ST JOHN KNITS INTERNATIONAL INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended February 2, 2003

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from _______________ to _______________

Commission File Number 333-73107

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)

Delaware		52-2303510
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

17622 Armstrong Avenue, Irvine, California		92614
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (949) 863-1171

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x

No o

* The Registrant is not subject to the reporting requirements of Item 405.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes o

No x

The number of outstanding shares of registrant’s Common Stock, par value $0.01 per share, was 6,456,619 shares as of March 14, 2003.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(unaudited)

			February 2, 2003			November 3, 2002

ASSETS
Current assets:
	Cash and cash equivalents		$	40,122,432		$	30,129,208
	Investments			8,849			6,713
	Accounts receivable, net			24,913,167			31,344,914
	Inventories			48,619,645			54,705,873
	Deferred income tax benefit			13,445,240			13,383,637
	Other			4,867,678			3,857,975

		Total current assets		131,977,011			133,428,320
Property and equipment:
	Machinery and equipment			67,434,931			68,781,604
	Leasehold improvements			47,925,703			48,186,803
	Buildings			23,910,323			23,782,871
	Furniture and fixtures			14,029,935			13,748,486
	Land			8,798,320			8,798,320
	Construction in progress			2,804,806			2,714,513

				164,904,018			166,012,597
	Less - Accumulated depreciation and amortization			83,252,943			82,250,167

				81,651,075			83,762,430

Deferred financing costs, net				7,598,088			8,100,736
Deferred income tax benefit				3,155,896			3,217,500
Other assets				6,944,808			7,398,360

			$	231,326,878		$	235,907,346

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
	Accounts payable		$	6,616,472		$	6,873,932
	Accrued expenses			17,183,007			16,803,824
	Current portion of long-term debt			11,865,648			10,159,054
	Accrued interest expense			1,688,149			6,352,267
	Income taxes payable			8,473,924			7,201,500

		Total current liabilities		45,827,200			47,390,577
Long-term debt, net of current portion				255,897,896			259,103,889
Deferred rent				5,323,647			5,143,785

		Total liabilities		307,048,743			311,638,251

Redeemable common stock, par value $0.01 per share; issued and outstanding - 879,362 and 968,983 shares, respectively				52,110,992			54,059,562

Commitments and contingencies (Note 5)
Stockholders’ deficit:
	Common stock, par value $0.01 per share; authorized - 10,000,000 shares, issued and outstanding - 5,577,257 shares			55,772			55,772
	Additional paid-in capital			90,041,873			93,093,303
	Cumulative translation adjustment			177,109			174,298
	Unrealized loss on securities			(42,012	)		(44,148	)
	Accumulated deficit			(218,065,599	)		(223,069,692	)

		Total stockholders’ deficit		(127,832,857	)		(129,790,467	)

			$	231,326,878		$	235,907,346

See accompanying notes.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)

		Thirteen Weeks Ended

		February 2, 2003			January 27, 2002

Net sales		$	98,295,641		$	87,965,222
Cost of sales			43,614,186			38,571,650

Gross profit			54,681,455			49,393,572
Selling, general and administrative expenses			39,318,047			33,785,562

Operating income			15,363,408			15,608,010
Interest expense			6,606,570			5,714,506
Other income (expense)			(251,676	)		164,757

Income before income taxes			8,505,162			10,058,261
Income taxes			3,501,069			4,191,366

Net income			5,004,093			5,866,895
Preferred stock dividends			—			1,295,554

Income allocated to common stockholders		$	5,004,093		$	4,571,341

Comprehensive income, net of tax:
Net income		$	5,004,093		$	5,866,895
	Foreign currency translation adjustments		6,883			(169,750	)
	Unrealized loss on hedging transactions		—			(40,669	)
	Unrealized gain on securities		1,257			—

Comprehensive income		$	5,012,233		$	5,656,476

Earnings per common share:
	Basic	$	0.77		$	0.70

	Diluted	$	0.75		$	0.70

Shares used in the calculation of earnings per common share:
	Basic		6,461,490			6,546,240

	Diluted		6,689,235			6,546,240

See accompanying notes.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

				Thirteen Weeks Ended

				February 2, 2003			January 27, 2002

Cash flows from operating activities:
	Net income			$	5,004,093		$	5,866,895
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			4,424,701			3,722,032
		Amortization of discount on 12.5% notes due 2009			34,599			34,600
		Loss on disposal of property and equipment			177,340			—
		Partnership losses			219,827			229,311
		Deferred rent			179,862			—
		Decrease in accounts receivable			6,431,747			13,368,242
		Decrease in inventories			6,086,228			2,463,761
		Amortization of deferred loan costs			502,648			523,819
		Increase in other current assets			(1,009,703	)		(670,012	)
		Decrease in other assets			108,130			45,068
		Decrease in accounts payable			(257,460	)		(3,905,478	)
		Increase (decrease) in accrued expenses			379,183			(772,098	)
		Decrease in accrued interest expense			(4,131,157	)		(3,218,910	)
		Increase in income taxes payable			1,272,424			3,947,994

			Net cash provided by operating activities		19,422,462			21,635,224

Cash flows from investing activities:
		Proceeds from sale of property and equipment			20,000			—
		Purchase of property and equipment			(2,505,090	)		(1,299,523	)
		Capital distributions from partnership			120,000			147,500

			Net cash used in investing activities		(2,365,090	)		(1,152,023	)

Cash flows from financing activities:
		Principal payments on long-term debt			(2,075,847	)		(6,234,355	)
		Redemption of redeemable common stock			(5,000,000	)		—

			Net cash used in financing activities		(7,075,847	)		(6,234,355	)

Effect of exchange rate changes					11,699			(291,021	)

