UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~July~~May 284, ~~2002~~2003

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

For the transition period from ~~_________~~ to ~~_________~~

Commission File Number 333-73107

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

(Exact Name of Registrant as Specified in its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		52-2061057 (I.R.S. Employer Identification Number)
Delaware		52-2303510
17622 Armstrong Avenue, Irvine, California (Address of Principal Executive Offices)		92614 (Zip Code)
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
17622 Armstrong Avenue, Irvine, California		92614
(Address of Principal Executive Offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨*

~~Yes þ No ¨~~* The Registrant is not subject to the reporting requirements of Item 405.

~~The~~Indicate ~~number~~by ofcheck ~~outstanding~~mark ~~shares~~whether ~~of registrant’s~~the ~~Common~~Registrant ~~Stock,~~is ~~par~~an ~~value~~accelerated ~~$0.01~~filer ~~per share, was 6,546,240 shares~~ (as ofdefined ~~September~~in 9,Exchange ~~2002~~Act Rule 12b-2). Yes ¨ No x

The number of outstanding shares of registrant’s Common Stock, par value $0.01 per share, was 6,456,619 shares as of June 16, 2003.

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
	May 4, 2003			November 3,2002
ASSETS
Current assets:
Cash and cash equivalents	$	3241,~~468~~990,~~372~~915		$	2630,~~210~~129,~~874~~208
Investments		~~9,493~~—			106,~~045~~713
Accounts receivable, net		2423,~~668~~671,~~884~~421			2531,~~512~~344,~~903~~914
Inventories		4951,~~745~~221,~~037~~323			5254,~~497~~705,~~697~~873
Deferred income tax benefit		13,~~815~~445,~~985~~240			13,~~815~~383,~~985~~637
Other		34,~~989~~254,~~512~~519			3,~~702~~857,~~444~~975
Total current assets		~~124~~134,~~697~~583,~~283~~418			~~121~~133,~~749~~428,~~948~~320
Property and equipment:
Machinery and equipment		6869,~~727~~216,~~001~~621			68,~~272~~781,~~493~~604
Leasehold improvements		4648,~~126~~671,~~339~~652			4248,~~339~~186,~~225~~803
Buildings		2325,~~770~~708,~~662~~231			23,~~699~~782,~~445~~871
Furniture and fixtures		1114,~~352~~416,~~089~~295			913,~~757~~748,~~411~~486
Land		8,798,320			8,798,320
Construction in progress		12,~~858~~609,~~378~~947			2,~~215~~714,~~527~~513
		160,632,789			155,082,421
		169,421,066			166,012,597
Less—Accumulated depreciation and amortization		8086,~~679~~953,~~438~~065			7282,~~713~~250,~~841~~167
		79,953,351			82,368,580
		82,468,001			83,762,430
Deferred financing costs, net		87,~~609~~101,~~132~~190			108,~~107~~100,~~345~~736
Other assets		8,200,704			7,997,366
Deferred income tax benefit		3,155,896			3,217,500
	$	221,460,470		$	222,223,239
Other assets		7,017,744			7,398,360
	$	234,326,249		$	235,907,346
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	67,~~528~~629,~~847~~021		$	86,~~961~~873,~~470~~932
Accrued expenses		1718,~~164~~304,~~730~~404			1516,~~669~~803,~~641~~824
Dividends payable		—			10,302,516
Senior subordinated 15.25% notes (Note 5)		39,293,709			—
Current portion of long-term debt		913,~~308~~397,~~426~~202			910,~~005~~159,~~724~~054
Accrued interest expense		16,~~979~~384,~~789~~159			46,~~864~~352,~~191~~267
Income taxes payable		54,~~150~~709,~~352~~806			17,~~921~~201,~~035~~500
Total current liabilities		4089,~~132~~718,~~144~~301			5047,~~724~~390,577
Long-term debt, net of current portion		~~262~~212,~~840~~865,~~180~~233			~~243~~259,~~290~~103,~~691~~889
Total liabilities		302,972,324			294,015,268
Deferred rent		5,480,281			5,143,785
Mandatorily redeemable preferred stock, $100 stated value:Authorized—2,000,000 shares, issued and outstanding—noneand 250,000 shares, respectively		—			25,000,000
Total liabilities		308,063,815			311,638,251
Redeemable common stock—par value $0.01, issued and outstanding—968,983 shares		31,007,456			27,131,524
Redeemable common stock, par value $0.01 per share; issued and outstanding —879,362 and 968,983 shares, respectively		44,407,781			54,059,562
Stockholders’ equity (deficit):
Commitments and contingencies (Note 7)
Common stock, par value $0.01 per share: Authorized—10,000,000 shares, issued and outstanding—5,577,257 shares		55,772			55,772
Stockholders’ deficit:
Unrealized loss on securities		(41,368	)		(40,826	)
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 gain (loss) on hedging transactions		(253,793	)		106,999
Additional paid-in capital		97,745,084			93,093,303
Cumulative translation adjustment		30214,~~359~~630			~~(150~~174,~~371~~298	)
Additional paid-in capital		116,145,409			120,021,341
Unrealized loss on securities		(42,012	)		(44,148	)
Accumulated deficit		(~~228~~216,~~455~~118,~~689~~821	)		(~~243~~223,~~916~~069,~~468~~692	)
Total stockholders’ deficit		(~~112~~118,~~519~~145,~~310~~347	)		(~~123~~129,~~923~~790,~~553~~467	)
	$	~~221~~234,~~460~~326,~~470~~249		$	~~222~~235,~~223~~907,~~239~~346

See accompanying notes.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(unaudited)

Thirteen Weeks Ended

~~Thirty~~Twenty-~~Nine~~six Weeks Ended

July 28, 2002

July 29, 2001

July 28, 2002

July 29, 2001

May 4, 2003

April 28, 2002

May 4, 2003

April 28, 2002

Net sales

8887,~~056~~595,~~901~~390

8092,~~399~~278,~~853~~686

~~268~~185,~~300~~891,~~809~~031

~~278~~180,~~641~~243,~~939~~908

Cost of sales

3734,~~475~~921,~~329~~318

3539,~~711~~216,~~133~~608

~~115~~78,~~263~~535,~~587~~503

~~120~~77,~~838~~788,~~553~~258

Gross profit

5052,~~581~~674,~~572~~072

4453,~~688~~062,~~720~~078

~~153~~107,~~037~~355,~~222~~528

~~157~~102,~~803~~455,~~386~~650

Selling, general and administrative expenses

3442,~~971~~516,~~343~~320

3135,~~848~~219,~~096~~549

~~103~~81,~~976~~834,~~453~~368

~~100~~69,~~987~~005,~~711~~111

Operating income

1510,~~610~~157,~~229~~752

1217,~~840~~842,~~624~~529

4925,~~060~~521,~~769~~160

5633,~~815~~450,~~675~~539

Interest expense

56,~~941~~551,~~968~~694

65,~~562~~334,~~881~~025

1613,~~990~~158,~~499~~264

2211,~~010~~048,~~298~~531

Other income

40,415

315,799

167,026

1,113,736

Other income (expense)

(551,870

)

(38,146

)

(803,547

)

126,612

Income before income taxes

93,~~708~~054,~~676~~188

612,~~593~~470,~~542~~358

3211,~~237~~559,~~296~~349

3522,~~919~~528,~~113~~620

Income taxes

31,~~957~~107,~~740~~410

25,~~767~~169,~~069~~178

134,~~318~~608,~~284~~478

159,~~130~~360,~~182~~544

Net income

51,~~750~~946,~~936~~778

37,~~826~~301,~~473~~180

186,~~919~~950,~~012~~871

2013,~~788~~168,~~931~~076

Preferred stock dividends

~~736,507~~—

1,~~231~~426,~~354~~171

~~3,458,232~~—

32,~~577~~721,~~389~~725

Income allocated to common stockholders

51,~~014~~946,~~429~~778

25,~~595~~875,~~119~~009

156,~~460~~950,~~780~~871

1710,~~211~~446,~~542~~351

Comprehensive income, net of tax:

Net income

51,~~750~~946,~~936~~778

37,~~826~~301,~~473~~180

186,~~919~~950,~~012~~871

2013,~~788~~168,~~931~~076

Foreign currency translation adjustments

~~288~~26,~~607~~391

(189,~~169~~059

)

~~106~~31,~~065~~932

(~~216~~179,~~064~~146

)

Unrealized gain (loss) on hedging transactions

(124,171

)

70,006

(211,737

)

70,006

Unrealized loss on hedging transactions

—

(47,684

)

—

(88,358

)

Unrealized gain (loss) on securities

—1,257

~~1,643~~(317

)

~~(317~~1,257

)

(~~564~~317

)

Comprehensive income

51,~~915~~974,~~372~~426

37,~~879~~244,~~953~~120

186,~~813~~984,~~023~~060

2012,~~642~~900,~~309~~255

Earnings per common share:

Basic

0.7730

0.4090

21.3608

21.6360

Diluted

0.7629

0.3889

21.3403

21.59

Shares used in the calculation of earnings per common share:

Basic

6,~~546~~456,~~240~~619

6,546,~~183~~240

6,~~546~~459,~~240~~068

6,546,~~177~~240

Diluted

6,~~635~~696,~~483~~866

6,~~786~~606,~~388~~240

6,~~597~~722,~~557~~682

6,~~638~~570,~~732~~436

See accompanying notes.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Thirty-Nine Weeks Ended
	Twenty-six Weeks Ended
	July 28, 2002			July 29, 2001
	May 4,2003			April 28, 2002
Cash flows from operating activities:
Net income	$	186,~~919~~950,~~012~~871		$	2013,~~788~~168,~~931~~076
Adjustments to reconcile net income to net cashprovided by operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		118,~~146~~391,~~072~~526			107,~~912~~414,~~680~~552
Amortization of discount on 12.5% notes due 2009		~~103~~69,~~800~~200			9469,~~189~~200
Amortization of deferred loan costs		1999,~~552,213~~546			1,~~621~~039,~~265~~318
Loss on disposal of property and equipment		124,401			90,289
(Gain) loss on disposal of property and equipment		547,357			(6,450	)
Partnership losses		~~676~~438,~~962~~472			~~235~~452,~~701~~422
Decrease in accounts receivable		~~844~~7,~~019~~673,493			117,~~023~~369,~~510~~714
(Increase) decrease in inventories		2,752,660			(2,114,956	)
Decrease in inventories		3,484,550			4,943,300
Increase in prepaid income tax		—			(3,317,383	)
Increase in other current assets		(396,544	)		(76,300	)
Increase in other current assets		(287,068	)		(15,719	)
(Increase) decrease in other assets		(266,911	)		90,354
Increase in other assets		(1,274,755	)		(460,204	)
Increase (decrease) in accounts payable		755,089			(2,373,289	)
Decrease in accounts payable		(2,432,623	)		(4,818,992	)
Increase (decrease) in accrued expenses		1,500,580			(752,881	)
Increase in accrued expenses		1,495,089			3,861,594
Increase (decrease) in accrued interest expense		564,853			(164,236	)
Decrease in accrued interest expense		(2,884,402	)		(6,004,996	)
Increase (decrease) in income taxes payable		(2,491,694	)		4,167,387
Increase (decrease) in income taxes payable		3,229,317			(4,558,120	)
Increase in deferred rent		336,496			—
Net cash provided by operating activities		3328,~~964~~556,~~697~~884			2735,~~337~~341,~~789~~167
Cash flows from investing activities:
Proceeds from sale of property and equipment		1420,~~900~~500			46,~~500~~450
Purchase of property and equipment		(87,~~866~~653,~~190~~763	)		(96,~~525~~009,~~564~~273	)
Sale of short-term investments		~~552~~6,713			~~4,141~~552
Capital contributions to partnership		—			(3,080,493	)
Capital distributions from partnership		200,000			227,500
Capital distributions from partnership		336,500			77,500
Net cash used in investing activities		(7,426,550	)		(5,774,771	)
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	)
Principal payments on long-term debt		(4,321,730	)		(17,667,617	)
Issuance of common stock		—			1,980
Redemption of redeemable common stock		(5,000,000	)		—
Net cash used in financing activities		(199,~~012~~321,~~357~~730	)		(1417,~~017~~667,~~069~~617	)
Effect of exchange rate changes		~~180~~53,~~730~~103			(~~373~~306,~~315~~493	)
Unrealized loss on securities		(542	)		(974	)
Change in value of hedging transactions		—			(151,168	)
Unrealized gain (loss) on hedging transactions		(360,792	)		120,957
Net increase in cash and cash equivalents		11,861,707			11,441,118
Net increase in cash and cash equivalents		6,257,498			547,472
Beginning balance, cash and cash equivalents		30,129,208			26,210,874
Beginning balance, cash and cash equivalents		26,210,874			25,130,928
Ending balance, cash and cash equivalents	$	41,990,915		$	37,651,992
Ending balance, cash and cash equivalents	$	32,468,372		$	25,678,400

