AUNITED SSTATES S E T S April 28, October 28, ----------- 2002 2001 --------------- -------------- Current assets: (unaudited) Cash and cash equivalents ...................................................... $ 37,651,992 $ 26,210,874 Investments .................................................................... 9,493 10,045 Accounts receivable, net ....................................................... 18,143,189 25,512,903 Inventories .................................................................... 47,554,397 52,497,697 Deferred income tax benefit .................................................... 13,815,985 13,815,985 Other .......................................................................... 3,778,744 3,702,444 ------------- -------------- Total current assets ....................................................... 120,953,800 121,749,948 ------------- -------------- Property and equipment: Machinery and equipment ........................................................ 70,013,564 68,272,493 Leasehold improvements ......................................................... 45,109,990 42,339,225 Buildings ...................................................................... 23,770,662 23,699,445 Furniture and fixtures ......................................................... 10,513,568 9,757,411 Land ........................................................................... 8,798,320 8,798,320 Construction in progress ....................................................... 2,885,591 2,215,527 ------------- -------------- 161,091,695 155,082,421 Less--Accumulated depreciation and amortization ................................ 80,130,037 72,713,841 ------------- -------------- 80,961,658 82,368,580 ------------- -------------- Deferred financing costs, net ....................................................... 9,122,027 10,107,345 Other assets ........................................................................ 7,174,190 7,997,366 ------------- -------------- $ 218,211,675 $ 222,223,239 ============= ============== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable ............................................................... $ 6,588,181 $ 8,961,470 Accrued expenses ............................................................... 14,916,760 15,669,641 Dividends payable .............................................................. 13,024,241 10,302,516 Current portion of long-term debt .............................................. 6,674,327 9,005,724 Accrued interest expense ....................................................... 4,699,955 4,864,191 Income taxes payable ........................................................... 6,088,422 1,921,035 ------------- -------------- Total current liabilities .................................................. 51,991,886 50,724,577 Long-term debt, net of current portion .............................................. 228,023,671 243,290,691 ------------- -------------- Total liabilities .......................................................... 280,015,557 294,015,268 ------------- -------------- Mandatorily redeemable preferred stock, $100 stated value: Authorized--2,000,000 shares, issued and outstanding--250,000 shares .............................. 25,000,000 25,000,000 ------------- -------------- Redeemable common stock - par value $0.01, issued and outstanding--968,983 shares ...................................................................... 37,790,337 27,131,524 ------------- -------------- Stockholders' equity (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 Unrealized loss on securities .................................................. (41,368) (40,826) Unrealized gain (loss) on hedging transactions ................................. (44,169) 106,999 Cumulative translation adjustment .............................................. (456,864) (150,371) Additional paid-in capital ..................................................... 109,362,528 120,021,341 Accumulated deficit ............................................................ (233,470,118) (243,916,468) ------------- -------------- Total stockholders' deficit ................................................ (124,594,219) (123,923,553) ------------- -------------- $ 218,211,675 $ 222,223,239 ============= ==============

~~Thirteen~~SECURITIES ~~Weeks~~AND ~~Ended~~EXCHANGE ~~Twenty-Six~~COMMISSION Weeks Ended ------------------------------ -------------------------------- April 28, April 29, April 28, April 29, 2002 2001 2002 2001 ----------- ------------ -------------- ------------- (unaudited) (unaudited) Net sales ................................................. $92,278,686 $97,059,982 $180,243,908 $198,242,086 Cost of sales ............................................. 39,216,608 40,526,593 77,788,258 85,127,420 ----------- ----------- ------------ ------------ Gross profit .............................................. 53,062,078 56,533,389 102,455,650 113,114,666 Selling, general and administrative expenses .............. 35,219,549 36,397,647 69,005,111 69,139,615 ----------- ----------- ------------ ------------ Operating income .......................................... 17,842,529 20,135,742 33,450,539 43,975,051 Interest expense .......................................... 5,334,025 7,680,230 11,048,531 15,447,371 Other income (expense) .................................... (38,146) 200,859 126,612 797,892 ----------- ----------- ------------ ------------ Income before income taxes ................................ 12,470,358 12,656,371 22,528,620 29,325,572 Income taxes .............................................. 5,169,178 5,333,515 9,360,544 12,363,114 ----------- ----------- ------------ ------------ Net income ................................................ 7,301,180 7,322,856 13,168,076 16,962,458 Preferred stock dividends ................................. 1,426,171 1,202,820 2,721,725 2,346,035 ----------- ----------- ------------ ------------ Income allocated to common stockholders ................... $ 5,875,009 $ 6,120,036 $ 10,446,351 $ 14,616,423 =========== =========== ============ ============ Comprehensive income, net of tax: Net income ................................................ 7,301,180 7,322,856 13,168,076 16,962,458 Foreign currency translation adjustments ................ (9,059) (87,944) (179,146) (197,895) Unrealized loss on hedging transactions ................. (47,684) -- (88,358) -- Unrealized loss on securities ........................... (317) (2,207) (317) (2,207) ----------- ----------- ------------ ------------ Comprehensive income ...................................... $ 7,244,120 $ 7,232,705 $ 12,900,255 $ 16,762,356 =========== =========== ============ ============ Earnings per common share - basic ......................... $ 0.90 $ 0.93 $ 1.60 $ 2.23 .......................................................... =========== =========== ============ ============ Earnings per common share - diluted ....................... $ 0.89 $ 0.93 $ 1.59 $ 2.23 =========== =========== ============ ============ Shares used in the calculation of earnings per common share- basic ................................................... 6,546,240 6,546,174 6,546,240 6,546,174 =========== =========== ============ ============ Shares used in the calculation of earnings per common share- diluted ................................................. 6,606,240 6,602,610 6,570,436 6,546,174 =========== =========== ============ ============

~~Twenty-Six Weeks Ended ---------------------------------------- April 28~~WASHINGTON, ~~2002 April 29, 2001 -------------- ---------------- (unaudited) Cash flows from operating activities: Net income~~ D.C.~~...........................................................~~ $20549 13,168,076 $ 16,962,458 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................................ 7,414,552 7,245,822 Amortization of discount on 12.5% notes due 2009 ..................... 69,200 69,969 Amortization of deferred loan costs .................................. 1,039,318 1,083,766 (Gain) loss on disposal of property and equipment .................... (6,450) 15,795 Partnership losses ................................................... 452,422 137,807 Decrease in accounts receivable ...................................... 7,369,714 4,196,707 Decrease in inventories .............................................. 4,943,300 1,270,817 Increase in prepaid income tax ....................................... -- (904,959) Increase in other current assets ..................................... (76,300) (143,339) (Increase) decrease in other assets .................................. 90,896 (590,354) Decrease in accounts payable ......................................... (2,373,289) (6,877,501) Increase (decrease) in accrued expenses .............................. (752,881) 3,998,768 Decrease in accrued interest expense ................................. (164,236) (218,725) Increase (decrease) in income taxes payable .......................... 4,167,387 (4,558,120) ------------ ------------ Net cash provided by operating activities ....................... 35,341,709 21,688,911 ------------ ------------ Cash flows from investing activities: Proceeds from sale of property and equipment ......................... 6,450 4,500 Purchase of property and equipment ................................... (6,009,273) (6,476,701) Sale of short-term investments ....................................... 552 6,993 Capital contributions to partnership ................................. -- (3,060,993) Capital distributions from partnership ............................... 227,500 70,000 ------------ ------------ Net cash used in investing activities ........................... (5,774,771) (9,456,201) ------------ ------------ Cash flows from financing activities: Principal payments on long-term debt ................................. (17,667,617) (12,728,505) ------------ ------------ Net cash used in financing activities ........................... (17,667,617) (12,728,505) ------------ ------------ Effect of exchange rate changes ........................................... (306,493) (342,128) ------------ ------------ Change in value of hedging transactions ................................... (151,168) -- ------------ ------------ Unrealized loss on securities ............................................. (542) (3,814) ------------ ------------ Net increase (decrease) in cash and cash equivalents ...................... 11,441,118 (841,737) ------------ ------------ Beginning balance, cash and cash equivalents .............................. 26,210,874 25,130,928 ------------ ------------ Ending balance, cash and cash equivalents ................................. $ 37,651,992 $ 24,289,191 ============ ============