Unrealized loss on hedging transactions					—			(69,724	)

Net increase in cash and cash equivalents					9,993,224			13,888,101
Beginning balance, cash and cash equivalents					30,129,208			26,210,874

Ending balance, cash and cash equivalents				$	40,122,432		$	40,098,975

Supplemental disclosures of cash flow information:
		Cash received for interest income		$	131,780		$	173,717

		Cash paid for:
			Interest expense	$	10,183,944		$	8,195,558

			Income taxes	$	2,227,812		$	421,433

Supplemental disclosures of noncash financing and investing activities:
		Dividends accrued on mandatorily redeemable preferred stock		$	—		$	1,295,554

		Conversion of accrued interest to subordinated notes		$	532,961		$	—

		Unrealized gain on securities		$	2,136		$	—

See accompanying notes.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Basis of Presentation and Company Operations

The accompanying unaudited consolidated financial statements of St. John Knits International, Incorporated (“SJKI”) and its subsidiaries, including St. John Knits, Inc. (“St. John”), reflect all adjustments (which include only normal recurring adjustments) considered necessary to present fairly the financial position, results of operations and cash flows for the periods presented. SJKI and its subsidiaries are collectively referred to herein as “the Company.” The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended November 3, 2002 as filed with the Securities and Exchange Commission on January 31, 2003.

The results of operations for the periods presented are not necessarily indicative of the operating results that may be expected for the year ending November 2, 2003.

Company operations

The Company is a leading designer, manufacturer and marketer of women’s clothing and accessories. The Company’s products are distributed primarily through specialty retailers and Company owned retail boutiques and outlet stores in the United States and internationally. All intercompany and interdivisional transactions and accounts have been eliminated.

Definition of Fiscal Year

The Company utilizes a 52-53 week fiscal year whereby the fiscal year ends on the Sunday nearest to October 31. The quarters also end on the Sunday nearest the end of the quarter, which accordingly were February 2, 2003 and January 27, 2002.

Dividends

SJKI has not paid any cash dividends to its common stockholders since the completion of the mergers in July 1999. SJKI does not anticipate the payment of any cash dividends on its common stock in the future.

2. Earnings Per Common Share

Basic earnings per common share is computed by dividing income allocated to common stockholders by the weighted average number of common shares outstanding, excluding the dilutive effect of common stock equivalents, including stock options. Diluted earnings per common share includes all dilutive items and is calculated based upon the treasury stock method, which assumes that all dilutive securities were exercised and that the proceeds received were applied to repurchase outstanding shares at the average market price during the period. Preferred stock dividends are deducted from net income to arrive at income allocated to common stockholders.

The following is a reconciliation of the Company’s weighted average shares outstanding for the purpose of calculating basic and diluted earnings per common share for all periods presented:

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

	Thirteen Weeks Ended

	February 2, 2003		January 27, 2002

Weighted average shares outstanding		6,461,490		6,546,240
Add: dilutive effect of stock options		227,745		—

Shares used to calculate diluted earnings per share		6,689,235		6,546,240

3. Inventories

Inventories are comprised of the following:

	February 2, 2003		November 3, 2002

Raw materials	$	12,910,133	$	12,986,013
Work-in-process		6,873,302		8,641,353
Finished products		28,836,210		33,078,507

	$	48,619,645	$	54,705,873

4. Stock Option Plan

As of February 2, 2003, the Company had one stock-based employee compensation plan, the 1999 St. John Knits International, Incorporated Stock Option Plan (the “1999 Plan”). Options granted under the 1999 Plan are nonstatutory stock options. During the first quarter of fiscal year 2003, the Company granted a total of 60,000 stock options with an exercise price of $55.79 per share. The exercise price of the stock options represented the estimated fair market value, as determined by the board of directors, of the Company’s common stock on the date of grant. The Company accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of the Financial Accounting Standards Board (“FASB”) Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

		Thirteen Weeks Ended

		February 2, 2003		January 27, 2002

Net income, as reported		$	5,004,093	$	5,866,895
Less: total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects			142,814		232,718

Pro forma net income		$	4,861,279	$	5,634,177

Earnings per common share:
	Basic – as reported	$	0.77	$	0.70
	Basic – pro forma	$	0.75	$	0.66
	Diluted – as reported	$	0.75	$	0.70
	Diluted – pro forma	$	0.73	$	0.66

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

5. Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 addresses financial accounting and reporting for business combinations and is effective for all business combinations after June 30, 2001. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and was adopted on November 4, 2002. The Company has no goodwill or intangible assets with indefinite lives, therefore, the adoption of these standards did not have a material impact on the Company’s financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of “ and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business (as previously defined). The Company adopted the provisions of SFAS No. 144 effective November 4, 2002. The adoption of SFAS No. 144 did not have a material impact on the Company’s financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will apply the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002 as required.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The adoption of SFAS No. 148 did not have a material impact on the Company’s financial position or results of operations.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others”, an interpretation of FIN Nos. 5, 57 and 107, and rescission of FIN No. 34. FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while, the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of the recognition provisions of FIN No. 45 is not expected to have a material impact on the Company’s financial position or results of operations.

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities”, an interpretation of Accounting Research Bulletin No. 51. FIN No. 46 requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements of FIN No. 46 apply to variable interest entities created after January 31, 2003. The consolidation requirements apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. The adoption of FIN No. 46 is not expected to have a material impact on the Company’s financial position or results of operations.