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(unaudited)

(Continued)

	Twenty-six Weeks Ended
	May 4, 2003			April 28, 2002
Supplemental disclosures of cash flow information:
Cash received for interest income	$	263,855		$	293,390

Cash paid for:
Interest expense	$	11,491,865		$	9,873,460

Income taxes	$	7,110,523		$	5,388,830

Supplemental disclosure of noncash financing activity:
Dividends accrued on mandatorily redeemable preferred stock	$	—		$	2,721,725

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

Unrealized gain (loss) on securities	$	2,136		$	(542	)

Adjustment of redeemable common stock to fair value	$	(4,651,825	)	$	10,658,813

	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 mandatorilyredeemable preferred stock (note 5)	$	3,458,232	$	3,577,389
Conversion of mandatorily redeemable preferred stock andaccrued 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.” ItThe ~~is suggested that the~~ accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes ~~included~~ included in the Company’s Annual Report on Form 10-K for the year ended ~~October~~November 283, ~~2001~~2002 as filed with the Securities and Exchange Commission on January 2831, ~~2002~~2003.

The results of operations for the periods presented are not necessarily indicative of the operating results that may be expected for the year ending November 32, ~~2002~~2003.

Company Operations

The Company is a leading designer, manufacturer and marketer of women’s clothing and accessories. The Company’s products are distributed primarily through specialty retailers and Company -owned retail boutiques and outlet stores in the United States and internationally. ~~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~~May 284, ~~2002~~2003 and ~~July~~April 2928, ~~2001~~2002.

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.

32. ~~Earnings~~ ~~Per~~Stock ~~Common~~Option ~~Share~~ Plan

~~Basic~~The ~~earnings~~Company ~~per~~has ~~common~~one stock-based ~~share~~employee iscompensation ~~computed~~plan, bythe ~~dividing~~1999 ~~income~~St. ~~allocated~~John toKnits ~~common~~International, ~~stockholders~~Incorporated byStock Option Plan (the “1999 Plan”). Options granted under the 1999 Plan are nonstatutory stock options. During the first six months of fiscal year ~~weighted~~2003, ~~average~~the ~~number~~Company granted a total of ~~common~~60,000 ~~shares~~stock ~~outstanding~~options with an exercise price of $55.79 per share. The exercise price of the stock options represents the estimated fair market value, ~~excluding~~as determined by the ~~dilutive~~board ~~effect~~of directors, of the Company’s common stock ~~equivalents,~~on ~~including~~the ~~stock~~date ~~options~~of grant. ~~Diluted~~The ~~earnings~~Company ~~per~~accounts ~~common~~for ~~share~~the ~~includes~~plan ~~all~~under ~~dilutive~~the ~~items~~recognition and ismeasurement ~~calculated~~principles ~~based~~of ~~upon~~Accounting ~~the~~Principles ~~treasury~~Board ~~stock method,~~(“APB”) ~~which~~Opinion ~~assumes~~No. ~~that~~25, ~~all~~“Accounting ~~dilutive~~for ~~securities~~Stock ~~were~~Issued ~~exercised~~to Employees, and ~~that~~Related Interpretations”. No stock-based employee compensation cost is reflected in net income, as all options granted under the ~~proceeds~~1999 ~~received~~Plan ~~were~~have ~~applied~~an exercise price equal to ~~repurchase~~the ~~outstanding~~estimated ~~shares~~fair atmarket value of the ~~average~~underlying ~~market~~common ~~price~~stock ~~during~~on the ~~period~~date of grant. ~~Preferred~~The ~~stock~~following ~~dividends~~table ~~are~~illustrates ~~deducted~~the ~~from~~effect on net income ~~to arrive~~and atearnings ~~income~~per ~~allocated~~common toshare ~~common~~if ~~stockholders~~the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”.

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				Twenty-six Weeks Ended
	May 4, 2003		April 28, 2002		May 4, 2003		April 28, 2002
	(in thousands, except per share amounts)
Net income, as reported	$	1,947	$	7,301	$	6,951	$	13,168
Less: total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		154		234		290		467

Pro forma net income	$	1,793	$	7,067	$	6,661	$	12,701

Earnings per common share:
Basic—as reported	$	0.30	$	0.90	$	1.08	$	1.60
Basic—pro forma	$	0.28	$	0.86	$	1.03	$	1.52
Diluted—as reported	$	0.29	$	0.89	$	1.03	$	1.59
Diluted—pro forma	$	0.27	$	0.85	$	0.99	$	1.52

	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

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.

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

	Thirteen Weeks Ended		Twenty-six Weeks Ended
	May 4, 2003	April 28, 2002	May 4, 2003	April 28, 2002
Weighted average shares outstanding	6,456,619	6,546,240	6,459,068	6,546,240
Add: dilutive effect of stock options	240,247	60,000	263,614	24,196

Shares used to calculate diluted earnings per share	6,696,866	6,606,240	6,722,682	6,570,436

4. Inventories

Inventories ~~consist~~are comprised of the following:

	July 28, 2002		October 28, 2001
	May 4, 2003		November 3, 2002
Raw materials	$	1413,~~377~~661,~~856~~885	$	1312,~~011~~986,~~735~~013
Work-in-process		87,~~256~~909,~~343~~949		8,~~184~~641,~~806~~353
Finished products		2729,~~110~~649,~~838~~489		3133,~~301~~078,~~156~~507
	$	4951,~~745~~221,~~037~~323	$	5254,~~497~~705,~~697~~873

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~~5. ~~SFAS~~Senior ~~No.~~Subordinated ~~142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and is effective for fiscal years beginning after December~~ 15~~, 2001~~.25% ~~The~~Notes ~~adoption of these standards is not expected to have a material impact on the Company’s financial position or results of operations.~~

InThe ~~August~~Company ~~2001,~~had ~~the~~$39.3 ~~FASB~~million ~~issued~~of ~~SFAS No~~15.25% ~~144,~~notes ~~“Accounting~~outstanding ~~for~~at ~~the~~May ~~Impairment~~4, or2003. ~~Disposal~~The ofCompany ~~Long-Lived~~had ~~Assets.”~~the ~~SFAS~~option ~~No.~~to ~~144 addresses~~redeem ~~financial~~the ~~accounting~~notes ~~and~~in ~~reporting~~cash for the ~~impairment~~face orvalue ~~disposal~~ of ~~long-lived~~the notes ~~assets.~~plus ~~SFAS~~accrued ~~No.~~and ~~144~~unpaid ~~supersedes~~interest ~~SFAS~~before ~~No.~~January ~~121~~2, ~~“Accounting~~2004. ~~for~~The ~~the~~Company’s ~~Impairment~~ability ofto ~~Long-Lived~~call ~~Assets~~such ~~and~~notes ~~for~~was ~~Long-Lived~~subject ~~Assets~~ to, Beamong ~~Disposed~~other Ofthings,” ~~and~~ the ~~accounting~~approval ~~and reporting provisions~~ of ~~Accounting~~the ~~Principles~~financial ~~Board~~institutions ~~Opinion~~which ~~No.~~issued ~~30, “Reporting~~ the ~~Results~~Company’s ofcredit ~~Operations—Reporting~~facilities. ~~the~~The Company ~~Effects~~received ofsuch ~~Disposal~~approval ofand athe ~~Segment~~notes ofwere aredeemed ~~Business,~~on ~~and~~May ~~Extraordinary~~30, ~~Unusual~~2003. ~~and Infrequently Occurring Events and Transactions~~Therefore,” ~~for~~ the ~~disposal~~notes ofhave abeen ~~segment~~classified ~~of a business (~~as ~~previously~~current ~~defined~~ in ~~that~~the ~~Opinion).~~accompanying ~~The~~balance ~~provisions~~sheet as of ~~SFAS~~May ~~No. 144 are effective for financial statements issued for fiscal years beginning after December 15~~4, ~~2001, with early application encouraged, and generally are to be applied prospectively~~2003. ~~The~~See ~~adoption~~note of9 ~~this~~for ~~standard~~additional isinformation ~~not expected to have a material impact~~ on the ~~Company’s financial position or results of operations~~redemption.

In6. ~~July~~Recent ~~2002, the FASB issued SFAS 146, “~~Accounting ~~for~~Pronouncements 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~~July ~~2001~~2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task ~~Force~~ Force (“EITF”) Issue No. 0094-253, “~~Vendor~~Liability ~~Income~~Recognition ~~Statement~~for ~~Characterization~~Certain ofEmployee ~~Consideration~~Termination ~~Paid~~Benefits and Other Costs to aExit ~~Reseller~~an ofActivity ~~the~~(including ~~Vendor’s~~Certain ~~Products~~Costs Incurred in a Restructuring).” ~~was~~SFAS ~~issued~~No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 0094-253, ~~governs~~a ~~the~~liability ~~accounting~~ for ~~consideration~~an ~~from~~exit acost ~~vendor~~was torecognized ~~a reseller~~at the date of ~~the~~an ~~vendor~~entity’s ~~products~~commitment ~~and~~to ~~was~~an ~~adopted~~exit byplan. ~~the~~SFAS ~~Company~~No. in146 also establishes that the ~~fourth~~liability ~~quarter~~should ofinitially ~~fiscal~~be ~~2001~~measured and recorded at fair value. The ~~adoption~~Company will apply the provisions of ~~this~~SFAS ~~EITF~~No. ~~did~~146 ~~not~~for ~~have~~exit aor ~~material~~disposal ~~impact~~activities onthat ~~the~~are ~~Company’s~~initiated ~~financial~~after ~~position~~December or31, ~~results~~2002 ofas ~~operations~~required.

7In December 2002, the FASB issued SFAS No. ~~Segment~~ ~~Information~~148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The adoption of SFAS No. 148 did not have a material impact on the Company’s financial position or results of operations.

