999
------------ ------------ -----------
Net income ................................................. $25,879,350 $23,813,092 $14,689,067
Less: preferred stock dividends ........................... 4,872,942 4,201,100 1,228,472
----------- ----------- -----------
Income allocated to common stockholders .................... $21,006,408 $19,611,992 $13,460,595
=========== =========== ===========
Weighted average shares outstanding-basic .................. 6,546,193 6,546,174 13,389,747
=========== =========== ===========
Basic earnings per common share ............................ $ 3.21 $ 3.00 $ 1.01
=========== =========== ===========
Add: dilutive effect of stock options ..................... 97,829 -- 278,891
----------- ----------- -----------
Weighted average shares outstanding-diluted ................ 6,622,625 6,546,174 13,668,638
=========== =========== ===========
Diluted earnings per common share .......................... $ 3.17 $ 3.00 $ 0.98
=========== =========== ===========
j. Foreign Currency Translation
The Company translates the financial statements of its foreign subsidiaries
from the local (functional) currencies to U.S. dollars in accordance with SFAS
No. 52 "Foreign Currency Translation." Substantially all assets and liabilities
of the Company's foreign subsidiaries are translated at year-end exchange rates,
while revenue and expenses are translated at average exchange rates prevailing
during the year. Adjustments for foreign currency translation fluctuations are
excluded from net income and are included as a separate component of
consolidated stockholders' equity (deficit).
k. Advertising and Promotion
All costs associated with advertising and promotion of the Company's
products are expensed as incurred. Total advertising expenses for the Company
for fiscal years 2001, 2000 and 1999 were approximately $15,000,000, $13,300,000
and $11,300,000, respectively.
l. Investments
The Company's investments are categorized as available-for-sale securities,
as defined by SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." Unrealized holding gains and losses are reflected as a net
amount in a separate component of stockholders' equity (deficit) until realized.
For the purpose of computing realized gains and losses, cost is identified on a
specific identification basis.
m. Comprehensive Income
The Company adopted SFAS No. 130 "Reporting Comprehensive Income" in fiscal
1999. This statement requires that all items that meet the definition of
components of comprehensive income be reported in a financial statement for the
period in which they are recognized. Components of comprehensive income include
revenues, expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but excluded from net income.
41
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 28, 2001, October 29, 2000 and October 31, 1999
n. Segment Reporting
The Company adopted SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information", in fiscal 1999. SFAS No. 131 established
new standards for reporting information about business segments and related
disclosures about products, geographic areas and major customers. The business
segments of the Company are wholesale and retail sales. Information on segment
reporting is included at Note 14.
o. Shipping and Handling Fees
The Company adopted Emerging Issues Task Force ("EITF") No. 00-10
"Accounting for Shipping and Handling Fees and Costs" in the fourth quarter of
fiscal 2001. EITF No. 00-10 governs the accounting treatment and classification
of the Company's delivery revenues and certain of its delivery expenses.
During fiscal years 2001, 2000 and 1999, the Company incurred shipping
expenses to ship its products to its customers of approximately $2,621,000,
$1,981,000 and $2,167,000, respectively. These shipping expenses are included in
selling, general and administrative expenses for all years.
p. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 addresses financial accounting and reporting
for business combinations and is effective for all business combinations after
June 30, 2001. SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets and is effective for fiscal years
beginning after December 15, 2001. The adoption of these standards is not
expected to have a material impact on the Company's financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board ("APB")
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business
(as previously defined in that Opinion). The provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, with early application encouraged and generally are to be
applied prospectively. We do not expect the adoption of SFAS No. 144 to have a
material impact on the Company's financial position or results of operations.
In April 2001 EITF No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products" was issued. EITF No.
00-25 governs the accounting for consideration from a vendor to a reseller of
the vendor's products and was adopted by the Company in the fourth quarter of
fiscal 2001. The adoption of this EITF did not have a material impact on the
Company's financial position or results of operations.
q. Reclassifications
Certain reclassifications have been made to prior year balances in order to
conform with the current year presentation.
3. Fair Value of Financial Instruments
The following methods and assumptions were used by management to estimate
the fair value of each class of financial instrument for which it is practicable
to estimate:
Cash and Cash Equivalents - The carrying amount is a reasonable estimate of
the fair value.
42
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 28, 2001, October 29, 2000 and October 31, 1999
Investments - Investments consist primarily of common stock which is
classified as available-for-sale and reported at fair value.
Senior Credit Facility - The term debt related to the senior credit
facility approximates the market value as the interest rate on the debt is
variable and similar to what is currently available.
12.5% Senior Notes due 2009 - This issue is publicly traded (on a limited
basis). Therefore, the fair value of this issue is based on its quoted market
price.
Mandatorily Redeemable Preferred Stock - Based on current market
conditions, the fair value of this item approximates book value.
Redeemable Common Stock - The book value of the redeemable common stock is
adjusted each period to the current market value of the common stock.
Foreign Currency Contracts - The fair value of foreign currency contracts
(used for hedging purposes) is estimated based on current market prices.
Interest Rate Collar - The fair value of this instrument is based upon the
present value of the estimated future cash flows.
The estimated fair values of the Company's financial instruments are as follows:
Fiscal Year Ended
---------------------------------------------------
2001 2000
------------------------ ------------------------
Book Value Fair Value Book Value Fair Value
---------- ---------- ---------- ----------
Financial Assets:
Cash and cash equivalents .................... $26,210,874 $26,210,874 $25,130,928 $25,130,928
Investments .................................. 10,045 10,045 17,373 17,373
Financial Liabilities:
Long-term debt:
Senior Credit Facility .................... 151,983,282 151,983,282 167,000,000 167,000,000
12.5% Senior Subordinated Notes due 2009 .. 98,940,204 93,000,000 98,800,533 92,500,000
Mandatorily Redeemable Preferred Stock ....... 25,000,000 25,000,000 25,000,000 25,000,000
Redeemable Common Stock ...................... 27,131,524 27,131,524 29,069,490 29,069,490
Other:
Foreign currency contracts ................... 106,999 106,999 -- --
Interest rate collar ......................... 35,000,000 (824,761) 40,000,000 (24,825)
4. Hedging Activities
The Company accounts for its hedging activities in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" and has
designated certain financial instruments as cash flow hedges which must be
reported in accordance with SFAS No. 133.
The Company enters into contracts to buy and sell foreign currencies in the
future to protect the U.S. dollar value of certain anticipated foreign
currency transactions. The forward contracts are carried on the balance sheet at
their fair value with changes in their fair value initially included in a
separate component of stockholders' equity until the anticipated transactions
occur. Such gains and losses then offset the related gains and losses reported
on the underlying transaction.
43
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 28, 2001, October 29, 2000 and October 31, 1999
At October 28, 2001, the Company held contracts maturing through April 30,
2002 to sell 1.3 million Euros at a rate of .89 U.S. dollars to the Euro. The
Company also held contracts maturing through May 31, 2002 to buy 5.0 billion
Italian lira at a rate of 2,286 Italian lira to the U.S. dollar. At October 29,
2000 the Company did not hold any foreign exchange contracts. At October 28,
2001 the fair value of these foreign currency contracts of $106,999 was recorded
as a component of stockholders' equity and comprehensive income.
The Company is exposed to market risks related to fluctuations in interest
rates on its variable rate debt which consists of bank borrowings related to the
mergers. The Company has entered into an interest rate collar agreement with a
major financial institution to initally limit its exposure on $45 million of the
Company's variable rate debt. The agreement became effective on October 4, 1999
and will expire on July 7, 2002. The amount of debt covered under this agreement
decreased to $35 million effective July 5, 2001. The agreement establishes a
LIBOR cap at 8.50% and a LIBOR floor at 5.37%. During fiscal 2001, LIBOR
decreased below the floor and the Company began making payments under the
agreement.
The fair value of the interest rate collar agreement is included on the
balance sheet and the ineffective portion is included currently in interest
expense.