~~Twenty-Six~~FORM ~~Weeks Ended~~ 10-~~---------------------------------------~~Q April 28, 2002 April 29, 2001 -------------- ---------------- (unaudited) Supplemental disclosures of cash flow information: Cash received for interest income ................................. $ 293,390 $ 473,139 ============== ================ Cash paid for: Interest expense ............................................. $9,873,460 $14,014,140 ============== ================ Income taxes ................................................. $5,388,830 $17,811,373 ============== ================ Supplemental disclosure of noncash financing activity: Dividends accrued on mandatorily redeemable preferred stock ....... $2,721,725 $ 2,346,035 ============== ================

~~Thirteen~~þ ~~Weeks~~QUARTERLY ~~Ended~~REPORT ~~Twenty-six~~PURSUANT ~~Weeks~~TO ~~Ended~~SECTION ----------------------------- ----------------------------- April 28, 2002 April 29, 2001 April 28, 2002 April 29, 2001 -------------- -------------- -------------- -------------- Net income ............................................ $7,301,180 $7,322,856 $13~~,168,076~~ ~~$16,962,458~~OR ~~Less:~~15(d) ~~preferred~~OF ~~stock~~THE ~~dividends~~SECURITIES ~~......................~~EXCHANGE ~~1,426,171~~ACT ~~1,202,820~~OF 2,721,725 2,346,035 ---------- ---------- ----------- ----------- Income allocated to common stockholders ............... $5,875,009 $6,120,036 $10,446,351 $14,616,423 ========== ========== =========== =========== Weighted average shares outstanding ................... 6,546,240 6,546,174 6,546,240 6,546,174 Add: dilutive effect of stock options ................ 60,000 56,436 24,196 -- ---------- ---------- ----------- ----------- Shares used to calculate diluted earnings per share ... 6,606,240 6,602,610 6,570,436 6,546,174 ========== ========== =========== =========== Basic earnings per common share ....................... $ 0.90 $ 0.93 $ 1.60 $ 2.23 ========== ========== =========== =========== Diluted earnings per common share ..................... $ 0.89 $ 0.93 $ 1.59 $ 2.23 ========== ========== =========== ===========1934

~~(Amounts~~For inthe ~~thousands)~~quarterly ~~PARENT~~period ~~GUARANTOR~~ended ~~NON-GUARANTOR~~July ~~COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------------------------------------------------------------- ASSETS Current assets: Cash~~28, ~~cash~~2002 equivalents and investments $ 37,159 $ 4 $ 499 $ - $ 37,662 Accounts receivable, net 17,036 119 988 18,143 Inventories (1) 44,604 661 2,289 47,554 Deferred income tax benefit 13,816 13,816 Other 3,575 56 148 3,779 Intercompany accounts receivable 2,539 (2,539) - ---------------------------------------------------------------- Total current assets 118,729 840 3,924 (2,539) 120,954 Property and equipment, net 74,505 1,124 5,333 80,962 Investment in subsidiaries (4,348) 4,348 - Receivable from consolidated subsidiaries 14,452 (14,452) - Deferred financing costs 9,122 9,122 Other assets 6,489 25 660 7,174 ---------------------------------------------------------------- Total assets $ 218,949 $ 1,989 $ 9,917 $ (12,643) $ 218,212 ================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 6,236 $ - $ 352 $ - $ 6,588 Accrued expenses 14,697 132 88 14,917 Current portion of long-term debt 6,674 6,674 Accrued interest expense 4,700 4,700 Dividends payable 13,024 13,024 Intercompany accounts payable 2,539 (2,539) - Income taxes payable 6,357 (268) 6,089 ---------------------------------------------------------------- Total current liabilities 51,688 132 2,711 (2,539) 51,992 Intercompany payable 9,595 4,857 (14,452) - Long-term debt, net of current portion 228,024 228,024 ---------------------------------------------------------------- Total liabilities 279,712 9,727 7,568 (16,991) 280,016 ---------------------------------------------------------------- Mandatorily redeemable preferred stock 25,000 25,000 ---------------------------------------------------------------- Redeemable common stock 37,790 37,790 ---------------------------------------------------------------- Total stockholders' equity (deficit) (123,553) (7,738) 2,349 4,348 (124,594) ---------------------------------------------------------------- Total liabilities and stockholders' equity (deficit) $ 218,949 $ 1,989 $ 9,917 $ (12,643) $ 218,212 ================================================================

~~PARENT~~OR GUARANTOR NON-GUARANTOR (Amounts in thousands) COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED =========================================================================== ASSETS Current assets: Cash, cash equivalents and investments $ 26,000 $ 4 $ 217 $ - $ 26,221 Accounts receivable, net 24,315 91 1,107 25,513 Inventories (1) 48,943 1,615 1,940 52,498 Deferred income tax benefit 13,816 13,816 Other 3,580 90 32 3,702 Intercompany accounts receivable 1,698 (1,698) - ----------------------------------------------------------------------- Total current assets 118,352 1,800 3,296 (1,698) 121,750 Property and equipment, net 75,643 1,221 5,505 82,369 Investment in subsidiaries (3,757) 3,757 - Receivable from consolidated subsidiaries 15,153 (15,153) - Deferred financing costs 10,107 10,107 Other assets 7,247 60 690 7,997 ----------------------------------------------------------------------- Total assets $ 222,745 $ 3,081 $ 9,491 $ (13,094) $ 222,223 ======================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 8,846 $ - $ 115 $ - $ 8,961 Accrued expenses 15,423 159 87 15,669 Current portion of long-term debt 9,006 9,006 Accrued interest expense 4,864 4,864 Dividends payable 10,303 10,303 Intercompany accounts payable 1,698 (1,698) - Income taxes payable 1,907 14 1,921 ----------------------------------------------------------------------- Total current liabilities 50,349 159 1,914 (1,698) 50,724 Intercompany payable 10,154 4,999 (15,153) - Long-term debt, net of current portion 243,291 243,291 ----------------------------------------------------------------------- Total liabilities 293,640 10,313 6,913 (16,851) 294,015 ----------------------------------------------------------------------- Mandatorily redeemable preferred stock 25,000 25,000 ----------------------------------------------------------------------- Redeemable common stock 27,132 27,132 ----------------------------------------------------------------------- Total stockholders' equity (deficit) (123,027) (7,232) 2,578 3,757 (123,924) ----------------------------------------------------------------------- Total liabilities and stockholders' equity (deficit) $ 222,745 $ 3,081 $ 9,491 $ (13,094) $ 222,223 =======================================================================

~~PARENT~~¨ ~~GUARANTOR~~TRANSITION ~~NON-GUARANTOR~~REPORT ~~COMPANY~~PURSUANT ~~SUBSIDIARIES~~TO ~~SUBSIDIARIES~~SECTION ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------- (Amounts in thousands) Net sales $ 88,846 $ 1,359 $ 2,074 $ - $ 92,279 Cost of sales 37,316 767 1,134 39,217 ------------------------------------------------------------------- Gross profit 51,530 592 940 - 53,062 Selling, general and administrative expenses 32,757 1,138 1,325 35,220 ------------------------------------------------------------------- Operating income (loss) 18,773 (546) (385) - 17,842 Interest expense 5,334 5,334 Other expense (26) (12) (38) ------------------------------------------------------------------- Income (loss) before income taxes 13~~,413~~ ~~(546)~~OR 15(~~397~~d) -OF ~~12,470~~THE ~~Income~~SECURITIES ~~taxes~~EXCHANGE ~~5,652~~ACT ~~(229)~~OF (254) 5,169 ------------------------------------------------------------------- Income (loss) before equity in loss of consolidated subsidiaries 7,761 (317) (143) - 7,301 Equity in loss of consolidated subsidiaries (460) 460 - ------------------------------------------------------------------- Net income (loss) $ 7,301 $ (317) $ (143) $ 460 $ 7,301 ===================================================================1934

~~PARENT~~For ~~GUARANTOR~~the ~~NON-GUARANTOR~~transition ~~COMPANY~~period ~~SUBSIDIARIES~~from _________ to _________ SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------ (Amounts in thousands) Net sales $ 93,322 $ 1,701 $ 2,037 $ - $ 97,060 Cost of sales 38,590 1,061 876 40,527 ------------------------------------------------------------------ Gross profit 54,732 640 1,161 - 56,533 Selling, general and administrative expenses 34,243 1,131 1,023 36,397 ------------------------------------------------------------------ Operating income (loss) 20,489 (491) 138 - 20,136 Interest expense 7,680 7,680 Other income 182 2 17 201 ------------------------------------------------------------------ Income (loss) before income taxes 12,991 (489) 155 - 12,657 Income taxes 5,476 (206) 64 5,334 ------------------------------------------------------------------ Income (loss) before equity in loss of consolidated subsidiaries 7,515 (283) 91 - 7,323 Equity in loss of consolidated subsidiaries (191) 191 - ------------------------------------------------------------------ Net income (loss) $ 7,324 $ (283) $ 91 $ 191 $ 7,323 ==================================================================