6. Commitments and Contingencies

During the normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include those given to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. The Company has also issued guarantees, in the form of letters of credit, to cover contractual commitments, including merchandise purchases from foreign vendors and to secure the payment for future workers’ compensation claims. The Company had $11.1 million of letters of credit outstanding at February 2, 2003. Of this total, $9.9 million related to future workers’ compensation claims. The Company has accrued a liability for the estimated claims, both reported and incurred but not yet reported, on the accompanying consolidated balance sheets. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets other than as noted.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)

7. Segment Information

The Company has two reportable business segments, wholesale and retail sales. For the first quarter of fiscal year 2003, retail sales were generated through the Company’s 29 St. John boutiques, 11 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 the periods indicated:

		Wholesale		Retail		Eliminations			Total

		(in thousands)
First Quarter Fiscal 2003
	Net sales	$	79,674	$	40,984	$	(22,362	)	$	98,296
	Operating income		16,149		2,716		(3,502	)		15,363
	Capital expenditures		1,329		1,176		—			2,505
	Depreciation and amortization		2,520		1,905		—			4,425
First Quarter Fiscal 2002
	Net sales	$	73,068	$	36,946	$	(22,049	)	$	87,965
	Operating income		15,862		1,360		(1,614	)		15,608
	Capital expenditures		630		670		—			1,300
	Depreciation and amortization		2,709		1,013		—			3,722

8. 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 for restrictions under applicable law, there are no material restrictions on distributions 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 income, and statement of cash flow information for the Parent Company (consisting of SJKI and St. John), 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 Subsidiaries and Non-Guarantor Subsidiaries using the equity method of accounting. The supplemental financial information is presented for the periods as of February 2, 2003 and November 3, 2002, and for the 13 weeks ended February 2, 2003 and January 27, 2002.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
FEBRUARY 2, 2003
(UNAUDITED)

(Amounts in thousands)		PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

ASSETS
Current assets:
Cash, cash equivalents and investments		$	38,754		$	—		$	1,377		$	—		$	40,131
Accounts receivable, net			23,352			13			1,548						24,913
Inventories (1)			45,949			20			2,651						48,620
Deferred income tax benefit			13,445												13,445
Other			4,843						25						4,868
Intercompany accounts receivable			5,490									(5,490	)		—

Total current assets			131,833			33			5,601			(5,490	)		131,977
Property and equipment, net			76,581						5,070						81,651
Investment in subsidiaries			(6,600	)								6,600			—
Receivable from consolidated subsidiaries			13,444									(13,444	)		—
Deferred financing costs			7,598												7,598
Deferred income tax benefit			2,363						793						3,156
Other assets			6,945												6,945

	Total assets	$	232,164		$	33		$	11,464		$	(12,334	)	$	231,327

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	6,028		$	—		$	588		$	—		$	6,616
Accrued expenses			16,664			574			(55	)					17,183
Current portion of long-term debt			11,532						334						11,866
Accrued interest expense			1,688												1,688
Intercompany accounts payable									5,490			(5,490	)		—
Income taxes payable			9,825						(1,351	)					8,474

Total current liabilities			45,737			574			5,006			(5,490	)		45,827
Intercompany payable						8,805			4,639			(13,444	)		—
Long-term debt, net of current portion			255,898												255,898
Deferred rent			5,324												5,324

Total liabilities			306,959			9,379			9,645			(18,934	)		307,049

Redeemable common stock			52,111						—						52,111

Total stockholders' equity (deficit)			(126,906	)		(9,346	)		1,819			6,600			(127,833	)

	Total liabilities and stockholders' equity (deficit)	$	232,164		$	33		$	11,464		$	(12,334	)	$	231,327


(1) Inventories are shown at cost for all entities

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
NOVEMBER 3, 2002

(Amounts in thousands)		PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

ASSETS
Current assets:
Cash, cash equivalents and investments		$	29,418		$	2		$	716		$	—		$	30,136
Accounts receivable, net			29,773			37			1,535						31,345
Inventories (1)			51,846			312			2,548						54,706
Deferred income tax benefit			13,384												13,384
Other			3,853			1			4						3,858
Intercompany accounts receivable			4,485									(4,485	)		—

Total current assets			132,759			352			4,803			(4,485	)		133,429
Property and equipment, net			77,931			629			5,202						83,762
Investment in subsidiaries			(6,022	)								6,022			—
Receivable from consolidated subsidiaries			14,210									(14,210	)		—
Deferred financing costs			8,101												8,101
Deferred income tax benefit			3,217												3,217
Other assets			6,584			24			790						7,398

	Total assets	$	236,780		$	1,005		$	10,795		$	(12,673	)	$	235,907

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	6,455		$	—		$	419		$	—		$	6,874
Accrued expenses			16,403			355			46						16,804
Current portion of long-term debt			9,751						408						10,159
Accrued interest expense			6,352												6,352
Intercompany accounts payable									4,485			(4,485	)		—
Income taxes payable			8,374						(1,172	)					7,202

Total current liabilities			47,335			355			4,186			(4,485	)		47,391
Intercompany payable						9,468			4,742			(14,210	)		—
Long-term debt, net of current portion			259,104												259,104
Deferred rent			5,144												5,144

Total liabilities			311,583			9,823			8,928			(18,695	)		311,639

Redeemable common stock			54,059												54,059

Total stockholders' equity (deficit)			(128,862	)		(8,818	)		1,867			6,022			(129,791	)

	Total liabilities and stockholders' equity (deficit)	$	236,780		$	1,005		$	10,795		$	(12,673	)	$	235,907


(1) Inventories are shown at cost for all entities

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
THIRTEEN WEEKS ENDED FEBRUARY 2, 2003
(UNAUDITED)

(Amounts in thousands)	PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS		CONSOLIDATED

Net sales	$	94,720		$	1,197		$	2,379		$	—	$	98,296
Cost of sales		41,637			787			1,191					43,615

Gross profit		53,083			410			1,188			—		54,681
Selling, general and administrative expenses		36,780			1,128			1,410					39,318