5. Accrued Expenses
Accrued expenses for fiscal years 2001 and 2000 are comprised of the
following:
2001 2000
---- ----
Wages and benefits ...................... $ 6,331,868 $ 5,768,817
Workers' compensation ................... 694,660 259,283
Profit-sharing plan contribution ........ 500,000 500,000
Promotional and advertising allowance ... 870,819 924,095
Software purchase ....................... 144,500 715,375
Other ................................... 7,127,794 3,913,311
----------- -----------
$15,669,641 $12,080,881
=========== ===========
6. Income Taxes
The provision for income taxes for fiscal years 2001, 2000 and 1999,
consists of the following:
2001 2000 1999
---- ---- ----
Current:
Federal ...................... $15,352,292 $16,176,318 $ 9,248,127
State and foreign ............ 5,192,715 5,852,583 1,002,995
----------- ----------- -----------
20,545,007 22,028,901 10,251,122
Deferred (benefit) provision ... (1,619,626) (4,518,087) 65,689
----------- ----------- -----------
$18,925,381 $17,510,814 $10,316,811
=========== =========== ===========
The components of the deferred income tax (benefit) provision for fiscal
years 2001, 2000 and 1999 are as follows:
2001 2000 1999
---- ---- ----
Allowance for uncollectible accounts ... $ (541,431) $ (82,010) $ 86,516
Inventory adjustments to market ........ 584,987 (2,236,374) (1,097,816)
Accrued expenses ....................... (1,196,716) (570,381) 157,138
Depreciation ........................... (287,901) (789,533) 919,851
Tax basis adjustments to inventory ..... (178,565) (839,789) --
----------- ----------- -----------
$(1,619,626) $(4,518,087) $ 65,689
=========== =========== ===========
44
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 28, 2001, October 29, 2000 and October 31, 1999
The components of the Company's deferred income tax benefit as of October
28, 2001 and October 29, 2000 are as follows:
2001 2000
---- ----
Deferred income tax benefit:
Tax basis adjustments to inventory ....... $ 1,945,446 $ 1,766,881
Allowance for uncollectible accounts ..... 1,069,750 528,319
Inventory adjustments to market .......... 4,081,738 4,666,725
Accrued expenses ......................... 4,499,724 3,303,008
Depreciation ............................. 2,219,327 1,931,426
----------- -----------
$13,815,985 $12,196,359
=========== ===========
The reported provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to the income before provision
for income taxes for fiscal years 2001, 2000 and 1999 as follows:
2001 2000 1999
---- ---- ----
Income tax provision computed at statutory rate ... $15,681,656 $14,463,367 $ 8,752,057
State and foreign taxes, net of federal benefit ... 3,243,725 3,047,447 1,564,754
----------- ----------- -----------
Tax provision ..................................... $18,925,381 $17,510,814 $10,316,811
=========== =========== ===========
7. Benefit and Stock Option Plans
The Company is self-insured for a portion of its medical benefits programs.
Amounts charged to expense for health benefits were $6,210,000, $4,480,000 and
$3,917,000 for fiscal years 2001, 2000 and 1999, respectively, and were based on
actual claims and an estimate of claims incurred but not reported. The current
liability for health benefits is included in accrued expenses on the
accompanying consolidated balance sheets. The Company maintains excess insurance
coverage on an individual and an aggregate basis.
The Company maintains a qualified profit-sharing plan for the benefit of
all eligible employees. This plan contemplates the sharing of profits annually
at the discretion of the Board of Directors and is funded by cash contributions.
The contribution to this plan was $500,000, in each of the fiscal years 2001,
2000 and 1999.
Prior to the mergers, the Company had one stock option plan, the 1993 St.
John Knits, Inc. Stock Option Plan (the "1993 Plan"). During fiscal 1999 the
Company terminated the 1993 Plan and adopted the 1999 St. John Knits
International, Incorporated Stock Option Plan (the "1999 Plan"). Options granted
under the 1999 Plan are nonstatutory stock options. The Company accounts for the
plans under APB Opinion No. 25 "Accounting for Stock Issued to Employees", under
which no compensation cost has been recognized for fiscal years 2001, 2000 and
1999.
SFAS No. 123 "Accounting for Stock-Based Compensation" was issued in 1995
and, if fully adopted, changes the methods for recognition of cost on plans
similar to that of the Company. Adoption of SFAS No. 123 is optional for
employee stock option grants, however pro forma disclosure as if the Company had
adopted the fair value method is required. Had compensation cost for stock
options awarded under the 1999 Plan or 1993 Plan been determined to be
consistent with SFAS No. 123, the Company's net income and earnings per common
share would have reflected the following pro forma amounts:
2001 2000
---- ----
Net income: As reported .... $25,879,350 $23,813,092
Pro forma ...... $24,774,995 $22,749,609
Net income per common share-diluted: As reported .... $3.17 $3.00
Pro forma ...... $3.00 $2.84
45
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 28, 2001, October 29, 2000 and October 31, 1999
The Company may grant up to 727,360 options under the 1999 Plan. The
Company has granted 554,263 options which remain outstanding as of October 28,
2001 under the 1999 Plan. Stock options are issued at the approximate fair
market value. Options generally vest over three to five years; are exercisable
in whole or in installments; and expire ten years from date of grant.
The following is a summary of the activity in the 1999 Plan and the 1993
Plan for fiscal years 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding, beginning of year .................... 533,693 $30.00 498,519 $30.00 921,652 $15.42
Granted ........................................... 104,237 30.00 35,841 30.00 498,519 30.00
Exercised ......................................... (66) 30.00 -- -- (894,316) 15.42
Forfeited ......................................... (83,601) 30.00 (667) 30.00 (27,336) 18.50
------- ------ ------- ------ -------- ------
Outstanding, end of year .......................... 554,263 $30.00 533,693 $30.00 498,519 $30.00
======= ======= =======
Exercisable, end of year .......................... 185,765 $30.00 34,003 $30.00 -- --
Weighted average fair value of options granted .... $10.97 $5.04 $ 8.92
The options outstanding as of October 28, 2001 have an exercise price of
$30.00 and a weighted average remaining contractual life of 7.85 years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes pricing model with the following assumptions used for the
grants in fiscal years 2001, 2000 and 1999: weighted average risk-free interest
rate of 5.12%, 6.51% and 6.09%; weighted average volatility of 43.98%, 37.31%
and 33.73%; expected life of 6 years; and weighted average dividend yield of
0.00%.
8. Commitments
The Company has entered into various leases for manufacturing, showroom,
warehouse, retail and office locations, including leases with related parties
(Note 11). The leases expire at various dates through the year 2014 and certain
leases contain renewal options. Rental expense under these leases was
approximately $16,118,000, $14,687,000 and $13,846,000 in fiscal years 2001,
2000 and 1999, respectively.
The following is a schedule of future annual minimum rental payments
required under noncancellable operating leases as of October 28, 2001:
Fiscal Year
2002 .......................... $17,120,613
2003 .......................... 18,239,741
2004 .......................... 18,603,849
2005 .......................... 18,105,733
2006 .......................... 17,248,604
Thereafter .................... 73,918,239
------------
$163,236,779
============
The Company has various employment contracts with certain key employees,
which expire at various times through December 31, 2004. These agreements
provide for total annual compensation aggregating $2,800,000 and the payment of
severance benefits upon the termination of employment.
As of October 28, 2001 and October 29, 2000, the Company's commitments to
purchase wool yarn were approximately $9,902,000 and $12,983,000, respectively.
46
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 28, 2001, October 29, 2000 and October 31, 1999
9. Long-term Debt
October 28, October 29,
Long-term debt consists of the following: 2001 2000
---- ----
Senior credit facility:
Tranche A ...................................... $ 54,364,936 $ 63,779,729
Tranche B ...................................... 97,618,346 103,220,271
------------ ------------
151,983,282 167,000,000
Senior subordinated notes, net of discount ....... 98,940,204 98,800,533
Other ............................................ 1,372,929 1,623,610
------------ ------------
252,296,415 267,424,143
Less - Current portion ......................... 9,005,724 5,577,398
------------ ------------
$243,290,691 $261,846,745
============ ============
Senior Credit Facilities
Concurrent with the consummation of the mergers, the Company entered into a
credit agreement with a syndicate of lending institutions (the "Lenders"), which
agreement provides for an aggregate principal amount of loans of up to $215.0
million (the "Credit Agreement"). Loans under the Credit Agreement consist of
$190.0 million in aggregate principal amount of term loans ("Term Loan
Facility"), which facility includes a $75.0 million tranche A term loan
subfacility, a $115.0 million tranche B term loan subfacility, and a $25.0
million revolving credit facility ("Revolving Credit Facility"). The Credit
Agreement includes a subfacility for swingline borrowings and a sublimit for
letters of credit. The Company's obligations under the Credit Agreement are
secured by a security interest in substantially all of the Company's assets. The
Company used proceeds from the Term Loan Facility to provide a portion of the
funding necessary to consummate the mergers. There were no borrowings under the
Revolving Credit Facility at October 28, 2001.