~~The~~In ~~Company~~November ~~has~~2002, ~~two~~the ~~reportable~~FASB ~~business~~issued ~~segments~~FASB Interpretation (“FIN”) No. 45, ~~wholesale~~“Guarantors Accounting and ~~retail~~Disclosure ~~sales.~~Requirements ~~For~~for ~~the~~Guarantees, ~~third~~Including ~~quarter~~Indirect Guarantees and ~~first~~Indebtedness ~~nine~~of ~~months~~Others”, an interpretation of ~~fiscal~~FIN ~~2002~~Nos. 5, ~~retail~~57 ~~sales~~and ~~were~~107, ~~generated~~and ~~through~~rescission of FIN No. 34. FIN No. 45 elaborates on the ~~Company’s~~disclosures 27to Stbe made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. ~~John~~ ~~boutiques~~It also requires that a guarantor recognize, ~~10 St. John~~at the ~~outlet~~inception ~~stores~~of a guarantee, ~~two~~a Stliability for the fair value of the obligation undertaken in issuing the guarantee. ~~John~~The ~~Home~~initial ~~stores~~recognition and ~~one~~measurement Stprovisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while, the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. ~~John~~The ~~Home~~adoption ~~outlet~~of ~~store~~the recognition provisions of FIN No. ~~Management~~45 did ~~evaluates~~not ~~segment~~have ~~performance~~a ~~based~~material ~~primarily~~impact on ~~revenue~~the ~~and~~Company’s ~~earnings~~financial ~~from~~position or results of operations.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

~~Segment~~In ~~information~~January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities”, an interpretation of Accounting Research Bulletin No. 51. FIN No. 46 requires that variable interest entities be consolidated by a company if that company is ~~summarized~~subject asto ~~follows~~a ~~for~~majority of the ~~periods~~risk ~~indicated~~of (loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that companies are not required to consolidate but in ~~000~~which a company has a significant variable interest. The consolidation requirements of FIN No. 46 apply to variable interest entities created after January 31, 2003. The consolidation requirements apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. The adoption of FIN No. 46 is not expected to have a material impact on the Company’s): financial position or results of operations.

	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

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity”, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not believe that the adoption of this standard will have a material impact on its financial position or results of operations.

87. ~~Supplemental~~ ~~Condensed~~Commitments ~~Consolidated~~and ~~Financial~~Contingencies ~~Information~~

~~The~~During ~~Company’s~~the ~~payment~~normal ~~obligations~~course ~~under~~of ~~its~~business, ~~12.5%~~the ~~senior~~Company ~~subordinated~~has ~~notes~~made ~~are guaranteed by~~ certain of ~~the~~indemnities, ~~Company’s~~commitments ~~wholly~~and ~~owned~~guarantees ~~subsidiaries~~under ~~(the~~which ~~“Guarantor~~it ~~Subsidiaries”).~~may ~~Such~~be ~~guarantees~~required ~~are~~to ~~full,~~make ~~unconditional~~payments ~~and~~in ~~joint~~relation ~~and~~to ~~several~~certain transactions. ~~Except~~These ~~for~~indemnities ~~restrictions~~include ~~under~~those ~~applicable~~given ~~law,~~to ~~there~~various ~~are~~lessors noin ~~material~~connection ~~restrictions~~with onfacility ~~distributions from~~leases ~~the~~for ~~Guarantor~~certain ~~Subsidiaries~~claims toarising ~~SJKI.~~from such ~~Separate~~facility ~~financial~~or ~~statements~~lease ofand ~~the~~indemnities ~~Guarantor~~to ~~Subsidiaries~~directors ~~are~~and ~~not~~officers ~~presented~~of ~~because~~ the Company’s ~~management~~to ~~has~~the ~~determined~~maximum ~~that~~extent ~~they~~permitted ~~would~~under ~~not~~the belaws ~~material~~of tothe ~~investors~~State of Delaware. The ~~following~~Company ~~supplemental financial~~has ~~information~~also ~~sets~~issued ~~forth~~guarantees, onin anthe ~~unconsolidated~~form ~~basis,~~of ~~balance~~letters ~~sheet~~of credit, ~~statement~~to ofcover ~~income~~contractual commitments, ~~and~~including ~~statement~~merchandise ofpurchases ~~cash~~from ~~flow~~foreign ~~information~~vendors ~~for~~and to secure the ~~Parent~~payment ~~Company~~for ~~(consisting~~potential offuture ~~SJKI~~workers’ ~~and~~compensation Stclaims. ~~John),~~The ~~for~~Company ~~the~~had ~~Guarantor~~$11.8 ~~Subsidiaries~~million ~~and~~of ~~for~~letters ~~the Company’s~~of ~~other~~credit ~~subsidiaries~~outstanding ~~(the~~at ~~“Non-Guarantor~~May ~~Subsidiaries”)~~4, 2003. ~~The~~Of ~~supplemental~~this ~~financial~~total, ~~information~~$9.9 million ~~reflects~~related ~~the~~to ~~investments~~potential offuture ~~the~~workers’ ~~Parent~~compensation claims. The Company inhas accrued a liability for the ~~Guarantor~~estimated ~~Subsidiaries~~claims, both reported and ~~Non-Guarantor~~incurred ~~Subsidiaries~~but ~~using~~not yet reported, on the ~~equity method~~accompanying ofconsolidated ~~accounting~~balance sheets. The ~~supplemental~~duration ~~financial~~of these ~~information~~indemnities, iscommitments ~~presented~~and ~~for~~guarantees ~~the~~varies, ~~periods~~and asin certain cases, is indefinite. The majority of ~~July~~these 28indemnities, ~~2002~~commitments and ~~October~~guarantees ~~28,~~do ~~2001,~~not ~~and~~provide for any limitation of the 13maximum ~~and~~potential 39future ~~weeks~~payments ~~ended~~the ~~July~~Company 28could be obligated to make. The Company has not recorded any liability for these indemnities, ~~2002~~commitments and ~~July~~guarantees ~~29,~~in ~~2001~~the accompanying consolidated balance sheets other than as noted.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

8. Segment Information

The Company has two reportable business segments, wholesale and retail sales. For the second quarter and first six months of fiscal year 2003, retail sales were generated through the Company’s 30 St. John boutiques and 13 St. John outlet stores. In addition, the Company had sales from two St. John Home stores and one St. John Home outlet store which were closed during the first six months of fiscal 2003. Management evaluates segment performance based primarily on revenue and earnings from operations.

Segment information is summarized as follows for the periods indicated:

	Wholesale		Retail		Eliminations			Total
	(in thousands)
Second Quarter Fiscal 2003
Net sales	$	73,702	$	36,575	$	(22,682	)	$	87,595
Operating income		12,416		2,219		(4,477	)		10,158
Capital expenditures		2,450		2,699		—			5,149
Depreciation and amortization		2,425		1,542		—			3,967

Second Quarter Fiscal 2002
Net sales	$	71,623	$	38,335	$	(17,679	)	$	92,279
Operating income		13,740		4,876		(773	)		17,843
Capital expenditures		1,726		2,984		—			4,710
Depreciation and amortization		2,661		1,032		—			3,693

First Six Months Fiscal 2003
Net sales	$	153,376	$	77,559	$	(45,044	)	$	185,891
Operating income		28,565		4,935		(7,979	)		25,521
Capital expenditures		3,779		3,875		—			7,654
Depreciation and amortization		4,945		3,447		—			8,392

First Six Months Fiscal 2002
Net sales	$	144,691	$	75,281	$	(39,728	)	$	180,244
Operating income		31,443		6,235		(4,227	)		33,451
Capital expenditures		2,355		3,654		—			6,009
Depreciation and amortization		5,370		2,045		—			7,415

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

9. Subsequent Event

Effective May 30, 2003 the Company redeemed its senior subordinated 15.25% notes for cash at a price equal to the face value of the notes plus accrued and unpaid interest. Prior to initiating this transaction, the Company’s credit agreement was amended to allow for the redemption and to provide for additional borrowing under the tranche B facility of $30 million. The proceeds of this additional borrowing, together with cash on hand, were used to redeem the notes. The redemption of the notes and accrued interest totaled $41.8 million. The amendment increased the interest rate on the total outstanding balance of the bank borrowings by increasing the current spread over the banks borrowing rate and LIBOR by 0.75%. The Company paid fees of approximately $1 million to complete the amendment.

10. Supplemental Condensed Consolidated Financial Information

The Company’s payment obligations under the senior subordinated notes are guaranteed by certain of the Company’s wholly owned subsidiaries (the “Guarantor Subsidiaries”). Such guarantees are full, unconditional and joint and several. Except for restrictions under applicable law, there are no material restrictions on distributions from the Guarantor Subsidiaries to SJKI. Separate financial statements of the Guarantor Subsidiaries are not presented because the Company’s management has determined that they would not be material to investors. The following supplemental financial information sets forth, on an unconsolidated basis, balance sheet, statement of income, and statement of cash flow information for the Parent Company (consisting of SJKI and St. John), for the Guarantor Subsidiaries and for the Company’s other subsidiaries (the “Non-Guarantor Subsidiaries”). The supplemental financial information reflects the investments of the Parent Company in the Guarantor Subsidiaries and Non-Guarantor Subsidiaries using the equity method of accounting. The supplemental financial information is presented for the periods as of May 4, 2003 and November 3, 2002, and for the 13 and 26 weeks ended May 4, 2003 and April 28, 2002.

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

~~JULY~~MAY 284, ~~2002~~2003

(UNAUDITED)

(Amounts in thousands)	PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
	ParentCompany			GuarantorSubsidiaries			Non-guarantorSubsidiaries			Eliminations			Consolidated
	(Amounts in thousands)
ASSETS
Current assets:
Cash, cash equivalents and investments	$	3141,~~947~~178		$	2—		$	~~529~~813		$	—		$	3241,~~478~~991
Accounts receivable, net		2322,~~737~~118			431			~~889~~1,552						2423,~~669~~671
Inventories (1)		47,134			218			2,393						49,745
Inventories(1)		48,803			1			2,417						51,221
Deferred income tax benefit		13,~~816~~445						—						13,~~816~~445
Other		34,~~940~~179			47			376						34,~~990~~255
Intercompany accounts receivable		35,~~312~~733						—			(35,~~312~~733	)		—
Total current assets		~~123~~135,~~886~~456			~~310~~2			34,~~814~~858			(35,~~312~~733	)		~~124~~134,~~698~~583
Property and equipment, net		7375,~~554~~632			~~1,059~~			56,~~340~~836						7982,~~953~~468
Investment in subsidiaries		(57,~~094~~782	)					—			57,~~094~~782			—
Receivable from consolidated subsidiaries		1415,~~297~~425						—			(1415,~~297~~425	)		—
Deferred financing costs		87,~~609~~101						—						87,~~609~~101
Other assets		7,241			19			941						8,201
Deferred income tax benefit		3,156												3,156
Total assets	$	222,493		$	1,388		$	10,095		$	(12,515	)	$	221,461
Other assets		5,981						1,037						7,018
Total assets	$	234,969		$	2		$	12,731		$	(13,376	)	$	234,326
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	56,~~921~~954		$	—		$	~~608~~675		$	—		$	67,~~529~~629
Accrued expenses		17,~~079~~613			41692			45(1	)					1718,~~165~~304
Current portion of long-term debt		9,308						—						9,308
Senior subordinated 15.25% notes		39,294												39,294
Accrued interest expense		1,980						—						1,980
Current portion of long-term debt		13,313						84						13,397
Intercompany accounts payable								3,312			(3,312	)		—
Accrued interest expense		6,384												6,384
Income taxes payable		56,~~944~~451						(~~793~~1,741	)					54,~~151~~710
Total current liabilities		40,232			41			3,172			(3,312	)		40,133
Intercompany accounts payable								5,733			(5,733	)		—
Intercompany payable					9,492			4,805			(14,297	)		—
Total current liabilities		90,009			692			4,750			(5,733	)		89,718
Long-term debt, net of current portion		262,840						—						262,840
Intercompany payable					8,955			6,470			(15,425	)		—
Total liabilities		303,072			9,533			7,977			(17,609	)		302,973
Long-term debt, net of current portion		212,865												212,865
Redeemable common stock		31,007						—						31,007
Deferred rent		5,480												5,480
Total stockholders’ equity (deficit)		(111,586	)		(8,145	)		2,118			5,094			(112,519	)
Total liabilities		308,354			9,647			11,220			(21,158	)		308,063
Total liabilities and stockholders’ equity (deficit)	$	222,493		$	1,388		$	10,095		$	(12,515	)	$	221,461
Redeemable common stock		44,408												44,408
Total stockholders’ equity (deficit)		(117,793	)		(9,645	)		1,511			7,782			(118,145	)
Total liabilities and stockholders’ equity (deficit)	$	234,969		$	2		$	12,731		$	(13,376	)	$	234,326