~~PARENT~~Commission ~~GUARANTOR~~File ~~NON-GUARANTOR~~Number ~~COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED~~ 333-~~------------------------------------------------------------------~~73107 (Amounts in thousands) Net sales $ 172,612 $ 3,405 $ 4,227 $ - $ 180,244 Cost of sales 73,541 2,021 2,226 77,788 ------------------------------------------------------------------ Gross profit 99,071 1,384 2,001 - 102,456 Selling, general and administrative expenses 64,349 2,256 2,400 69,005 ------------------------------------------------------------------ Operating income (loss) 34,722 (872) (399) - 33,451 Interest expense 11,049 11,049 Other income 108 19 127 ------------------------------------------------------------------ Income (loss) before income taxes 23,781 (872) (380) - 22,529 Income taxes 10,022 (366) (295) 9,361 ------------------------------------------------------------------ Income (loss) before equity in loss of consolidated subsidiaries 13,759 (506) (85) - 13,168 Equity in loss of consolidated subsidiaries (591) 591 - ------------------------------------------------------------------ Net income (loss) $ 13,168 $ (506) $ (85) $ 591 $ 13,168 ===================================================================

~~PARENT~~ST. ~~GUARANTOR~~JOHN ~~NON-GUARANTOR~~KNITS ~~COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------------------------------------------------------------- (Amounts in thousands) Net sales $ 190~~INTERNATIONAL,~~510~~ $INCORPORATED 3,478 $ 4,254 $ - $ 198,242 Cost of sales 81,078 2,247 1,802 85,127 ----------------------------------------------------------------- Gross profit 109,432 1,231 2,452 - 113,115 Selling, general and administrative expenses 64,827 2,242 2,071 69,140 ----------------------------------------------------------------- Operating income (loss) 44,605 (1,011) 381 - 43,975 Interest expense 15,447 15,447 Other income 776 5 17 798 ----------------------------------------------------------------- Income (loss) before income taxes 29,934 (1,006) 398 - 29,326 Income taxes 12,617 (424) 170 12,363 ----------------------------------------------------------------- Income (loss) before equity in loss of consolidated subsidiaries 17,317 (582) 228 - 16,963 Equity in loss of consolidated subsidiaries (354) 354 - ----------------------------------------------------------------- Net income (loss) $ 16,963 $ (582) $ 228 $ 354 $ 16,963 =================================================================

~~PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -----------------------------------------------------------------~~ (~~Amounts~~Exact inName thousands) OPERATING ACTIVITIES: Net income (loss) $ 13,168 $ (506) $ (85) $ 591 $ 13,168 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 7,008 100 307 7,415 Amortization of ~~discount~~Registrant onas ~~12.5%~~Specified ~~notes due 2009 69 69 Amortization of deferred loan costs 1,039 1,039 Gain on disposal of property and equipment (6) (6) Partnership losses 452 452 Equity~~ in ~~loss~~its ~~of consolidated subsidiaries 591 (591~~Charter) - Cash provided by changes in operating assets and liabilities: Accounts receivable 7,425 (28) (27) 7,370 Intercompany receivables (net) (341) (559) 900 - Inventories 4,337 954 (348) 4,943 Other current assets (111) 34 1 (76) Other assets 31 35 25 91 Accounts payable (2,373) (2,373) Accrued expenses (776) (26) 49 (753) Accrued interest expense (164) (164) Income taxes payable 4,420 (253) 4,167 ----------------------------------------------------------------- Net cash provided by operating activities 34,769 4 569 - 35,342 ----------------------------------------------------------------- INVESTING ACTIVITIES: Proceeds from sale of property and equipment 6 6 Purchases of property and equipment (5,870) (4) (135) (6,009) Sale of short-term investments 1 1 Capital distributions from partnership 227 227 ----------------------------------------------------------------- Net cash used in investing activities (5,636) (4) (135) - (5,775) ----------------------------------------------------------------- FINANCING ACTIVITIES: Principal payments of long-term debt (17,660) (8) (17,668) ----------------------------------------------------------------- Net cash used in financing activities (17,660) - (8) - (17,668) ----------------------------------------------------------------- Effect of exchange rate changes (162) (144) (306) ----------------------------------------------------------------- Unrealized loss on securities (1) (1) ----------------------------------------------------------------- Change in value of hedging transactions (151) (151) ----------------------------------------------------------------- Net increase in cash and cash equivalents 11,159 - 282 - 11,441 Beginning balance, cash and cash equivalents 25,990 4 217 26,211 ----------------------------------------------------------------- Ending balance, cash and cash equivalents $ 37,149 $ 4 $ 499 $ - $ 37,652 ================================================================= Supplemental disclosures of cash flow information: Cash received for interest income $ 293 $ - $ - $ - $ 293 ================================================================= Cash paid for: Interest expense $ 9,873 $ - $ - $ - $ 9,873 ================================================================= Income taxes $ 5,389 $ - $ - $ - $ 5,389 ================================================================= Supplemental disclosure of noncash financing activity: Dividends accrued on mandatorily redeemable preferred stock $ 2,722 $ - $ - $ - $ 2,722 =================================================================

PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------------------------------------------------------------- (Amounts in thousands) OPERATING ACTIVITIES: Net income (loss) $ 16,963 $ (582) $ 228 $ 354 $ 16,963 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 7,074 64 108 7,246 Amortization of discount on 12.5% notes due 2009 70 70 Amortization of deferred loan costs 1,084 1,084 Loss on disposal of property and equipment 16 16 Partnership losses 138 138 Equity in loss of consolidated subsidiaries 354 (354) - Cash provided by changes in operating assets and liabilities: Accounts receivable 3,923 47 227 4,197 Intercompany receivables (net) (2,144) 998 1,146 - Prepaid income tax (905) (905) Inventories 1,059 257 (45) 1,271 Other current assets (79) (66) 1 (144) Other assets (775) 6 178 (591) Accounts payable (6,878) (6,878) Accrued expenses 3,981 19 (1) 3,999 Accrued interest expense (219) (219) Income taxes payable (4,014) (424) (120) (4,558) ------------------------------------------------------------- Net cash provided by operating activities 19,648 319 1,722 - 21,689 ------------------------------------------------------------- INVESTING ACTIVITIES: Proceeds from sale of property and equipment 5 5 Purchases of property and equipment (5,254) (149) (1,074) (6,477) Sale of short-term investments 7 7 Capital contributions to partnership (3,061) (3,061) Capital distributions from partnership 70 70 ------------------------------------------------------------- Net cash used in investing activities (8,233) (149) (1,074) - (9,456) ------------------------------------------------------------- FINANCING ACTIVITIES: Principal payments of long-term debt (12,555) (174) (12,729) ------------------------------------------------------------- Net cash used in financing activities (12,555) - (174) - (12,729) ------------------------------------------------------------- Effect of exchange rate changes (13) (329) (342) ------------------------------------------------------------- Unrealized loss on securities (4) (4) ------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (1,157) 170 145 - (842) Beginning balance, cash and cash equivalents 24,729 100 302 25,131 ------------------------------------------------------------- Ending balance, cash and cash equivalents $ 23,572 $ 270 $ 447 $ - $ 24,289 ============================================================= Supplemental disclosures of cash flow information: Cash received for interest income $ 473 $ - $ - $ - $ 473 ============================================================= Cash paid for: Interest expense $ 14,013 $ - $ 1 $ - $ 14,014 ============================================================= Income taxes $ 17,811 $ - $ - $ - $ 17,811 ============================================================= Supplemental disclosure of noncash financing activity: Dividends accrued on mandatorily redeemable preferred stock $ 2,346 $ - $ - $ - $ 2,346 =============================================================

Delaware (State or Other Jurisdiction of Incorporation or Organization)		52-2061057 (I.R.S. Employer Identification Number)
17622 Armstrong Avenue, Irvine, California (Address of Principal Executive Offices)		92614 (Zip Code)

