EXHIBIT (a)(2)
TO SCHEDULE 13E-3
CHASE SECURITIES INC.
270 Park Avenue
New York, New York 10017
February 2, 1999
Vestar Capital Partners III, L.P.
245 Park Avenue
41st Floor
New York, NY 10167-4098
Attention: Sander M. Levy
Vestar Capital Partners III, L.P.
17th Street Plaza
1225 17th Street, Suite 1660
Denver, CO 80202
Attention: James P. Kelley
Christopher Henderson
Gentlemen:
You have advised Chase Securities Inc. ("CSI") that Vestar Capital
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Partners III, L.P. ("Vestar") proposes to acquire (the "Acquisition") St. John
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Knits, Inc., a California corporation (the "Company"). You have further advised
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us that immediately prior to the Acquisition, a wholly owned subsidiary ("Merger
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Sub") of St. John Knits International, Incorporated, a wholly owned subsidiary
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of the Company ("SJKI"), will merge with and into the Company, with the Company
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being the surviving corporation (the "Reorganization"). In connection with the
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Reorganization, the existing stockholders of the Company will exchange their
shares of common stock of the Company ("Company Common Stock") for shares of
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common stock of SJKI ("SJKI Common Stock"), resulting in the Company becoming a
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wholly owned subsidiary of SJKI. You have further advised us that, in
connection with the Acquisition, (a) Vestar will form a limited liability
company ("Holdco"), which will form a subsidiary ("Newco") and (b) immediately
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prior to the Reorganization (i) Vestar and certain co-investors reasonably
satisfactory to CSI will contribute approximately $153,637,000 of cash equity to
Holdco in consideration for the issuance of an 84.1% limited liability company
interest in Holdco ("Holdco Interest"), (ii) certain members of management of
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the Company (the "Gray Management") will contribute approximately 1,206,000
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shares of Company Common Stock to Holdco in consideration for approximately
$7,110,000 and the issuance of an aggregate 15.9% Holdco Interest (having an
aggregate value of approxi-
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mately $29,069,000) and (iii) Holdco will contribute approximately $146,527,000
of cash equity to Newco in consideration for the issuance of 100% of the common
stock of Newco. You have further advised us that certain members of management
of the Company may be offered the opportunity to purchase SJKI Common Stock from
SJKI representing not more than 5% of the outstanding capital stock of SJKI and
that any such purchase would reduce the amount of Vestar's contribution to
Holdco and may be funded by loans from Vestar. You have further advised us that
in connection with the Acquisition, Newco, SJKI, the Company and Merger Sub will
enter into an agreement and plan of merger (the "Merger Agreement"), pursuant to
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which (a) SJKI will obtain senior secured credit facilities (the "Facilities")
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consisting of a $155,000,000 term loan and a $25,000,000 revolving credit
facility, (b) SJKI will issue up to $160,000,000 principal amount of its senior
subordinated notes (the "Notes") in a public offering or in a Rule 144A offering
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or other private placement (which Notes will be guaranteed, on a senior
subordinated basis, by the Company and those subsidiaries of SJKI that guarantee
or otherwise provide credit support for the Facilities), (c) Newco will merge
with and into SJKI (the "Merger"), (d) at the effective time of the Merger, the
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outstanding shares of capital stock of SJKI held by its stockholders (the
"Sellers") (other than the shares held by Holdco, which will be canceled) will
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be converted into a combination of aggregate cash consideration equal to
approximately $447,581,000 and 456,000 shares of SJKI Common Stock, such that,
following the Merger, certain of the Sellers will continue to own approximately
7.0% of the outstanding capital stock of SJKI having an aggregate value of
approximately $13,684,000, (e) at the effective time of the Merger, outstanding
in the money options to buy shares of SJKI Common Stock will be cashed out for
an aggregate amount of approximately $14,003,000, (f) at the effective time of
the Merger, the outstanding shares of capital stock of Newco held by Holdco will
be converted into SJKI Common Stock representing approximately 93.0% of the
outstanding capital stock of SJKI having an aggregate value of approximately
$182,706,000, and (g) SJKI will pay transaction costs and expenses in connection
with the foregoing in an amount not to exceed $20,000,000 (the foregoing
transactions are collectively referred to herein as the "Transactions"). You
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have asked us to assist you in raising a portion of the funds required to
consummate the Transactions through the sale or placement of up to $160,000,000
of Notes.
