===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 3, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 1-11752
ST. JOHN KNITS, INC.
(Exact Name of Registrant as Specified in its Charter)
California 95-2245070
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
17422 Derian Avenue, Irvine, California 92614
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (949) 863-1171
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The number of outstanding shares of registrant's Common Stock, no par value, was
16,742,884 shares as of June 10, 1998.
================================================================================
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ST. JOHN KNITS, INC.
CONSOLIDATED BALANCE SHEETS
May 3, November 2,
1998 1997
------------ -------------
(unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents............................. $ 17,703,044 $ 14,266,564
Investments........................................... 2,476,535 2,351,765
Accounts receivable, net.............................. 31,287,327 36,572,423
Inventories........................................... 39,193,670 30,736,980
Deferred income tax benefit........................... 5,793,961 5,793,961
Other................................................. 2,445,264 2,591,742
------------ ------------
Total current assets................................ 98,899,801 92,313,435
------------ ------------
Property and equipment:
Machinery and equipment.............................. 41,404,311 35,903,659
Leasehold improvements............................... 26,494,772 25,351,868
Buildings............................................ 14,953,265 11,572,917
Furniture and fixtures............................... 5,690,650 5,434,754
Land................................................. 5,226,857 3,536,606
Construction in progress............................. 4,004,445 4,225,573
------------ ------------
97,774,300 86,025,377
Less-Accumulated depreciation and amortization...... 33,358,280 28,222,633
------------ ------------
64,416,020 57,802,744
------------ ------------
Other assets............................................. 3,371,542 3,787,396
------------ ------------
$166,687,363 $153,903,575
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................... $ 6,165,957 $ 10,034,396
Accrued expenses.................................... 8,981,080 10,504,934
Income taxes payable................................ 481,077 2,081,242
------------ ------------
Total current liabilities........................ 15,628,114 22,620,572
------------ ------------
Minority interest........................................ 646,806 602,910
------------ ------------
Shareholders' equity:
Preferred Stock, no par value: Authorized-2,000,000
shares, issued and outstanding-none................ -- --
Common Stock, no par value: Authorized-40,000,000
shares, issued and outstanding-16,738,384 and
16,634,548 shares, respectively.................... 502,799 502,799
Additional paid-in capital.......................... 20,647,575 18,929,541
Cumulative translation adjustment................... (137,376) (19,351)
Retained earnings................................... 129,399,445 111,267,104
------------ ------------
150,412,443 130,680,093
------------ ------------
$166,687,363 $153,903,575
============ ============
See accompanying notes.
2
ST. JOHN KNITS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------------- -----------------------------------
May 3, May 4, May 3, May 4,
1998 1997 1998 1997
----------- ----------- ------------ ------------
(unaudited) (unaudited)
Net sales..................................... $69,805,532 $59,562,531 $138,566,509 $115,737,826
Cost of sales................................. 28,929,281 23,691,678 57,912,169 48,111,388
----------- ----------- ------------ ------------
Gross profit.................................. 40,876,251 35,870,853 80,654,340 67,626,438
Selling, general and administrative expenses.. 25,198,783 21,034,471 49,391,546 40,444,987
----------- ----------- ------------ ------------
Operating income.............................. 15,677,468 14,836,382 31,262,794 27,181,451
Other income.................................. 404,096 248,299 632,231 454,711
----------- ----------- ------------ ------------
Income before income taxes.................... 16,081,564 15,084,681 31,895,025 27,636,162
Income taxes.................................. 6,335,116 6,211,119 12,928,410 11,379,189
----------- ----------- ------------ ------------
Net income.................................... $ 9,746,448 $ 8,873,562 $18,966,615 $16,256,973
=========== =========== =========== ===========
Net income per common share - basic........... $0.58 $0.53 $1.14 $0.98
=========== =========== =========== ===========
Net income per common share - diluted......... $0.57 $0.52 $1.11 $0.95
=========== =========== =========== ===========
Dividends per share........................... $0.025 $0.025 $0.05 $0.05
=========== =========== =========== ===========
Shares used in the calculation of net income
per share - basic........................... 16,728,923 16,606,552 16,687,010 16,602,995
=========== =========== =========== ===========
Shares used in the calculation of net income
per share - diluted.......................... 17,171,117 17,129,632 17,115,348 17,132,697
=========== =========== =========== ===========
See accompanying notes.