~~Percent~~Registrant’s ofTelephone ~~Net~~Number, ~~Sales~~Including ~~Percent~~Area Code: ~~of Net Sales Thirteen Weeks Ended Twenty-Six Weeks Ended~~ (~~"Second Quarter"~~949) ~~("Six Months")~~ 863-~~-------------------~~1171 ---------------------- April 28, April 29, April 28, April 29, 2002 2001 2002 2001 --------- --------- --------- ----------- Net sales ...................................... 100.0% 100.0% 100.0% 100.0% Cost of sales .................................. 42.5 41.8 43.2 42.9 --------- --------- --------- ---------- Gross profit ................................... 57.5 58.2 56.8 57.1 Selling, general and administrative expenses ... 38.2 37.5 38.3 34.9 --------- --------- --------- ---------- Operating income ............................... 19.3 20.7 18.5 22.2 Interest expense ............................... 5.8 7.9 6.1 7.8 Other income ................................... -- 0.2 0.1 0.4 --------- --------- --------- ---------- Income before income taxes ..................... 13.5 13.0 12.5 14.8 Income taxes ................................... 5.6 5.5 5.2 6.2 --------- --------- --------- ---------- Net income ..................................... 7.9% 7.5% 7.3% 8.6% ========= ========= ========= ==========

~~Fiscal~~Indicate ~~Years~~by ~~----------------------------------------~~check ~~2002~~mark ~~(A)~~whether ~~2003~~the ~~2004~~registrant ~~2005 2006 Thereafter Total -------- ---- ---- ---- ---- ---------- -----~~ (~~Amounts in thousands~~1) ~~Fixed~~has ~~rate~~filed ~~subordinated~~all ~~notes~~reports $required --to $be --filed $by --Section $13 --or $15(d) of --the $Securities ~~100,000~~Exchange ~~$100,000~~Act ~~Variable~~of ~~rate~~1934 ~~debt~~during ~~4,676~~the ~~9,751~~preceding ~~17,957~~12 ~~19,914~~months ~~34,113~~(or ~~49,268~~for ~~135,679~~such ~~Operating~~shorter ~~leases~~period ~~9,131~~that ~~18,891~~the ~~19,906~~registrant ~~19,421~~was ~~18,590~~required ~~92,136~~to ~~178,075~~file ~~--------~~such ~~------- ------- ------- ------- ---------- -------- Total obligations $ 13~~reports),~~807~~ ~~$28,642~~and ~~$37,863~~(2) ~~$39,335~~has ~~$52,703~~been $subject ~~241,404~~to ~~$413,754~~such ~~========~~filing ~~=======~~requirements ~~=======~~for ~~=======~~the ~~=======~~past ~~==========~~90 ~~========~~days.

Yes þ No ¨

The number of outstanding shares of registrant’s Common Stock, par value $0.01 per share, was 6,546,240 shares as of September 9, 2002.

PART I. FINANCIAL INFORMATION

Item

1. Financial Statements

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

CONSOLIDATED BALANCE SHEETS

(unaudited)

A S S E T S	July 28, 2002			October 28, 2001
Current assets:
Cash and cash equivalents	$	32,468,372		$	26,210,874
Investments		9,493			10,045
Accounts receivable, net		24,668,884			25,512,903
Inventories		49,745,037			52,497,697
Deferred income tax benefit		13,815,985			13,815,985
Other		3,989,512			3,702,444

Total current assets		124,697,283			121,749,948

Property and equipment:
Machinery and equipment		68,727,001			68,272,493
Leasehold improvements		46,126,339			42,339,225
Buildings		23,770,662			23,699,445
Furniture and fixtures		11,352,089			9,757,411
Land		8,798,320			8,798,320
Construction in progress		1,858,378			2,215,527

		160,632,789			155,082,421
Less—Accumulated depreciation and amortization		80,679,438			72,713,841

		79,953,351			82,368,580

Deferred financing costs, net		8,609,132			10,107,345
Other assets		8,200,704			7,997,366

	$	221,460,470		$	222,223,239

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	6,528,847		$	8,961,470
Accrued expenses		17,164,730			15,669,641
Dividends payable		—			10,302,516
Current portion of long-term debt		9,308,426			9,005,724
Accrued interest expense		1,979,789			4,864,191
Income taxes payable		5,150,352			1,921,035

Total current liabilities		40,132,144			50,724,577
Long-term debt, net of current portion		262,840,180			243,290,691

Total liabilities		302,972,324			294,015,268

Mandatorily redeemable preferred stock, $100 stated value: Authorized—2,000,000 shares, issued and outstanding—none and 250,000 shares, respectively		—			25,000,000

Redeemable common stock—par value $0.01, issued and outstanding—968,983 shares		31,007,456			27,131,524

Stockholders’ equity (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
Unrealized loss on securities		(41,368	)		(40,826	)
Unrealized gain (loss) on hedging transactions		(253,793	)		106,999
Cumulative translation adjustment		30,359			(150,371	)
Additional paid-in capital		116,145,409			120,021,341
Accumulated deficit		(228,455,689	)		(243,916,468	)

Total stockholders’ deficit		(112,519,310	)		(123,923,553	)

	$	221,460,470		$	222,223,239

See accompanying notes.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(unaudited)

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	July 28, 2002			July 29, 2001			July 28, 2002			July 29, 2001
Net sales	$	88,056,901		$	80,399,853		$	268,300,809		$	278,641,939
Cost of sales		37,475,329			35,711,133			115,263,587			120,838,553

Gross profit		50,581,572			44,688,720			153,037,222			157,803,386
Selling, general and administrative expenses		34,971,343			31,848,096			103,976,453			100,987,711

Operating income		15,610,229			12,840,624			49,060,769			56,815,675
Interest expense		5,941,968			6,562,881			16,990,499			22,010,298
Other income		40,415			315,799			167,026			1,113,736

Income before income taxes		9,708,676			6,593,542			32,237,296			35,919,113
Income taxes		3,957,740			2,767,069			13,318,284			15,130,182

Net income		5,750,936			3,826,473			18,919,012			20,788,931
Preferred stock dividends		736,507			1,231,354			3,458,232			3,577,389

Income allocated to common stockholders	$	5,014,429		$	2,595,119		$	15,460,780		$	17,211,542

Comprehensive income, net of tax:
Net income	$	5,750,936		$	3,826,473		$	18,919,012		$	20,788,931
Foreign currency translation adjustments		288,607			(18,169	)		106,065			(216,064	)
Unrealized gain (loss) on hedging transactions		(124,171	)		70,006			(211,737	)		70,006
Unrealized gain (loss) on securities		—			1,643			(317	)		(564	)

Comprehensive income	$	5,915,372		$	3,879,953		$	18,813,023		$	20,642,309

Earnings per common share:
Basic	$	0.77		$	0.40		$	2.36		$	2.63

Diluted	$	0.76		$	0.38		$	2.34		$	2.59

Shares used in the calculation of earnings per common share:
Basic		6,546,240			6,546,183			6,546,240			6,546,177

Diluted		6,635,483			6,786,388			6,597,557			6,638,732

See accompanying notes.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Thirty-Nine Weeks Ended
	July 28, 2002			July 29, 2001
Cash flows from operating activities:
Net income	$	18,919,012		$	20,788,931
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,146,072			10,912,680
Amortization of discount on 12.5% notes due 2009		103,800			94,189
Amortization of deferred loan costs		1,552,213			1,621,265
Loss on disposal of property and equipment		124,401			90,289
Partnership losses		676,962			235,701
Decrease in accounts receivable		844,019			11,023,510
(Increase) decrease in inventories		2,752,660			(2,114,956	)
Increase in prepaid income tax		—			(3,317,383	)
Increase in other current assets		(287,068	)		(15,719	)
Increase in other assets		(1,274,755	)		(460,204	)
Decrease in accounts payable		(2,432,623	)		(4,818,992	)
Increase in accrued expenses		1,495,089			3,861,594
Decrease in accrued interest expense		(2,884,402	)		(6,004,996	)
Increase (decrease) in income taxes payable		3,229,317			(4,558,120	)

Net cash provided by operating activities		33,964,697			27,337,789

Cash flows from investing activities:
Proceeds from sale of property and equipment		14,900			4,500
Purchase of property and equipment		(8,866,190	)		(9,525,564	)
Sale of short-term investments		552			4,141
Capital contributions to partnership		—			(3,080,493	)
Capital distributions from partnership		336,500			77,500

Net cash used in investing activities		(8,514,238	)		(12,519,916	)

Cash flows from financing activities:
Principal payments of long-term debt		(19,012,357	)		(14,019,049	)
Issuance of common stock		—			1,980

Net cash used in financing activities		(19,012,357	)		(14,017,069	)

Effect of exchange rate changes		180,730			(373,315	)

Unrealized loss on securities		(542	)		(974	)

Unrealized gain (loss) on hedging transactions		(360,792	)		120,957

Net increase in cash and cash equivalents		6,257,498			547,472
Beginning balance, cash and cash equivalents		26,210,874			25,130,928

Ending balance, cash and cash equivalents	$	32,468,372		$	25,678,400

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Continued)

	Thirty-Nine Weeks Ended
	July 28, 2002		July 29, 2001
Supplemental disclosures of cash flow information:
Cash received during the thirty-nine weeks for interest income	$	835,498	$	716,770

Cash paid during the thirty-nine weeks for:
Interest expense	$	17,745,169	$	25,698,927

Income taxes	$	11,057,456	$	22,987,439

Supplemental disclosure of noncash financing activity:
Dividends accrued during the thirty-nine weeks on mandatorily redeemable preferred stock (note 5)	$	3,458,232	$	3,577,389

Conversion of mandatorily redeemable preferred stock and accrued dividends to subordinated notes (note 5)	$	38,760,748	$	—

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.” It is suggested that the accompanying unaudited consolidated financial statements and notes thereto 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 October 28, 2001 as filed with the Securities and Exchange Commission on January 28, 2002.