The tranche A term loan facility and the Revolving Credit Facility mature
on July 31, 2005. The tranche B term loan facility matures on July 31, 2007. The
Term Loan Facility is subject to repayment according to quarterly amortization
of principal based upon the Scheduled Amortization (as defined in the Credit
Agreement). The Company may prepay the term loan facility without penalty.
Indebtedness under the Term Loan Facility and the Revolving Credit Facility
bears interest at a rate based (at the Company's option) upon (i) LIBOR for one,
two, three or six months, plus 2.00% with respect to the tranche A term loan
facility and the Revolving Credit Facility or plus 3.00% with respect to the
tranche B term loan facility, or (ii) the Alternate Base Rate (5.50% at October
28, 2001) plus 1.00% with respect to the tranche A term loan facility and the
Revolving Credit Facility or plus 2.00% with respect to the tranche B term loan
facility.
Interest rates at October 28, 2001 were approximately 4.7% and 5.7% on
tranche A and tranche B term loans, respectively. Effective October 4, 1999, the
Company entered into an interest rate collar agreement with a major financial
institution. The agreement limits the Company's exposure on a portion of the
term loans by placing a cap on the rate for LIBOR contracts at 8.50%. The
contract also sets a minimum rate of 5.37%. The contract currently covers $35
million of the term debt and will expire on July 7, 2002. During fiscal 2001,
LIBOR decreased below the minimum rate and the Company began making payments
under the agreement.
The Company is required to pay to the Lenders in the aggregate a commitment
fee equal to 0.5% per annum on the undrawn amount of the Revolving Credit
Facility during the preceding quarter.
Pursuant to the terms of the Credit Agreement and the Revolving Credit
Facility, the Company is required to maintain certain financial ratios and
minimum levels of tangible net worth and working capital as well as to achieve
certain levels of earnings before interest, taxes, depreciation and
amortization. In addition, the Company is restricted from entering into certain
transactions or making certain payments and dividend distributions without the
prior consent of the Lenders.
47
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 28, 2001, October 29, 2000 and October 31, 1999
Senior Subordinated Notes
In connection with the mergers, the Company obtained financing through the
issuance of $100 million in senior subordinated debt ("Subordinated Notes"). The
Subordinated Notes bear interest at a rate of 12.5% per year and were issued at
98.616% of the actual face value. The Subordinated Notes will mature on July 1,
2009. Interest on the Subordinated Notes is payable in cash semi-annually on
January 1 and July 1 of each year. The Subordinated Notes are redeemable, in
whole or in part, at the option of the Company, at any time on or after July 1,
2004, at the redemption prices set forth below, plus accrued and unpaid interest
and liquidation damages, if any, to the date of redemption.
Redemption Year Price
--------------- -----
2004 ....................................... 106.250%
2005 ....................................... 104.688%
2006 ....................................... 103.125%
2007 ....................................... 101.563%
2008 and thereafter ........................ 100.000%
In addition, at any time on or before July 1, 2002, the Company may redeem
up to 35% of the original aggregate principal amount of the Subordinated Notes
with the net proceeds of an initial public equity offering at a redemption price
equal to 112.5% of the principal amount thereof, plus accrued and unpaid
interest and liquidated damages, if any, to the date of redemption (subject to
the right of holders of record on the relevant record date to receive interest
due on the relevant interest payment date); provided, however, that at least 65%
of the originally issued aggregate principal amount of the notes must remain
outstanding immediately after giving effect to each such redemption (excluding
any notes held by SJKI or any of its affiliates). Notice of any such redemption
must be given within 60 days after the date of the closing of the relevant
public equity offering of SJKI. These notes are subordinated to the Senior
Credit Facility as discussed above.
Fees associated with obtaining the Subordinated Notes and the tranche A and
tranche B term loans were $15.3 million, which are amortized over the terms of
the respective notes using the effective interest rate method. Amortization
expense of approximately $2,154,000 relating to such fees is included in
interest expense for the year ended October 28, 2001.
As of October 28, 2001, future annual maturities of long-term debt were as
follows:
Fiscal Year
-----------
2002 ........................................ $ 9,005,724
2003 ........................................ 12,037,316
2004 ........................................ 21,886,529
2005 ........................................ 23,519,711
2006 ........................................ 35,528,852
Later years ................................ 150,318,283
------------
$252,296,415
============
10. Redeemable Common and Preferred Stock
Redeemable Common Stock
Redeemable common stock represents all of the shares of the Company's
common stock that are beneficially owned by the Grays. The value shown on the
Consolidated Balance Sheets reflects the fair market value of the Company's
common stock at the balance sheet dates. Changes in the fair market value of the
Company's common stock from period to period are recorded as an increase or
decrease to additional paid-in capital.
In connection with the mergers, SJKI entered into a stockholders' agreement
with Vestar/Gray Investors, Vestar and the Grays, which states, among other
things, that prior to a public offering of SJKI common stock, if Bob Gray ceases
to serve as Chairman or Chief Executive Officer of St. John or SJKI or if the
employment with SJKI of Marie Gray or Kelly Gray ceases for
48
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 28, 2001, October 29, 2000 and October 31, 1999
any reason, then he or she will have the right to require SJKI to purchase the
shares of SJKI common stock beneficially owned by them, up to a maximum of $5
million of such common stock for all the Grays during any 12-month period. If
any of the Grays are terminated without "cause" or resigns for "good reason," as
these terms are defined in their current respective employment agreements with
the Company, then he or she will have the right to require SJKI to purchase the
shares of SJKI common stock beneficially owned by them, up to a maximum of 25%
of the total shares held by such terminated or resigning Gray employee during
any 12-month period. This agreement may be limited by the terms of the
agreements related to the credit facilities and the senior subordinated notes.
Mandatorily Redeemable Preferred Stock
The $25,000,000 Mandatorily Redeemable Preferred Stock consists of 250,000
shares of Preferred Stock with a liquidation preference of $100 per share and
ranks junior in right of payment to all liabilities and obligations (whether or
not for borrowed money) of SJKI (other than common stock of SJKI and any
preferred stock of SJKI which by its terms is on parity with or junior to the
Preferred Stock).
Holders of Preferred Stock will be entitled to receive, when, as and if
declared by the board of directors of SJKI, out of funds legally available
therefore, dividends on the Preferred Stock, at an annual rate equal to 15.25%,
provided that if dividends are not paid on a dividend payment date, dividends
shall continue to accrue on unpaid dividends.
The Preferred Stock may be redeemed at any time on or after July 1, 2004,
in whole or in part, at the option of SJKI, at the redemption prices (expressed
in percentages of liquidation value) set forth below together with all
accumulated dividends to the date of redemption, if redeemed during the 12-month
period beginning on July 1 of the years indicated.
Redemption Year Percentage
--------------- ----------
2004 ....................................... 107.625%
2005 ....................................... 105.719%
2006 ....................................... 103.813%
2007 ....................................... 101.906%
2008 and thereafter ........................ 100.000%
The Preferred Stock will also be redeemable in whole or in part, at the
option of SJKI at any time before July 1, 2004, at a redemption price equal to
the greater of (i) 100% of the liquidation value of the Preferred Stock and (ii)
the present values of the liquidation value at the mandatory redemption date,
discounted on a semi-annual basis at the Treasury Yield plus 15 basis points.
The "Treasury Yield" means, with respect to any redemption date, the rate per
annum equal to the semi-annual equivalent yield to maturity for a comparable
treasury issue.
In addition, at any time and from time to time on or prior to July 1, 2002,
SJKI may redeem in the aggregate up to 35% of the originally issued liquidation
value of the Preferred Stock with the net cash proceeds of one or more Public
Equity Offerings (as defined in the indenture) by SJKI at a redemption price in
cash equal to 115.25% of the liquidation value thereof, plus accumulated
dividends thereon, if any, to the date of redemption; provided, however, that at
least 65% of the originally issued aggregate liquidation value of the Preferred
Stock must remain outstanding immediately after giving effect to each such
redemption (excluding any Preferred Stock held by SJKI or any of its
affiliates). Notice of any such redemption must be given within 60 days after
the date of the closing of the relevant public equity offering of SJKI. The
Preferred Stock may only be redeemed if permitted under the terms of the senior
credit facilities, the indenture and other contractual arrangements of SJKI.