3
ST. JOHN KNITS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-Six Weeks Ended
------------------------------
May 3, 1998 May 4, 1997
------------ ------------
(unaudited)
Cash flows from operating activities:
Net income.............................. $ 18,966,615 $ 16,256,973
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........... 5,335,153 4,351,630
(Gain) loss on disposal of property and
equipment............................. 325,708 (10,034)
Partnership losses...................... 169,593 176,093
Minority interest in income of
consolidated subsidiaries.............. 43,896 --
Decrease in accounts receivable......... 5,285,096 469,422
Increase in inventories................. (8,456,690) (250,950)
(Increase) decrease in other current
assets................................. 146,478 (372,259)
Decrease in other assets................ 49,485 211,734
Increase (decrease) in accounts payable. (3,868,439) 238,513
Decrease in accrued expenses............ (1,107,990) (1,852,417)
Decrease in income taxes payable........ (1,600,165) (190,355)
------------ ------------
Net cash provided by operating
activities........................... 15,288,740 19,028,350
------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and
equipment.............................. 250 222,932
Purchase of property and equipment...... (12,123,612) (11,964,158)
Purchase of short term investments...... (124,770) (129,398)
Capital distributions from partnership.. 46,000 39,000
------------ ------------
Net cash used in investing activities. (12,202,132) (11,831,624)
------------ ------------
Cash flows from financing activities:
Issuance of common stock............... 1,718,034 285,608
Dividends paid......................... (1,250,137) (1,245,287)
------------ ------------
Net cash provided by (used in)
financing activities................. 467,897 (959,679)
------------ ------------
Effect of exchange rate changes............ (118,025) --
------------ ------------
Net increase in cash and cash equivalents.. 3,436,480 6,237,047
Beginning balance, cash and cash
equivalents............................... 14,266,564 6,186,057
------------ ------------
Ending balance, cash and cash equivalents.. $ 17,703,044 $ 12,423,104
============ ============
Supplemental disclosures of cash flow
information:
Cash received during the twenty-six
weeks for interest income............. $ 729,357 $ 408,795
============ ============
Cash paid during the twenty-six weeks
for:
Interest expense.................... $ 331 $ 9,375
============ ============
Income taxes........................ $ 13,759,408 $ 11,391,597
============ ============
See accompanying notes.
4
ST. JOHN KNITS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of St. John
Knits, Inc. and its subsidiaries (collectively referred to herein as "the
Company") reflect all adjustments (which include only normal recurring
adjustments) considered necessary to present fairly the financial position,
results of operations and cash flows of the Company for the periods presented.
It is suggested that the accompanying unaudited consolidated financial
statements and footnotes thereto be read in conjunction with the financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended November 2, 1997 as filed with the Securities and Exchange
Commission on January 30, 1998.
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 1, 1998.
2. Summary of Accounting Policies
a. Company Operations
The Company is a leading designer, manufacturer and marketer of women's
clothing and accessories. The Company's products are distributed primarily
through specialty retailers and Company owned retail boutiques. All
intercompany and interdivisional transactions and accounts have been eliminated.
b. Definition of Fiscal Year
The Company utilizes a 52-53 week fiscal year whereby the fiscal year ends
on the Sunday nearest to October 31. The quarters also end on the Sunday nearest
the end of the quarter, which accordingly were May 3, 1998 and May 4, 1997.
3. Dividends
The Company declared a quarterly dividend of $0.025 per share on March 2,
1998 for all shareholders of record on March 31, 1998. The dividend was paid on
April 30, 1998. On June 8, 1998, the Company declared another quarterly cash
dividend of $0.025 per share to be paid on July 30, 1998 to shareholders of
record on June 25, 1998.
