Item 1. BUSINESS
Overview
St. John Knits International, Incorporated ("SJKI" and together with its subsidiaries, the "company") 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 six separate product lines: Knitwear, Sport, Griffith & Gray, Shoes, Accessories and Fragrance.
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 elegant ready-to-wear styles. This line of daytime knit fashions includes sophisticated dresses and suits that focus on a 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, theater suits and dressy ------ separates. The look of the Dressy line is one of understated elegance enhanced by innovative touches, such as layers of transparent paillettes and sequins, embroidered sleeves or glittery collars and cuffs.
Basics. The Basics line is comprised of products which are sold ------ throughout 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, white or navy. Simplicity of design and color 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 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 activewear which includes jackets, skirts, pants, tops and jeans and is targeted to the designer sportsware customer as well as our core knitwear customers. The line is manufactured primarily in the company's production facilities and includes various knit styles along with woven garnmets made from fabrics purchased in Italy.
Griffith & Gray. Griffith & Gray includes suits, coats, dresses, separates and eveningwear. The line targets a slightly younger customer than the core Knitwear line. Approximately half 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, Griffith & Gray is carried exclusively in our company-owned stores.
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.
Accessories. The Accessories line is comprised of fashion jewelry, belts and handbags. All Accessories are color coordinated with the various fashion collections. Four collections of jewelry are produced each year.
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 marketed as accessories to the St. John apparel line through most of the company's major customers and company-owned retail stores.
The following table details the approximate range of suggested retail prices by product line. The suggested retail prices are indicative of individual item prices.
Sales by Division
The following is a comparison of the net sales by division for the past three fiscal years (in 000's):
- ---------- (1) The SJK and Coat lines were discontinued at the end of fiscal 1998.
Licenses
The company has license agreements to manufacture and sell eyewear and coats under the St. John name. The eyewear line was launched during fiscal 1998. In February 1999, the company signed a licensing agreement to create a new line of women's coats. The new St. John Coat Collection offers the usual classic styles, elegance and superior quality which St. John customers have come to expect. The new line was launched in August 1999. Prior to the license agreement, the company's Coat Collection, consisting primarily of faux fur coats in various styles and colors, was manufactured in the company's factories using fabric imported from Europe.
During fiscal 1999, the company cancelled its license agreement for the manufacture and sale of watches.
St. John Home
The company operates three home furnishing 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. The company previously operated six home furnishing stores through a joint venture which was terminated in May 1999. Three of those stores were closed, and one was transferred to the joint venture partner.
Manufacturing
The company has developed a vertically integrated manufacturing process which it believes is unique and critical to its success. During fiscal 2000, approximately 95% of the company's products were manufactured at the company's own facilities, while the remaining 5% were manufactured by outside contractors, primarily in Europe. 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 principally consist of the Griffith & Gray and Shoe product lines as well as home furnishings, 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 proprietary process that produces the company's "Santana" yarn. The twisted yarn is transferred to the company's dye house for dyeing based on garment orders received. The dyed yarn is knit 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 new 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 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.
As noted above, 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 staff has an average of ten years of experience with the company.
Distribution
The company's products are distributed primarily through a select group of retail customers and the company's 23 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 2000 (approximately 43% collectively) and have been customers of the company for approximately 25, 20 and 15 years, respectively. The company distributes its products to approximately 560 locations in the United States and internationally. Since the mid-1980s, the company has worked with these and certain other retail 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, Lord & Taylor and select Marshall Field's and Dayton Hudson stores.
Company-Owned 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 23 such boutiques. The boutiques showcase the company's entire line of 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. In addition, the company operates three home furnishing stores and one home furnishing outlet.
International. The company sells its products to retail customers 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 and two in-hotel boutiques. The company's European efforts involve expanding and upgrading its relationships with high quality independent retail customers, principally in the United Kingdom, Germany, Belgium, Switzerland and the Netherlands. During fiscal 2000, international sales to retail customers and sales through the company's subsidiary in Japan accounted for approximately 7.4% of SJKI'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 six divisions: Knitwear, Sport, Griffith & Gray, Shoes, Accessories and Fragrance. For fiscal 2000, retail sales were generated through the company's 22 St. John boutiques, 10 St. John outlet stores, two 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 in January for delivery between May and October and in August 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, Accessories and Fragrance lines throughout the year.
The company shows its product lines to retail customer buyers in its New York, Irvine and Dallas showrooms. Members of the company's senior management team work closely with major retail 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 is currently comprised of 22 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 2000, the company spent approximately $13.3 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 2000, the company purchased approximately $10.7 million of wool and approximately $3.3 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 approximately 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 Griffith & Gray(R). 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.
Geographic Information
The table below presents information related to the geographic areas in which the company operated during fiscal years 2000, 1999 and 1998 (in 000's):
Fiscal Years ------------------------------------- 2000 1999 1998 --------- -------- -------- Net sales: United States................... $311,395 $269,701 $256,618 Asia/(1)/....................... 15,284 13,344 9,877 Europe/(1)/..................... 6,298 6,909 7,113 Other/(1)/...................... 3,482 4,217 4,292 -------- -------- -------- $336,459 $294,171 $277,900 ======== ======== ========
(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.