Operating income (loss)		16,303			(718	)		(222	)		—		15,363
Interest expense		6,607											6,607
Other income (expense)		(57	)		(192	)		(2	)				(251	)

Income (loss) before income taxes		9,639			(910	)		(224	)		—		8,505
Income taxes		4,057			(382	)		(174	)				3,501

Income (loss) before equity in loss of consolidated subsidiaries		5,582			(528	)		(50	)		—		5,004
Equity in loss of consolidated subsidiaries		(578	)								578		—

Net income (loss)	$	5,004		$	(528	)	$	(50	)	$	578	$	5,004

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
THIRTEEN WEEKS ENDED JANUARY 27, 2002
(UNAUDITED)

(Amounts in thousands)	PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS		CONSOLIDATED

Net sales	$	83,766		$	2,046		$	2,153		$	—	$	87,965
Cost of sales		36,226			1,254			1,092					38,572

Gross profit		47,540			792			1,061			—		49,393
Selling, general and administrative expenses		31,593			1,118			1,075					33,786

Operating income (loss)		15,947			(326	)		(14	)		—		15,607
Interest expense		5,715											5,715
Other income		134						31					165

Income (loss) before income taxes		10,366			(326	)		17			—		10,057
Income taxes		4,369			(137	)		(41	)				4,191

Income (loss) before equity in loss of consolidated subsidiaries		5,997			(189	)		58			—		5,866
Equity in loss of consolidated subsidiaries		(131	)								131		—

Net income (loss)	$	5,866		$	(189	)	$	58		$	131	$	5,866

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THIRTEEN WEEKS ENDED FEBRUARY 2, 2003
(UNAUDITED)

(Amounts in thousands)			PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

OPERATING ACTIVITIES:
Net income (loss)			$	5,004		$	(528	)	$	(50	)	$	578		$	5,004
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Depreciation and amortization			3,650			629			146						4,425
	Amortization of discount on 12.5% notes due 2009			35												35
	Amortization of deferred loan costs			503												503
	Loss on disposal of property and equipment			177												177
	Partnership losses			220												220
	Deferred rent			180												180
	Equity in loss of consolidated subsidiaries			578									(578	)		—
Cash provided by changes in operating assets and liabilities:
	Accounts receivable			6,421			24			(13	)					6,432
	Intercompany receivables (net)			(370	)		(663	)		1,033						—
	Inventories			5,897			292			(103	)					6,086
	Other current assets			(991	)		1			(20	)					(1,010	)
	Other assets			88			24			(4	)					108
	Accounts payable			(258	)											(258	)
	Accrued expenses			226			219			(66	)					379
	Accrued interest expense			(4,131	)											(4,131	)
	Income taxes payable			1,449						(177	)					1,272

		Net cash provided by (used in) operating activities		18,678			(2	)		746			—			19,422

INVESTING ACTIVITIES:
	Proceeds from sale of property and equipment			20												20
	Purchase of property and equipment			(2,505	)											(2,505	)
	Capital distributions from partnership			120												120

		Net cash used in investing activities		(2,365	)		—			—			—			(2,365	)

FINANCING ACTIVITIES:
	Principal payments of long-term debt			(1,992	)					(84	)					(2,076	)
	Redemption of redeemable common stock			(5,000	)											(5,000	)

		Net cash used in financing activities		(6,992	)		—			(84	)		—			(7,076	)

Effect of exchange rate changes				13						(1	)					12

Net increase (decrease) in cash and cash equivalents				9,334			(2	)		661			—			9,993
Beginning balance, cash and cash equivalents				29,411			2			716						30,129

Ending balance, cash and cash equivalents			$	38,745		$	—		$	1,377		$	—		$	40,122

Supplemental disclosures of cash flow information:
	Cash received for interest income		$	132		$	—		$	—		$	—		$	132

	Cash paid for:
		Interest expense	$	10,182		$	—		$	2		$	—		$	10,184

		Income taxes	$	2,228		$	—		$	—		$	—		$	2,228

Supplemental disclosures of noncash activities:
	Conversion of accrued interest to subordinated notes		$	533		$	—		$	—		$	—		$	533

	Unrealized gain on securities		$	2		$	—		$	—		$	—		$	2

ST. JOHN KNITS INTERNATIONAL, INCORPORATED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THIRTEEN WEEKS ENDED JANUARY 27, 2002
(UNAUDITED)

(Amounts in thousands)			PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

OPERATING ACTIVITIES:
Net income (loss)			$	5,867		$	(189	)	$	58		$	131		$	5,867
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Depreciation and amortization			3,518			50			154						3,722
	Amortization of discount on 12.5% notes due 2009			34												34
	Amortization of deferred loan costs			524												524
	Partnership losses			229												229
	Equity in loss of consolidated subsidiaries			131									(131	)		—
Cash provided by changes in operating assets and liabilities:
	Accounts receivable			13,310			16			42						13,368
	Intercompany receivables (net)			233			(815	)		582						—
	Inventories			1,686			781			(3	)					2,464
	Other current assets			(737	)		66			1						(670	)
	Other assets			(37	)		30			52						45
	Accounts payable			(3,905	)											(3,905	)
	Accrued expenses			(691	)		61			(142	)					(772	)
	Accrued interest expense			(3,219	)											(3,219	)
	Income taxes payable			3,965						(17	)					3,948

		Net cash provided by operating activities		20,908			—			727			—			21,635

INVESTING ACTIVITIES:
	Purchase of property and equipment			(1,260	)					(40	)					(1,300	)
	Capital distributions from partnership			148												148

		Net cash used in investing activities		(1,112	)		—			(40	)		—			(1,152	)