On July 1, 2010, SJKI will be required to redeem (subject to contractual
and other restrictions with respect thereto and to the legal availability of
funds therefor) all outstanding shares of Preferred Stock at a price equal to
the liquidation value thereof plus all accumulated dividends to the date of
redemption. Accordingly, the carrying value of such stock has been classified
outside of shareholders' equity.
49
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 28, 2001, October 29, 2000 and October 31, 1999
SJKI may, at its option, exchange all but not less than all of the shares
of then outstanding Preferred Stock for debentures of SJKI in a principal amount
equal to the liquidation value of the Preferred Stock plus accumulated
dividends.
The exchange debentures will bear interest at 15.25% per annum, have a
final stated maturity of July 1, 2010, have optional redemption provisions
comparable to the Preferred Stock and will have customary covenants and events
of default. SJKI may not cause the exchange of Preferred Stock for debentures
unless permitted under the terms of the senior credit facilities, the indenture
and other contractual arrangements of SJKI.
11. Related-Party Transactions
The Company entered into a management agreement with Vestar. Pursuant to
the management agreement, the Company paid to Vestar a transaction fee of $4.0
million at the closing of the mergers. The Company also pays an annual fee of
$500,000 to Vestar for management services.
The Company leases three manufacturing facilities from partnerships in
which a stockholder(s) of the Company is a significant partner. The annual
payments on these leases were approximately $1,135,000, $1,051,000 and
$1,014,000 in fiscal years 2001, 2000 and 1999, respectively. The leases expire
at various dates during fiscal year 2006. In addition, the Company entered into
a lease with an entity in which a stockholder of the Company is a significant
owner. This new lease will begin during fiscal 2002 for a period of 10 years.
Payments under these leases are included in the future minimum rental payments
disclosure (Note 8).
The Company periodically rents personal property provided by a company that
is owned by a stockholder. Rental payments for the use of such equipment were
approximately $9,000, $3,000 and $8,000 in fiscal years 2001, 2000 and 1999,
respectively.
At October 28, 2001 and October 29, 2000, the Company held a 50 percent
ownership interest in a partnership which leases transportation equipment to the
Company. The holder of the other 50 percent ownership interest is a corporation
which is wholly owned by one of the Company's stockholders.|~3emspace~|At
October 28, 2001 and October 29, 2000, the Company's investment in this
partnership, net of partnership losses, was approximately $6,008,000 and
$2,035,000, respectively, and is included in other assets on the accompanying
consolidated balance sheets. During fiscal years 2001, 2000 and 1999, the
Company made lease payments to the partnership of $1,123,000, $953,000 and
$1,038,000, respectively. During the same years, the Company reported net losses
from the activities of the partnership of approximately $295,000, $307,000 and
$231,000, respectively. Offsetting the loss for fiscal 2001 was a gain of
approximately $2,482,000 reported on the sale of equipment by the partnership.
12. Current Vulnerability Due to Certain Concentrations
A substantial portion of the Company's sales are made to three major
customers. These three customers accounted for 16, 16 and 15 percent of net
sales during fiscal 2001, 15, 15 and 14 percent of net sales during fiscal 2000
and 15, 13 and 13 percent of net sales during fiscal 1999. The loss of any one
of these customers could have a materially adverse affect on the Company's
business.
The Company sells primarily to specialty apparel retailers; thus, the risk
of collection losses is concentrated in this industry. Management believes that
the Company's credit and collection policies are adequate to prevent significant
collection losses and that the allowance for uncollectible accounts is adequate
at October 28, 2001 and October 29, 2000.
50
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 28, 2001, October 29, 2000 and October 31, 1999
13. Litigation
Litigation Regarding the Mergers
On June 9, 2000, the Company reached an agreement to settle a class action
shareholders' lawsuit arising from the mergers of the Company that closed on
July 7, 1999. The terms of the settlement agreement, which received final court
approval on August 1, 2000, called for payment of $13.75 million to the
Company's former public shareholders and their attorneys. Nearly all of this
payment was funded by the Company's insurance carriers. Additionally, in the
event of a future sale, merger or public offering of the Company, the Company
has agreed to provide these former shareholders with an opportunity to receive a
specified percentage of proceeds from such an event under certain limited
circumstances. On September 1, 2000, one of the plaintiffs in this lawsuit filed
a notice of appeal from the judgment approving the settlement and the court
order regarding application for attorney's fees. On October 12, 2001, an order
was entered dismissing the appeal as it relates to the settlement, thereby
leaving the only issue on appeal the court order regarding application for
attorney's fees. As such, the matter as it relates to the Company has been
finalized.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 28, 2001, October 29, 2000 and October 31, 1999
14. Segment Information
The Company has two reportable business segments, wholesale and retail
sales. The Company's wholesale sales business consists primarily of eight
divisions, Knitwear, Sport, Shoes, Jewelry, Accessories, Gray & Gray, Fragrance
and Home Furnishings. For fiscal 2001, retail sales were generated through the
Company's 24 St. John boutiques, 10 St. John outlet stores, three St. John Home
stores and one St. John Home outlet store. Management evaluates segment
performance based primarily on revenue and earnings from operations.
Segment information is summarized as follows for fiscal years 2001, 2000
and 1999 (in 000's):
Wholesale Retail Corporate Eliminations Total
--------- ------ --------- ------------ -----
Fiscal 2001
Net sales ................. $313,606 $121,850 $ - $(69,535) $365,921
Segment operating income .. 65,338 3,773 - - 69,111
Segment assets ............ 147,270 56,783 29,932 (11,762) 222,223
Fiscal 2000
Net sales ................. $275,241 $117,105 $ - $(55,887) $336,459
Segment operating income .. 63,919 8,192 - - 72,111
Segment assets ............ 150,915 48,821 26,628 (7,865) 218,499
Fiscal 1999
Net sales ................. $244,734 $98,129 $ - $(48,692) $294,171
Segment operating income .. 47,646 1,511 (15,123) - 34,034
Segment assets ............ 145,166 46,842 22,759 (7,957) 206,810
The table below presents information related to geographic areas in
which the Company operated during fiscal years 2001, 2000 and 1999 (in 000's):
Fiscal Years
------------------------------------
2001 2000 1999
------------------------------------
Net sales:
United States ............. $337,050 $311,395 $269,701
Europe(1) ................. 17,445 15,284 13,344
Asia(1).................... 6,750 6,298 6,909
Other ..................... 4,676 3,482 4,217
-------- ---------- --------
$365,921 $336,459 $294,171
======== ======== ========
(1) Sales for these geographic areas include sales made into the area directly
from the United States and sales made in the area by subsidiaries of the
Company.
15. Supplemental Condensed Consolidated Financial Information
The Company's payment obligations under the Senior Subordinated Notes are
guaranteed by certain of the Company's wholly owned subsidiaries (the Guarantor
Subsidiaries). Such guarantees are full, unconditional and joint and several.
Except as may be required under applicable law, there are no restrictions on the
transfer of funds or assets from the Guarantor Subsidiaries to SJKI. Separate
financial statements of the Guarantor Subsidiaries are not presented because the
Company's management has determined that they would not be material to
investors. The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheet, statement of operations, and statement of
cash flows information for the Parent Company (consisting of St. John Knits
International, Incorporated and St. John Knits, Inc.), for the Guarantor
Subsidiaries and for the Company's other subsidiaries (the Non-Guarantor
Subsidiaries). The supplemental financial information reflects the investments
of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the
equity method of accounting. The supplemental financial information is presented
for the periods as of October 28, 2001 and October 29, 2000, and for the years
ended October 28, 2001, October 29, 2000 and October 31, 1999.