The Company
SJKI
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 Knits, Inc.
St. John Knits Inc., a California corporation, is a wholly owned subsidiary of SJKI and was incorporated during 1962.
SJK International, Inc.
SJK International, Inc. ("International") is a wholly owned subsidiary of St. John and, during fiscal 2000, acted as a foreign sales corporation for the company. International was incorporated during fiscal 1999 in Barbados as a "large FSC" under Section 922 of the Internal Revenue Code of 1986, as amended. International participates in certain of the company's foreign operations.
St. John Company, Ltd.
St. John Company, Ltd. is a wholly owned subsidiary of St. John which was incorporated during fiscal 1997 under the laws of Japan. St. John Company, Ltd. is licensed by the company to distribute the company's products in Japan. During fiscal 2000, St. John increased its ownership percentage in this subsidiary to 100% from 68% held previously.
St. John Home Stores, LLC
St. John Home Stores, LLC ("St. John Home"), a Delaware limited liability company, is a wholly owned subsidiary of St. John. St. John Home was formerly operated as Amen Wardy Home Stores, LLC, a 51 % owned subsidiary of St. John. The name and ownership change occurred during fiscal 1999.
St. John Trademarks, Inc.
St. John Trademarks, Inc. is a wholly owned subsidiary of St. John. St. John Trademarks, Inc. and St. John have entered into a partnership organized under the laws of Luxembourg to hold certain of the company's proprietary rights.
St. John--Varian Development Company
St. John--Varian Development Company, a 50 % owned joint venture between St. John and an unrelated third party, was formed during fiscal 1995. The joint venture owns a 175,000 square foot building located in Irvine which is leased to the company under a lease agreement expiring in 2010.
St. John--Italy, Inc.
St. John--Italy, Inc., a California corporation, is a wholly owned subsidiary of St. John. St. John--Italy, Inc. was incorporated during fiscal 1996 to operate as a branch in Italy. During fiscal 1997, the entity began operating as a buying office for the company. Subsequent to the end of fiscal 1998, the company moved its operations to Irvine, California and is currently not operating in Italy.
St. John Knits AG
St. John Knits AG is a wholly owned subsidiary of St. John which was incorporated during fiscal 1996 under the laws of Switzerland. St. John Knits AG operates a research and development facility and buying office located in Switzerland.
St. John de Mexico SA de CV
St. John de Mexico SA de CV is a wholly owned subsidiary of St. John which was incorporated during fiscal 1997 under the laws of Mexico. St. John de Mexico operates as a manufacturing entity within Mexico to assist in the production of the company's jewelry and hardware components. During fiscal 1998, St. John de Mexico began assisting in the application of sequins on certain of the company's product lines. During fiscal 2000, it also began assisting in the manufacturing of certain items in the Sport product line.
St. John Asia, Ltd.
St. John Asia, Ltd. is a wholly owned subsidiary of St. John which was incorporated during fiscal 1999 under the laws of Hong Kong. St. John Asia, Ltd. operates a retail boutique in Hong Kong.
Employees
At October 29, 2000, the company had approximately 5,015 full-time employees, including six in executive positions, approximately 270 in design and sample production, 3,150 in production, 180 in quality control, 330 in retail, 80 in sales and advertising and the balance in clerical and office positions. In addition, the company had approximately 600 full-time employees working at the company's facility in Mexico, 35 working at St. John Home and 45 at St. John Company, Ltd. 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 29, 2000, we had total debt of approximately $267.4 million, of which approximately $167.0 million was senior debt, and a stockholders' deficit of approximately $117.6 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.
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 person.
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 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 prices, 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.
During fiscal 2000 and 1999, net sales to our three largest retail customers, Saks Fifth Avenue, Neiman Marcus and Nordstrom, totaled approximately 43% and 41% of net sales, respectively, and net sales to Saks Fifth Avenue, our largest retail customer, accounted for approximately 15% of net sales in each year. 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, President, each of whom has an employment agreement with the company. 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. Vestar and the Grays, through Vestar/Gray Investors LLC, beneficially own approximately 78% and 15%, respectively, of the outstanding common stock of SJKI. As a result, Vestar will be able to effectively control the outcome of certain matters requiring a stockholder vote, including the election of three of the five directors of SJKI (the Grays will be contractually entitled to appoint the remaining two 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 2000, we purchased approximately $10.7 million of wool and approximately $3.3 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, small leather goods 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 2000, approximately 7.4% of our sales occurred outside the United States, and approximately 5% of our products were manufactured abroad by third-party contractors. 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 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 29, 2000, the company had unfilled customer orders for the cruise/spring season of approximately $160 million compared with approximately $103 million as of October 31, 1999. 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.
Item 2.
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.
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.
- --------------
(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 lease includes both the St. John and St. John Home boutiques which were opened during fiscal 1999. (4) The square footage of the retail boutique located on 5th Avenue in New York City is covered by these two leases.