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 3, 2002.

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. The Company also operates two home furnishing stores and one home furnishing outlet store under the name St. John Home. 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 July 28, 2002 and July 29, 2001.

2. 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.

3. 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.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

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:

	Thirteen Weeks Ended		Thirty-nine Weeks Ended
	July 28, 2002	July 29, 2001	July 28, 2002	July 29, 2001
Weighted average shares outstanding	6,546,240	6,546,183	6,546,240	6,546,177
Add: dilutive effect of stock options	89,243	240,205	51,317	92,555

Shares used to calculate diluted earnings per share	6,635,483	6,786,388	6,597,557	6,638,732

4. Inventories

Inventories consist of the following:

	July 28, 2002		October 28, 2001
Raw materials	$	14,377,856	$	13,011,735
Work-in-process		8,256,343		8,184,806
Finished products		27,110,838		31,301,156

	$	49,745,037	$	52,497,697

5. Long-term Debt

On May 17, 2002, Vestar/SJK Investors LLC and the Gray family, the holders of all of the Company’s 15.25% mandatorily redeemable preferred stock, sold their interest therein to a third party. Vestar/SJK Investors LLC is owned by Vestar Capital Partners III, L.P. (“Vestar”). Three of our non-executive directors are affiliates of Vestar. In connection with such sale, the terms of the preferred stock were amended to provide for the exchange of the securities, plus any accrued dividends, for senior subordinated unsecured notes bearing interest at a rate of 15.25%. On July 2, 2002, the preferred stock plus accrued dividends were converted to notes with an aggregate balance of $38.8 million. The Company will have the option to redeem the notes in cash for face value of the notes plus accrued and unpaid interest after January 2, 2003 and 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 during the 12 month window 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 sheet. 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.

6. Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 addresses financial accounting and reporting for business

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

combinations and is effective for all business combinations after June 30, 2001. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and is effective for fiscal years beginning after December 15, 2001. The adoption of these standards is not expected to have a material impact on the Company’s financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business (as previously defined in that Opinion). The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, with early application encouraged, and generally are to be applied prospectively. The adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operations.

In July 2002, the FASB issued SFAS 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) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. We will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002.

In April 2001, Emerging Issues Task Force (“EITF”) No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products” was issued. EITF No. 00-25 governs the accounting for consideration from a vendor to a reseller of the vendor’s products and was adopted by the Company in the fourth quarter of fiscal 2001. The adoption of this EITF did not have a material impact on the Company’s financial position or results of operations.

7. Segment Information

The Company has two reportable business segments, wholesale and retail sales. For the third quarter and first nine months of fiscal 2002, retail sales were generated through the Company’s 27 St. John boutiques, 10 St. John outlet stores, two St. John Home stores and one St. John Home outlet store. Management evaluates segment performance based primarily on revenue and earnings from operations.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

Segment information is summarized as follows for the periods indicated (in 000’s):

	Wholesale		Retail		Eliminations			Total

Third Quarter Fiscal 2002
Net sales	$	74,067	$	30,896	$	(16,906	)	$	88,057
Segment operating income	$	16,854	$	634	$	(1,878	)	$	15,610

Third Quarter Fiscal 2001
Net sales	$	71,716	$	26,931	$	(18,247	)	$	80,400
Segment operating income	$	14,908	$	396	$	(2,463	)	$	12,841

First Nine Months Fiscal 2002
Net sales	$	218,758	$	106,177	$	(56,634	)	$	268,301
Segment operating income	$	46,456	$	6,869	$	(4,264	)	$	49,061

First Nine Months Fiscal 2001
Net sales	$	235,527	$	93,145	$	(50,030	)	$	278,642
Segment operating income	$	55,004	$	4,900	$	(3,088	)	$	56,816

8. Supplemental Condensed Consolidated Financial Information

The Company’s payment obligations under its 12.5% 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 July 28, 2002 and October 28, 2001, and for the 13 and 39 weeks ended July 28, 2002 and July 29, 2001.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

JULY 28, 2002

(UNAUDITED)

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


ASSETS

Current assets:
Cash, cash equivalents and investments	$	31,947		$	2		$	529		$	—		$	32,478
Accounts receivable, net		23,737			43			889						24,669
Inventories (1)		47,134			218			2,393						49,745
Deferred income tax benefit		13,816						—						13,816
Other		3,940			47			3						3,990
Intercompany accounts receivable		3,312						—			(3,312	)		—

Total current assets		123,886			310			3,814			(3,312	)		124,698

Property and equipment, net		73,554			1,059			5,340						79,953
Investment in subsidiaries		(5,094	)					—			5,094			—
Receivable from consolidated subsidiaries		14,297						—			(14,297	)		—
Deferred financing costs		8,609						—						8,609
Other assets		7,241			19			941						8,201

Total assets	$	222,493		$	1,388		$	10,095		$	(12,515	)	$	221,461

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	5,921		$	—		$	608		$	—		$	6,529
Accrued expenses		17,079			41			45						17,165
Current portion of long-term debt		9,308						—						9,308
Accrued interest expense		1,980						—						1,980
Intercompany accounts payable								3,312			(3,312	)		—
Income taxes payable		5,944						(793	)					5,151

Total current liabilities		40,232			41			3,172			(3,312	)		40,133

Intercompany payable					9,492			4,805			(14,297	)		—
Long-term debt, net of current portion		262,840						—						262,840

Total liabilities		303,072			9,533			7,977			(17,609	)		302,973

Redeemable common stock		31,007						—						31,007

Total stockholders’ equity (deficit)		(111,586	)		(8,145	)		2,118			5,094			(112,519	)

Total liabilities and stockholders’ equity (deficit)	$	222,493		$	1,388		$	10,095		$	(12,515	)	$	221,461

(1)

Inventories are shown at cost for all entities

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

OCTOBER 28, 2001

(UNAUDITED)

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


ASSETS

Current assets:
Cash, cash equivalents and investments	$	26,000		$	4		$	217	$	—		$	26,221
Accounts receivable, net		24,315			91			1,107					25,513
Inventories (1)		48,943			1,615			1,940					52,498
Deferred income tax benefit		13,816											13,816
Other		3,580			90			32					3,702
Intercompany accounts receivable		1,698								(1,698	)		—

Total current assets		118,352			1,800			3,296		(1,698	)		121,750

Property and equipment, net		75,643			1,221			5,505					82,369
Investment in subsidiaries		(3,757	)							3,757			—
Receivable from consolidated subsidiaries		15,153								(15,153	)		—
Deferred financing costs		10,107											10,107
Other assets		7,247			60			690					7,997

Total assets	$	222,745		$	3,081		$	9,491	$	(13,094	)	$	222,223


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Accounts payable	$	8,846		$	—		$	115	$	—		$	8,961
Accrued expenses		15,423			159			87					15,669
Current portion of long-term debt		9,006											9,006
Accrued interest expense		4,864											4,864
Dividends payable		10,303											10,303
Intercompany accounts payable								1,698		(1,698	)		—
Income taxes payable		1,907						14					1,921

Total current liabilities		50,349			159			1,914		(1,698	)		50,724

Intercompany payable					10,154			4,999		(15,153	)		—
Long-term debt, net of current portion		243,291											243,291

Total liabilities		293,640			10,313			6,913		(16,851	)		294,015

Mandatorily redeemable preferred stock		25,000											25,000

Redeemable common stock		27,132											27,132

Total stockholders’ equity (deficit)		(123,027	)		(7,232	)		2,578		3,757			(123,924	)