52
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 28, 2001
PARENT GUARANTOR NON-GUARANTOR
(Amounts in thousands) COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------
ASSETS
Current assets:
Cash, cash equivalents and investments $ 26,000 $ 4 $ 217 $ - $ 26,221
Accounts receivable, net 24,315 91 1,107 25,513
Inventories (1) 48,943 1,615 1,940 52,498
Deferred income tax benefit 13,816 - 13,816
Other 3,580 90 32 3,702
Intercompany accounts receivable 1,698 - (1,698) -
-------------------------------------------------------------------
Total current assets 118,352 1,800 3,296 (1,698) 121,750
Property and equipment, net 75,643 1,221 5,505 82,369
Investment in subsidiaries (3,757) - 3,757 -
Receivable from consolidated subsidiaries 15,153 - (15,153) -
Deferred financing costs 10,107 - 10,107
Other assets 7,247 60 690 7,997
-------------------------------------------------------------------
Total assets $ 222,745 $ 3,081 $9,491 $(13,094) $ 222,223
===================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 8,846 - $ 115 $ 8,961
Accrued expenses 15,423 159 87 15,669
Dividends payable 10,303 - 10,303
Currrent portion of long-term debt 9,006 - 9,006
Accrued interest expense 4,864 - 4,864
Intercompany accounts payable 1,698 (1,698) -
Income taxes payable 1,907 14 1,921
-------------------------------------------------------------------
Total current liabilities 50,349 159 1,914 (1,698) 50,724
Intercompany payable 10,154 4,999 (15,153) -
Long-term debt, net of current portion 243,291 243,291
-------------------------------------------------------------------
Total liabilities 293,640 10,313 6,913 (16,851) 294,015
-------------------------------------------------------------------
Mandatorily redeemable preferred stock 25,000 25,000
-------------------------------------------------------------------
Redeemable common stock 27,132 27,132
-------------------------------------------------------------------
Total stockholders' equity (deficit) (123,027) (7,232) 2,578 3,757 (123,924)
-------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 222,745 $ 3,081 $9,491 $(13,094) $ 222,223
===================================================================
(1) Inventories are shown at cost for all entities.
53
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 29, 2000
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
(Amounts in thousands) --------------------------------------------------------------------
ASSETS
Current assets:
Cash, cash equivalents and investments $ 24,746 $ 100 $ 302 $ - $ 25,148
Accounts receivable, net 28,210 198 1,397 (630) 29,175
Inventories (1) 46,114 1,617 1,365 71 49,167
Deferred income tax benefit 12,196 12,196
Other 3,141 91 155 3,387
Intercompany accounts receivable 419 (419) -
-----------------------------------------------------------------------
Total current assets 114,826 2,006 3,219 (978) 119,073
Property and equipment, net 77,041 1,269 4,719 83,029
Investment in subsidiaries (2,545) 2,545 -
Receivable from consolidated subsidiaries 17,086 (17,086) -
Deferred financing costs 12,261 12,261
Other assets 3,028 179 929 4,136
----------------------------------------------------------------------
Total assets $ 221,697 $ 3,454 $8,867 $(15,519) $ 218,499
======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 12,838 $ 219 $ 668 $ (374) $ 13,351
Accrued expenses 11,740 159 182 12,081
Current portion of long-term debt 5,350 229 (2) 5,577
Accrued interest expense 8,255 8,255
Dividends payable 5,430 5,430
Intercompany accounts payable 419 (419) -
Income taxes payable 8,520 (4,387) 425 4,558
----------------------------------------------------------------------
Total current liabilities 52,133 (4,009) 1,923 (795) 49,252
Intercompany payable 13,194 3,892 (17,086) -
Long-term debt, net of current portion 261,847 183 (183) 261,847
--------------------------------------------------------------------
Total liabilities 313,980 9,185 5,998 (18,064) 311,099
--------------------------------------------------------------------
Mandatorily redeemable preferred stock 25,000 25,000
--------------------------------------------------------------------
Redeemable common stock 29,069 29,069
--------------------------------------------------------------------
Total stockholders' equity (deficit) (146,352) (5,731) 2,869 2,545 (146,669)
--------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 221,697 $ 3,454 $8,867 $(15,519) $ 218,499
======================================================================
(1) Inventories are shown at cost for all entities.
54
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FISCAL YEAR ENDED OCTOBER 28, 2001
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------
(Amounts in thousands)
Net sales $ 351,665 $ 5,905 $ 8,351 $ -- $ 365,921
Cost of sales 151,886 3,926 3,673 159,485
-----------------------------------------------------------------------
Gross profit 199,779 1,979 4,678 -- 206,436
Selling, general and administrative expenses 128,370 4,562 4,393 -- 137,325
-----------------------------------------------------------------------
Operating income (loss) 71,409 (2,583) 285 -- 69,111
Interest expense 28,344 28,344
Other income 3,961 -- 76 -- 4,037
-----------------------------------------------------------------------
Income (loss) before income taxes 47,026 (2,583) 361 -- 44,804
Income taxes 19,913 (1,085) 97 18,925
-----------------------------------------------------------------------
Income (loss) before equity in loss of
consolidated subsidiaries 27,113 (1,498) 264 -- 25,879
Equity in loss of consolidated subsidiaries (1,234) 1,234 --
-----------------------------------------------------------------------
Net income (loss) $ 25,879 $ (1,498) $ 264 $ 1,234 $ 25,879
=======================================================================
55
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FISCAL YEAR ENDED OCTOBER 29, 2000
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------
(Amounts in thousands)
Net sales $ 323,177 $ 4,960 $ 8,321 $ -- $ 336,458
Cost of sales 134,557 3,270 3,270 141,097
------------------------------------------------------------------------
Gross profit 188,620 1,690 5,051 -- 195,361
Selling, general and administrative expenses 115,240 4,001 4,010 -- 123,251
------------------------------------------------------------------------
Operating income (loss) 73,380 (2,311) 1,041 -- 72,110
Interest expense (income) 31,787 (17) 31,770
Other income (expense) 925 (24) 112 (30) 983
------------------------------------------------------------------------
Income (loss) before income taxes 42,518 (2,318) 1,153 (30) 41,323
Income taxes 17,967 (974) 517 17,510
------------------------------------------------------------------------
Income (loss) before equity in loss of
consolidated subsidiaries 24,551 (1,344) 636 (30) 23,813
Equity in loss of consolidated subsidiaries (708) -- -- 708 --
------------------------------------------------------------------------
Net income (loss) $ 23,843 $ (1,344) $ 636 $ 678 $ 23,813
========================================================================
56
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FISCAL YEAR ENDED OCTOBER 31, 1999
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
(Amounts in thousands)
Net sales $ 279,315 $ 8,552 $ 6,304 $ -- $ 294,171
Cost of sales 122,239 5,255 2,636 130,130
-------------------------------------------------------------------------
Gross profit 157,076 3,297 3,668 -- 164,041
Selling, general and administrative expenses 103,334 7,576 3,974 -- 114,884
Transaction fees and expenses 15,123 15,123
-------------------------------------------------------------------------
Operating income (loss) 38,619 (4,279) (306) -- 34,034
Interest expense 10,225 10,225
Other income (A20expense) 2,321 (1,251) 167 (40) 1,197
-------------------------------------------------------------------------
Income (loss) before income taxes 30,715 (5,530) (139) (40) 25,006
Income taxes 12,648 (2,270) (61) 10,317
-------------------------------------------------------------------------
Income (loss) before equity in loss of
consolidated subsidiaries 18,067 (3,260) (78) (40) 14,689
Equity in loss of consolidated subsidiaries (2,692) -- -- 2,692 --
-------------------------------------------------------------------------
Net income (loss) $ 15,375 $ (3,260) $ (78) $ 2,652 $ 14,689
=========================================================================
57
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED OCTOBER 28, 2001
NON
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------
(Amounts in thousands)
OPERATING ACTIVITIES:
Net Income/Loss $ 25,879 $ (1,498) $ 264 $ 1,234 $ 25,879
Adjustments to reconcile net income/loss to net cash
provided by operating activities:
Depreciation and amortization 11,976 276 2,526 14,778
Amortization of discount on 12.5% notes due 2009 140 140
Amortization of deferred loan costs 2,154 2,154
Loss on disposal of property and equipment 112 112
Partnership losses 295 295
Partnership gains (2,482) (2,482)
Equity in loss of consolidated subsidiaries 1,234 (1,234) -
Cash provided by changes in operating assets
and liabilities
Accounts receivable 3,113 107 442 3,662
Intercompany receivables (net) 677 (3,040) 2,363 -
Prepaid income tax - -
Inventories (2,759) 2 (574) (3,331)
Other current assets (312) (2) (1) (315)
Other assets (497) 119 241 (137)
Accounts payable (4,390) (4,390)
Accrued expenses 3,766 (220) 43 3,589
Accrued interest expense (3,391) (3,391)
Accrued contrubutions - -
Income taxes payable (8,204) 4,387 (440) (4,257)
-------------------------------------------------------------------
Net cash provided by operating activities 27,311 131 4,864 - 32,306
-------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 7 7
Proceeds from sale of airplane 1,225 1,225
Purchases of property and equipment (9,616) (227) (4,145) (13,988)
Sale of short-term investments 7 7
Capital contributions to partnership (3,089) (3,089)
Capital distributions from partnership 77 77
-------------------------------------------------------------------
Net cash used in investing activities (11,389) (227) (4,145) - (15,761)
-------------------------------------------------------------------
FINANCING ACTIVITIES:
Principle payments of long-term debt (15,018) (249) (15,267)
Revaluation of hedge - -
Dividends paid/received 250 (250) -
Issuance of common stock 2 2
-------------------------------------------------------------------
Net cash used in financing activities (14,766) - (499) - (15,265)
-------------------------------------------------------------------
Effect of exchange rate changes 2 (305) (303)
-------------------------------------------------------------------
Unrealized loss on securities (4) (4)