As of October 29, 2000, annual base rents for the company's leased properties listed in the table above ranged from approximately $230,000 to $1,306,000. 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 20 additional retail boutiques (including three that will open in fiscal 2001 or later), two additional showrooms, one additional administrative and warehouse facility, 10 outlet stores, two home furnishing stores and one home furnishing outlet store (aggregating approximately 232,000 square feet).
Item 3.
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. Such appeal is still pending.
The company is not a party to any other litigation which is individually or in the aggregate material to its business.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5.
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 2000 Fiscal 1999/(1)/ ----------- ---------------- Quarter High Low High Low ------- ---- --- ---- --- Fourth $28.00 $20.88 $24.50 $12.00 Third 25.00 18.00 Second 18.00 16.25 First 16.00 14.50
- --------- (1) As a result of the mergers consummated on July 7, 1999, 455,969 shares of SJKI were issued to former shareholders of St. John, other than the Grays. Prior to such time, SJKI was a wholly owned subsidiary of St. John.
As of January 22, 2001, there were approximately 15 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 - Liquity and Capital Resources."
Item 6.
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."
- ----------- (1) Certain reclasses have been made to the prior year balances to conform with the current year presentation.
(2) Net income per share, dividends per share and weighted average shares outstanding have been adjusted for the 2-for-1 stock split which occurred during the third quarter of fiscal 1996.
(3) The company increased its long-term debt and issued the redeemable preferred stock in connection with the mergers consummated in July 1999. In addition, the deficit in stockholders' equity was incurred in connection with the mergers.
Item 7.
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, (a) 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 (b) Pearl Acquisition Corp., 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 the 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 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:
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 retail boutiques, including significant increases at the boutiques located in New York City and Palm Desert, California, and the addition of four retail boutiques and one outlet store since the beginning of fiscal 2000 and (ii) an increase in sales to existing domestic retail 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.
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 there to. 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.
Fiscal 1999 Compared to Fiscal 1998
Net sales for fiscal 1999 increased by $16.3 million, or 5.9% over fiscal 1998. This increase was principally attributable to (i) an increase in sales by company-owned retail stores of approximately $15.2 million, due in part to the expansion of the Las Vegas and South Coast Plaza boutiques which were completed in May 1998 and December 1998, respectively, increased sales at the boutique located in Beverly Hills and the addition of one retail boutique in Scottsdale, Arizona and one outlet store since the beginning of fiscal 1998, (ii) an increase in international sales of $3.2 million, which includes the sales of St. John Company, Ltd., a majority owned subsidiary which commenced operations in Japan during the fourth quarter of fiscal 1997 and (iii) an increase in sales of approximately $2.3 million recorded by St. John Home, which commenced operations during the fourth quarter of fiscal 1997. These increases were offset by a decrease in sales to existing domestic retail customers, primarily due to the discontinuance of the SJK line. Net sales increased primarily as a result of increased unit sales of various product lines. See "Business - Sales by Division."
Gross profit for fiscal 1999 increased by $7.0 million, or 4.5% as compared with fiscal 1998, and decreased as a percentage of net sales to 55.8% from 56.5%. This decrease in the gross profit margin was primarily due to a decrease in the gross margin for the Knitwear line, due to increased production costs which were not offset by a corresponding increase in the selling price. This increase in the production costs was due in part to the reevaluation of the company's quality control program and the related procedures which were implemented during the second half of fiscal 1998.
Selling, general and administrative expenses for fiscal 1999 increased by $11.9 million, or 11.6% over fiscal 1998, and increased as a percentage of net sales to 39.1% from 37.1%. This increase was primarily due to (i) an increase of approximately $2.0 million in selling expenses related to increased costs of promoting and marketing its products to its major customers, (ii) non-recurring expenses totaling approximately $1.7 million incurred in connection with resolving the litigation involving Amen Wardy Home Stores and the closure of three such stores, (iii) the write off of the costs associated with the acquisition of the company's trademark in Japan totaling approximately $600,000 and (iv) additional legal fees related to the Amen Wardy Home litigation and litigation involving the mergers.
Transaction fees and expenses represent costs directly associated with the completion of the mergers as discussed above under "Agreement and Plan of Merger."
Operating income for fiscal 1999 decreased by $20.0 million, or 37.0% as compared with fiscal 1998. Operating income as a percentage of net sales decreased to 11.7% from 19.4% during the same period as a result of the reasons mentioned above.
Interest expense for fiscal 1999 increased by $10.2 million as compared with fiscal 1998. This increase was due to the borrowings under the senior credit facility and senior subordinated notes incurred in connection with the mergers.
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 2000, cash provided by operating activities was $45.1 million. Cash provided by operating activities was primarily generated by net income, an increase in accounts payable, an increase in accrued expenses and a decrease in accounts receivable. Cash used in investing activities was $29.4 million during fiscal 2000. The principal use of cash in investing activities was for (i) the purchase of electronic knitting machines, (ii) the construction of improvements for a new corporate headquarters in Irvine, California, (iii) upgrades to the company's computer systems, (iv) construction of leasehold improvements for a new boutique location in Palm Desert, California, (v) construction of leasehold improvements for a new boutique in Seattle, Washington, (vi) the construction of improvements for a new manufacturing facility located in Irvine, California, (vii) the construction of leasehold improvements for a new boutique location in Hawaii and (viii) the purchase of a condominium located in New York City. Cash used in financing activities was $22.8 million during fiscal 2000. Cash used in financing activities included the prepayment of bank debt totaling $20 million.