Total liabilities and stockholders’ equity (deficit)	$	222,745		$	3,081		$	9,491	$	(13,094	)	$	222,223

(1)

Inventories are shown at cost for all entities.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME

THIRTEEN WEEKS ENDED JULY 28, 2002

(UNAUDITED)

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

Net sales	$	85,034		$	1,057		$	1,965		$	—	$	88,056
Cost of sales		35,574			800			1,101					37,475

Gross profit		49,460			257			864					50,581
Selling, general and administrative expenses		32,522			947			1,502					34,971

Operating income (loss)		16,938			(690	)		(638	)				15,610
Interest expense		5,942											5,942
Other income		233			(12	)		(180	)				41

Income (loss) before income taxes		11,229			(702	)		(818	)				9,709
Income taxes		4,732			(295	)		(479	)				3,958

Income (loss) before equity in loss of consolidated subsidiaries		6,497			(407	)		(339	)				5,751
Equity in loss of consolidated subsidiaries		(746	)								746		—

Net income (loss)	$	5,751		$	(407	)	$	(339	)	$	746	$	5,751

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME

THIRTEEN WEEKS ENDED JULY 29, 2001

(UNAUDITED)

	PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES		ELIMINATIONS		CONSOLIDATED

(Amounts in thousands)

Net sales	$	76,934		$	1,334		$	2,132	$	—	$	80,400
Cost of sales		33,761			955			995				35,711

Gross profit		43,173			379			1,137				44,689
Selling, general and administrative expenses		29,741			1,077			1,030				31,848

Operating income (loss)		13,432			(698	)		107				12,841

Interest expense		6,563										6,563
Other income/(expense)		295			—			21				316

Income (loss) before income taxes		7,164			(698	)		128				6,594
Income taxes		3,028			(302	)		42				2,768

Income (loss) before equity in loss of consolidated subsidiaries		4,136			(396	)		86				3,826
Equity in loss of consolidated subsidiaries		(310	)							310		—

Net income (loss)	$	3,826		$	(396	)	$	86	$	310	$	3,826

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME

THIRTY-NINE WEEKS ENDED JULY 28, 2002

(UNAUDITED)

	PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS		CONSOLIDATED

(Amounts in thousands)

Net sales	$	257,647		$	4,463		$	6,191		$	—	$	268,301
Cost of sales		109,116			2,822			3,326					115,264

Gross profit		148,531			1,641			2,865					153,037
Selling, general and administrative expenses		96,871			3,203			3,902					103,976

Operating income (loss)		51,660			(1,562	)		(1,037	)				49,061

Interest expense		16,991											16,991
Other income		341			(12	)		(162	)				167

Income (loss) before income taxes		35,010			(1,574	)		(1,199	)				32,237
Income taxes		14,754			(661	)		(775	)				13,318

Income (loss) before equity in loss of consolidated subsidiaries		20,256			(913	)		(424	)				18,919
Equity in loss of consolidated subsidiaries		(1,337	)								1,337		—

Net income (loss)	$	18,919		$	(913	)	$	(424	)	$	1,337	$	18,919

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME

THIRTY-NINE WEEKS ENDED JULY 29, 2001

(UNAUDITED)

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

Net sales	$	267,443		$	4,813		$	6,386	$	—	$	278,642
Cost of sales		114,839			3,203			2,797				120,839

Gross profit		152,604			1,610			3,589				157,803
Selling, general and administrative expenses		94,567			3,319			3,102				100,988

Operating income (loss)		58,037			(1,709	)		487				56,815
Interest expense		22,010										22,010
Other income		1,076						38				1,114

Income (loss) before income taxes		37,103			(1,709	)		525				35,919
Income taxes		15,626			(708	)		212				15,130

Income (loss) before equity in loss of consolidated subsidiaries		21,477			(1,001	)		313				20,789
Equity in loss of consolidated subsidiaries		(688	)							688		—

Net income (loss)	$	20,789		$	(1,001	)	$	313	$	688	$	20,789

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

THIRTY-NINE WEEKS ENDED JULY 28, 2002

(UNAUDITED)

	PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

(Amounts in thousands)

OPERATING ACTIVITIES:
Net income (loss)	$	18,919		$	(913	)	$	(424	)	$	1,337		$	18,919
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		10,466			137			543						11,146
Amortization of discount on 12.5% notes due 2009		104												104
Amortization of deferred loan costs		1,552												1,552
Gain on disposal of property and equipment		124												124
Partnership losses		677												677
Gain on sale of partnership asset		—												—
Equity in loss of consolidated subsidiaries		1,337									(1,337	)		—

Cash provided by changes in operating assets and liabilities:
Accounts receivable		579			48			217						844
Intercompany receivables (net)		(1,051	)		(662	)		1,713						—
Inventories		1,808			1,397			(452	)					2,753
Other current assets		(331	)		43			1						(287	)
Other assets		(1,050	)		41			(266	)					(1,275	)
Accounts payable		(2,433	)											(2,433	)
Accrued expenses		1,441			(116	)		170						1,495
Accrued interest expense		(2,884	)											(2,884	)
Income taxes payable		4,008						(779	)					3,229

Net cash provided by operating activities		33,266			(25	)		723			—			33,964

INVESTING ACTIVITIES:
Proceeds from sale of property and equipment		15												15
Purchases of property and equipment		(8,511	)		23			(378	)					(8,866	)
Sale of short-term investments		1												1
Capital distributions from partnership		336												336

Net cash used in investing activities		(8,159	)		23			(378	)		—			(8,514	)

FINANCING ACTIVITIES:
Principal payments of long-term debt		(19,015	)					3						(19,012	)

Net cash used in financing activities		(19,015	)		—			3			—			(19,012	)

Effect of exchange rate changes		217						(36	)					181

Unrealized loss on securities		(1	)											(1	)

Change in value of hedging transactions		(361	)											(361	)

Net increase in cash and cash equivalents		5,947			(2	)		312			—			6,257
Beginning balance, cash and cash equivalents		25,990			4			217						26,211

Ending balance, cash and cash equivalents	$	31,937		$	2		$	529		$	—		$	32,468

Supplemental disclosures of cash flow information:
Cash received for interest income	$	835		$	—		$	—		$	—		$	835

Cash paid for:
Interest expense	$	17,745		$	—		$	—		$	—		$	17,745

Income taxes	$	11,057		$	—		$	—		$	—		$	11,057

Supplemental disclosure of noncash financing activity:
Dividends accrued on mandatorily redeemable preferred stock	$	3,458		$	—		$	—		$	—		$	3,458

Conversion of manditorily redeemable preferred stock and accrued dividends to subordinated notes	$	38,761		$	—		$	—		$	—		$	38,761

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

THIRTY-NINE WEEKS ENDED JULY 29, 2001

(UNAUDITED)

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

OPERATING ACTIVITIES:
Net Income/Loss	$	20,789		$	(1,001	)	$	313		$	688		$	20,789
Adjustments to reconcile net income/loss to net cash provided by operating activities:
Depreciation and amortization		10,647			100			166						10,913
Amortization of discount on 12.5% notes due 2009		94												94
Amortization of deferred loan costs		1,621												1,621
Loss on disposal of property and equipment		90												90
Partnership losses		236												236
Equity in loss of consolidated subsidiaries		688									(688	)		—
Cash provided by changes in operating assets and liabilities
Accounts receivable		10,419			129			475						11,023
Intercompany receivables (net)		2,292			(3,596	)		1,304						—
Prepaid income tax		(3,317	)											(3,317	)
Inventories		(2,156	)		376			(335	)					(2,115	)
Other current assets		19			(36	)		1						(16	)
Other assets		(814	)		80			274						(460	)
Accounts payable		(4,819	)											(4,819	)
Accrued expenses		4,155			(240	)		(54	)					3,861
Accrued interest expense		(6,005	)											(6,005	)
Income taxes payable		(8,726	)		4,387			(219	)					(4,558	)

Net cash provided by operating activities		25,213			199			1,925			—			27,337

INVESTING ACTIVITIES:
Proceeds from sale of property and equipment		5												5
Purchases of property and equipment		(8,227	)		(226	)		(1,073	)					(9,526	)
Sale of short-term investments		4												4
Capital contributions to partnership		(3,080	)											(3,080	)
Capital distributions from partnership		77												77

Net cash used in investing activities		(11,221	)		(226	)		(1,073	)		—			(12,520	)

FINANCING ACTIVITIES:
Principal payments of long-term debt		(13,780	)					(239	)					(14,019	)
Dividends received (paid)		250						(250	)					—
Issuance of common stock		2												2