(1)

Inventories are shown at cost for all entities

1012

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

~~OCTOBER~~NOVEMBER 283, ~~2001~~2002

(UNAUDITED)

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

Total current assets		132,759			352			4,803			(4,485	)		133,429

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

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

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

Total current liabilities		47,335			355			4,186			(4,485	)		47,391

Intercompany payable					9,468			4,742			(14,210	)		—
Long-term debt, net of current portion		259,104												259,104
Deferred rent		5,144												5,144

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

Redeemable common stock		54,059												54,059

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

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

(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

~~(1)~~13 ~~Inventories are shown at cost for all entities.~~

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME

THIRTEEN WEEKS ENDED ~~JULY~~MAY 284, ~~2002~~ 2003

(UNAUDITED)

(Amounts in thousands)	PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS		CONSOLIDATED
	ParentCompany			GuarantorSubsidiaries			Non-guarantorSubsidiaries			Eliminations		Consolidated
Net sales	$	85,034		$	1,057		$	1,965		$	—	$	88,056
	(Amounts in thousands)
Cost of sales		35,574			800			1,101					37,475
Net sales	$	85,490		$	55		$	2,050		$	—	$	87,595
Gross profit		49,460			257			864					50,581
Cost of sales		33,952			24			945					34,921
Selling, general and administrative expenses		32,522			947			1,502					34,971
Gross profit		51,538			31			1,105			—		52,674
Operating income (loss)		16,938			(690	)		(638	)				15,610
Selling, general and administrative expenses		40,325			545			1,646					42,516
Interest expense		5,942											5,942
Operating income (loss)		11,213			(514	)		(541	)		—		10,158
Other income		233			(12	)		(180	)				41
Interest expense		6,552											6,552
Income (loss) before income taxes		11,229			(702	)		(818	)				9,709
Other expense		(398	)					(154	)				(552	)
Income taxes		4,732			(295	)		(479	)				3,958
Income (loss) before income taxes		4,263			(514	)		(695	)		—		3,054
Income (loss) before equity in loss of consolidated subsidiaries		6,497			(407	)		(339	)				5,751
Income taxes		1,713			(216	)		(390	)				1,107
Equity in loss of consolidated subsidiaries		(746	)								746		—
Income (loss) before equity in loss of consolidated subsidiaries		2,550			(298	)		(305	)		—		1,947
Net income (loss)	$	5,751		$	(407	)	$	(339	)	$	746	$	5,751
Equity in loss of consolidated subsidiaries		(603	)								603		—
Net income (loss)	$	1,947		$	(298	)	$	(305	)	$	603	$	1,947

1214

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME

THIRTEEN WEEKS ENDED ~~JULY~~APRIL 2928, ~~2001~~ 2002

(UNAUDITED)

	PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
	ParentCompany			GuarantorSubsidiaries			Non-guarantorSubsidiaries				Eliminations			Consolidated
~~(Amounts in thousands)~~	(Amounts in thousands)
Net sales	$	7688,~~934~~846		$	1,~~334~~359		$	2,~~132~~074		$	—$	—	$	~~80,400~~$	92,279
Cost of sales		3337,~~761~~316			~~955~~767			~~995~~1,134						~~35,711~~	39,217
Gross profit		4351,~~173~~530			~~379~~592			~~1,137~~940				—		~~44,689~~	53,062
Selling, general and administrative expenses		2932,~~741~~757			1,~~077~~138			1,~~030~~325						~~31,848~~	35,220
Operating income (loss)		1318,~~432~~773			(~~698~~546	)		~~107~~(385	)			—		~~12,841~~	17,842
Interest expense		65,~~563~~334												~~6,563~~	5,334
Other income/(expense)		295			—			21						316
Other expense		(26	)					(12	)						(38	)
Income (loss) before income taxes		713,~~164~~413			(~~698~~546	)		~~128~~(397	)			—		~~6,594~~	12,470
Income taxes		35,~~028~~652			(~~302~~229	)		42(254	)					~~2,768~~	5,169
Income (loss) before equity in loss of consolidated subsidiaries		47,~~136~~761			(~~396~~317	)		86(143	)			—		~~3,826~~	7,301
Equity in loss of consolidated subsidiaries		(~~310~~460	)								~~310~~	460		—	—
Net income (loss)	$	37,~~826~~301		$	(~~396~~317	)	$	86(143	)	$	~~310~~$	460	$	~~3,826~~$	7,301

1315

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME

~~THIRTY~~TWENTY-~~NINE~~SIX WEEKS ENDED ~~JULY~~MAY 284, ~~2002~~ 2003

(UNAUDITED)

PARENT COMPANY

GUARANTOR SUBSIDIARIES

NON-GUARANTOR SUBSIDIARIES

ELIMINATIONS

CONSOLIDATED

ParentCompany

GuarantorSubsidiaries

Non-guarantorSubsidiaries

Eliminations

Consolidated

~~(Amounts in thousands)~~

(Amounts in thousands)

Net sales

~~257~~180,~~647~~210

41,~~463~~252

64,~~191~~429

—

~~268~~185,~~301~~891

Cost of sales

~~109~~75,~~116~~588

~~2,822~~812

32,~~326~~136

~~115~~78,~~264~~536

Gross profit

~~148~~104,~~531~~622

~~1,641~~440

2,~~865~~293

—

~~153~~107,~~037~~355

Selling, general and administrative expenses

9677,~~871~~104

31,~~203~~674

3,~~902~~056

~~103~~81,~~976~~834

Operating income (loss)

5127,~~660~~518

(1,~~562~~234

)

(~~1,037~~763

)

—

4925,~~061~~521

Interest expense

1613,~~991~~158

Other income

341

(12

)

(162

)

167

Other expense

(456

)

(192

)

(156

)

(804

)

Income (loss) before income taxes

3513,~~010~~904

(1,~~574~~426

)

(~~1,199~~919

)

—

3211,~~237~~559

Income taxes

145,~~754~~771

(~~661~~599

)

(~~775~~564

)

134,~~318~~608

Income (loss) before equity in loss of consolidated subsidiaries

208,~~256~~133

(~~913~~827

)

(~~424~~355

)

—

186,~~919~~951

Equity in loss of consolidated subsidiaries

(1,~~337~~182

)

1,~~337~~182

—

Net income (loss)

186,~~919~~951

(~~913~~827

)

(~~424~~355

)

1,~~337~~182

186,~~919~~951

1416

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME

~~THIRTY~~TWENTY-~~NINE~~SIX WEEKS ENDED ~~JULY~~APRIL 2928, ~~2001~~ 2002

(UNAUDITED)

(Amounts in thousands)	PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
	ParentCompany			GuarantorSubsidiaries			Non-guarantorSubsidiaries				Eliminations			Consolidated
Net sales	$	267,443		$	4,813		$	6,386		$	—		$	278,642
	(Amounts in thousands)
Cost of sales		114,839			3,203			2,797						120,839
Net sales	$	172,612		$	3,405		$	4,227			$	—		$	180,244
Gross profit		152,604			1,610			3,589						157,803
Cost of sales		73,541			2,021			2,226							77,788
Selling, general and administrative expenses		94,567			3,319			3,102						100,988
Gross profit		99,071			1,384			2,001				—			102,456
Operating income (loss)		58,037			(1,709	)		487						56,815
Selling, general and administrative expenses		64,349			2,256			2,400							69,005
Interest expense		22,010												22,010
Operating income (loss)		34,722			(872	)		(399	)			—			33,451
Other income		1,076						38						1,114
Interest expense		11,049													11,049
Income (loss) before income taxes		37,103			(1,709	)		525						35,919
Other income		108						19							127
Income taxes		15,626			(708	)		212						15,130
Income (loss) before income taxes		23,781			(872	)		(380	)			—			22,529
Income (loss) before equity in loss of consolidated subsidiaries		21,477			(1,001	)		313						20,789
Income taxes		10,022			(366	)		(295	)						9,361
Equity in loss of consolidated subsidiaries		(688	)								688			—
Income (loss) before equity in loss of consolidated subsidiaries		13,759			(506	)		(85	)			—			13,168
Net income (loss)	$	20,789		$	(1,001	)	$	313		$	688		$	20,789
Equity in loss of consolidated subsidiaries		(591	)									591			—
Net income (loss)	$	13,168		$	(506	)	$	(85	)		$	591		$	13,168

1517

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

~~THIRTY~~TWENTY-~~NINE~~SIX WEEKS ENDED ~~JULY~~MAY 284, ~~2002~~ 2003

(UNAUDITED)

	PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
	ParentCompany			GuarantorSubsidiaries			Non-guarantorSubsidiaries			Eliminations			Consolidated
~~(Amounts in thousands)~~	(Amounts in thousands)
OPERATING ACTIVITIES:
Net income (loss)	$	186,~~919~~951		$	(~~913~~827	)	$	(~~424~~355	)	$	1,~~337~~182		$	186,~~919~~951
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		107,~~466~~366			~~137~~629			~~543~~397						118,~~146~~392
Amortization of discount on 12.5% notes due 2009		~~104~~69												~~104~~69
Amortization of deferred loan costs		1,~~552~~000												1,~~552~~000
Gain on disposal of property and equipment		124												124
Loss on disposal of property and equipment		547												547
Partnership losses		~~677~~438												~~677~~438
Gain on sale of partnership asset		—												—
Equity in loss of consolidated subsidiaries		1,182									(1,182	)		—
Equity in loss of consolidated subsidiaries		1,337									(1,337	)		—
Cash provided by changes in operating assets and liabilities:
Accounts receivable		~~579~~7,653			4836			~~217~~(16	)					~~844~~7,673
Intercompany receivables (net)		(13,~~051~~007	)		(~~662~~513	)		13,~~713~~520						—
Inventories		13,~~808~~044			~~1,397~~311			~~(452~~130	)					23,~~753~~485
Other current assets		~~(331~~72	)		431			1(470	)					(~~287~~397	)
Other assets		(~~1,050~~44	)		4124			(~~266~~247	)					(~~1,275~~267	)
Accounts payable		~~(2,433~~755	)											~~(2,433~~755	)
Accrued expenses		1,~~441~~104			~~(116~~337	)		~~170~~60						1,~~495~~501
Accrued interest expense		~~(2,884~~565	)											~~(2,884~~565	)
Income taxes payable		4(1,~~008~~924	)					(~~779~~568	)					3(2,~~229~~492	)
Net cash provided by operating activities		33,266			(25	)		723			—			33,964
Deferred rent		337												337
Net cash provided by (used in) operating activities		26,108			(2	)		2,451			—			28,557
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment		1521												1521
Purchases of property and equipment		(8,511	)		23			(378	)					(8,866	)
Purchase of property and equipment		(5,596	)					(2,058	)					(7,654	)
Sale of short-term investments		17												17
Capital distributions from partnership		~~336~~200												~~336~~200
Net cash used in investing activities		(85,~~159~~368	)		23—			(~~378~~2,058	)		—			(87,~~514~~426	)
FINANCING ACTIVITIES:
Principal payments of long-term debt		(193,~~015~~985	)					3(337	)					(194,~~012~~322	)
Net cash used in financing activities		(19,015	)		—			3			—			(19,012	)
Redemption of redeemable common stock		(5,000	)											(5,000	)
Effect of exchange rate changes		217						(36	)					181
Net cash used in financing activities		(8,985	)		—			(337	)		—			(9,322	)
Unrealized loss on securities		(1	)											(1	)
Effect of exchange rate changes		12						41						53
Change in value of hedging transactions		(361	)											(361	)
Net increase (decrease) in cash and cash equivalents		11,767			(2	)		97			—			11,862
Net increase in cash and cash equivalents		5,947			(2	)		312			—			6,257
Beginning balance, cash and cash equivalents		29,411			2			716						30,129
Beginning balance, cash and cash equivalents		25,990			4			217						26,211
Ending balance, cash and cash equivalents	$	41,178		$	—		$	813		$	—		$	41,991
Ending balance, cash and cash equivalents	$	31,937		$	2		$	529		$	—		$	32,468
Supplemental disclosures of cash flow information:
Cash received for interest income	$	~~835~~264		$	—		$	—		$	—		$	~~835~~264
Cash paid for:
Interest expense	$	1711,~~745~~490		$	—		$	—3		$	—		$	1711,~~745~~493
Income taxes	$	117,~~057~~111		$	—		$	—		$	—		$	117,~~057~~111
Supplemental disclosure of noncash financing activity:
Supplemental disclosures of noncash financing activities:
Dividends accrued on mandatorily redeemable preferred stock	$	3,458		$	—		$	—		$	—		$	3,458
Conversion of accrued interest to subordinated notes	$	533		$	—		$	—		$	—		$	533
Conversion of manditorily redeemable preferred stock and accrued dividends to subordinated notes	$	38,761		$	—		$	—		$	—		$	38,761
Unrealized gain on securities	$	2		$	—		$	—		$	—		$	2
Adjustment of redeemable common stock to fair value	$	(4,652	)	$	—		$	—		$	—		$	(4,652	)

1618

ST. JOHN KNITS INTERNATIONAL, INCORPORATED

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

~~THIRTY~~TWENTY-~~NINE~~SIX WEEKS ENDED ~~JULY~~APRIL 2928, ~~2001~~ 2002

(UNAUDITED)

(Amounts in thousands)	PARENT COMPANY			GUARANTOR SUBSIDIARIES			NON-GUARANTOR SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
	ParentCompany			GuarantorSubsidiaries			Non-guarantorSubsidiaries			Eliminations			Consolidated
	(Amounts in thousands)
OPERATING ACTIVITIES:
Net Income/Loss	$	20,789		$	(1,001	)	$	313		$	688		$	20,789
Net income (loss)	$	13,168		$	(506	)	$	(85	)	$	591		$	13,168
Adjustments to reconcile net income/loss to net cash provided by operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		107,~~647~~008			100			~~166~~307						107,~~913~~415
Amortization of discount on 12.5% notes due 2009		9469												9469
Amortization of deferred loan costs		1,~~621~~039												1,~~621~~039
Loss on disposal of property and equipment		90												90
Gain on disposal of property and equipment		(6	)											(6	)
Partnership losses		~~236~~452												~~236~~452
Equity in loss of consolidated subsidiaries		~~688~~591									(~~688~~591	)		—
Cash provided by changes in operating assets and liabilities
Cash provided by changes in operating assets and liabilities:
Accounts receivable		107,~~419~~425			~~129~~(28	)		~~475~~(27	)					117,~~023~~370
Intercompany receivables (net)		~~2,292~~(341	)		(~~3,596~~559	)		~~1,304~~900						—
Prepaid income tax		(3,317	)											(3,317	)
Inventories		4,337			954			(348	)					4,943
Inventories		(2,156	)		376			(335	)					(2,115	)
Other current assets		(111	)		34			1						(76	)
Other current assets		19			(36	)		1						(16	)
Other assets		30			35			25						90
Other assets		(814	)		80			274						(460	)
Accounts payable		(2,373	)											(2,373	)
Accounts payable		(4,819	)											(4,819	)
Accrued expenses		(776	)		(26	)		49						(753	)
Accrued expenses		4,155			(240	)		(54	)					3,861
Accrued interest expense		(164	)											(164	)
Accrued interest expense		(6,005	)											(6,005	)
Income taxes payable		4,420						(253	)					4,167
Income taxes payable		(8,726	)		4,387			(219	)					(4,558	)
Net cash provided by operating activities		34,768			4			569			—			35,341
Net cash provided by operating activities		25,213			199			1,925			—			27,337
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment		56												56
Purchases of property and equipment		(85,~~227~~870	)		(~~226~~4	)		(~~1,073~~135	)					(96,~~526~~009	)
Sale of short-term investments		41												41
Capital contributions to partnership		(3,080	)											(3,080	)
Capital distributions from partnership		227												227
Capital distributions from partnership		77												77
Net cash used in investing activities		(5,636	)		(4	)		(135	)		—			(5,775	)
Net cash used in investing activities		(11,221	)		(226	)		(1,073	)		—			(12,520	)
FINANCING ACTIVITIES:
Principal payments of long-term debt		(1317,~~780~~660	)					(~~239~~8	)					(1417,~~019~~668	)
Dividends received (paid)		250						(250	)					—
Net cash used in financing activities		(17,660	)		—			(8	)		—			(17,668	)
Issuance of common stock		2												2
Effect of exchange rate changes		(162	)					(144	)					(306	)
Net cash used in financing activities		(13,528	)		—			(489	)		—			(14,017	)
Change in value of hedging transactions		(151	)											(151	)
Effect of exchange rate changes		(14	)		—			(359	)		—			(373	)
Net increase in cash and cash equivalents		11,159			—			282			—			11,441
Unrealized loss on securities		(1	)		—			—			—			(1	)
Beginning balance, cash and cash equivalents		25,990			4			217						26,211
Unrealized gain on hedging transactions		121			—			—			—			121
Ending balance, cash and cash equivalents	$	37,149		$	4		$	499		$	—		$	37,652
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~~293		$	—		$	—		$	—		$	~~717~~293
Cash paid for:
Interest expense	$	259,~~698~~873		$	—		$	1—		$	—		$	259,~~699~~873
Income taxes	$	225,~~577~~389		$	—		$	~~410~~—		$	—		$	225,~~987~~389
Supplemental disclosure of noncash financing activity:
Dividends accrued on mandatorily redeemable preferred stock	$	32,~~577~~722		$	—		$	—		$	—		$	32,~~577~~722
Unrealized loss on securities	$	(1	)	$	—		$	—		$	—		$	(1	)
Adjustment of redeemable common stock to fair value	$	10,659		$	—		$	—		$	—		$	10,659

1719

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”)
	Percentage of Net SalesThirteen Weeks Ended(“Second Quarter”)				Percentage of Net SalesTwenty-six Weeks Ended(“Six Months”)
	(unaudited)				(unaudited)
	May 4,2003		April 28,2002		May 4,2003		April 28, 2002
	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	4239.69		4442.45		4342.02		43.42
Gross profit	5760.41		5557.65		57.08		56.68
Selling, general and administrative expenses	3948.75		3938.62		3844.80		3638.23
Operating income	1711.76		1619.03		1813.28		2018.45
Interest expense	6.7.5		85.28		67.31		76.91
Other income	—		0.4		0.1		0.4
Other income (expense)	(0.6	)	—		(0.4	)	0.1
Income before income taxes	113.05		813.25		126.03		12.95
Income tax provision	4.5		3.4		5.0		5.4
Income taxes	1.3		5.6		2.5		5.2
Net income	62.52	%	47.89	%	73.08	%	7.53	%

18Second Quarter Fiscal 2003 Compared to Second Quarter Fiscal 2002

~~Certain~~Net ~~Critical~~sales ~~Accounting~~for ~~Policies~~the second quarter of fiscal 2003 decreased by $4.7 million, or 5.1% as compared to the second quarter of fiscal 2002. This decrease was principally attributable to (i) a decrease in sales to existing domestic wholesale customers of approximately $2.8 million, resulting from an approximately $3.8 million reduction associated with the bankruptcy filing and subsequent liquidation of Jacobson Stores, Inc., (ii) a decrease in sales by Company-owned retail boutiques of approximately $2.5 million, due to the weak economic environment compounded by the war in Iraq and the threat of the SARS virus and (iii) a decrease in sales for the St. John Home stores of approximately $1.3 million, which were closed during the first six months of fiscal 2003. These decreases were partially offset by an increase in sales by Company-owned retail outlet stores of approximately $2.0 million, due to in part the addition of three new stores since the beginning of the second quarter of fiscal 2002. Sales for Company-owned retail boutiques open at least one year decreased 16.2% during the second quarter of fiscal 2003 compared to the second quarter of fiscal 2002. Net sales decreased primarily as a result of decreased unit sales of the Knit product line.

~~The~~Gross ~~Company’s~~profit ~~consolidated~~for ~~financial~~the ~~statements~~second ~~have~~quarter ~~been~~of ~~prepared~~fiscal in2003 ~~accordance~~decreased by ~~with~~$0.4 ~~accounting~~million, ~~principles~~or ~~generally~~0.7% ~~accepted~~as incompared with the ~~United~~second ~~States.~~quarter Asof ~~such~~fiscal 2002, ~~the Company~~but isincreased ~~required~~as a percentage of net sales to ~~make~~60.1% ~~estimates~~from ~~and~~57.5%. ~~assumptions~~This ~~that~~increase ~~affect~~in the ~~reported~~gross ~~amounts~~profit margin was primarily the result of ~~assets~~an ~~and~~increase ~~liabilities~~in atthe gross profit margin on wholesale sales of the ~~balance~~Knit ~~sheet~~product ~~dates~~line and ~~the~~an ~~reported~~increase ~~amounts~~in ofthe ~~revenue~~gross ~~and~~profit ~~expense~~margin ~~during~~for the ~~reporting~~Company-owned ~~periods.~~retail ~~Actual~~boutiques ~~results~~due ~~could significantly~~to ~~differ~~lower ~~from~~point ~~such~~of ~~estimates~~sale markdowns.