The company anticipates purchasing property and equipment of approximately $20 million during fiscal 2001. The estimated $20 million will be used principally for (i) upgrades to the company's computer systems, (ii) the purchase of electronic knitting machines, (iii) the construction of leasehold improvements for a new showroom location in New York and (iv) the construction of leasehold improvements for new retail boutiques in Naples, Forida and Plano, Texas and 2 additional locations to be determined.
As of October 29, 2000, the company had approximately $69.8 million in working capital and $25.1 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 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 plus 1.0% (9.5% at October 29, 2000) 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 October 29, 2000, no amounts were outstanding under the revolving credit facility. The company invests its excess cash in a money market fund.
Total debt outstanding decreased $22.5 million to $267.4 million at October 29, 2000, as compared to the amount outstanding at October 31, 1999. This decrease is primarily due to prepayments totaling $20 million. The company's outstanding debt is comprised primarily of senior secured credit facilities of $167.0 million and $98.8 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 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."
St. John paid approximately $1,245,000 in dividends to its shareholders during fiscal 1999 prior to the mergers. SJKI did not make any payment of dividends during fiscal 2000 and does not anticipate the payment of any cash dividends on its common stock in the future.
The company's EBITDA as defined in its credit agreement for its senior secured credit facilities was $86,900,000 and $66,528,000 for fiscal 2000 and 1999, 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 term loans require a mandatory prepayment based upon the excess cash flow of the company.
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 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. The credit agreement contains customary events of default.
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) 75% 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).
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 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
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.
Year 2000
The company undertook many actions intended to assure that its computer systems and other equipment were capable of functioning in, and processing for, periods for the Year 2000 and beyond. These actions were generally described in the company's report on Form 10-Q for the quarter ended August 1, 1999. The company implemented a program intended to address, on a timely basis, "Year 2000 Readiness" (the need for computer applications and other systems used by the company to function in and after the Year 2000 and to recognize and properly perform date sensitive functions involving dates after December 31, 1999).
As of January 25, 2001, the company has not experienced any material consequences of failure of Year 2000 Readiness, either by the company, its suppliers, or its customers. However, Year 2000 Readiness has many elements and potential consequences, some of which may not be foreseeable or may be realized in future periods. Therefore, there can be no assurance
that unforeseen circumstances could still not arise, or that the company will not in the future identify equipment or systems which are not Year 2000 ready.
The company's Year 2000 costs were approximately $716,000.
New Accounting Pronouncements
See Note 2(o) "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 anticipated purchases of property and equipment during fiscal 2001, (ii) 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 (iii) 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 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The company has exposure to fluctuations in foreign currency exchange rates for the revenues derived from sales to its foreign customers denominated in foreign currency. In order to reduce the effects of such fluctuations, under established procedures and controls, the company enters into forward contracts. These contractual arrangements are entered with a major financial institution. The company does not hold derivative financial instruments for trading. At October 29, 2000, the company did not have any outstanding forward contracts.
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 and the British pound. At October 31, 1999, the company had contracts maturing through February 29, 2000 to sell 2.2 million Euros and 280,000 British pounds at rates ranging from 1.05 to 1.06 U.S. dollars to the Euro and 1.57 to 1.67 U.S. dollars to the British pound. The company also held a contract which matured on November 30, 1999 to sell 700,000 deutsche marks at a rate of 1.66 deutsche marks to the U.S. dollar.
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 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 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 rate of 5.37%. The agreement covers $40 million of the company's variable rate debt.
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. Holding the variable rate debt balance constant, each one percentage point increase in interest rates occurring on the first day of the year would result in an increase in interest expense for the coming year of approximately $1.7 million.
The table below details the principal amounts 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 29, 2000.
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.
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.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10.
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:
Biographical Information
Bob Gray, a co-founder of St. John, has served as Chairman of the Board and Chief Executive Officer of the company since its inception in 1962. Mr. Gray will relinquish his position as CEO on February 1, 2001, when Hugh Mullins begins his employment with the company, but will continue as Chairman. 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.
Hugh Mullins will become Chief Executive Officer of the company when he begins his employment with the company on February 1, 2001. From February 2000 to December 2000 he served as Chairman and Chief Executive Officer of Neiman Marcus Stores. From December 1998 to February 2000 he served as Executive Vice President of Neiman Marcus Stores. He held various other positions with Neiman Marcus Stores from 1991 to December 1998. Prior to that he held various store posts at Macy's San Francisco and Foley's in Houston. He graduated with a B.S. degree in education from Concord College.
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 Griffith & 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 the company, 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 the company, 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 Executive Vice President and Chief Operating Officer of the company in June 1999. He served as Senior Vice President and Chief Operating Officer of the company since 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 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.
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 Advanced Organics, Inc., Aearo Corporation, Cluett American Corp., Remington Products Company L.L.C., Russell-Stanley Holdings, Inc., Siegel gale Holdings, Inc. and Sunrise Medical Inc. Mr. O'Connell received an A.B. 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.