Net cash used in financing activities		(13,528	)		—			(489	)		—			(14,017	)

Effect of exchange rate changes		(14	)		—			(359	)		—			(373	)

Unrealized loss on securities		(1	)		—			—			—			(1	)

Unrealized gain on hedging transactions		121			—			—			—			121

Net increase (decrease) in cash and cash equivalents		570			(27	)		4			—			547
Beginning balance, cash and cash equivalents		24,729			100			302			—			25,131

Ending balance, cash and cash equivalents	$	25,299		$	73		$	306		$	—		$	25,678

Supplemental disclosures of cash flow information:
Cash received for interest income	$	717		$	—		$	—		$	—		$	717

Cash paid for:
Interest expense	$	25,698		$	—		$	1		$	—		$	25,699

Income taxes	$	22,577		$	—		$	410		$	—		$	22,987

Supplemental disclosure of noncash financing activity:
Dividends accrued on mandatorily redeemable preferred stock	$	3,577		$	—		$	—		$	—		$	3,577

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In May 2002, the Company selected Deloitte & Touche LLP ("Deloitte") to replace Arthur Andersen LLP as the Company's independent public accountants. The Company and Deloitte are currently reviewing the Company's accounting policy related to the recognition of real estate rental expenses in order to determine whether a change in this policy may be required. The Company expects to come to a final determination before the end of the Company's fiscal year ending November 3, 2002 ("fiscal 2002"). If this change in accounting policy is implemented, the Company may be required to restate its historical financial statements in its Annual Report on Form 10-K for fiscal 2002. The Company currently estimates that any such restatement would have the effect of decreasing net income by approximately $500,000 for each of fiscal years 2001 and 2000. The Company also currently estimates that a restatement would have the effect of decreasing net income by approximately $100,000 and $300,000 for the third quarter and first nine months of fiscal 2002 and $125,000 and $375,000 for the same periods of fiscal 2001, respectively. Such restatement would also require the Company to add a liability for deferred rent expense to the balance sheet at October 28, 2001 of approximately $5 million.

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 Thirteen Weeks Ended (“Third Quarter”)				Percent of Net Sales Thirty-Nine Weeks Ended (“Nine Months”)
	(unaudited)				(unaudited)
	July 28, 2002		July 29, 2001		July 28, 2002		July 29, 2001
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	42.6		44.4		43.0		43.4

Gross profit	57.4		55.6		57.0		56.6
Selling, general and administrative expenses	39.7		39.6		38.8		36.2

Operating income	17.7		16.0		18.2		20.4
Interest expense	6.7		8.2		6.3		7.9
Other income	—		0.4		0.1		0.4

Income before income taxes	11.0		8.2		12.0		12.9
Income tax provision	4.5		3.4		5.0		5.4

Net income	6.5	%	4.8	%	7.0	%	7.5	%

Certain 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 judgements 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 adverse change in the anticipated demand for the Company’s products could cause the Company to revise its estimate of excess and obsolete inventory.

Wholesale Markdowns

The Company has agreements with its major wholesale customers to reimburse them for markdowns which exceed an agreed upon level. The Company records an estimate of its liability under these agreements 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.

Accounts Receivable

The Company performs ongoing credit evaluations of its wholesale customers and adjusts credit limits based upon payment history and the customer’s current financial status. The Company continuously monitors its customer payments 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.

Insurance Program

Beginning on January 1, 2002, the Company became 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.

Results of Operations

Third Quarter Fiscal 2002 Compared to Third Quarter Fiscal 2001

Net sales for the third quarter of fiscal 2002 increased by $7.7 million, or 9.5% as compared to the third quarter of fiscal 2001. This increase was principally attributable to (i) an increase in sales by Company owned retail stores of approximately $4.0 million, including $2.6 million related to the addition of five new retail boutiques since the beginning of the third quarter of fiscal 2001 and (ii) an increase in sales to domestic wholesale customers of approximately $3.9 million, including an increase of approximately $2.9 million in sales of the Sport product line to these customers. Sales for Company owned retail boutiques open at least one year increased by 2.7% over the third quarter of fiscal 2001.

Gross profit for the third quarter of fiscal 2002 increased by $5.9 million, or 13.2% as compared to the third quarter of fiscal 2001, and increased as a percentage of net sales to 57.4% from 55.6%. This increase in the gross profit margin was primarily the result of an increase in the gross profit margin for the Sport product line, due to an increase in production efficiency, and a reduction in the markdowns related to the Company’s wholesale sales.

Selling, general and administrative expenses for the third quarter of fiscal 2002 increased by $3.1 million, or 9.8% over the third quarter of fiscal 2001, and increased slightly as a percentage of net sales to 39.7% from 39.6%. Selling, general and administrative expenses increased during the period primarily due to an increase in expenses associated with the retail division, resulting from the expansion of the Company’s retail operations. Selling, general and administrative expenses remained relatively constant as a percentage of net sales due to the increase in net sales noted above.

Operating income for the third quarter of fiscal 2002 increased by $2.8 million, or 21.6% as compared to the third quarter of fiscal 2001. Operating income as percentage of net sales increased to 17.7% from 16.0% during the same period. This increase in operating income as a percentage of net sales was due to an increase in the gross profit margin, partially offset by an increase in selling, general and administrative expenses as a percentage of net sales.

Interest expense for the third quarter of fiscal 2002 decreased by $0.6 million, or 9.5% from the third quarter of fiscal 2001. This decrease was primarily due a reduction in interest rates between the periods.

First Nine Months Fiscal 2002 Compared to First Nine Months Fiscal 2001

Net sales for the first nine months of fiscal 2002 decreased by $10.3 million, or 3.7% as compared to the first nine months of fiscal 2001. This decrease was principally attributable to a decrease in sales to domestic wholesale customers of approximately $22.7 million, due in part to their reduced inventory levels from the same period of the prior year. This decrease was partially offset by an increase in sales by Company owned retail stores of approximately $13.0 million, primarily due to the addition of five new retail boutiques since the beginning of fiscal 2001 and significant increases in sales for the boutiques located in New York and Costa Mesa, California. Sales for Company owned retail boutiques open at least one year increased by 6.8% over the first nine months of fiscal 2001.

Gross profit for the first nine months of fiscal 2002 decreased by $4.8 million, or 3.0% as compared to the first nine months of fiscal 2001, but increased as a percentage of net sales to 57.0% from 56.6%. This increase in gross profit as a percent of net sales was primarily the result of an

increase in sales by the Company owned retail boutiques, which on a consolidated basis have a higher gross profit margin than sales to wholesale customers and an increase in the gross profit margin for the Sport product line. These increases were partially offset by a decrease in the gross profit margin for the Knit product line, due to a reduction in the number of units being manufactured and sold without a corresponding decrease in the production costs.

Selling, general and administrative expenses for the first nine months of fiscal 2002 increased by $3.0 million, or 3.0% over the first nine months of fiscal 2001, and increased as a percentage of net sales to 38.8% from 36.2%. Selling, general and administrative expenses increased during the period primarily due to (i) an increase in the expenses associated with the retail division of approximately $4.6 million, resulting from the expansion of the Company’s retail operations and (ii) an increase in costs related to the Company’s expanding operations in Japan of approximately $0.8 million. These increases were partially offset by a decrease in advertising and promotion expenses of approximately $1.5 million and a decrease in severance expenses of approximately $1.7 million, due to non-recurring expenses which were recorded during fiscal 2001. Selling, general and administrative expenses increased as a percentage of net sales primarily due to a decrease in net sales without a corresponding decrease in the selling, general and administrative expenses due to the Company’s decision to maintain its infrastructure to allow for a quick response to an increase in demand.

Operating income for the first nine months of fiscal 2002 decreased by $7.8 million, or 13.6% as compared to the first nine months of fiscal 2001. Operating income as percentage of net sales decreased to 18.2% from 20.4% during the same period. This decrease in operating income as a percentage of net sales was due to an increase in selling, general and administrative expenses as a percentage of net sales, partially offset by an increase in the gross profit margin.

Interest expense for the first nine months of fiscal 2002 decreased by $5.0 million, or 22.8% from the first nine months of fiscal 2001. This decrease was primarily due 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 nine months of fiscal 2002, cash provided by operating activities was $34.0 million. Cash provided by operating activities was primarily generated by net income, a decrease in inventories and an increase in income taxes payable while cash used in operating activities was primarily used to fund a decrease in accounts payable and accrued interest expense. Cash used in investing activities was $8.5 million during the first nine months of fiscal 2002. The principal use of cash in investing activities was for the construction of leasehold improvements for scheduled new boutiques and upgrades to the Company’s computer systems. Cash used in financing activities was $19.0 million during the first nine months of fiscal 2002, which included prepayments made on the Company’s senior secured debt of $15.0 million. These prepayments included a $6.8 million payment that was required under the terms of the credit agreement based on the calculation of the Company’s excess cash flow.