FINANCING ACTIVITIES:
	Principal payments of long-term debt			(6,219	)					(15	)					(6,234	)

		Net cash used in financing activities		(6,219	)		—			(15	)		—			(6,234	)

Effect of exchange rate changes				(64	)					(227	)					(291	)

Unrealized loss on hedging transactions				(70	)											(70	)

Net increase in cash and cash equivalents				13,443			—			445			—			13,888
Beginning balance, cash and cash equivalents				25,990			4			217						26,211

Ending balance, cash and cash equivalents			$	39,433		$	4		$	662		$	—		$	40,099

Supplemental disclosures of cash flow information:
	Cash received for interest income		$	174		$	—		$	—		$	—		$	174

	Cash paid for:
		Interest expense	$	8,195		$	—		$	1		$	—		$	8,196

		Income taxes	$	421		$	—		$	—		$	—		$	421

Supplemental disclosure of noncash financing activity:
	Dividends accrued on mandatorily redeemable preferred stock		$	1,296		$	—		$	—		$	—		$	1,296

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The following table is derived from the Company’s unaudited Consolidated Statements of Income and sets forth, for the periods indicated, the results of operations as a percentage of net sales:

	Percentage of Net Sales Thirteen Weeks Ended (“First Quarter”)

	February 2, 2003			January 27, 2002

Net sales		100.0	%		100.0	%
Cost of sales		44.4			43.8

Gross profit		55.6			56.2
Selling, general and administrative expenses		40.0			38.4

Operating income		15.6			17.8
Interest expense		6.7			6.5
Other income (expense)		(0.3	)		0.2

Income before income taxes		8.6			11.5
Income taxes		3.5			4.8

Net income		5.1	%		6.7	%

First Quarter Fiscal 2003 Compared to First Quarter Fiscal 2002

Net sales for the first quarter of fiscal 2003 increased by $10.3 million, or 11.7% as compared to the first quarter of fiscal 2002. This increase was principally attributable to (i) an increase in sales by Company owned retail boutiques and outlet stores of approximately 14.0% or $4.9 million, including $2.9 million in sales from five new retail boutiques which were opened after the end of the first quarter of fiscal 2002, and the balance from an increase in sales from the outlet stores, (ii) an increase in sales to existing domestic wholesale customers of approximately $4.1 million and (iii) an increase in sales to existing international wholesale customers of approximately $1.9 million. These increases were partially offset by a decrease in sales of approximately $0.8 million from St. John Home stores, which were being closed. Sales for Company owned retail boutiques open at least one year remained constant during the first quarter of fiscal 2003 as compared to the first quarter of fiscal 2002. Net sales increased primarily as a result of increased unit sales for the Knit product line.

Gross profit for the first quarter of fiscal 2003 increased by $5.3 million, or 10.7% as compared with the first quarter of fiscal 2002, however, decreased slightly as a percentage of net sales to 55.6% from 56.2%. This decrease in the gross profit margin was primarily due to a decrease in the gross profit margin on wholesale sales of the Knit product line.

Selling, general and administrative expenses for the first quarter of fiscal 2003 increased by $5.5

million, or 16.4% over the first quarter of fiscal 2002, and increased as a percentage of net sales to 40.0% from 38.4%. Selling, general and administrative expenses increased as a percentage of net sales during the period primarily due to (i) an increase in expenses of approximately $2.1 million resulting from the expansion of the Company’s retail operations, (ii) an increase in advertising expenses of approximately $0.8 million, largely due to the timing of the expenses and (iii) an increase in design sample expenses of approximately $0.7 million.

Operating income for the first quarter of fiscal 2003 decreased by $0.2 million, or 1.6% as compared to the first quarter of fiscal 2002. Operating income as percentage of net sales decreased to 15.6% from 17.8% during the same period. This decrease in operating income as a percentage of net sales was due to a decrease in the gross profit margin and an increase in selling, general and administrative expenses as a percentage of net sales.

Interest expense for the first quarter of fiscal 2003 increased by $0.9 million, or 15.6% from the first quarter of fiscal 2002. This increase was due to an increase in the debt balance resulting from the conversion of the Company’s preferred stock and accrued dividends to senior subordinated debt during July 2002. This increase was partially offset by a reduction in interest rates between the periods.

Liquidity and Capital Resources

The Company’s primary cash requirements are to fund payments required to service the Company’s debt, to fund the Company’s working capital needs, primarily inventory and accounts receivable, and for the purchase of property and equipment. During the first three months of fiscal 2003, cash provided by operating activities was $19.4 million. Cash provided by operating activities was primarily generated by net income, a decrease in accounts receivable and inventories and an increase in income taxes payable, while cash used in operating activities was primarily used to fund a decrease in accrued interest expense and an increase in other current assets. The decrease in accounts receivable was primarily due to the timing of shipments to the Company’s wholesale customers and an increase in the accrual for the estimated liability for the reimbursement for markdowns. The decrease in inventory was also due to the timing of shipments to the Company’s wholesale customers and the Company’s annual warehouse sale. Cash used in investing activities was $2.4 million during the first three months of fiscal 2003. The principal use of cash in investing activities was for the expansion of the Company’s manufacturing facility in Mexico and the construction of leasehold improvements for scheduled new boutiques. Cash used in financing activities was $7.1 million during the first three months of fiscal 2003, which included the redemption of $5.0 million of the Company’s redeemable common stock from its former Chief Executive Officer.