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~~Selling, ingeneral ~~sales~~and byadministrative expenses for the ~~Company~~second ~~owned~~quarter ~~retail~~of ~~boutiques~~fiscal 2003 increased by $7.3 million, ~~which~~or on20.7% aover ~~consolidated~~the ~~basis~~second ~~have~~quarter aof ~~higher~~fiscal ~~gross~~2002, ~~profit~~and ~~margin~~increased ~~than~~as a percentage of net sales to ~~wholesale customers~~48.5% from 38.2%. Selling, general and administrative expenses increased during the period primarily due to (i) an increase in expenses of approximately $2.6 million resulting from the ~~gross~~opening ~~profit~~of ~~margin~~six ~~for~~retail boutiques and three retail outlet stores since the ~~Sport~~beginning ~~product~~of ~~line.~~the ~~These~~second ~~increases~~quarter ~~were~~of ~~partially~~fiscal ~~offset~~2002, by(ii) aan ~~decrease~~increase in ~~the~~advertising ~~gross~~expenses ~~profit~~of ~~margin~~approximately $1.4 million, relating to a planned increase in advertising expenditures for the ~~Knit~~first ~~product~~six ~~line,~~months ~~due~~of fiscal 2003 as compared to afiscal ~~reduction~~2002, (iii) an increase in ~~the~~design ~~number~~sample expenses of ~~units~~approximately ~~being~~$0.9 ~~manufactured~~million, (iv) an increase in bad debt expense of approximately ~~and~~$0.5 ~~sold~~million ~~without~~and a(v) ~~corresponding~~an ~~decrease~~increase in costs related to the ~~production~~expansion ~~costs~~of the Company’s operations in Japan of approximately $0.3 million.

~~Selling,~~Operating ~~general~~income ~~and administrative expenses~~ for the ~~first~~second ~~nine~~quarter ~~months~~ of fiscal ~~2002~~2003 ~~increased~~decreased by $37.0 7 million, or 343.01% ~~over~~as ~~the~~compared ~~first~~to ~~nine~~the ~~months~~second quarter of fiscal ~~2001,~~2002. ~~and~~Operating income ~~increased~~ as a percentage of net sales decreased to 3811.86% from 3619.23%. ~~Selling, general and administrative expenses increased~~ during ~~the~~ ~~period primarily due to (i) an increase in~~ the ~~expenses~~same ~~associated with the retail division of approximately $4~~period.6 ~~million,~~This 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~~operating ~~and~~income ~~promotion~~as ~~expenses of approximately $1.5 million and~~ a ~~decrease~~percentage ~~in severance expenses~~ of ~~approximately $1.7~~net ~~million,~~sales was due to ~~non-recurring~~an ~~expenses~~increase ~~which~~in ~~were recorded during fiscal 2001. Selling~~selling, general and administrative expenses ~~increased~~ as a percentage of net sales ~~primarily~~which ~~due~~was topartially aoffset ~~decrease~~by inan ~~net~~increase ~~sales without a corresponding decrease~~ in the ~~selling,~~ ~~general~~gross ~~and~~profit ~~administrative~~margin ~~expenses~~for ~~due to~~ the ~~Company’s decision to maintain its infrastructure to allow for a quick response to an increase in demand~~period.

~~Operating~~Interest ~~income~~expense for the ~~first~~second ~~nine~~quarter ~~months~~ of fiscal ~~2002~~2003 ~~decreased~~increased by $71.82 million, or 1322.68% asfrom ~~compared to~~ the ~~first~~second ~~nine~~quarter ~~months~~ of fiscal ~~2001~~2002. ~~Operating~~This ~~income~~increase ~~as percentage~~was ofdue ~~net sales decreased~~ to ~~18.2%~~an ~~from~~increase ~~20.4%~~in ~~during~~ the ~~same~~debt ~~period.~~balance ~~This~~resulting ~~decrease~~from inthe ~~operating~~conversion of ~~income~~the asCompany’s apreferred ~~percentage~~stock ofand ~~net~~accrued ~~sales~~dividends ~~was due~~ to ansenior ~~increase~~subordinated in15.25% ~~selling,~~notes ~~general~~during ~~and~~July ~~administrative~~2002. ~~expenses~~This asincrease awas ~~percentage of net sales,~~ partially offset by ana ~~increase~~reduction in interest rates on the ~~gross~~Company’s ~~profit~~variable ~~margin~~rate debt.

~~Interest~~First ~~expense~~Six ~~for~~Months ~~the~~Fiscal ~~first~~2003 ~~nine~~Compared ~~months~~to ofFirst ~~fiscal 2002~~Six ~~decreased~~Months byFiscal ~~$5.0~~2002 ~~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~~Net sales for the first six months of fiscal 2003 increased by $5.6 million, or 3.1% as compared to the first six months of fiscal 2002. This increase was principally attributable to (i) an increase in sales by Company-owned retail outlet stores of approximately $4.3 million, partially due to the addition of three new stores since the beginning of fiscal 2002, (ii) an increase in international sales of approximately $1.7 million and ~~Capital~~(iii) ~~Resources~~an increase in sales to existing domestic wholesale customers of approximately $1.4 million, despite a decrease of approximately $6.9 million associated with the bankruptcy filing and subsequent liquidation of Jacobson Stores, Inc. These increases were partially offset by a decrease in sales of approximately $2.2 million for the St. John Home stores which were closed during the first six months of fiscal 2003. Sales for Company-owned retail boutiques open at least one year decreased 8.4% during the first six months of fiscal 2003 as compared to the first six months of fiscal 2002. Net sales increased primarily as a result of increased unit sales of the Knit product line.

~~The~~Gross ~~Company’s primary~~profit ~~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~~ six months of fiscal ~~2002,~~2003 ~~cash~~increased ~~provided~~ by ~~operating activities was~~ $344.09 million. ~~Cash~~or 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 expense4. ~~Cash used in investing activities was $~~8.5% ~~million~~as ~~during~~compared with the first ~~nine~~six months of fiscal 2002., ~~The~~and ~~principal~~increased ~~use~~as ofa ~~cash~~percentage ~~in investing activities was for the construction~~ of ~~leasehold~~net ~~improvements~~sales ~~for scheduled new boutiques and upgrades~~ to ~~the~~57.8% ~~Company’s~~from ~~computer systems~~56.8%. ~~Cash~~This ~~used~~increase in ~~financing~~the ~~activities~~gross ~~was~~profit ~~$19.0~~margin ~~million~~was ~~during~~ primarily the ~~first~~result ~~nine~~of ~~months~~an ofincrease ~~fiscal~~in ~~2002,~~the ~~which included~~gross ~~prepayments~~profit ~~made~~margin onfor the Company’s-owned ~~senior~~retail ~~secured~~boutiques ~~debt~~due ofto ~~$15.0~~lower ~~million.~~point ~~These~~of ~~prepayments~~sale ~~included~~markdowns aand ~~$6.8~~an ~~million~~increase ~~payment~~in ~~that was required under~~ the ~~terms~~gross ofprofit ~~the~~margin ~~credit agreement based~~ on ~~the~~wholesale ~~calculation~~sales of the ~~Company’s~~Knit ~~excess cash~~and ~~flow~~Sport product lines.

AsSelling, ofgeneral ~~July~~and ~~28,~~administrative ~~2002,~~expenses for the ~~Company~~first ~~had~~six ~~approximately~~months of fiscal 2003 increased by $8412.68 million, inor ~~working~~18.6% ~~capital~~over ~~and~~the ~~$32.5~~first ~~million in~~six ~~cash~~months ~~and~~of ~~marketable~~fiscal ~~securities.~~2002, ~~The~~and ~~Company’s~~increased ~~principal~~as ~~source~~a percentage of ~~liquidity~~net issales ~~internally~~to ~~generated~~44.0% ~~funds~~from 38.3%. ~~The~~Selling, ~~Company~~general ~~also~~and ~~has~~administrative aexpenses ~~$25.0~~increased ~~million~~during ~~revolving~~the ~~commitment~~period ~~from~~primarily adue ~~bank~~to (~~“Revolving Commitment”~~i) an ~~which~~increase ~~expires~~in onexpenses ~~July~~of ~~31, 2005~~approximately $4.7 ~~The~~million ~~Revolving~~resulting ~~Commitment~~from isthe ~~secured~~opening of six retail boutiques and ~~borrowings~~three ~~thereunder~~retail ~~bear~~outlet ~~interest~~stores atsince the ~~Company’s~~beginning ~~choice~~of fiscal 2002, (ii) an increase in advertising expenses of approximately $2.1 million, relating to a planned increase in advertising expenditures for the ~~bank’s~~first ~~borrowing~~six ~~rate~~months ~~plus~~of fiscal 2003 as compared to fiscal 2002, (iii) an increase in design

~~1.0%~~ sample ~~(4.75%~~expenses atof ~~July~~approximately 28$1.7 million, ~~2002~~(iv) oran aincrease ~~Eurodollar~~in ~~rate~~bad ~~plus~~debt ~~2.0%.~~expense ~~The~~of ~~availability~~approximately of$0.6 ~~funds~~million ~~under~~and ~~the~~(v) ~~Revolving~~an ~~Commitment~~increase isin ~~subject~~costs related to the ~~Company’s~~expansion ~~continued~~of ~~compliance with certain covenants, including a covenant that sets~~ the ~~maximum amount the~~ Company’s ~~can~~operations ~~spend~~in ~~annually~~Japan ~~on the acquisition~~ of ~~fixed~~approximately or$0.6 ~~capital assets, and certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum interest expense coverage ratio~~million. ~~As of July 28~~Selling, ~~2002,~~general ~~the Company was in compliance with all covenants~~ and noadministrative ~~amounts~~expenses ~~were~~for ~~outstanding under~~ the ~~Revolving Commitment. The~~ Company ~~currently has~~increased ~~$6.6 million~~as ofa ~~letters~~percentage of ~~credit~~net ~~outstanding~~sales ~~which~~primarily ~~reduces~~due ~~the~~to ~~amount available under~~ the ~~Revolving~~above ~~Commitment by a corresponding amount~~items. ~~The Company invests its excess cash in a money market fund.~~

~~Total~~Operating ~~debt~~income ~~outstanding~~for ~~increased~~the first six months of fiscal 2003 decreased by $197.9 million, toor ~~$272~~23.17% ~~million~~as ~~during~~compared to the ~~nine~~first six months ~~ended~~of ~~July~~fiscal ~~28,~~ 2002. ~~The~~Operating ~~Company’s outstanding~~income ~~debt~~as isa ~~comprised~~percentage of ~~bank~~net ~~borrowings~~sales ofdecreased ~~$134~~to 13.38% ~~million,~~from 1218.5% ~~senior~~during ~~subordinated~~the ~~notes~~same ~~(“12~~period.5% ~~notes”)~~This ofdecrease ~~$99.0~~in ~~million~~operating ~~and~~income ~~senior~~as ~~subordinated~~a ~~notes~~percentage of ~~$38.8~~net ~~million.~~sales ~~The increase~~ was due to ~~the conversion of the~~an ~~Company’s~~increase ~~mandatorily~~in ~~redeemable~~selling, ~~preferred~~general ~~stock~~ and ~~accrued~~administrative ~~dividends~~expenses ~~into~~as ~~senior subordinated notes bearing interest at~~ a ~~rate~~percentage of ~~15.25%~~net ~~(“15~~sales.~~25%~~ ~~notes”).~~

~~The~~Interest ~~Company’s~~expense ~~primary ongoing cash requirements will be~~ for ~~debt~~the ~~service~~first ~~and~~six ~~capital~~months ~~expenditures. The Company’s debt service requirements consist primarily~~ of ~~principal~~ ~~and~~fiscal ~~interest~~2003 ~~payments~~increased onby ~~bank~~$2.1 ~~borrowings~~million, ~~and~~or ~~interest on its 12~~19.51% ~~and~~from ~~15.25%~~the ~~notes.~~first ~~The~~six ~~Company~~months ~~believes~~of itfiscal ~~will~~2002. beThis ~~able~~increase towas ~~finance~~due ~~its~~an ~~debt~~increase ~~service~~in ~~and capital expenditure requirements for~~ the ~~foreseeable~~debt ~~future~~balance ~~with~~resulting ~~internally~~from ~~generated~~the ~~funds~~conversion ~~and~~of ~~funds available under~~ the Company’s ~~revolving~~preferred ~~credit~~stock ~~facility. However, the Company’s ability to fund its capital investment requirements, interest~~ and ~~principal~~accrued ~~payment~~dividends ~~obligations and working capital requirements and~~ to ~~comply with~~senior ~~all~~subordinated of15.25% ~~the~~notes ~~financial~~during ~~covenants~~July ~~under~~2002. ~~its~~This ~~debt~~increase ~~agreements~~was ~~depends~~partially onoffset ~~its~~by ~~future~~a ~~operating~~reduction ~~performance and cash flow, which~~ in ~~turn~~interest ~~are~~rates ~~subject~~on ~~to prevailing economic conditions and to financial, business and other factors, some of which are beyond~~ the Company’s ~~control.~~variable rate debt.