As of July 28, 2002, the Company had approximately $84.6 million in working capital and $32.5 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 plus

1.0% (4.75% at July 28, 2002) or a Eurodollar rate 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 July 28, 2002, the Company was in compliance with all covenants and no amounts were outstanding under the Revolving Commitment. The Company currently has $6.6 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 increased $19.9 million to $272.1 million during the nine months ended July 28, 2002. The Company’s outstanding debt is comprised of bank borrowings of $134.3 million, 12.5% senior subordinated notes (“12.5% notes”) of $99.0 million and senior subordinated notes of $38.8 million. The increase was due to the conversion of the Company’s mandatorily redeemable preferred stock and accrued dividends into senior subordinated notes bearing interest at a rate of 15.25% (“15.25% notes”).

The Company’s primary ongoing cash requirements will be for debt service and capital expenditures. The Company’s debt service requirements consist primarily of principal and interest payments on bank borrowings and interest on 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 its capital investment requirements, interest and principal payment obligations and working capital requirements and to comply with all of the financial covenants under its debt agreements depends on its future operating performance and cash flow, which in turn are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond the Company’s control.

The table below details the Company’s obligations and commitments under contracts and lease agreements in effect as of July 28, 2002:

	Fiscal Years
	2002 (A)		2003		2004		2005		2006		Thereafter		Total
	(Amounts in thousands)
12.5% notes	$	—	$	—	$	—	$	—	$	—	$	100,000	$	100,000
15.25% notes		—		—		—		—		—		38,761		38,761
Variable rate debt		3,325		9,751		17,957		19,914		34,113		49,284		134,344
Operating leases		4,509		18,593		20,002		19,557		18,774		92,136		173,571

Total obligations	$	7,834	$	28,344	$	37,959	$	39,471	$	52,887	$	280,181	$	446,676

(A)

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

In addition to payments under the above contractual obligations, the Company anticipates purchasing property and equipment of approximately $9.0 million during the remainder of fiscal 2002. The estimated $9.0 million will be used principally for (i) the construction of leasehold improvements for two new retail boutiques located in Orlando, Florida and Short Hills, New Jersey, (ii) the purchase of electronic knitting machines and (iii) the construction of leasehold improvements for a relocated

boutique in Atlanta, Georgia.

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. See Note 8 to the Company’s unaudited consolidated financial statements contained herein.

The Company has the option of calling the 15.25% notes after January 2, 2003 and 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 during the 12 month window 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 sheet.

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 million annually of the common stock beneficially owned by the Gray family. Any such repurchases would be limited by the restrictions of the agreements under the credit facilities and senior subordinated notes.

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% senior subordinated note indenture 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 as defined in its credit agreement for its senior secured credit facilities was approximately $60.3 million and $68.1 million for the first nine months of fiscal 2002 and 2001, respectively, and $19.3 and $16.5 million for the third quarter of fiscal 2002 and 2001, respectively. EBITDA represents net income excluding the effects of interest expense, income taxes and depreciation. In addition, EBITDA allows for the add back of noncash expenses. 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.

Credit Facilities

In order to finance a portion of the cash consideration paid pursuant to the mergers, the Company entered into a credit agreement with a group of financial institutions, which provides for an aggregate principal amount of loans totaling $215 million. The credit agreement consists of three facilities: (i) tranche A facility totaling $75 million, (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 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 payment creates a default under the credit agreement. The credit agreement contains customary events of default.

12.5% Notes

In addition to the credit facilities described above, the Company sold $100 million 12.5% notes to help finance the mergers. 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

In order to finance a portion of the cash consideration paid in the mergers, SJKI issued 250,000 shares of 15.25% mandatorily redeemable preferred stock due 2010 to Vestar/SJK Investors LLC.

executive directors are affiliates of Vestar. In connection with such sale, the terms of the preferred stock were amended to provide for the exchange of the securities, plus any accrued dividends, for senior subordinated unsecured notes bearing interest at a rate of 15.25%. On July 2, 2002, the preferred stock plus accrued dividends were converted to notes with an aggregate balance of $38.5 million. The Company will have the option to redeem the notes in cash for face value of the notes plus accrued and unpaid interest after January 2, 2003 and 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 during the 12 month window 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 sheet. 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

In connection with the mergers, SJKI has entered into a stockholders’ agreement with Vestar/Gray Investors, Vestar and the Grays, which states, among other things, that prior to a public offering of SJKI common stock, if Bob Gray ceases to serve as Chairman or Chief Executive Officer of St. John or SJKI or if the employment with SJKI of Marie Gray or Kelly Gray ceases for any reason, then he or she will have the right to require SJKI to purchase the shares of SJKI common stock beneficially owned by them, 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.

Inflation

The Company does not believe that inflation had a material impact on the sales reported for the third quarter or first nine months of fiscal 2002.

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 2002, (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 during the 12 month window beginning January 2, 2003.

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. These risks, uncertainties and other factors include, but are not limited to, the following: (i) the financial strength of the retail industry and the level of consumer spending for apparel and accessories, (ii) the Company’s ability to develop, market and sell its products, (iii) increased competition from other manufacturers and retailers of women’s clothing and accessories, (iv) general economic conditions and (v) the inability of the Company to meet the financial covenants under its senior secured credit facilities and subordinated note indenture. The potential adverse impact on the Company of these and other risks is discussed in more detail in the Company’s Annual Report on Form 10-K for the year ended October 28, 2001 and the risk factors described therein are incorporated herein by reference. All forward looking statements included in this report are based on information available to the Company as of the date of the report, and the Company assumes no obligation to update or revise any such forward looking statements to reflect events or circumstances that occur after such statements are made.

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 currencies. In order to reduce the effects of such fluctuations, under established risk management practices, the Company enters into forward contracts. These contractual arrangements are placed with a major financial institution. The Company does not hold derivative financial instruments for 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 currency exchange rate fluctuation is on the Euro and the yen. At July 28, 2002, the Company had contracts maturing through October 31, 2002 to sell 1.2 million Euros at a rate of 0.88 U.S. dollars to the Euro and contracts maturing through January 31, 2003 to sell 234 million yen at rates ranging from 128 to 129 yen to the U.S. dollar.

The Company purchases its shoes and leather goods, as well as various other raw materials, from companies located in Italy. The purchase of these items is completed in 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 foreign exchange contracts. At July 28, 2002 there were no outstanding contracts to buy Euros. The Company has made a decision to use the sales made in Euros as a natural hedge of the purchases of items in Euros for the period from November 2002 to April 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 of bank borrowings related to the mergers. The Company also holds fixed rate subordinated notes. The Company entered into an interest rate collar agreement with a major financial institution to limit its exposure on $35 million of the variable rate debt. The agreement became effective on October 4, 1999 and expired on July 7, 2002. Consequently, the Company is no longer protected against interest rate changes related to its variable rate debt.

For fixed rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not influence fair market value, but do affect future earnings and cash flows. The Company has managed its exposure to changes in interest rates by issuing part of its debt with a fixed interest rate. Holding the variable rate debt balance constant, each one percentage point increase in interest rates occurring on the first day of the year would result in an increase in interest expense for the coming year of approximately $1.3 million.

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.


4.1		Form of 15.25% Senior Subordinated Notes due 2009

4.2		Form of 15.25% Senior Subordinated Guarantee

(b) Reports on Form 8-K.

None

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.

September 9, 2002	ST. JOHN KNITS INTERNATIONAL, INCORPORATED

	By:	/s/ BOB GRAY
		Bob Gray Chairman of the Board

	By:	/s/ ROGER G. RUPPERT
		Roger G. Ruppert Senior Vice President — Finance, Chief Financial Officer (Principal Financial Officer)

CERTIFICATION

I, Bob Gray, certify that:

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

Based on my knowledge, this quarterly report does not contain any untrue statements 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; and

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.

Dated: September 9, 2002

By:		/s/ BOB GRAY
		Bob Gray Chairman of the Board

CERTIFICATION

I, Roger G. Ruppert, certify that:

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

Dated: September 9, 2002

By:		/s/ ROGER G. RUPPERT
		Roger G. Ruppert Senior Vice President — Finance, Chief Financial Officer (Principal Financial Officer)

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