4. Earnings Per Share
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128 "Earnings Per Share" during the first quarter of fiscal 1998. Under the
new requirement, 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 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.
As a result of the adoption of SFAS No. 128, primary earnings per share for
the second quarter and first six months of fiscal 1997 were restated from $0.52
to $0.53 and from $0.95 to $0.98, respectively, to reflect the change to basic
earnings per share. The difference between basic and diluted earnings per
share, as shown on the consolidated statements of income, is due to the dilutive
effect of stock options outstanding at May 3, 1998 and May 4, 1997.
5. Inventories
A summary of the components of inventories is as follows:
May 3, November 2,
1998 1997
----------- -----------
Raw materials $13,763,216 $10,362,158
Work in process 7,931,273 6,451,053
Finished products 17,499,181 13,923,769
----------- -----------
$39,193,670 $30,736,980
=========== ===========
5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table is derived from the Company's Consolidated Statements
of Income and sets forth, for the periods indicated, the results of operations
as a percentage of net sales:
Percent of Net Sales Percent of Net Sales
Thirteen Weeks Ended Twenty-Six Weeks Ended
("Second Quarter") ("Six Months")
---------------------- ----------------------
May 3, May 4, May 3, May 4,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales....................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................... 41.4 39.8 41.8 41.6
----- ----- ----- -----
Gross profit.................... 58.6 60.2 58.2 58.4
Selling, general and
administrative expenses........ 36.1 35.3 35.6 34.9
----- ----- ----- -----
Operating income................ 22.5 24.9 22.6 23.5
Other income.................... 0.6 0.4 0.5 0.4
----- ----- ----- -----
Income before income taxes...... 23.1 25.3 23.1 23.9
Income taxes.................... 9.1 10.4 9.3 9.8
----- ----- ----- -----
Net income...................... 14.0% 14.9% 13.8% 14.1%
===== ===== ===== =====
6
Second Quarter Fiscal 1998 Compared to Second Quarter Fiscal 1997
Net sales for the second quarter of fiscal 1998 increased by $10,243,000,
or 17.2 % over the second quarter of fiscal 1997. This increase was principally
attributable to (i) an increase in sales to existing domestic retail customers
of approximately $5,762,000, (ii) an increase in sales by Company owned retail
stores of approximately $2,484,000, due in part to the expansion of the New York
boutique, which was completed in October 1996, and the addition of two retail
outlet stores since the beginning of the second quarter of fiscal 1997, (iii)
sales of approximately $1,570,000 recorded by Amen Wardy Home Stores, LLC, a
majority owned subsidiary which commenced operations during the fourth quarter
of fiscal 1997 ("Amen Wardy Home Stores") and (iv) an increase in international
sales of $427,000, which includes the sales of St. John Company, Ltd., a
majority owned subsidiary which commenced operations in Japan during the fourth
quarter of fiscal 1997 ("St. John Company, Ltd."). Net sales increased primarily
as a result of increased unit sales of various product lines.
Gross profit for the second quarter of fiscal 1998 increased by $5,005,000,
or 14.0% as compared with the second quarter of fiscal 1997, and decreased as a
percentage of net sales to 58.6% from 60.2%. This decrease in the gross profit
margin was primarily due to labor inefficiencies related to the training of new
employees and the time incurred to repair finished product which, upon final
inspection, did not meet the Company's quality control standards.
Selling, general and administrative expenses for the second quarter of
fiscal 1998 increased by $4,164,000, or 19.8% over the second quarter of fiscal
1997, and increased as a percentage of net sales to 36.1% from 35.3%. This
increase was primarily due to costs incurred related to the start-up of the new
home furnishing subsidiary, Amen Wardy Home Stores, and the closure of the
Company's retail boutique located in Aspen.
Operating income for the second quarter of fiscal 1998 increased by
$841,000, or 5.7% over the second quarter of fiscal 1997. Operating income as
percentage of net sales decreased to 22.5% from 24.9% during the same period.
This decrease in the operating income as a percentage of net sales was due to
the decrease in the gross profit margin and an increase in selling, general and
administrative expenses as a percentage of net sales.