As of February 2, 2003, the Company had approximately $86.1 million in working capital and $40.1 million in cash and marketable securities. The Company’s principal source of liquidity is internally generated funds. The Company also has a $25.0 million revolving commitment from a bank (“Revolving Commitment”) which expires on July 31, 2005. The Revolving Commitment is secured and borrowings thereunder bear interest at the Company’s choice of the bank’s borrowing rate (4.25% at February 2, 2003) plus 1.0% or LIBOR (1.375% at February 2, 2003) plus 2.0%. The availability of funds under the Revolving Commitment 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. As of February 2, 2003, the Company was in compliance with all covenants and no amounts were outstanding under the Revolving Commitment. The Company currently has $11.1 million of letters of credit outstanding which reduces the amount available under the Revolving Commitment by a corresponding amount. The Company invests its excess cash in a money market fund.

Total debt outstanding decreased $1.5 million to $267.8 million during the three months ended February 2, 2003. The Company’s outstanding debt is comprised primarily of bank borrowings of $127.7 million, 12.5% senior subordinated notes (“12.5% notes”) of $99.1 million and 15.25% senior subordinated notes (“15.25% notes”) of $39.3 million.

The Company’s primary ongoing cash requirements include debt service and capital expenditures. The Company’s debt service requirements consist primarily of principal and interest payments on bank borrowings and interest on its 12.5% and 15.25% 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 funds available under the Company’s revolving credit facility. However, the Company’s ability to fund such cash 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.

The table below details the Company’s material obligations and commitments under contracts and lease agreements in effect as of February 2, 2003:

		Fiscal Years

		2003^(A)		2004		2005		2006		2007		Thereafter		Total

		(in thousands)

12.5% notes		$	—	$	—	$	—	$	—	$	—	$	100,000	$	100,000
15.25% notes			—		—		—		—		—		39,294		39,294
Variable rate debt			8,092		17,957		19,914		34,123		49,268		—		129,354
Operating leases			15,861		20,506		19,787		18,961		18,094		78,838		172,047
Yarn purchase commitment			11,241		—		—		—		—		—		11,241

	Total obligations	$	35,194	$	38,463	$	39,701	$	53,084	$	67,362	$	218,132	$	451,936


	(A) The amounts shown in this column reflect the amounts to be paid during the remainder of the fiscal year.

In addition to the obligations and commitments above, during its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include those given to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. The Company has also issued guarantees, in the form of letters of credit, to cover contractual commitments, including merchandise purchases from foreign vendors and to secure the payment for future workers’ compensation claims. The Company had $11.1 million of letters of credit outstanding at February 2, 2003. Of this total, $9.9 million related to future workers’ compensation claims. The Company has accrued a liability for the estimated claims, both reported and incurred but not yet reported. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets other than as noted.

In addition to the fiscal year 2003 payments included on the table above, the Company anticipates purchasing property and equipment of approximately $19.0 million during the remainder of fiscal 2003,

but is not contractually committed to do so. The estimated $19.0 million will be used principally for (i) the construction of leasehold improvements for relocated retail boutiques located in Beverly Hills, California, Chicago, Illinois, and Manhasset, New York, (ii) the expansion of the retail boutiques located in Houston, Texas and Costa Mesa, California, (iii) the purchase of electronic knitting machines, (iv) the construction of St. John shops within the Company’s major wholesale customer locations, (v) the expansion of the Company’s manufacturing facility in Mexico, (vi) upgrades to the Company’s computer systems and (vii) the construction of leasehold improvements and related lease deposit for a flagship boutique in Japan.

SJKI must rely on distributions, loans and other intercompany cash flows from its subsidiaries to generate the funds necessary to satisfy the repayment of its outstanding loans. Except for restrictions under applicable law, there are no material restrictions on distributions to the Company from the Company’s wholly owned subsidiaries that have guaranteed the Company’s payment obligations under its 12.5% and 15.25% notes.

The Company has the option of calling the 15.25% notes before January 2, 2004. The Company’s ability to call such notes is subject to, among other things, the approval of the financial institutions which issued the Company’s credit facilities. The Company intends to seek such approval and call the notes prior to the deadline discussed above. There can be no assurance that such approval will be obtained or that the notes will be called, and as a result, the outstanding balance has been classified as long-term debt in the accompanying balance sheets.

The Company may repurchase, from time to time, a portion of its 12.5% notes, subject to market conditions and other factors. No assurance can be given as to whether or when or at what prices such repurchases will occur. In addition, the Company may be required to repurchase up to $5.0 million annually of the common stock beneficially owned by Bob Gray, Marie Gray or Kelly Gray (the “Gray family”). Any such repurchases would be limited by the restrictions of the agreements under the credit facilities and senior subordinated notes. During November 2002, the Company redeemed at fair market value, as determined by the board of directors, 89,621 shares of SJKI’s common stock beneficially owned by Bob Gray at a total cost of $5.0 million.

SJKI has not paid any cash dividends since the completion of the mergers in July 1999. SJKI’s ability to pay dividends is restricted by the terms of its senior secured credit facilities, 12.5% notes and 15.25% notes. SJKI does not anticipate the payment of any cash dividends on its common stock in the future.

The Company’s EBITDA (EBITDA generally represents the net income of the Company excluding the effects of interest expense, income taxes, depreciation and a majority of the items included in other income/expense) as defined in its credit agreement for its senior secured credit facilities was approximately $20.0 million and $19.6 million for the first three months of fiscal 2003 and 2002, respectively. EBITDA is not a defined term under generally accepted accounting principles (“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. EBITDA as defined by the Company may not be consistent with similarly titled measures of other companies.

The table below shows the reconciliation from operating income to EBITDA for the first three months of fiscal years 2003 and 2002:

	Thirteen Weeks Ended

	February 2, 2003		January 27, 2002

	(in thousands)
Operating income	$	15,363	$	15,608
Depreciation and amortization		4,425		3,722
Deferred rent expense		180		132
Licensing income		—		108

Consolidated EBITDA	$	19,968	$	19,570

Credit Facilities

The Company is a party to a credit agreement with a group of financial institutions, which initially provided for an aggregate principal amount of loans totaling $215 million. The credit agreement consists of three facilities: (i) tranche A facility totaling $75 million, (ii) tranche B facility totaling $115 million 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 up to 0.5% per year.