-------------------------------------------------------------------
Unrealized gain on hedging transactions 107 107
-------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,261 (96) (85) - 1,080
Beginning balance, cash and cash equivalents 24,729 100 302 25,131
-------------------------------------------------------------------
Ending balance, cash and cash equivalents $ 25,990 $ 4 $ 217 $ - $ 26,211
===================================================================
Supplemental disclosures of cash flow information:
Cash received during the year for interest income $ 892 $ 892
===================================================================
Cash paid during the year for:
Interest expense $ 28,501 $ 1 $ 25,502
===================================================================
Income taxes $ 22,670 $ 510 $ 23,180
===================================================================
Supplemental disclosure of noncash financing activity:
===================================================================
Dividends accrued on mandatorily redeemable preferred stock $ 4,873 $ 4,873
===================================================================
58
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED OCTOBER 29, 2000
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------
(Amounts in thousands)
OPERATING ACTIVITIES:
Net Income $ 23,843 $(1,344) $ 636 $ 678 23,813
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 12,975 158 230 13,363
Amortization of discount on 12.5% notes due 2009 140 140
Amortization of deferred loan costs 2,457 2,457
Increase in deferred income tax benefit (4,518) (4,518)
Loss on disposal of property and equipment 507 137 644
Partnership losses 307 307
Minority interest in income of consolidated subsidiaries - 30 30
Book value in excess of purchase price of minority interest in
Japan subsidiary (495) (495)
Equity in income(loss) of consolidated subsidiaries 708 (708) -
Cash provided by (used in) changes in operating assets
and liabilities
Accounts receivable 2,094 106 143 2,343
Intercompany receivables (net) (604) 1,949 (1,345) -
Inventories (6,456) 300 511 (5,645)
Other current assets (759) 6 - (753)
Other assets (122) (92) 225 11
Accounts payable 6,565 (19) 6,546
Accrued expenses 2,983 (164) 30 2,849
Accrued interest expense 594 594
Income taxes payable 4,085 (974) 256 3,367
-----------------------------------------------------------------
Net cash provided by operating activities 44,304 82 667 - 45,053
-----------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 19 19
Purchases of property and equipment (26,974) (62) (198) (27,234)
Purchase of minority interest in Japan subsidiary (228) (228)
Purchase of foreign trademark (70) (70)
Sale of short-term investments 8 8
Capital contributions to partnership (2,013) (2,013)
Capital distributions from partnership 167 167
-----------------------------------------------------------------
Net cash used in investing activities (29,091) (62) (198) - (29,351)
-----------------------------------------------------------------
FINANCING ACTIVITIES
Principle payments of long-term debt (22,458) (143) (22,601)
Recapitalization (19) (19)
Financing fees and expenses (133) (133)
-----------------------------------------------------------------
Net cash used in financing activities (22,610) - (143) - (22,753)
-----------------------------------------------------------------
Effect of exchange rate changes (111) (143) (254)
Unrealized loss on securities (8) (8)
-----------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (7,516) 20 183 - (7,313)
Beginning balance, cash and cash equivalents 32,245 80 119 32,444
-----------------------------------------------------------------
Ending balance, cash and cash equivalents $ 24,729 $ 100 $ 302 $ - $ 25,131
=================================================================
Supplemental disclosures of cash flow information:
Cash received during the year for interest income $ 1,349 $ 1,349
=================================================================
Cash paid during the year for:
Interest Expense $ 28,552 $ 7 $ 28,559
=================================================================
Income taxes $ 18,400 $ 276 $ 18,676
=================================================================
Supplemental disclosure of noncash financing activity:
Dividends accrued on mandatorily redeemable preferred stock $ 4,201 $ 4,201
=================================================================
59
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED OCTOBER 31, 1999
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------
(Amounts in thousands)
OPERATING ACTIVITIES:
Net income $ 15,376 $(3,260) $ (79) $ 2,652 $ 14,689
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,165 266 181 13,612
Amortization of discount on 12.5% notes due 2009 45 45
Amortization of deferred loan costs 612 612
Increase in deferred income tax benefit 66 66
Loss on disposal of property and equipment (209) 1,525 1,316
Partnership losses 231 231
Write off of trademark in Japan 620 620
Minority interest in income of consolidated subsidiaries - 40 40
Equity in income(loss) of consolidated subsidiaries 2,692 (2,692) -
Cash provided by (used in) changes in operating assets
and liabilities
Accounts receivable 2,360 (103) (257) 2,000
Intercompany receivables (net) (3,674) 3,027 647 -
Inventories 2,457 2,173 (404) 4,226
Other current assets (443) 189 (3) (257)
Other assets (481) (85) 94 (472)
Accounts payable (1,499) (1,499)
Accrued expenses 230 (105) 49 174
Accrued interest expense 7,662 7,662
Income taxes payable 3,249 (2,269) 90 1,070
-----------------------------------------------------------------
Net cash provided by operating activities 42,459 1,358 318 - 44,135
-----------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 184 184
Purchases of property and equipment (12,769) (1,433) (329) (14,531)
Sale of short-term investments 1,150 1,150
Capital distributions from partnership 127 127
-----------------------------------------------------------------
Net cash used in investing activities (11,308) (1,433) (329) - (13,070)
-----------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from credit agreement 190,000 190,000
Proceeds from issuance of subordinated notes 98,616 98,616
Addition to long-term debt 1,427 1,427
Principle payments of long-term debt (670) (168) (838)
Recapitalization (311,780) (311,780)
Issuance of common stock 797 797
Issuance of preferred stock 25,000 25,000
Financing fees and expenses (15,198) (15,198)
Cash dividends paid (1,245) (1,245)
Short-swing profit reimbursement
54 54
-----------------------------------------------------------------
Net cash used in financing activities (12,999) - (168) - (13,167)
-----------------------------------------------------------------
Effect of exchange rate changes (2) 212 210
Unrealized loss on securities (1) (1)
-----------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 18,149 (75) 33 - 18,107
Beginning balance, cash and cash equivalents 14,096 155 86 14,337
-----------------------------------------------------------------
Ending balance, cash and cash equivalents $ 32,245 $ 80 $ 119 $ - $ 32,444
=================================================================
Supplemental disclosures of cash flow information:
Cash received during the year for interest income $ 1,240 $ 1,240
=================================================================
Cash paid during the year for:
Interest Expense $ 1,701 $ 1,701
=================================================================
Income taxes $ 10,554 $ 10,554
=================================================================
Supplemental disclosure of noncash financing activity:
Dividends accrued on mandatorily redeemable preferred stock $ 1,228 $ 1,228
=================================================================
60
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 28, 2001, October 29, 2000 and October 31, 1999
16. Results by Quarter (Unaudited)
The unaudited results by quarter for fiscal years 2001 and 2000 are shown
below:
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- -------
(in thousands, except per share amounts)
Year ended October 28, 2001
Net sales ................................................. $101,182 $ 97,060 $ 80,400 $ 87,279
Gross profit .............................................. 56,581 56,533 44,689 48,633
Net income ................................................ 9,640 7,323 3,826 5,090
Basic net income per common share-diluted ................. 1.30 0.93 0.38 0.57
Year ended October 29, 2000
Net sales ................................................. $ 78,531 $ 84,242 $ 82,425 $ 91,261
Gross profit .............................................. 43,500 49,158 48,410 54,293
Net income ................................................ 3,740 5,308 5,661 9,105
Basic net income per common share-diluted ................. 0.42 0.65 0.70 1.22
61
SCHEDULE II
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
VALUATION AND QUALIFYING ACCOUNT
For the Fiscal Years Ended October 28, 2001,
October 29, 2000 and October 31, 1999
Balance at Charged to Balance at
Beginning of Costs and End of
Fiscal Year Expenses Deductions Fiscal Year
------------ ---------- ---------- -----------
Allowance for Uncollectible Accounts:
Fiscal year ended October 28, 2001 ...... $1,468,278 $1,713,411 $90,191 $3,091,498
Fiscal year ended October 29, 2000 ...... $1,204,961 $ 299,434 $36,117 $1,468,278
Fiscal year ended October 31, 1999 ...... $ 950,757 $ 395,181 $140,977 $1,204,961
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: January 25, 2002
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
(REGISTRANT)
By: /S/ BOB GRAY
--------------------------------------------
Bob Gray
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ BOB GRAY
- ------------------------- Chairman of the Board and Chief January 25, 2002
Bob Gray Executive Officer (Principal
Executive Officer)
/S/ KELLY A. GRAY
- ------------------------- Director and Co-President January 25, 2002
Kelly A. Gray
/S/ ROGER G. RUPPERT
- ------------------------- Senior Vice President-Finance January 25, 2002
Roger G. Ruppert and Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
/S/ DANIEL O'CONNELL
- ------------------------- Director January 25, 2002
Daniel O'Connell
/S/ JAMES KELLEY
- ------------------------- Director January 25, 2002
James Kelley
/S/ SANDER LEVY
- ------------------------- Director January 25, 2002
Sander Levy
/S/ CHRISTOPHER HENDERSON
- ------------------------- Director January 25, 2002
Christopher Henderson
63
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT
No annual report or proxy material has been sent to security holders
covering fiscal 2001.