First Six Months Fiscal 1998 Compared to First Six Months Fiscal 1997
Net sales for the first six months of fiscal 1998 increased by $22,829,000,
or 19.7% over the first six months of fiscal 1997. This increase was
principally attributable to (i) an increase in sales to existing domestic retail
customers of approximately $11,723,000, (ii) an increase in sales by Company
owned retail stores of approximately $5,312,000, due in part to the expansion of
the New York boutique, which was completed in October 1996, and the addition of
two retail outlet stores since the beginning of fiscal 1997, (iii) sales by
Amen Wardy Home Stores of approximately $2,916,000 and (iv) an increase in sales
to international retail customers of $2,878,000, which includes the sales of St.
John Company, Ltd. Net sales increased primarily as a result of increased unit
sales of various product lines.
Gross profit for the first six months of fiscal 1998 increased by
$13,028,000, or 19.3% as compared with the first six months of fiscal 1997, and
decreased as a percentage of net sales to 58.2% from 58.4%. This decrease in
the gross profit margin was primarily due to labor inefficiencies experienced
during the second quarter of fiscal 1998.
Selling, general and administrative expenses for the first six months of
fiscal 1998 increased by $8,947,000, or 22.1% over the first six months of
fiscal 1997, and increased as a percentage of net sales to 35.6% from 34.9%.
This increase was primarily due to costs incurred related to the start-up of the
Company's new home furnishing subsidiary, Amen Wardy Home Stores, and the
closure of the
7
Company's retail boutique located in Aspen during the second quarter of fiscal
1998.
Operating income for the first six months of fiscal 1998 increased by
$4,081,000, or 15.0% over the first six months of fiscal 1997. Operating income
as percentage of net sales decreased to 22.6% from 23.5% during the same period.
This decrease in the operating income as a percentage of net sales was due to
the decrease in the gross profit margin and an increase in selling, general and
administrative expenses as a percentage of net sales.
Liquidity and Capital Resources
The Company's primary cash requirements are to fund the Company's working
capital needs, primarily inventory and accounts receivable, and for the purchase
of property and equipment. During the first six months of fiscal 1998, cash
provided by operating activities was $15,289,000. Cash provided by operating
activities was primarily generated by net income and a decrease in accounts
receivable, while cash used in operating activities was primarily used to fund
the increase in inventories and the decreases in accounts payable, accrued
expenses and income taxes payable. Cash used in investing activities was
$12,202,000 during the first six months of fiscal 1998. The principal use of
cash in investing activities was for the purchase of 34 computerized knitting
machines, the purchase of property and construction of improvements for the
Company's jewelry and garment hardware manufacturing facility in Mexico and the
construction of leasehold improvements for a new boutique location in Las Vegas.
The Company anticipates purchasing property and equipment of approximately
$9,000,000 during the remainder of fiscal 1998. The estimated $9,000,000 will
be used principally for (i) the construction of leasehold improvements for two
new retail boutiques, (ii) the completion of construction and the purchase of
equipment for the Company's manufacturing facility in Mexico and (iii) upgrades
to the Company's computer systems.
As of May 3, 1998, the Company had approximately $83,272,000 in working
capital and $20,180,000 in cash and marketable securities. The Company's
principal source of liquidity is internally generated funds. The Company also
has a $25,000,000 bank line of credit ("Line of Credit") which expires on March
1, 2000. The Line of Credit is unsecured and borrowings thereunder bear
interest at the Company's choice of the bank's reference rate (8.25% at May 3,
1998) minus 0.25% or an offshore rate plus 1.5%. The availability of funds
under the Line of Credit is subject to the Company's continued compliance with
certain covenants, including a covenant that sets the maximum amount the Company
can spend annually on the acquisition of fixed or capital assets, and certain
financial covenants, including a minimum quick ratio, a minimum tangible net
worth and a maximum ratio of total liabilities to tangible net worth. The
Company may not declare or pay any dividends if the Company fails to perform its
obligations under, or fails to meet the conditions of, the Line of Credit or if
payment of the dividend creates a default under the Line of Credit. As of May
3, 1998, no amounts were outstanding under the Line of Credit. The Company
invests its excess funds primarily in a money market fund, investment grade
commercial paper and tax exempt municipal bonds.