~~The~~Liquidity ~~table below details the Company’s obligations~~ and ~~commitments~~Capital ~~under contracts~~Resources ~~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

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 six months of fiscal 2003, cash provided by operating activities was $28.6 million. Cash provided by operating activities was primarily generated by net income, a decrease in accounts receivable and inventories and an increase in accrued expenses, while cash used in operating activities was primarily used to fund a decrease in income taxes payable. The decrease in accounts receivable was primarily due to lower wholesale sales in April 2003 as compared to October 2002, partially due to the April 2003 billing month including only 4 weeks compared to the October 2002 billing month which included 5 weeks. The decrease in inventory was due to the timing of shipments to the Company’s wholesale customers and the Company’s annual warehouse sale. Cash used in investing activities was $7.4 million during the first six months of fiscal 2003. The principal use of cash in investing activities was for the purchase of electronic knitting machines, the expansion of the Company’s manufacturing facility in Mexico and the construction of leasehold improvements for scheduled new or relocated boutiques. Cash used in financing activities was $9.3 million during the first six months of fiscal 2003, which included the redemption of $5.0 million of the Company’s redeemable common stock from its former Chief Executive Officer and principal payments on its long-term debt.

As of May 4, 2003, the Company had approximately $44.9 million in working capital and $42.0 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 syndicate of banks (A“Revolving Commitment”) which expires on July 31, 2005. The ~~amounts~~Revolving ~~shown~~Commitment inis ~~this~~secured ~~column~~and ~~reflect~~borrowings thereunder bear interest at the ~~amounts~~Company’s choice of the bank’s borrowing rate (4.25% at May 4, 2003) plus 1.0% or LIBOR (1.3125% at May 4, 2003) plus 2.0%. The availability of funds under the Revolving Commitment is subject to bethe ~~paid~~Company’s ~~during~~continued compliance with certain covenants, including a covenant that sets the ~~remainder~~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 May 4, 2003, the ~~fiscal~~Company ~~year~~was in compliance with all covenants and no amounts were outstanding under the Revolving Commitment. The Company currently has $11.8 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.

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~~Total debt outstanding decreased $3.7 million to $265.6 million during the six months ended May 4, 2003. The Company’s outstanding debt was comprised primarily of bank borrowings of $125.7 million, senior subordinated 12.5% notes (“12.5% notes”) of $99.1 million and senior subordinated 15.25% notes (“15.25% notes”) of $39.3 million. The Company redeemed the 15.25% notes in ~~Atlanta~~full on May 30, ~~Georgia~~2003 using $30.0 million in additional borrowing under the Company’s credit facilities and excess cash.

~~SJKI~~The ~~must~~Company’s ~~rely~~primary onongoing ~~distributions,~~cash ~~loans~~requirements include debt service which consists primarily of principal and ~~other~~interest payments ~~intercompany~~on ~~cash~~bank ~~flows~~borrowings ~~from~~and interest on its ~~subsidiaries~~12.5% tonotes. ~~generate~~The ~~the~~Company ~~funds~~believes ~~necessary~~it towill ~~satisfy~~be ~~the~~able ~~repayment~~to offinance its ~~outstanding~~cash ~~loans.~~requirements ~~Except~~ for ~~restrictions~~the ~~under~~foreseeable ~~applicable~~future ~~law, there~~with ~~are~~internally nogenerated ~~material~~funds ~~restrictions~~and onfunds ~~distributions~~available tounder the Company’s ~~from~~Revolving Commitment. However, the Company’s ~~wholly~~ability ~~owned~~to ~~subsidiaries~~fund ~~that~~such ~~have~~cash ~~guaranteed~~requirements ~~the~~and ~~Company’s~~to ~~payment~~comply ~~obligations~~with all of the financial covenants under its ~~12.5%~~debt agreements depends on its future operating performance and ~~15.25%~~cash ~~notes.~~flow, ~~See~~which ~~Note~~in 8turn toare ~~the~~subject ~~Company’s~~to ~~unaudited~~prevailing ~~consolidated~~economic conditions and to financial, ~~statements~~business ~~contained~~and ~~herein~~other factors, some of which are beyond the Company’s control.

The ~~Company~~table ~~has~~below ~~the~~details ~~option of calling~~ the ~~15.25% notes after January 2, 2003 and before January 2, 2004. The~~ Company’s ~~ability~~material toobligations ~~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~~commitments ~~the~~under ~~notes~~contracts ~~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 aslease aagreements ~~result~~in ~~the~~effect ~~outstanding balance has been classified~~ as ~~long-term~~of ~~debt~~May in4, ~~the accompanying balance sheet.~~ 2003:

Contractual Obligations	Total		Fiscal Years								2007		Thereafter
Contractual Obligations	Total		2003^(A)		2004		2005		2006		2007		Thereafter
			(in thousands)
12.5% notes	$	100,000	$	—	$	—	$	—	$	—	$	—	$	100,000
15.25% notes^(B)		39,294		39,294		—		—		—		—		—
Variable rate debt		127,112		5,850		17,957		19,914		34,123		49,268		—
Operating leases		166,888		10,702		20,506		19,787		18,961		18,094		78,838
Yarn purchase commitment		9,554		9,554		—		—		—		—		—

Total obligations	$	442,848	$	65,400	$	38,463	$	39,701	$	53,084	$	67,362	$	178,838

~~SJKI~~(A) ~~has~~The ~~not~~amounts ~~paid~~shown ~~any~~in ~~cash~~this ~~dividends~~column ~~since~~reflect the ~~completion~~amounts ~~of the mergers in July 1999. SJKI’s ability~~ to ~~pay~~be ~~dividends~~paid isduring ~~restricted by~~ the ~~terms~~remainder of ~~its senior secured credit facilities, 12.5% senior subordinated note indenture and 15.25% notes. SJKI does not anticipate~~ the ~~payment~~fiscal ~~of any cash dividends on its common stock in the future~~year.

~~The~~(B) ~~Company’s~~These ~~EBITDA~~notes aswere ~~defined~~redeemed inat ~~its~~face ~~credit~~value ~~agreement~~on ~~for~~May ~~its~~30, ~~senior~~2003 ~~secured~~using ~~credit~~cash ~~facilities was approximately $60.3 million~~ and ~~$68.1~~additional ~~million~~borrowings ~~for the first nine months~~ of ~~fiscal 2002 and 2001, respectively, and~~ $1930.30 ~~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~~credit ~~performance or as a measure of liquidity~~facilities.

~~Credit~~In ~~Facilities~~addition to the obligations and commitments above, during its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include those given to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. The Company has also issued guarantees, in the form of letters of credit, to cover contractual commitments, including merchandise purchases from foreign vendors and to secure the payment for potential future workers’ compensation claims. The Company had $11.8 million of letters of credit outstanding at May 4, 2003. Of this total, $9.9 million related to potential future workers’ compensation claims. The Company has accrued a liability for the estimated claims, both reported and incurred but not yet reported. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets other than as noted.

In 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~~In ~~rate~~addition ~~plus~~to ~~2.5%~~the orfiscal ~~LIBOR~~year ~~plus~~2003 ~~3.5%.~~payments Inincluded ~~addition~~on the table above, the Company anticipates purchasing property and equipment of approximately $14.8 million during the remainder of fiscal 2003, but is ~~required~~not contractually committed to ~~pay~~do aso. ~~commitment~~The ~~fee~~estimated on$14.8 million will be used principally for (i) the ~~unused~~construction ~~portion~~of leasehold improvements for relocated retail boutiques located in Beverly Hills, California, Chicago, Illinois, and Manhasset, New York, (ii) the expansion of the ~~revolving~~retail boutiques located in Houston, Texas and Costa Mesa, California, (iii) the construction of ~~credit~~St. John shops within the Company’s major wholesale customer locations, (iv) the expansion of the Company’s manufacturing facility in Mexico, (v) upgrades to the Company’s computer systems and (vi) the construction of ~~0.5%~~leasehold improvements ~~per~~and ~~year~~the related lease deposit for a flagship boutique in Japan.

~~Borrowings~~SJKI ~~under~~must ~~the~~rely ~~tranche A facility began to mature quarterly~~ on ~~October 31~~distributions, ~~1999,~~loans ~~while~~and ~~borrowings~~other ~~under~~intercompany ~~the~~cash ~~tranche~~flows Bfrom ~~facility~~its ~~began~~subsidiaries to ~~mature~~generate ~~quarterly on October 31, 2000. The credit agreement permits~~ the ~~Company~~funds tonecessary ~~prepay loans and~~ to ~~permanently~~satisfy ~~reduce~~the ~~revolving~~repayment ~~credit~~of ~~commitments,~~its inoutstanding ~~whole~~loans. orExcept infor ~~part,~~restrictions ~~at any time.~~under Inapplicable ~~addition~~law, ~~the~~there ~~Company~~are isno ~~required~~material torestrictions ~~make~~on ~~mandatory~~distributions ~~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~~Company ~~agreement);~~from ~~and (ii) 100% of~~ the ~~net~~Company’s ~~cash proceeds~~wholly ofowned ~~certain~~subsidiaries ~~dispositions~~that ofhave ~~assets~~guaranteed ~~or issuances of debt or equity of~~ the Company’s orpayment ~~any~~obligations ofunder its ~~subsidiaries~~12.5% ~~(in each case, subject to certain exceptions and subject to a reduction to zero based upon the Company’s financial performance)~~notes.

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

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

The Company’s EBITDA (EBITDA generally represents the net income of the Company excluding the effects of interest expense, income taxes, depreciation and a majority of the items included in other income and expense) as defined in its credit agreement for its senior secured credit facilities was approximately $34.2 million and $41.3 million for the first six months of fiscal 2003 and 2002, respectively, and $14.3 million and $21.7 million for the second quarter of fiscal 2003 and 2002, respectively. EBITDA as defined by the Company may not be consistent with similarly titled measures of other companies. 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. EBITDA is used to calculate certain covenants under the Company’s credit agreement. The Company believes that EBITDA provides additional information for determining its ability to meet future debt service requirements; however, EBITDA should not be construed as an indication of the Company’s operating performance or as a measure of liquidity.