64
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ---------- ----------------------
2.1 Agreement and Plan of Merger, dated as of February 2, 1999, among St.
John Knits, Inc., SJK Acquisition, Inc., St. John Knits International,
Incorporated and Acquisition Corp. (incorporated by reference to
Exhibit 2.1 to St. John Knits International's Registration Statement
on Form S-4 dated March 1, 1999).
3.1 Restated Certificate of Incorporation of St. John Knits International,
Incorporated (incorporated by reference to Exhibit 3.1 to St. John
Knits International's Registration Statement on Form S-4 dated
September 3, 1999).
3.2 By-Laws of St. John Knits International, Incorporated (incorporated by
reference to Exhibit 3.2 to Amendment No. 2 to St. John Knits
International's Registration Statement on Form S-4 dated May 17,
1999).
3.3 Certificate of Designation for 15.25% Exchangeable Preferred Stock due
2010 of St. John Knits International, Incorporated (incorporated by
reference to Exhibit (a)(3) to St. John Knits International's
Amendment No. 4 to Rule 13e-3 Transaction Statement on Schedule 13E-3
dated July 12, 1999).
4.1 Indenture, dated as of July 7, 1999, by and among St. John Knits
International, Incorporated, the guarantors named therein and The Bank
of New York, as the trustee (incorporated by reference to Exhibit
(a)(2) to St. John Knits International's Amendment No. 4 to Rule 13e-3
Transaction Statement on Schedule 13E-3 dated July 12, 1999).
4.2 Form of 12.5% Senior Subordinated Notes due 2009 (included as part of
the Indenture filed as Exhibit 4.1 hereto).
4.3 Exchange and Registration Rights Agreement, dated as of July 7, 1999,
by and among St. John Knits International, Incorporated, St. John
Knits, Inc., St. John Italy, Inc., St. John Trademarks, Inc., St. John
Home, LLC, Chase Securities Inc., Bear, Stearns & Co. Inc. and
PaineWebber Incorporated (incorporated by reference to Exhibit 4.3 to
St. John Knits International's Registration Statement on Form S-4
dated September 3, 1999).
4.4 Subscription Agreement, dated as of July 7, 1999, between St. John
Knits International, Incorporated and Vestar/SJK Investors LLC,
relating to the 15.25% Exchangeable Preferred Stock due 2010 of St.
John Knits International, Incorporated (incorporated by reference to
Exhibit 4.5 of St. John Knits International's Registration Statement
on Form S-4 dated September 3, 1999).
10.1 Credit Agreement, dated July 7, 1999, by and among the Company, the
Lenders from time to time party thereto and The Chase Manhattan Bank,
as administrative agent (incorporated by reference to Exhibit (a)(1)
to St. John Knits International's Amendment No. 4 to Rule 13e-3
Transaction Statement on Schedule 13E-3 dated July 12, 1999).
10.2 Voting Agreement, dated as of February 2, 1999, among Vestar Capital
Partners III, L.P., Vestar/Gray LLC and the parties listed on Schedule
A thereto (incorporated by reference to Exhibit 10.1 to St. John Knits
International's Registration Statement on Form S-4 dated March 1,
1999).
10.3 Stockholders' Agreement, dated July 7, 1999, by and among the Company,
SJK, Vestar/Gray Investors LLC, Vestar/SJK Investors LLC and the
members of Vestar/Gray Investors LLC signatory thereto (incorporated
by reference to Exhibit 99.3 of St. John Knits International's Form
8-K dated July 7, 1999).
10.4 Amended and Restated Limited Liability Company Agreement of Vestar/SJK
Investors LLC, dated as of July 7, 1999 (incorporated by reference to
Exhibit 10.4 to St. John Knits International's Amendment No. 1 to the
Registration Statement on Form S-4 dated November 12, 1999).
10.5 Management Agreement among St. John Knits, Inc., St. John Knits
International, Incorporated and Vestar Capital Partners (incorporated
by reference to Exhibit 10.4 to Amendment No. 1 to St. John Knits
International's Registration Statement on Form S-4 dated April 28,
1999).
10.6 Letter Agreement dated April 27, 1999, between Vestar Capital Partners
and Robert E. Gray, attaching (i) a summary of terms for the Grays'
stock options, (ii) a form of St. John Knits International,
Incorporated 1999 Stock Option Plan and (iii) a form of stock option
agreement (incorporated by reference to Exhibit 10.5 to Amendment No.
1 to St. John Knits International's Registration Statement on Form S-4
dated April 28, 1999).
10.7 Superior Court of the State of California County of Orange, Central
Justice Center Minute Order, dated April 30, 1999 (incorporated by
reference to Exhibit 10.8 to Amendment No. 2 to St. John Knits
International's Registration Statement on Form S-4 dated May 17,
1999).
10.8 Lease Amendment Agreement dated April 1, 1997 between St. John Knits,
Inc. and G.M. Properties (increasing the space of the corporate
headquarters, warehousing and manufacturing facility) (incorporated by
reference to Exhibit 10.1 to St. John Knits, Inc.'s Report on Form
10-K for the fiscal year ended November 2, 1997).
10.9 Agreement of Lease dated as of December 31, 1995 by and between St.
John Knits, Inc. and Rolex Realty Company, Inc. (New York Boutique)
(incorporated by reference to Exhibit 10.3 to St. John Knits, Inc.'s
Report on Form 10-K for the fiscal year ended October 29, 1995).
65
10.10 Lease dated June 1, 1986 between G.M. Properties and St. John
Knits, Inc. (Corporate Headquarters) (incorporated by reference
to Exhibit 10.4 to St. John Knits, Inc.'s Registration Statement
on Form S-1, as amended (file no. 33-57128)).
10.11 Industrial Real Estate Lease dated November 13, 1985 between
Alhambra Partners, a California Limited Partnership, and St. John
Knits, Inc., together with Amendment No. 1 to Industrial Real
Estate Lease dated November 13, 1985 and Option to Extend Term
dated November 13, 1985 (Assembling, Sewing) (incorporated by
reference to Exhibit 10.5 to St. John Knits, Inc.'s Registration
Statement on Form S-1, as amended (file no. 33-57128)).
10.12 Agreement of Lease dated January 11, 1991 by and between Rolex
Realty Company, Inc. and St. John Knits, Inc. together with Lease
Modification Agreement dated January 11, 1991 and Second Lease
Modification Agreement dated April 12, 1991 (New York Boutique)
(incorporated by reference to Exhibit 10.9 to St. John Knits,
Inc.'s Registration Statement on Form S-1, as amended (file no.
33-57128)).
10.13 Amended and Restated Agreement of Limited Partnership of SJA
1&2, Ltd. dated October 31, 1993 by and between St. John Knits,
Inc. and Ocean Air Charters, Inc. (incorporated by reference to
Exhibit 10.13 to St. John Knits International's Amendment No. 1
to the Registration Statement on Form S-4 dated November 12,
1999).
10.14 Second Amended and Restated Employment Agreement between St.
John Knits, Inc. and Robert E. Gray (incorporated by reference to
Exhibit 10.14 to St. John Knits International's Amendment No. 1
to the Registration Statement on Form S-4 dated November 12,
1999).