Director Compensation
Directors of SJKI do not receive compensation, except as officers or employees of the company.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation for services in all capacities to SJKI and its subsidiaries of the following persons: (i) the chief executive officer of the company during fiscal year 2000 and (ii) the other four most highly compensated executive officers (the "Named Executive Officers"):
_____________
(1) The company has concluded that the aggregate amount of perquisites and other personal benefits, securities or property paid to each of the listed officers for each of the fiscal years 2000, 1999 and 1998 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 2000, 1999 and 1998 that were earned but not paid in such fiscal year.
(3) This amount includes $ 327,000 of salary which was earned but initially deferred in fiscal 1999 and $500,000 of annual salary that was earned but deferred in fiscal year 1998, pursuant to the Employment Agreement, as amended, dated June 1, 1995 by and between the company and Mr. Gray. During fiscal 1999, in connection with the mergers, all such deferred compensation was paid to Mr. Gray.
(4) This amount includes modeling fees of $400,000 which were paid to Ms. Gray during fiscal 2000 and $250,000 which were paid to Ms. Gray during each of fiscal years 1999 and 1998.
(5) 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.
Employment Agreements
Bob Gray's employment agreement with the company provides for his employment as Chairman of the Board and Chief Executive Officer until May 31, 2001. The agreement provides for the payment of a base salary of $1,475,000 and that he devote substantially all his full business time and attention and best efforts to the affairs of the company during the term of the agreement.
The company also 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, 2001. The agreements provide for the payment of a base salary at the rate of $500,000 for Marie Gray, $500,000 for Kelly Gray and $425,000 for 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, Bob Gray would receive a lump sum payment equal to all salary payments which would have been paid through the full term of the agreement, plus health benefits for 18 months. 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 six months. 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 Bob, Marie and Kelly Grays' employment agreements, each would also receive a lump sum payment of $2,950,000, $1,000,000 and $1,000,000, respectively, 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 12 months after such change in control, he would receive salary and health benefits continuation for a period of 12 months. If Bruce Fetter's agreement expires without being renewed for another year, he will receive continued salary payments and health benefits for six months.
Retirement Plan
The company maintains the Employees' Profit Sharing Plan, as amended (the "Retirement Plan"), a qualified profit-sharing plan for the benefit of all eligible employees. The Retirement Plan contemplates the sharing of profits and is funded annually by cash contributions at the discretion of the board of directors. The Retirement Plan was funded in each of fiscal years 2000, 1999 and 1998 with contributions of $500,000.
Stock Option Plan
In connection with the mergers, in order to provide financial incentives for certain of its employees, SJKI adopted a stock option plan, which provides for the grant of options to purchase shares of SJKI common stock.
SJKI granted Bob Gray, Marie Gray and Kelly Gray, as incentive compensation, employee stock options to acquire SJKI common stock representing approximately 5% of the total shares of SJKI common stock outstanding on a fully diluted basis. The exercise price of the options is $30.00 per share. The options vest and become exercisable in specified circumstances, including upon the continued employment of the Grays for a specified period of time and the achievement of specified performance criteria, and have up to a 10-year term. Any unvested options expire following specified terminations of the applicable individual's employment with SJKI. In addition, if the applicable performance criteria are not met, the options will not become exercisable and will terminate without payment therefor.
In addition, some members of management other than the Grays received, as incentive compensation, employee stock options to acquire shares of SJKI common stock. The exercise price reflects the fair market value of the underlying shares, as determined by the board of directors of SJKI in its best judgment. The options vest and become exercisable upon the continued employment of the applicable individual with SJKI for a specified period of time and have up to a 10-year term. Any unvested options expire following specified terminations of the applicable individual's employment with SJKI. In addition, upon the occurrence of a change in control transaction, these options may become fully vested and exercisable. The board of directors of SJKI determines which members of management will receive these options.
The shares of SJKI common stock underlying the options that these members of management received as incentive compensation will, along with any future grants, in the aggregate, represent approximately 5% of the outstanding common stock of SJKI on a fully diluted basis.
Option Grants in Last Fiscal Year
No options were granted to the Named Executive Officers during the fiscal year ended October 29, 2000.
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 29, 2000 and unexercised options held by each such officer as of October 29, 2000:
(1) All stock options currently held by the Named Executive Officers have an exercise price of $30. The current fair market value of the stock 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 address by the full board of directors. Bob and Kelly Gray participated in deliberations regarding executive compensation during fiscal 2000.
Item 12.
Item 12. SECURY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of January 25, 2001 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 executive officer listed in the Summary Compensation Table above; and (iv) all current directors and executive officers of SJKI as a group.
- -----------
* 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 78.23%, 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 Robert and Marie Gray serve as co-trustees and of which Kelly Gray is the sole beneficiary.
(3) Includes 3,333 shares issuable upon exercise of options exercisable at or within 60 days of January 25, 2001.
(4) Includes 1,666 shares issuable upon exercise of options exercisable at or within 60 days of January 25, 2001.