We are pleased to inform you that, based upon our understanding of the
Transactions as described by you, current market conditions, and subject to the
conditions set forth below, we are highly confident of our ability, as lead
manager, to sell or place the Notes in connection with the Transactions.
The structure, covenants and terms (including as to credit support) of
the Notes will be as determined by CSI in consultation with you, and subject to
your prior agreement, on terms
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mutually acceptable to both parties based on market conditions at the time of
the sale or placement and based on the structure and documentation of the
Transactions.
Our confidence in our ability to consummate the sale or placement of
the Notes is also subject to (i) (a) CSI and its representatives not having
discovered or otherwise becoming aware of any information not previously
disclosed to them that they believe to be materially adversely inconsistent with
their understanding, based on the information provided to them prior to the date
hereof, of the business, assets, operations, prospects or condition (financial
or otherwise) of SJKI, the Company and its subsidiaries, and (b) CSI and its
representatives having received reasonably satisfactory audits with respect to
the amount and nature of any environmental exposures to which the Company and
its subsidiaries may be subject; (ii) consummation of the Transactions, and
related financings, on terms and pursuant to documentation reasonably consistent
with the terms described to CSI and reasonably satisfactory to CSI; (iii) there
not occurring any material adverse change in or affecting the business, assets,
operations, prospects or condition (financial or otherwise) of SJKI, the Company
and its subsidiaries, taken as a whole, since November 1, 1998; (iv) the
availability of (a) reasonably satisfactory unaudited financial statements for
the Company for each fiscal quarter, and monthly balance sheets and statements
of income for the Company for each fiscal month, in each case ending after
November 1, 1998 and (b) pro forma financial statements of the Company and SJKI
after giving effect to the Transactions, which financial statements shall not be
materially inconsistent with the forecasts previously provided to CSI and shall
be in form and presentation as required by the Securities Act of 1933, as
amended, and the rules and regulations thereunder applicable to registration
statements filed thereunder; (v) there not having been any material disruption
or material adverse change in the market for new issues of high yield securities
or the financial or capital markets in general, in the reasonable judgment of
CSI; (vi) CSI having a reasonable time to market the Notes based on CSI's
experience in comparable transactions; (vii) the Pro Forma Leverage Ratio of
SJKI for the latest 12 months ending immediately prior to the Closing Date shall
be no greater than 5.25:1.00 (calculated in a manner reasonably satisfactory to
CSI and in a manner consistent with the financial models previously furnished to
CSI); (viii) there not existing any pending or threatened claim, suit or
proceeding by any governmental or regulatory authority (other than any pending
claim, suit or proceeding on the date hereof previously identified to CSI) which
CSI shall reasonably determine could have a materially adverse effect on the
business, assets, operations, prospects or condition (financial or otherwise) of
the Company and its subsidiaries, taken as a whole, after giving effect to the
Transactions and (ix) the
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receipt of all necessary governmental, regulatory and material third party
approvals or consents in connection with the Transactions.
This letter is not intended to be and should not be construed as a
commitment or undertaking with respect to the underwriting, sale or placement of
the Notes on a principal or agency basis.
This letter is delivered to you on the understanding that neither this
letter nor any of its terms or substance shall be disclosed, directly or
indirectly by you, to any other person except (i) you may disclose this letter
(a) to your officers who are directly involved in the consideration of this
matter, (b) as may be compelled in a judicial or administrative proceeding or as
otherwise required by law (in which case you agree to inform us promptly
thereof) or (c) in any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, as amended and (ii) you may disclose this letter, and its
terms and substance to the Company (including its Board of Directors and any
committee thereof), SJKI (including its Board of Directors and any committee
thereof), Robert E. Gray, Marie Gray, Kelly A. Gray and their respective
attorneys and advisors on a confidential basis in connection with the
Transactions.
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We are very pleased to be able to work with you on these Transactions
and look forward to its successful completion.
Very truly yours,
CHASE SECURITIES INC.
By: /s/ JOSEPH C. PURCELL
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Name: Joseph C. Purcell
Title: Vice President