10.15 Employment Agreement dated as of July 14, 1998 between St. John
Knits, Inc. and Marie St. John Gray (incorporated by reference to
Exhibit 10.4 to St. John Knits, Inc.'s Quarterly Report on Form
10-Q for the quarter ended August 2, 1998).
10.16 Employment Agreement dated as of July 14, 1998 between St. John
Knits, Inc. and Kelly A. Gray (incorporated by reference to
Exhibit 10.5 to St. John Knits, Inc.'s Quarterly Report on Form
10-Q for the quarter ended August 2, 1998).
10.17 Employment Agreement dated as of January 1, 2001 between St.
John Knits, Inc. and Bruce Fetter (incorporated by reference to
Exhibit 10.17 to St. John Knits International, Incorporated's
Report on Form 10-K for the fiscal year ended October 29, 2000).
10.18 First Amendment to Second Amended and Restated Employment
Agreement, effective as of May 4, 2000, between Bob Gray and St.
John Knits, Inc. (incorporated by reference to Exhibit 10.1 to
St. John Knits International, Incorporated's Report on Form 10-Q
for the quarter ended July 30, 2000).
10.19 St. John Knits, Inc. Employees' Profit Sharing Plan dated as of
August 21, 1995 (incorporated by reference to Exhibit 10.18 to
St. John Knits, Inc.'s Report on Form 10-K for the fiscal year
ended October 29, 1995).
10.20* Aircraft Lease dated October 18, 2001 by and between St. John
Knits, Inc. and Ocean Air Charters, Inc. as Trustee of the SJA
1&2, Ltd. Trust (Lease for Company airplane).
10.21 Form of Indemnity Agreement by and between St. John Knits, Inc.,
St. John Knits International, Incorporated and each of their
directors and officers (incorporated by reference to Exhibit
10.21 to St. John Knits International's Amendment No. 1 to the
Registration Statement on Form S-4 dated November 12, 1999).
10.22 Distribution Agreement dated June 11, 1997 by and between St.
John Knits, Inc. and Gary Farn, Ltd. (incorporated by reference
to Exhibit 10.26 to St. John Knits, Inc.'s Report on Form 10-K
for the fiscal year ended November 2, 1997).
10.23 General Partnership Agreement of St. John-Varian Development
Company dated April 3, 1995 by and between St. John Knits, Inc.
and Varian Associates, a California General Partnership
(incorporated by reference to Exhibit 10.28 to St. John Knits,
Inc.'s Report on Form 10-K for the fiscal year ended October 29,
1995).
10.24 Lease Agreement dated April 3, 1995 by and between St. John
Knits, Inc. and St. John-Varian Development Company (Knitting,
Sewing, Finishing, Shipping, Administrative Offices)
(incorporated by reference to Exhibit 10.29 to St. John Knits,
Inc.'s Report on Form 10-K for the fiscal year ended October 29,
1995).
10.25* First Amendment to Employment Agreement, effective as of
November 5, 2001, between Bruce Fetter and St. John Knits, Inc.
10.26 Lease Extension Agreement dated November 20, 2000 between St.
John Knits, Inc. and G.M. Properties (extending the lease for a
manufacturing facility) (incorporated by reference to Exhibit
10.26 to St. John Knits International, Incorporated's Report on
Form 10-K for the fiscal year ended October 29, 2000).
10.27 Lease Extension Agreement dated as of November 20, 2000 between
St. John Knits, Inc. and Alhambra Partners (extending the lease
for one of the Company's assembling and sewing facilities)
(incorporated by reference to Exhibit 10.27 to St. John Knits
International, Incorporated's Report on Form 10-K for the fiscal
year ended October 29, 2000).
10.28 License and Distribution Agreement dated as of August 1, 1997
between St. John Knits, Inc. and St. John Co., Ltd. (incorporated
by reference to Exhibit 10.35 to St. John Knits, Inc.'s Report on
Form 10-K for the fiscal year ended November 2, 1997).
10.29 Asset Purchase Agreement dated as of August 29, 1996 among St.
John Knits, Inc., Jakob Schlaepfer & Co. AG and Jakob Schlaepfer,
Inc. (incorporated by reference to Exhibit 10.39 to St. John
Knits, Inc.'s Report on Form 10-K for the fiscal year ended
November 3, 1996).
66
10.30 Manufacturing and Supply Agreement dated as of November 9, 1996 by
and between St. John Knits, Inc. and Calzaturificio M.A.B. S.p.A.
(incorporated by reference to Exhibit 10.41 to St. John Knits, Inc.'s
Report on Form 10-K for the fiscal year ended November 3, 1996).
10.31 Sales Representative Agreement dated November 13, 1996 by and between
St. John Knits, Inc. and Hilda Chang (incorporated by reference to
Exhibit 10.43 to St. John Knits, Inc.'s Report on Form 10-K for the
fiscal year ended November 3, 1996).
10.32 Unit Price Construction Agreement between St. John de Mexico, S.A. de
C.V. and Administration Tijuana Industrial, S.A. de C.V. (incorporated
by reference to Exhibit 10.50 to St. John Knits, Inc.'s Report on Form
10-K for the fiscal year ended November 2, 1997).
10.33 1999 St. John Knits International, Incorporated Stock Option Plan
(incorporated by reference to Exhibit 10.33 to St. John Knits
International's Amendment No. 1 to the Registration Statement on Form
S-4 dated November 12, 1999).
10.34 Stock Option Agreement, dated as of July 7, 1999, between St. John
Knits International and Bob Gray (incorporated by reference to Exhibit
10.34 to St. John Knits International's Amendment No. 1 to the
Registration Statement on Form S-4 dated November 12, 1999).
10.35 Stock Option Agreement, dated as of July 7, 1999, between St. John
Knits International and Marie St. John Gray (incorporated by reference
to Exhibit 10.35 to St. John Knits International's Amendment No. 1 to
the Registration Statement on Form S-4 dated November 12, 1999).
10.36 Stock Option Agreement, dated as of July 7, 1999, between St. John
Knits International and Kelly A. Gray (incorporated by reference to
Exhibit 10.36 to St. John Knits International's Amendment No. 1 to the
Registration Statement on Form S-4 dated November 12, 1999).
10.37 First Amendment to Amended and Restated Employment Agreement,
effective as of May 4, 2000, between Kelly A. Gray and St. John Knits,
Inc. (incorporated by reference to Exhibit 10.1 to St. John Knits
International, Incorporated's Report on Form 10-Q for the quarter
ended July 30, 2000).
10.38 First Amendment to Amended and Restated Employment Agreement,
effective as of May 4, 2000, between Marie St. John Gray and St. John
Knits, Inc. (incorporated by reference to Exhibit 10.1 to St. John
Knits International, Incorporated's Report on Form 10-Q for the
quarter ended July 30, 2000).
10.39 Amended and Restated St. John Knits International, Incorporated 1999
Stock Option Plan, executed May 15, 2000 (incorporated by reference to
Exhibit 10.1 to St. John Knits International, Incorporated's Report on
Form 10-Q for the quarter ended July 30, 2000).
10.40 Amendment, dated May 15, 2000, to the Management Stockholders'
Agreement dated as of September 21, 1999 among St. John Knits
International, Incorporated, Vestar/Gray Investors LLC, Vestar/SJK
Investors LLC and the Management Investors (incorporated by reference
to Exhibit 10.1 to St. John Knits International, Incorporated's Report
on Form 10-Q for the quarter ended July 30, 2000).
10.41* Employment Agreement, effective as of February 1, 2001, between Hugh
Mullins and St. John Knits, Inc.
10.42* Separation and General Release Agreement, effective as of October
16, 2001, between Hugh Millins and St. John Knits, Inc.
10.43 Amendment to the Amended and Restated Limited Liability Company
Agreement of Vestar/Gray Investors LLC, dated as of July 7, 1999
(incorporated by reference to Exhibit 10.1 to St. John Knits
International, Incorporated's Report on Form 10-Q for the quarter
ended July 29, 2001).
10.44 Amended to the Stockholders' Agreement dated July 7, 1999, by and
among the Company, SJK and Vestar/Gray Investors, LLC (incorporated by
reference to Exhibit 10.2 to St. John Knits International,
Incorporated's Report on Form 10-Q for the quarter ended July 29,
2001).
22.1* List of subsidiaries
* Filed herewith
67