(5) Includes shares beneficially owned by Vestar. Each of Mr. O'Connell, Mr. Kelley and Mr. Levy disclaims the existence of a group and disclaims beneficial ownership of the common stock not held by him.
(6) Includes 4,999 shares issuable upon exercise of options exercisable at or within 60 days of January 25, 2001.
Item 13.
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 $64,000, with annual increases of 4%. During fiscal years 2000, 1999 and 1998, the company paid GM Properties approximately $756,000, $729,000 and $701,000, 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 $25,000, with annual increases of 4%. During fiscal years 2000, 1999 and 1998, the company paid Alhambra Partners approximately $295,000, $285,000 and $274,000, respectively, under this lease.
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 2000, 1999 and 1998, the company paid approximately $3,000, $8,000 and $21,000, 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 29, 2000, each partner had a net capital investment in the Partnership of approximately $2,035,000. During fiscal years 2000, 1999 and 1998, the Partnership leased the airplane to the company and received lease payments totaling approximately $953,000, $1,038,000 and $868,000, respectively. As of April 1, 1999, St. John and the Partnership entered into a lease agreement for the airplane expiring March 31, 2001, at a lease rate of $93,000 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. Pursuant to the management agreement, SJKI and St. John paid to Vestar Capital a transaction fee of $4.0 million at closing and reimbursed Vestar Capital for all out-of-pocket expenses incurred in connection with the mergers. In addition, under the agreement, Vestar Capital will provide 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, the management agreement provides that SJKI and St. John will pay Vestar Capital an annual fee of $500,000 and will reimburse 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 transactions 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 three of SJKI's five directors and the Grays may appoint the remaining two 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-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.
PART IV
Item 14.
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
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To St. John Knits International, Incorporated:
We have audited the accompanying balance sheets of ST. JOHN KNITS INTERNATIONAL, INCORPORATED (a Delaware corporation) as of October 29, 2000 and October 31, 1999--as restated (see note 10), and the related consolidated statements of income, shareholders' equity (deficit) and cash flows for each of the three years in the period ended October 29, 2000. 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 29, 2000 and October 31, 1999, and the results of its operations and its cash flows for each of the three years in the period ended October 29, 2000 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 are 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 state 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 20, 2000
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED BALANCE SHEETS
See accompanying notes.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
See accompanying notes.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
See accompanying notes.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 29, 2000, October 31, 1999 and November 1, 1998
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. 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 two 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 2000, 1999 and 1998 ended on October 29, October 31 and November 1, respectively. Fiscal years 2000, 1999 and 1998 were comprised of 52 weeks.
b. Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States 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 $2,255,000 and $1,468,000 in fiscal year 2000, and $2,270,000 and $1,205,000 in fiscal year 1999, respectively.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 29, 2000, October 31, 1999 and November 1, 1998
d. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Inventories are comprised of the following:
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
The Company adopted SFAS No. 128 "Earnings Per Share" during fiscal 1998. Under this statement, primary earnings per share was replaced with basic earnings per share. Basic earnings per share excludes the dilutive effect of common stock equivalents, including stock options. Diluted earnings per share, which replaced fully diluted earnings per share, includes all dilutive items. Dilution is calculated based upon the treasury stock method, which assumes that all dilutive securities were exercised and that the proceeds received were applied to repurchase outstanding shares at the average market price during the period.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 29, 2000, October 31, 1999 and November 1, 1998
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 share for all periods presented:
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.
k. Advertising and Promotion
All costs associated with advertising and promotion of the Company's products are expensed as incurred.
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 until realized. For the purpose of computing realized gains and losses, cost is identified on a specific identification basis.
m. Comprehensive Income
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income" during the first quarter of fiscal 1999. This statement requires that all items that meet the definition of components of comprehensive income be reported in a financial statement for the period in which they are recognized. Components of comprehensive income include revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 29, 2000, October 31, 1999 and November 1, 1998
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. New Accounting Pronouncements
During December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company will adopt this standard during the first quarter of fiscal 2001. The adoption of this standard is not expected to have a material impact on the Company's financial position or results of operations.
During May 2000, Emerging Issues Task Force (EITF) No. 00-10 "Accounting for Shipping and Handling Fees and Costs" was issued. EITF No. 00-10 governs the accounting treatment and classification of the Company's delivery revenues and certain of its delivery expenses and will be adopted by the Company in the first quarter of fiscal 2001. The adoption of this EITF will only affect the classification of revenues from deliveries to its customers and certain delivery expenses related to shipping and handling of the Company's product and is not expected to have material impact on the Company's financial position or results of operations.
p. 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.
Investments - Investments consist primarily of municipal bonds with maturity dates of less than six months and common stock, which are 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.
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.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 29, 2000, October 31, 1999 and November 1, 1998
The estimated fair values of the Company's financial instruments are as follows:
4. Hedging Activities
During the fourth quarter of fiscal 1998, the Company adopted 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 adoption of SFAS No. 133 did not have a material effect on the Company's financial position or results of operations.
It is the Company's policy to reduce the effects of fluctuations in foreign currency exchange rates associated with its sale of goods denominated in a foreign currency by entering into forward contracts. 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 in 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. The Company recorded a net loss of $64,000 during fiscal 2000 and a net gain of $168,000 during fiscal 1999.