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

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	May 4, 2003		April 28, 2002		May 4, 2003		April 28, 2002
	(in thousands)				(in thousands)
Operating income	$	10,158	$	17,843	$	25,521	$	33,451
Depreciation and amortization		3,967		3,693		8,392		7,415
Deferred rent expense		156		132		336		265
Licensing income		—		27		—		135

Consolidated EBITDA	$	14,281	$	21,695	$	34,249	$	41,266

Credit Facilities

The Company is a party to a credit agreement with a group of financial institutions, which initially provided for an aggregate principal amount of loans totaling $215 million. The credit agreement consists of three facilities: (i) tranche A facility totaling $75 million, (ii) tranche B facility totaling $115 million and (iii) the revolving credit facility totaling $25 million which matures July 31, 2005.

Borrowings under the tranche A facility and the revolving credit facility bear interest at a floating rate, based upon the leverage ratio of the Company, which was the bank’s borrowing rate plus 1.0% or LIBOR plus 2.0% at May 4, 2003. Borrowings under the tranche B facility bear interest at a floating rate, also based upon the leverage ratio of the Company, which was the bank’s borrowing rate plus 2.0% or LIBOR plus 3.0% at May 4, 2003. 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.~~

conditions of, the credit agreement or if such payment creates a default under the credit agreement. The credit agreement contains customary events of default. At May 4, 2003, the Company was in compliance with all covenants.

Effective May 30, 2003 the Company amended its credit agreement. The amendment allowed the Company to borrow an additional $30.0 million under the tranche B facility. The additional borrowing increased the overall maximum for the tranche B facility to approximately $122.0 million. The amendment also increased the interest rate on the total outstanding balance of the bank borrowings by increasing the current spread over the banks borrowing rate and LIBOR by 0.75% for each of the three facilities. The Company paid fees of approximately $1.0 million to complete the amendment. The Company used these funds, along with a portion of its available cash, to retire its 15.25% notes.

12.5% Notes

In addition to the credit facilities described above, the Company ~~sold~~has $100 million of 12.5% notes ~~to help finance the mergers~~outstanding. The 12.5% notes are unsecured and mature on July 1, 2009. The 12.5% notes bear interest at a rate of 12.5% per year and were issued at 98.616% of the actual face value. Interest on such notes is payable semiannually to the holders of record. The notes are subject to redemption by the Company on or after July 1, 2004 at a premium starting at 6.25% and decreasing to zero at July 1, 2008. The indenture governing the notes limits, among other things, the payment of dividends, the incurrence of additional indebtedness and other restricted payments. The indenture contains customary events of default.

15.25% Notes

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~~is ~~entered~~a ~~into~~party to a stockholders’ agreement with Vestar/Gray Investors, LLC, Vestar Capital Partners III, L.P. and the ~~Grays~~Gray family, which states, among other things, that prior to a public offering of SJKI common stock, if Bob Gray ceases to serve as Chairman or Chief Executive Officer of St. John or SJKI or if the employment with SJKI of Marie Gray or Kelly Gray ceases for any reason, then he or she will have the right to require SJKI to purchase the shares of SJKI common stock beneficially owned by them, at fair value, up to a maximum of $5 .0 million of such common stock for all the Grays during any 12- month period. If any of the Grays are terminated without “cause” or resigns for “good reason,” as these terms are defined in their employment agreements with the Company, then he or she will have the right to require SJKI to purchase the shares of SJKI common stock beneficially owned by them, up to a maximum of 25% of the total shares held by such terminated or resigning Gray employee during any 12- month period. This agreement may be limited by the terms of the agreements related to the credit facilities and the senior subordinated notes.

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

Critical Accounting Policies

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

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

Inventories

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

Revenue Recognition

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

Wholesale Markdowns

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

Accounts Receivable

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

Insurance Program

The Company is partially self-insured for its workers’ compensation insurance coverage. Under this insurance program the Company is liable for a deductible of $500,000 for each individual claim. The Company records a liability for the estimated cost of claims both reported and incurred but not reported based upon its historical experience. The estimated costs include the estimated future cost of all open claims. The Company will continue to adjust the estimates as the actual experience dictates. A

significant change in the number or dollar amount of claims could cause the Company to revise its estimate of potential losses and affect its reported results.

Inflation

The Company does not believe that inflation had a material impact on the ~~sales~~ sales reported for the ~~third quarter or~~ first ~~nine~~six months of fiscal ~~2002~~year 2003.

2528

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~~2003, (ii) the Company’s belief that it will be able to fund its working capital and capital expenditure requirements with internally generated funds and the use of its revolving credit facility, and (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~~In ~~risks,~~addition ~~uncertainties~~to ~~and~~the ~~other~~ factors ~~include,~~that ~~but~~may ~~are~~be ~~not~~described ~~limited~~in tothis report, the following factors could cause actual results to differ from those expressed in any forward looking statements made by the Company: (i) the financial strength of the retail industry and the level of consumer spending for apparel and accessories, (ii) the financial health of the Company’s principal customers, (iii) the Company’s ability to develop, market and sell its products, (~~iii~~iv) increased competition from other manufacturers and retailers of women’s clothing and accessories, (ivv) general economic conditions and (vvi) the inability of the Company to meet the financial covenants under its ~~senior secured~~ credit facilities and senior subordinated ~~note indenture~~notes. 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.

2629

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~~currency. In order to reduce the effects of such fluctuations, under established risk management practices, the Company ~~enters~~may enter into ~~forward~~foreign exchange forward contracts. These contractual arrangements are ~~placed~~typically entered into with a major financial institution. The Company does not hold derivative financial instruments for speculative trading.

The primary business objective of this program is to secure the anticipated profit on sales denominated in foreign currencies. Forward contracts are usually entered into at the time the Company prices its products. The Company’s primary exposure to foreign ~~currency~~ exchange ~~rate~~ fluctuation is on the Euro ~~and the yen~~. AtThe ~~July~~Company ~~28,~~did ~~2002,~~not ~~the~~hold any ~~Company~~forward ~~had~~ contracts ~~maturing through October 31, 2002~~ to sell ~~1.2 million~~ Euros at aMay ~~rate of 0.88 U.S. dollars to the Euro and contracts maturing through January 31~~4, 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~~Europe. The purchase of these items is completed in Euros. In order to reduce the effect of the fluctuation in the exchange rate between the Euro and the U.S. dollar, the Company may enter into ~~foreign~~forward ~~exchange~~ contracts. AtThe ~~July~~Company ~~28,~~did ~~2002~~not ~~there~~hold ~~were~~any noforward ~~outstanding~~ contracts to ~~buy~~purchase Euros. ~~The~~at ~~Company~~May ~~has~~4, ~~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 ishas ~~also~~made ~~exposed~~a todecision ~~market risks related~~ to ~~fluctuations~~use ~~in interest rates on~~ its ~~variable~~sales ~~rate~~made ~~debt~~in ~~which~~Euros ~~consists~~as ofa ~~bank~~natural ~~borrowings~~hedge ~~related~~for to the ~~mergers.~~purchases ~~The~~of ~~Company~~inventory ~~also~~items ~~holds~~made ~~fixed rate~~in ~~subordinated~~Euros ~~notes.~~for ~~The~~fiscal ~~Company~~year ~~entered into an interest rate collar agreement with a major financial institution to limit its exposure on $35 million of the variable rate debt~~2003. There ~~The~~can ~~agreement~~be ~~became~~no ~~effective~~assurance onthat ~~October~~this 4,strategy ~~1999~~will ~~and~~fully ~~expired~~offset ~~on July 7, 2002. Consequently,~~ the Company’s isforeign nocurrency ~~longer protected against interest rate changes related to its variable rate debt~~exposure.

~~For~~The ~~fixed~~Company ~~rate~~is ~~debt,~~also ~~changes~~exposed into ~~interest rates generally affect the fair~~ market ~~value,~~risks ~~but~~related 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~~fluctuations in interest rates byon ~~issuing part of~~ its ~~debt with a fixed interest rate. Holding the~~ variable rate debt ~~balance constant~~, ~~each~~which ~~one~~consists ~~percentage~~primarily ~~point~~of ~~increase in~~bank ~~interest~~borrowings ~~rates~~under ~~occurring on~~ the ~~first~~credit ~~day~~agreement. ofAt ~~the~~May ~~year~~4, ~~would~~2003, ~~result~~the inCompany anhad ~~increase~~no inoutstanding ~~interest~~hedging ~~expense~~contracts ~~for~~associated ~~the~~with ~~coming~~interest ~~year of approximately $1~~rates.3 ~~million.~~

27The Company also holds fixed rate subordinated notes. For fixed rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not influence fair market value, but do affect future earnings and cash flows. The Company has managed its exposure to changes in interest rates by issuing part of its debt with a fixed interest rate. Assuming that the balance of variable rate debt remains constant, a one percentage point increase in LIBOR from the first day of the year would result in an annual increase in interest expense of approximately $1.3 million.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect such controls subsequent to the date of the Co-Chief Executive Officers’ and Chief Financial Officer’s most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Changes in Securities and Use of Proceeds

None

Item 3. Defaults upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits required by Item 601 of Regulation S-K.

4.1		Form of 15.25% Senior Subordinated Notes due 2009
4.2		Form of 15.25% Senior Subordinated Guarantee

4.1

Amended and Restated Credit Agreement dated May 30, 2003

(b)

Reports on Form 8-K.

None

2832

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the ~~registrant~~Registrant has duly caused this ~~report~~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)

Date: June 16, 2003

29ST.JOHN KNITS INTERNATIONAL, INCORPORATED (REGISTRANT) By: /s/KELLY GRAY Kelly Gray Co-Chief Executive Officer By: /s/BRUCE FETTER Bruce Fetter Co-Chief Executive Officer By: /s/ROGER G. RUPPERT Roger G. Ruppert Executive Vice President—Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

CERTIFICATION

I, ~~Bob~~Kelly Gray, certify that:

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

2. Based on my knowledge, this quarterly report does not contain any untrue ~~statements~~statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report~~; 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:~~4. ~~September~~The 9,registrant’s ~~2002~~other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

~~By:~~a) ~~/s/~~designed ~~BOB~~such ~~GRAY~~disclosure ~~Bob~~controls ~~Gray~~and ~~Chairman~~procedures ofto ensure that material information relating to the ~~Board~~registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

30b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

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

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

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

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

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

June 16, 2003


By:		/S/KELLY GRAY
		Kelly Gray
		Co-Chief Executive Officer

CERTIFICATION

I, Bruce Fetter, 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 statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.

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

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

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

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

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

June 16, 2003


By:		/S/BRUCE FETTER
		Bruce Fetter
		Co-Chief Executive Officer

CERTIFICATION

I, Roger G. Ruppert, certify that:

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

~~By:~~a) ~~/s/~~designed ~~ROGER~~such G.disclosure ~~RUPPERT~~controls ~~Roger~~and G.procedures ~~Ruppert~~to ~~Senior~~ensure ~~Vice~~that ~~President~~material —information ~~Finance~~relating to the registrant, ~~Chief~~including ~~Financial~~its ~~Officer~~consolidated ~~(Principal~~subsidiaries, ~~Financial~~is ~~Officer)~~made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

31b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

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

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

June 16, 2003


By:		/S/ROGER G. RUPPERT
		Roger G. Ruppert
		Chief Financial Officer

EXHIBIT INDEX

Exhibit

Number

Description of Exhibit

4.1

Amended and Restated Credit Agreement dated May 30, 2003

Filing Compare · ST JOHN KNITS INTERNATIONAL INC