Borrowings under the tranche A facility began to mature quarterly on October 31, 1999, while borrowings under the tranche B facility began to mature quarterly on October 31, 2000. The credit agreement permits the Company to prepay loans and to permanently reduce revolving credit commitments, in whole or in part, at any time. In addition, the Company is required to make mandatory prepayments of tranche A and B facilities, subject to certain exceptions, in amounts equal to (i) 50% of excess cash flow (as defined in the credit agreement); and (ii) 100% of the net cash proceeds of certain dispositions of assets or issuances of debt or equity of the Company or any of its subsidiaries (in each case, subject to certain exceptions and subject to a reduction to zero based upon the Company’s financial performance).

The obligations of the Company under the credit agreement are guaranteed by each domestic subsidiary of the Company, including St. John, and to the extent no adverse tax consequences would result from such guarantees, each foreign subsidiary of the Company. The credit agreement and the related guarantees are secured by (i) a pledge of 100% of the capital stock of each domestic subsidiary of the Company, including St. John, and 65% of each foreign subsidiary of the Company and (ii) a security 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 such payment creates a default under the credit agreement. The credit agreement contains customary events of default. At February 2, 2003, the Company was in compliance with all covenants.

12.5% Notes

In addition to the credit facilities described above, the Company has $100 million of 12.5% notes outstanding. The 12.5% notes are unsecured and mature on July 1, 2009. The 12.5% notes bear interest at a rate of 12.5% per year and were issued at 98.616% of the actual face value. Interest on such notes is payable semiannually to the holders of record. The notes are subject to redemption by the Company on or after July 1, 2004 at a premium starting at 6.25% and decreasing to zero at July 1, 2008. 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.

15.25% Notes

The Company also has $39.3 million of 15.25% notes outstanding. The Company will have the option to redeem the notes in cash for the face value of the notes plus accrued and unpaid interest before January 2, 2004. After January 2, 2004, the Company’s call option will expire and the securities will be non-callable until July 7, 2004. At that date, the securities will be callable starting at 106.25% of the principal amount plus accrued and unpaid interest and decreasing ratably to face value plus accrued and unpaid interest at maturity on July 7, 2009. The Company’s ability to call such notes is subject to, among other things, the approval of the financial institutions which issued the Company’s credit facilities. The Company intends to seek such approval and call the notes prior to the deadline discussed above. There can be no assurance that such approval will be obtained or that the notes will be called, and as a result, the outstanding balance has been classified as long-term debt in the accompanying balance sheets. Interest on such notes is accrued at 15.25%, but is payable semiannually at 12.5% to the holders of record. The agreement governing the 15.25% notes limits, among other things, the payment of dividends, the incurrence of additional indebtedness and other restricted payments, and contains customary events of default.

Redeemable Common Stock

SJKI is a party to a stockholders’ agreement with Vestar/Gray Investors, LLC, Vestar Capital Partners III, L.P. and the Gray family, 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, at fair value, up to a maximum of $5 million of such common stock for all the Grays during any 12 month period. If any of the Grays are terminated without “cause” or resigns for “good reason,” as these terms are defined in their employment agreements with the Company, then he or she will have the right to require SJKI to purchase the shares of SJKI common stock beneficially owned by them, up to a maximum of 25% of the total shares held by such terminated or resigning Gray employee during any 12 month period. This agreement may be limited by the terms of the agreements related to the credit facilities and the senior subordinated notes.

At the end of fiscal 2002, Bob Gray retired from his position as Chairman of the Board and Chief Executive Officer of the Company. In November 2002, as provided in the stockholders’ agreement, pursuant to Mr. Gray’s request, the Company redeemed at fair market value, as determined by the board of directors, 89,621 shares of SJKI’s common stock beneficially owned by him at a total cost of $5.0 million, or $55.79 per share.

Critical Accounting Policies

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. As such, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense during the reporting periods. Actual results could significantly differ from such estimates.

The Company believes that the following accounting policies are among the most critical because they involve significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions.

Inventories

Inventories are stated at the lower of the cost to purchase and/or manufacture the inventory or the current estimated market value (lower of cost or market). The Company regularly reviews its inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on the Company’s estimated forecast of product demand and production requirements. Any significant change in the anticipated demand for the Company’s products could cause the Company to revise its estimate of excess and obsolete inventory, which could affect the Company’s reported results.

Revenue Recognition

Sales to the Company’s wholesale customers are recognized when the goods are shipped and title passes. Sales are recognized upon purchase by customers at the Company’s retail store locations at the point of sale. The Company has recorded reserves to estimate sales returns by customers based on historical sales return results. Actual return rates have historically been within management’s expectations and the reserves established. However, in the unlikely event that the actual rate of sales returns by customers changes significantly, the Company’s reported results could be affected.

Wholesale Markdowns

The Company has arrangements with some of its major wholesale customers which may result in the Company reimbursing them for markdowns. The Company records an estimate of its liability under these arrangements at the time of sale, based upon historical experience. These estimates are based in part on projected sales and markdowns for these customers into the future. While historical experience has been within management’s expectations, any significant variation from the projected sales or markdowns could cause the Company to change its estimates. Any such change in the Company’s estimates could affect the Company’s reported results.