At October 29, 2000 the Company did not hold any foreign exchange contracts. At October 31, 1999, the Company had contracts maturing through February 29, 2000 to sell 2.2 million Euros and 280,000 British pounds at rates ranging from 1.05 to 1.06 U.S. dollars to the Euro and 1.57 to 1.67 U.S. dollars to the British pound. The Company also held a contract which matured on November 30, 1999 to sell 700,000 deutsche marks at a rate of 1.66 deutsche marks to the U.S. dollar. At October 31, 1999 the fair value of these foreign currency contracts was not recorded as a component of stockholders' equity as the amounts were not material.
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 limit its exposure on $45 million of the Company's variable rate debt and establishes a LIBOR cap at 8.50% and a LIBOR floor at 5.37%. 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 $40 million effective July 5, 2000.
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.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 29, 2000, October 31, 1999 and November 1, 1998
5. Accrued Expenses
Accrued expenses for fiscal years 2000 and 1999 are comprised of the following:
6. Income Taxes
The provision for income taxes for fiscal years 2000, 1999 and 1998, consists of the following:
The components of the deferred income tax (benefit) provision for fiscal years 2000, 1999 and 1998 are as follows:
The components of the Company's deferred income tax benefit as of October 29, 2000 and October 31, 1999 are as follows:
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 29, 2000, October 31, 1999 and November 1, 1998
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 2000, 1999 and 1998 as follows:
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 $4,480,000, $3,917,000 and $3,594,000 for fiscal years 2000, 1999 and 1998, 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 2000, 1999 and 1998.
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 Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees", under which no compensation cost has been recognized for fiscal years 2000, 1999 and 1998.
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 cost recognition 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 share would have reflected the following pro forma amounts:
The Company may grant up to 727,360 options under the 1999 Plan. The Company has granted 534,360 options as of October 29, 2000 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.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 29, 2000, October 31, 1999 and November 1, 1998
The following is a summary of the activity in the 1999 Plan and the 1993 Plan for fiscal years 2000, 1999, and 1998:
The options outstanding as of October 29, 2000 have an exercise price of $30.00 and a weighted average remaining contractual life of 8.79 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 2000 and 1999: weighted average risk-free interest rate of 6.51% and 6.09%; weighted average volatility of 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 $14,687,000, $13,846,000 and $12,052,000 in fiscal years 2000, 1999 and 1998, respectively.
The following is a schedule of future minimum rental payments required under noncancellable operating leases as of October 29, 2000:
2001......................................... $ 14,503,000 2002......................................... 14,505,000 2003......................................... 14,234,000 2004......................................... 14,388,000 2005......................................... 13,744,000 Thereafter................................... 60,757,000 ------------ $132,131,000 ============
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 $3,834,000 and the payment of severance benefits upon the termination of employment.
As of October 29, 2000 and October 31, 1999, the Company's commitments to purchase wool yarn were approximately $12,983,000 and $7,897,000, respectively.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 29, 2000, October 31, 1999 and November 1, 1998
9. Long-term Debt
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. 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 to provide a portion of the funding necessary to consummate the mergers. There were no borrowings under the Revolving Credit Facility at October 29, 2000.
The tranche B term loan facility matures on July 31, 2007. The tranche A term loan facility and the Revolving Credit Facility mature on July 31, 2005. 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.
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 (9.50% at October 29, 2000) 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 29, 2000 were approximately 8.7% and 9.6% 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 8.5%. The contract also sets a minimum rate of 5.37%. The contract covers $45 million of the term debt and will expire on July 7, 2002.
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 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.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 29, 2000, October 31, 1999 and November 1, 1998
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 $2,457,000 relating to such fees is included in interest expense for the year ended October 29, 2000.
As of October 29, 2000, future maturities of long-term debt were as follows:
2001........................................ $ 5,577,398 2002........................................ 9,782,831 2003........................................ 13,101,756 2004........................................ 23,761,058 2005........................................ 25,367,007 Later years................................. 191,033,560 ------------ $268,623,610 ============ 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 reflect the value used in the mergers of $30 per share, which also estimates the fair market value of the Company's common stock at the balance sheet dates. The fiscal 1999 presentation has been reclassified to be consistent with the fiscal 2000 presentation.
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 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.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 29, 2000, October 31, 1999 and November 1, 1998
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 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 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.
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.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 29, 2000, October 31, 1999 and November 1, 1998
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 two manufacturing facilities from partnerships in which a stockholder of the Company is a significant partner. The annual payments on these leases were approximately $1,051,000, $1,014,000 and $975,000 in fiscal years 2000, 1999 and 1998, respectively. The leases expire at various dates during fiscal year 2006 and 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 $3,000, $8,000 and $21,000 in fiscal years 2000, 1999 and 1998, respectively.
At October 29, 2000 and October 31, 1999, 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. At October 29, 2000 and October 31, 1999, the Company's investment in this partnership, net of partnership losses, was approximately $2,035,000 and $496,000, respectively, and is included in other assets on the accompanying consolidated balance sheets. During fiscal years 2000, 1999 and 1998, the Company made lease payments to the partnership of $953,000, $1,038,000 and $868,000, respectively. During the same years, the Company reported net losses from the activities of the partnership of $307,000, $231,000 and $331,000, respectively.