The Company believes it will be able to finance its working capital and
capital expenditure requirements on both a short-term and long-term basis with
internally generated funds.
The Company declared a quarterly cash dividend of $0.025 per share on March
2, 1998 which was paid on April 30, 1998 to shareholders of record on March 31,
1998. On June 8, 1998, the Company declared another quarterly cash dividend of
$0.025 per outstanding share to be paid on July 30, 1998 to shareholders of
record on June 25, 1998. Future dividends by the Company remain
8
subject to limitations under applicable law, certain covenants under the Line of
Credit and other factors the Board of Directors deems relevant, including
results of operations, financial condition and capital requirements.
Year 2000
The Company is continuing to assess the impact of the Year 2000 issues on
its computer systems. Company personnel are currently making the required
modifications to certain of the Company's computer systems for Year 2000
compliance. In addition, the Company plans to begin implementing the replacement
of some of its existing systems during fiscal years 1998 and 1999, primarily to
improve productivity, but such replacement systems will also address Year 2000
issues. The Company plans to complete the replacement of such systems during
fiscal 1999. The estimated costs of the new systems are included in the capital
budget for fiscal years 1998 and 1999. Management currently believes that the
impact of Year 2000 issues will not have a material effect on the Company's
financial condition or results of operations. However, the Company will
continue to assess the impact of Year 2000 issues on its computer systems to
evaluate the appropriate courses of corrective action needed. If the Company
determines additional corrective measures are required, the cost of such
measures could have a material effect on its financial condition or results of
operations.
9
PART II. OTHER INFORMATION
Item 4. Submission of matters to a Vote of Security-Holders
The Company held its Annual Meeting on March 25, 1998. At the Annual
Meeting, shareholders re-elected Robert E. Gray, Marie St. John Gray, Kelly A.
Gray, Roger G. Ruppert, Richard A. Gadbois, III and David A. Krinsky as
directors of the Company. The shareholders also approved the amendment to the
Company's 1993 Stock Option Plan to increase the number of authorized shares
thereunder and to provide an individual limit on the number of shares subject to
options granted in any one calendar year. Voting at the meeting was as follows:
MATTER FOR AGAINST WITHHELD
- ----------------------------------------------- ---------- --------- --------
Election of Robert E. Gray 15,426,594 -- 133,862
Election of Marie St. John Gray 15,426,244 -- 134,212
Election of Kelly A. Gray 15,427,864 -- 132,592
Election of Roger G. Ruppert 15,425,270 -- 135,186
Election of David A. Krinsky 15,426,425 -- 134,031
Election of Richard A. Gadbois, III 15,464,655 -- 95,801
Approval of Amendment to 1993 Stock Option Plan 9,126,584 6,157,562 276,310
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
See "Exhibit Index."
(b) Reports on Form 8-K.
None.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
June 10, 1998 ST. JOHN KNITS, INC.
By: /s/ Bob Gray
-------------------------------
Bob Gray
Chairman of the Board and
Chief Executive Officer
By: /s/ Roger G. Ruppert
-------------------------------
Roger G. Ruppert
Senior Vice President - Finance,
Chief Financial Officer
(Principal Financial Officer)
11
EXHIBIT INDEX
Exhibit Sequentially
Number Description of Exhibit Numbered Page
------- ---------------------- -------------
10.1 Aircraft Lease dated April 1, 1998 by and between the
Company and Ocean Air Charters, Inc. as Trustee of the
SJA 1&2, Ltd. Trust (Lease for Company airplane)
10.2 Amendment No.II to the St. John Knits, Inc. 1993 Stock
Option Plan
10.3 Amendment No. 5 to the Business Loan Agreement between
the Company and Bank of America National Trust and
Savings Association
27.1 Financial Data Schedule
12