Accounts Receivable

The Company performs ongoing credit evaluations of its wholesale customers and adjusts the credit limits based upon payment history and the customer’s current financial status. The Company continuously monitors its receivable balances and maintains a provision for estimated credit losses based upon the Company’s historical experience and any specific customer collection issues that have been identified. The Company’s accounts receivable are concentrated in the apparel industry, primarily with its three major customers. The risk of collection is concentrated within this industry and with these specific customers. As a result of this concentration, a change in the credit worthiness of the companies within the apparel industry could cause the Company to revise its estimate of credit losses, which could have a significant affect on the Company’s reported results.

Insurance Program

The Company is partially self-insured for its workers’ compensation insurance coverage. Under this insurance program the Company is liable for a deductible of $500,000 for each individual claim. The Company records a liability for the estimated cost of claims both reported and incurred but not reported based upon its historical experience. The estimated costs include the estimated future cost of all open claims. The Company will continue to adjust the estimates as the actual experience dictates. A significant change in the number or dollar amount of claims could cause the Company to revise its estimate of potential losses and affect its reported results.

Inflation

The Company does not believe that inflation had a material impact on the sales reported for the first quarter of fiscal year 2003.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains certain statements which describe the Company’s beliefs concerning future business conditions and the outlook for the Company based on currently available information. Wherever possible, the Company has identified these “forward looking” statements (as defined in Section 21E of the Securities Exchange Act of 1934) by words such as “anticipates,” “believes,” “estimates,” “expects” and other similar expressions. The forward looking statements and associated risks set forth herein may include or relate to: (i) the Company’s anticipated purchases of property and equipment during the remainder of fiscal 2003, (ii) the Company’s belief that it will be able to fund its working capital and capital expenditure requirements with internally generated funds and the use of its revolving credit facility, (iii) the Company’s anticipation that it will not pay cash dividends on its common stock in the future and (iv) the Company’s intent to call its 15.25% notes prior to January 2, 2004.

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. 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 financial health of the Company’s principal customers, (iii) the Company’s ability to develop, market and sell its products, (iv) increased competition from other manufacturers and retailers of women’s clothing and accessories, (v) general economic conditions and (vi) the inability of the Company to meet the financial covenants under its credit facilities and senior subordinated notes.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The Company has exposure to fluctuations in foreign currency exchange rates for the revenues derived from sales to its foreign customers denominated in foreign currency. In order to reduce the effects of such fluctuations, under established risk management practices, the Company may enter into foreign exchange forward contracts. These contractual arrangements are typically entered into with a major financial institution. The Company does not hold derivative financial instruments for speculative trading.

The primary business objective of this 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. The Company did not hold any forward contracts to sell Euros at February 2, 2003.

The Company purchases its shoes and leather goods, as well as various other raw materials, from companies located in Europe. The purchase of these items is completed in Euros. In order to reduce the effect of the fluctuation in the exchange rate between the Euro and the U.S. dollar, the Company may enter into forward contracts. The Company did not hold any forward contracts to purchase Euros at February 2, 2003.

The Company has made a decision to use its sales made in Euros as a natural hedge for the purchases of inventory items made in Euros for fiscal year 2003. There can be no assurance that this strategy will fully offset the Company’s foreign currency exposure.

The Company is also exposed to market risks related to fluctuations in interest rates on its variable rate debt, which consists primarily of bank borrowings under the credit agreement. At February 2, 2003, the Company had no outstanding hedging contracts associated with interest rates.

The Company also holds fixed rate subordinated notes. For fixed rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not influence fair market value, but do affect future earnings and cash flows. The Company has managed its exposure to changes in interest rates by issuing part of its debt with a fixed interest rate. Assuming that the balance of variable rate debt remains constant, a one percentage point increase in LIBOR from the first day of the year would result in an annual increase in interest expense of approximately $1.3 million.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Within the 90-day period prior to the filing of this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the co-chief executive officers and the chief financial officer, of the design and operation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)). Based upon that evaluation, the co-chief executive officers and the chief financial officer concluded that the design and operation of the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

Changes in Internal Controls

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect such controls subsequent to the date of the co-chief executive officers’ and chief financial officer’s most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

None

Item 2.

Changes in Securities and Use of Proceeds

None

Item 3.

Defaults upon Senior Securities

None

Item 4.

Submission of Matters to a Vote of Security Holders

None

Item 5.

Other Information

None

Item 6.

Exhibits and Reports on Form 8-K

(a) Exhibits required by Item 601 of Regulation S-K.

None

(b) Reports on Form 8-K.

None

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: March 14, 2003

	ST. JOHN KNITS INTERNATIONAL, INCORPORATED (Registrant)

		By:	/s/ KELLY GRAY

			Kelly Gray Co-Chief Executive Officer

		By:	/s/ BRUCE FETTER

			Bruce Fetter Co-Chief Executive Officer

		By:	/s/ ROGER G. RUPPERT

			Roger G. Ruppert Executive Vice President-Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

CERTIFICATION

I, Kelly Gray, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of St. John Knits International, Incorporated;

	2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.

	3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

	4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

				a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

				b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

				c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of the Evaluation Date;

	5.		The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

				a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

				b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

	6.		The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

			March 14, 2003

						By:	/s/ KELLY GRAY

							Kelly Gray Co-Chief Executive Officer

CERTIFICATION

I, Bruce Fetter, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of St. John Knits International, Incorporated;

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

		a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

		b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

		c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of the Evaluation Date;

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

		a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

		b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

	March 14, 2003

				By:	/s/ BRUCE FETTER

					Bruce Fetter Co-Chief Executive Officer

CERTIFICATION

I, Roger G. Ruppert, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of St. John Knits International, Incorporated;

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

		a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

		b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

		c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of the Evaluation Date;

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

		a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

		b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

	March 14, 2003

				By:	/s/ ROGER G. RUPPERT

					Roger G. Ruppert Chief Financial Officer