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 15, 15 and 14 percent of net sales during fiscal 2000, 15, 13 and 13 percent of net sales during fiscal 1999 and 17, 14 and 14 percent during fiscal 1998. 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 29, 2000 and October 31, 1999.
13. Litigation
Securities Fraud Class Action
On January 23, 2000 the Company reached an agreement in principle to settle a case filed in 1998 by Binary Traders, Inc. for $5 million, an amount the Company's insurance carrier has agreed to pay. On October 13, 1998, Binary Traders, Inc. had filed a complaint on behalf of purchasers of publicly traded securities of St. John during the period of February 25, 1998 to August 20, 1998 (the "Class Period") against St. John, Bob Gray, and Kelly Gray in the United States District Court, Central District of California, Southern Division (Binary Traders, Inc. v. St. John Knits, Inc. et al.). The complaint, which sought class action certification, alleged that the defendants violated federal securities laws by allegedly making fraudulent statements during the Class Period and sought an unspecified amount of compensatory damages. The settlement which was reached on January 23, 2000, between the Company and Binary Traders, Inc. received final approval from the court on April 24, 2000.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 29, 2000, October 31, 1999 and November 1, 1998
Litigation Regarding the Transactions
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. Such appeal is now pending.
Amen Wardy Home Stores Litigation
In May 1999, the Company settled litigation relating to the Amen Wardy Home Stores joint venture. In connection with this settlement, the Company transferred ownership of the Las Vegas home furnishing store and the Amen Wardy name to its former partner in the joint venture. The Company also transferred certain property and agreed to pay certain expenses in connection with the settlement.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 29, 2000, October 31, 1999 and November 1, 1998
14. Segment Information
The Company has two reportable business segments, wholesale and retail sales. The Company's wholesale sales business consists primarily of six divisions, Knitwear, Sport, Shoes, Accessories, Griffith & Gray and Fragrance. For fiscal 2000, retail sales were generated through the Company's 22 St. John boutiques, 10 St. John outlet stores, two 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 2000, 1999 and 1998 (in 000's):
The table below presents information related to geographic areas in which the Company operated during fiscal years 2000, 1999 and 1998 (in 000's):
(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 29, 2000 and October 31, 1999, and for the years ended October 29, 2000, October 31, 1999 and November 1, 1998.
ST. JOHN KNITS INTERNATIONAL, INCORPORATED SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET OCTBOBER 29, 2000
(1) Inventories are shown at cost for all entities
ST. JOHN KNITS INTERNATIONAL, INCORPORATED SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET OCTOBER 31, 1999
(1) Inventories are shown at cost for all entities
ST. JOHN KNITS INTERNATIONAL, INCORPORATED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FISCAL YEAR ENDED OCTOBER 29, 2000
ST. JOHN INTERNATIONAL, INCORPORATED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FISCAL YEAR ENDED OCTOBER 31, 1999
ST. JOHN KNITS INTERNATIONAL, INCORPORATED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FISCAL YEAR ENDED NOVEMBER 1, 1998
ST. JOHN INTERNATIONAL, INCORPORATED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FISCAL YEAR ENDED OCTOBER 29, 2000
ST. JOHN INTERNATIONAL, INCORPORATED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FISCAL YEAR ENDED OCTOBER 31, 1999
ST. JOHN KNITS INTERNATIONAL, INCORPORATED SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FISCAL YEAR ENDED NOVEMBER 1, 1998
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
October 29, 2000, October 31, 1999 and November 1, 1998
16. Results by Quarter (Unaudited)
The unaudited results by quarter for fiscal years 2000 and 1999 are shown below:
________ (1) Consummation of recapitalization transaction.
SCHEDULE II
ST. JOHN KNITS INTERNATIONAL, INCORPORATED
VALUATION AND QUALIFYING ACCOUNT
For the Fiscal Years Ended October 29, 2000, October 31, 1999 and November 1, 1998
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 26, 2001
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 26, 2001 - ------------------------- Bob Gray Executive Officer (Principal Executive Officer)
/s/ KELLY A. GRAY Director and President January 26, 2001 - ------------------------- Kelly A. Gray
/s/ ROGER G. RUPPERT Senior Vice President-Finance January 26, 2001 - ------------------------- Roger G. Ruppert and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
/s/ DANIEL O'CONNELL Director January 26, 2001 - ------------------------- Daniel O'Connell
/s/ JAMES KELLEY Director January 26, 2001 - ------------------------ James Kelley
/s/ SANDER LEVY Director January 26, 2001 - --------------------- Sander Levy
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 2000.
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).
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. 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 April 1, 1999 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 Joint Venture Agreement dated July 17, 1997 between St. John Knits, Inc. and Commercial Development Co., Ltd. (incorporated by reference to Exhibit 10.30 to St. John Knits, Inc.'s Report on Form 10-K for the fiscal year ended November 2, 1997). 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). 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). 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).
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 Stocion 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 Firsndment 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).
* Filed herewith